[Congressional Record Volume 143, Number 110 (Wednesday, July 30, 1997)]
[House]
[Pages H6409-H6617]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]



      CONFERENCE REPORT ON H.R. 2014, TAXPAYER RELIEF ACT OF 1997

  Mr. ARCHER submitted the following conference report and statement on 
the bill (H.R. 2014) to provide for reconciliation pursuant to 
subsections (b)(2) and (d) of section 105 of the concurrent resolution 
on the budget for fiscal year 1998:

                  Conference Report (H.Rept. 105-220)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the Senate to the bill (H.R. 
     2014) to provide for reconciliation pursuant to subsections 
     (b)(2) and (d) of section 105 of the concurrent resolution on 
     the budget for fiscal year 1998, having met, after full and 
     free conference, have agreed to recommend and do recommend to 
     their respective Houses as follows:
       That the House recede from its disagreement to the 
     amendment of the Senate and agree to the same with an 
     amendment as follows:
       In lieu of the matter proposed to be inserted by the Senate 
     amendment, insert the following:

     SECTION 1. SHORT TITLE; ETC.

       (a) Short Title.--This Act may be cited as the ``Taxpayer 
     Relief Act of 1997''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Section 15 Not To Apply.--No amendment made by this Act 
     shall be treated as a change in a rate of tax for purposes of 
     section 15 of the Internal Revenue Code of 1986.
       (d) Waiver of Estimated Tax Penalties.--No addition to tax 
     shall be made under section 6654 or 6655 of the Internal 
     Revenue Code of 1986 for any period before January 1, 1998, 
     for any payment the due date of which is before January 16, 
     1998, with respect to any underpayment attributable to such 
     period to the extent such underpayment was created or 
     increased by any provision of this Act.
       (e) Table of Contents.--The table of contents for this Act 
     is as follows:

Sec. 1. Short title; etc.

                       TITLE I--CHILD TAX CREDIT

Sec. 101. Child tax credit.

                     TITLE II--EDUCATION INCENTIVES

        Subtitle A--Tax Benefits Relating to Education Expenses

Sec. 201. Hope and lifetime learning credits.
Sec. 202. Deduction for interest on education loans.
Sec. 203. Penalty-free withdrawals from individual retirement plans for 
              higher education expenses.

    Subtitle B--Expanded Education Investment Savings Opportunities

                   Part I--Qualified Tuition Programs

Sec. 211. Modifications of qualified State tuition programs.

           Part Ii--Education Individual Retirement Accounts

Sec. 213. Education individual retirement accounts.

                Subtitle C--Other Education Initiatives

Sec. 221. Extension of exclusion for employer-provided educational 
              assistance.
Sec. 222. Repeal of limitation on qualified 501(c)(3) bonds other than 
              hospital bonds.
Sec. 223. Increase in arbitrage rebate exception for governmental bonds 
              used to finance education facilities.
Sec. 224. Contributions of computer technology and equipment for 
              elementary or secondary school purposes.
Sec. 225. Treatment of cancellation of certain student loans.
Sec. 226. Incentives for education zones.

              TITLE III--SAVINGS AND INVESTMENT INCENTIVES

                     Subtitle A--Retirement Savings

Sec. 301. Restoration of IRA deduction for certain taxpayers.
Sec. 302. Establishment of nondeductible tax-free individual retirement 
              accounts.
Sec. 303. Distributions from certain plans may be used without penalty 
              to purchase first homes.
Sec. 304. Certain bullion not treated as collectibles.

                       Subtitle B--Capital Gains

Sec. 311. 20 percent maximum capital gains rate for individuals.
Sec. 312. Exemption from tax for gain on sale of principal residence.
Sec. 313. Rollover of gain from sale of qualified stock.
Sec. 314. Amount of net capital gain taken into account in computing 
              alternative tax on capital gains for corporations not to 
              exceed taxable income of the corporation.

                TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

Sec. 401. Exemption from alternative minimum tax for small 
              corporations.
Sec. 402. Repeal of separate depreciation lives for minimum tax 
              purposes.
Sec. 403. Minimum tax not to apply to farmers' installment sales.

     TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS

               Subtitle A--Estate and Gift Tax Provisions

Sec. 501. Cost-of-living adjustments relating to estate and gift tax 
              provisions.
Sec. 502. Family-owned business exclusion.
Sec. 503. Modifications to rate of interest on portion of estate tax 
              extended under section 6166.
Sec. 504. Extension of treatment of certain rents under section 2032A 
              to lineal descendants.
Sec. 505. Clarification of judicial review of eligibility for extension 
              of time for payment of estate tax.
Sec. 506. Gifts may not be revalued for estate tax purposes after 
              expiration of statute of limitations.
Sec. 507. Repeal of throwback rules applicable to certain domestic 
              trusts.
Sec. 508. Treatment of land subject to a qualified conservation 
              easement.

             Subtitle B--Generation-Skipping Tax Provision

Sec. 511. Expansion of exception from generation-skipping transfer tax 
              for transfers to individuals with deceased parents.

                          TITLE VI--EXTENSIONS

Sec. 601. Research tax credit.
Sec. 602. Contributions of stock to private foundations.
Sec. 603. Work opportunity tax credit.
Sec. 604. Orphan drug tax credit.

  TITLE VII--INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF COLUMBIA

Sec. 701. Tax incentives for revitalization of the District of 
              Columbia.

                 TITLE VIII--WELFARE-TO-WORK INCENTIVES

Sec. 801. Incentives for employing long-term family assistance 
              recipients.

[[Page H6410]]

                   TITLE IX--MISCELLANEOUS PROVISIONS

            Subtitle A--Provisions Relating to Excise Taxes

Sec. 901. General revenue portion of highway motor fuels taxes 
              deposited into Highway Trust Fund.
Sec. 902. Repeal of tax on diesel fuel used in recreational boats.
Sec. 903. Continued application of tax on imported recycled Halon-1211.
Sec. 904. Uniform rate of tax on vaccines.
Sec. 905. Operators of multiple gasoline retail outlets treated as 
              wholesale distributor for refund purposes.
Sec. 906. Exemption of electric and other clean-fuel motor vehicles 
              from luxury automobile classification.
Sec. 907. Rate of tax on certain special fuels determined on basis of 
              BTU equivalency with gasoline.
Sec. 908. Modification of tax treatment of hard cider.
Sec. 909. Study of feasibility of moving collection point for distilled 
              spirits excise tax.
Sec. 910. Clarification of authority to use semi-generic designations 
              on wine labels.

              Subtitle B--Revisions Relating to Disasters

Sec. 911. Authority to postpone certain tax-related deadlines by reason 
              of presidentially declared disaster.
Sec. 912. Use of certain appraisals to establish amount of disaster 
              loss.
Sec. 913. Treatment of livestock sold on account of weather-related 
              conditions.
Sec. 914. Mortgage financing for residences located in disaster areas.
Sec. 915. Abatement of interest on underpayments by taxpayers in 
              presidentially declared disaster areas.

          Subtitle C--Provisions Relating to Employment Taxes

Sec. 921. Clarification of standard to be used in determining 
              employment tax status of securities brokers.
Sec. 922. Clarification of exemption from self-employment tax for 
              certain termination payments received by former insurance 
              salesmen.

          Subtitle D--Provisions Relating to Small Businesses

Sec. 931. Waiver of penalty through June 30, 1998, on small businesses 
              failing to make electronic fund transfers of taxes.
Sec. 932. Clarification of treatment of home office use for 
              administrative and management activities.
Sec. 933. Averaging of farm income over 3 years.
Sec. 934. Increase in deduction for health insurance costs of self-
              employed individuals.
Sec. 935. Moratorium on certain regulations.

                        Subtitle E--Brownfields

Sec. 941. Expensing of environmental remediation costs.

Subtitle F--Empowerment Zones, Enterprise Communities, Brownfields, and 
              Community Development Financial Institutions

                Chapter 1--Additional Empowerment Zones

Sec. 951. Additional empowerment zones.

                    Chapter 2--New Empowerment Zones

Sec. 952. Designation of new empowerment zones.
Sec. 953. Volume cap not to apply to enterprise zone facility bonds 
              with respect to new empowerment zones.
Sec. 954. Modification to eligibility criteria for designation of 
              future enterprise zones in Alaska or Hawaii.

  Chapter 3--Treatment Of Empowerment Zones and Enterprise Communities

Sec. 955. Modifications to enterprise zone facility bond rules for all 
              empowerment zones and enterprise communities.
Sec. 956. Modifications to enterprise zone business definition for all 
              empowerment zones and enterprise communities.

                      Subtitle G--Other Provisions

Sec. 961. Use of estimates of shrinkage for inventory accounting.
Sec. 962. Assignment of workmen's compensation liability eligible for 
              exclusion relating to personal injury liability 
              assignments.
Sec. 963. Tax-exempt status for certain State worker's compensation act 
              companies.
Sec. 964. Election for 1987 partnerships to continue exception from 
              treatment of publicly traded partnerships as 
              corporations.
Sec. 965. Exclusion from unrelated business taxable income for certain 
              sponsorship payments.
Sec. 966. Associations of holders of timeshare interests to be taxed 
              like other homeowners associations.
Sec. 967. Additional advance refunding of certain Virgin Island bonds.
Sec. 968. Nonrecognition of gain on sale of stock to certain farmers' 
              cooperatives.
Sec. 969. Increased deductibility of business meal expenses for 
              individuals subject to Federal hours of service.
Sec. 970. Clarification of de minimis fringe benefit rules to no-charge 
              employee meals.
Sec. 971. Exemption of the incremental cost of a clean fuel vehicle 
              from the limits on depreciation for vehicles.
Sec. 972. Temporary suspension of taxable income limit on percentage 
              depletion for marginal production.
Sec. 973. Increase in standard mileage rate expense deduction for 
              charitable use of passenger automobile.
Sec. 974. Clarification of treatment of certain receivables purchased 
              by cooperative hospital service organizations.
Sec. 975. Deduction in computing adjusted gross income for expenses in 
              connection with service performed by certain officials.
Sec. 976. Combined employment tax reporting demonstration project.
Sec. 977. Elective carryback of existing carryovers of National 
              Railroad Passenger Corporation.

 Subtitle H--Extension of Duty-Free Treatment Under Generalized System 
                             of Preferences

Sec. 981. Generalized System of Preferences.

                           TITLE X--REVENUES

                     Subtitle A--Financial Products

Sec. 1001. Constructive sales treatment for appreciated financial 
              positions.
Sec. 1002. Limitation on exception for investment companies under 
              section 351.
Sec. 1003. Gains and losses from certain terminations with respect to 
              property.
Sec. 1004. Determination of original issue discount where pooled debt 
              obligations subject to acceleration.
Sec. 1005. Denial of interest deductions on certain debt instruments.

        Subtitle B--Corporate Organizations and Reorganizations

Sec. 1011. Tax treatment of certain extraordinary dividends.
Sec. 1012. Application of section 355 to distributions in connection 
              with acquisitions and to intragroup transactions.
Sec. 1013. Tax treatment of redemptions involving related corporations.
Sec. 1014. Certain preferred stock treated as boot.
Sec. 1015. Modification of holding period applicable to dividends 
              received deduction.

                 Subtitle C--Administrative Provisions

Sec. 1021. Reporting of certain payments made to attorneys.
Sec. 1022. Decrease of threshold for reporting payments to corporations 
              performing services for Federal agencies.
Sec. 1023. Disclosure of return information for administration of 
              certain veterans programs.
Sec. 1024. Continuous levy on certain payments.
Sec. 1025. Modification of levy exemption.
Sec. 1026. Confidentiality and disclosure of returns and return 
              information.
Sec. 1027. Returns of beneficiaries of estates and trusts required to 
              file returns consistent with estate or trust return or to 
              notify Secretary of inconsistency.
Sec. 1028. Registration and other provisions relating to confidential 
              corporate tax shelters.

            Subtitle D--Excise and Employment Tax Provisions

Sec. 1031. Extension and modification of taxes funding Airport and 
              Airway Trust Fund; increased deposits into such Fund.
Sec. 1032. Kerosene taxed as diesel fuel.
Sec. 1033. Restoration of Leaking Underground Storage Tank Trust Fund 
              taxes.
Sec. 1034. Application of communications tax to prepaid telephone 
              cards.
Sec. 1035. Extension of temporary unemployment tax.

         Subtitle E--Provisions Relating to Tax-Exempt Entities

Sec. 1041. Expansion of look-thru rule for interest, annuities, 
              royalties, and rents derived by subsidiaries of tax-
              exempt organizations.
Sec. 1042. Termination of certain exceptions from rules relating to 
              exempt organizations which provide commercial-type 
              insurance.

                     Subtitle F--Foreign Provisions

Sec. 1051. Definition of foreign personal holding company income.
Sec. 1052. Personal property used predominantly in the United States 
              treated as not property of a like kind with respect to 
              property used predominantly outside the United States.
Sec. 1053. Holding period requirement for certain foreign taxes.
Sec. 1054. Denial of treaty benefits for certain payments through 
              hybrid entities.
Sec. 1055. Interest on underpayments not reduced by foreign tax credit 
              carrybacks.
Sec. 1056. Clarification of period of limitations on claim for credit 
              or refund attributable to foreign tax credit 
              carryforward.
Sec. 1057. Repeal of exception to alternative minimum foreign tax 
              credit limit.

                   Subtitle G--Partnership Provisions

Sec. 1061. Allocation of basis among properties distributed by 
              partnership.
Sec. 1062. Repeal of requirement that inventory be substantially 
              appreciated with respect to sale or exchange of 
              partnership interest.
Sec. 1063. Extension of time for taxing precontribution gain.

                     Subtitle H--Pension Provisions

Sec. 1071. Pension accrued benefit distributable without consent 
              increased to $5,000.
Sec. 1072. Election to receive taxable cash compensation in lieu of 
              nontaxable parking benefits.

[[Page H6411]]

Sec. 1073. Repeal of excess distribution and excess retirement 
              accumulation tax.
Sec. 1074. Increase in tax on prohibited transactions.
Sec. 1075. Basis recovery rules for annuities over more than one life.

                  Subtitle I--Other Revenue Provisions

Sec. 1081. Termination of suspense accounts for family corporations 
              required to use accrual method of accounting.
Sec. 1082. Modification of taxable years to which net operating losses 
              may be carried.
Sec. 1083. Modifications to taxable years to which unused credits may 
              be carried.
Sec. 1084. Expansion of denial of deduction for certain amounts paid in 
              connection with insurance.
Sec. 1085. Improved enforcement of the application of the earned income 
              credit.
Sec. 1086. Limitation on property for which income forecast method may 
              be used.
Sec. 1087. Expansion of requirement that involuntarily converted 
              property be replaced with property acquired from an 
              unrelated person.
Sec. 1088. Treatment of exception from installment sales rules for 
              sales of property by a manufacturer to a dealer.
Sec. 1089. Limitations on charitable remainder trust eligibility for 
              certain trusts.
Sec. 1090. Expanded SSA records for tax enforcement.
Sec. 1091. Modification of estimated tax safe harbors.

     TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS

                     Subtitle A--General Provisions

Sec. 1101. Certain individuals exempt from foreign tax credit 
              limitation.
Sec. 1102. Exchange rate used in translating foreign taxes.
Sec. 1103. Election to use simplified section 904 limitation for 
              alternative minimum tax.
Sec. 1104. Treatment of personal transactions by individuals under 
              foreign currency rules.
Sec. 1105. Foreign tax credit treatment of dividends from noncontrolled 
              section 902 corporations.

        Subtitle B--Treatment of Controlled Foreign Corporations

Sec. 1111. Gain on certain stock sales by controlled foreign 
              corporations treated as dividends.
Sec. 1112. Miscellaneous modifications to subpart F.
Sec. 1113. Indirect foreign tax credit allowed for certain lower tier 
              companies.

     Subtitle C--Treatment of Passive Foreign Investment Companies

Sec. 1121. United States shareholders of controlled foreign 
              corporations not subject to PFIC inclusion.
Sec. 1122. Election of mark to market for marketable stock in passive 
              foreign investment company.
Sec. 1123. Valuation of assets for passive foreign investment company 
              determination.
Sec. 1124. Effective date.

   Subtitle D--Repeal of Excise Tax on Transfers to Foreign Entities

Sec. 1131. Repeal of excise tax on transfers to foreign entities; 
              recognition of gain on certain transfers to foreign 
              trusts and estates.

                   Subtitle E--Information Reporting

Sec. 1141. Clarification of application of return requirement to 
              foreign partnerships.
Sec. 1142. Controlled foreign partnerships subject to information 
              reporting comparable to information reporting for 
              controlled foreign corporations.
Sec. 1143. Modifications relating to returns required to be filed by 
              reason of changes in ownership interests in foreign 
              partnership.
Sec. 1144. Transfers of property to foreign partnerships subject to 
              information reporting comparable to information reporting 
              for such transfers to foreign corporations.
Sec. 1145. Extension of statute of limitations for foreign transfers.
Sec. 1146. Increase in filing thresholds for returns as to organization 
              of foreign corporations and acquisitions of stock in such 
              corporations.

Subtitle F--Determination of Foreign or Domestic Status of Partnerships

Sec. 1151. Determination of foreign or domestic status of partnerships.

              Subtitle G--Other Simplification Provisions

Sec. 1161. Transition rule for certain trusts.
Sec. 1162. Repeal of stock and securities safe harbor requirement that 
              principal office be outside the United States.
Sec. 1163. Miscellaneous clarifications.

                      Subtitle H--Other Provisions

Sec. 1171. Treatment of computer software as FSC export property.
Sec. 1172. Adjustment of dollar limitation on section 911 exclusion.
Sec. 1173. United States property not to include certain assets 
              acquired by dealers in ordinary course of trade or 
              business.
Sec. 1174. Treatment of nonresident aliens engaged in international 
              transportation services.
Sec. 1175. Exemption for active financing income.

   TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND 
                               BUSINESSES

             Subtitle A--Provisions Relating to Individuals

Sec. 1201. Basic standard deduction and minimum tax exemption amount 
              for certain dependents.
Sec. 1202. Increase in amount of tax exempt from estimated tax 
              requirements.
Sec. 1203. Treatment of certain reimbursed expenses of rural mail 
              carriers.
Sec. 1204. Treatment of traveling expenses of certain Federal employees 
              engaged in criminal investigations.
Sec. 1205. Payment of tax by commercially acceptable means.

        Subtitle B--Provisions Relating to Businesses Generally

Sec. 1211. Modifications to look-back method for long-term contracts.
Sec. 1212. Minimum tax treatment of certain property and casualty 
              insurance companies.
Sec. 1213. Qualified lessee construction allowances for short-term 
              leases.

   Subtitle C--Simplification Relating to Electing Large Partnerships

                       Part I--General Provisions

Sec. 1221. Simplified flow-through for electing large partnerships.
Sec. 1222. Simplified audit procedures for electing large partnerships.
Sec. 1223. Due date for furnishing information to partners of electing 
              large partnerships.
Sec. 1224. Returns required on magnetic media.
Sec. 1225. Treatment of partnership items of individual retirement 
              accounts.
Sec. 1226. Effective date.

      Part II--Provisions Related to TEFRA Partnership Proceedings

Sec. 1231. Treatment of partnership items in deficiency proceedings.
Sec. 1232. Partnership return to be determinative of audit procedures 
              to be followed.
Sec. 1233. Provisions relating to statute of limitations.
Sec. 1234. Expansion of small partnership exception.
Sec. 1235. Exclusion of partial settlements from 1-year limitation on 
              assessment.
Sec. 1236. Extension of time for filing a request for administrative 
              adjustment.
Sec. 1237. Availability of innocent spouse relief in context of 
              partnership proceedings.
Sec. 1238. Determination of penalties at partnership level.
Sec. 1239. Provisions relating to court jurisdiction, etc.
Sec. 1240. Treatment of premature petitions filed by notice partners or 
              5-percent groups.
Sec. 1241. Bonds in case of appeals from certain proceeding.
Sec. 1242. Suspension of interest where delay in computational 
              adjustment resulting from certain settlements.
Sec. 1243. Special rules for administrative adjustment requests with 
              respect to bad debts or worthless securities.

  Part III--Provision Relating to Closing of Partnership Taxable Year 
                 With Respect to Deceased Partner, Etc.

Sec. 1246. Closing of partnership taxable year with respect to deceased 
              partner, etc.

    Subtitle D--Provisions Relating to Real Estate Investment Trusts

Sec. 1251. Clarification of limitation on maximum number of 
              shareholders.
Sec. 1252. De minimis rule for tenant services income.
Sec. 1253. Attribution rules applicable to stock ownership.
Sec. 1254. Credit for tax paid by REIT on retained capital gains.
Sec. 1255. Repeal of 30-percent gross income requirement.
Sec. 1256. Modification of earnings and profits rules for determining 
              whether REIT has earnings and profits from non-REIT year.
Sec. 1257. Treatment of foreclosure property.
Sec. 1258. Payments under hedging instruments.
Sec. 1259. Excess noncash income.
Sec. 1260. Prohibited transaction safe harbor.
Sec. 1261. Shared appreciation mortgages.
Sec. 1262. Wholly owned subsidiaries.
Sec. 1263. Effective date.

   Subtitle E--Provisions Relating to Regulated Investment Companies

Sec. 1271. Repeal of 30-percent gross income limitation.

                    Subtitle F--Taxpayer Protections

Sec. 1281. Reasonable cause exception for certain penalties.
Sec. 1282. Clarification of period for filing claims for refunds.
Sec. 1283. Repeal of authority to disclose whether prospective juror 
              has been audited.
Sec. 1284. Clarification of statute of limitations.
Sec. 1285. Awarding of administrative costs.

TITLE XIII--SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND GIFT TAXES

Sec. 1301. Gifts to charities exempt from gift tax filing requirements.
Sec. 1302. Clarification of waiver of certain rights of recovery.
Sec. 1303. Transitional rule under section 2056A.

[[Page H6412]]

Sec. 1304. Treatment for estate tax purposes of short-term obligations 
              held by nonresident aliens.
Sec. 1305. Certain revocable trusts treated as part of estate.
Sec. 1306. Distributions during first 65 days of taxable year of 
              estate.
Sec. 1307. Separate share rules available to estates.
Sec. 1308. Executor of estate and beneficiaries treated as related 
              persons for disallowance of losses, etc.
Sec. 1309. Treatment of funeral trusts.
Sec. 1310. Adjustments for gifts within 3 years of decedent's death.
Sec. 1311. Clarification of treatment of survivor annuities under 
              qualified terminable interest rules.
Sec. 1312. Treatment under qualified domestic trust rules of forms of 
              ownership which are not trusts.
Sec. 1313. Opportunity to correct certain failures under section 2032A.
Sec. 1314. Authority to waive requirement of United States trustee for 
              qualified domestic trusts.

  TITLE XIV--SIMPLIFICATION PROVISIONS RELATING TO EXCISE TAXES, TAX-
                    EXEMPT BONDS, AND OTHER MATTERS

                 Subtitle A--Excise Tax Simplification

          Part I--Excise Taxes on Heavy Trucks and Luxury Cars

Sec. 1401. Increase in de minimis limit for after-market alterations 
              for heavy trucks and luxury cars.
Sec. 1402. Credit for tire tax in lieu of exclusion of value of tires 
              in computing price.

   Part II--Provisions Related to Distilled Spirits, Wines, and Beer

Sec. 1411. Credit or refund for imported bottled distilled spirits 
              returned to distilled spirits plant.
Sec. 1412. Authority to cancel or credit export bonds without 
              submission of records.
Sec. 1413. Repeal of required maintenance of records on premises of 
              distilled spirits plant.
Sec. 1414. Fermented material from any brewery may be received at a 
              distilled spirits plant.
Sec. 1415. Repeal of requirement for wholesale dealers in liquors to 
              post sign.
Sec. 1416. Refund of tax to wine returned to bond not limited to 
              unmerchantable wine.
Sec. 1417. Use of additional ameliorating material in certain wines.
Sec. 1418. Domestically produced beer may be withdrawn free of tax for 
              use of foreign embassies, legations, etc.
Sec. 1419. Beer may be withdrawn free of tax for destruction.
Sec. 1420. Authority to allow drawback on exported beer without 
              submission of records.
Sec. 1421. Transfer to brewery of beer imported in bulk without payment 
              of tax.
Sec. 1422. Transfer to bonded wine cellars of wine imported in bulk 
              without payment of tax.

                 Part III--Other Excise Tax Provisions

Sec. 1431. Authority to grant exemptions from registration 
              requirements.
Sec. 1432. Repeal of expired provisions.
Sec. 1433. Simplification of imposition of excise tax on arrows.
Sec. 1434. Modifications to retail tax on heavy trucks.
Sec. 1435. Skydiving flights exempt from tax on transportation of 
              persons by air.
Sec. 1436. Allowance or credit of refund for tax-paid aviation fuel 
              purchased by registered producer of aviation fuel.

                 Subtitle B--Tax-Exempt Bond Provisions

Sec. 1441. Repeal of $100,000 limitation on unspent proceeds under 1-
              year exception from rebate.
Sec. 1442. Exception from rebate for earnings on bona fide debt service 
              fund under construction bond rules.
Sec. 1443. Repeal of debt service-based limitation on investment in 
              certain nonpurpose investments.
Sec. 1444. Repeal of expired provisions.
Sec. 1445. Effective date.

                    Subtitle C--Tax Court Procedures

Sec. 1451. Overpayment determinations of Tax Court.
Sec. 1452. Redetermination of interest pursuant to motion.
Sec. 1453. Application of net worth requirement for awards of 
              litigation costs.
Sec. 1454. Proceedings for determination of employment status.

                      Subtitle D--Other Provisions

Sec. 1461. Extension of due date of first quarter estimated tax payment 
              by private foundations.
Sec. 1462. Clarification of authority to withhold Puerto Rico income 
              taxes from salaries of Federal employees.
Sec. 1463. Certain notices disregarded under provision increasing 
              interest rate on large corporate underpayments.

                TITLE XV--PENSIONS AND EMPLOYEE BENEFITS

                       Subtitle A--Simplification

Sec. 1501. Matching contributions of self-employed individuals not 
              treated as elective employer contributions.
Sec. 1502. Modification of prohibition of assignment or alienation.
Sec. 1503. Elimination of paperwork burdens on plans.
Sec. 1504. Modification of 403(b) exclusion allowance to conform to 415 
              modifications.
Sec. 1505. Extension of moratorium on application of certain 
              nondiscrimination rules to State and local governments.
Sec. 1506. Clarification of certain rules relating to employee stock 
              ownership plans of S corporations.
Sec. 1507. Modification of 10-percent tax for nondeductible 
              contributions.
Sec. 1508. Modification of funding requirements for certain plans.
Sec. 1509. Clarification of disqualification rules relating to 
              acceptance of rollover contributions.
Sec. 1510. New technologies in retirement plans.

Subtitle B--Other Provisions Relating to Pensions and Employee Benefits

Sec. 1521. Increase in current liability funding limit.
Sec. 1522. Special rules for church plans.
Sec. 1523. Repeal of application of unrelated business income tax to 
              ESOPs.
Sec. 1524. Diversification of section 401(k) plan investments.
Sec. 1525. Section 401(k) plans for certain irrigation and drainage 
              entities.
Sec. 1526. Portability of permissive service credit under governmental 
              pension plans.
Sec. 1527. Removal of dollar limitation on benefit payments from a 
              defined benefit plan maintained for certain police and 
              fire employees.
Sec. 1528. Survivor benefits for public safety officers killed in the 
              line of duty.
Sec. 1529. Treatment of certain disability benefits received by former 
              police officers or firefighters.
Sec. 1530. Gratuitous transfers for the benefit of employees.

         Subtitle C--Provisions Relating to Certain Health Acts

Sec. 1531. Amendments to the Internal Revenue Code of 1986 to implement 
              the Newborns' and Mothers' Health Protection Act of 1996 
              and the Mental Health Parity Act of 1996.
Sec. 1532. Special rules relating to church plans.

           Subtitle D--Provisions Relating to Plan Amendments

Sec. 1541. Provisions relating to plan amendments.

     TITLE XVI--TECHNICAL AMENDMENTS RELATED TO SMALL BUSINESS JOB 
              PROTECTION ACT OF 1996 AND OTHER LEGISLATION

Sec. 1600. Coordination with other titles.
Sec. 1601. Amendments related to Small Business Job Protection Act of 
              1996.
Sec. 1602. Amendments related to Health Insurance Portability and 
              Accountability Act of 1996.
Sec. 1603. Amendments related to Taxpayer Bill of Rights 2.
Sec. 1604. Miscellaneous provisions.

TITLE XVII--IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO LINE ITEM 
                                  VETO

Sec. 1701. Identification of limited tax benefits subject to line item 
              veto.
                       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 with respect to each qualifying child of the 
     taxpayer an amount equal to $500 ($400 in the case of taxable 
     years beginning in 1998).
       ``(b) Limitation Based on Adjusted Gross Income.--
       ``(1) In general.--The amount of the credit allowable under 
     subsection (a) shall be reduced (but not below zero) by $50 
     for each $1,000 (or fraction thereof) by which the taxpayer's 
     modified adjusted gross income exceeds the threshold amount. 
     For purposes of the preceding sentence, the term `modified 
     adjusted gross income' means adjusted gross income increased 
     by any amount excluded from gross income under section 911, 
     931, or 933.
       ``(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 the taxable year,
       ``(B) such individual has not attained the age of 17 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).
       ``(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'.

[[Page H6413]]

       ``(d) Additional Credit for Families With 3 or More 
     Children.--
       ``(1) In general.--In the case of a taxpayer with 3 or more 
     qualifying children for any taxable year, the amount of the 
     credit allowed under this section shall be equal to the 
     greater of--
       ``(A) the amount of the credit allowed under this section 
     (without regard to this subsection and after application of 
     the limitation under section 26), or
       ``(B) the alternative credit amount determined under 
     paragraph (2).
       ``(2) Alternative credit amount.--For purposes of this 
     subsection, the alternative credit amount is the amount of 
     the credit which would be allowed under this section if the 
     limitation under paragraph (3) were applied in lieu of the 
     limitation under section 26.
       ``(3) Limitation.--The limitation under this paragraph for 
     any taxable year is the limitation under section 26 (without 
     regard to this subsection)--
       ``(A) increased by the taxpayer's social security taxes for 
     such taxable year, and
       ``(B) reduced by the sum of--
       ``(i) the credits allowed under this part other than under 
     subpart C or this section, and
       ``(ii) the credit allowed under section 32 without regard 
     to subsection (m) thereof.
       ``(4) Unused credit to be refundable.--If the amount of the 
     credit under paragraph (1)(B) exceeds the amount of the 
     credit under paragraph (1)(A), such excess shall be treated 
     as a credit to which subpart C applies. The rule of section 
     32(h) shall apply to such excess.
       ``(5) Social security taxes.--For purposes of paragraph 
     (3)--
       ``(A) In general.--The term `social security taxes' means, 
     with respect to any taxpayer for any taxable year--
       ``(i) the amount of the taxes imposed by sections 3101 and 
     3201(a) on amounts received by the taxpayer during the 
     calendar year in which the taxable year begins,
       ``(ii) 50 percent of the taxes imposed by section 1401 on 
     the self-employment income of the taxpayer for the taxable 
     year, and
       ``(iii) 50 percent of the taxes imposed by section 
     3211(a)(1) on amounts received by the taxpayer during the 
     calendar year in which the taxable year begins.
       ``(B) Coordination with special refund of social security 
     taxes.--The term `social security taxes' shall not include 
     any taxes to the extent the taxpayer is entitled to a special 
     refund of such taxes under section 6413(c).
       ``(C) Special rule.--Any amounts paid pursuant to an 
     agreement under section 3121(l) (relating to agreements 
     entered into by American employers with respect to foreign 
     affiliates) which are equivalent to the taxes referred to in 
     subparagraph (A)(i) shall be treated as taxes referred to in 
     such subparagraph.
       ``(e) Identification Requirement.--No credit shall be 
     allowed under this section to a taxpayer with respect to any 
     qualifying child unless the taxpayer includes the name and 
     taxpayer identification number of such qualifying child on 
     the return of tax for the taxable year.
       ``(f) 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) Supplemental Credit.--Section 32 is amended by adding 
     at the end the following new subsection:
       ``(m) Supplemental Child Credit.--
       ``(1) In general.--In the case of a taxpayer with respect 
     to whom a credit is allowed under section 24 for the taxable 
     year, there shall be allowed as a credit under this section 
     an amount equal to the supplemental child credit (if any) 
     determined for such taxpayer for such taxable year under 
     paragraph (2). Such credit shall be in addition to the credit 
     allowed under subsection (a).
       ``(2) Supplemental child credit.--For purposes of this 
     subsection, the supplemental child credit is an amount equal 
     to the excess (if any) of--
       ``(A) the amount determined under section 24(d)(1)(A), over
       ``(B) the amount determined under section 24(d)(1)(B).

     The amounts referred to in subparagraphs (A) and (B) shall be 
     determined as if section 24(d) applied to all taxpayers.
       ``(3) Coordination with section 24.--The amount of the 
     credit under section 24 shall be reduced by the amount of the 
     credit allowed under this subsection.''
       (c) High Risk Pools Permitted To Cover Spouses and 
     Dependents of High Risk Individuals.--Paragraph (26) of 
     section 501(c) is amended by adding at the end the following 
     flush sentence:
     ``A spouse and any qualifying child (as defined in section 
     24(c)) of an individual described in subparagraph (B) 
     (without regard to this sentence) shall be treated as 
     described in subparagraph (B).''.
       (d) Conforming Amendments.--
       (1) Section 1324(b)(2) of title 31, United States Code, is 
     amended by inserting before the period at the end ``, or 
     enacted by the Taxpayer Relief Act of 1997''.
       (2) Paragraph (2) of section 6213(g) (relating to the 
     definition of mathematical or clerical errors) is amended by 
     striking ``and'' at the end of subparagraph (G), by striking 
     the period at the end of subparagraph (H) and inserting ``, 
     and'', and by inserting after subparagraph (H) the following 
     new subparagraph:
       ``(I) an omission of a correct TIN required under section 
     24(e) (relating to child tax credit) to be included on a 
     return.''.
       (3) 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.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.
                     TITLE II--EDUCATION INCENTIVES
        Subtitle A--Tax Benefits Relating to Education Expenses

     SEC. 201. HOPE AND LIFETIME LEARNING CREDITS.

       (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 25 the following new 
     section:

     ``SEC. 25A. HOPE AND LIFETIME LEARNING CREDITS.

       ``(a) Allowance of Credit.--In the case of an individual, 
     there shall be allowed as a credit against the tax imposed by 
     this chapter for the taxable year the amount equal to the sum 
     of--
       ``(1) the Hope Scholarship Credit, plus
       ``(2) the Lifetime Learning Credit.
       ``(b) Hope Scholarship Credit.--
       ``(1) Per student credit.--In the case of any eligible 
     student for whom an election is in effect under this section 
     for any taxable year, the Hope Scholarship Credit is an 
     amount equal to the sum of--
       ``(A) 100 percent of so much of the qualified tuition and 
     related expenses paid by the taxpayer during the taxable year 
     (for education furnished to the eligible student during any 
     academic period beginning in such taxable year) as does not 
     exceed $1,000, plus
       ``(B) 50 percent of such expenses so paid as exceeds $1,000 
     but does not exceed the applicable limit.
       ``(2) Limitations applicable to hope scholarship credit.--
       ``(A) Credit allowed only for 2 taxable years.--An election 
     to have this section apply with respect to any eligible 
     student for purposes of the Hope Scholarship Credit under 
     subsection (a)(1) may not be made for any taxable year if 
     such an election (by the taxpayer or any other individual) is 
     in effect with respect to such student for any 2 prior 
     taxable years.
       ``(B) Credit allowed for year only if individual is at 
     least \1/2\ time student for portion of year.--The Hope 
     Scholarship Credit under subsection (a)(1) shall not be 
     allowed for a taxable year with respect to the qualified 
     tuition and related expenses of an individual unless such 
     individual is an eligible student for at least one academic 
     period which begins during such year.
       ``(C) Credit allowed only for first 2 years of 
     postsecondary education.--The Hope Scholarship Credit under 
     subsection (a)(1) shall not be allowed for a taxable year 
     with respect to the qualified tuition and related expenses of 
     an eligible student if the student has completed (before the 
     beginning of such taxable year) the first 2 years of 
     postsecondary education at an eligible educational 
     institution.
       ``(D) Denial of credit if student convicted of a felony 
     drug offense.--The Hope Scholarship Credit under subsection 
     (a)(1) shall not be allowed for qualified tuition and related 
     expenses for the enrollment or attendance of a student for 
     any academic period if such student has been convicted of a 
     Federal or State felony offense consisting of the possession 
     or distribution of a controlled substance before the end of 
     the taxable year with or within which such period ends.
       ``(3) Eligible student.--For purposes of this subsection, 
     the term `eligible student' means, with respect to any 
     academic period, a student who--
       ``(A) meets the requirements of section 484(a)(1) of the 
     Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), as in 
     effect on the date of the enactment of this section, and
       ``(B) is carrying at least \1/2\ the normal full-time work 
     load for the course of study the student is pursuing.
       ``(4) Applicable limit.--For purposes of paragraph (1)(B), 
     the applicable limit for any taxable year is an amount equal 
     to 2 times the dollar amount in effect under paragraph (1)(A) 
     for such taxable year.
       ``(c) Lifetime Learning Credit.--
       ``(1) Per taxpayer credit.--The Lifetime Learning Credit 
     for any taxpayer for any taxable year is an amount equal to 
     20 percent of so much of the qualified tuition and related 
     expenses paid by the taxpayer during the taxable year (for 
     education furnished during any academic period beginning in 
     such taxable year) as does not exceed $10,000 ($5,000 in the 
     case of taxable years beginning before January 1, 2003).
       ``(2) Special rules for determining expenses.--
       ``(A) Coordination with hope scholarship.--The qualified 
     tuition and related expenses with respect to an individual 
     who is an eligible student for whom a Hope Scholarship Credit 
     under subsection (a)(1) is allowed for the taxable year shall 
     not be taken into account under this subsection.
       ``(B) Expenses eligible for lifetime learning credit.--For 
     purposes of paragraph (1), qualified tuition and related 
     expenses shall include expenses described in subsection 
     (f)(1) with respect to any course of instruction at an 
     eligible educational institution to acquire or improve job 
     skills of the individual.
       ``(d) Limitation Based on Modified Adjusted Gross Income.--
       ``(1) In general.--The amount which would (but for this 
     subsection) be taken into account under subsection (a) for 
     the taxable year shall be reduced (but not below zero) by the 
     amount determined under paragraph (2).
       ``(2) Amount of reduction.--The amount determined under 
     this paragraph is the amount which bears the same ratio to 
     the amount which would be so taken into account as--
       ``(A) the excess of--
       ``(i) the taxpayer's modified adjusted gross income for 
     such taxable year, over

[[Page H6414]]

       ``(ii) $40,000 ($80,000 in the case of a joint return), 
     bears to
       ``(B) $10,000 ($20,000 in the case of a joint return).
       ``(3) Modified adjusted gross income.--The term `modified 
     adjusted gross income' means the adjusted gross income of the 
     taxpayer for the taxable year increased by any amount 
     excluded from gross income under section 911, 931, or 933.
       ``(e) Election To Have Section Apply.--
       ``(1) In general.--No credit shall be allowed under 
     subsection (a) for a taxable year with respect to the 
     qualified tuition and related expenses of an individual 
     unless the taxpayer elects to have this section apply with 
     respect to such individual for such year.
       ``(2) Coordination with exclusions.--An election under this 
     subsection shall not take effect with respect to an 
     individual for any taxable year if any portion of any 
     distribution during such taxable year from an education 
     individual retirement account is excluded from gross income 
     under section 530(d)(2).
       ``(f) Definitions.--For purposes of this section--
       ``(1) Qualified tuition and related expenses.--
       ``(A) In general.--The term `qualified tuition and related 
     expenses' means tuition and fees required for the enrollment 
     or attendance of--
       ``(i) the taxpayer,
       ``(ii) the taxpayer's spouse, or
       ``(iii) any dependent of the taxpayer with respect to whom 
     the taxpayer is allowed a deduction under section 151,

     at an eligible educational institution for courses of 
     instruction of such individual at such institution.
       ``(B) Exception for education involving sports, etc.--Such 
     term does not include expenses with respect to any course or 
     other education involving sports, games, or hobbies, unless 
     such course or other education is part of the individual's 
     degree program.
       ``(C) Exception for nonacademic fees.--Such term does not 
     include student activity fees, athletic fees, insurance 
     expenses, or other expenses unrelated to an individual's 
     academic course of instruction.
       ``(2) Eligible educational institution.--The term `eligible 
     educational institution' means an institution--
       ``(A) which is described in section 481 of the Higher 
     Education Act of 1965 (20 U.S.C. 1088), as in effect on the 
     date of the enactment of this section, and
       ``(B) which is eligible to participate in a program under 
     title IV of such Act.
       ``(g) Special Rules.--
       ``(1) Identification requirement.--No credit shall be 
     allowed under subsection (a) to a taxpayer with respect to 
     the qualified tuition and related expenses of an individual 
     unless the taxpayer includes the name and taxpayer 
     identification number of such individual on the return of tax 
     for the taxable year.
       ``(2) Adjustment for certain scholarships, etc.--The amount 
     of qualified tuition and related expenses otherwise taken 
     into account under subsection (a) with respect to an 
     individual for an academic period shall be reduced (before 
     the application of subsections (b), (c), and (d)) by the sum 
     of any amounts paid for the benefit of such individual which 
     are allocable to such period as--
       ``(A) a qualified scholarship which is excludable from 
     gross income under section 117,
       ``(B) an educational assistance allowance under chapter 30, 
     31, 32, 34, or 35 of title 38, United States Code, or under 
     chapter 1606 of title 10, United States Code, and
       ``(C) a payment (other than a gift, bequest, devise, or 
     inheritance within the meaning of section 102(a)) for such 
     individual's educational expenses, or attributable to such 
     individual's enrollment at an eligible educational 
     institution, which is excludable from gross income under any 
     law of the United States.
       ``(3) Treatment of expenses paid by dependent.--If a 
     deduction under section 151 with respect to an individual is 
     allowed to another taxpayer for a taxable year beginning in 
     the calendar year in which such individual's taxable year 
     begins--
       ``(A) no credit shall be allowed under subsection (a) to 
     such individual for such individual's taxable year, and
       ``(B) qualified tuition and related expenses paid by such 
     individual during such individual's taxable year shall be 
     treated for purposes of this section as paid by such other 
     taxpayer.
       ``(4) Treatment of certain prepayments.--If qualified 
     tuition and related expenses are paid by the taxpayer during 
     a taxable year for an academic period which begins during the 
     first 3 months following such taxable year, such academic 
     period shall be treated for purposes of this section as 
     beginning during such taxable year.
       ``(5) Denial of double benefit.--No credit shall be allowed 
     under this section for any expense for which a deduction is 
     allowed under any other provision of this chapter.
       ``(6) No credit for married individuals filing separate 
     returns.--If the taxpayer is a married individual (within the 
     meaning of section 7703), this section shall apply only if 
     the taxpayer and the taxpayer's spouse file a joint return 
     for the taxable year.
       ``(7) Nonresident aliens.--If the taxpayer is a nonresident 
     alien individual for any portion of the taxable year, this 
     section shall apply only if such individual is treated as a 
     resident alien of the United States for purposes of this 
     chapter by reason of an election under subsection (g) or (h) 
     of section 6013.
       ``(h) Inflation Adjustments.--
       ``(1) Dollar limitation on amount of credit.--
       ``(A) In general.--In the case of a taxable year beginning 
     after 2001, each of the $1,000 amounts under subsection 
     (b)(1) shall be increased by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2000' 
     for `calendar year 1992' in subparagraph (B) thereof.
       ``(B) Rounding.--If any amount as adjusted under 
     subparagraph (A) is not a multiple of $100, such amount shall 
     be rounded to the next lowest multiple of $100.
       ``(2) Income limits.--
       ``(A) In general.--In the case of a taxable year beginning 
     after 2001, the $40,000 and $80,000 amounts in subsection 
     (d)(2) shall each be increased by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2000' 
     for `calendar year 1992' in subparagraph (B) thereof.
       ``(B) Rounding.--If any amount as adjusted under 
     subparagraph (A) is not a multiple of $1,000, such amount 
     shall be rounded to the next lowest multiple of $1,000.
       ``(i) Regulations.--The Secretary may prescribe such 
     regulations as may be necessary or appropriate to carry out 
     this section, including regulations providing for a recapture 
     of the credit allowed under this section in cases where there 
     is a refund in a subsequent taxable year of any amount which 
     was taken into account in determining the amount of such 
     credit.''.
       (b) Extension of Procedures Applicable to Mathematical or 
     Clerical Errors.--Paragraph (2) of section 6213(g) (relating 
     to the definition of mathematical or clerical errors), as 
     amended by section 101, is amended by striking ``and'' at the 
     end of subparagraph (H), by striking the period at the end of 
     subparagraph (I) and inserting ``, and'', and by inserting 
     after subparagraph (I) the following new subparagraph:
       ``(J) an omission of a correct TIN required under section 
     25A(g)(1) (relating to higher education tuition and related 
     expenses) to be included on a return.''.
       (c) Returns Relating to Tuition and Related Expenses.--
       (1) In general.--Subpart B of part III of subchapter A of 
     chapter 61 (relating to information concerning transactions 
     with other persons) is amended by inserting after section 
     6050R the following new section:

     ``SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION TUITION 
                   AND RELATED EXPENSES.

       ``(a) In General.--Any person--
       ``(1) which is an eligible educational institution which 
     receives payments for qualified tuition and related expenses 
     with respect to any individual for any calendar year, or
       ``(2) which is engaged in a trade or business and which, in 
     the course of such trade or business, makes payments during 
     any calendar year to any individual which constitute 
     reimbursements or refunds (or similar amounts) of qualified 
     tuition and related expenses of such individual,

     shall make the return described in subsection (b) with 
     respect to the individual at such time as the Secretary may 
     by regulations prescribe.
       ``(b) Form and Manner of Returns.--A return is described in 
     this subsection if such return--
       ``(1) is in such form as the Secretary may prescribe,
       ``(2) contains--
       ``(A) the name, address, and TIN of the individual with 
     respect to whom payments described in subsection (a) were 
     received from (or were paid to),
       ``(B) the name, address, and TIN of any individual 
     certified by the individual described in subparagraph (A) as 
     the taxpayer who will claim the individual as a dependent for 
     purposes of the deduction allowable under section 151 for any 
     taxable year ending with or within the calendar year, and
       ``(C) the--
       ``(i) aggregate amount of payments for qualified tuition 
     and related expenses received with respect to the individual 
     described in subparagraph (A) during the calendar year, and
       ``(ii) aggregate amount of reimbursements or refunds (or 
     similar amounts) paid to such individual during the calendar 
     year, and
       ``(D) such other information as the Secretary may 
     prescribe.
       ``(c) Application to Governmental Units.--For purposes of 
     this section--
       ``(1) a governmental unit or any agency or instrumentality 
     thereof shall be treated as a person, and
       ``(2) any return required under subsection (a) by such 
     governmental entity shall be made by the officer or employee 
     appropriately designated for the purpose of making such 
     return.
       ``(d) Statements To Be Furnished to Individuals With 
     Respect to Whom Information Is Required.--Every person 
     required to make a return under subsection (a) shall furnish 
     to each individual whose name is required to be set forth in 
     such return under subparagraph (A) or (B) of subsection 
     (b)(2) a written statement showing--
       ``(1) the name, address, and phone number of the 
     information contact of the person required to make such 
     return, and
       ``(2) the aggregate amounts described in subparagraph (C) 
     of subsection (b)(2).

     The written statement required under the preceding sentence 
     shall be furnished on or before January 31 of the year 
     following the calendar year for which the return under 
     subsection (a) was required to be made.
       ``(e) Definitions.--For purposes of this section, the terms 
     `eligible educational institution' and `qualified tuition and 
     related expenses' have the meanings given such terms by 
     section 25A.

[[Page H6415]]

       ``(f) Returns Which Would Be Required To Be Made by 2 or 
     More Persons.--Except to the extent provided in regulations 
     prescribed by the Secretary, in the case of any amount 
     received by any person on behalf of another person, only the 
     person first receiving such amount shall be required to make 
     the return under subsection (a).
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the provisions 
     of this section. No penalties shall be imposed under part II 
     of subchapter B of chapter 68 with respect to any return or 
     statement required under this section until such time as such 
     regulations are issued.''.
       (2) Assessable penalties.--
       (A) Subparagraph (B) of section 6724(d)(1) (relating to 
     definitions) is amended by redesignating clauses (ix) through 
     (xiv) as clauses (x) through (xv), respectively, and by 
     inserting after clause (viii) the following new clause:
       ``(ix) section 6050S (relating to returns relating to 
     payments for qualified tuition and related expenses),''.
       (B) Paragraph (2) of section 6724(d) is amended by striking 
     ``or'' at the end of the next to last subparagraph, by 
     striking the period at the end of the last subparagraph and 
     inserting ``, or'', and by adding at the end the following 
     new subparagraph:
       ``(Z) section 6050S(d) (relating to returns relating to 
     qualified tuition and related expenses).''.
       (3) Clerical amendment.--The table of sections for subpart 
     B of part III of subchapter A of chapter 61 is amended by 
     inserting after the item relating to section 6050R the 
     following new item:

``Sec. 6050S. Returns relating to higher education tuition and related 
              expenses.''.

       (d) Coordination With Section 135.--Subsection (d) of 
     section 135 is amended by redesignating paragraphs (2) and 
     (3) as paragraphs (3) and (4), respectively, and by inserting 
     after paragraph (1) the following new paragraph:
       ``(2) Coordination with higher education credit.--The 
     amount of the qualified higher education expenses otherwise 
     taken into account under subsection (a) with respect to the 
     education of an individual shall be reduced (before the 
     application of subsection (b)) by the amount of such expenses 
     which are taken into account in determining the credit 
     allowable to the taxpayer or any other person under section 
     25A with respect to such expenses.''.
       (e) Clerical 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 25 the following 
     new item:

``Sec. 25A. Higher education tuition and related expenses.''.

       (f) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to expenses paid after December 31, 1997 (in taxable 
     years ending after such date), for education furnished in 
     academic periods beginning after such date.
       (2) Lifetime learning credit.--Section 25A(a)(2) of the 
     Internal Revenue Code of 1986 shall apply to expenses paid 
     after June 30, 1998 (in taxable years ending after such 
     date), for education furnished in academic periods beginning 
     after such dates.

     SEC. 202. DEDUCTION FOR INTEREST ON EDUCATION LOANS.

       (a) In General.--Part VII of subchapter B of chapter 1 
     (relating to additional itemized deductions for individuals) 
     is amended by redesignating section 221 as section 222 and by 
     inserting after section 220 the following new section:

     ``SEC. 221. INTEREST ON EDUCATION LOANS.

       ``(a) Allowance of Deduction.--In the case of an 
     individual, there shall be allowed as a deduction for the 
     taxable year an amount equal to the interest paid by the 
     taxpayer during the taxable year on any qualified education 
     loan.
       ``(b) Maximum Deduction.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     deduction allowed by subsection (a) for the taxable year 
     shall not exceed the amount determined in accordance with the 
     following table:

                                               ``In the case The dollar
                                                    years begamount is:
      1998......................................................$1,000 
      1999......................................................$1,500 
      2000......................................................$2,000 
      2001 or thereafter........................................$2,500.

       ``(2) Limitation based on modified adjusted gross income.--
       ``(A) In general.--The amount which would (but for this 
     paragraph) be allowable as a deduction under this section 
     shall be reduced (but not below zero) by the amount 
     determined under subparagraph (B).
       ``(B) Amount of reduction.--The amount determined under 
     this subparagraph is the amount which bears the same ratio to 
     the amount which would be so taken into account as--
       ``(i) the excess of--

       ``(I) the taxpayer's modified adjusted gross income for 
     such taxable year, over
       ``(II) $40,000 ($60,000 in the case of a joint return), 
     bears to

       ``(ii) $15,000.
       ``(C) Modified adjusted gross income.--The term `modified 
     adjusted gross income' means adjusted gross income 
     determined--
       ``(i) without regard to this section and sections 135, 137, 
     911, 931, and 933, and
       ``(ii) after application of sections 86, 219, and 469.

     For purposes of sections 86, 135, 137, 219, and 469, adjusted 
     gross income shall be determined without regard to the 
     deduction allowed under this section.
       ``(c) Dependents Not Eligible for Deduction.--No deduction 
     shall be allowed by this section to an individual for the 
     taxable year if a deduction under section 151 with respect to 
     such individual is allowed to another taxpayer for the 
     taxable year beginning in the calendar year in which such 
     individual's taxable year begins.
       ``(d) Limit on Period Deduction Allowed.--A deduction shall 
     be allowed under this section only with respect to interest 
     paid on any qualified education loan during the first 60 
     months (whether or not consecutive) in which interest 
     payments are required. For purposes of this paragraph, any 
     loan and all refinancings of such loan shall be treated as 1 
     loan.
       ``(e) Definitions.--For purposes of this section--
       ``(1) Qualified education loan.--The term `qualified 
     education loan' means any indebtedness incurred to pay 
     qualified higher education expenses--
       ``(A) which are incurred on behalf of the taxpayer, the 
     taxpayer's spouse, or any dependent of the taxpayer as of the 
     time the indebtedness was incurred,
       ``(B) which are paid or incurred within a reasonable period 
     of time before or after the indebtedness is incurred, and
       ``(C) which are attributable to education furnished during 
     a period during which the recipient was an eligible student.

     Such term includes indebtedness used to refinance 
     indebtedness which qualifies as a qualified education loan. 
     The term `qualified education loan' shall not include any 
     indebtedness owed to a person who is related (within the 
     meaning of section 267(b) or 707(b)(1)) to the taxpayer.
       ``(2) Qualified higher education expenses.--The term 
     `qualified higher education expenses' means the cost of 
     attendance (as defined in section 472 of the Higher Education 
     Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before 
     the date of the enactment of this Act) at an eligible 
     educational institution, reduced by the sum of--
       ``(A) the amount excluded from gross income under section 
     127, 135, or 530 by reason of such expenses, and
       ``(B) the amount of any scholarship, allowance, or payment 
     described in section 25A(g)(2).

     For purposes of the preceding sentence, the term `eligible 
     educational institution' has the same meaning given such term 
     by section 25A(f)(2), except that such term shall also 
     include an institution conducting an internship or residency 
     program leading to a degree or certificate awarded by an 
     institution of higher education, a hospital, or a health care 
     facility which offers postgraduate training.
       ``(3) Eligible student.--The term `eligible student' has 
     the meaning given such term by section 25A(b)(3).
       ``(4) Dependent.--The term `dependent' has the meaning 
     given such term by section 152.
       ``(f) Special Rules.--
       ``(1) Denial of double benefit.--No deduction shall be 
     allowed under this section for any amount for which a 
     deduction is allowable under any other provision of this 
     chapter.
       ``(2) Married couples must file joint return.--If the 
     taxpayer is married at the close of the taxable year, the 
     deduction shall be allowed under subsection (a) only if the 
     taxpayer and the taxpayer's spouse file a joint return for 
     the taxable year.
       ``(3) Marital status.--Marital status shall be determined 
     in accordance with section 7703.
       ``(g) Inflation Adjustments.--
       ``(1) In general.--In the case of a taxable year beginning 
     after 2002, the $40,000 and $60,000 amounts in subsection 
     (b)(2) shall each be increased by an amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2001' 
     for `calendar year 1992' in subparagraph (B) thereof.
       ``(2) Rounding.--If any amount as adjusted under paragraph 
     (1) is not a multiple of $5,000, such amount shall be rounded 
     to the next lowest multiple of $5,000.''.
       (b) Deduction Allowed Whether or Not Taxpayer Itemizes 
     Other Deductions.--Subsection (a) of section 62 is amended by 
     inserting after paragraph (16) the following new paragraph:
       ``(17) Interest on education loans.--The deduction allowed 
     by section 221.''.
       (c) Reporting Requirement.--
       (1) In general.--Section 6050S(a)(2) (relating to returns 
     relating to higher education tuition and related expenses) is 
     amended to read as follows:
       ``(2) which is engaged in a trade or business and which, in 
     the course of such trade or business--
       ``(A) makes payments during any calendar year to any 
     individual which constitutes reimbursements or refunds (or 
     similar amounts) of qualified tuition and related expenses of 
     such individual, or
       ``(B) except as provided in regulations, receives from any 
     individual interest aggregating $600 or more for any calendar 
     year on 1 or more qualified education loans,''.
       (2) Information.--Section 6050S(b)(2) is amended--
       (A) by inserting ``or interest'' after ``payments'' in 
     subparagraph (A), and
       (B) in subparagraph (C), by striking ``and'' at the end of 
     clause (i), by inserting ``and'' at the end of clause (ii), 
     and by inserting after clause (ii) the following:
       ``(iii) aggregate amount of interest received for the 
     calendar year from such individual,''.
       (3) Definition.--Section 6050S(e) is amended by inserting 
     ``, and except as provided in regulations, the term 
     `qualified education loan' has

[[Page H6416]]

     the meaning given such term by section 221(e)(1)'' after 
     ``section 25A''.
       (d) Clerical Amendment.--The table of sections for part VII 
     of subchapter B of chapter 1 is amended by striking the last 
     item and inserting the following new items:

``Sec. 221. Interest on education loans.
``Sec. 222. Cross reference.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to any qualified education loan (as defined in 
     section 221(e)(1) of the Internal Revenue Code of 1986, as 
     added by this section) incurred on, before, or after the date 
     of the enactment of this Act, but only with respect to--
       (1) any loan interest payment due and paid after December 
     31, 1997, and
       (2) the portion of the 60-month period referred to in 
     section 221(d) of the Internal Revenue Code of 1986 (as added 
     by this section) after December 31, 1997.

     SEC. 203. PENALTY-FREE WITHDRAWALS FROM INDIVIDUAL RETIREMENT 
                   PLANS FOR HIGHER EDUCATION EXPENSES.

       (a) In General.--Paragraph (2) of section 72(t) (relating 
     to exceptions to 10-percent additional tax on early 
     distributions from qualified retirement plans) is amended by 
     adding at the end the following new subparagraph:
       ``(E) Distributions from individual retirement plans for 
     higher education 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 paragraph (7)) of the taxpayer for 
     the taxable year. Distributions shall not be taken into 
     account under the preceding sentence if such distributions 
     are described in subparagraph (A), (C), or (D) or to the 
     extent paragraph (1) does not apply to such distributions by 
     reason of subparagraph (B).''.
       (b) Definition.--Section 72(t) is amended by adding at the 
     end the following new paragraph:
       ``(7) Qualified higher education expenses.--For purposes of 
     paragraph (2)(E)--
       ``(A) In general.--The term `qualified higher education 
     expenses' means qualified higher education expenses (as 
     defined in section 529(e)(3)) for education furnished to--
       ``(i) the taxpayer,
       ``(ii) the taxpayer's spouse, or
       ``(iii) any child (as defined in section 151(c)(3)) or 
     grandchild of the taxpayer or the taxpayer's spouse,

     at an eligible educational institution (as defined in section 
     529(e)(5)).
       ``(B) Coordination with other benefits.--The amount of 
     qualified higher education expenses for any taxable year 
     shall be reduced as provided in section 25A(g)(2).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to distributions after December 31, 1997, with 
     respect to expenses paid after such date (in taxable years 
     ending after such date), for education furnished in 
     academic periods beginning after such date.
    Subtitle B--Expanded Education Investment Savings Opportunities

                   PART I--QUALIFIED TUITION PROGRAMS

     SEC. 211. MODIFICATIONS OF QUALIFIED STATE TUITION PROGRAMS.

       (a) Qualified Higher Education Expenses To Include Room and 
     Board.--Paragraph (3) of section 529(e) (defining qualified 
     higher education expenses) is amended to read as follows:
       ``(3) Qualified higher education expenses.--
       ``(A) In general.--The term `qualified higher education 
     expenses' means tuition, fees, books, supplies, and equipment 
     required for the enrollment or attendance of a designated 
     beneficiary at an eligible educational institution.
       ``(B) Room and board included for students under guaranteed 
     plans who are at least half-time.--
       ``(i) In general.--In the case of an individual who is an 
     eligible student (as defined in section 25A(b)(3)) for any 
     academic period, such term shall also include reasonable 
     costs for such period (as determined under the qualified 
     State tuition program) incurred by the designated beneficiary 
     for room and board while attending such institution. For 
     purposes of subsection (b)(7), a designated beneficiary shall 
     be treated as meeting the requirements of this clause.
       ``(ii) Limitation.--The amount treated as qualified higher 
     education expenses by reason of the preceding sentence shall 
     not exceed the minimum amount (applicable to the student) 
     included for room and board for such period in the cost of 
     attendance (as defined in section 472 of the Higher Education 
     Act of 1965, 20 U.S.C. 1087ll, as in effect on the date of 
     the enactment of this paragraph) for the eligible educational 
     institution for such period.''
       (b) Additional Modifications.--
       (1) Member of family.--Paragraph (2) of section 529(e) 
     (relating to other definitions and special rules) is amended 
     to read as follows:
       ``(2) Member of family.--The term `member of the family' 
     means--
       ``(A) an individual who bears a relationship to another 
     individual which is a relationship described in paragraphs 
     (1) through (8) of section 152(a), and
       ``(B) the spouse of any individual described in 
     subparagraph (A).''.
       (2) Eligible educational institution.--Section 529(e) is 
     amended by adding at the end the following:
       ``(5) Eligible educational institution.--The term `eligible 
     educational institution' means an institution--
       ``(A) which is described in section 481 of the Higher 
     Education Act of 1965 (20 U.S.C. 1088), as in effect on the 
     date of the enactment of this paragraph, and
       ``(B) which is eligible to participate in a program under 
     title IV of such Act.''.
       (3) Estate and gift tax treatment.--
       (A) Gift tax treatment.--
       (i) Paragraph (2) of section 529(c) is amended to read as 
     follows:
       ``(2) Gift tax treatment of contributions.--For purposes of 
     chapters 12 and 13--
       ``(A) In general.--Any contribution to a qualified tuition 
     program on behalf of any designated beneficiary--
       ``(i) shall be treated as a completed gift to such 
     beneficiary which is not a future interest in property, and
       ``(ii) shall not be treated as a qualified transfer under 
     section 2503(e).
       ``(B) Treatment of excess contributions.--If the aggregate 
     amount of contributions described in subparagraph (A) during 
     the calendar year by a donor exceeds the limitation for such 
     year under section 2503(b), such aggregate amount shall, at 
     the election of the donor, be taken into account for purposes 
     of such section ratably over the 5-year period beginning with 
     such calendar year.''
       (ii) Paragraph (5) of section 529(c) is amended to read as 
     follows:
       ``(5) Other gift tax rules.--For purposes of chapters 12 
     and 13--
       ``(A) Treatment of distributions.--Except as provided in 
     subparagraph (B), in no event shall a distribution from a 
     qualified tuition program be treated as a taxable gift.
       ``(B) Treatment of designation of new beneficiary.--The 
     taxes imposed by chapters 12 and 13 shall apply to a transfer 
     by reason of a change in the designated beneficiary under the 
     program (or a rollover to the account of a new beneficiary) 
     only if the new beneficiary is a generation below the 
     generation of the old beneficiary (determined in accordance 
     with section 2651).''.
       (B) Estate tax treatment.--Paragraph (4) of section 529(c) 
     is amended to read as follows:
       ``(4) Estate tax treatment.--
       ``(A) In general.--No amount shall be includible in the 
     gross estate of any individual for purposes of chapter 11 by 
     reason of an interest in a qualified tuition program.
       ``(B) Amounts includible in estate of designated 
     beneficiary in certain cases.--Subparagraph (A) shall not 
     apply to amounts distributed on account of the death of a 
     beneficiary.
       ``(C) Amounts includible in estate of donor making excess 
     contributions.--In the case of a donor who makes the election 
     described in paragraph (2)(B) and who dies before the close 
     of the 5-year period referred to in such paragraph, 
     notwithstanding subparagraph (A), the gross estate of the 
     donor shall include the portion of such contributions 
     properly allocable to periods after the date of death of the 
     donor.''
       (4) Prohibition against investment direction.--Section 
     529(b)(5) is amended by inserting ``directly or indirectly'' 
     after ``may not''.
       (c) Coordination With Education Savings Bond.--Section 
     135(c)(2) (defining qualified higher education expenses) is 
     amended by adding at the end the following:
       ``(C) Contributions to qualified state tuition program.--
     Such term shall include any contribution to a qualified State 
     tuition program (as defined in section 529) on behalf of a 
     designated beneficiary (as defined in such section) who is an 
     individual described in subparagraph (A); but there shall be 
     no increase in the investment in the contract for purposes of 
     applying section 529(c)(3)(A) by reason of any portion of 
     such contribution which is not includible in gross income by 
     reason of this subparagraph.''.
       (d) Clarification of Taxation of Distributions.--
     Subparagraph (A) of section 529(c)(3) is amended by striking 
     ``section 72'' and inserting ``section 72(b)''.
       (e) Technical Amendments.--
       (1)(A) The heading for part VIII of subchapter F of chapter 
     1 is amended to read as follows:

           ``PART VIII--HIGHER EDUCATION SAVINGS ENTITIES''.

       (B) The table of parts for subchapter F of chapter 1 is 
     amended by striking the item relating to part VIII and 
     inserting:

``Part VIII. Higher education savings entities.''.

       (2)(A) Section 529(d) is amended to read as follows:
       ``(d) Reports.--Each officer or employee having control of 
     the qualified State tuition program or their designee shall 
     make such reports regarding such program to the Secretary and 
     to designated beneficiaries with respect to contributions, 
     distributions, and such other matters as the Secretary may 
     require. The reports required by this subsection shall be 
     filed at such time and in such manner and furnished to such 
     individuals at such time and in such manner as may be 
     required by the Secretary.''.
       (B) Paragraph (2) of section 6693(a) (relating to failure 
     to provide reports on individual retirement accounts or 
     annuities) is amended by striking ``and'' at the end of 
     subparagraph (A), by striking the period at the end of 
     subparagraph (B) and inserting ``, and'', and by adding at 
     the end the following new subparagraph:
       ``(C) Section 529(d) (relating to qualified State tuition 
     programs).''.
       (C) The section heading for section 6693 is amended by 
     striking ``individual retirement'' and inserting ``certain 
     tax-favored''.
       (D) The item relating to section 6693 in the table of 
     sections for part I of subchapter B of chapter 68 is amended 
     by striking ``individual retirement'' and inserting ``certain 
     tax-favored''.
       (f) Effective Dates.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall take 
     effect on January 1, 1998.
       (2) Expenses to include room and board.--The amendment made 
     by subsection (a) shall take effect as if included in the 
     amendments made by section 1806 of the Small Business Job 
     Protection Act of 1996.
       (3) Eligible educational institution.--The amendment made 
     by subsection (b)(2) shall

[[Page H6417]]

     apply to distributions after December 31, 1997, with respect 
     to expenses paid after such date (in taxable years ending 
     after such date), for education furnished in academic periods 
     beginning after such date.
       (4) Coordination with education savings bonds.--The 
     amendment made by subsection (c) shall apply to taxable years 
     beginning after December 31, 1997.
       (5) Estate and gift tax changes.--
       (A) Gift tax changes.--Paragraphs (2) and (5) of section 
     529(c) of the Internal Revenue Code of 1986, as amended by 
     this section, shall apply to transfers (including 
     designations of new beneficiaries) made after the date of the 
     enactment of this Act.
       (B) Estate tax changes.--Paragraph (4) of such section 
     529(c) shall apply to estates of decedents dying after June 
     8, 1997.
       (6) Transition rule for pre-august 20, 1996 contracts.--In 
     the case of any contract issued prior to August 20, 1996, 
     section 529(c)(3)(C) of the Internal Revenue Code of 1986 
     shall be applied for taxable years ending after August 20, 
     1996, without regard to the requirement that a distribution 
     be transferred to a member of the family or the requirement 
     that a change in beneficiaries may be made only to a member 
     of the family.

           PART II--EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS

     SEC. 213. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

       (a) In General.--Part VIII of subchapter F of chapter 1 
     (relating to qualified State tuition programs) is amended by 
     adding at the end the following new section:

     ``SEC. 530. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

       ``(a) General Rule.--An education individual retirement 
     account shall be exempt from taxation under this subtitle. 
     Notwithstanding the preceding sentence, the education 
     individual retirement account shall be subject to the taxes 
     imposed by section 511 (relating to imposition of tax on 
     unrelated business income of charitable organizations).
       ``(b) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Education individual retirement account.--The term 
     `education individual retirement account' means a trust 
     created or organized in the United States exclusively for the 
     purpose of paying the qualified higher education expenses of 
     the designated beneficiary of the trust (and designated as an 
     education individual retirement account at the time created 
     or organized), but only if the written governing instrument 
     creating the trust meets the following requirements:
       ``(A) No contribution will be accepted--
       ``(i) unless it is in cash,
       ``(ii) after the date on which such beneficiary attains age 
     18, or
       ``(iii) except in the case of rollover contributions, if 
     such contribution would result in aggregate contributions for 
     the taxable year exceeding $500.
       ``(B) The trustee is a bank (as defined in section 408(n)) 
     or another person who demonstrates to the satisfaction of the 
     Secretary that the manner in which that person will 
     administer the trust will be consistent with the requirements 
     of this section or who has so demonstrated with respect to 
     any individual retirement plan.
       ``(C) No part of the trust assets will be invested in life 
     insurance contracts.
       ``(D) The assets of the trust shall not be commingled with 
     other property except in a common trust fund or common 
     investment fund.
       ``(E) Upon the death of the designated beneficiary, any 
     balance to the credit of the beneficiary shall be distributed 
     within 30 days after the date of death to the estate of such 
     beneficiary.
       ``(2) Qualified higher education expenses.--
       ``(A) In general.--The term `qualified higher education 
     expenses' has the meaning given such term by section 
     529(e)(3), reduced as provided in section 25A(g)(2).
       ``(B) Qualified state tuition programs.--Such term shall 
     include amounts paid or incurred to purchase tuition credits 
     or certificates, or to make contributions to an account, 
     under a qualified State tuition program (as defined in 
     section 529(b)) for the benefit of the beneficiary of the 
     account.
       ``(3) Eligible educational institution.--The term `eligible 
     educational institution' has the meaning given such term by 
     section 529(e)(5).
       ``(c) Reduction in Permitted Contributions Based on 
     Adjusted Gross Income.--
       ``(1) In general.--The maximum amount which a contributor 
     could otherwise make to an account under this section shall 
     be reduced by an amount which bears the same ratio to such 
     maximum amount as--
       ``(A) the excess of--
       ``(i) the contributor's modified adjusted gross income for 
     such taxable year, over
       ``(ii) $95,000 ($150,000 in the case of a joint return), 
     bears to
       ``(B) $15,000 ($10,000 in the case of a joint return).
       ``(2) Modified adjusted gross income.--For purposes of 
     paragraph (1), the term `modified adjusted gross income' 
     means the adjusted gross income of the taxpayer for the 
     taxable year increased by any amount excluded from gross 
     income under section 911, 931, or 933.
       ``(d) Tax Treatment of Distributions.--
       ``(1) In general.--Any distribution shall be includible in 
     the gross income of the distributee in the manner as provided 
     in section 72(b).
       ``(2) Distributions for qualified higher education 
     expenses.--
       ``(A) In general.--No amount shall be includible in gross 
     income under paragraph (1) if the qualified higher education 
     expenses of the designated beneficiary during the taxable 
     year are not less than the aggregate distributions during the 
     taxable year.
       ``(B) Distributions in excess of expenses.--If such 
     aggregate distributions exceed such expenses during the 
     taxable year, the amount otherwise includible in gross income 
     under paragraph (1) shall be reduced by the amount which 
     bears the same ratio to the amount which would be includible 
     in gross income under paragraph (1) (without regard to this 
     subparagraph) as the qualified higher education expenses bear 
     to such aggregate distributions.
       ``(C) Election to waive exclusion.--A taxpayer may elect to 
     waive the application of this paragraph for any taxable year.
       ``(3) Special rules for applying estate and gift taxes with 
     respect to account.--Rules similar to the rules of paragraphs 
     (2), (4), and (5) of section 529(c) shall apply for purposes 
     of this section.
       ``(4) Additional tax for distributions not used for 
     educational expenses.--
       ``(A) In general.--The tax imposed by this chapter for any 
     taxable year on any taxpayer who receives a payment or 
     distribution from an education individual retirement account 
     which is includible in gross income shall be increased by 10 
     percent of the amount which is so includible.
       ``(B) Exceptions.--Subparagraph (A) shall not apply if the 
     payment or distribution is--
       ``(i) made to a beneficiary (or to the estate of the 
     designated beneficiary) on or after the death of the 
     designated beneficiary,
       ``(ii) attributable to the designated beneficiary's being 
     disabled (within the meaning of section 72(m)(7)), or
       ``(iii) made on account of a scholarship, allowance, or 
     payment described in section 25A(g)(2) received by the 
     account holder to the extent the amount of the payment or 
     distribution does not exceed the amount of the scholarship, 
     allowance, or payment.
       ``(C) Excess contributions returned before due date of 
     return.--Subparagraph (A) shall not apply to the distribution 
     of any contribution made during a taxable year on behalf of a 
     designated beneficiary to the extent that such contribution 
     exceeds $500 if--
       ``(i) such distribution is received on or before the day 
     prescribed by law (including extensions of time) for filing 
     such contributor's return for such taxable year, and
       ``(ii) such distribution is accompanied by the amount of 
     net income attributable to such excess contribution.

     Any net income described in clause (ii) shall be included in 
     gross income for the taxable year in which such excess 
     contribution was made.
       ``(5) Rollover contributions.--Paragraph (1) shall not 
     apply to any amount paid or distributed from an education 
     individual retirement account to the extent that the amount 
     received is paid into another education individual retirement 
     account for the benefit of the same beneficiary or a member 
     of the family (within the meaning of section 529(e)(2)) of 
     such beneficiary not later than the 60th day after the date 
     of such payment or distribution. The preceding sentence shall 
     not apply to any payment or distribution if it applied to any 
     prior payment or distribution during the 12-month period 
     ending on the date of the payment or distribution.
       ``(6) Change in beneficiary.--Any change in the beneficiary 
     of an education individual retirement account shall not be 
     treated as a distribution for purposes of paragraph (1) if 
     the new beneficiary is a member of the family (as so defined) 
     of the old beneficiary.
       ``(7) Special rules for death and divorce.--Rules similar 
     to the rules of paragraphs (7) and (8) of section 220(f) 
     shall apply.
       ``(e) Tax Treatment of Accounts.--Rules similar to the 
     rules of paragraphs (2) and (4) of section 408(e) shall apply 
     to any education individual retirement account.
       ``(f) Community Property Laws.--This section shall be 
     applied without regard to any community property laws.
       ``(g) Custodial Accounts.--For purposes of this section, a 
     custodial account shall be treated as a trust if the assets 
     of such account are held by a bank (as defined in section 
     408(n)) or another person who demonstrates, to the 
     satisfaction of the Secretary, that the manner in which he 
     will administer the account will be consistent with the 
     requirements of this section, and if the custodial account 
     would, except for the fact that it is not a trust, constitute 
     an account described in subsection (b)(1). For purposes of 
     this title, in the case of a custodial account treated as a 
     trust by reason of the preceding sentence, the custodian of 
     such account shall be treated as the trustee thereof.
       ``(h) Reports.--The trustee of an education individual 
     retirement account shall make such reports regarding such 
     account to the Secretary and to the beneficiary of the 
     account with respect to contributions, distributions, and 
     such other matters as the Secretary may require. The reports 
     required by this subsection shall be filed at such time and 
     in such manner and furnished to such individuals at such time 
     and in such manner as may be required.''.
       (b) Tax on Prohibited Transactions.--
       (1) In general.--Paragraph (1) of section 4975(e) (relating 
     to prohibited transactions) is amended by striking ``or'' at 
     the end of subparagraph (D), by redesignating subparagraph 
     (E) as subparagraph (F), and by inserting after subparagraph 
     (D) the following new subparagraph:
       ``(E) an education individual retirement account described 
     in section 530, or''.
       (2) Special rule.--Subsection (c) of section 4975 is 
     amended by adding at the end of subsection (c) the following 
     new paragraph:
       ``(5) Special rule for education individual retirement 
     accounts.--An individual for whose benefit an education 
     individual retirement account is established and any 
     contributor

[[Page H6418]]

     to such account shall be exempt from the tax imposed by this 
     section with respect to any transaction concerning such 
     account (which would otherwise be taxable under this section) 
     if section 530(d) applies with respect to such 
     transaction.''.
       (c) Failure To Provide Reports on Education Individual 
     Retirement Accounts.--Paragraph (2) of section 6693(a) 
     (relating to failure to provide reports on individual 
     retirement accounts or annuities) is amended by striking 
     ``and'' at the end of subparagraph (B), by striking the 
     period at the end of subparagraph (C) and inserting ``, 
     and'', and by adding at the end the following new 
     subparagraph:
       ``(D) Section 530(h) (relating to education individual 
     retirement accounts).''.
       (d) Tax on Excess Contributions.--
       (1) In general.--Subsection (a) of section 4973 is amended 
     by striking ``or'' at the end of paragraph (2), by adding 
     ``or'' at the end of paragraph (3), and by inserting after 
     paragraph (3) the following new paragraph:
       ``(4) an education individual retirement account (as 
     defined in section 530),''.
       (2) Excess contributions defined.--Section 4973 is amended 
     by adding at the end the following new subsection:
       ``(e) Excess Contributions to Education Individual 
     Retirement Accounts.--For purposes of this section--
       ``(1) In general.--In the case of education individual 
     retirement accounts maintained for the benefit of any 1 
     beneficiary, the term `excess contributions' means--
       ``(A) the amount by which the amount contributed for the 
     taxable year to such accounts exceeds $500, and
       ``(B) any amount contributed to such accounts for any 
     taxable year if any amount is contributed during such year to 
     a qualified State tuition program for the benefit of such 
     beneficiary.
       ``(2) Special rules.--For purposes of paragraph (1), the 
     following contributions shall not be taken into account:
       ``(A) Any contribution which is distributed out of the 
     education individual retirement account in a distribution to 
     which section 530(d)(4)(C) applies.
       ``(B) Any contribution described in section 530(b)(2)(B) to 
     a qualified State tuition program.
       ``(C) Any rollover contribution.''.
       (e) Technical Amendments.--
       (1) Section 26(b)(2) is amended by redesignating 
     subparagraphs (E) through (P) as subparagraphs (F) through 
     (Q), respectively, and by inserting after subparagraph (D) 
     the following new subparagraph:
       ``(E) section 530(d)(3) (relating to additional tax on 
     certain distributions from education individual retirement 
     accounts),''.
       (2) Subparagraph (C) of section 135(c)(2), as added by the 
     preceding section, is amended by inserting ``, or to an 
     education individual retirement account (as defined in 
     section 530) on behalf of an account beneficiary,'' after 
     ``(as defined in such section)''.
       (3) The table of sections for part VIII of subchapter F of 
     chapter 1 is amended by adding at the end the following new 
     item:

``Sec. 530. Education individual retirement accounts.''.

       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.
                Subtitle C--Other Education Initiatives

     SEC. 221. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED 
                   EDUCATIONAL ASSISTANCE.

       (a) In General.--Subsection (d) of section 127 (relating to 
     educational assistance programs) is amended to read as 
     follows:
       ``(d) Termination.--This section shall not apply to 
     expenses paid with respect to courses beginning after May 31, 
     2000.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 222. REPEAL OF LIMITATION ON QUALIFIED 501(C)(3) BONDS 
                   OTHER THAN HOSPITAL BONDS.

       Section 145(b) (relating to qualified 501(c)(3) bond) is 
     amended by adding at the end the following new paragraph:
       ``(5) Termination of limitation.--This subsection shall not 
     apply with respect to bonds issued after the date of the 
     enactment of this paragraph as part of an issue 95 percent or 
     more of the net proceeds of which are to be used to finance 
     capital expenditures incurred after such date.''.

     SEC. 223. INCREASE IN ARBITRAGE REBATE EXCEPTION FOR 
                   GOVERNMENTAL BONDS USED TO FINANCE EDUCATION 
                   FACILITIES.

       (a) In General.--Section 148(f)(4)(D) (relating to 
     exception for governmental units issuing $5,000,000 or less 
     of bonds) is amended by adding at the end the following new 
     clause:
       ``(vii) Increase in exception for bonds financing public 
     school capital expenditures.--Each of the $5,000,000 amounts 
     in the preceding provisions of this subparagraph shall be 
     increased by the lesser of $5,000,000 or so much of the 
     aggregate face amount of the bonds as are attributable to 
     financing the construction (within the meaning of 
     subparagraph (C)(iv)) of public school facilities.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to bonds issued after December 31, 1997.

     SEC. 224. CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT 
                   FOR ELEMENTARY OR SECONDARY SCHOOL PURPOSES.

       (a) Contributions of Computer Technology and Equipment for 
     Elementary or Secondary School Purposes.--Subsection (e) of 
     section 170 is amended by adding at the end the following new 
     paragraph:
       ``(6) Special rule for contributions of computer technology 
     and equipment for elementary or secondary school purposes.--
       ``(A) Limit on reduction.--In the case of a qualified 
     elementary or secondary educational contribution, the 
     reduction under paragraph (1)(A) shall be no greater than the 
     amount determined under paragraph (3)(B).
       ``(B) Qualified elementary or secondary educational 
     contribution.--For purposes of this paragraph, the term 
     `qualified elementary or secondary educational contribution' 
     means a charitable contribution by a corporation of any 
     computer technology or equipment, but only if--
       ``(i) the contribution is to--

       ``(I) an educational organization described in subsection 
     (b)(1)(A)(ii), or
       ``(II) an entity described in section 501(c)(3) and exempt 
     from tax under section 501(a) (other than an entity described 
     in subclause (I)) that is organized primarily for purposes of 
     supporting elementary and secondary education,

       ``(ii) the contribution is made not later than 2 years 
     after the date the taxpayer acquired the property (or in the 
     case of property constructed by the taxpayer, the date the 
     construction of the property is substantially completed),
       ``(iii) the original use of the property is by the donor or 
     the donee,
       ``(iv) substantially all of the use of the property by the 
     donee is for use within the United States for educational 
     purposes in any of the grades K-12 that are related to the 
     purpose or function of the organization or entity,
       ``(v) the property is not transferred by the donee in 
     exchange for money, other property, or services, except for 
     shipping, installation and transfer costs,
       ``(vi) the property will fit productively into the entity's 
     education plan, and
       ``(vii) the entity's use and disposition of the property 
     will be in accordance with the provisions of clauses (iv) and 
     (v).
       ``(C) Contribution to private foundation.--A contribution 
     by a corporation of any computer technology or equipment to a 
     private foundation (as defined in section 509) shall be 
     treated as a qualified elementary or secondary educational 
     contribution for purposes of this paragraph if--
       ``(i) the contribution to the private foundation satisfies 
     the requirements of clauses (ii) and (v) of subparagraph (B), 
     and
       ``(ii) within 30 days after such contribution, the private 
     foundation--

       ``(I) contributes the property to an entity described in 
     clause (i) of subparagraph (B) that satisfies the 
     requirements of clauses (iv) through (vii) of subparagraph 
     (B), and
       ``(II) notifies the donor of such contribution.

       ``(D) Special rule relating to construction of property.--
     For the purposes of this paragraph, the rules of paragraph 
     (4)(C) shall apply.
       ``(E) Definitions.--For the purposes of this paragraph--
       ``(i) Computer technology or equipment.--The term `computer 
     technology or equipment' means computer software (as defined 
     by section 197(e)(3)(B)), computer or peripheral equipment 
     (as defined by section 168(i)(2)(B)), and fiber optic cable 
     related to computer use.
       ``(ii) Corporation.--The term `corporation' has the meaning 
     given to such term by paragraph (4)(D).
       ``(F) Termination.--This paragraph shall not apply to any 
     contribution made during any taxable year beginning after 
     December 31, 1999.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 225. TREATMENT OF CANCELLATION OF CERTAIN STUDENT LOANS.

       (a) Certain Loans by Exempt Organizations.--
       (1) In general.--Paragraph (2) of section 108(f) (defining 
     student loan) is amended by striking ``or'' at the end of 
     subparagraph (B) and by striking subparagraph (D) and 
     inserting the following:
       ``(D) any educational organization described in section 
     170(b)(1)(A)(ii) if such loan is made--
       ``(i) pursuant to an agreement with any entity described in 
     subparagraph (A), (B), or (C) under which the funds from 
     which the loan was made were provided to such educational 
     organization, or
       ``(ii) pursuant to a program of such educational 
     organization which is designed to encourage its students to 
     serve in occupations with unmet needs or in areas with unmet 
     needs and under which the services provided by the students 
     (or former students) are for or under the direction of a 
     governmental unit or an organization described in section 
     501(c)(3) and exempt from tax under section 501(a).

     The term `student loan' includes any loan made by an 
     educational organization so described or by an organization 
     exempt from tax under section 501(a) to refinance a loan 
     meeting the requirements of the preceding sentence.''.
       (2) Exception for discharges on account of services 
     performed for certain lenders.--Subsection (f) of section 108 
     is amended by adding at the end the following new paragraph:
       ``(3) Exception for discharges on account of services 
     performed for certain lenders.--Paragraph (1) shall not apply 
     to the discharge of a loan made by an organization described 
     in paragraph (2)(D) (or by an organization described in 
     paragraph (2)(E) from funds provided by an organization 
     described in paragraph (2)(D)) if the discharge is on account 
     of services performed for either such organization.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to discharges of indebtedness after the date of 
     the enactment of this Act.

     SEC. 226. INCENTIVES FOR EDUCATION ZONES.

       (a) In General.--Subchapter U of chapter 1 (relating to 
     additional incentives for

[[Page H6419]]

     empowerment zones) is amended by redesignating part IV as 
     part V, by redesignating section 1397E as section 1397F, and 
     by inserting after part III the following new part:

               ``PART IV--INCENTIVES FOR EDUCATION ZONES

``Sec. 1397E. Credit to holders of qualified zone academy bonds.''

     ``SEC. 1397E. CREDIT TO HOLDERS OF QUALIFIED ZONE ACADEMY 
                   BONDS.

       ``(a) Allowance of Credit.--In the case of an eligible 
     taxpayer who holds a qualified zone academy bond on the 
     credit allowance date of such bond which occurs during the 
     taxable year, there shall be allowed as a credit against the 
     tax imposed by this chapter for such taxable year the amount 
     determined under subsection (b).
       ``(b) Amount of Credit.--
       ``(1) In general.--The amount of the credit determined 
     under this subsection with respect to any qualified zone 
     academy bond is the amount equal to the product of--
       ``(A) the credit rate determined by the Secretary under 
     paragraph (2) for the month in which such bond was issued, 
     multiplied by
       ``(B) the face amount of the bond held by the taxpayer on 
     the credit allowance date.
       ``(2) Determination.--During each calendar month, the 
     Secretary shall determine a credit rate which shall apply to 
     bonds issued during the following calendar month. The credit 
     rate for any month is the percentage which the Secretary 
     estimates will permit the issuance of qualified zone academy 
     bonds without discount and without interest cost to the 
     issuer.
       ``(c) Limitation Based on Amount of Tax.--The credit 
     allowed under subsection (a) for any taxable year shall not 
     exceed the excess of--
       ``(1) the sum of the regular tax liability (as defined in 
     section 26(b)) plus the tax imposed by section 55, over
       ``(2) the sum of the credits allowable under part IV of 
     subchapter A (other than subpart C thereof, relating to 
     refundable credits).
       ``(d) Qualified Zone Academy Bond.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified zone academy bond' 
     means any bond issued as part of an issue if--
       ``(A) 95 percent or more of the proceeds of such issue are 
     to be used for a qualified purpose with respect to a 
     qualified zone academy established by an eligible local 
     education agency,
       ``(B) the bond is issued by a State or local government 
     within the jurisdiction of which such academy is located,
       ``(C) the issuer--
       ``(i) designates such bond for purposes of this section,
       ``(ii) certifies that it has written assurances that the 
     private business contribution requirement of paragraph (2) 
     will be met with respect to such academy, and
       ``(iii) certifies that it has the written approval of the 
     eligible local education agency for such bond issuance, and
       ``(D) the term of each bond which is part of such issue 
     does not exceed the maximum term permitted under paragraph 
     (3).
       ``(2) Private business contribution requirement.--
       ``(A) In general.--For purposes of paragraph (1), the 
     private business contribution requirement of this paragraph 
     is met with respect to any issue if the eligible local 
     education agency that established the qualified zone academy 
     has written commitments from private entities to make 
     qualified contributions having a present value (as of the 
     date of issuance of the issue) of not less than 10 percent of 
     the proceeds of the issue.
       ``(B) Qualified contributions.--For purposes of 
     subparagraph (A), the term `qualified contribution' means any 
     contribution (of a type and quality acceptable to the 
     eligible local education agency) of--
       ``(i) equipment for use in the qualified zone academy 
     (including state-of-the-art technology and vocational 
     equipment),
       ``(ii) technical assistance in developing curriculum or in 
     training teachers in order to promote appropriate market 
     driven technology in the classroom,
       ``(iii) services of employees as volunteer mentors,
       ``(iv) internships, field trips, or other educational 
     opportunities outside the academy for students, or
       ``(v) any other property or service specified by the 
     eligible local education agency.
       ``(3) Term requirement.--During each calendar month, the 
     Secretary shall determine the maximum term permitted under 
     this paragraph for bonds issued during the following calendar 
     month. Such maximum term shall be the term which the 
     Secretary estimates will result in the present value of the 
     obligation to repay the principal on the bond being equal to 
     50 percent of the face amount of the bond. Such present value 
     shall be determined using as a discount rate the average 
     annual interest rate of tax-exempt obligations having a term 
     of 10 years or more which are issued during the month. If the 
     term as so determined is not a multiple of a whole year, such 
     term shall be rounded to the next highest whole year.
       ``(4) Qualified zone academy.--
       ``(A) In general.--The term `qualified zone academy' means 
     any public school (or academic program within a public 
     school) which is established by and operated under the 
     supervision of an eligible local education agency to provide 
     education or training below the postsecondary level if--
       ``(i) such public school or program (as the case may be) is 
     designed in cooperation with business to enhance the academic 
     curriculum, increase graduation and employment rates, and 
     better prepare students for the rigors of college and the 
     increasingly complex workforce,
       ``(ii) students in such public school or program (as the 
     case may be) will be subject to the same academic standards 
     and assessments as other students educated by the eligible 
     local education agency,
       ``(iii) the comprehensive education plan of such public 
     school or program is approved by the eligible local education 
     agency, and
       ``(iv)(I) such public school is located in an empowerment 
     zone or enterprise community (including any such zone or 
     community designated after the date of the enactment of this 
     section), or
       ``(II) there is a reasonable expectation (as of the date of 
     issuance of the bonds) that at least 35 percent of the 
     students attending such school or participating in such 
     program (as the case may be) will be eligible for free or 
     reduced-cost lunches under the school lunch program 
     established under the National School Lunch Act.
       ``(B) Eligible local education agency.--The term `eligible 
     local education agency' means any local education agency as 
     defined in section 14101 of the Elementary and Secondary 
     Education Act of 1965.
       ``(5) Qualified purpose.--The term `qualified purpose' 
     means, with respect to any qualified zone academy--
       ``(A) rehabilitating or repairing the public school 
     facility in which the academy is established,
       ``(B) providing equipment for use at such academy,
       ``(C) developing course materials for education to be 
     provided at such academy, and
       ``(D) training teachers and other school personnel in such 
     academy.
       ``(6) Eligible taxpayer.--The term `eligible taxpayer' 
     means--
       ``(A) a bank (within the meaning of section 581),
       ``(B) an insurance company to which subchapter L applies, 
     and
       ``(C) a corporation actively engaged in the business of 
     lending money.
       ``(e) Limitation on Amount of Bonds Designated.--
       ``(1) National limitation.--There is a national zone 
     academy bond limitation for each calendar year. Such 
     limitation is $400,000,000 for 1998 and 1999, and, except as 
     provided in paragraph (4), zero thereafter.
       ``(2) Allocation of limitation.--The national zone academy 
     bond limitation for a calendar year shall be allocated by the 
     Secretary among the States on the basis of their respective 
     populations of individuals below the poverty line (as defined 
     by the Office of Management and Budget). The limitation 
     amount allocated to a State under the preceding sentence 
     shall be allocated by the State education agency to qualified 
     zone academies within such State.
       ``(3) Designation subject to limitation amount.--The 
     maximum aggregate face amount of bonds issued during any 
     calendar year which may be designated under subsection (d)(1) 
     with respect to any qualified zone academy shall not exceed 
     the limitation amount allocated to such academy under 
     paragraph (2) for such calendar year.
       ``(4) Carryover of unused limitation.--If for any calendar 
     year--
       ``(A) the limitation amount for any State, exceeds
       ``(B) the amount of bonds issued during such year which are 
     designated under subsection (d)(1) with respect to qualified 
     zone academies within such State,

     the limitation amount for such State for the following 
     calendar year shall be increased by the amount of such 
     excess.
       ``(f) Other Definitions.--For purposes of this section--
       ``(1) Credit allowance date.--The term `credit allowance 
     date' means, with respect to any issue, the last day of the 
     1-year period beginning on the date of issuance of such issue 
     and the last day of each successive 1-year period thereafter.
       ``(2) Bond.--The term `bond' includes any obligation.
       ``(3) State.--The term `State' includes the District of 
     Columbia and any possession of the United States.
       ``(g) Credit Included in Gross Income.--Gross income 
     includes the amount of the credit allowed to the taxpayer 
     under this section.''
       (b) Conforming Amendments.--
       (1) The table of parts for subchapter U of chapter 1 is 
     amended by striking the last item and inserting the 
     following:

``Part IV. Incentives for education zones.
``Part V. Regulations.''

       (2) The table of sections for part V, as so redesignated, 
     is amended to read as follows:

``Sec. 1397F. Regulations.''

       (c) Effective Date.--The amendments made by this section 
     shall apply to obligations issued after December 31, 1997.
              TITLE III--SAVINGS AND INVESTMENT INCENTIVES
                     Subtitle A--Retirement Savings

     SEC. 301. RESTORATION OF IRA DEDUCTION FOR CERTAIN TAXPAYERS.

       (a) Increase in Income Limits Applicable to Active 
     Participants.--
       (1) In general.--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:

                                                ``For taxThe applicable
                                                      dollar amount is:
  1998.....................................................$50,000 ....

  1999.....................................................$51,000 ....

  2000.....................................................$52,000 ....

  2001.....................................................$53,000 ....

[[Page H6420]]

  2002.....................................................$54,000 ....

  2003.....................................................$60,000 ....

  2004.....................................................$65,000 ....

  2005.....................................................$70,000 ....

  2006.....................................................$75,000 ....

  2007 and thereafter......................................$80,000.....

       ``(ii) In the case of any other taxpayer (other than a 
     married individual filing a separate return):

                                                ``For taxThe applicable
                                                      dollar amount is:
  1998.....................................................$30,000 ....

  1999.....................................................$31,000 ....

  2000.....................................................$32,000 ....

  2001.....................................................$33,000 ....

  2002.....................................................$34,000 ....

  2003.....................................................$40,000 ....

  2004.....................................................$45,000 ....

  2005 and thereafter......................................$50,000.....

       ``(iii) In the case of a married individual filing a 
     separate return, zero.''.
       (2) Increase in phase-out range for joint returns.--Clause 
     (ii) of section 219(g)(2)(A) is amended by inserting 
     ``($20,000 in the case of a joint return for a taxable year 
     beginning after December 31, 2006)''.
       (b) Limitations for Active Participation Not Based on 
     Spouse's Participation.--Section 219(g) (relating to 
     limitation on deduction for active participants in certain 
     pension plans) is amended--
       (1) by striking ``or the individual's spouse'' in paragraph 
     (1), and
       (2) by adding at the end the following new paragraph:
       ``(7) Special rule for certain spouses.--In the case of an 
     individual who is an active participant at no time during any 
     plan year ending with or within the taxable year but whose 
     spouse is an active participant for any part of any such plan 
     year--
       ``(A) the applicable dollar amount under paragraph 
     (3)(B)(i) with respect to the taxpayer shall be $150,000, and
       ``(B) the amount applicable under paragraph (2)(A)(ii) 
     shall be $10,000.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 302. 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. ROTH IRAS.

       ``(a) General Rule.--Except as provided in this section, a 
     Roth IRA shall be treated for purposes of this title in the 
     same manner as an individual retirement plan.
       ``(b) Roth IRA.--For purposes of this title, the term `Roth 
     IRA' 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 a Roth IRA. Such designation shall be made in 
     such manner as the Secretary may prescribe.
       ``(c) Treatment of Contributions.--
       ``(1) No deduction allowed.--No deduction shall be allowed 
     under section 219 for a contribution to a Roth IRA.
       ``(2) Contribution limit.--The aggregate amount of 
     contributions for any taxable year to all Roth IRAs 
     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 (d)(1) or (g) of 
     such section), over
       ``(B) the aggregate amount of contributions for such 
     taxable year to all other individual retirement plans (other 
     than Roth IRAs) maintained for the benefit of the individual.
       ``(3) Limits based on modified adjusted gross income.--
       ``(A) Dollar limit.--The amount determined under paragraph 
     (2) for any taxable year shall be reduced (but not below 
     zero) by the amount which bears the same ratio to such amount 
     as--
       ``(i) the excess of--

       ``(I) the taxpayer's adjusted gross income for such taxable 
     year, over
       ``(II) the applicable dollar amount, bears to

       ``(ii) $15,000 ($10,000 in the case of a joint return).

     The rules of subparagraphs (B) and (C) of section 219(g)(2) 
     shall apply to any reduction under this subparagraph.
       ``(B) Rollover from ira.--A taxpayer shall not be allowed 
     to make a qualified rollover contribution to a Roth IRA from 
     an individual retirement plan other than a Roth IRA during 
     any taxable year if--
       ``(i) the taxpayer's adjusted gross income for such taxable 
     year exceeds $100,000, or
       ``(ii) the taxpayer is a married individual filing a 
     separate return.
       ``(C) Definitions.--For purposes of this paragraph--
       ``(i) adjusted gross income shall be determined in the same 
     manner as under section 219(g)(3), except that any amount 
     included in gross income under subsection (d)(3) shall not be 
     taken into account and the deduction under section 219 shall 
     be taken into account, and
       ``(ii) the applicable dollar amount is--

       ``(I) in the case of a taxpayer filing a joint return, 
     $150,000,
       ``(II) in the case of any other taxpayer (other than a 
     married individual filing a separate return), $95,000, and
       ``(III) in the case of a married individual filing a 
     separate return, zero.

       ``(D) Marital status.--Section 219(g)(4) shall apply for 
     purposes of this paragraph.
       ``(4) Contributions permitted after age 70\1/2\.--
     Contributions to a Roth IRA may be made even after the 
     individual for whom the account is maintained has attained 
     age 70\1/2\.
       ``(5) Mandatory distribution rules not to apply before 
     death.--Notwithstanding subsections (a)(6) and (b)(3) of 
     section 408 (relating to required distributions), the 
     following provisions shall not apply to any Roth IRA:
       ``(A) Section 401(a)(9)(A).
       ``(B) The incidental death benefit requirements of section 
     401(a).
       ``(6) Rollover contributions.--
       ``(A) In general.--No rollover contribution may be made to 
     a Roth IRA 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).
       ``(7) Time when contributions made.--For purposes of this 
     section, the rule of section 219(f)(3) shall apply.
       ``(d) Distribution Rules.--For purposes of this title--
       ``(1) General rules.--
       ``(A) Exclusions from gross income.--Any qualified 
     distribution from a Roth IRA shall not be includible in gross 
     income.
       ``(B) Nonqualified distributions.--In applying section 72 
     to any distribution from a Roth IRA which is not a qualified 
     distribution, such distribution shall be treated as made from 
     contributions to the Roth IRA to the extent that such 
     distribution, when added to all previous distributions from 
     the Roth IRA, does not exceed the aggregate amount of 
     contributions to the Roth IRA.
       ``(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 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 a Roth IRA (or such individual's spouse made 
     a contribution to a Roth IRA) 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 from an 
     individual retirement plan other than a Roth IRA (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.
       ``(3) Rollovers from an ira other than a Roth IRA.--
       ``(A) In general.--Notwithstanding section 408(d)(3), in 
     the case of any distribution to which this paragraph 
     applies--
       ``(i) there shall be included in gross income any amount 
     which would be includible were it not part of a qualified 
     rollover contribution,
       ``(ii) section 72(t) shall not apply, and
       ``(iii) in the case of a distribution 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.
       ``(B) Distributions to which paragraph applies.--This 
     paragraph shall apply to a distribution from an individual 
     retirement plan (other than a Roth IRA) maintained for the 
     benefit of an individual which is contributed to a Roth IRA 
     maintained for the benefit of such individual in a qualified 
     rollover contribution.
       ``(C) Conversions.--The conversion of an individual 
     retirement plan (other than a Roth IRA) to a Roth IRA shall 
     be treated for purposes of this paragraph as a distribution 
     to which this paragraph applies.
       ``(D) Conversion of excess contributions.--If, no later 
     than the due date for filing the return of tax for any 
     taxable year (without regard to extensions), an individual 
     transfers, from an individual retirement plan (other than a 
     Roth IRA), contributions for such taxable year (and any 
     earnings allocable thereto) to a Roth IRA, no such amount 
     shall be includible in gross income to the extent no 
     deduction was allowed with respect to such amount.
       ``(E) Additional reporting requirements.--Trustees of Roth 
     IRAs, trustees of individual retirement plans, or both, 
     whichever is appropriate, shall include such additional 
     information in reports required under section 408(i) as the 
     Secretary may require to ensure that amounts required to be 
     included in gross income under subparagraph (A) are so 
     included.
       ``(4) Coordination with individual retirement accounts.--
     Section 408(d)(2) shall be applied separately with respect to 
     Roth IRAs and other individual retirement plans.
       ``(5) Qualified special purpose distribution.--For purposes 
     of this section, the term `qualified special purpose 
     distribution' means any distribution to which subparagraph 
     (F) of section 72(t)(2) applies.
       ``(e) Qualified Rollover Contribution.--For purposes of 
     this section, the term `qualified rollover contribution' 
     means a rollover contribution to a Roth IRA 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 (other 
     than a Roth IRA) to a Roth IRA.''.

[[Page H6421]]

       (b) Excess Contributions.--Section 4973(b), as amended by 
     title II, is amended by adding at the end the following new 
     subsection:
       ``(f) Excess Contributions to Roth IRAs.--For purposes of 
     this section, in the case of contributions to a Roth IRA 
     (within the meaning of section 408A(b)), the term `excess 
     contributions' means the sum of--
       ``(1) the excess (if any) of--
       ``(A) the amount contributed for the taxable year to such 
     accounts (other than a qualified rollover contribution 
     described in section 408A(e)), over
       ``(B) the amount allowable as a contribution under sections 
     408A (c)(2) and (c)(3), and
       ``(2) the amount determined under this subsection for the 
     preceding taxable year, reduced by the sum of--
       ``(A) the distributions out of the accounts for the taxable 
     year, and
       ``(B) the excess (if any) of the maximum amount allowable 
     as a contribution under sections 408A (c)(2) and (c)(3) for 
     the taxable year over the amount contributed to the accounts 
     for the taxable year.

     For purposes of this subsection, any contribution which is 
     distributed from a Roth IRA in a distribution described in 
     section 408(d)(4) shall be treated as an amount not 
     contributed.''
       (c) 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 a Roth IRA under section 408A for such taxable 
     year.''.

       (d) Authority To Prescribe Necessary Reporting.--Section 
     408(i) is amended--
       (1) by striking ``under regulations'', and
       (2) by striking ``in such regulations'' each place it 
     appears.
       (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. Roth IRAs.''.

       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 303. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE USED 
                   WITHOUT PENALTY TO PURCHASE FIRST HOMES.

       (a) 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 203, is amended by adding at the end the following 
     new subparagraph:
       ``(F) Distributions from certain plans for first home 
     purchases.--Distributions to an individual from an individual 
     retirement plan which are qualified first-time homebuyer 
     distributions (as defined in paragraph (8)). Distributions 
     shall not be taken into account under the preceding sentence 
     if such distributions are described in subparagraph (A), (C), 
     (D), or (E) or to the extent paragraph (1) does not apply 
     to such distributions by reason of subparagraph (B).''.
       (b) Definitions.--Section 72(t), as amended by section 203, 
     is amended by adding at the end the following new paragraphs:
       ``(8) Qualified first-time homebuyer distributions.--For 
     purposes of paragraph (2)(F)--
       ``(A) In general.--The term `qualified first-time homebuyer 
     distribution' means any payment or distribution received by 
     an individual to the extent such payment or distribution is 
     used by the individual before the close of the 120th day 
     after the day on which such payment or distribution is 
     received to pay qualified acquisition costs with respect to a 
     principal residence of a first-time homebuyer who is such 
     individual, the spouse of such individual, or any child, 
     grandchild, or ancestor of such individual or the 
     individual's spouse.
       ``(B) Lifetime dollar limitation.--The aggregate amount of 
     payments or distributions received by an individual which may 
     be treated as qualified first-time homebuyer distributions 
     for any taxable year shall not exceed the excess (if any) 
     of--
       ``(i) $10,000, over
       ``(ii) the aggregate amounts treated as qualified first-
     time homebuyer distributions with respect to such individual 
     for all prior taxable years.
       ``(C) Qualified acquisition costs.--For purposes of this 
     paragraph, the term `qualified acquisition costs' means the 
     costs of acquiring, constructing, or reconstructing a 
     residence. Such term includes any usual or reasonable 
     settlement, financing, or other closing costs.
       ``(D) First-time homebuyer; other definitions.--For 
     purposes of this paragraph--
       ``(i) First-time homebuyer.--The term `first-time 
     homebuyer' means any individual if--

       ``(I) such individual (and if married, such individual's 
     spouse) had no present ownership interest in a principal 
     residence during the 2-year period ending on the date of 
     acquisition of the principal residence to which this 
     paragraph applies, and
       ``(II) subsection (h) or (k) of section 1034 (as in effect 
     on the day before the date of the enactment of this 
     paragraph) did not suspend the running of any period of time 
     specified in section 1034 (as so in effect) with respect to 
     such individual on the day before the date the distribution 
     is applied pursuant to subparagraph (A).

       ``(ii) Principal residence.--The term `principal residence' 
     has the same meaning as when used in section 121.
       ``(iii) Date of acquisition.--The term `date of 
     acquisition' means the date--

       ``(I) on which a binding contract to acquire the principal 
     residence to which subparagraph (A) applies is entered into, 
     or
       ``(II) on which construction or reconstruction of such a 
     principal residence is commenced.

       ``(E) Special rule where delay in acquisition.--If any 
     distribution from any individual retirement plan fails to 
     meet the requirements of subparagraph (A) solely by reason 
     of a delay or cancellation of the purchase or construction 
     of the residence, the amount of the distribution may be 
     contributed to an individual retirement plan as provided 
     in section 408(d)(3)(A)(i) (determined by substituting 
     `120 days' for `60 days' in such section), except that--
       ``(i) section 408(d)(3)(B) shall not be applied to such 
     contribution, and
       ``(ii) such amount shall not be taken into account in 
     determining whether section 408(d)(3)(B) applies to any other 
     amount.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to payments and distributions in taxable years 
     beginning after December 31, 1997.

     SEC. 304. CERTAIN BULLION NOT TREATED AS COLLECTIBLES.

       (a) In General.--Paragraph (3) of section 408(m) (relating 
     to exception for certain coins) is amended to read as 
     follows:
       ``(3) Exception for certain coins and bullion.--For 
     purposes of this subsection, the term `collectible' shall not 
     include--
       ``(A) any coin which is--
       ``(i) a gold coin described in paragraph (7), (8), (9), or 
     (10) of section 5112(a) of title 31, United States Code,
       ``(ii) a silver coin described in section 5112(e) of title 
     31, United States Code,
       ``(iii) a platinum coin described in section 5112(k) of 
     title 31, United States Code, or
       ``(iv) a coin issued under the laws of any State, or
       ``(B) any gold, silver, platinum, or palladium bullion of a 
     fineness equal to or exceeding the minimum fineness that a 
     contract market (as described in section 7 of the Commodity 
     Exchange Act, 7 U.S.C. 7) requires for metals which may be 
     delivered in satisfaction of a regulated futures contract,

     if such bullion is in the physical possession of a trustee 
     described under subsection (a) of this section.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.
                       Subtitle B--Capital Gains

     SEC. 311. MAXIMUM CAPITAL GAINS RATES FOR INDIVIDUALS.

       (a) In General.--Subsection (h) of section 1 (relating to 
     maximum capital gains rate) is amended to read as follows:
       ``(h) Maximum Capital Gains Rate.--
       ``(1) In general.--If a taxpayer has a net capital gain for 
     any taxable year, the tax imposed by this section for such 
     taxable year shall not exceed the sum of--
       ``(A) a tax computed at the rates and in the same manner as 
     if this subsection had not been enacted on the greater of--
       ``(i) taxable income reduced by the net capital gain, or
       ``(ii) the lesser of--

       ``(I) the amount of taxable income taxed at a rate below 28 
     percent, or
       ``(II) taxable income reduced by the adjusted net capital 
     gain, plus

       ``(B) 25 percent of the excess (if any) of--
       ``(i) the unrecaptured section 1250 gain (or, if less, the 
     net capital gain), over
       ``(ii) the excess (if any) of--

       ``(I) the sum of the amount on which tax is determined 
     under subparagraph (A) plus the net capital gain, over
       ``(II) taxable income, plus

       ``(C) 28 percent of the amount of taxable income in excess 
     of the sum of--
       ``(i) the adjusted net capital gain, plus
       ``(ii) the sum of the amounts on which tax is determined 
     under subparagraphs (A) and (B), plus
       ``(D) 10 percent of so much of the taxpayer's adjusted net 
     capital gain (or, if less, taxable income) as does not exceed 
     the excess (if any) of--
       ``(i) the amount of taxable income which would (without 
     regard to this paragraph) be taxed at a rate below 28 
     percent, over
       ``(ii) the taxable income reduced by the adjusted net 
     capital gain, plus
       ``(E) 20 percent of the taxpayer's adjusted net capital 
     gain (or, if less, taxable income) in excess of the amount on 
     which a tax is determined under subparagraph (D).
       ``(2) Reduced capital gain rates for qualified 5-year 
     gain.--
       ``(A) Reduction in 10-percent rate.--In the case of any 
     taxable year beginning after December 31, 2000, the rate 
     under paragraph (1)(D) shall be 8 percent with respect to so 
     much of the amount to which the 10-percent rate would 
     otherwise apply as does not exceed qualified 5-year gain, and 
     10 percent with respect to the remainder of such amount.
       ``(B) Reduction in 20-percent rate.--The rate under 
     paragraph (1)(E) shall be 18 percent with respect to so much 
     of the amount to which the 20-percent rate would otherwise 
     apply as does not exceed the lesser of--
       ``(i) the excess of qualified 5-year gain over the amount 
     of such gain taken into account under subparagraph (A) of 
     this paragraph, or
       ``(ii) the amount of qualified 5-year gain (determined by 
     taking into account only property the holding period for 
     which begins after December 31, 2000),

     and 20 percent with respect to the remainder of such amount. 
     For purposes of determining under the preceding sentence 
     whether the holding period of property begins after December 
     31, 2000, the holding period of property acquired pursuant to 
     the exercise of an option (or other right or obligation to 
     acquire property) shall include the period such option (or 
     other right or obligation) was held.

[[Page H6422]]

       ``(3) Net capital gain taken into account as investment 
     income.--For purposes of this subsection, 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).
       ``(4) Adjusted net capital gain.--For purposes of this 
     subsection, the term `adjusted net capital gain' means net 
     capital gain determined without regard to--
       ``(A) collectibles gain,
       ``(B) unrecaptured section 1250 gain,
       ``(C) section 1202 gain, and
       ``(D) mid-term gain.
       ``(5) Collectibles gain.--For purposes of this subsection--
       ``(A) 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.
       ``(B) Partnerships, etc.--For purposes of subparagraph (A), 
     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.
       ``(6) Unrecaptured section 1250 gain.--For purposes of this 
     subsection--
       ``(A) In general.--The term `unrecaptured section 1250 
     gain' means the amount of long-term capital gain which would 
     be treated as ordinary income if--
       ``(i) section 1250(b)(1) included all depreciation and the 
     applicable percentage under section 1250(a) were 100 percent, 
     and
       ``(ii) in the case of gain properly taken into account 
     after July 28, 1997, only gain from section 1250 property 
     held for more than 18 months were taken into account.
       ``(B) Limitation with respect to section 1231 property.--
     The amount of unrecaptured section 1250 gain from sales, 
     exchanges, and conversions described in section 1231(a)(3)(A) 
     for any taxable year shall not exceed the excess of the net 
     section 1231 gain (as defined in section 1231(c)(3)) for such 
     year over the amount treated as ordinary income under section 
     1231(c)(1) for such year.
       ``(C) Pre-may 7, 1997, gain.--In the case of a taxable year 
     which includes May 7, 1997, subparagraph (A) shall be applied 
     by taking into account only the gain properly taken into 
     account for the portion of the taxable year after May 6, 
     1997.
       ``(7) Section 1202 gain.--For purposes of this subsection, 
     the term `section 1202 gain' means an amount equal to the 
     gain excluded from gross income under section 1202(a).
       ``(8) Mid-term gain.--For purposes of this subsection, the 
     term `mid-term gain' means the amount which would be adjusted 
     net capital gain for the taxable year if--
       ``(A) adjusted net capital gain were determined by taking 
     into account only the gain or loss properly taken into 
     account after July 28, 1997, from property held for more than 
     1 year but not more than 18 months, and
       ``(B) paragraph (3) and section 1212 did not apply.
       ``(9) Qualified 5-year gain.--For purposes of this 
     subsection, the term `qualified 5-year gain' means the amount 
     of long-term capital gain which would be computed for the 
     taxable year if only gains from the sale or exchange of 
     property held by the taxpayer for more than 5 years were 
     taken into account. The determination under the preceding 
     sentence shall be made without regard to collectibles gain, 
     unrecaptured section 1250 gain (determined without regard to 
     subparagraph (B) of paragraph (6)), section 1202 gain, or 
     mid-term gain.
       ``(10) Pre-effective date gain.--
       ``(A) In general.--In the case of a taxable year which 
     includes May 7, 1997, gains and losses properly taken into 
     account for the portion of the taxable year before May 7, 
     1997, shall be taken into account in determining mid-term 
     gain as if such gains and losses were described in paragraph 
     (8)(A).
       ``(B) Special rules for pass-thru entities.--In applying 
     subparagraph (A) with respect to any pass-thru entity, the 
     determination of when gains and loss are properly taken into 
     account shall be made at the entity level.
       ``(C) Pass-thru entity defined.--For purposes of 
     subparagraph (B), 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.
       ``(11) Treatment of pass-thru entities.--The Secretary may 
     prescribe such regulations as are appropriate (including 
     regulations requiring reporting) to apply this subsection in 
     the case of sales and exchanges by pass-thru entities (as 
     defined in paragraph (10)(C)) and of interests in such 
     entities.''.
       (b) Minimum Tax.--
       (1) In general.--Subsection (b) of section 55 is amended by 
     adding at the end the following new paragraph:
       ``(3) Maximum rate of tax on net capital gain of 
     noncorporate taxpayers.--The amount determined under the 
     first sentence of paragraph (1)(A)(i) shall not exceed the 
     sum of--
       ``(A) the amount determined under such first sentence 
     computed at the rates and in the same manner as if this 
     paragraph had not been enacted on the taxable excess reduced 
     by the lesser of--
       ``(i) the net capital gain, or
       ``(ii) the sum of--

       ``(I) the adjusted net capital gain, plus
       ``(II) the unrecaptured section 1250 gain, plus

       ``(B) 25 percent of the lesser of--
       ``(i) the unrecaptured section 1250 gain, or
       ``(ii) the amount of taxable excess in excess of the sum 
     of--

       ``(I) the adjusted net capital gain, plus
       ``(II) the amount on which a tax is determined under 
     subparagraph (A), plus

       ``(C) 10 percent of so much of the taxpayer's adjusted net 
     capital gain (or, if less, taxable excess) as does not exceed 
     the amount on which a tax is determined under section 
     1(h)(1)(D), plus
       ``(D) 20 percent of the taxpayer's adjusted net capital 
     gain (or, if less, taxable excess) in excess of the amount on 
     which tax is determined under subparagraph (C).

     In the case of taxable years beginning after December 31, 
     2000, rules similar to the rules of section 1(h)(2) shall 
     apply for purposes of subparagraphs (C) and (D). Terms used 
     in this paragraph which are also used in section 1(h) shall 
     have the respective meanings given such terms by section 
     1(h).''.
       (2) Conforming amendments.--
       (A) Clause (ii) of section 55(b)(1)(A) is amended by 
     striking ``clause (i)'' and inserting ``this subsection''.
       (B) Paragraph (7) of section 57(a) is amended by striking 
     ``one-half'' and inserting ``42 percent''.
       (c) Other Conforming Amendments.--
       (1) Paragraph (1) of section 1445(e) is amended by striking 
     ``28 percent'' and inserting ``20 percent''.
       (2) The second sentence of section 7518(g)(6)(A), and the 
     second sentence of section 607(h)(6)(A) of the Merchant 
     Marine Act, 1936, are each amended by striking ``28 percent'' 
     and inserting ``20 percent''.
       (3) Paragraph (2) of section 904(b) is amended by adding at 
     the end the following new subparagraph:
       ``(C) Coordination with capital gains rates.--The Secretary 
     may by regulations modify the application of this paragraph 
     and paragraph (3) to the extent necessary to properly reflect 
     any capital gain rate differential under section 1(h) or 
     1201(a) and the computation of net capital gain.''.
       (d) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     ending after May 6, 1997.
       (2) Withholding.--The amendment made by subsection (c)(1) 
     shall apply only to amounts paid after the date of the 
     enactment of this Act.
       (e) Election To Recognize Gain on Assets Held on January 1, 
     2001.--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 a capital asset) 
     held by such taxpayer on January 1, 2001, 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 capital asset or property used in the trade 
     or business (as defined in section 1231(b) of the Internal 
     Revenue Code of 1986) held by the taxpayer on January 1, 
     2001, 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, 2001, is readily tradable on an 
     established securities market or otherwise.

     SEC. 312. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL 
                   RESIDENCE.

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

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

       ``(a) Exclusion.--Gross income shall not include gain from 
     the sale or exchange of property if, during the 5-year period 
     ending on the date of the sale or exchange, such property has 
     been owned and used by the taxpayer as the taxpayer's 
     principal residence for periods aggregating 2 years or more.
       ``(b) Limitations.--
       ``(1) In general.--The amount of gain excluded from gross 
     income under subsection (a) with respect to any sale or 
     exchange shall not exceed $250,000.
       ``(2) $500,000 limitation for certain joint returns.--
     Paragraph (1) shall be applied by substituting `$500,000' for 
     `$250,000' if--
       ``(A) a husband and wife make a joint return for the 
     taxable year of the sale or exchange of the property,
       ``(B) either spouse meets the ownership requirements of 
     subsection (a) with respect to such property,

[[Page H6423]]

       ``(C) both spouses meet the use requirements of subsection 
     (a) with respect to such property, and
       ``(D) neither spouse is ineligible for the benefits of 
     subsection (a) with respect to such property by reason of 
     paragraph (3).
       ``(3) Application to only 1 sale or exchange every 2 
     years.--
       ``(A) In general.--Subsection (a) shall not apply to any 
     sale or exchange by the taxpayer if, during the 2-year period 
     ending on the date of such sale or exchange, there was any 
     other sale or exchange by the taxpayer to which subsection 
     (a) applied.
       ``(B) Pre-may 7, 1997, sales not taken into account.--
     Subparagraph (A) shall be applied without regard to any sale 
     or exchange before May 7, 1997.
       ``(c) Exclusion for Taxpayers Failing To Meet Certain 
     Requirements.--
       ``(1) In general.--In the case of a sale or exchange to 
     which this subsection applies, the ownership and use 
     requirements of subsection (a) shall not apply and subsection 
     (b)(3) shall not apply; but the amount of gain excluded from 
     gross income under subsection (a) with respect to such sale 
     or exchange shall not exceed--
       ``(A) the amount which bears the same ratio to the amount 
     which would be so excluded under this section if such 
     requirements had been met, as
       ``(B) the shorter of--
       ``(i) the aggregate periods, during the 5-year period 
     ending on the date of such sale or exchange, such property 
     has been owned and used by the taxpayer as the taxpayer's 
     principal residence, or
       ``(ii) the period after the date of the most recent prior 
     sale or exchange by the taxpayer to which subsection (a) 
     applied and before the date of such sale or exchange,

     bears to 2 years.
       ``(2) Sales and exchanges to which subsection applies.--
     This subsection shall apply to any sale or exchange if--
       ``(A) subsection (a) would not (but for this subsection) 
     apply to such sale or exchange by reason of--
       ``(i) a failure to meet the ownership and use requirements 
     of subsection (a), or
       ``(ii) subsection (b)(3), and
       ``(B) such sale or exchange is by reason of a change in 
     place of employment, health, or, to the extent provided in 
     regulations, unforeseen circumstances.
       ``(d) Special Rules.--
       ``(1) Joint returns.--If a husband and wife make a joint 
     return for the taxable year of the sale or exchange of the 
     property, subsections (a) and (c) shall apply if either 
     spouse meets the ownership and use requirements of subsection 
     (a) with respect to such property.
       ``(2) Property of deceased spouse.--For purposes of this 
     section, in the case of an unmarried individual whose spouse 
     is deceased on the date of the sale or exchange of property, 
     the period such unmarried individual owned and used such 
     property shall include the period such deceased spouse owned 
     and used such property before death.
       ``(3) Property owned by spouse or former spouse.--For 
     purposes of this section--
       ``(A) Property transferred to individual from spouse or 
     former spouse.--In the case of an individual holding property 
     transferred to such individual in a transaction described in 
     section 1041(a), the period such individual owns such 
     property shall include the period the transferor owned the 
     property.
       ``(B) Property used by former spouse pursuant to divorce 
     decree, etc.--Solely for purposes of this section, an 
     individual shall be treated as using property as such 
     individual's principal residence during any period of 
     ownership while such individual's spouse or former spouse is 
     granted use of the property under a divorce or separation 
     instrument (as defined in section 71(b)(2)).
       ``(4) Tenant-stockholder in cooperative housing 
     corporation.--For purposes of this section, if the taxpayer 
     holds stock as a tenant-stockholder (as defined in section 
     216) in a cooperative housing corporation (as defined in such 
     section), then--
       ``(A) the holding requirements of subsection (a) shall be 
     applied to the holding of such stock, and
       ``(B) the use requirements of subsection (a) shall be 
     applied to the house or apartment which the taxpayer was 
     entitled to occupy as such stockholder.
       ``(5) Involuntary conversions.--
       ``(A) In general.--For purposes of this section, the 
     destruction, theft, seizure, requisition, or condemnation of 
     property shall be treated as the sale of such property.
       ``(B) Application of section 1033.--In applying section 
     1033 (relating to involuntary conversions), the amount 
     realized from the sale or exchange of property shall be 
     treated as being the amount determined without regard to this 
     section, reduced by the amount of gain not included in gross 
     income pursuant to this section.
       ``(C) Property acquired after involuntary conversion.--If 
     the basis of the property sold or exchanged is determined (in 
     whole or in part) under section 1033(b) (relating to basis of 
     property acquired through involuntary conversion), then the 
     holding and use by the taxpayer of the converted property 
     shall be treated as holding and use by the taxpayer of the 
     property sold or exchanged.
       ``(6) Recognition of gain attributable to depreciation.--
     Subsection (a) shall not apply to so much of the gain from 
     the sale of any property as does not exceed the portion of 
     the depreciation adjustments (as defined in section 
     1250(b)(3)) attributable to periods after May 6, 1997, in 
     respect of such property.
       ``(7) Determination of use during periods of out-of-
     residence care.--In the case of a taxpayer who--
       ``(A) becomes physically or mentally incapable of self-
     care, and
       ``(B) owns property and uses such property as the 
     taxpayer's principal residence during the 5-year period 
     described in subsection (a) for periods aggregating at least 
     1 year,

     then the taxpayer shall be treated as using such property as 
     the taxpayer's principal residence during any time during 
     such 5-year period in which the taxpayer owns the property 
     and resides in any facility (including a nursing home) 
     licensed by a State or political subdivision to care for an 
     individual in the taxpayer's condition.
       ``(8) Sales of remainder interests.--For purposes of this 
     section--
       ``(A) In general.--At the election of the taxpayer, this 
     section shall not fail to apply to the sale or exchange of an 
     interest in a principal residence by reason of such interest 
     being a remainder interest in such residence, but this 
     section shall not apply to any other interest in such 
     residence which is sold or exchanged separately.
       ``(B) Exception for sales to related parties.--Subparagraph 
     (A) shall not apply to any sale to, or exchange with, any 
     person who bears a relationship to the taxpayer which is 
     described in section 267(b) or 707(b).
       ``(e) Denial of Exclusion for Expatriates.--This section 
     shall not apply to any sale or exchange by an individual if 
     the treatment provided by section 877(a)(1) applies to such 
     individual.
       ``(f) Election To Have Section Not Apply.--This section 
     shall not apply to any sale or exchange with respect to which 
     the taxpayer elects not to have this section apply.
       ``(g) Residences Acquired in Rollovers Under Section 
     1034.--For purposes of this section, in the case of property 
     the acquisition of which by the taxpayer resulted under 
     section 1034 (as in effect on the day before the date of the 
     enactment of this section) in the nonrecognition of any part 
     of the gain realized on the sale or exchange of another 
     residence, in determining the period for which the taxpayer 
     has owned and used such property as the taxpayer's principal 
     residence, there shall be included the aggregate periods for 
     which such other residence (and each prior residence taken 
     into account under section 1223(7) in determining the holding 
     period of such property) had been so owned and used.''.
       (b) Repeal of Nonrecognition of Gain on Rollover of 
     Principal Residence.--Section 1034 (relating to rollover of 
     gain on sale of principal residence) is hereby repealed.
       (c) Exception From Reporting.--Subsection (e) of section 
     6045 (relating to return required in the case of real estate 
     transactions) is amended by adding at the end the 
     following new paragraph:
       ``(5) Exception for sales or exchanges of certain principal 
     residences.--
       ``(A) In general.--Paragraph (1) shall not apply to any 
     sale or exchange of a residence for $250,000 or less if the 
     person referred to in paragraph (2) receives written 
     assurance in a form acceptable to the Secretary from the 
     seller that--
       ``(i) such residence is the principal residence (within the 
     meaning of section 121) of the seller,
       ``(ii) if the Secretary requires the inclusion on the 
     return under subsection (a) of information as to whether 
     there is federally subsidized mortgage financing assistance 
     with respect to the mortgage on residences, that there is no 
     such assistance with respect to the mortgage on such 
     residence, and
       ``(iii) the full amount of the gain on such sale or 
     exchange is excludable from gross income under section 121.

     If such assurance includes an assurance that the seller is 
     married, the preceding sentence shall be applied by 
     substituting `$500,000' for `$250,000'.

     The Secretary may by regulation increase the dollar amounts 
     under this subparagraph if the Secretary determines that such 
     an increase will not materially reduce revenues to the 
     Treasury.
       ``(B) Seller.--For purposes of this paragraph, the term 
     `seller' includes the person relinquishing the residence in 
     an exchange.''.
       (d) Conforming Amendments.--
       (1) The following provisions of the Internal Revenue Code 
     of 1986 are each amended by striking ``section 1034'' and 
     inserting ``section 121'': sections 25(e)(7), 56(e)(1)(A), 
     56(e)(3)(B)(i), 143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 
     280A(d)(4)(A), 464(f)(3)(B)(i), 1033(h)(4), 1274(c)(3)(B), 
     6334(a)(13), and 7872(f)(11)(A).
       (2) Paragraph (4) of section 32(c) is amended by striking 
     ``(as defined in section 1034(h)(3))'' and by adding at the 
     end the following new sentence: ``For purposes of the 
     preceding sentence, the term `extended active duty' means any 
     period of active duty pursuant to a call or order to such 
     duty for a period in excess of 90 days or for an indefinite 
     period.''.
       (3) Subparagraph (A) of 143(m)(6) is amended by inserting 
     ``(as in effect on the day before the date of the enactment 
     of the Taxpayer Relief Act of 1997)'' after ``1034(e)''.
       (4) Subsection (e) of section 216 is amended by striking 
     ``such exchange qualifies for nonrecognition of gain under 
     section 1034(f)'' and inserting ``such dwelling unit is used 
     as his principal residence (within the meaning of section 
     121)''.
       (5) Section 512(a)(3)(D) is amended by inserting ``(as in 
     effect on the day before the date of the enactment of the 
     Taxpayer Relief Act of 1997)'' after ``1034''.
       (6) Paragraph (7) of section 1016(a) is amended by 
     inserting ``(as in effect on the day before the date of the 
     enactment of the Taxpayer Relief Act of 1997)'' after 
     ``1034'' and by inserting ``(as so in effect)'' after 
     ``1034(e)''.
       (7) Paragraph (3) of section 1033(k) is amended to read as 
     follows:

[[Page H6424]]

       ``(3) For exclusion from gross income of gain from 
     involuntary conversion of principal residence, see section 
     121.''.
       (8) Subsection (e) of section 1038 is amended to read as 
     follows:
       ``(e) Principal Residences.--If--
       ``(1) subsection (a) applies to a reacquisition of real 
     property with respect to the sale of which gain was not 
     recognized under section 121 (relating to gain on sale of 
     principal residence); and
       ``(2) within 1 year after the date of the reacquisition of 
     such property by the seller, such property is resold by him,

     then, under regulations prescribed by the Secretary, 
     subsections (b), (c), and (d) of this section shall not apply 
     to the reacquisition of such property and, for purposes of 
     applying section 121, the resale of such property shall be 
     treated as a part of the transaction constituting the 
     original sale of such property.''.
       (9) Paragraph (7) of section 1223 is amended by inserting 
     ``(as in effect on the day before the date of the enactment 
     of the Taxpayer Relief Act of 1997)'' after ``1034''.
       (10)(A) Subsection (d) of section 1250 is amended by 
     striking paragraph (7) and by redesignating paragraphs (9) 
     and (10) as paragraphs (7) and (8), respectively.
       (B) Subsection (e) of section 1250 is amended by striking 
     paragraph (3).
       (11) Subsection (c) of section 6012 is amended by striking 
     ``(relating to one-time exclusion of gain from sale of 
     principal residence by individual who has attained age 55)'' 
     and inserting ``(relating to gain from sale of principal 
     residence)''.
       (12) Paragraph (2) of section 6212(c) is amended by 
     striking subparagraph (C) and by redesignating the succeeding 
     subparagraphs accordingly.
       (13) Section 6504 is amended by striking paragraph (4) and 
     by redesignating the succeeding paragraphs accordingly.
       (14) The item relating to section 121 in the table of 
     sections for part III of subchapter B of chapter 1 is amended 
     to read as follows:


``Sec. 121. Exclusion of gain from sale of principal residence.''.

       (15) The table of sections for part III of subchapter O of 
     chapter 1 is amended by striking the item relating to section 
     1034.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to sales and exchanges after May 6, 1997.
       (2) Sales before date of enactment.--At the election of the 
     taxpayer, the amendments made by this section shall not apply 
     to any sale or exchange before the date of the enactment of 
     this Act.
       (3) Certain sales within 2 years after date of enactment.--
     Section 121 of the Internal Revenue Code of 1986 (as amended 
     by this section) shall be applied without regard to 
     subsection (c)(2)(B) thereof in the case of any sale or 
     exchange of property during the 2-year period beginning on 
     the date of the enactment of this Act if the taxpayer held 
     such property on the date of the enactment of this Act and 
     fails to meet the ownership and use requirements of 
     subsection (a) thereof with respect to such property.
       (4) Binding contracts.--At the election of the taxpayer, 
     the amendments made by this section shall not apply to a sale 
     or exchange after the date of the enactment of this Act, if--
       (A) such sale or exchange is pursuant to a contract which 
     was binding on such date, or
       (B) without regard to such amendments, gain would not be 
     recognized under section 1034 of the Internal Revenue Code of 
     1986 (as in effect on the day before the date of the 
     enactment of this Act) on such sale or exchange by reason of 
     a new residence acquired on or before such date or with 
     respect to the acquisition of which by the taxpayer a 
     binding contract was in effect on such date.

     This paragraph shall not apply to any sale or exchange by an 
     individual if the treatment provided by section 877(a)(1) of 
     the Internal Revenue Code of 1986 applies to such individual.

     SEC. 313. ROLLOVER OF GAIN FROM SALE OF QUALIFIED STOCK.

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

     ``SEC. 1045. ROLLOVER OF GAIN FROM QUALIFIED SMALL BUSINESS 
                   STOCK TO ANOTHER QUALIFIED SMALL BUSINESS 
                   STOCK.

       ``(a) Nonrecognition of Gain.--In the case of any sale of 
     qualified small business stock held by an individual for more 
     than 6 months and with respect to which such individual 
     elects the application of this section, gain from such sale 
     shall be recognized only to the extent that the amount 
     realized on such sale exceeds--
       ``(1) the cost of any qualified small business stock 
     purchased by the taxpayer during the 60-day period beginning 
     on the date of such sale, reduced by
       ``(2) any portion of such cost previously taken into 
     account under this section.
     This section shall not apply to any gain which is treated as 
     ordinary income for purposes of this title.
       ``(b) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Qualified small business stock.--The term `qualified 
     small business stock' has the meaning given such term by 
     section 1202(c).
       ``(2) Purchase.--A taxpayer shall be treated as having 
     purchased any property if, but for paragraph (3), the 
     unadjusted basis of such property in the hands of the 
     taxpayer would be its cost (within the meaning of section 
     1012).
       ``(3) Basis adjustments.--If gain from any sale is not 
     recognized by reason of subsection (a), such gain shall be 
     applied to reduce (in the order acquired) the basis for 
     determining gain or loss of any qualified small business 
     stock which is purchased by the taxpayer during the 60-day 
     period described in subsection (a).
       ``(4) Holding period.--For purposes of determining whether 
     the nonrecognition of gain under subsection (a) applies to 
     stock which is sold--
       ``(A) the taxpayer's holding period for such stock and the 
     stock referred to in subsection (a)(1) shall be determined 
     without regard to section 1223, and
       ``(B) only the first 6 months of the taxpayer's holding 
     period for the stock referred to in subsection (a)(1) shall 
     be taken into account for purposes of applying section 
     1202(c)(2).''.
       (b) Conforming Amendments.--
       (1) Section 1016(a)(23) is amended--
       (A) by striking ``or 1044'' and inserting ``, 1044, or 
     1045'', and
       (B) by striking ``or 1044(d)'' and inserting ``, 1044(d), 
     or 1045(b)(4)''.
       (2) Section 1223 is amended by redesignating paragraph (15) 
     as paragraph (16) and by inserting after paragraph (14) the 
     following new paragraph:
       ``(15) In determining the period for which the taxpayer has 
     held property the acquisition of which resulted under section 
     1045 in the nonrecognition of any part of the gain realized 
     on the sale of other property, there shall be included the 
     period for which such other property has been held as of the 
     date of such sale.''.
       (3) The table of sections for part III of subchapter O of 
     chapter 1 is amended by adding at the end the following new 
     item:

``Sec. 1045. Rollover of gain from qualified small business stock to 
              another qualified small business stock.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to sales after the date of enactment of this Act.

     SEC. 314. AMOUNT OF NET CAPITAL GAIN TAKEN INTO ACCOUNT IN 
                   COMPUTING ALTERNATIVE TAX ON CAPITAL GAINS FOR 
                   CORPORATIONS NOT TO EXCEED TAXABLE INCOME OF 
                   THE CORPORATION.

       (a) In General.--Paragraph (2) of section 1201(a) is 
     amended by inserting before the period ``(or, if less, 
     taxable income)''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years ending after December 31, 1997.
                TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

     SEC. 401. EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR SMALL 
                   CORPORATIONS.

       (a) In General.--Section 55 (relating to alternative 
     minimum tax imposed) is amended by adding at the end the 
     following new subsection:
       ``(e) Exemption for Small Corporations.--
       ``(1) In general.--The tentative minimum tax of a 
     corporation shall be zero for any taxable year if--
       ``(A) such corporation met the $5,000,000 gross receipts 
     test of section 448(c) for its first taxable year beginning 
     after December 31, 1996, and
       ``(B) such corporation would meet such test for the taxable 
     year and all prior taxable years beginning after such first 
     taxable year if such test were applied by substituting 
     `$7,500,000' for `$5,000,000'.
       ``(2) Prospective application of minimum tax if small 
     corporation ceases to be small.--In the case of a corporation 
     whose tentative minimum tax is zero for any prior taxable 
     year by reason of paragraph (1), the application of this part 
     for taxable years beginning with the first taxable year such 
     corporation ceases to be described in paragraph (1) shall be 
     determined with the following modifications:
       ``(A) Section 56(a)(1) (relating to depreciation) and 
     section 56(a)(5) (relating to pollution control facilities) 
     shall apply only to property placed in service on or after 
     the change date.
       ``(B) Section 56(a)(2) (relating to mining exploration and 
     development costs) shall apply only to costs paid or incurred 
     on or after the change date.
       ``(C) Section 56(a)(3) (relating to treatment of long-term 
     contracts) shall apply only to contracts entered into on or 
     after the change date.
       ``(D) Section 56(a)(4) (relating to alternative net 
     operating loss deduction) shall apply in the same manner as 
     if, in section 56(d)(2), the change date were substituted for 
     `January 1, 1987' and the day before the change date were 
     substituted for `December 31, 1986' each place it appears.
       ``(E) Section 56(g)(2)(B) (relating to limitation on 
     allowance of negative adjustments based on adjusted current 
     earnings) shall apply only to prior taxable years beginning 
     on or after the change date.
       ``(F) Section 56(g)(4)(A) (relating to adjustment for 
     depreciation to adjusted current earnings) shall not apply.
       ``(G) Subparagraphs (D) and (F) of section 56(g)(4) 
     (relating to other earnings and profits adjustments and 
     depletion) shall apply in the same manner as if the day 
     before the change date were substituted for `December 31, 
     1989' each place it appears therein.
       ``(3) Exception.--The modifications in paragraph (2) shall 
     not apply to--
       ``(A) any item acquired by the corporation in a transaction 
     to which section 381 applies, and
       ``(B) any property the basis of which in the hands of the 
     corporation is determined by reference to the basis of the 
     property in the hands of the transferor,

     if such item or property was subject to any provision 
     referred to in paragraph (2) while held by the transferor.
       ``(4) Change date.--For purposes of paragraph (2), the 
     change date is the first day of the first taxable year for 
     which the taxpayer ceases to be described in paragraph (1).

[[Page H6425]]

       ``(5) Limitation on use of credit for prior year minimum 
     tax liability.--In the case of a taxpayer whose tentative 
     minimum tax for any taxable year is zero by reason of 
     paragraph (1), section 53(c) shall be applied for such year 
     by reducing the amount otherwise taken into account under 
     section 53(c)(1) by 25 percent of so much of such amount as 
     exceeds $25,000. Rules similar to the rules of section 
     38(c)(3)(B) shall apply for purposes of the preceding 
     sentence.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 402. REPEAL OF SEPARATE DEPRECIATION LIVES FOR MINIMUM 
                   TAX PURPOSES.

       (a) In General.--Clause (i) of section 56(a)(1)(A) is 
     amended by adding at the end the following new sentence: ``In 
     the case of property placed in service after December 31, 
     1998, the preceding sentence shall not apply but clause (ii) 
     shall continue to apply.''
       (b) Pollution Control Facilities.--Paragraph (5) of section 
     56(a) is amended by adding at the end the following new 
     sentence: ``In the case of such a facility placed in service 
     after December 31, 1998, such deduction shall be determined 
     under section 168 using the straight line method.''.

     SEC. 403. MINIMUM TAX NOT TO APPLY TO FARMERS' INSTALLMENT 
                   SALES.

       (a) In General.--Subsection (a) of section 56 is amended by 
     striking paragraph (6) (relating to treatment of installment 
     sales) and by redesignating paragraphs (7) and (8) as 
     paragraphs (6) and (7), respectively.
       (b) Effective Dates.--
       (1) In general.--The amendment made by this section shall 
     apply to dispositions in taxable years beginning after 
     December 31, 1987.
       (2) Special rule for 1987.--In the case of taxable years 
     beginning in 1987, the last sentence of section 56(a)(6) of 
     the Internal Revenue Code of 1986 (as in effect for such 
     taxable years) shall be applied by inserting ``or in the case 
     of a taxpayer using the cash receipts and disbursements 
     method of accounting, any disposition described in section 
     453C(e)(1)(B)(ii)'' after ``section 453C(e)(4)''.
     TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS
               Subtitle A--Estate and Gift Tax Provisions

     SEC. 501. COST-OF-LIVING ADJUSTMENTS RELATING TO ESTATE AND 
                   GIFT TAX PROVISIONS.

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

``In the case of estates                                               
  of decedents dying,                                    The applicable
  and gifts made                                              exclusion
  during:                                                    amount is:
      1998...................................................$ 625,000 
      1999...................................................$ 650,000 
      2000 and 2001..........................................$ 675,000 
      2002 and 2003..........................................$ 700,000 
      2004...................................................$ 850,000 
      2005...................................................$ 950,000 
      2006 or thereafter..................................$1,000,000.''

       (C) Estate tax returns.--Paragraph (1) of section 6018(a) 
     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''.
       (D) Phaseout of graduated rates and unified credit.--
     Paragraph (2) of section 2001(c) is amended by striking 
     ``$21,040,000'' and inserting ``the amount at which the 
     average tax rate under this section is 55 percent''.
       (E) Estates of nonresidents not citizens.--Subparagraph (A) 
     of section 2102(c)(3) 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''.
       (2) Unified gift tax credit.--Paragraph (1) of section 
     2505(a) is amended by striking ``$192,800'' and inserting 
     ``the applicable credit amount in effect under section 
     2010(c) for such calendar year''.
       (b) Alternate Valuation of Certain Farm, Etc., Real 
     Property.--Subsection (a) of section 2032A is amended by 
     adding at the end the following new paragraph:
       ``(3) Inflation adjustment.--In the case of estates of 
     decedents dying in a calendar year after 1998, the $750,000 
     amount contained in paragraph (2) shall be increased by an 
     amount equal to--
       ``(A) $750,000, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year by substituting 
     `calendar year 1997' for `calendar year 1992' in subparagraph 
     (B) thereof.

     If any amount as adjusted under the preceding sentence is not 
     a multiple of $10,000, such amount shall be rounded to the 
     next lowest multiple of $10,000.''.
       (c) Annual Gift Tax Exclusion.--Subsection (b) of section 
     2503 is amended--
       (1) by striking the subsection heading and inserting the 
     following:
       ``(b) Exclusions From Gifts.--
       ``(1) In general.--'',
       (2) by moving the text 2 ems to the right, and
       (3) by adding at the end the following new paragraph:
       ``(2) Inflation adjustment.--In the case of gifts made in a 
     calendar year after 1998, the $10,000 amount contained in 
     paragraph (1) shall be increased by an amount equal to--
       ``(A) $10,000, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year by substituting 
     `calendar year 1997' for `calendar year 1992' in subparagraph 
     (B) thereof.

     If any amount as adjusted under the preceding sentence is not 
     a multiple of $1,000, such amount shall be rounded to the 
     next lowest multiple of $1,000.''.
       (d) Exemption From Generation-Skipping Tax.--Section 2631 
     (relating to GST exemption) is amended by adding at the end 
     the following new subsection:
       ``(c) Inflation Adjustment.--In the case of an individual 
     who dies in any calendar year after 1998, the $1,000,000 
     amount contained in subsection (a) shall be increased by an 
     amount equal to--
       ``(1) $1,000,000, multiplied by
       ``(2) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year by substituting 
     `calendar year 1997' for `calendar year 1992' in subparagraph 
     (B) thereof.

     If any amount as adjusted under the preceding sentence is not 
     a multiple of $10,000, such amount shall be rounded to the 
     next lowest multiple of $10,000.''.
       (e) Amount Subject to Reduced Rate Where Extension of Time 
     for Payment of Estate Tax on Closely Held Business.--
     Subsection (j) of section 6601 is amended by redesignating 
     paragraph (3) as paragraph (4) and by inserting after 
     paragraph (2) the following new paragraph:
       ``(3) Inflation adjustment.--In the case of estates of 
     decedents dying in a calendar year after 1998, the $1,000,000 
     amount contained in paragraph (2)(A) shall be increased by an 
     amount equal to--
       ``(A) $1,000,000, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year by substituting 
     `calendar year 1997' for `calendar year 1992' in subparagraph 
     (B) thereof.

     If any amount as adjusted under the preceding sentence is not 
     a multiple of $10,000, such amount shall be rounded to the 
     next lowest multiple of $10,000.''.
       (f) Effective date.--The amendments made by this section 
     shall apply to the estates of decedents dying, and gifts 
     made, after December 31, 1997.

     SEC. 502. 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 excess of $1,300,000 over the applicable 
     exclusion amount under section 2010(c) with respect to such 
     estate.
       ``(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 executor elects the application of this section 
     and files the agreement referred to in subsection (h),
       ``(C) 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
       ``(D) during the 8-year period ending on the date of the 
     decedent's death there have been periods aggregating 5 years 
     or more during which--
       ``(i) such interests were owned by the decedent or a member 
     of the decedent's family, and
       ``(ii) there was material participation (within the meaning 
     of section 2032A(e)(6)) by the decedent or a member of the 
     decedent's family in the operation of the business to which 
     such interests relate.
       ``(2) Includible qualified family-owned business 
     interests.--The qualified family-owned business interests 
     described in this paragraph are the interests which--
       ``(A) are included in determining the value of the gross 
     estate (without regard to this section), and
       ``(B) are acquired by any qualified heir from, or passed to 
     any qualified heir from, the decedent (within the meaning of 
     section 2032A(e)(9)).
       ``(3) Includible gifts of interests.--The amount of the 
     gifts of qualified family-owned business interests determined 
     under this paragraph is the excess of--
       ``(A) the sum of--
       ``(i) the amount of such gifts from the decedent to members 
     of the decedent's family taken into account under subsection 
     2001(b)(1)(B), plus
       ``(ii) the amount of such gifts otherwise excluded under 
     section 2503(b),
     to the extent such interests are continuously held by members 
     of such family (other than the decedent's spouse) between the 
     date of the gift and the date of the decedent's death, over
       ``(B) the amount of such gifts from the decedent to members 
     of the decedent's family otherwise included in the gross 
     estate.

[[Page H6426]]

       ``(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 subparagraph (A) or 
     (B), 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)), which produce, or are held 
     for the production of, income of which is described in 
     section 543(a) or in section 954(c)(1) (determined without 
     regard to subparagraph (A) thereof and 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 (i)(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) Agreement.--The agreement referred to in this 
     subsection is a written agreement signed by each person in 
     being who has an interest (whether or not in possession) in 
     any property designated in such agreement consenting to the 
     application of subsection (f) with respect to such property.
       ``(i) Other Definitions and Applicable Rules.--For purposes 
     of this section--
       ``(1) Qualified heir.--The term `qualified heir'--
       ``(A) has the meaning given to such term by section 
     2032A(e)(1), and
       ``(B) includes any active employee of the trade or business 
     to which the qualified family-owned business interest relates 
     if such employee has been employed by such trade or business 
     for a period of at least 10 years before the date of the 
     decedent's death.
       ``(2) Member of the family.--The term `member of the 
     family' has the meaning given to such term by section 
     2032A(e)(2).
       ``(3) Applicable rules.--Rules similar to the following 
     rules shall apply:
       ``(A) Section 2032A(b)(4) (relating to decedents who are 
     retired or disabled).
       ``(B) Section 2032A(b)(5) (relating to special rules for 
     surviving spouses).
       ``(C) Section 2032A(c)(2)(D) (relating to partial 
     dispositions).
       ``(D) Section 2032A(c)(3) (relating to only 1 additional 
     tax imposed with respect to any 1 portion).
       ``(E) Section 2032A(c)(4) (relating to due date).
       ``(F) Section 2032A(c)(5) (relating to liability for tax; 
     furnishing of bond).
       ``(G) Section 2032A(c)(7) (relating to no tax if use begins 
     within 2 years; active management by eligible qualified heir 
     treated as material participation).
       ``(H) Paragraphs (1) and (3) of section 2032A(d) (relating 
     to election; agreement).
       ``(I) Section 2032A(e)(10) (relating to community 
     property).

[[Page H6427]]

       ``(J) Section 2032A(e)(14) (relating to treatment of 
     replacement property acquired in section 1031 or 1033 
     transactions).
       ``(K) Section 2032A(f) (relating to statute of 
     limitations).
       ``(L) Section 6166(b)(3) (relating to farmhouses and 
     certain other structures taken into account).
       ``(M) Subparagraphs (B), (C), and (D) of section 6166(g)(1) 
     (relating to acceleration of payment).
       ``(N) Section 6324B (relating to special lien for 
     additional estate tax).''.
       (b) Clerical Amendment.--The table of sections for part III 
     of subchapter A of chapter 11 is amended by inserting after 
     the item relating to section 2033 the following new item:

``Sec. 2033A. Family-owned business exclusion.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying after December 31, 
     1997.

     SEC. 503. MODIFICATIONS TO RATE OF INTEREST ON PORTION OF 
                   ESTATE TAX EXTENDED UNDER SECTION 6166.

       (a) In General.--Paragraphs (1) and (2) of section 6601(j) 
     (relating to 4-percent rate on certain portion of estate tax 
     extended under section 6166) are amended to read as follows:
       ``(1) In general.--If the time for payment of an amount of 
     tax imposed by chapter 11 is extended as provided in section 
     6166, then in lieu of the annual rate provided by subsection 
     (a)--
       ``(A) interest on the 2-percent portion of such amount 
     shall be paid at the rate of 2 percent, and
       ``(B) interest on so much of such amount as exceeds the 2-
     percent portion shall be paid at a rate equal to 45 percent 
     of the annual rate provided by subsection (a).

     For purposes of this subsection, the amount of any deficiency 
     which is prorated to installments payable under section 6166 
     shall be treated as an amount of tax payable in installments 
     under such section.
       ``(2) 2-percent portion.--For purposes of this subsection, 
     the term `2-percent portion' means the lesser of--
       ``(A)(i) 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 sum of $1,000,000 and the 
     applicable exclusion amount in effect under section 2010(c), 
     reduced by
       ``(ii) the applicable credit amount in effect under section 
     2010(c), or
       ``(B) the amount of the tax imposed by chapter 11 which is 
     extended as provided in section 6166.''.
       (b) Disallowance of Interest Deduction.--
       (1) Estate tax.--Paragraph (1) of section 2053(c) is 
     amended by adding at the end the following new subparagraph:
       ``(D) Section 6166 interest.--No deduction shall be allowed 
     under this section for any interest payable under section 
     6601 on any unpaid portion of the tax imposed by section 2001 
     for the period during which an extension of time for payment 
     of such tax is in effect under section 6166.''.
       (2) Income tax.--
       (A) Section 163 is amended by redesignating subsection (k) 
     as subsection (l) and by inserting after subsection (j) the 
     following new subsection:
       ``(k) Section 6166 Interest.--No deduction shall be allowed 
     under this section for any interest payable under section 
     6601 on any unpaid portion of the tax imposed by section 2001 
     for the period during which an extension of time for payment 
     of such tax is in effect under section 6166.''.
       (B) Subparagraph (E) of section 163(h)(2) is amended by 
     striking ``or 6166'' and all that follows and inserting a 
     period.
       (c) Conforming Amendments.--
       (1) Paragraphs (7)(A)(iii) and (8)(A)(iii) of section 
     6166(b) are amended by striking ``4-percent'' each place it 
     appears (including the heading) and inserting ``2-percent''.
       (2) Paragraph (4) of section 6601(j), as redesignated by 
     section 501(e), is amended by striking ``4-percent'' each 
     place it appears and inserting ``2-percent''.
       (3) The subsection heading for section 6601(j) is amended 
     by striking ``4-Percent'' and inserting ``2-Percent''.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to estates of decedents dying after December 31, 1997.
       (2) Election.--In the case of the estate of any decedent 
     dying before January 1, 1998, with respect to which there is 
     an election under section 6166 of the Internal Revenue Code 
     of 1986, the executor of the estate may elect to have the 
     amendments made by this section apply with respect to 
     installments due after the effective date of the election; 
     except that the 2-percent portion of such installments shall 
     be equal to the amount which would be the 4-percent portion 
     of such installments without regard to such election. Such an 
     election shall be made before January 1, 1999 in the manner 
     prescribed by the Secretary of the Treasury and, once made, 
     is irrevocable.

     SEC. 504. EXTENSION OF TREATMENT OF CERTAIN RENTS UNDER 
                   SECTION 2032A TO LINEAL DESCENDANTS.

       (a) General Rule.--Paragraph (7) of section 2032A(c) 
     (relating to special rules for tax treatment of dispositions 
     and failures to use for qualified use) is amended by adding 
     at the end the following new subparagraph:
       ``(E) Certain rents treated as qualified use.--For purposes 
     of this subsection, a surviving spouse or lineal descendant 
     of the decedent shall not be treated as failing to use 
     qualified real property in a qualified use solely because 
     such spouse or descendant rents such property to a member of 
     the family of such spouse or descendant on a net cash basis. 
     For purposes of the preceding sentence, a legally adopted 
     child of an individual shall be treated as the child of such 
     individual by blood.''.
       (b) Conforming Amendment.--Section 2032A(b)(5)(A) is 
     amended by striking the last sentence.
       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to leases entered into after 
     December 31, 1976.

     SEC. 505. CLARIFICATION OF JUDICIAL REVIEW OF ELIGIBILITY FOR 
                   EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX.

       (a) In General.--Part IV of subchapter C of chapter 76 of 
     the Internal Revenue Code of 1986 (relating to declaratory 
     judgments) is amended by adding at the end the following new 
     section:

     ``SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELIGIBILITY OF 
                   ESTATE WITH RESPECT TO INSTALLMENT PAYMENTS 
                   UNDER SECTION 6166.

       ``(a) Creation of remedy.--In a case of actual controversy 
     involving a determination by the Secretary of (or a failure 
     by the Secretary to make a determination with respect to)--
       ``(1) whether an election may be made under section 6166 
     (relating to extension of time for payment of estate tax 
     where estate consists largely of interest in closely held 
     business) with respect to an estate, or
       ``(2) whether the extension of time for payment of tax 
     provided in section 6166(a) has ceased to apply with respect 
     to an estate,

     upon the filing of an appropriate pleading, the Tax Court may 
     make a declaration with respect to whether such election may 
     be made or whether such extension has ceased to apply. Any 
     such declaration shall have the force and effect of a 
     decision of the Tax Court and shall be reviewable as such.
       ``(b) Limitations.--
       ``(1) Petitioner.--A pleading may be filed under this 
     section, with respect to any estate, only--
       ``(A) by the executor of such estate, or
       ``(B) by any person who has assumed an obligation to make 
     payments under section 6166 with respect to such estate (but 
     only if each other such person is joined as a party).
       ``(2) Exhaustion of administrative remedies.--The court 
     shall not issue a declaratory judgment or decree under this 
     section in any proceeding unless it determines that the 
     petitioner has exhausted all available administrative 
     remedies within the Internal Revenue Service. A petitioner 
     shall be deemed to have exhausted its administrative remedies 
     with respect to a failure of the Secretary to make a 
     determination at the expiration of 180 days after the date on 
     which the request for such determination was made if the 
     petitioner has taken, in a timely manner, all reasonable 
     steps to secure such determination.
       ``(3) Time for bringing action.--If the Secretary sends by 
     certified or registered mail notice of his determination as 
     described in subsection (a) to the petitioner, no proceeding 
     may be initiated under this section unless the pleading is 
     filed before the 91st day after the date of such mailing.''.
       (b) Clerical Amendment.--The table of sections for part IV 
     of subchapter C of chapter 76 of such Code is amended by 
     adding at the end the following new item:

``Sec. 7479. Declaratory judgments relating to eligibility of estate 
              with respect to installment payments under section 
              6166.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to the estates of decedents dying after the date 
     of the enactment of this Act.

     SEC. 506. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX PURPOSES 
                   AFTER EXPIRATION OF STATUTE OF LIMITATIONS.

       (a) In General.--Section 2001 (relating to imposition and 
     rate of estate tax) is amended by adding at the end the 
     following new subsection:
       ``(f) Valuation of Gifts.--If--
       ``(1) the time has expired within which a tax may be 
     assessed under chapter 12 (or under corresponding provisions 
     of prior laws) on the transfer of property by gift made 
     during a preceding calendar period (as defined in section 
     2502(b)), and
       ``(2) the value of such gift is shown on the return for 
     such preceding calendar period or is disclosed in such 
     return, or in a statement attached to the return, in a manner 
     adequate to apprise the Secretary of the nature of such gift,

     the value of such gift shall, for purposes of computing the 
     tax under this chapter, be the value of such gift as finally 
     determined for purposes of chapter 12.''.
       (b) Modification of Application of Statute of 
     Limitations.--Paragraph (9) of section 6501(c) is amended to 
     read as follows:
       ``(9) Gift tax on certain gifts not shown on return.--If 
     any gift of property the value of which (or any increase in 
     taxable gifts required under section 2701(d) which) is 
     required to be shown on a return of tax imposed by chapter 12 
     (without regard to section 2503(b)), and is not shown on such 
     return, any tax imposed by chapter 12 on such gift may be 
     assessed, or a proceeding in court for the collection of such 
     tax may be begun without assessment, at any time. The 
     preceding sentence shall not apply to any item which is 
     disclosed in such return, or in a statement attached to the 
     return, in a manner adequate to apprise the Secretary of the 
     nature of such item. The value of any item which is so 
     disclosed may not be redetermined by the Secretary after the 
     expiration of the period under subsection (a).''.
       (c) Declaratory Judgment Procedure for Determining Value of 
     Gift.--
       (1) In general.--Part IV of subchapter C of chapter 76 is 
     amended by inserting after section 7476 the following new 
     section:

[[Page H6428]]

     ``SEC. 7477. DECLARATORY JUDGMENTS RELATING TO VALUE OF 
                   CERTAIN GIFTS.

       ``(a) Creation of Remedy.--In a case of an actual 
     controversy involving a determination by the Secretary of the 
     value of any gift shown on the return of tax imposed by 
     chapter 12 or disclosed on such return or in any statement 
     attached to such return, upon the filing of an appropriate 
     pleading, the Tax Court may make a declaration of the value 
     of such gift. Any such declaration shall have the force and 
     effect of a decision of the Tax Court and shall be reviewable 
     as such.
       ``(b) Limitations.--
       ``(1) Petitioner.--A pleading may be filed under this 
     section only by the donor.
       ``(2) Exhaustion of administrative remedies.--The court 
     shall not issue a declaratory judgment or decree under this 
     section in any proceeding unless it determines that the 
     petitioner has exhausted all available administrative 
     remedies within the Internal Revenue Service.
       ``(3) Time for bringing action.--If the Secretary sends by 
     certified or registered mail notice of his determination as 
     described in subsection (a) to the petitioner, no proceeding 
     may be initiated under this section unless the pleading is 
     filed before the 91st day after the date of such mailing.''.
       (2) Clerical amendment.--The table of sections for such 
     part IV is amended by inserting after the item relating to 
     section 7476 the following new item:

``Sec. 7477. Declaratory judgments relating to value of certain 
              gifts.''.

       (d) Conforming Amendment.--Subsection (c) of section 2504 
     is amended by striking ``, and if a tax under this chapter or 
     under corresponding provisions of prior laws has been 
     assessed or paid for such preceding calendar period''.
       (e) Effective Dates.--
       (1) In general.--The amendments made by subsections (a) and 
     (c) shall apply to gifts made after the date of the enactment 
     of this Act.
       (2) Subsection (b)--The amendment made by subsection (b) 
     shall apply to gifts made in calendar years ending after the 
     date of the enactment of this Act.

     SEC. 507. REPEAL OF THROWBACK RULES APPLICABLE TO CERTAIN 
                   DOMESTIC TRUSTS.

       (a) Accumulation Distributions.--
       (1) In general.--Section 665 is amended by inserting after 
     subsection (b) the following new subsection:
       ``(c) Exception for Accumulation Distributions From Certain 
     Domestic Trusts.--For purposes of this subpart--
       ``(1) In general.--In the case of a qualified trust, any 
     distribution in any taxable year beginning after the date of 
     the enactment of this subsection shall be computed without 
     regard to any undistributed net income.
       ``(2) Qualified trust.--For purposes of this subsection, 
     the term `qualified trust' means any trust other than--
       ``(A) a foreign trust (or, except as provided in 
     regulations, a domestic trust which at any time was a foreign 
     trust), or
       ``(B) a trust created before March 1, 1984, unless it is 
     established that the trust would not be aggregated with other 
     trusts under section 643(f) if such section applied to such 
     trust.''.
       (2) Conforming amendments.--Subsection (b) of section 665 
     is amended by inserting ``except as provided in subsection 
     (c),'' after ``subpart,''.
       (b) Repeal of Tax on Transfers to Trusts at Less Than Fair 
     Market Value.--
       (1) Subpart A of part I of subchapter J of chapter 1 is 
     amended by striking section 644 and by redesignating section 
     645 as section 644.
       (2) Paragraph (5) of section 706(b) is amended by striking 
     ``section 645'' and inserting ``section 644''.
       (3) The table of sections for such subpart is amended by 
     striking the last 2 items and inserting the following new 
     item:

``Sec. 644. Taxable year of trusts.''

       (c) Effective Dates.--
       (1) Accumulation distributions.--The amendments made by 
     subsection (a) shall apply to distributions in taxable years 
     beginning after the date of the enactment of this Act.
       (2) Transferred property.--The amendments made by 
     subsection (b) shall apply to sales or exchanges after the 
     date of the enactment of this Act.

     SEC. 508. TREATMENT OF LAND SUBJECT TO A QUALIFIED 
                   CONSERVATION EASEMENT.

       (a) Estate Tax With Respect to Land Subject to a Qualified 
     Conservation Easement.--Section 2031 (relating to the 
     definition of gross estate) is amended by redesignating 
     subsection (c) as subsection (d) and by inserting after 
     subsection (b) the following new subsection:
       ``(c) Estate Tax With Respect to Land Subject to a 
     Qualified Conservation Easement.--
       ``(1) In general.--If the executor makes the election 
     described in paragraph (6), then, except as otherwise 
     provided in this subsection, there shall be excluded from the 
     gross estate the lesser of--
       ``(A) the applicable percentage of the value of land 
     subject to a qualified conservation easement, reduced by the 
     amount of any deduction under section 2055(f) with respect to 
     such land, or
       ``(B) the exclusion limitation.
       ``(2) Applicable percentage.--For purposes of paragraph 
     (1), the term `applicable percentage' means 40 percent 
     reduced (but not below zero) by 2 percentage points for each 
     percentage point (or fraction thereof) by which the value of 
     the qualified conservation easement is less than 30 percent 
     of the value of the land (determined without regard to the 
     value of such easement and reduced by the value of any 
     retained development right (as defined in paragraph (5)).
       ``(3) Exclusion limitation.--For purposes of paragraph (1), 
     the exclusion limitation is the limitation determined in 
     accordance with the following table:

                                            ``In the case The exclusion
                                                decedentslimitation is:
      1998....................................................$100,000 
      1999....................................................$200,000 
      2000....................................................$300,000 
      2001....................................................$400,000 
      2002 or thereafter......................................$500,000.

       ``(4) Treatment of certain indebtedness.--
       ``(A) In general.--The exclusion provided in paragraph (1) 
     shall not apply to the extent that the land is debt-financed 
     property.
       ``(B) Definitions.--For purposes of this paragraph--
       ``(i) Debt-financed property.--The term `debt-financed 
     property' means any property with respect to which there is 
     an acquisition indebtedness (as defined in clause (ii)) on 
     the date of the decedent's death.
       ``(ii) Acquisition indebtedness.--The term `acquisition 
     indebtedness' means, with respect to debt-financed property, 
     the unpaid amount of--

       ``(I) the indebtedness incurred by the donor in acquiring 
     such property,
       ``(II) the indebtedness incurred before the acquisition of 
     such property if such indebtedness would not have been 
     incurred but for such acquisition,
       ``(III) the indebtedness incurred after the acquisition of 
     such property if such indebtedness would not have been 
     incurred but for such acquisition and the incurrence of such 
     indebtedness was reasonably foreseeable at the time of such 
     acquisition, and
       ``(IV) the extension, renewal, or refinancing of an 
     acquisition indebtedness.

       ``(5) Treatment of retained development right.--
       ``(A) In general.--Paragraph (1) shall not apply to the 
     value of any development right retained by the donor in the 
     conveyance of a qualified conservation easement.
       ``(B) Termination of retained development right.--If every 
     person in being who has an interest (whether or not in 
     possession) in the land executes an agreement to extinguish 
     permanently some or all of any development rights (as defined 
     in subparagraph (D)) retained by the donor on or before the 
     date for filing the return of the tax imposed by section 
     2001, then any tax imposed by section 2001 shall be reduced 
     accordingly. Such agreement shall be filed with the return of 
     the tax imposed by section 2001. The agreement shall be in 
     such form as the Secretary shall prescribe.
       ``(C) Additional tax.--Any failure to implement the 
     agreement described in subparagraph (B) not later than the 
     earlier of--
       ``(i) the date which is 2 years after the date of the 
     decedent's death, or
       ``(ii) the date of the sale of such land subject to the 
     qualified conservation easement,

     shall result in the imposition of an additional tax in the 
     amount of the tax which would have been due on the retained 
     development rights subject to such agreement. Such 
     additional tax shall be due and payable on the last day of 
     the 6th month following such date.
       ``(D) Development right defined.--For purposes of this 
     paragraph, the term `development right' means any right to 
     use the land subject to the qualified conservation easement 
     in which such right is retained for any commercial purpose 
     which is not subordinate to and directly supportive of the 
     use of such land as a farm for farming purposes (within the 
     meaning of section 2032A(e)(5)).
       ``(6) Election.--The election under this subsection shall 
     be made on the return of the tax imposed by section 2001. 
     Such an election, once made, shall be irrevocable.
       ``(7) Calculation of estate tax due.--An executor making 
     the election described in paragraph (6) shall, for purposes 
     of calculating the amount of tax imposed by section 2001, 
     include the value of any development right (as defined in 
     paragraph (5)) retained by the donor in the conveyance of 
     such qualified conservation easement. The computation of tax 
     on any retained development right prescribed in this 
     paragraph shall be done in such manner and on such forms as 
     the Secretary shall prescribe.
       ``(8) Definitions.--For purposes of this subsection--
       ``(A) Land subject to a qualified conservation easement.--
     The term `land subject to a qualified conservation easement' 
     means land--
       ``(i) which is located--

       ``(I) in or within 25 miles of an area which, on the date 
     of the decedent's death, is a metropolitan area (as defined 
     by the Office of Management and Budget),
       ``(II) in or within 25 miles of an area which, on the date 
     of the decedent's death, is a national park or wilderness 
     area designated as part of the National Wilderness 
     Preservation System (unless it is determined by the Secretary 
     that land in or within 25 miles of such a park or wilderness 
     area is not under significant development pressure), or

       ``(III) in or within 10 miles of an area which, on the date 
     of the decedent's death, is an Urban National Forest (as 
     designated by the Forest Service),

       ``(ii) which was owned by the decedent or a member of the 
     decedent's family at all times during the 3-year period 
     ending on the date of the decedent's death, and
       ``(iii) with respect to which a qualified conservation 
     easement has been made by an individual described in 
     subparagraph (C), as of the date of the election described in 
     paragraph (6).
       ``(B) Qualified conservation easement.--The term `qualified 
     conservation easement' means a qualified conservation 
     contribution (as defined in section 170(h)(1)) of a qualified 
     real property interest (as defined in section 170(h)(2)(C)), 
     except that clause (iv) of section 170(h)(4)(A) shall not 
     apply, and the restriction

[[Page H6429]]

     on the use of such interest described in section 170(h)(2)(C) 
     shall include a prohibition on more than a de minimis use for 
     a commercial recreational activity.
       ``(C) Individual described.--An individual is described in 
     this subparagraph if such individual is--
       ``(i) the decedent,
       ``(ii) a member of the decedent's family,
       ``(iii) the executor of the decedent's estate, or
       ``(iv) the trustee of a trust the corpus of which includes 
     the land to be subject to the qualified conservation 
     easement.
       ``(D) Member of family.--The term `member of the decedent's 
     family' means any member of the family (as defined in section 
     2032A(e)(2)) of the decedent.
       ``(9) Application of this section to interests in 
     partnerships, corporations, and trusts.--This section shall 
     apply to an interest in a partnership, corporation, or trust 
     if at least 30 percent of the entity is owned (directly or 
     indirectly) by the decedent, as determined under the rules 
     described in section 2033A(e)(3).''.
       (b) Carryover Basis.--Section 1014(a) (relating to basis of 
     property acquired from a decedent) is amended by striking 
     ``or'' at the end of paragraphs (1) and (2), by striking the 
     period at the end of paragraph (3) and inserting ``, or'' and 
     by adding at the end the following new paragraph:
       ``(4) to the extent of the applicability of the exclusion 
     described in section 2031(c), the basis in the hands of the 
     decedent.''.
       (c) Qualified Conservation Contribution Is Not a 
     Disposition.--Subsection (c) of section 2032A (relating to 
     alternative valuation method) is amended by adding at the end 
     the following new paragraph:
       ``(8) Qualified conservation contribution is not a 
     disposition.--A qualified conservation contribution (as 
     defined in section 170(h)) by gift or otherwise shall not be 
     deemed a disposition under subsection (c)(1)(A).''.
       (d) Qualified Conservation Contribution Where Surface and 
     Mineral Rights are Separated.--Section 170(h)(5)(B)(ii) 
     (relating to special rule) is amended to read as follows:
       ``(ii) Special rule.--With respect to any contribution of 
     property in which the ownership of the surface estate and 
     mineral interests has been and remains separated, 
     subparagraph (A) shall be treated as met if the probability 
     of surface mining occurring on such property is so remote as 
     to be negligible.''.
       (e) Effective Dates.--
       (1) Exclusion.--The amendments made by subsections (a) and 
     (b) shall apply to estates of decedents dying after December 
     31, 1997.
       (2) Easements.--The amendments made by subsections (c) and 
     (d) shall apply to easements granted after December 31, 1997.
             Subtitle B--Generation-Skipping Tax Provision

     SEC. 511. EXPANSION OF EXCEPTION FROM GENERATION-SKIPPING 
                   TRANSFER TAX FOR TRANSFERS TO INDIVIDUALS WITH 
                   DECEASED PARENTS.

       (a) In General.--Section 2651 (relating to generation 
     assignment) is amended by redesignating subsection (e) as 
     subsection (f) and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Special Rule for Persons With a Deceased Parent.--
       ``(1) In general.--For purposes of determining whether any 
     transfer is a generation-skipping transfer, if--
       ``(A) an individual is a descendant of a parent of the 
     transferor (or the transferor's spouse or former spouse), and
       ``(B) such individual's parent who is a lineal descendant 
     of the parent of the transferor (or the transferor's spouse 
     or former spouse) is dead at the time the transfer (from 
     which an interest of such individual is established or 
     derived) is subject to a tax imposed by chapter 11 or 12 upon 
     the transferor (and if there shall be more than 1 such time, 
     then at the earliest such time),

     such individual shall be treated as if such individual were a 
     member of the generation which is 1 generation below the 
     lower of the transferor's generation or the generation 
     assignment of the youngest living ancestor of such individual 
     who is also a descendant of the parent of the transferor (or 
     the transferor's spouse or former spouse), and the generation 
     assignment of any descendant of such individual shall be 
     adjusted accordingly.
       ``(2) Limited application of subsection to collateral 
     heirs.--This subsection shall not apply with respect to a 
     transfer to any individual who is not a lineal descendant of 
     the transferor (or the transferor's spouse or former spouse) 
     if, at the time of the transfer, such transferor has any 
     living lineal descendant.''.
       (b) Conforming Amendments.--
       (1) Section 2612(c) (defining direct skip) is amended by 
     striking paragraph (2) and by redesignating paragraph (3) as 
     paragraph (2).
       (2) Section 2612(c)(2) (as so redesignated) is amended by 
     striking ``section 2651(e)(2)'' and inserting ``section 
     2651(f)(2)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to terminations, distributions, and transfers 
     occurring after December 31, 1997.
                          TITLE VI--EXTENSIONS

     SEC. 601. RESEARCH TAX CREDIT.

       (a) In General.--Paragraph (1) of section 41(h) (relating 
     to termination) is amended--
       (1) by striking ``May 31, 1997'' and inserting ``June 30, 
     1998'', and
       (2) by striking in the last sentence ``during the first 11 
     months of such taxable year.'' and inserting ``during the 24-
     month period beginning with the first month of such year. The 
     24 months referred to in the preceding sentence shall be 
     reduced by the number of full months after June 1996 (and 
     before the first month of such first taxable year) during 
     which the taxpayer paid or incurred any amount which is taken 
     into account in determining the credit under this section.''.
       (b) Technical Amendments.--
       (1) Subparagraph (B) of section 41(c)(4) is amended to read 
     as follows:
       ``(B) Election.--An election under this paragraph shall 
     apply to the taxable year for which made and all succeeding 
     taxable years unless revoked with the consent of the 
     Secretary.''.
       (2) Paragraph (1) of section 45C(b) is amended by striking 
     ``May 31, 1997'' and inserting ``June 30, 1998''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after May 31, 1997.

     SEC. 602. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.

       (a) In General.--Clause (ii) of section 170(e)(5)(D) 
     (relating to termination) is amended by striking ``May 31, 
     1997'' and inserting ``June 30, 1998''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to contributions made after May 31, 1997.

     SEC. 603. WORK OPPORTUNITY TAX CREDIT.

       (a) Extension.--Subparagraph (B) of section 51(c)(4) 
     (relating to termination) is amended by striking ``September 
     30, 1997'' and inserting ``June 30, 1998''.
       (b) Modification of Eligibility Requirement Based on Period 
     on Welfare.--
       (1) In general.--Subparagraph (A) of section 51(d)(2) 
     (defining qualified IV-A recipient) is amended by striking 
     all that follows ``a IV-A program'' and inserting ``for any 9 
     months during the 18-month period ending on the hiring 
     date.''.
       (2) Conforming amendment.--Subparagraph (A) of section 
     51(d)(3) is amended to read as follows:
       ``(A) In general.--The term `qualified veteran' means any 
     veteran who is certified by the designated local agency as 
     being a member of a family receiving assistance under a food 
     stamp program under the Food Stamp Act of 1977 for at least a 
     3-month period ending during the 12-month period ending on 
     the hiring date.''.
       (c) Qualified SSI Recipients Treated as Members of Targeted 
     Groups.--
       (1) In general.--Section 51(d)(1) (relating to members of 
     targeted groups) is amended by striking ``or'' at the end of 
     subparagraph (F), by striking the period at the end of 
     subparagraph (G) and inserting ``, or'', and by adding at the 
     end the following new subparagraph:
       ``(H) a qualified SSI recipient.''.
       (2) Qualified ssi recipients.--Section 51(d) is amended by 
     redesignating paragraphs (9), (10), and (11) as paragraphs 
     (10), (11), and (12), respectively, and by inserting after 
     paragraph (8) the following new paragraph:
       ``(9) Qualified ssi recipient.--The term `qualified SSI 
     recipient' means any individual who is certified by the 
     designated local agency as receiving supplemental security 
     income benefits under title XVI of the Social Security Act 
     (including supplemental security income benefits of the type 
     described in section 1616 of such Act or section 212 of 
     Public Law 93-66) for any month ending within the 60-day 
     period ending on the hiring date.''.
       (d) Percentage of Wages Allowed as Credit.--
       (1) In general.--Subsection (a) of section 51 (relating to 
     determination of amount) is amended by striking ``35 
     percent'' and inserting ``40 percent''.
       (2) Application of credit for individuals performing fewer 
     than 400 hours of services.--Paragraph (3) of section 51(i) 
     is amended to read as follows:
       ``(3) Individuals not meeting minimum employment periods.--
       ``(A) Reduction of credit for individuals performing fewer 
     than 400 hours of service.--In the case of an individual who 
     has performed at least 120 hours, but less than 400 hours, of 
     service for the employer, subsection (a) shall be applied by 
     substituting `25 percent' for `40 percent'.
       ``(B) Denial of credit for individuals performing fewer 
     than 120 hours of service.--No wages shall be taken into 
     account under subsection (a) with respect to any individual 
     unless such individual has performed at least 120 hours of 
     service for the employer.''.
       (e) Effective date.--The amendments made by this section 
     shall apply to individuals who begin work for the employer 
     after September 30, 1997.

     SEC. 604. ORPHAN DRUG TAX CREDIT.

       (a) In General.--Section 45C (relating to clinical testing 
     expenses for certain drugs for rare diseases or conditions) 
     is amended by striking subsection (e).
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to amounts paid or incurred after May 31, 1997.
  TITLE VII--INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF COLUMBIA

     SEC. 701. TAX INCENTIVES FOR REVITALIZATION OF THE DISTRICT 
                   OF COLUMBIA.

       (a) In General.--Chapter 1 is amended by adding at the end 
     the following new subchapter:

          ``Subchapter W--District of Columbia Enterprise Zone

``Sec. 1400.  Establishment of DC Zone.
``Sec. 1400A. Tax-exempt economic development bonds.
``Sec. 1400B. Zero percent capital gains rate.
``Sec. 1400C. First-time homebuyer credit for District of Columbia.

     ``SEC. 1400. ESTABLISHMENT OF DC ZONE.

       ``(a) In General.--For purposes of this title--
       ``(1) the applicable DC area is hereby designated as the 
     District of Columbia Enterprise Zone, and

[[Page H6430]]

       ``(2) except as otherwise provided in this subchapter, the 
     District of Columbia Enterprise Zone shall be treated as an 
     empowerment zone designated under subchapter U.
       ``(b) Applicable DC Area.--For purposes of subsection (a), 
     the term `applicable DC area' means the area consisting of--
       ``(1) the census tracts located in the District of Columbia 
     which are part of an enterprise community designated under 
     subchapter U before the date of the enactment of this 
     subchapter, and
       ``(2) all other census tracts--
       ``(A) which are located in the District of Columbia, and
       ``(B) for which the poverty rate is not less than than 20 
     percent.
       ``(c) District of Columbia Enterprise Zone.--For purposes 
     of this subchapter, the terms `District of Columbia 
     Enterprise Zone' and `DC Zone' mean the District of Columbia 
     Enterprise Zone designated by subsection (a).
       ``(d) Special Rules for Application of Employment Credit.--
       ``(1) Employees whose principal place of abode is in 
     district of columbia.--With respect to the DC Zone, section 
     1396(d)(1)(B) (relating to empowerment zone employment 
     credit) shall be applied by substituting `the District of 
     Columbia' for `such empowerment zone'.
       ``(2) No decrease of percentage in 2002.--In the case of 
     the DC Zone, section 1396 (relating to empowerment zone 
     employment credit) shall be applied by substituting ``20'' 
     for ``15'' in the table contained in section 1396(b). The 
     preceding sentence shall apply only with respect to qualified 
     zone employees, as defined in section 1396(d), determined by 
     treating no area other than the DC Zone as an empowerment 
     zone or enterprise community.
       ``(e) Special Rule for Application of Enterprise Zone 
     Business Definition.--For purposes of this subchapter and for 
     purposes of applying subchapter U with respect to the DC 
     Zone, section 1397B shall be applied without regard to 
     subsections (b)(6) and (c)(5) thereof.
       ``(f) Time For Which Designation Applicable.--
       ``(1) In general.--The designation made by subsection (a) 
     shall apply for the period beginning on January 1, 1998, and 
     ending on December 31, 2002.
       ``(2) Coordination with dc enterprise community designated 
     under subchapter u.--The designation under subchapter U of 
     the census tracts referred to in subsection (b)(1) as an 
     enterprise community shall terminate on December 31, 2002.

     ``SEC. 1400A. TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.

       ``(a) In General.--In the case of the District of Columbia 
     Enterprise Zone, subparagraph (A) of section 1394(c)(1) 
     (relating to limitation on amount of bonds) shall be applied 
     by substituting `$15,000,000' for `$3,000,000'.
       ``(b) Period of Applicability.--This section shall apply to 
     bonds issued during the period beginning on January 1, 1998, 
     and ending on December 31, 2002.

     ``SEC. 1400B. ZERO PERCENT CAPITAL GAINS RATE.

       ``(a) Exclusion.--Gross income shall not include qualified 
     capital gain from the sale or exchange of any DC Zone asset 
     held for more than 5 years.
       ``(b) DC Zone Asset.--For purposes of this section--
       ``(1) In general.--The term `DC Zone asset' means--
       ``(A) any DC Zone business stock,
       ``(B) any DC Zone partnership interest, and
       ``(C) any DC Zone business property.
       ``(2) DC zone business stock.--
       ``(A) In general.--The term `DC Zone business stock' means 
     any stock in a domestic corporation which is originally 
     issued after December 31, 1997, if--
       ``(i) such stock is acquired by the taxpayer, before 
     January 1, 2003, at its original issue (directly or through 
     an underwriter) solely in exchange for cash,
       ``(ii) as of the time such stock was issued, such 
     corporation was a DC Zone business (or, in the case of a new 
     corporation, such corporation was being organized for 
     purposes of being a DC Zone business), and
       ``(iii) during substantially all of the taxpayer's holding 
     period for such stock, such corporation qualified as a DC 
     Zone business.
       ``(B) Redemptions.--A rule similar to the rule of section 
     1202(c)(3) shall apply for purposes of this paragraph.
       ``(3) DC zone partnership interest.--The term `DC Zone 
     partnership interest' means any capital or profits interest 
     in a domestic partnership which is originally issued after 
     December 31, 1997, if--
       ``(A) such interest is acquired by the taxpayer, before 
     January 1, 2003, from the partnership solely in exchange for 
     cash,
       ``(B) as of the time such interest was acquired, such 
     partnership was a DC Zone business (or, in the case of a new 
     partnership, such partnership was being organized for 
     purposes of being a DC Zone business), and
       ``(C) during substantially all of the taxpayer's holding 
     period for such interest, such partnership qualified as a DC 
     Zone business.

     A rule similar to the rule of paragraph (2)(B) shall apply 
     for purposes of this paragraph.
       ``(4) DC zone business property.--
       ``(A) In general.--The term `DC Zone business property' 
     means tangible property if--
       ``(i) such property was acquired by the taxpayer by 
     purchase (as defined in section 179(d)(2)) after December 31, 
     1997, and before January 1, 2003,
       ``(ii) the original use of such property in the DC Zone 
     commences with the taxpayer, and
       ``(iii) during substantially all of the taxpayer's holding 
     period for such property, substantially all of the use of 
     such property was in a DC Zone business of the taxpayer.
       ``(B) Special rule for buildings which are substantially 
     improved.--
       ``(i) In general.--The requirements of clauses (i) and (ii) 
     of subparagraph (A) shall be treated as met with respect to--

       ``(I) property which is substantially improved by the 
     taxpayer before January 1, 2003, and
       ``(II) any land on which such property is located.

       ``(ii) Substantial improvement.--For purposes of clause 
     (i), property shall be treated as substantially improved by 
     the taxpayer only if, during any 24-month period beginning 
     after December 31, 1997, additions to basis with respect to 
     such property in the hands of the taxpayer exceed the greater 
     of--

       ``(I) an amount equal to the adjusted basis of such 
     property at the beginning of such 24-month period in the 
     hands of the taxpayer, or
       ``(II) $5,000.

       ``(6) Treatment of subsequent purchasers, etc.--The term 
     `DC Zone asset' includes any property which would be a DC 
     Zone asset but for paragraph (2)(A)(i), (3)(A), or (4)(A)(ii) 
     in the hands of the taxpayer if such property was a DC Zone 
     asset in the hands of a prior holder.
       ``(7) 5-year safe harbor.--If any property ceases to be a 
     DC Zone asset by reason of paragraph (2)(A)(iii), (3)(C), or 
     (4)(A)(iii) after the 5-year period beginning on the date the 
     taxpayer acquired such property, such property shall continue 
     to be treated as meeting the requirements of such paragraph; 
     except that the amount of gain to which subsection (a) 
     applies on any sale or exchange of such property shall not 
     exceed the amount which would be qualified capital gain had 
     such property been sold on the date of such cessation.
       ``(c) DC Zone Business.--For purposes of this section, the 
     term `DC Zone business' means any entity which is an 
     enterprise zone business (as defined in section 1397B), 
     determined--
       ``(1) after the application of section 1400(e),
       ``(2) by substituting ``80 percent'' for ``50 percent'' in 
     subsections (b)(2) and (c)(1) of section 1397B, and
       ``(3) by treating no area other than the DC Zone as an 
     empowerment zone or enterprise community.
       ``(d) Treatment of Zone as Including Census Tracts With 10 
     Percent Poverty Rate.--For purposes of applying this section 
     (and for purposes of applying this subchapter and subchapter 
     U with respect to this section), the DC Zone shall be treated 
     as including all census tracts--
       ``(1) which are located in the District of Columbia, and
       ``(2) for which the poverty rate is not less than 10 
     percent.
       ``(e) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Qualified capital gain.--Except as otherwise provided 
     in this subsection, the term `qualified capital gain' means 
     any gain recognized on the sale or exchange of--
       ``(A) a capital asset, or
       ``(B) property used in the trade or business (as defined in 
     section 1231(b)).
       ``(2) Gain before 1998 or after 2007 not qualified.--The 
     term `qualified capital gain' shall not include any gain 
     attributable to periods before January 1, 1998, or after 
     December 31, 2007.
       ``(3) Certain gain not qualified.--The term `qualified 
     capital gain' shall not include any gain which would be 
     treated as ordinary income under section 1245 or under 
     section 1250 if section 1250 applied to all depreciation 
     rather than the additional depreciation.
       ``(4) Intangibles and land not integral part of dc zone 
     business.--The term `qualified capital gain' shall not 
     include any gain which is attributable to real property, or 
     an intangible asset, which is not an integral part of a DC 
     Zone business.
       ``(5) Related party transactions.--The term `qualified 
     capital gain' shall not include any gain attributable, 
     directly or indirectly, in whole or in part, to a transaction 
     with a related person. For purposes of this paragraph, 
     persons are related to each other if such persons are 
     described in section 267(b) or 707(b)(1).
       ``(f) Certain Other Rules To Apply.--Rules similar to the 
     rules of subsections (g), (h), (i)(2), and (j) of section 
     1202 shall apply for purposes of this section.
       ``(g) Sales and Exchanges of Interests in Partnerships and 
     S Corporations Which Are DC Zone Businesses.--In the case of 
     the sale or exchange of an interest in a partnership, or of 
     stock in an S corporation, which was a DC Zone business 
     during substantially all of the period the taxpayer held such 
     interest or stock, the amount of qualified capital gain shall 
     be determined without regard to--
       ``(1) any gain which is attributable to real property, or 
     an intangible asset, which is not an integral part of a DC 
     Zone business, and
       ``(2) any gain attributable to periods before January 1, 
     1998, or after December 31, 2007.

     ``SEC. 1400C. FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT OF 
                   COLUMBIA.

       ``(a) Allowance of Credit.--In the case of an individual 
     who is a first-time homebuyer of a principal residence in the 
     District of Columbia during any taxable year, there shall be 
     allowed as a credit against the tax imposed by this chapter 
     for the taxable year an amount equal to so much of the 
     purchase price of the residence as does not exceed $5,000.
       ``(b) Limitation Based on Modified Adjusted Gross Income.--
       ``(1) In general.--The amount allowable as a credit under 
     subsection (a) (determined without regard to this subsection) 
     for the taxable year shall be reduced (but not below zero) by 
     the amount which bears the same ratio to the credit so 
     allowable as--
       ``(A) the excess (if any) of--

[[Page H6431]]

       ``(i) the taxpayer's modified adjusted gross income for 
     such taxable year, over
       ``(ii) $70,000 ($110,000 in the case of a joint return), 
     bears to
       ``(B) $20,000.
       ``(2) Modified adjusted gross income.--For purposes of 
     paragraph (1), the term `modified adjusted gross income' 
     means the adjusted gross income of the taxpayer for the 
     taxable year increased by any amount excluded from gross 
     income under section 911, 931, or 933.
       ``(c) First-Time Homebuyer.--For purposes of this section--
       ``(1) In general.--The term `first-time homebuyer' has the 
     same meaning as when used in section 72(t)(8)(D)(i), except 
     that `principal residence in the District of Columbia during 
     the 1-year period' shall be substituted for `principal 
     residence during the 2-year period' in subclause (I) thereof.
       ``(2) One-time only.--If an individual is treated as a 
     first-time homebuyer with respect to any principal residence, 
     such individual may not be treated as a first-time homebuyer 
     with respect to any other principal residence.
       ``(3) Principal residence.--The term `principal residence' 
     has the same meaning as when used in section 121.
       ``(d) Carryover of Credit.--If the credit allowable under 
     subsection (a) exceeds the limitation imposed by section 
     26(a) for such taxable year reduced by the sum of the credits 
     allowable under subpart A of part IV of subchapter A (other 
     than this section), such excess shall be carried to the 
     succeeding taxable year and added to the credit allowable 
     under subsection (a) for such taxable year.
       ``(e) Special Rules.--For purposes of this section--
       ``(1) Allocation of dollar limitation.--
       ``(A) Married individuals filing separately.--In the case 
     of a married individual filing a separate return, subsection 
     (a) shall be applied by substituting `$2,500' for `$5,000'.
       ``(B) Other taxpayers.--If 2 or more individuals who are 
     not married purchase a principal residence, the amount of the 
     credit allowed under subsection (a) shall be allocated among 
     such individuals in such manner as the Secretary may 
     prescribe, except that the total amount of the credits 
     allowed to all such individuals shall not exceed $5,000.
       ``(2) Purchase.--
       ``(A) In general.--The term `purchase' means any 
     acquisition, but only if--
       ``(i) the property is not acquired from a person whose 
     relationship to the person acquiring it would result in the 
     disallowance of losses under section 267 or 707(b) (but, in 
     applying section 267 (b) and (c) for purposes of this 
     section, paragraph (4) of section 267(c) shall be treated as 
     providing that the family of an individual shall include only 
     his spouse, ancestors, and lineal descendants), and
       ``(ii) the basis of the property in the hands of the person 
     acquiring it is not determined--

       ``(I) in whole or in part by reference to the adjusted 
     basis of such property in the hands of the person from whom 
     acquired, or

       ``(II) under section 1014(a) (relating to property acquired 
     from a decedent).

       ``(B) Construction.--A residence which is constructed by 
     the taxpayer shall be treated as purchased by the taxpayer.
       ``(3) Purchase price.--The term `purchase price' means the 
     adjusted basis of the principal residence on the date of 
     acquisition (within the meaning of section 72(t)(8)(D)(iii)).
       ``(f) Reporting.--If the Secretary requires information 
     reporting under section 6045 by a person described in 
     subsection (e)(2) thereof to verify the eligibility of 
     taxpayers for the credit allowable by this section, the 
     exception provided by section 6045(e)(5) shall not apply.
       ``(g) Credit Treated as Nonrefundable Personal Credit.--For 
     purposes of this title, the credit allowed by this section 
     shall be treated as a credit allowable under subpart A of 
     part IV of subchapter A of this chapter.
       ``(h) Basis Adjustment.--For purposes of this subtitle, if 
     a credit is allowed under this section with respect to the 
     purchase of any residence, the basis of such residence shall 
     be reduced by the amount of the credit so allowed.
       ``(i) Termination.--This section shall not apply to any 
     property purchased after December 31, 2000.''
       (b) Conforming Amendments.--
       (1) Subsection (d) of section 39 is amended by adding at 
     the end the following new paragraph:
       ``(8) No carryback of dc zone credits before effective 
     date.--No portion of the unused business credit for any 
     taxable year which is attributable to the credits allowable 
     under subchapter U by reason of section 1400 may be carried 
     back to a taxable year ending before the date of the 
     enactment of section 1400.''
       (2) Subsection (a) of section 1016 is amended by striking 
     ``and'' at the end of paragraph (25), by striking the period 
     at the end of paragraph (26) and inserting ``, and'', and by 
     adding at the end thereof the following new paragraph:
       ``(27) in the case of a residence with respect to which a 
     credit was allowed under section 1400C, to the extent 
     provided in section 1400C(h).''
       (c) Clerical Amendment.--The table of subchapters for 
     chapter 1 is amended by adding at the end the following new 
     item:

``Subchapter W. District of Columbia Enterprise Zone.''.

       (d) Effective Date.--Except as provided in subsection (c), 
     the amendments made by this section shall take effect on the 
     date of the enactment of this Act.
                 TITLE VIII--WELFARE-TO-WORK INCENTIVES

     SEC. 801. INCENTIVES FOR EMPLOYING LONG-TERM FAMILY 
                   ASSISTANCE RECIPIENTS.

       (a) In General.--Subpart F of part IV of subchapter A of 
     chapter 1 is amended by inserting after section 51 the 
     following new section:

     ``SEC. 51A. TEMPORARY INCENTIVES FOR EMPLOYING LONG-TERM 
                   FAMILY ASSISTANCE RECIPIENTS.

       ``(a) Determination of Amount.--For purposes of section 38, 
     the amount of the welfare-to-work credit determined under 
     this section for the taxable year shall be equal to--
       ``(1) 35 percent of the qualified first-year wages for such 
     year, and
       ``(2) 50 percent of the qualified second-year wages for 
     such year.
       ``(b) Qualified Wages Defined.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified wages' means the 
     wages paid or incurred by the employer during the taxable 
     year to individuals who are long-term family assistance 
     recipients.
       ``(2) Qualified first-year wages.--The term `qualified 
     first-year wages' means, with respect to any individual, 
     qualified wages attributable to service rendered during the 
     1-year period beginning with the day the individual begins 
     work for the employer.
       ``(3) Qualified second-year wages.--The term `qualified 
     second-year wages' means, with respect to any individual, 
     qualified wages attributable to service rendered during the 
     1-year period beginning on the day after the last day of the 
     1-year period with respect to such individual determined 
     under paragraph (2).
       ``(4) Only first $10,000 of wages per year taken into 
     account.--The amount of the qualified first-year wages, and 
     the amount of qualified second-year wages, which may be taken 
     into account with respect to any individual shall not exceed 
     $10,000 per year.
       ``(5) Wages.--
       ``(A) In general.--The term `wages' has the meaning given 
     such term by section 51(c), without regard to paragraph (4) 
     thereof.
       ``(B) Certain amounts treated as wages.--The term `wages' 
     includes amounts paid or incurred by the employer which are 
     excludable from such recipient's gross income under--
       ``(i) section 105 (relating to amounts received under 
     accident and health plans),
       ``(ii) section 106 (relating to contributions by employer 
     to accident and health plans),
       ``(iii) section 127 (relating to educational assistance 
     programs) or would be so excludable but for section 127(d), 
     but only to the extent paid or incurred to a person not 
     related to the employer, or
       ``(iv) section 129 (relating to dependent care assistance 
     programs).

     The amount treated as wages by clause (i) or (ii) for any 
     period shall be based on the reasonable cost of coverage for 
     the period, but shall not exceed the applicable premium for 
     the period under section 4980B(f)(4).
       ``(C) Special rules for agricultural and railway labor.--If 
     such recipient is an employee to whom subparagraph (A) or (B) 
     of section 51(h)(1) applies, rules similar to the rules of 
     such subparagraphs shall apply except that--
       ``(i) such subparagraph (A) shall be applied by 
     substituting `$10,000' for `$6,000', and
       ``(ii) such subparagraph (B) shall be applied by 
     substituting `$833.33' for `$500'.
       ``(c) Long-Term Family Assistance Recipients.--For purposes 
     of this section--
       ``(1) In general.--The term `long-term family assistance 
     recipient' means any individual who is certified by the 
     designated local agency (as defined in section 51(d)(10))--
       ``(A) as being a member of a family receiving assistance 
     under a IV-A program (as defined in section 51(d)(2)(B)) for 
     at least the 18-month period ending on the hiring date,
       ``(B)(i) as being a member of a family receiving such 
     assistance for 18 months beginning after the date of the 
     enactment of this section, and
       ``(ii) as having a hiring date which is not more than 2 
     years after the end of the earliest such 18-month period, or
       ``(C)(i) as being a member of a family which ceased to be 
     eligible after the date of the enactment of this section for 
     such assistance by reason of any limitation imposed by 
     Federal or State law on the maximum period such assistance is 
     payable to a family, and
       ``(ii) as having a hiring date which is not more than 2 
     years after the date of such cessation.
       ``(2) Hiring date.--The term `hiring date' has the meaning 
     given such term by section 51(d).
       ``(d) Certain Rules To Apply.--
       ``(1) In general.--Rules similar to the rules of section 
     52, and subsections (d)(11), (f), (g), (i) (as in effect on 
     the day before the date of the enactment of the Taxpayer 
     Relief Act of 1997), (j), and (k) of section 51, shall apply 
     for purposes of this section.
       ``(2) Credit to be part of general business credit, etc.--
     References to section 51 in section 38(b), 280C(a), and 
     1396(c)(3) shall be treated as including references to this 
     section.
       ``(e) Coordination With Work Opportunity Credit.--If a 
     credit is allowed under this section to an employer with 
     respect to an individual for any taxable year, then for 
     purposes of applying section 51 to such employer, such 
     individual shall not be treated as a member of a targeted 
     group for such taxable year.
       ``(f) Termination.--This section shall not apply to 
     individuals who begin work for the employer after April 30, 
     1999.''.
       (b) Clerical Amendment.--The table of sections for subpart 
     F of part IV of subchapter A of chapter 1 is amended by 
     inserting after the item relating to section 51 the following 
     new item:

``Sec. 51A. Temporary incentives for employing long-term family 
              assistance recipients.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to individuals who begin work for the employer 
     after December 31, 1997.

[[Page H6432]]

                   TITLE IX--MISCELLANEOUS PROVISIONS
            Subtitle A--Provisions Relating to Excise Taxes

     SEC. 901. GENERAL REVENUE PORTION OF HIGHWAY MOTOR FUELS 
                   TAXES DEPOSITED INTO HIGHWAY TRUST FUND.

       (a) In General.--Paragraph (4) of section 9503(b) (relating 
     to certain additional taxes not transferred to Highway Trust 
     Fund) is amended to read as follows:
       ``(4) Certain taxes not transferred to highway trust 
     fund.--For purposes of paragraphs (1) and (2), there shall 
     not be taken into account the taxes imposed by--
       ``(A) section 4041(d),
       ``(B) section 4081 to the extent attributable to the rate 
     specified in section 4081(a)(2)(B),
       ``(C) section 4041 or 4081 to the extent attributable to 
     fuel used in a train,
       ``(D) in the case of fuels used as described in paragraph 
     (4)(D), (5)(B), or (6)(D) of subsection (c), section 4041 or 
     4081--
       ``(i) with respect to so much of the rate of tax on 
     gasoline or special motor fuels as exceeds 11.5 cents per 
     gallon, and
       ``(ii) with respect to so much of the rate of tax on diesel 
     fuel or kerosene as exceeds 17.5 cents per gallon,
       ``(E) in the case of fuels described in section 
     4041(b)(2)(A), 4041(k), or 4081(c), section 4041 or 4081 
     before October 1, 1999, with respect to a rate equal to 2.5 
     cents per gallon, or
       ``(F) in the case of fuels described in section 4081(c)(2), 
     such section before October 1, 1999, with respect to a rate 
     equal to 2.8 cents per gallon.''.
       (b) Mass Transit Portion.--Section 9503(e)(2) (relating to 
     transfers to Mass Transit Account) is amended by striking ``2 
     cents'' and inserting ``2.85 cents''.
       (c) Limitation on Expenditures.--Subsection (c) of section 
     9503 is amended by adding at the end the following new 
     paragraph:
       ``(7) Limitation on expenditures.--Notwithstanding any 
     other provision of law, in calculating amounts under section 
     157(a) of title 23, United States Code, and sections 1013(c), 
     1015(a), and 1015(b) of the Intermodal Surface Transportation 
     Efficiency Act of 1991 (Public Law 102-240; 105 Stat. 1914), 
     deposits in the Highway Trust Fund resulting from the 
     amendments made by the Taxpayer Relief Act of 1997 shall not 
     be taken into account.''.
       (d) Technical Amendments.--
       (1) Section 9503 is amended by striking subsection (f).
       (2) The last sentence of subparagraph (A) of section 
     9503(c)(2) is amended by striking ``by taking into account 
     only the Highway Trust Fund financing rate applicable to any 
     fuel'' and inserting ``by taking into account only the 
     portion of the taxes which are deposited into the Highway 
     Trust Fund''.
       (3) Paragraphs (4)(D), (5)(B), and (6)(D) of section 
     9503(c) are each amended by striking ``attributable to the 
     Highway Trust Fund financing rate'' and inserting ``deposited 
     into the Highway Trust Fund''.
       (e) Delayed Deposits of Highway Motor Fuel Tax Revenues.--
     Notwithstanding section 6302 of the Internal Revenue Code of 
     1986, in the case of deposits of taxes imposed by sections 
     4041 and 4081 (other than subsection (a)(2)(A)(ii)) of the 
     Internal Revenue Code of 1986, the due date for any deposit 
     which would (but for this subsection) be required to be 
     made after July 31, 1998, and before October 1, 1998, 
     shall be October 5, 1998.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxes received in the Treasury after September 
     30, 1997.

     SEC. 902. REPEAL OF TAX ON DIESEL FUEL USED IN RECREATIONAL 
                   BOATS.

       (a) In General.--Subparagraph (B) of section 6421(e)(2) 
     (defining off-highway business use) is amended by striking 
     clauses (iii) and (iv).
       (b) Conforming Amendments.--
       (1) Subparagraph (A) of section 4041(a)(1) is amended--
       (A) by striking ``, a diesel-powered train, or a diesel-
     powered boat'' each place it appears and inserting ``or a 
     diesel-powered train'', and
       (B) by striking ``vehicle, train, or boat'' and inserting 
     ``vehicle or train''.
       (2) Paragraph (1) of section 4041(a) is amended by striking 
     subparagraph (D).
       (3) Paragraph (3) of section 4083(a) is amended by striking 
     ``, a diesel-powered train, or a diesel-powered boat'' and 
     inserting ``or a diesel-powered train''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 1998.

     SEC. 903. CONTINUED APPLICATION OF TAX ON IMPORTED RECYCLED 
                   HALON-1211.

       (a) In General.--Paragraph (1) of section 4682(d) is 
     amended by striking ``recycled halon'' and inserting 
     ``recycled Halon-1301 or recycled Halon-2402''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the date of the enactment of this Act.

     SEC. 904. UNIFORM RATE OF TAX ON VACCINES.

       (a) In General.--Subsection (b) of section 4131 is amended 
     to read as follows:
       ``(b) Amount of Tax.--
       ``(1) In general.--The amount of the tax imposed by 
     subsection (a) shall be 75 cents per dose of any taxable 
     vaccine.
       ``(2) Combinations of vaccines.--If any taxable vaccine is 
     described in more than 1 subparagraph of section 4132(a)(1), 
     the amount of the tax imposed by subsection (a) on such 
     vaccine shall be the sum of the amounts for the vaccines 
     which are so included.''.
       (b) Taxable Vaccines.--Paragraph (1) of section 4132(a) is 
     amended to read as follows:
       ``(1) Taxable vaccine.--The term `taxable vaccine' means 
     any of the following vaccines which are manufactured or 
     produced in the United States or entered into the United 
     States for consumption, use, or warehousing:
       ``(A) Any vaccine containing diphtheria toxoid.
       ``(B) Any vaccine containing tetanus toxoid.
       ``(C) Any vaccine containing pertussis bacteria, extracted 
     or partial cell bacteria, or specific pertussis antigens.
       ``(D) Any vaccine against measles.
       ``(E) Any vaccine against mumps.
       ``(F) Any vaccine against rubella.
       ``(G) Any vaccine containing polio virus.
       ``(H) Any HIB vaccine.
       ``(I) Any vaccine against hepatitis B.
       ``(J) Any vaccine against chicken pox.''.
       (c) Conforming Amendment.--Subsection (a) of section 4132 
     is amended by striking paragraphs (2), (3), (4), and (5) and 
     by redesignating paragraphs (6) through (8) as paragraphs (2) 
     through (4), respectively.
       (d) Effective Date.--The amendments made by this section 
     shall take effect on the day after the date of the enactment 
     of this Act.
       (e) Limitation on Certain Credits or Refunds.--For purposes 
     of applying section 4132(b) of the Internal Revenue Code of 
     1986 with respect to any claim for credit or refund filed 
     before January 1, 1999, the amount of tax taken into account 
     shall not exceed the tax computed under the rate in effect on 
     the day after the date of the enactment of this Act.

     SEC. 905. OPERATORS OF MULTIPLE GASOLINE RETAIL OUTLETS 
                   TREATED AS WHOLESALE DISTRIBUTOR FOR REFUND 
                   PURPOSES.

       (a) In General.--Subparagraph (B) of section 6416(a)(4) 
     (defining wholesale distributor) is amended by adding at the 
     end the following new sentence: ``Such term includes any 
     person who makes retail sales of gasoline at 10 or more 
     retail motor fuel outlets.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to sales after the date of the enactment of this 
     Act.

     SEC. 906. EXEMPTION OF ELECTRIC AND OTHER CLEAN-FUEL MOTOR 
                   VEHICLES FROM LUXURY AUTOMOBILE CLASSIFICATION.

       (a) In General.--Subsection (a) of section 4001 (relating 
     to imposition of tax) is amended to read as follows:
       ``(a) Imposition of Tax.--
       ``(1) In general.--There is hereby imposed on the 1st 
     retail sale of any passenger vehicle a tax equal to 10 
     percent of the price for which so sold to the extent such 
     price exceeds the applicable amount.
       ``(2) Applicable amount.--
       ``(A) In general.--Except as provided in subparagraphs (B) 
     and (C), the applicable amount is $30,000.
       ``(B) Qualified clean-fuel vehicle property.--In the case 
     of a passenger vehicle which is propelled by a fuel which is 
     not a clean-burning fuel and to which is installed qualified 
     clean-fuel vehicle property (as defined in section 
     179A(c)(1)(A)) for purposes of permitting such vehicle to be 
     propelled by a clean-burning fuel, the applicable amount is 
     equal to the sum of--
       ``(i) the dollar amount in effect under subparagraph (A), 
     plus
       ``(ii) the increase in the price for which the passenger 
     vehicle was sold (within the meaning of section 4002) due to 
     the installation of such property.
       ``(C) Purpose built passenger vehicle.--
       ``(i) In general.--In the case of a purpose built passenger 
     vehicle, the applicable amount is equal to 150 percent of the 
     dollar amount in effect under subparagraph (A).
       ``(ii) Purpose built passenger vehicle.--For purposes of 
     clause (i), the term `purpose built passenger vehicle' means 
     a passenger vehicle produced by an original equipment 
     manufacturer and designed so that the vehicle may be 
     propelled primarily by electricity.''.
       (b) Conforming Amendments.--
       (1) Subsection (e) of section 4001 (relating to inflation 
     adjustment) is amended by striking ``and section 4003(a)''.
       (2) Subsection (f) of section 4001 (relating to phasedown) 
     is amended by striking ``subsection (a)'' and inserting 
     ``subsection (a)(1)''.
       (3) Subparagraph (A) of section 4003(a)(1) is amended by 
     inserting ``(other than property described in section 
     4001(a)(2)(B))'' after ``part or accessory''.
       (4) Subparagraph (B) of section 4003(a)(2) is amended to 
     read as follows:
       ``(B) the appropriate applicable amount as determined under 
     section 4001(a)(2).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to sales and installations occurring after the 
     date of the enactment of this Act.

     SEC. 907. RATE OF TAX ON CERTAIN SPECIAL FUELS DETERMINED ON 
                   BASIS OF BTU EQUIVALENCY WITH GASOLINE.

       (a) Special Motor Fuels.--
       (1) In general.--Paragraph (2) of section 4041(a) (relating 
     to special motor fuels) is amended to read as follows:
       ``(2) Special motor fuels.--
       ``(A) In general.--There is hereby imposed a tax on any 
     liquid (other than kerosene, gas oil, fuel oil, or any 
     product taxable under section 4081)--
       ``(i) sold by any person to an owner, lessee, or other 
     operator of a motor vehicle or motorboat for use as a fuel in 
     such motor vehicle or motorboat, or
       ``(ii) used by any person as a fuel in a motor vehicle or 
     motorboat unless there was a taxable sale of such liquid 
     under clause (i).
       ``(B) Rate of tax.--The rate of the tax imposed by this 
     paragraph shall be--
       ``(i) except as otherwise provided in this subparagraph, 
     the rate of tax specified in section 4081(a)(2)(A)(i) which 
     is in effect at the time of such sale or use,
       ``(ii) 13.6 cents per gallon in the case of liquefied 
     petroleum gas, and

[[Page H6433]]

       ``(iii) 11.9 cents per gallon in the case of liquefied 
     natural gas.

     In the case of any sale or use after September 30, 1999, 
     clause (ii) shall be applied by substituting `3.2 cents' for 
     `13.6 cents', and clause (iii) shall be applied by 
     substituting `2.8 cents' for `11.9 cents'.''.
       (2) Conforming amendment.--Paragraph (1) of section 4041(d) 
     is amended by inserting ``and other than liquefied natural 
     gas'' after ``liquefied petroleum gas''.
       (b) Methanol Fuel Produced From Natural Gas.--Subparagraph 
     (A) of section 4041(m)(1) is amended to read as follows:
       ``(A) the rate of the tax imposed by subsection (a)(2) 
     shall be--
       ``(i) after September 30, 1997, and before October 1, 
     1999--

       ``(I) in the case of fuel none of the alcohol in which 
     consists of ethanol, 9.15 cents per gallon, and
       ``(II) in any other case, 11.3 cents per gallon, and

       ``(ii) after September 30, 1999--

       ``(I) in the case of fuel none of the alcohol in which 
     consists of ethanol, 2.15 cents per gallon, and
       ``(II) in any other case, 4.3 cents per gallon, and''.

       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 1997.

     SEC. 908. MODIFICATION OF TAX TREATMENT OF HARD CIDER.

       (a) Hard Cider Containing Less Than 7 Percent Alcohol Taxed 
     as Wine.--Subsection (b) of section 5041 (relating to 
     imposition and rate of tax) is amended by striking ``and'' at 
     the end of paragraph (4), by striking the period at the end 
     of paragraph (5) and inserting ``; and'', and by adding at 
     the end the following new paragraph:
       ``(6) On hard cider derived primarily from apples or apple 
     concentrate and water, containing no other fruit product, and 
     containing at least one-half of 1 percent and less than 7 
     percent alcohol by volume, 22.6 cents per wine gallon.''.
       (b) Application of Small Producer Credit.--Paragraph (1) of 
     section 5041(c) (relating to credit for small domestic 
     producers) is amended by adding at the end the following new 
     sentence: ``In the case of wine described in subsection 
     (b)(6), the preceding sentence shall be applied by 
     substituting `5.6 cents' for `90 cents'.''
       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 1997.

     SEC. 909. STUDY OF FEASIBILITY OF MOVING COLLECTION POINT FOR 
                   DISTILLED SPIRITS EXCISE TAX.

       (a) In General.--The Secretary of the Treasury or his 
     delegate shall conduct a study of options for changing the 
     event on which the tax imposed by section 5001 of the 
     Internal Revenue Code of 1986 is determined. One such option 
     which shall be studied is determining such tax on removal 
     from registered wholesale warehouses. In studying each such 
     option, such Secretary shall focus on administrative issues 
     including--
       (1) tax compliance,
       (2) the number of taxpayers required to pay the tax,
       (3) the types of financial responsibility requirements that 
     might be required, and
       (4) special requirements regarding segregation of non-tax-
     paid distilled spirits from other products.

     Such study shall review the effects of each such option on 
     the Department of the Treasury (including staffing and other 
     demands on budgetary resources) and the change in the period 
     between the time such tax is currently paid and the time such 
     tax would be paid under each such option.
       (b) Report.--The report of such study shall be submitted to 
     the Committee on Finance of the Senate and the Committee on 
     Ways and Means of the House of Representatives not later than 
     March 31, 1998.

     SEC. 910. CLARIFICATION OF AUTHORITY TO USE SEMI-GENERIC 
                   DESIGNATIONS ON WINE LABELS.

       (a) In General.--Section 5388 (relating to designation of 
     wines) is amended by adding at the end the following new 
     subsection:
       ``(c) Use of Semi-Generic Designations.--
       ``(1) In general.--Semi-generic designations may be used to 
     designate wines of an origin other than that indicated by 
     such name only if--
       ``(A) there appears in direct conjunction therewith an 
     appropriate appellation of origin disclosing the true place 
     of origin of the wine, and
       ``(B) the wine so designated conforms to the standard of 
     identity, if any, for such wine contained in the regulations 
     under this section or, if there is no such standard, to the 
     trade understanding of such class or type.
       ``(2) Determination of whether name is semi-generic.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     a name of geographic significance, which is also the 
     designation of a class or type of wine, shall be deemed to 
     have become semi-generic only if so found by the Secretary.
       ``(B) Certain names treated as semi-generic.--The following 
     names shall be treated as semi-generic: Angelica, Burgundy, 
     Claret, Chablis, Champagne, Chianti, Malaga, Marsala, 
     Madeira, Moselle, Port, Rhine Wine or Hock, Sauterne, Haut 
     Sauterne, Sherry, Tokay.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.
              Subtitle B--Revisions Relating to Disasters

     SEC. 911. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEADLINES 
                   BY REASON OF PRESIDENTIALLY DECLARED DISASTER.

       (a) In General.--Chapter 77 is amended by inserting after 
     section 7508 the following new section:

     ``SEC. 7508A. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED 
                   DEADLINES BY REASON OF PRESIDENTIALLY DECLARED 
                   DISASTER.

       ``(a) In General.--In the case of a taxpayer determined by 
     the Secretary to be affected by a Presidentially declared 
     disaster (as defined by section 1033(h)(3)), the Secretary 
     may prescribe regulations under which a period of up to 90 
     days may be disregarded in determining, under the internal 
     revenue laws, in respect of any tax liability (including any 
     penalty, additional amount, or addition to the tax) of such 
     taxpayer--
       ``(1) whether any of the acts described in paragraph (1) of 
     section 7508(a) were performed within the time prescribed 
     therefor, and
       ``(2) the amount of any credit or refund.
       ``(b) Interest on Overpayments and Underpayments.--
     Subsection (a) shall not apply for the purpose of determining 
     interest on any overpayment or underpayment.''.
       (b) Clerical Amendment.--The table of sections for chapter 
     77 is amended by inserting after the item relating to section 
     7508 the following new item:

``Sec. 7508A. Authority to postpone certain tax-related deadlines by 
              reason of presidentially declared disaster.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to any period for performing an act 
     that has not expired before the date of the enactment of this 
     Act.

     SEC. 912. USE OF CERTAIN APPRAISALS TO ESTABLISH AMOUNT OF 
                   DISASTER LOSS.

       (a) In General.--Subsection (i) of section 165 is amended 
     by adding at the end the following new paragraph:
       ``(4) Use of disaster loan appraisals to establish amount 
     of loss.--Nothing in this title shall be construed to 
     prohibit the Secretary from prescribing regulations or other 
     guidance under which an appraisal for the purpose of 
     obtaining a loan of Federal funds or a loan guarantee from 
     the Federal Government as a result of a Presidentially 
     declared disaster (as defined by section 1033(h)(3)) may be 
     used to establish the amount of any loss described in 
     paragraph (1) or (2).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the date of the enactment of this Act.

     SEC. 913. TREATMENT OF LIVESTOCK SOLD ON ACCOUNT OF WEATHER-
                   RELATED CONDITIONS.

       (a) Deferral of Income Inclusion.--Subsection (e) of 
     section 451 (relating to special rules for proceeds from 
     livestock sold on account of drought) is amended--
       (1) by striking ``drought conditions, and that these 
     drought conditions'' in paragraph (1) and inserting 
     ``drought, flood, or other weather-related conditions, and 
     that such conditions''; and
       (2) by inserting ``, Flood, or Other Weather-Related 
     Conditions'' after ``Drought'' in the subsection heading.
       (b) Involuntary Conversions.--Subsection (e) of section 
     1033 (relating to livestock sold on account of drought) is 
     amended--
       (1) by inserting ``, flood, or other weather-related 
     conditions'' before the period at the end thereof; and
       (2) by inserting ``, Flood, or Other Weather-Related 
     Conditions'' after ``Drought'' in the subsection heading.
       (c) Effective Date.--The amendments made by this section 
     shall apply to sales and exchanges after December 31, 1996.

     SEC. 914. MORTGAGE FINANCING FOR RESIDENCES LOCATED IN 
                   DISASTER AREAS.

       Subsection (k) of section 143 (relating to mortgage revenue 
     bonds; qualified mortgage bond and qualified veteran's 
     mortgage bond) is amended by adding at the end the following 
     new paragraph:
       ``(11) Special rules for residences located in disaster 
     areas.--In the case of a residence located in an area 
     determined by the President to warrant assistance from the 
     Federal Government under the Robert T. Stafford Disaster 
     Relief and Emergency Assistance Act (as in effect on the date 
     of the enactment of the Taxpayer Relief Act of 1997), this 
     section shall be applied with the following modifications to 
     financing provided with respect to such residence within 2 
     years after the date of the disaster declaration:
       ``(A) Subsection (d) (relating to 3-year requirement) shall 
     not apply.
       ``(B) Subsections (e) and (f) (relating to purchase price 
     requirement and income requirement) shall be applied as if 
     such residence were a targeted area residence.

     The preceding sentence shall apply only with respect to bonds 
     issued after December 31, 1996, and before January 1, 
     1999.''.

     SEC. 915. ABATEMENT OF INTEREST ON UNDERPAYMENTS BY TAXPAYERS 
                   IN PRESIDENTIALLY DECLARED DISASTER AREAS.

       (a) In General.--If the Secretary of the Treasury extends 
     for any period the time for filing income tax returns under 
     section 6081 of the Internal Revenue Code of 1986 and the 
     time for paying income tax with respect to such returns under 
     section 6161 of such Code (and waives any penalties relating 
     to the failure to so file or so pay) for any individual 
     located in a Presidentially declared disaster area, the 
     Secretary shall, notwithstanding section 7508A(b) of such 
     Code, abate for such period the assessment of any interest 
     prescribed under section 6601 of such Code on such income 
     tax.
       (b) Presidentially Declared Disaster Area.--For purposes of 
     subsection (a), the term

[[Page H6434]]

     ``Presidentially declared disaster area'' means, with respect 
     to any individual, any area which the President has 
     determined during 1997 warrants assistance by the Federal 
     Government under the Robert T. Stafford Disaster Relief and 
     Emergency Assistance Act.
       (c) Individual.--For purposes of this section, the term 
     ``individual'' shall not include any estate or trust.
       (d) Effective Date.--This section shall apply to disasters 
     declared after December 31, 1996.
          Subtitle C--Provisions Relating to Employment Taxes

     SEC. 921. CLARIFICATION OF STANDARD TO BE USED IN DETERMINING 
                   EMPLOYMENT TAX STATUS OF SECURITIES BROKERS.

       (a) In General.--In determining for purposes of the 
     Internal Revenue Code of 1986 whether a registered 
     representative of a securities broker-dealer is an employee 
     (as defined in section 3121(d) of the Internal Revenue Code 
     of 1986), no weight shall be given to instructions from the 
     service recipient which are imposed only in compliance with 
     investor protection standards imposed by the Federal 
     Government, any State government, or a governing body 
     pursuant to a delegation by a Federal or State agency.
       (b) Effective Date.--Subsection (a) shall apply to services 
     performed after December 31, 1997.

     SEC. 922. CLARIFICATION OF EXEMPTION FROM SELF-EMPLOYMENT TAX 
                   FOR CERTAIN TERMINATION PAYMENTS RECEIVED BY 
                   FORMER INSURANCE SALESMEN.

       (a) Internal Revenue Code.--Section 1402 (relating to 
     definitions) is amended by adding at the end the following 
     new subsection:
       ``(k) Codification of Treatment of Certain Termination 
     Payments Received by Former Insurance Salesmen.--Nothing in 
     subsection (a) shall be construed as including in the net 
     earnings from self-employment of an individual any amount 
     received during the taxable year from an insurance company on 
     account of services performed by such individual as an 
     insurance salesman for such company if--
       ``(1) such amount is received after termination of such 
     individual's agreement to perform such services for such 
     company,
       ``(2) such individual performs no services for such company 
     after such termination and before the close of such taxable 
     year,
       ``(3) such individual enters into a covenant not to compete 
     against such company which applies to at least the 1-year 
     period beginning on the date of such termination, and
       ``(4) the amount of such payment--
       ``(A) depends primarily on policies sold by or credited to 
     the account of such individual during the last year of such 
     agreement or the extent to which such policies remain in 
     force for some period after such termination, or both, and
       ``(B) does not depend to any extent on length of service or 
     overall earnings from services performed for such company 
     (without regard to whether eligibility for payment depends on 
     length of service).''.
       (b) Social Security Act.--Section 211 of the Social 
     Security Act is amended by adding at the end the following 
     new subsection:

``Codification of Treatment of Certain Termination Payments Received by 
                       Former Insurance Salesmen

       ``(j) Nothing in subsection (a) shall be construed as 
     including in the net earnings from self-employment of an 
     individual any amount received during the taxable year from 
     an insurance company on account of services performed by such 
     individual as an insurance salesman for such company if--
       ``(1) such amount is received after termination of such 
     individual's agreement to perform such services for such 
     company,
       ``(2) such individual performs no services for such company 
     after such termination and before the close of such taxable 
     year,
       ``(3) such individual enters into a covenant not to compete 
     against such company which applies to at least the 1-year 
     period beginning on the date of such termination, and
       ``(4) the amount of such payment--
       ``(A) depends primarily on policies sold by or credited to 
     the account of such individual during the last year of such 
     agreement or the extent to which such policies remain in 
     force for some period after such termination, or both, and
       ``(B) does not depend to any extent on length of service or 
     overall earnings from services performed for such company 
     (without regard to whether eligibility for payment depends on 
     length of service).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to payments after December 31, 1997.
          Subtitle D--Provisions Relating to Small Businesses

     SEC. 931. WAIVER OF PENALTY THROUGH JUNE 30, 1998, ON SMALL 
                   BUSINESSES FAILING TO MAKE ELECTRONIC FUND 
                   TRANSFERS OF TAXES.

       No penalty shall be imposed under the Internal Revenue Code 
     of 1986 solely by reason of a failure by a person to use the 
     electronic fund transfer system established under section 
     6302(h) of such Code if--
       (1) such person is a member of a class of taxpayers first 
     required to use such system on or after July 1, 1997, and
       (2) such failure occurs before July 1, 1998.

     SEC. 932. CLARIFICATION OF TREATMENT OF HOME OFFICE USE FOR 
                   ADMINISTRATIVE AND MANAGEMENT ACTIVITIES.

       (a) In General.--Paragraph (1) of section 280A(c) is 
     amended by adding at the end the following new sentence: 
     ``For purposes of subparagraph (A), the term `principal place 
     of business' includes a place of business which is used by 
     the taxpayer for the administrative or management activities 
     of any trade or business of the taxpayer if there is no other 
     fixed location of such trade or business where the taxpayer 
     conducts substantial administrative or management activities 
     of such trade or business.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 933. AVERAGING OF FARM INCOME OVER 3 YEARS.

       (a) In General.--Subchapter Q of chapter 1 (relating to 
     readjustment of tax between years and special limitations) is 
     amended by adding the following new part:

                       ``PART I--INCOME AVERAGING

``Sec. 1301. Averaging of farm income.

     ``SEC. 1301. AVERAGING OF FARM INCOME.

       ``(a) In General.--At the election of an individual engaged 
     in a farming business, the tax imposed by section 1 for such 
     taxable year shall be equal to the sum of--
       ``(1) a tax computed under such section on taxable income 
     reduced by elected farm income, plus
       ``(2) the increase in tax imposed by section 1 which would 
     result if taxable income for each of the 3 prior taxable 
     years were increased by an amount equal to one-third of the 
     elected farm income.

     Any adjustment under this section for any taxable year shall 
     be taken into account in applying this section for any 
     subsequent taxable year.
       ``(b) Definitions.--In this section--
       ``(1) Elected farm income.--
       ``(A) In general.--The term `elected farm income' means so 
     much of the taxable income for the taxable year--
       ``(i) which is attributable to any farming business; and
       ``(ii) which is specified in the election under subsection 
     (a).
       ``(B) Treatment of gains.--For purposes of subparagraph 
     (A), gain from the sale or other disposition of property 
     (other than land) regularly used by the taxpayer in such a 
     farming business for a substantial period shall be treated as 
     attributable to such a farming business.
       ``(2) Individual.--The term `individual' shall not include 
     any estate or trust.
       ``(3) Farming business.--The term `farming business' has 
     the meaning given such term by section 263A(e)(4).
       ``(c) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out the purposes 
     of this section, including regulations regarding--
       ``(1) the order and manner in which items of income, gain, 
     deduction, or loss, or limitations on tax, shall be taken 
     into account in computing the tax imposed by this chapter on 
     the income of any taxpayer to whom this section applies for 
     any taxable year, and
       ``(2) the treatment of any short taxable year.''.
       (b) Clerical Amendment.--The table of parts for such 
     subchapter Q is amended by inserting before the item relating 
     to part II the following new item:

``Part I. Income averaging.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997, and before January 1, 2001.

     SEC. 934. INCREASE IN DEDUCTION FOR HEALTH INSURANCE COSTS OF 
                   SELF-EMPLOYED INDIVIDUALS.

       (a) In General.--The table contained in section 
     162(l)(1)(B) is amended to read as follows:

                                                ``For taxThe applicable
                                             ginning in percentage is--
  1997..........................................................40 ....

  1998 and 1999.................................................45 ....

  2000 and 2001.................................................50 ....

  2002..........................................................60 ....

  2003 through 2005.............................................80 ....

  2006..........................................................90 ....

  2007 and thereafter.......................................100.''.....

       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 935. MORATORIUM ON CERTAIN REGULATIONS.

       No temporary or final regulation with respect to the 
     definition of a limited partner under section 1402(a)(13) of 
     the Internal Revenue Code of 1986 may be issued or made 
     effective before July 1, 1998.
                        Subtitle E--Brownfields

     SEC. 941. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

       (a) In General.--Part VI of subchapter B of chapter 1 is 
     amended by adding at the end the following new section:

     ``SEC. 198. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

       ``(a) In General.--A taxpayer may elect to treat any 
     qualified environmental remediation expenditure which is paid 
     or incurred by the taxpayer as an expense which is not 
     chargeable to capital account. Any expenditure which is so 
     treated shall be allowed as a deduction for the taxable year 
     in which it is paid or incurred.
       ``(b) Qualified Environmental Remediation Expenditure.--For 
     purposes of this section--
       ``(1) In general.--The term `qualified environmental 
     remediation expenditure' means any expenditure--
       ``(A) which is otherwise chargeable to capital account, and
       ``(B) which is paid or incurred in connection with the 
     abatement or control of hazardous substances at a qualified 
     contaminated site.
       ``(2) Special rule for expenditures for depreciable 
     property.--Such term shall not include any expenditure for 
     the acquisition of property of a character subject to the 
     allowance for depreciation which is used in connection with 
     the abatement or control of hazardous substances at a 
     qualified contaminated site; except

[[Page H6435]]

     that the portion of the allowance under section 167 for such 
     property which is otherwise allocated to such site shall be 
     treated as a qualified environmental remediation expenditure.
       ``(c) Qualified Contaminated Site.--For purposes of this 
     section--
       ``(1) Qualified contaminated site.--
       ``(A) In general.--The term `qualified contaminated site' 
     means any area--
       ``(i) which is held by the taxpayer for use in a trade or 
     business or for the production of income, or which is 
     property described in section 1221(1) in the hands of the 
     taxpayer,
       ``(ii) which is within a targeted area, and
       ``(iii) at or on which there has been a release (or threat 
     of release) or disposal of any hazardous substance.
       ``(B) Taxpayer must receive statement from state 
     environmental agency.--An area shall be treated as a 
     qualified contaminated site with respect to expenditures paid 
     or incurred during any taxable year only if the taxpayer 
     receives a statement from the appropriate agency of the State 
     in which such area is located that such area meets the 
     requirements of clauses (ii) and (iii) of subparagraph (A).
       ``(C) Appropriate state agency.--For purposes of 
     subparagraph (B), the chief executive officer of each State 
     may, in consultation with the Administrator of the 
     Environmental Protection Agency, designate the appropriate 
     State environmental agency within 60 days of the date of the 
     enactment of this section. If the chief executive officer of 
     a State has not designated an appropriate State environmental 
     agency within such 60-day period, the appropriate 
     environmental agency for such State shall be designated by 
     the Administrator of the Environmental Protection Agency.
       ``(2) Targeted area.--
       ``(A) In general.--The term `targeted area' means--
       ``(i) any population census tract with a poverty rate of 
     not less than 20 percent,
       ``(ii) a population census tract with a population of less 
     than 2,000 if--

       ``(I) more than 75 percent of such tract is zoned for 
     commercial or industrial use, and
       ``(II) such tract is contiguous to 1 or more other 
     population census tracts which meet the requirement of clause 
     (i) without regard to this clause,

       ``(iii) any empowerment zone or enterprise community (and 
     any supplemental zone designated on December 21, 1994), and
       ``(iv) any site announced before February 1, 1997, as being 
     included as a brownfields pilot project of the Environmental 
     Protection Agency.
       ``(B) National priorities listed sites not included.--Such 
     term shall not include any site which is on, or proposed for, 
     the national priorities list under section 105(a)(8)(B) of 
     the Comprehensive Environmental Response, Compensation, and 
     Liability Act of 1980 (as in effect on the date of the 
     enactment of this section).
       ``(C) Certain rules to apply.--For purposes of this 
     paragraph the rules of sections 1392(b)(4) and 1393(a)(9) 
     shall apply.
       ``(d) Hazardous Substance.--For purposes of this section--
       ``(1) In general.--The term `hazardous substance' means--
       ``(A) any substance which is a hazardous substance as 
     defined in section 101(14) of the Comprehensive Environmental 
     Response, Compensation, and Liability Act of 1980, and
       ``(B) any substance which is designated as a hazardous 
     substance under section 102 of such Act.
       ``(2) Exception.--Such term shall not include any substance 
     with respect to which a removal or remedial action is not 
     permitted under section 104 of such Act by reason of 
     subsection (a)(3) thereof.
       ``(e) Deduction Recaptured as Ordinary Income on Sale, 
     Etc.--Solely for purposes of section 1245, in the case of 
     property to which a qualified environmental remediation 
     expenditure would have been capitalized but for this 
     section--
       ``(1) the deduction allowed by this section for such 
     expenditure shall be treated as a deduction for depreciation, 
     and
       ``(2) such property (if not otherwise section 1245 
     property) shall be treated as section 1245 property solely 
     for purposes of applying section 1245 to such deduction.
       ``(f) Coordination With Other Provisions.--Sections 280B 
     and 468 shall not apply to amounts which are treated as 
     expenses under this section.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.
       ``(h) Termination.--This section shall not apply to 
     expenditures paid or incurred after December 31, 2000.''.
       (b) Clerical Amendment.--The table of sections for part VI 
     of subchapter B of chapter 1 is amended by adding at the end 
     the following new item:

``Sec. 198. Expensing of environmental remediation costs.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to expenditures paid or incurred after the date 
     of the enactment of this Act, in taxable years ending after 
     such date.
Subtitle F--Empowerment Zones, Enterprise Communities, Brownfields, and 
              Community Development Financial Institutions

                CHAPTER 1--ADDITIONAL EMPOWERMENT ZONES

     SEC. 951. ADDITIONAL EMPOWERMENT ZONES.

       (a) In General.--Paragraph (2) of section 1391(b) (relating 
     to designations of empowerment zones and enterprise 
     communities) is amended--
       (1) by striking ``9'' and inserting ``11'',
       (2) by striking ``6'' and inserting ``8'', and
       (3) by striking ``750,000'' and inserting ``1,000,000''.
       (b) Special Rules for Application of Employment Credit.--
     Subsection (b) of section 1396 (relating to empowerment zone 
     employment credit) is amended--
       (1) by striking so much of the subsection as precedes the 
     table and inserting the following:
       ``(b) Applicable Percentage.--For purposes of this 
     section--
       ``(1) In general.--Except as provided in paragraph (2), the 
     term `applicable percentage' means the percentage determined 
     in accordance with the following table:'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Special Rule.--With respect to each empowerment zone 
     designated pursuant to the amendments made by the Taxpayer 
     Relief Act of 1997 to section 1391(b)(2), the following table 
     shall apply in lieu of the table in paragraph (1):

                                                 ``In the case of wages
                                                paid or iThe applicable
                                                        cpercentage is:
  2000 through 2004.............................................20 ....

  2005..........................................................15 ....

  2006..........................................................10 ....

  2007.........................................................5.''....

       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act, 
     except that designations of new empowerment zones made 
     pursuant to such amendments shall be made during the 180-day 
     period beginning on the date of the enactment of this Act. No 
     designation pursuant to such amendments shall take effect 
     before January 1, 2000.

                    CHAPTER 2--NEW EMPOWERMENT ZONES

     SEC. 952. DESIGNATION OF NEW EMPOWERMENT ZONES.

       (a) In General.--Section 1391 (relating to designation 
     procedure for empowerment zones and enterprise communities) 
     is amended by adding at the end the following new subsection:
       ``(g) Additional Designations Permitted.--
       ``(1) In general.--In addition to the areas designated 
     under subsection (a), the appropriate Secretaries may 
     designate in the aggregate an additional 20 nominated areas 
     as empowerment zones under this section, subject to the 
     availability of eligible nominated areas. Of that number, not 
     more than 15 may be designated in urban areas and not more 
     than 5 may be designated in rural areas.
       ``(2) Period designations may be made and take effect.--A 
     designation may be made under this subsection after the date 
     of the enactment of this subsection and before January 1, 
     1999.
       ``(3) Modifications to eligibility criteria, etc.--
       ``(A) Poverty rate requirement.--
       ``(i) In general.--A nominated area shall be eligible for 
     designation under this subsection only if the poverty rate 
     for each population census tract within the nominated area is 
     not less than 20 percent and the poverty rate for at least 90 
     percent of the population census tracts within the nominated 
     area is not less than 25 percent.
       ``(ii) Treatment of census tracts with small populations.--
     A population census tract with a population of less than 
     2,000 shall be treated as having a poverty rate of not less 
     than 25 percent if--

       ``(I) more than 75 percent of such tract is zoned for 
     commercial or industrial use, and
       ``(II) such tract is contiguous to 1 or more other 
     population census tracts which have a poverty rate of not 
     less than 25 percent (determined without regard to this 
     clause).

       ``(iii) Exception for developable sites.--Clause (i) shall 
     not apply to up to 3 noncontiguous parcels in a nominated 
     area which may be developed for commercial or industrial 
     purposes. The aggregate area of noncontiguous parcels to 
     which the preceding sentence applies with respect to any 
     nominated area shall not exceed 2,000 acres.
       ``(iv) Certain provisions not to apply.--Section 1392(a)(4) 
     (and so much of paragraphs (1) and (2) of section 1392(b) as 
     relate to section 1392(a)(4)) shall not apply to an area 
     nominated for designation under this subsection.
       ``(v) Special rule for rural empowerment zone.--The 
     Secretary of Agriculture may designate not more than 1 
     empowerment zone in a rural area without regard to clause (i) 
     if such area satisfies emigration criteria specified by the 
     Secretary of Agriculture.
       ``(B) Size limitation.--
       ``(i) In general.--The parcels described in subparagraph 
     (A)(iii) shall not be taken into account in determining 
     whether the requirement of subparagraph (A) or (B) of section 
     1392(a)(3) is met.
       ``(ii) Special rule for rural areas.--If a population 
     census tract (or equivalent division under section 
     1392(b)(4)) in a rural area exceeds 1,000 square miles or 
     includes a substantial amount of land owned by the Federal, 
     State, or local government, the nominated area may exclude 
     such excess square mileage or governmentally owned land and 
     the exclusion of that area will not be treated as violating 
     the continuous boundary requirement of section 1392(a)(3)(B).
       ``(C) Aggregate population limitation.--The aggregate 
     population limitation under the last sentence of subsection 
     (b)(2) shall not apply to a designation under paragraph 
     (1)(B).
       ``(D) Previously designated enterprise communities may be 
     included.--Subsection (e)(5) shall not apply to any 
     enterprise community designated under subsection (a) that is 
     also nominated for designation under this subsection.
       ``(E) Indian reservations may be nominated.--
       ``(i) In general.--Section 1393(a)(4) shall not apply to an 
     area nominated for designation under this subsection.

[[Page H6436]]

       ``(ii) Special rule.--An area in an Indian reservation 
     shall be treated as nominated by a State and a local 
     government if it is nominated by the reservation governing 
     body (as determined by the Secretary of Interior).''
       (b) Employment Credit Not To Apply to New Empowerment 
     Zones.--Section 1396 (relating to empowerment zone employment 
     credit) is amended by adding at the end the following new 
     subsection:
       ``(e) Credit Not To Apply to Empowerment Zones Designated 
     Under Section 1391(g).--This section shall be applied without 
     regard to any empowerment zone designated under section 
     1391(g).''
       (c) Increased Expensing Under Section 179 Not To Apply in 
     Developable Sites.--Section 1397A (relating to increase in 
     expensing under section 179) is amended by adding at the end 
     the following new subsection:
       ``(c) Limitation.--For purposes of this section, qualified 
     zone property shall not include any property substantially 
     all of the use of which is in any parcel described in section 
     1391(g)(3)(A)(iii).''
       (d) Conforming Amendments.--
       (1) Subsections (e) and (f) of section 1391 are each 
     amended by striking ``subsection (a)'' and inserting ``this 
     section''.
       (2) Section 1391(c) is amended by striking ``this section'' 
     and inserting ``subsection (a)''.

     SEC. 953. VOLUME CAP NOT TO APPLY TO ENTERPRISE ZONE FACILITY 
                   BONDS WITH RESPECT TO NEW EMPOWERMENT ZONES.

       (a) In General.--Section 1394 (relating to tax-exempt 
     enterprise zone facility bonds) is amended by adding at the 
     end the following new subsection:
       ``(f) Bonds for Empowerment Zones Designated Under Section 
     1391(g).--
       ``(1) In general.--In the case of a new empowerment zone 
     facility bond--
       ``(A) such bond shall not be treated as a private activity 
     bond for purposes of section 146, and
       ``(B) subsection (c) of this section shall not apply.
       ``(2) Limitation on amount of bonds.--
       ``(A) In general.--Paragraph (1) shall apply to a new 
     empowerment zone facility bond only if such bond is 
     designated for purposes of this subsection by the local 
     government which nominated the area to which such bond 
     relates.
       ``(B) Limitation on bonds designated.--The aggregate face 
     amount of bonds which may be designated under subparagraph 
     (A) with respect to any empowerment zone shall not exceed--
       ``(i) $60,000,000 if such zone is in a rural area,
       ``(ii) $130,000,000 if such zone is in an urban area and 
     the zone has a population of less than 100,000, and
       ``(iii) $230,000,000 if such zone is in an urban area and 
     the zone has a population of at least 100,000.
       ``(C) Special rules.--
       ``(i) Coordination with limitation in subsection (c).--
     Bonds to which paragraph (1) applies shall not be taken into 
     account in applying the limitation of subsection (c) to other 
     bonds.
       ``(ii) Current refunding not taken into account.--In the 
     case of a refunding (or series of refundings) of a bond 
     designated under this paragraph, the refunding obligation 
     shall be treated as designated under this paragraph (and 
     shall not be taken into account in applying subparagraph (B)) 
     if--

       ``(I) the amount of the refunding bond does not exceed the 
     outstanding amount of the refunded bond, and
       ``(II) the refunded bond is redeemed not later than 90 days 
     after the date of issuance of the refunding bond.

       ``(3) New empowerment zone facility bond.--For purposes of 
     this subsection, the term `new empowerment zone facility 
     bond' means any bond which would be described in subsection 
     (a) if only empowerment zones designated under section 
     1391(g) were taken into account under sections 1397B and 
     1397C.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to obligations issued after the date of the 
     enactment of this Act.

     SEC. 954. MODIFICATION TO ELIGIBILITY CRITERIA FOR 
                   DESIGNATION OF FUTURE ENTERPRISE ZONES IN 
                   ALASKA OR HAWAII.

       Section 1392 (relating to eligibility criteria) is amended 
     by adding at the end the following new subsection:
       ``(d) Special Eligibility for Nominated Areas Located in 
     Alaska or Hawaii.--A nominated area in Alaska or Hawaii shall 
     be treated as meeting the requirements of paragraphs (2), 
     (3), and (4) of subsection (a) if for each census tract or 
     block group within such area 20 percent or more of the 
     families have income which is 50 percent or less of the 
     statewide median family income (as determined under section 
     143).''.

  CHAPTER 3--TREATMENT OF EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES

     SEC. 955. MODIFICATIONS TO ENTERPRISE ZONE FACILITY BOND 
                   RULES FOR ALL EMPOWERMENT ZONES AND ENTERPRISE 
                   COMMUNITIES.

       (a) Modifications Relating to Enterprise Zone Business.--
     Paragraph (3) of section 1394(b) (defining enterprise zone 
     business) is amended to read as follows:
       ``(3) Enterprise zone business.--
       ``(A) In general.--Except as modified in this paragraph, 
     the term `enterprise zone business' has the meaning given 
     such term by section 1397B.
       ``(B) Modifications.--In applying section 1397B for 
     purposes of this section--
       ``(i) Businesses in enterprise communities eligible.--
     References in section 1397B to empowerment zones shall be 
     treated as including references to enterprise communities.
       ``(ii) Waiver of requirements during startup period.--A 
     business shall not fail to be treated as an enterprise zone 
     business during the startup period if--

       ``(I) as of the beginning of the startup period, it is 
     reasonably expected that such business will be an enterprise 
     zone business (as defined in section 1397B as modified by 
     this paragraph) at the end of such period, and
       ``(II) such business makes bona fide efforts to be such a 
     business.

       ``(iii) Reduced requirements after testing period.--A 
     business shall not fail to be treated as an enterprise zone 
     business for any taxable year beginning after the testing 
     period by reason of failing to meet any requirement of 
     subsection (b) or (c) of section 1397B if at least 35 percent 
     of the employees of such business for such year are residents 
     of an empowerment zone or an enterprise community. The 
     preceding sentence shall not apply to any business which is 
     not a qualified business by reason of paragraph (1), (4), or 
     (5) of section 1397B(d).
       ``(C) Definitions relating to subparagraph (b).--For 
     purposes of subparagraph (B)--
       ``(i) Startup period.--The term `startup period' means, 
     with respect to any property being provided for any business, 
     the period before the first taxable year beginning more than 
     2 years after the later of--

       ``(I) the date of issuance of the issue providing such 
     property, or
       ``(II) the date such property is first placed in service 
     after such issuance (or, if earlier, the date which is 3 
     years after the date described in subclause (I)).

       ``(ii) Testing period.--The term `testing period' means the 
     first 3 taxable years beginning after the startup period.
       ``(D) Portions of business may be enterprise zone 
     business.--The term `enterprise zone business' includes any 
     trades or businesses which would qualify as an enterprise 
     zone business (determined after the modifications of 
     subparagraph (B)) if such trades or businesses were 
     separately incorporated.''
       (b) Modifications Relating to Qualified Zone Property.--
     Paragraph (2) of section 1394(b) (defining qualified zone 
     property) is amended to read as follows:
       ``(2) Qualified zone property.--The term `qualified zone 
     property' has the meaning given such term by section 1397C; 
     except that--
       ``(A) the references to empowerment zones shall be treated 
     as including references to enterprise communities, and
       ``(B) section 1397C(a)(2) shall be applied by substituting 
     `an amount equal to 15 percent of the adjusted basis' for `an 
     amount equal to the adjusted basis'.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to obligations issued after the date of the 
     enactment of this Act.

     SEC. 956. MODIFICATIONS TO ENTERPRISE ZONE BUSINESS 
                   DEFINITION FOR ALL EMPOWERMENT ZONES AND 
                   ENTERPRISE COMMUNITIES.

       (a) In General.--Section 1397B (defining enterprise zone 
     business) is amended--
       (1) by striking ``80 percent'' in subsections (b)(2) and 
     (c)(1) and inserting ``50 percent'',
       (2) by striking ``substantially all'' each place it appears 
     in subsections (b) and (c) and inserting ``a substantial 
     portion'',
       (3) by striking ``, and exclusively related to,'' in 
     subsections (b)(4) and (c)(3),
       (4) by adding at the end of subsection (d)(2) the following 
     new flush sentence:

     ``For purposes of subparagraph (B), the lessor of the 
     property may rely on a lessee's certification that such 
     lessee is an enterprise zone business.'',
       (5) by striking ``substantially all'' in subsection (d)(3) 
     and inserting ``at least 50 percent'', and
       (6) by adding at the end the following new subsection:
       ``(f) Treatment of Businesses Straddling Census Tract 
     Lines.--For purposes of this section, if--
       ``(1) a business entity or proprietorship uses real 
     property located within an empowerment zone,
       ``(2) the business entity or proprietorship also uses real 
     property located outside the empowerment zone,
       ``(3) the amount of real property described in paragraph 
     (1) is substantial compared to the amount of real property 
     described in paragraph (2), and
       ``(4) the real property described in paragraph (2) is 
     contiguous to part or all of the real property described in 
     paragraph (1),

     then all the services performed by employees, all business 
     activities, all tangible property, and all intangible 
     property of the business entity or proprietorship that occur 
     in or is located on the real property described in paragraphs 
     (1) and (2) shall be treated as occurring or situated in an 
     empowerment zone.''
       (b) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning on or after the date of the 
     enactment of this Act.
       (2) Special rule for enterprise zone facility bonds.--For 
     purposes of section 1394(b) of the Internal Revenue Code of 
     1986, the amendments made by this section shall apply to 
     obligations issued after the date of the enactment of this 
     Act.
                      Subtitle G--Other Provisions

     SEC. 961. USE OF ESTIMATES OF SHRINKAGE FOR INVENTORY 
                   ACCOUNTING.

       (a) In General.--Section 471 (relating to general rule for 
     inventories) is amended by redesignating subsection (b) as 
     subsection (c) and by inserting after subsection (a) the 
     following new subsection:
       ``(b) Estimates of Inventory Shrinkage Permitted.--A method 
     of determining inventories shall not be treated as failing to 
     clearly reflect income solely because it utilizes estimates

[[Page H6437]]

     of inventory shrinkage that are confirmed by a physical count 
     only after the last day of the taxable year if--
       ``(1) the taxpayer normally does a physical count of 
     inventories at each location on a regular and consistent 
     basis, and
       ``(2) the taxpayer makes proper adjustments to such 
     inventories and to its estimating methods to the extent such 
     estimates are greater than or less than the actual 
     shrinkage.''.
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     apply to taxable years ending after the date of the enactment 
     of this Act.
       (2) Coordination with section 481.--In the case of any 
     taxpayer permitted by this section to change its method of 
     accounting to a permissible method for any taxable year--
       (A) such changes shall be treated as initiated by the 
     taxpayer,
       (B) such changes shall be treated as made with the consent 
     of the Secretary of the Treasury, and
       (C) the period for taking into account the adjustments 
     under section 481 by reason of such change shall be 4 years.

     SEC. 962. ASSIGNMENT OF WORKMEN'S COMPENSATION LIABILITY 
                   ELIGIBLE FOR EXCLUSION RELATING TO PERSONAL 
                   INJURY LIABILITY ASSIGNMENTS.

       (a) In General.--Subsection (c) of section 130 (relating to 
     certain personal injury liability assignments) is amended--
       (1) by inserting ``, or as compensation under any workmen's 
     compensation act,'' after ``(whether by suit or agreement)'' 
     in the material preceding paragraph (1),
       (2) by inserting ``or the workmen's compensation claim,'' 
     after ``agreement,'' in paragraph (1), and
       (3) by striking ``section 104(a)(2)'' in paragraph (2)(D) 
     and inserting ``paragraph (1) or (2) of section 104(a)''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to claims under workmen's compensation acts filed 
     after the date of the enactment of this Act.

     SEC. 963. TAX-EXEMPT STATUS FOR CERTAIN STATE WORKER'S 
                   COMPENSATION ACT COMPANIES.

       (a) In General.--Section 501(c)(27) (relating to membership 
     organizations under workmen's compensation acts) is amended 
     by adding at the end the following:
       ``(B) Any organization (including a mutual insurance 
     company) if--
       ``(i) such organization is created by State law and is 
     organized and operated under State law exclusively to--
       ``(I) provide workmen's compensation insurance which is 
     required by State law or with respect to which State law 
     provides significant disincentives if such insurance is not 
     purchased by an employer, and
       ``(II) provide related coverage which is incidental to 
     workmen's compensation insurance,
       ``(ii) such organization must provide workmen's 
     compensation insurance to any employer in the State (for 
     employees in the State or temporarily assigned out-of-State) 
     which seeks such insurance and meets other reasonable 
     requirements relating thereto,
       ``(iii)(I) the State makes a financial commitment with 
     respect to such organization either by extending the full 
     faith and credit of the State to the initial debt of such 
     organization or by providing the initial operating capital of 
     such organization, and (II) in the case of periods after the 
     date of enactment of this subparagraph, the assets of such 
     organization revert to the State upon dissolution or State 
     law does not permit the dissolution of such organization, and
       ``(iv) the majority of the board of directors or oversight 
     body of such organization are appointed by the chief 
     executive officer or other executive branch official of the 
     State, by the State legislature, or by both.''.
       (b) Conforming Amendments.--Section 501(c)(27) is amended 
     by inserting ``(A)'' after ``(27)'', by redesignating 
     subparagraphs (A), (B), and (C) as clauses (i), (ii), and 
     (iii), respectively, and by redesignating clauses (i) and 
     (ii) of subparagraphs (B) and (C) (before redesignation) as 
     subclauses (I) and (II), respectively.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 964. ELECTION FOR 1987 PARTNERSHIPS TO CONTINUE 
                   EXCEPTION FROM TREATMENT OF PUBLICLY TRADED 
                   PARTNERSHIPS AS CORPORATIONS.

       (a) In General.--Section 7704 is amended by adding at the 
     end the following new subsection:
       ``(g) Exception for Electing 1987 Partnerships.--
       ``(1) In general.--Subsection (a) shall not apply to an 
     electing 1987 partnership.
       ``(2) Electing 1987 partnership.--For purposes of this 
     subsection, the term `electing 1987 partnership' means any 
     publicly traded partnership if--
       ``(A) such partnership is an existing partnership (as 
     defined in section 10211(c)(2) of the Revenue Reconciliation 
     Act of 1987),
       ``(B) subsection (a) has not applied (and without regard to 
     subsection (c)(1) would not have applied) to such partnership 
     for all prior taxable years beginning after December 31, 
     1987, and before January 1, 1998, and
       ``(C) such partnership elects the application of this 
     subsection, and consents to the application of the tax 
     imposed by paragraph (3), for its first taxable year 
     beginning after December 31, 1997.

     A partnership which, but for this sentence, would be treated 
     as an electing 1987 partnership shall cease to be so treated 
     (and the election under subparagraph (C) shall cease to be in 
     effect) as of the 1st day after December 31, 1997, on which 
     there has been an addition of a substantial new line of 
     business with respect to such partnership.
       ``(3) Additional tax on electing partnerships.--
       ``(A) Imposition of tax.--There is hereby imposed for each 
     taxable year on the income of each electing 1987 partnership 
     a tax equal to 3.5 percent of such partnership's gross income 
     for the taxable year from the active conduct of trades and 
     businesses by the partnership.
       ``(B) Adjustments in the case of tiered partnerships.--For 
     purposes of this paragraph, in the case of a partnership 
     which is a partner in another partnership, the gross income 
     referred to in subparagraph (A) shall include the 
     partnership's distributive share of the gross income of such 
     other partnership from the active conduct of trades and 
     businesses of such other partnership. A similar rule shall 
     apply in the case of lower-tiered partnerships.
       ``(C) Treatment of tax.--For purposes of this title, the 
     tax imposed by this paragraph shall be treated as imposed by 
     chapter 1 other than for purposes of determining the amount 
     of any credit allowable under chapter 1.
       ``(4) Election.--An election and consent under this 
     subsection shall apply to the taxable year for which made and 
     all subsequent taxable years unless revoked by the 
     partnership. Such revocation may be made without the consent 
     of the Secretary, but, once so revoked, may not be 
     reinstated.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 965. EXCLUSION FROM UNRELATED BUSINESS TAXABLE INCOME 
                   FOR CERTAIN SPONSORSHIP PAYMENTS.

       (a) In General.--Section 513 (relating to unrelated trade 
     or business income) is amended by adding at the end the 
     following new subsection:
       ``(i) Treatment of Certain Sponsorship Payments.--
       ``(1) In general.--The term `unrelated trade or business' 
     does not include the activity of soliciting and receiving 
     qualified sponsorship payments.
       ``(2) Qualified sponsorship payments.--For purposes of this 
     subsection--
       ``(A) In general.--The term `qualified sponsorship payment' 
     means any payment made by any person engaged in a trade or 
     business with respect to which there is no arrangement or 
     expectation that such person will receive any substantial 
     return benefit other than the use or acknowledgement of the 
     name or logo (or product lines) of such person's trade or 
     business in connection with the activities of the 
     organization that receives such payment. Such a use or 
     acknowledgement does not include advertising such person's 
     products or services (including messages containing 
     qualitative or comparative language, price information, or 
     other indications of savings or value, an endorsement, or an 
     inducement to purchase, sell, or use such products or 
     services).
       ``(B) Limitations.--
       ``(i) Contingent payments.--The term `qualified sponsorship 
     payment' does not include any payment if the amount of such 
     payment is contingent upon the level of attendance at one or 
     more events, broadcast ratings, or other factors indicating 
     the degree of public exposure to one or more events.
       ``(ii) Safe harbor does not apply to periodicals and 
     qualified convention and trade show activities.--The term 
     `qualified sponsorship payment' does not include--

       ``(I) any payment which entitles the payor to the use or 
     acknowledgement of the name or logo (or product lines) of the 
     payor's trade or business in regularly scheduled and printed 
     material published by or on behalf of the payee organization 
     that is not related to and primarily distributed in 
     connection with a specific event conducted by the payee 
     organization, or
       ``(II) any payment made in connection with any qualified 
     convention or trade show activity (as defined in subsection 
     (d)(3)(B)).

       ``(3) Allocation of portions of single payment.--For 
     purposes of this subsection, to the extent that a portion of 
     a payment would (if made as a separate payment) be a 
     qualified sponsorship payment, such portion of such payment 
     and the other portion of such payment shall be treated as 
     separate payments.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to payments solicited or received after December 
     31, 1997.

     SEC. 966. ASSOCIATIONS OF HOLDERS OF TIMESHARE INTERESTS TO 
                   BE TAXED LIKE OTHER HOMEOWNERS ASSOCIATIONS.

       (a) Timeshare Associations Included as Homeowner 
     Associations.--
       (1) In general.--Paragraph (1) of section 528(c) (defining 
     homeowners association) is amended--
       (A) by striking ``or a residential real estate management 
     association'' and inserting ``, a residential real estate 
     management association, or a timeshare association'' in the 
     material preceding subparagraph (A),
       (B) by striking ``or'' at the end of clause (i) of 
     subparagraph (B), by striking the period at the end of clause 
     (ii) of subparagraph (B) and inserting ``, or'', and by 
     adding at the end of subparagraph (B) the following new 
     clause:
       ``(iii) owners of timeshare rights to use, or timeshare 
     ownership interests in, association property in the case of a 
     timeshare association,'', and
       (C) by inserting ``and, in the case of a timeshare 
     association, for activities provided to or on behalf of 
     members of the association'' before the comma at the end of 
     subparagraph (C).
       (2) Timeshare association defined.--Subsection (c) of 
     section 528 is amended by redesignating paragraph (4) as 
     paragraph (5) and by inserting after paragraph (3) the 
     following new paragraph:
       ``(4) Timeshare association.--The term `timeshare 
     association' means any organization

[[Page H6438]]

     (other than a condominium management association) meeting the 
     requirement of subparagraph (A) of paragraph (1) if any 
     member thereof holds a timeshare right to use, or a timeshare 
     ownership interest in, real property constituting association 
     property.''.
       (b) Exempt Function Income.--Paragraph (3) of section 
     528(d) is amended by striking ``or'' at the end of 
     subparagraph (A), by striking the period at the end of 
     subparagraph (B) and inserting ``, or'', and by adding at the 
     end the following new subparagraph:
       ``(C) owners of timeshare rights to use, or timeshare 
     ownership interests in, real property in the case of a 
     timeshare association.''.
       (c) Association Property.--Paragraph (5) of section 528(c), 
     as redesignated by subsection (a)(2), is amended by adding at 
     the end the following new flush sentence:

     ``In the case of a timeshare association, such term includes 
     property in which the timeshare association, or members of 
     the association, have rights arising out of recorded 
     easements, covenants, or other recorded instruments to use 
     property related to the timeshare project.''.
       (d) Rate of Tax.--Subsection (b) of section 528 (relating 
     to certain homeowners associations) is amended by inserting 
     before the period ``(32 percent of such income in the case of 
     a timeshare association)''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 967. ADDITIONAL ADVANCE REFUNDING OF CERTAIN VIRGIN 
                   ISLAND BONDS.

       Subclause (I) of section 149(d)(3)(A)(i) of the Internal 
     Revenue Code of 1986 shall not apply to the second advance 
     refunding of any issue of the Virgin Islands which was first 
     advance refunded before June 9, 1997, if the debt provisions 
     of the refunding bonds are changed to repeal the priority 
     first lien requirement of the refunded bonds.

     SEC. 968. NONRECOGNITION OF GAIN ON SALE OF STOCK TO CERTAIN 
                   FARMERS' COOPERATIVES.

       (a) In General.--Section 1042 (relating to sales of stock 
     to employee stock ownership plans or certain cooperatives) is 
     amended by adding at the end the following new subsection:
       ``(g) Application of Section to Sales of Stock in 
     Agricultural Refiners and Processors to Eligible Farm 
     Cooperatives.--
       ``(1) In general.--This section shall apply to the sale of 
     stock of a qualified refiner or processor to an eligible 
     farmers' cooperative.
       ``(2) Qualified refiner or processor.--For purposes of this 
     subsection, the term `qualified refiner or processor' means a 
     domestic corporation--
       ``(A) substantially all of the activities of which consist 
     of the active conduct of the trade or business of refining or 
     processing agricultural or horticultural products, and
       ``(B) which, during the 1-year period ending on the date of 
     the sale, purchases more than one-half of such products to be 
     refined or processed from--
       ``(i) farmers who make up the eligible farmers' cooperative 
     which is purchasing stock in the corporation in a transaction 
     to which this subsection is to apply, or
       ``(ii) such cooperative.
       ``(3) Eligible farmers' cooperative.--For purposes of this 
     section, the term `eligible farmers' cooperative' means an 
     organization to which part I of subchapter T applies and 
     which is engaged in the marketing of agricultural or 
     horticultural products.
       ``(4) Special rules.--In applying this section to a sale to 
     which paragraph (1) applies--
       ``(A) the eligible farmers' cooperative shall be treated in 
     the same manner as a cooperative described in subsection 
     (b)(1)(B),
       ``(B) subsection (b)(2) shall be applied by substituting 
     `100 percent' for `30 percent' each place it appears,
       ``(C) the determination as to whether any stock in the 
     domestic corporation is a qualified security shall be made 
     without regard to whether the stock is an employer security 
     or to subsection (c)(1)(A), and
       ``(D) paragraphs (2)(D) and (7) of subsection (c) shall not 
     apply.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to sales after December 31, 1997.

     SEC. 969. INCREASED DEDUCTIBILITY OF BUSINESS MEAL EXPENSES 
                   FOR INDIVIDUALS SUBJECT TO FEDERAL HOURS OF 
                   SERVICE.

       (a) In General.--Section 274(n) (relating to only 50 
     percent of meal and entertainment expenses allowed as 
     deduction) is amended by adding at the end the following new 
     paragraph:
       ``(3) Special rule for individuals subject to federal hours 
     of service.--
       ``(A) In general.--In the case of any expenses for food or 
     beverages consumed while away from home (within the meaning 
     of section 162(a)(2)) by an individual during, or incident 
     to, the period of duty subject to the hours of service 
     limitations of the Department of Transportation, paragraph 
     (1) shall be applied by substituting `the applicable 
     percentage' for `50 percent'.
       ``(B) Applicable percentage.--For purposes of this 
     paragraph, the term `applicable percentage' means the 
     percentage determined under the following table:

``For taxable years be-                                  The applicable
  ginning in calendar year--                            percentage is--
  1998 or 1999..................................................55 ....

  2000 or 2001..................................................60 ....

  2002 or 2003..................................................65 ....

  2004 or 2005..................................................70 ....

  2006 or 2007..................................................75 ....

  2008 or thereafter.........................................80.''.....

       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 970. CLARIFICATION OF DE MINIMIS FRINGE BENEFIT RULES TO 
                   NO-CHARGE EMPLOYEE MEALS.

       (a) In General.--Paragraph (2) of section 132(e) (defining 
     de minimis fringe) is amended by adding at the end the 
     following new sentence: ``For purposes of subparagraph (B), 
     an employee entitled under section 119 to exclude the value 
     of a meal provided at such facility shall be treated as 
     having paid an amount for such meal equal to the direct 
     operating costs of the facility attributable to such meal.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 971. EXEMPTION OF THE INCREMENTAL COST OF A CLEAN FUEL 
                   VEHICLE FROM THE LIMITS ON DEPRECIATION FOR 
                   VEHICLES.

       (a) In General.--Section 280F(a)(1) (relating to limiting 
     depreciation on luxury automobiles) is amended by adding at 
     the end the following new subparagraph:
       ``(C) Special rule for certain clean-fuel passenger 
     automobiles.--
       ``(i) Modified automobiles.--In the case of a passenger 
     automobile which is propelled by a fuel which is not a clean-
     burning fuel and to which is installed qualified clean-fuel 
     vehicle property (as defined in section 179A(c)(1)(A)) for 
     purposes of permitting such vehicle to be propelled by a 
     clean burning fuel (as defined in section 179A(e)(1)), 
     subparagraph (A) shall not apply to the cost of the installed 
     qualified clean burning vehicle property.
       ``(ii) Purpose built passenger vehicles.--In the case of a 
     purpose built passenger vehicle (as defined in section 
     4001(a)(2)(C)(ii)), each of the annual limitations specified 
     in subparagraph (A) shall be tripled.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after the date of 
     enactment of this Act and before January 1, 2005.

     SEC. 972. TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT ON 
                   PERCENTAGE DEPLETION FOR MARGINAL PRODUCTION.

       (a) In General.--Paragraph (6) of section 613A(c) is 
     amended by adding at the end the following new subparagraph:
       ``(H) Temporary suspension of taxable income limit with 
     respect to marginal production.--The second sentence of 
     subsection (a) of section 613 shall not apply to so much of 
     the allowance for depletion as is determined under 
     subparagraph (A) for any taxable year beginning after 
     December 31, 1997, and before January 1, 2000.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 973. INCREASE IN STANDARD MILEAGE RATE EXPENSE DEDUCTION 
                   FOR CHARITABLE USE OF PASSENGER AUTOMOBILE.

       (a) In General.--Section 170(i) (relating to standard 
     mileage rate for use of passenger automobile) is amended to 
     read as follows:
       ``(i) Standard Mileage Rate for Use of Passenger 
     Automobile.--For purposes of computing the deduction under 
     this section for use of a passenger automobile, the standard 
     mileage rate shall be 14 cents per mile.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 974. CLARIFICATION OF TREATMENT OF CERTAIN RECEIVABLES 
                   PURCHASED BY COOPERATIVE HOSPITAL SERVICE 
                   ORGANIZATIONS.

       (a) In General.--Subparagraph (A) of section 501(e)(1) is 
     amended by inserting ``(including the purchase of patron 
     accounts receivable on a recourse basis)'' after ``billing 
     and collection''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 975. DEDUCTION IN COMPUTING ADJUSTED GROSS INCOME FOR 
                   EXPENSES IN CONNECTION WITH SERVICE PERFORMED 
                   BY CERTAIN OFFICIALS.

       (a) In General.--Paragraph (2) of section 62(a) (defining 
     adjusted gross income) is amended by adding at the end the 
     following new subparagraph:
       ``(C) Certain expenses of officials.--The deductions 
     allowed by section 162 which consist of expenses paid or 
     incurred with respect to services performed by an official as 
     an employee of a State or a political subdivision thereof in 
     a position compensated in whole or in part on a fee basis.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to expenses paid or incurred in taxable years 
     beginning after December 31, 1986.

     SEC. 976. COMBINED EMPLOYMENT TAX REPORTING DEMONSTRATION 
                   PROJECT.

       (a) In General.--The Secretary of the Treasury shall 
     provide for a demonstration project to assess the feasibility 
     and desirability of expanding combined Federal and State tax 
     reporting.
       (b) Description of Demonstration Project.--The 
     demonstration project under subsection (a) shall be--
       (1) carried out between the Internal Revenue Service and 
     the State of Montana for a period ending with the date which 
     is 5 years after the date of the enactment of this Act,
       (2) limited to the reporting of employment taxes, and
       (3) limited to the disclosure of the taxpayer identity (as 
     defined in section 6103(b)(6) of such Code) and the signature 
     of the taxpayer.
       (c) Conforming Amendment.--Section 6103(d) is amended by 
     adding at the end the following new paragraph:
       ``(5) Disclosure for certain combined reporting project.--
     The Secretary shall disclose

[[Page H6439]]

     taxpayer identities and signatures for purposes of the 
     demonstration project described in section 967 of the 
     Taxpayer Relief Act of 1997.''.

     SEC. 977. ELECTIVE CARRYBACK OF EXISTING CARRYOVERS OF 
                   NATIONAL RAILROAD PASSENGER CORPORATION.

       (a) Elective Carryback.--
       (1) In general.--If the National Railroad Passenger 
     Corporation (in this section referred to as the 
     ``Corporation'')--
       (A) makes an election under this section for its first 
     taxable year ending after September 30, 1997, and
       (B) agrees to the conditions specified in paragraph (2),

     then the Corporation shall be treated as having made a 
     payment of the tax imposed by chapter 1 of the Internal 
     Revenue Code of 1986 for such first taxable year and the 
     succeeding taxable year in an amount (for each such taxable 
     year) equal to 50 percent of the amount determined under 
     paragraph (3). Each such payment shall be treated as having 
     been made by the Corporation on the last day prescribed by 
     law (without regard to extensions) for filing its return of 
     tax under chapter 1 of such Code for the taxable year to 
     which such payment relates.
       (2) Conditions.--
       (A) In general.--This section shall only apply to the 
     Corporation if it agrees (in such manner as the Secretary of 
     the Treasury or his delegate may prescribe) to--
       (i) except as provided in clause (ii), use any refund of 
     the payment described in paragraph (1) (and any interest 
     thereon) solely to finance qualified expenses of the 
     Corporation, and
       (ii) make the payments to non-Amtrak States as described in 
     subsection (c).
       (B) Repayment.--
       (i) In general.--The Corporation shall repay to the United 
     States any amount not used in accordance with this paragraph 
     and any amount remaining unused as of January 1, 2010.
       (ii) Special rules.--For purposes of clause (i)--

       (I) no amount shall be treated as remaining unused as of 
     January 1, 2010, if it is obligated as of such date for a 
     qualified expense, and
       (II) the Corporation shall not be treated as failing to 
     meet the requirements of clause (i) by reason of investing 
     any amount for a temporary period.

       (3) Amount.--For purposes of paragraph (1)--
       (A) In general.--The amount determined under this paragraph 
     shall be the lesser of--
       (i) 35 percent of the Corporation's existing qualified 
     carryovers, or
       (ii) the Corporation's net tax liability for the carryback 
     period.
       (B) Dollar limit.--Such amount shall not exceed 
     $2,323,000,000.
       (b) Existing Qualified Carryovers; Net Tax Liability.--For 
     purposes of this section--
       (1) Existing qualified carryovers.--The term ``existing 
     qualified carryovers'' means the aggregate of the amounts 
     which are net operating loss carryovers under section 172(b) 
     of the Internal Revenue Code of 1986 to the Corporation's 
     first taxable year ending after September 30, 1997.
       (2) Net tax liability for carryback period.--
       (A) In general.--The Corporation's net tax liability for 
     the carryback period is the aggregate of the net tax 
     liability of the Corporation's railroad predecessors for 
     taxable years in the carryback period.
       (B) Net tax liability.--The term ``net tax liability'' 
     means, with respect to any taxable year, the amount of the 
     tax imposed by chapter 1 of the Internal Revenue Code of 1986 
     (or any corresponding provision of prior law) for such 
     taxable year, reduced by the sum of the credits allowable 
     against such tax under such Code (or any corresponding 
     provision of prior law).
       (C) Carryback period.--The term ``carryback period'' means 
     the period--
       (i) which begins with the first taxable year of any 
     railroad predecessor beginning before January 1, 1971, for 
     which there is a net tax liability, and
       (ii) which ends with the last taxable year of any railroad 
     predecessor beginning before January 1, 1971.
       (3) Railroad predecessor.--
       (A) In general.--The term ``railroad predecessor'' means--
       (i) any railroad which entered into a contract under 
     section 401 or 404(a) of the Rail Passenger Service Act of 
     1970 relieving the railroad of its entire responsibility for 
     the provision of intercity rail passenger service, and
       (ii) any predecessor thereof.
       (B) Consolidated returns.--If any railroad described in 
     subparagraph (A) was a member of an affiliated group which 
     filed a consolidated return for any taxable year in the 
     carryback period, each member of such group shall be treated 
     as a railroad predecessor for such year.
       (c) Payments to Non-Amtrak States.--
       (1) In general.--Within 30 days after receipt of any refund 
     of any payment described in subsection (a)(1), the 
     Corporation shall pay to each non-Amtrak State an amount 
     equal to 1 percent of the amount of such refund.
       (2) Use of payment.--Each non-Amtrak State shall use the 
     payment described in paragraph (1) (and any interest thereon) 
     solely to finance qualified expenses of the State.
       (3) Repayment.--A non-Amtrak State shall pay to the United 
     States--
       (A) any portion of the payment received by the State under 
     paragraph (1) (and any interest thereon) which is used for a 
     purpose other than to finance qualified expenses of the State 
     or which remains unused as of January 1, 2010, or
       (B) if such State ceases to be a non-Amtrak State, the 
     portion of such payment (and any interest thereon) remaining 
     as of the date of the cessation.

     Rules similar to the rules of subsection (a)(2)(B) shall 
     apply for purposes of this paragraph.
       (d) Tax Consequences.--
       (1) Reduction in carryovers.--If the Corporation elects the 
     application of this section, the Corporation's existing 
     qualified carryovers shall be reduced by an amount equal to 
     the amount determined under subsection (a)(3) divided by 
     0.35.
       (2) Reduction in tax paid by railroad predecessors.--
       (A) In general.--The Secretary of the Treasury or his 
     delegate shall appropriately adjust the tax account of each 
     railroad predecessor to reduce the net tax liability of such 
     predecessor for taxable years beginning in the carryback 
     period which is offset by reason of the application of this 
     section.
       (B) FIFO ordering rule.--The Secretary shall make the 
     adjustments under subparagraph (A) first for the earliest 
     year in the carryback period and then for each subsequent 
     year in such period.
       (C) No effect on other taxpayers.--In no event shall any 
     taxpayer other than the Corporation be allowed a refund or 
     credit by reason of this section.
       (D) Waiver of limitations.--If the adjustment under 
     subparagraph (A) is barred by the operation of any law or 
     rule of law, such law or rule of law shall be waived solely 
     for purposes of making such adjustment.
       (3) Tax treatment of expenditures.--With respect to any 
     payment by the Corporation of qualified expenses described in 
     subsection (e)(1)(A) during any taxable year from the amount 
     of any refund of the payment described in subsection (a)(1)--
       (A) no deduction shall be allowed to the Corporation with 
     respect to any amount paid or incurred which is attributable 
     to such amount, and
       (B) the basis of any property shall be reduced by the 
     portion of the cost of such property which is attributable to 
     such amount.
       (4) Payments to a non-amtrak state.--No deduction shall be 
     allowed to the Corporation under chapter 1 of the Internal 
     Revenue Code of 1986 for any payment to a non-Amtrak State 
     required under subsection (a)(2)(A)(ii).
       (e) Definitions.--For purposes of this section--
       (1) Qualified expenses.--The term ``qualified expenses'' 
     means expenses incurred for--
       (A) in the case of the Corporation--
       (i) the acquisition of equipment, rolling stock, and other 
     capital improvements, the upgrading of maintenance 
     facilities, and the maintenance of existing equipment, in 
     intercity passenger rail service, and
       (ii) the payment of interest and principal on obligations 
     incurred for such acquisition, upgrading, and maintenance, 
     and
       (B) in the case of a non-Amtrak State--
       (i) the acquisition of equipment, rolling stock, and other 
     capital improvements, the upgrading of maintenance 
     facilities, and the maintenance of existing equipment, in 
     intercity passenger rail service,
       (ii) the acquisition of equipment, rolling stock, and other 
     capital improvements, the upgrading of maintenance 
     facilities, and the maintenance of existing equipment, in 
     intercity bus service,
       (iii) the purchase of intercity passenger rail services 
     from the Corporation, and
       (iv) the payment of interest and principal on obligations 
     incurred for such acquisition, upgrading, maintenance, and 
     purchase.

     In the case of a non-Amtrak State which provides its own 
     intercity passenger rail service on the date of the enactment 
     of this paragraph, subparagraph (B) shall be applied by only 
     taking into account clauses (i) and (iv).
       (2) Non-amtrak state.--The term ``non-Amtrak State'' means, 
     with respect to any payment, any State which does not receive 
     intercity passenger rail service from the Corporation at any 
     time during the period beginning on the date of the enactment 
     of this Act and ending on the date of the payment.
       (f) Authorizing Reform Required.--
       (1) In general.--The Secretary of the Treasury shall not 
     make payment of any refund of any payment described in 
     subsection (a)(1) earlier than the date of the enactment of 
     Federal legislation, other than legislation included in this 
     section, which is enacted after July 29, 1997, and which 
     authorizes reforms of the National Railroad Passenger 
     Corporation.
       (2) No interest.--Notwithstanding any other provision of 
     law, if the payment of any refund is delayed by reason of 
     paragraph (1), no interest shall accrue with respect to such 
     payment prior to the 45th day following the date of the 
     enactment of Federal legislation described in paragraph (1).
       (3) Estimate of revenue.--For purposes of estimating 
     revenues under budget reconciliation, the impact of this 
     section on Federal revenues shall be determined without 
     regard to this subsection.
 Subtitle H--Extension of Duty-Free Treatment Under Generalized System 
                             of Preferences

     SEC. 981. GENERALIZED SYSTEM OF PREFERENCES.

       (a) Extension of Duty-Free Treatment Under System.--Section 
     505 of the Trade Act of 1974 (19 U.S.C. 2465) is amended by 
     striking ``May 31, 1997'' and inserting ``June 30, 1998''.
       (b) Retroactive Application for Certain Liquidations and 
     Reliquidations.--
       (1) In general.--Notwithstanding section 514 of the Tariff 
     Act of 1930 or any other provision of law and subject to 
     paragraph (2), the entry--
       (A) of any article to which duty-free treatment under title 
     V of the Trade Act of 1974 would have applied if the entry 
     had been made on May 31, 1997, and
       (B) that was made after May 31, 1997, and before the date 
     of the enactment of this Act,

     shall be liquidated or reliquidated as free of duty, and the 
     Secretary of the Treasury shall

[[Page H6440]]

     refund any duty paid with respect to such entry. As used in 
     this subsection, the term ``entry'' includes a withdrawal 
     from warehouse for consumption.
       (2) Requests.--Liquidation or reliquidation may be made 
     under paragraph (1) with respect to an entry only if a 
     request therefor is filed with the Customs Service, within 
     180 days after the date of the enactment of this Act, that 
     contains sufficient information to enable the Customs 
     Service--
       (A) to locate the entry; or
       (B) to reconstruct the entry if it cannot be located.
                           TITLE X--REVENUES
                     Subtitle A--Financial Products

     SEC. 1001. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED 
                   FINANCIAL POSITIONS.

       (a) In General.--Part IV of subchapter P of chapter 1 is 
     amended by adding at the end the following new section:

     ``SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED 
                   FINANCIAL POSITIONS.

       ``(a) In General.--If there is a constructive sale of an 
     appreciated financial position--
       ``(1) the taxpayer shall recognize gain as if such position 
     were sold, assigned, or otherwise terminated at its fair 
     market value on the date of such constructive sale (and any 
     gain shall be taken into account for the taxable year which 
     includes such date), and
       ``(2) for purposes of applying this title for periods after 
     the constructive sale--
       ``(A) proper adjustment shall be made in the amount of any 
     gain or loss subsequently realized with respect to such 
     position for any gain taken into account by reason of 
     paragraph (1), and
       ``(B) the holding period of such position shall be 
     determined as if such position were originally acquired on 
     the date of such constructive sale.
       ``(b) Appreciated Financial Position.--For purposes of this 
     section--
       ``(1) In general.--Except as provided in paragraph (2), the 
     term `appreciated financial position' means any position with 
     respect to any stock, debt instrument, or partnership 
     interest if there would be gain were such position sold, 
     assigned, or otherwise terminated at its fair market value.
       ``(2) Exceptions.--The term `appreciated financial 
     position' shall not include--
       ``(A) any position with respect to debt if--
       ``(i) the debt unconditionally entitles the holder to 
     receive a specified principal amount,
       ``(ii) the interest payments (or other similar amounts) 
     with respect to such debt meet the requirements of clause (i) 
     of section 860G(a)(1)(B), and
       ``(iii) such debt is not convertible (directly or 
     indirectly) into stock of the issuer or any related person, 
     and
       ``(B) any position which is marked to market under any 
     provision of this title or the regulations thereunder.
       ``(3) Position.--The term `position' means an interest, 
     including a futures or forward contract, short sale, or 
     option.
       ``(c) Constructive Sale.--For purposes of this section--
       ``(1) In general.--A taxpayer shall be treated as having 
     made a constructive sale of an appreciated financial position 
     if the taxpayer (or a related person)--
       ``(A) enters into a short sale of the same or substantially 
     identical property,
       ``(B) enters into an offsetting notional principal contract 
     with respect to the same or substantially identical property,
       ``(C) enters into a futures or forward contract to deliver 
     the same or substantially identical property,
       ``(D) in the case of an appreciated financial position that 
     is a short sale or a contract described in subparagraph (B) 
     or (C) with respect to any property, acquires the same or 
     substantially identical property, or
       ``(E) to the extent prescribed by the Secretary in 
     regulations, enters into 1 or more other transactions (or 
     acquires 1 or more positions) that have substantially the 
     same effect as a transaction described in any of the 
     preceding subparagraphs.
       ``(2) Exception for sales of nonpublicly traded property.--
     The term `constructive sale' shall not include any contract 
     for sale of any stock, debt instrument, or partnership 
     interest which is not a marketable security (as defined in 
     section 453(f)) if the contract settles within 1 year after 
     the date such contract is entered into.
       ``(3) Exception for certain closed transactions.--
       ``(A) In general.--In applying this section, there shall be 
     disregarded any transaction (which would otherwise be treated 
     as a constructive sale) during the taxable year if--
       ``(i) such transaction is closed before the end of the 30th 
     day after the close of such taxable year,
       ``(ii) the taxpayer holds the appreciated financial 
     position throughout the 60-day period beginning on the date 
     such transaction is closed, and
       ``(iii) at no time during such 60-day period is the 
     taxpayer's risk of loss with respect to such position reduced 
     by reason of a circumstance which would be described in 
     section 246(c)(4) if references to stock included references 
     to such position.
       ``(B) Treatment of positions which are reestablished.--If--
       ``(i) a transaction, which would otherwise be treated as a 
     constructive sale of an appreciated financial position, is 
     closed during the taxable year or during the 30 days 
     thereafter, and
       ``(ii) another substantially similar transaction is entered 
     into during the 60-day period beginning on the date the 
     transaction referred to in clause (i) is closed--

       ``(I) which also would otherwise be treated as a 
     constructive sale of such position,
       ``(II) which is closed before the 30th day after the close 
     of the taxable  year in which the transaction referred to in 
     clause (i) occurs, and

       ``(III) which meets the requirements of clauses (ii) and 
     (iii) of subparagraph (A),

     the transaction referred to in clause (ii) shall be 
     disregarded for purposes of determining whether the 
     requirements of subparagraph (A)(iii) are met with respect to 
     the transaction described in clause (i).
       ``(4) Related person.--A person is related to another 
     person with respect to a transaction if--
       ``(A) the relationship is described in section 267(b) or 
     707(b), and
       ``(B) such transaction is entered into with a view toward 
     avoiding the purposes of this section.
       ``(d) Other Definitions.--For purposes of this section--
       ``(1) Forward contract.--The term `forward contract' means 
     a contract to deliver a substantially fixed amount of 
     property for a substantially fixed price.
       ``(2) Offsetting notional principal contract.--The term 
     `offsetting notional principal contract' means, with respect 
     to any property, an agreement which includes--
       ``(A) a requirement to pay (or provide credit for) all or 
     substantially all of the investment yield (including 
     appreciation) on such property for a specified period, and
       ``(B) a right to be reimbursed for (or receive credit for) 
     all or substantially all of any decline in the value of such 
     property.
       ``(e) Special Rules.--
       ``(1) Treatment of subsequent sale of position which was 
     deemed sold.--If--
       ``(A) there is a constructive sale of any appreciated 
     financial position,
       ``(B) such position is subsequently disposed of, and
       ``(C) at the time of such disposition, the transaction 
     resulting in the constructive sale of such position is open 
     with respect to the taxpayer or any related person,

     solely for purposes of determining whether the taxpayer has 
     entered into a constructive sale of any other appreciated 
     financial position held by the taxpayer, the taxpayer shall 
     be treated as entering into such transaction immediately 
     after such disposition. For purposes of the preceding 
     sentence, an assignment or other termination shall be 
     treated as a disposition.
       ``(2) Certain trust instruments treated as stock.--For 
     purposes of this section, an interest in a trust which is 
     actively traded (within the meaning of section 1092(d)(1)) 
     shall be treated as stock unless substantially all (by value) 
     of the property held by the trust is debt described in 
     subsection (b)(2)(A).
       ``(3) Multiple positions in property.--If a taxpayer holds 
     multiple positions in property, the determination of whether 
     a specific transaction is a constructive sale and, if so, 
     which appreciated financial position is deemed sold shall be 
     made in the same manner as actual sales.
       ``(f) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (b) Election of Mark to Market for Dealers in Commodities 
     and for Traders in Securities or Commodities.--Section 475 
     (relating to mark to market accounting method for dealers in 
     securities) is amended by redesignating subsection (e) as 
     subsection (g) and by inserting after subsection (d) the 
     following new subsections:
       ``(e) Election of Mark to Market For Dealers in 
     Commodities.--
       ``(1) In general.--In the case of a dealer in commodities 
     who elects the application of this subsection, this section 
     shall apply to commodities held by such dealer in the same 
     manner as this section applies to securities held by a dealer 
     in securities.
       ``(2) Commodity.--For purposes of this subsection and 
     subsection (f), the term `commodity' means--
       ``(A) any commodity which is actively traded (within the 
     meaning of section 1092(d)(1));
       ``(B) any notional principal contract with respect to any 
     commodity described in subparagraph (A);
       ``(C) any evidence of an interest in, or a derivative 
     instrument in, any commodity described in subparagraph (A) or 
     (B), including any option, forward contract, futures 
     contract, short position, and any similar instrument in such 
     a commodity; and
       ``(D) any position which--
       ``(i) is not a commodity described in subparagraph (A), 
     (B), or (C),
       ``(ii) is a hedge with respect to such a commodity, and
       ``(iii) is clearly identified in the taxpayer's records as 
     being described in this subparagraph before the close of the 
     day on which it was acquired or entered into (or such other 
     time as the Secretary may by regulations prescribe).
       ``(3) Election.--An election under this subsection may be 
     made without the consent of the Secretary. Such an election, 
     once made, shall apply to the taxable year for which made and 
     all subsequent taxable years unless revoked with the consent 
     of the Secretary.
       ``(f) Election of Mark to Market For Traders in Securities 
     or Commodities.--
       ``(1) Traders in securities.--
       ``(A) In general.--In the case of a person who is engaged 
     in a trade or business as a trader in securities and who 
     elects to have this paragraph apply to such trade or 
     business--
       ``(i) such person shall recognize gain or loss on any 
     security held in connection with such trade or business at 
     the close of any taxable year as if such security were sold 
     for its fair

[[Page H6441]]

     market value on the last business day of such taxable year, 
     and
       ``(ii) any gain or loss shall be taken into account for 
     such taxable year.

     Proper adjustment shall be made in the amount of any gain or 
     loss subsequently realized for gain or loss taken into 
     account under the preceding sentence. The Secretary may 
     provide by regulations for the application of this 
     subparagraph at times other than the times provided in this 
     subparagraph.
       ``(B) Exception.--Subparagraph (A) shall not apply to any 
     security--
       ``(i) which is established to the satisfaction of the 
     Secretary as having no connection to the activities of such 
     person as a trader, and
       ``(ii) which is clearly identified in such person's records 
     as being described in clause (i) before the close of the day 
     on which it was acquired, originated, or entered into (or 
     such other time as the Secretary may by regulations 
     prescribe).

     If a security ceases to be described in clause (i) at any 
     time after it was identified as such under clause (ii), 
     subparagraph (A) shall apply to any changes in value of the 
     security occurring after the cessation.
       ``(C) Coordination with section 1259.--Any security to 
     which subparagraph (A) applies and which was acquired in the 
     normal course of the taxpayer's activities as a trader in 
     securities shall not be taken into account in applying 
     section 1259 to any position to which subparagraph (A) does 
     not apply.
       ``(D) Other rules to apply.--Rules similar to the rules of 
     subsections (b)(4) and (d) shall apply to securities held by 
     a person in any trade or business with respect to which an 
     election under this paragraph is in effect.
       ``(2) Traders in commodities.--In the case of a person who 
     is engaged in a trade or business as a trader in commodities 
     and who elects to have this paragraph apply to such trade or 
     business, paragraph (1) shall apply to commodities held by 
     such trader in connection with such trade or business in the 
     same manner as paragraph (1) applies to securities held by a 
     trader in securities.
       ``(3) Election.--The elections under paragraphs (1) and (2) 
     may be made separately for each trade or business and without 
     the consent of the Secretary. Such an election, once made, 
     shall apply to the taxable year for which made and all 
     subsequent taxable years unless revoked with the consent of 
     the Secretary.''.
       (c) Clerical Amendment.--The table of sections for part IV 
     of subchapter P of chapter 1 is amended by adding at the end 
     the following new item:

``Sec. 1259. Constructive sales treatment for appreciated financial 
              positions.''.

       (d) Effective Dates.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to any constructive sale after June 8, 1997.
       (2) Exception for sales of positions, etc. held before june 
     9, 1997.--If--
       (A) before June 9, 1997, the taxpayer entered into any 
     transaction which is a constructive sale of any appreciated 
     financial position, and
       (B) before the close of the 30-day period beginning on the 
     date of the enactment of this Act or before such later date 
     as may be specified by the Secretary of the Treasury, such 
     transaction and position are clearly identified in the 
     taxpayer's records as offsetting,

     such transaction and position shall not be taken into account 
     in determining whether any other constructive sale after June 
     8, 1997, has occurred. The preceding sentence shall cease to 
     apply as of the date such transaction is closed or the 
     taxpayer ceases to hold such position.
       (3) Special rule.--In the case of a decedent dying after 
     June 8, 1997, if--
       (A) there was a constructive sale on or before such date of 
     any appreciated financial position,
       (B) the transaction resulting in such constructive sale of 
     such position remains open (with respect to the decedent or 
     any related person)--
       (i) for not less than 2 years after the date of such 
     transaction (whether such period is before or after June 8, 
     1997), and
       (ii) at any time during the 3-year period ending on the 
     date of the decedent's death, and
       (C) such transaction is not closed within the 30-day period 
     beginning on the date of the enactment of this Act,

     then, for purposes of such Code, such position (and the 
     transaction resulting in such constructive sale) shall be 
     treated as property constituting rights to receive an item of 
     income in respect of a decedent under section 691 of such 
     Code. Section 1014(c) of such Code shall not apply to so much 
     of such position's or property's value (as included in the 
     decedent's estate for purposes of chapter 11 of such Code) as 
     exceeds its fair market value as of the date such transaction 
     is closed.
       (4) Election of mark to market by securities traders and 
     traders and dealers in commodities.--
       (A) In general.--The amendments made by subsection (b) 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.
       (B) 4-year spread of adjustments.--In the case of a 
     taxpayer who elects under subsection (e) or (f) of section 
     475 of the Internal Revenue Code of 1986 (as added by this 
     section) to change its method of accounting for the taxable 
     year which includes the date of the enactment of this Act--
       (i) any identification required under such subsection with 
     respect to securities and commodities held on the date of the 
     enactment of this Act shall be treated as timely made if made 
     on or before the 30th day after such date of enactment, and
       (ii) the net amount of the adjustments required to be taken 
     into account by the taxpayer under section 481 of such Code 
     shall be taken into account ratably over the 4-taxable year 
     period beginning with such first taxable year.

     SEC. 1002. LIMITATION ON EXCEPTION FOR INVESTMENT COMPANIES 
                   UNDER SECTION 351.

       (a) In General.--Paragraph (1) of section 351(e) (relating 
     to exceptions) is amended by adding at the end the following: 
     ``For purposes of the preceding sentence, the determination 
     of whether a company is an investment company shall be made--
       ``(A) by taking into account all stock and securities held 
     by the company, and
       ``(B) by treating as stock and securities--
       ``(i) money,
       ``(ii) stocks and other equity interests in a corporation, 
     evidences of indebtedness, options, forward or futures 
     contracts, notional principal contracts and derivatives,
       ``(iii) any foreign currency,
       ``(iv) any interest in a real estate investment trust, a 
     common trust fund, a regulated investment company, a 
     publicly-traded partnership (as defined in section 7704(b)) 
     or any other equity interest (other than in a corporation) 
     which pursuant to its terms or any other arrangement is 
     readily convertible into, or exchangeable for, any asset 
     described in any preceding clause, this clause or clause (v) 
     or (viii),
       ``(v) except to the extent provided in regulations 
     prescribed by the Secretary, any interest in a precious 
     metal, unless such metal is used or held in the active 
     conduct of a trade or business after the contribution,
       ``(vi) except as otherwise provided in regulations 
     prescribed by the Secretary, interests in any entity if 
     substantially all of the assets of such entity consist 
     (directly or indirectly) of any assets described in any 
     preceding clause or clause (viii),
       ``(vii) to the extent provided in regulations prescribed by 
     the Secretary, any interest in any entity not described in 
     clause (vi), but only to the extent of the value of such 
     interest that is attributable to assets listed in clauses (i) 
     through (v) or clause (viii), or
       ``(viii) any other asset specified in regulations 
     prescribed by the Secretary.

     The Secretary may prescribe regulations that, under 
     appropriate circumstances, treat any asset described in 
     clauses (i) through (v) as not so listed.''.
       (b) Effective Date.--
       (1) In general.--The amendment made by subsection (a) shall 
     apply to transfers after June 8, 1997, in taxable years 
     ending after such date.
       (2) Binding contracts.--The amendment made by subsection 
     (a) shall not apply to any transfer pursuant to a written 
     binding contract in effect on June 8, 1997, and at all times 
     thereafter before such transfer if such contract provides for 
     the transfer of a fixed amount of property.

     SEC. 1003. GAINS AND LOSSES FROM CERTAIN TERMINATIONS WITH 
                   RESPECT TO PROPERTY.

       (a) Application of Capital Treatment to Property Other Than 
     Personal Property.--
       (1) In general.--Paragraph (1) of section 1234A (relating 
     to gains and losses from certain terminations) is amended by 
     striking ``personal property (as defined in section 
     1092(d)(1))'' and inserting ``property''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to terminations more than 30 days after the date 
     of the enactment of this Act.
       (b) Treatment of Short Sales of Property Which Becomes 
     Substantially Worthless.--
       (1) In general.--Section 1233 is amended by adding at the 
     end the following new subsection:
       ``(h) Short Sales of Property Which Becomes Substantially 
     Worthless.--
       ``(1) In general.--If--
       ``(A) the taxpayer enters into a short sale of property, 
     and
       ``(B) such property becomes substantially worthless,

     the taxpayer shall recognize gain in the same manner as if 
     the short sale were closed when the property becomes 
     substantially worthless. To the extent provided in 
     regulations prescribed by the Secretary, the preceding 
     sentence also shall apply with respect to any option with 
     respect to property, any offsetting notional principal 
     contract with respect to property, any futures or forward 
     contract to deliver any property, and any other similar 
     transaction.
       ``(2) Statute of limitations.--If property becomes 
     substantially worthless during a taxable year and any short 
     sale of such property remains open at the time such property 
     becomes substantially worthless, then--
       ``(A) the statutory period for the assessment of any 
     deficiency attributable to any part of the gain on such 
     transaction shall not expire before the earlier of--
       ``(i) the date which is 3 years after the date the 
     Secretary is notified by the taxpayer (in such manner as the 
     Secretary may by regulations prescribe) of the substantial 
     worthlessness of such property, or
       ``(ii) the date which is 6 years after the date the return 
     for such taxable year is filed, and
       ``(B) such deficiency may be assessed before the date 
     applicable under subparagraph (A) notwithstanding the 
     provisions of any other law or rule of law which would 
     otherwise prevent such assessment.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to property which becomes substantially worthless 
     after the date of the enactment of this Act.
       (c) Application of Capital Treatment, Etc. to Obligations 
     Issued by Natural Persons.--
       (1) In general.--Section 1271(b) is amended to read as 
     follows:
       ``(b) Exception for Certain Obligations.--
       ``(1) In general.--This section shall not apply to--

[[Page H6442]]

       ``(A) any obligation issued by a natural person before June 
     9, 1997, and
       ``(B) any obligation issued before July 2, 1982, by an 
     issuer which is not a corporation and is not a government or 
     political subdivision thereof.
       ``(2) Termination.--Paragraph (1) shall not apply to any 
     obligation purchased (within the meaning of section 
     1272(d)(1)) after June 8, 1997.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to sales, exchanges, and retirements after the 
     date of enactment of this Act.

     SEC. 1004. DETERMINATION OF ORIGINAL ISSUE DISCOUNT WHERE 
                   POOLED DEBT OBLIGATIONS SUBJECT TO 
                   ACCELERATION.

       (a) In General.--Subparagraph (C) of section 1272(a)(6) 
     (relating to debt instruments to which the paragraph applies) 
     is amended by striking ``or'' at the end of clause (i), by 
     striking the period at the end of clause (ii) and inserting 
     ``, or'', and by inserting after clause (ii) the following:
       ``(iii) any pool of debt instruments the yield on which may 
     be affected by reason of prepayments (or to the extent 
     provided in regulations, by reason of other events).

     To the extent provided in regulations prescribed by the 
     Secretary, in the case of a small business engaged in the 
     trade or business of selling tangible personal property at 
     retail, clause (iii) shall not apply to debt instruments 
     incurred in the ordinary course of such trade or business 
     while held by such business.''.
       (b) Effective Dates.--
       (1) In general.--The amendment made by this section shall 
     apply to taxable years beginning after the date of the 
     enactment of this Act.
       (2) Change in method of accounting.--In the case of any 
     taxpayer required by this section to change its method of 
     accounting for its first taxable year beginning after the 
     date of the enactment of this Act--
       (A) such change shall be treated as initiated by the 
     taxpayer,
       (B) such change shall be treated as made with the consent 
     of the Secretary of the Treasury, and
       (C) the net amount of the adjustments required to be taken 
     into account by the taxpayer under section 481 of the 
     Internal Revenue Code of 1986 shall be taken into account 
     ratably over the 4-taxable year period beginning with such 
     first taxable year.

     SEC. 1005. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT 
                   INSTRUMENTS.

       (a) In General.--Section 163 (relating to deduction for 
     interest), as amended by title V, is amended by redesignating 
     subsection (l) as subsection (m) and by inserting after 
     subsection (k) the following new subsection:
       ``(l) Disallowance of Deduction on Certain Debt Instruments 
     of Corporations.--
       ``(1) In general.--No deduction shall be allowed under this 
     chapter for any interest paid or accrued on a disqualified 
     debt instrument.
       ``(2) Disqualified debt instrument.--For purposes of this 
     subsection, the term `disqualified debt instrument' means any 
     indebtedness of a corporation which is payable in equity of 
     the issuer or a related party.
       ``(3) Special rules for amounts payable in equity.--For 
     purposes of paragraph (2), indebtedness shall be treated as 
     payable in equity of the issuer or a related party only if--
       ``(A) a substantial amount of the principal or interest is 
     required to be paid or converted, or at the option of the 
     issuer or a related party is payable in, or convertible into, 
     such equity,
       ``(B) a substantial amount of the principal or interest is 
     required to be determined, or at the option of the issuer or 
     a related party is determined, by reference to the value of 
     such equity, or
       ``(C) the indebtedness is part of an arrangement which is 
     reasonably expected to result in a transaction described in 
     subparagraph (A) or (B).

     For purposes of this paragraph, principal or interest shall 
     be treated as required to be so paid, converted, or 
     determined if it may be required at the option of the holder 
     or a related party and there is a substantial certainty the 
     option will be exercised.
       ``(4) Related party.--For purposes of this subsection, a 
     person is a related party with respect to another person if 
     such person bears a relationship to such other person 
     described in section 267(b) or 707(b).
       ``(5) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this subsection, including regulations 
     preventing avoidance of this subsection through the use of an 
     issuer other than a corporation.''.
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     apply to disqualified debt instruments issued after June 8, 
     1997.
       (2) Transition rule.--The amendment made by this section 
     shall not apply to any instrument issued after June 8, 1997, 
     if such instrument is--
       (A) issued pursuant to a written agreement which was 
     binding on such date and at all times thereafter,
       (B) described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or
       (C) described on or before such date in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission required solely by reason of the issuance.
        Subtitle B--Corporate Organizations and Reorganizations

     SEC. 1011. TAX TREATMENT OF CERTAIN EXTRAORDINARY DIVIDENDS.

       (a) Treatment of Extraordinary Dividends in Excess of 
     Basis.--Paragraph (2) of section 1059(a) (relating to 
     corporate shareholder's recognition of gain attributable to 
     nontaxed portion of extraordinary dividends) is amended to 
     read as follows:
       ``(2) Amounts in excess of basis.--If the nontaxed portion 
     of such dividends exceeds such basis, such excess shall be 
     treated as gain from the sale or exchange of such stock for 
     the taxable year in which the extraordinary dividend is 
     received.''.
       (b) Treatment of Redemptions Where Options Involved.--
     Paragraph (1) of section 1059(e) (relating to treatment of 
     partial liquidations and non-pro rata redemptions) is amended 
     to read as follows:
       ``(1) Treatment of partial liquidations and certain 
     redemptions.--Except as otherwise provided in regulations--
       ``(A) Redemptions.--In the case of any redemption of 
     stock--
       ``(i) which is part of a partial liquidation (within the 
     meaning of section 302(e)) of the redeeming corporation,
       ``(ii) which is not pro rata as to all shareholders, or
       ``(iii) which would not have been treated (in whole or in 
     part) as a dividend if any options had not been taken into 
     account under section 318(a)(4),

     any amount treated as a dividend with respect to such 
     redemption shall be treated as an extraordinary dividend to 
     which paragraphs (1) and (2) of subsection (a) apply without 
     regard to the period the taxpayer held such stock. In the 
     case of a redemption described in clause (iii), only the 
     basis in the stock redeemed shall be taken into account under 
     subsection (a).
       ``(B) Reorganizations, etc.--An exchange described in 
     section 356 which is treated as a dividend shall be treated 
     as a redemption of stock for purposes of applying 
     subparagraph (A).''.
       (c) Time for Reduction.--Paragraph (1) of section 1059(d) 
     is amended to read as follows:
       ``(1) Time for reduction.--Any reduction in basis under 
     subsection (a)(1) shall be treated as occurring at the 
     beginning of the ex-dividend date of the extraordinary 
     dividend to which the reduction relates.''.
       (d) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to distributions after May 3, 1995.
       (2) Transition rule.--The amendments made by this section 
     shall not apply to any distribution made pursuant to the 
     terms of--
       (A) a written binding contract in effect on May 3, 1995, 
     and at all times thereafter before such distribution, or
       (B) a tender offer outstanding on May 3, 1995.
       (3) Certain dividends not pursuant to certain 
     redemptions.--In determining whether the amendment made by 
     subsection (a) applies to any extraordinary dividend other 
     than a dividend treated as an extraordinary dividend under 
     section 1059(e)(1) of the Internal Revenue Code of 1986 (as 
     amended by this Act), paragraphs (1) and (2) shall be applied 
     by substituting ``September 13, 1995'' for ``May 3, 1995''.

     SEC. 1012. APPLICATION OF SECTION 355 TO DISTRIBUTIONS IN 
                   CONNECTION WITH ACQUISITIONS AND TO INTRAGROUP 
                   TRANSACTIONS.

       (a) Distributions In Connection With Acquisitions.--Section 
     355 (relating to distributions of stock and securities of a 
     controlled corporation) is amended by adding at the end the 
     following new subsection:
       ``(e) Recognition of Gain on Certain Distributions of Stock 
     or Securities In Connection With Acquisitions.--
       ``(1) General rule.--If there is a distribution to which 
     this subsection applies, any stock or securities in the 
     controlled corporation shall not be treated as qualified 
     property for purposes of subsection (c)(2) of this section or 
     section 361(c)(2).
       ``(2) Distributions to which subsection applies.--
       ``(A) In general.--This subsection shall apply to any 
     distribution--
       ``(i) to which this section (or so much of section 356 as 
     relates to this section) applies, and
       ``(ii) which is part of a plan (or series of related 
     transactions) pursuant to which 1 or more persons acquire 
     directly or indirectly stock representing a 50-percent or 
     greater interest in the distributing corporation or any 
     controlled corporation.
       ``(B) Plan presumed to exist in certain cases.--If 1 or 
     more persons acquire directly or indirectly stock 
     representing a 50-percent or greater interest in the 
     distributing corporation or any controlled corporation during 
     the 4-year period beginning on the date which is 2 years 
     before the date of the distribution, such acquisition shall 
     be treated as pursuant to a plan described in subparagraph 
     (A)(ii) unless it is established that the distribution and 
     the acquisition are not pursuant to a plan or series of 
     related transactions.
       ``(C) Certain plans disregarded.--A plan (or series of 
     related transactions) shall not be treated as described in 
     subparagraph (A)(ii) if, immediately after the completion of 
     such plan or transactions, the distributing corporation and 
     all controlled corporations are members of a single 
     affiliated group (as defined in section 1504 without regard 
     to subsection (b) thereof).
       ``(D) Coordination with subsection (d).--This subsection 
     shall not apply to any distribution to which subsection (d) 
     applies.
       ``(3) Special rules relating to acquisitions.--
       ``(A) Certain acquisitions not taken into account.--Except 
     as provided in regulations, the following acquisitions shall 
     not be treated as described in paragraph (2)(A)(ii):
       ``(i) The acquisition of stock in any controlled 
     corporation by the distributing corporation.
       ``(ii) The acquisition by a person of stock in any 
     controlled corporation by reason of holding

[[Page H6443]]

     stock or securities in the distributing corporation.
       ``(iii) The acquisition by a person of stock in any 
     successor corporation of the distributing corporation or any 
     controlled corporation by reason of holding stock or 
     securities in such distributing or controlled corporation.
       ``(iv) The acquisition of stock in a corporation if 
     shareholders owning directly or indirectly stock possessing--

       ``(I) more than 50 percent of the total combined voting 
     power of all classes of stock entitled to vote, and
       ``(II) more than 50 percent of the total value of shares of 
     all classes of stock,

     in the distributing corporation or any controlled corporation 
     before such acquisition own directly or indirectly stock 
     possessing such vote and value in such distributing or 
     controlled corporation after such acquisition.

     This subparagraph shall not apply to any acquisition if the 
     stock held before the acquisition was acquired pursuant to a 
     plan (or series of related transactions) described in 
     paragraph (2)(A)(ii).
       ``(B) Asset acquisitions.--Except as provided in 
     regulations, for purposes of this subsection, if the assets 
     of the distributing corporation or any controlled corporation 
     are acquired by a successor corporation in a transaction 
     described in subparagraph (A), (C), or (D) of section 
     368(a)(1) or any other transaction specified in regulations 
     by the Secretary, the shareholders (immediately before the 
     acquisition) of the corporation acquiring such assets shall 
     be treated as acquiring stock in the corporation from which 
     the assets were acquired.
       ``(4) Definition and special rules.--For purposes of this 
     subsection--
       ``(A) 50-percent or greater interest.--The term `50-percent 
     or greater interest' has the meaning given such term by 
     subsection (d)(4).
       ``(B) Distributions in title 11 or similar case.--Paragraph 
     (1) shall not apply to any distribution made in a title 11 or 
     similar case (as defined in section 368(a)(3)).
       ``(C) Aggregation and attribution rules.--
       ``(i) Aggregation.--The rules of paragraph (7)(A) of 
     subsection (d) shall apply.
       ``(ii) Attribution.--Section 318(a)(2) shall apply in 
     determining whether a person holds stock or securities in any 
     corporation. Except as provided in regulations, section 
     318(a)(2)(C) shall be applied without regard to the phrase 
     `50 percent or more in value' for purposes of the preceding 
     sentence.
       ``(D) Successors and predecessors.--For purposes of this 
     subsection, any reference to a controlled corporation or a 
     distributing corporation shall include a reference to any 
     predecessor or successor of such corporation.
       ``(E) Statute of limitations.--If there is a distribution 
     to which paragraph (1) applies--
       ``(i) the statutory period for the assessment of any 
     deficiency attributable to any part of the gain recognized 
     under this subsection by reason of such distribution shall 
     not expire before the expiration of 3 years from the date the 
     Secretary is notified by the taxpayer (in such manner as the 
     Secretary may by regulations prescribe) that such 
     distribution occurred, and
       ``(ii) such deficiency may be assessed before the 
     expiration of such 3-year period notwithstanding the 
     provisions of any other law or rule of law which would 
     otherwise prevent such assessment.
       ``(5) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection, including regulations--
       ``(A) providing for the application of this subsection 
     where there is more than 1 controlled corporation,
       ``(B) treating 2 or more distributions as 1 distribution 
     where necessary to prevent the avoidance of such purposes, 
     and
       ``(C) providing for the application of rules similar to the 
     rules of subsection (d)(6) where appropriate for purposes of 
     paragraph (2)(B).''.
       (b) Special Rules for Certain Intragroup Transactions.--
       (1) Section 355 not to apply.--Section 355, as amended by 
     subsection (a), is amended by adding at the end the following 
     new subsection:
       ``(f) Section Not To Apply to Certain Intragroup 
     Distributions.--Except as provided in regulations, this 
     section (or so much of section 356 as relates to this 
     section) shall not apply to the distribution of stock from 1 
     member of an affiliated group (as defined in section 1504(a)) 
     to another member of such group if such distribution is part 
     of a plan (or series of related transactions) described in 
     subsection (e)(2)(A)(ii) (determined after the application of 
     subsection (e)).''.
       (2) Adjustments to basis.--Section 358 (relating to basis 
     to distributees) is amended by adding at the end the 
     following new subsection:
       ``(g) Adjustments in Intragroup Transactions Involving 
     Section 355.--In the case of a distribution to which section 
     355 (or so much of section 356 as relates to section 355) 
     applies and which involves the distribution of stock from 1 
     member of an affiliated group (as defined in section 1504(a) 
     without regard to subsection (b) thereof) to another member 
     of such group, the Secretary may, notwithstanding any other 
     provision of this section, provide adjustments to the 
     adjusted basis of any stock which--
       ``(1) is in a corporation which is a member of such group, 
     and
       ``(2) is held by another member of such group,
     to appropriately reflect the proper treatment of such 
     distribution.''.
       (c) Determination of Control in Certain Divisive 
     Transactions.--
       (1) Section 351 transactions.--Section 351(c) (relating to 
     special rule) is amended to read as follows:
       ``(c) Special Rules Where Distribution to Shareholders.--In 
     determining control for purposes of this section--
       ``(1) the fact that any corporate transferor distributes 
     part or all of the stock in the corporation which it receives 
     in the exchange to its shareholders shall not be taken into 
     account, and
       ``(2) if the requirements of section 355 are met with 
     respect to such distribution, the shareholders shall be 
     treated as in control of such corporation immediately after 
     the exchange if the shareholders own (immediately after the 
     distribution) stock possessing--
       ``(A) more than 50 percent of the total combined voting 
     power of all classes of stock of such corporation entitled to 
     vote, and
       ``(B) more than 50 percent of the total value of shares of 
     all classes of stock of such corporation.''.
       (2) D reorganizations.--Section 368(a)(2)(H) (relating to 
     special rule for determining whether certain transactions are 
     qualified under paragraph (1)(D)) is amended to read as 
     follows:
       ``(H) Special rules for determining whether certain 
     transactions are qualified under paragraph (1)(d).--For 
     purposes of determining whether a transaction qualifies under 
     paragraph (1)(D)--
       ``(i) in the case of a transaction with respect to which 
     the requirements of subparagraphs (A) and (B) of section 
     354(b)(1) are met, the term `control' has the meaning given 
     such term by section 304(c), and
       ``(ii) in the case of a transaction with respect to which 
     the requirements of section 355 are met, the shareholders 
     described in paragraph (1)(D) shall be treated as having 
     control of the corporation to which the assets are 
     transferred if such shareholders own (immediately after the 
     distribution) stock possessing--

       ``(I) more than 50 percent of the total combined voting 
     power of all classes of stock of such corporation entitled to 
     vote, and
       ``(II) more than 50 percent of the total value of shares of 
     all classes of stock of such corporation.''.

       (d) Effective Dates.--
       (1) Section 355 rules.--The amendments made by subsections 
     (a) and (b) shall apply to distributions after April 16, 
     1997, pursuant to a plan (or series of related transactions) 
     which involves an acquisition described in section 
     355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 
     occurring after such date.
       (2) Divisive transactions.--The amendments made by 
     subsection (c) shall apply to transfers after the date of the 
     enactment of this Act.
       (3) Transition rule.--The amendments made by this section 
     shall not apply to any distribution pursuant to a plan (or 
     series of related transactions) which involves an acquisition 
     described in section 355(e)(2)(A)(ii) of the Internal 
     Revenue Code of 1986 (or, in the case of the amendments 
     made by subsection (c), any transfer) occurring after 
     April 16, 1997, if such acquisition or transfer is--
       (A) made pursuant to an agreement which was binding on such 
     date and at all times thereafter,
       (B) described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or
       (C) described on or before such date in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission required solely by reason of the acquisition or 
     transfer.

     This paragraph shall not apply to any agreement, ruling 
     request, or public announcement or filing unless it 
     identifies the acquirer of the distributing corporation or 
     any controlled corporation, or the transferee, whichever is 
     applicable.

     SEC. 1013. TAX TREATMENT OF REDEMPTIONS INVOLVING RELATED 
                   CORPORATIONS.

       (a) Stock Purchases by Related Corporations.--The last 
     sentence of section 304(a)(1) (relating to acquisition by 
     related corporation other than subsidiary) is amended to read 
     as follows: ``To the extent that such distribution is treated 
     as a distribution to which section 301 applies, the 
     transferor and the acquiring corporation shall be treated in 
     the same manner as if the transferor had transferred the 
     stock so acquired to the acquiring corporation in exchange 
     for stock of the acquiring corporation in a transaction to 
     which section 351(a) applies, and then the acquiring 
     corporation had redeemed the stock it was treated as issuing 
     in such transaction.''.
       (b) Coordination With Section 1059.--Clause (iii) of 
     section 1059(e)(1)(A), as amended by this title, is amended 
     to read as follows:
       ``(iii) which would not have been treated (in whole or in 
     part) as a dividend if--

       ``(I) any options had not been taken into account under 
     section 318(a)(4), or
       ``(II) section 304(a) had not applied,''.

       (c) Special Rule for Acquisitions by Foreign 
     Corporations.--Section 304(b) (relating to special rules for 
     application of subsection (a)) is amended by adding at the 
     end the following new paragraph:
       ``(5) Acquisitions by foreign corporations.--
       ``(A) In general.--In the case of any acquisition to which 
     subsection (a) applies in which the acquiring corporation is 
     a foreign corporation, the only earnings and profits taken 
     into account under paragraph (2)(A) shall be those earnings 
     and profits--
       ``(i) which are attributable (under regulations prescribed 
     by the Secretary) to stock of the acquiring corporation owned 
     (within the meaning of section 958(a)) by a corporation or 
     individual which is--

       ``(I) a United States shareholder (within the meaning of 
     section 951(b)) of the acquiring corporation, and
       ``(II) the transferor or a person who bears a relationship 
     to the transferor described in section 267(b) or 707(b), and

       ``(ii) which were accumulated during the period or periods 
     such stock was owned by such person while the acquiring 
     corporation was a controlled foreign corporation.

[[Page H6444]]

       ``(B) Application of section 1248.--For purposes of 
     subparagraph (A), the rules of section 1248(d) shall apply 
     except to the extent otherwise provided by the Secretary.
       ``(C) Regulations.--The Secretary shall prescribe such 
     regulations as are appropriate to carry out the purposes of 
     this paragraph.''.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to distributions and acquisitions after June 8, 1997.
       (2) Transition rule.--The amendments made by this section 
     shall not apply to any distribution or acquisition after June 
     8, 1997, if such distribution or acquisition is--
       (A) made pursuant to a written agreement which was binding 
     on such date and at all times thereafter,
       (B) described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or
       (C) described in a public announcement or filing with the 
     Securities and Exchange Commission on or before such date.

     SEC. 1014. CERTAIN PREFERRED STOCK TREATED AS BOOT.

       (a) Section 351.--Section 351 (relating to transfer to 
     corporation controlled by transferor) is amended by 
     redesignating subsection (g) as subsection (h) and by 
     inserting after subsection (f) the following new subsection:
       ``(g) Nonqualified Preferred Stock Not Treated as Stock.--
       ``(1) In general.--In the case of a person who transfers 
     property to a corporation and receives nonqualified preferred 
     stock--
       ``(A) subsection (a) shall not apply to such transferor,
       ``(B) subsection (b) shall apply to such transferor, and
       ``(C) such nonqualified preferred stock shall be treated as 
     other property for purposes of applying subsection (b).
       ``(2) Nonqualified preferred stock.--For purposes of 
     paragraph (1)--
       ``(A) In general.--The term `nonqualified preferred stock' 
     means preferred stock if--
       ``(i) the holder of such stock has the right to require the 
     issuer or a related person to redeem or purchase the stock,
       ``(ii) the issuer or a related person is required to redeem 
     or purchase such stock,
       ``(iii) the issuer or a related person has the right to 
     redeem or purchase the stock and, as of the issue date, it is 
     more likely than not that such right will be exercised, or
       ``(iv) the dividend rate on such stock varies in whole or 
     in part (directly or indirectly) with reference to interest 
     rates, commodity prices, or other similar indices.
       ``(B) Limitations.--Clauses (i), (ii), and (iii) of 
     subparagraph (A) shall apply only if the right or obligation 
     referred to therein may be exercised within the 20-year 
     period beginning on the issue date of such stock and such 
     right or obligation is not subject to a contingency which, as 
     of the issue date, makes remote the likelihood of the 
     redemption or purchase.
       ``(C) Exceptions for certain rights or obligations.--
       ``(i) In general.--A right or obligation shall not be 
     treated as described in clause (i), (ii), or (iii) of 
     subparagraph (A) if--

       ``(I) it may be exercised only upon the death, disability, 
     or mental incompetency of the holder, or
       ``(II) in the case of a right or obligation to redeem or 
     purchase stock transferred in connection with the performance 
     of services for the issuer or a related person (and which 
     represents reasonable compensation), it may be exercised only 
     upon the holder's separation from service from the issuer or 
     a related person.

       ``(ii) Exception.--Clause (i)(I) shall not apply if the 
     stock relinquished in the exchange, or the stock acquired in 
     the exchange is in--

       ``(I) a corporation if any class of stock in such 
     corporation or a related party is readily tradable on an 
     established securities market or otherwise, or

       ``(II) any other corporation if such exchange is part of a 
     transaction or series of transactions in which such 
     corporation is to become a corporation described in subclause 
     (I).

       ``(3) Definitions.--For purposes of this subsection--
       ``(A) Preferred stock.--The term `preferred stock' means 
     stock which is limited and preferred as to dividends and does 
     not participate in corporate growth to any significant 
     extent.
       ``(B) Related person.--A person shall be treated as related 
     to another person if they bear a relationship to such other 
     person described in section 267(b) or 707(b).
       ``(4) Regulations.--The Secretary may prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this subsection and sections 354(a)(2)(C), 
     355(a)(3)(D), and 356(e). The Secretary may also prescribe 
     regulations, consistent with the treatment under this 
     subsection and such sections, for the treatment of 
     nonqualified preferred stock under other provisions of this 
     title.''.
       (b) Section 354.--Paragraph (2) of section 354(a) (relating 
     to exchanges of stock and securities in certain 
     reorganizations) is amended by adding at the end the 
     following new subparagraph:
       ``(C) Nonqualified preferred stock.--
       ``(i) In general.--Nonqualified preferred stock (as defined 
     in section 351(g)(2)) received in exchange for stock other 
     than nonqualified preferred stock (as so defined) shall not 
     be treated as stock or securities.
       ``(ii) Recapitalizations of family-owned corporations.--

       ``(I) In general.--Clause (i) shall not apply in the case 
     of a recapitalization under section 368(a)(1)(E) of a family-
     owned corporation.
       ``(II) Family-owned corporation.--For purposes of this 
     clause, except as provided in regulations, the term `family-
     owned corporation' means any corporation which is described 
     in clause (i) of section 447(d)(2)(C) throughout the 8-year 
     period beginning on the date which is 5 years before the date 
     of the recapitalization. For purposes of the preceding 
     sentence, stock shall not be treated as owned by a family 
     member during any period described in section 
     355(d)(6)(B).''.

       (c) Section 355.--Paragraph (3) of section 355(a) is 
     amended by adding at the end the following new subparagraph:
       ``(D) Nonqualified preferred stock.--Nonqualified preferred 
     stock (as defined in section 351(g)(2)) received in a 
     distribution with respect to stock other than nonqualified 
     preferred stock (as so defined) shall not be treated as stock 
     or securities.''.
       (d) Section 356.--Section 356 is amended by redesignating 
     subsections (e) and (f) as subsections (f) and (g), 
     respectively, and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Nonqualified Preferred Stock Treated as Other 
     Property.--For purposes of this section--
       ``(1) In general.--Except as provided in paragraph (2), the 
     term `other property' includes nonqualified preferred stock 
     (as defined in section 351(g)(2)).
       ``(2) Exception.--The term `other property' does not 
     include nonqualified preferred stock (as so defined) to the 
     extent that, under section 354 or 355, such preferred stock 
     would be permitted to be received without the recognition of 
     gain.''.
       (e) Conforming Amendments.--
       (1) Subparagraph (B) of section 354(a)(2) and subparagraph 
     (C) of section 355(a)(3)(C) are each amended by inserting 
     ``(including nonqualified preferred stock, as defined in 
     section 351(g)(2))'' after ``stock''.
       (2) Subparagraph (A) of section 354(a)(3) and subparagraph 
     (A) of section 355(a)(4) are each amended by inserting 
     ``nonqualified preferred stock and'' after ``including''.
       (3) Section 1036 is amended by redesignating subsection (b) 
     as subsection (c) and by inserting after subsection (a) the 
     following new subsection:
       ``(b) Nonqualified Preferred Stock Not Treated as Stock.--
     For purposes of this section, nonqualified preferred stock 
     (as defined in section 351(g)(2)) shall be treated as 
     property other than stock.''.
       (f) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to transactions after June 8, 1997.
       (2) Transition rule.--The amendments made by this section 
     shall not apply to any transaction after June 8, 1997, if 
     such transaction is--
       (A) made pursuant to a written agreement which was binding 
     on such date and at all times thereafter,
       (B) described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or
       (C) described on or before such date in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission required solely by reason of the transaction.

     SEC. 1015. MODIFICATION OF HOLDING PERIOD APPLICABLE TO 
                   DIVIDENDS RECEIVED DEDUCTION.

       (a) In General.--Subparagraph (A) of section 246(c)(1) is 
     amended to read as follows:
       ``(A) which is held by the taxpayer for 45 days or less 
     during the 90-day period beginning on the date which is 45 
     days before the date on which such share becomes ex-dividend 
     with respect to such dividend, or''.
       (b) Conforming Amendments.--
       (1) Paragraph (2) of section 246(c) is amended to read as 
     follows:
       ``(2) 90-day rule in the case of certain preference 
     dividends.--In the case of stock having preference in 
     dividends, if the taxpayer receives dividends with respect to 
     such stock which are attributable to a period or periods 
     aggregating in excess of 366 days, paragraph (1)(A) shall be 
     applied--
       ``(A) by substituting `90 days' for `45 days' each place it 
     appears, and
       ``(B) by substituting `180-day period' for `90-day 
     period'.''.
       (2) Paragraph (3) of section 246(c) is amended by adding 
     ``and'' at the end of subparagraph (A), by striking 
     subparagraph (B), and by redesignating subparagraph (C) as 
     subparagraph (B).
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to dividends received or accrued after the 30th day 
     after the date of the enactment of this Act.
       (2) Transitional rule.--The amendments made by this section 
     shall not apply to dividends received or accrued during the 
     2-year period beginning on the date of the enactment of this 
     Act if--
       (A) the dividend is paid with respect to stock held by the 
     taxpayer on June 8, 1997, and all times thereafter until the 
     dividend is received,
       (B) such stock is continuously subject to a position 
     described in section 246(c)(4) of the Internal Revenue Code 
     of 1986 on June 8, 1997, and all times thereafter until the 
     dividend is received, and
       (C) such stock and position are clearly identified in the 
     taxpayer's records within 30 days after the date of the 
     enactment of this Act.

     Stock shall not be treated as meeting the requirement of 
     subparagraph (B) if the position is sold, closed, or 
     otherwise terminated and reestablished.
                 Subtitle C--Administrative Provisions

     SEC. 1021. REPORTING OF CERTAIN PAYMENTS MADE TO ATTORNEYS.

       (a) In General.--Section 6045 (relating to returns of 
     brokers) is amended by adding at the end the following new 
     subsection:
       ``(f) Return Required in the Case of Payments to 
     Attorneys.--

[[Page H6445]]

       ``(1) In general.--Any person engaged in a trade or 
     business and making a payment (in the course of such trade or 
     business) to which this subsection applies shall file a 
     return under subsection (a) and a statement under subsection 
     (b) with respect to such payment.
       ``(2) Application of subsection.--
       ``(A) In general.--This subsection shall apply to any 
     payment to an attorney in connection with legal services 
     (whether or not such services are performed for the payor).
       ``(B) Exception.--This subsection shall not apply to the 
     portion of any payment which is required to be reported under 
     section 6041(a) (or would be so required but for the dollar 
     limitation contained therein) or section 6051.''.
       (b) Reporting of Attorneys' Fees Payable to Corporations.--
     The regulations providing an exception under section 6041 of 
     the Internal Revenue Code of 1986 for payments made to 
     corporations shall not apply to payments of attorneys' fees.
       (c) Effective Date.--The amendment made by this section 
     shall apply to payments made after December 31, 1997.

     SEC. 1022. DECREASE OF THRESHOLD FOR REPORTING PAYMENTS TO 
                   CORPORATIONS PERFORMING SERVICES FOR FEDERAL 
                   AGENCIES.

       (a) In General.--Subsection (d) of section 6041A (relating 
     to returns regarding payments of remuneration for services 
     and direct sales) is amended by adding at the end the 
     following new paragraph:
       ``(3) Payments to corporations by federal executive 
     agencies.--
       ``(A) In general.--Notwithstanding any regulation 
     prescribed by the Secretary before the date of the enactment 
     of this paragraph, subsection (a) shall apply to remuneration 
     paid to a corporation by any Federal executive agency (as 
     defined in section 6050M(b)).
       ``(B) Exception.--Subparagraph (A) shall not apply to--
       ``(i) services under contracts described in section 
     6050M(e)(3) with respect to which the requirements of section 
     6050M(e)(2) are met, and
       ``(ii) such other services as the Secretary may specify in 
     regulations prescribed after the date of the enactment of 
     this paragraph.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to returns the due date for which (determined 
     without regard to any extension) is more than 90 days after 
     the date of the enactment of this Act.

     SEC. 1023. DISCLOSURE OF RETURN INFORMATION FOR 
                   ADMINISTRATION OF CERTAIN VETERANS PROGRAMS.

       (a) General Rule.--Clause (viii) of section 6103(l)(7)(D) 
     (relating to disclosure of return information to Federal, 
     State, and local agencies administering certain programs) is 
     amended by striking ``1998'' and inserting ``2003''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the date of the enactment of this Act.

     SEC. 1024. CONTINUOUS LEVY ON CERTAIN PAYMENTS.

       (a) In General.--Section 6331 (relating to levy and 
     distraint) is amended--
       (1) by redesignating subsection (h) as subsection (i), and
       (2) by inserting after subsection (g) the following new 
     subsection:
       ``(h) Continuing Levy on Certain Payments.--
       ``(1) In general.--The effect of a levy on specified 
     payments to or received by a taxpayer shall be continuous 
     from the date such levy is first made until such levy is 
     released. Notwithstanding section 6334, such continuous levy 
     shall attach to up to 15 percent of any specified payment due 
     to the taxpayer.
       ``(2) Specified payment.--For the purposes of paragraph 
     (1), the term `specified payment' means--
       ``(A) any Federal payment other than a payment for which 
     eligibility is based on the income or assets (or both) of a 
     payee,
       ``(B) any payment described in paragraph (4), (7), (9), or 
     (11) of section 6334(a), and
       ``(C) any annuity or pension payment under the Railroad 
     Retirement Act or benefit under the Railroad Unemployment 
     Insurance Act.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to levies issued after the date of the enactment 
     of this Act.

     SEC. 1025. MODIFICATION OF LEVY EXEMPTION.

       (a) In General.--Section 6334 (relating to property exempt 
     from levy) is amended by redesignating subsection (f) as 
     subsection (g) and by inserting after subsection (e) the 
     following new subsection:
       ``(f) Levy Allowed on Certain Specified Payments.--Any 
     payment described in subparagraph (B) or (C) of section 
     6331(h)(2) shall not be exempt from levy if the Secretary 
     approves the levy thereon under section 6331(h).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to levies issued after the date of the enactment 
     of this Act.

     SEC. 1026. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND 
                   RETURN INFORMATION.

       (a) In General.--Subsection (k) of section 6103 is amended 
     by adding at the end the following new paragraph:
       ``(8) Levies on certain government payments.--
       ``(A) Disclosure of return information in levies on 
     financial management service.--In serving a notice of levy, 
     or release of such levy, with respect to any applicable 
     government payment, the Secretary may disclose to officers 
     and employees of the Financial Management Service--
       ``(i) return information, including taxpayer identity 
     information,
       ``(ii) the amount of any unpaid liability under this title 
     (including penalties and interest), and
       ``(iii) the type of tax and tax period to which such unpaid 
     liability relates.
       ``(B) Restriction on use of disclosed information.--Return 
     information disclosed under subparagraph (A) may be used by 
     officers and employees of the Financial Management Service 
     only for the purpose of, and to the extent necessary in, 
     transferring levied funds in satisfaction of the levy, 
     maintaining appropriate agency records in regard to such levy 
     or the release thereof, notifying the taxpayer and the agency 
     certifying such payment that the levy has been honored, or in 
     the defense of any litigation ensuing from the honor of such 
     levy.
       ``(C) Applicable government payment.--For purposes of this 
     paragraph, the term `applicable government payment' means--
       ``(i) any Federal payment (other than a payment for which 
     eligibility is based on the income or assets (or both) of a 
     payee) certified to the Financial Management Service for 
     disbursement, and
       ``(ii) any other payment which is certified to the 
     Financial Management Service for disbursement and which the 
     Secretary designates by published notice.''.
       (b) Conforming Amendments.--
       (1) Section 6103(p) is amended--
       (A) in paragraph (3)(A), by striking ``(2), or (6)'' and 
     inserting ``(2), (6), or (8)'', and
       (B) in paragraph (4), by inserting ``(k)(8),'' after ``(j) 
     (1) or (2),'' each place it appears.
       (2) Section 552a(a)(8)(B) of title 5, United States Code, 
     is amended by striking ``or'' at the end of clause (v), by 
     adding ``or'' at the end of clause (vi), and by adding at the 
     end the following new clause:
       ``(vii) matches performed incident to a levy described in 
     section 6103(k)(8) of the Internal Revenue Code of 1986;''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to levies issued after the date of the enactment 
     of this Act.

     SEC. 1027. RETURNS OF BENEFICIARIES OF ESTATES AND TRUSTS 
                   REQUIRED TO FILE RETURNS CONSISTENT WITH ESTATE 
                   OR TRUST RETURN OR TO NOTIFY SECRETARY OF 
                   INCONSISTENCY.

       (a) Domestic Estates and Trusts.--Section 6034A (relating 
     to information to beneficiaries of estates and trusts) is 
     amended by adding at the end the following new subsection:
       ``(c) Beneficiary's Return Must be Consistent with Estate 
     or Trust Return or Secretary Notified of Inconsistency.--
       ``(1) In general.--A beneficiary of any estate or trust to 
     which subsection (a) applies shall, on such beneficiary's 
     return, treat any reported item in a manner which is 
     consistent with the treatment of such item on the applicable 
     entity's return.
       ``(2) Notification of inconsistent treatment.--
       ``(A) In general.--In the case of any reported item, if--
       ``(i)(I) the applicable entity has filed a return but the 
     beneficiary's treatment on such beneficiary's return is (or 
     may be) inconsistent with the treatment of the item on the 
     applicable entity's return, or
       ``(II) the applicable entity has not filed a return, and
       ``(ii) the beneficiary files with the Secretary a statement 
     identifying the inconsistency,

     paragraph (1) shall not apply to such item.
       ``(B) Beneficiary receiving incorrect information.--A 
     beneficiary shall be treated as having complied with clause 
     (ii) of subparagraph (A) with respect to a reported item if 
     the beneficiary--
       ``(i) demonstrates to the satisfaction of the Secretary 
     that the treatment of the reported item on the beneficiary's 
     return is consistent with the treatment of the item on the 
     statement furnished under subsection (a) to the beneficiary 
     by the applicable entity, and
       ``(ii) elects to have this paragraph apply with respect to 
     that item.
       ``(3) Effect of failure to notify.--In any case--
       ``(A) described in subparagraph (A)(i)(I) of paragraph (2), 
     and
       ``(B) in which the beneficiary does not comply with 
     subparagraph (A)(ii) of paragraph (2),

     any adjustment required to make the treatment of the items by 
     such beneficiary consistent with the treatment of the items 
     on the applicable entity's return shall be treated as arising 
     out of mathematical or clerical errors and assessed according 
     to section 6213(b)(1). Paragraph (2) of section 6213(b) shall 
     not apply to any assessment referred to in the preceding 
     sentence.
       ``(4) Definitions.--For purposes of this subsection--
       ``(A) Reported item.--The term `reported item' means any 
     item for which information is required to be furnished under 
     subsection (a).
       ``(B) Applicable entity.--The term `applicable entity' 
     means the estate or trust of which the taxpayer is the 
     beneficiary.
       ``(5) Addition to tax for failure to comply with section.--
     For addition to tax in the case of a beneficiary's negligence 
     in connection with, or disregard of, the requirements of this 
     section, see part II of subchapter A of chapter 68.''.
       (b) Foreign Trusts.--Subsection (d) of section 6048 
     (relating to information with respect to certain foreign 
     trusts) is amended by adding at the end the following new 
     paragraph:
       ``(5) United states person's return must be consistent with 
     trust return or secretary notified of inconsistency.--Rules 
     similar to the rules of section 6034A(c) shall apply to items 
     reported by a trust under subsection (b)(1)(B) and to United 
     States persons referred to in such subsection.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to returns of beneficiaries and owners filed 
     after the date of the enactment of this Act.

[[Page H6446]]

     SEC. 1028. REGISTRATION AND OTHER PROVISIONS RELATING TO 
                   CONFIDENTIAL CORPORATE TAX SHELTERS.

       (a) In General.--Section 6111 (relating to registration of 
     tax shelters) is amended by redesignating subsections (d) and 
     (e) as subsections (e) and (f), respectively, and by 
     inserting after subsection (c) the following new subsection:
       ``(d) Certain Confidential Arrangements Treated as Tax 
     Shelters.--
       ``(1) In general.--For purposes of this section, the term 
     `tax shelter' includes any entity, plan, arrangement, or 
     transaction--
       ``(A) a significant purpose of the structure of which is 
     the avoidance or evasion of Federal income tax for a direct 
     or indirect participant which is a corporation,
       ``(B) which is offered to any potential participant under 
     conditions of confidentiality, and
       ``(C) for which the tax shelter promoters may receive fees 
     in excess of $100,000 in the aggregate.
       ``(2) Conditions of confidentiality.--For purposes of 
     paragraph (1)(B), an offer is under conditions of 
     confidentiality if--
       ``(A) the potential participant to whom the offer is made 
     (or any other person acting on behalf of such participant) 
     has an understanding or agreement with or for the benefit of 
     any promoter of the tax shelter that such participant (or 
     such other person) will limit disclosure of the tax shelter 
     or any significant tax features of the tax shelter, or
       ``(B) any promoter of the tax shelter--
       ``(i) claims, knows, or has reason to know,
       ``(ii) knows or has reason to know that any other person 
     (other than the potential participant) claims, or
       ``(iii) causes another person to claim,

     that the tax shelter (or any aspect thereof) is proprietary 
     to any person other than the potential participant or is 
     otherwise protected from disclosure to or use by others.

     For purposes of this subsection, the term `promoter' means 
     any person or any related person (within the meaning of 
     section 267 or 707) who participates in the organization, 
     management, or sale of the tax shelter.
       ``(3) Persons other than promoter required to register in 
     certain cases.--
       ``(A) In general.--If--
       ``(i) the requirements of subsection (a) are not met with 
     respect to any tax shelter (as defined in paragraph (1)) by 
     any tax shelter promoter, and
       ``(ii) no tax shelter promoter is a United States person,

     then each United States person who discussed participation in 
     such shelter shall register such shelter under subsection 
     (a).
       ``(B) Exception.--Subparagraph (A) shall not apply to a 
     United States person who discussed participation in a tax 
     shelter if--
       ``(i) such person notified the promoter in writing (not 
     later than the close of the 90th day after the day on which 
     such discussions began) that such person would not 
     participate in such shelter, and
       ``(ii) such person does not participate in such shelter.
       ``(4) Offer to participate treated as offer for sale.--For 
     purposes of subsections (a) and (b), an offer to participate 
     in a tax shelter (as defined in paragraph (1)) shall be 
     treated as an offer for sale.''.
       (b) Penalty.--Subsection (a) of section 6707 (relating to 
     failure to furnish information regarding tax shelters) is 
     amended by adding at the end the following new paragraph:
       ``(3) Confidential arrangements.--
       ``(A) In general.--In the case of a tax shelter (as defined 
     in section 6111(d)), the penalty imposed under paragraph (1) 
     shall be an amount equal to the greater of--
       ``(i) 50 percent of the fees paid to all promoters of the 
     tax shelter with respect to offerings made before the date 
     such shelter is registered under section 6111, or
       ``(ii) $10,000

     .Clause (i) shall be applied by substituting `75 percent' for 
     `50 percent' in the case of an intentional failure or act 
     described in paragraph (1).
       ``(B) Special rule for participants required to register 
     shelter.--In the case of a person required to register such a 
     tax shelter by reason of section 6111(d)(3)--
       ``(i) such person shall be required to pay the penalty 
     under paragraph (1) only if such person actually participated 
     in such shelter,
       ``(ii) the amount of such penalty shall be determined by 
     taking into account under subparagraph (A)(i) only the fees 
     paid by such person, and
       ``(iii) such penalty shall be in addition to the penalty 
     imposed on any other person for failing to register such 
     shelter.''.
       (c) Modifications to Substantial Understatement Penalty.--
       (1) Restriction on reasonable basis for corporate 
     understatement of income tax.--Subparagraph (B) of section 
     6662(d)(2) is amended by adding at the end the following new 
     flush sentence:

     ``For purposes of clause (ii)(II), in no event shall a 
     corporation be treated as having a reasonable basis for its 
     tax treatment of an item attributable to a multiple-party 
     financing transaction if such treatment does not clearly 
     reflect the income of the corporation.''.
       (2) Modification to definition of tax shelter.--Clause 
     (iii) of section 6662(d)(2)(C) is amended by striking ``the 
     principal purpose'' and inserting ``a significant purpose''.
       (d) Conforming Amendments.--
       (1) Paragraph (2) of section 6707(a) is amended by striking 
     ``The penalty'' and inserting ``Except as provided in 
     paragraph (3), the penalty''.
       (2) Subparagraph (A) of section 6707(a)(1) is amended by 
     striking ``paragraph (2)'' and inserting ``paragraph (2) or 
     (3), as the case may be''.
       (e) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to any tax 
     shelter (as defined in section 6111(d) of the Internal 
     Revenue Code of 1986, as amended by this section) interests 
     in which are offered to potential participants after the 
     Secretary of the Treasury prescribes guidance with respect to 
     meeting requirements added by such amendments.
       (2) Modifications to substantial understatement penalty.--
     The amendments made by subsection (c) shall apply to items 
     with respect to transactions entered into after the date of 
     the enactment of this Act.
            Subtitle D--Excise and Employment Tax Provisions

     SEC. 1031. EXTENSION AND MODIFICATION OF TAXES FUNDING 
                   AIRPORT AND AIRWAY TRUST FUND; INCREASED 
                   DEPOSITS INTO SUCH FUND.

       (a) Fuel Taxes.--
       (1) Aviation fuel.--Clause (ii) of section 4091(b)(3)(A) is 
     amended by striking ``September 30, 1997'' and inserting 
     ``September 30, 2007''.
       (2) Aviation gasoline.--Subparagraph (B) of section 
     4081(d)(2) is amended by striking ``September 30, 1997'' and 
     inserting ``September 30, 2007''.
       (3) Noncommercial aviation.--Subparagraph (B) of section 
     4041(c)(3) is amended by striking ``September 30, 1997'' and 
     inserting ``September 30, 2007''.
       (b) Ticket Taxes.--
       (1) Persons.--Clause (ii) of section 4261(g)(1)(A) is 
     amended by striking ``September 30, 1997'' and inserting 
     ``September 30, 2007''.
       (2) Property.--Clause (ii) of section 4271(d)(1)(A) is 
     amended by striking ``September 30, 1997'' and inserting 
     ``September 30, 2007''.
       (c) Modifications to Tax on Transportation of Persons by 
     Air.--
       (1) In general.--Section 4261 (relating to imposition of 
     tax) is amended by striking subsections (a), (b), and (c) and 
     inserting the following new subsections:
       ``(a) In General.--There is hereby imposed on the amount 
     paid for taxable transportation of any person a tax equal to 
     7.5 percent of the amount so paid.
       ``(b) Domestic Segments of Taxable Transportation.--
       ``(1) In general.--There is hereby imposed on the amount 
     paid for each domestic segment of taxable transportation by 
     air a tax in the amount determined in accordance with the 
     following table for the period in which the segment begins:

In the case of segments                                                
  beginning:                                                The tax is:
    After September 30, 1997, and before October 1, 1998.........$1.00 
    After September 30, 1998, and before October 1, 1999.........$2.00 
    After September 30, 1999, and before January 1, 2000.........$2.25 
    During 2000..................................................$2.50 
    During 2001..................................................$2.75 
    During 2002 or thereafter....................................$3.00.

       ``(2) Domestic segment.--For purposes of this section, the 
     term `domestic segment' means any segment consisting of 1 
     takeoff and 1 landing and which is taxable transportation 
     described in section 4262(a)(1).
       ``(3) Changes in segments by reason of rerouting.--If--
       ``(A) transportation is purchased between 2 locations on 
     specified flights, and
       ``(B) there is a change in the route taken between such 2 
     locations which changes the number of domestic segments, but 
     there is no change in the amount charged for such 
     transportation,

     the tax imposed by paragraph (1) shall be determined without 
     regard to such change in route.
       ``(c) Use of International Travel Facilities.--
       ``(1) In general.--There is hereby imposed a tax of $12.00 
     on any amount paid (whether within or without the United 
     States) for any transportation of any person by air, if such 
     transportation begins or ends in the United States.
       ``(2) Exception for transportation entirely taxable under 
     subsection (a).--This subsection shall not apply to any 
     transportation all of which is taxable under subsection (a) 
     (determined without regard to sections 4281 and 4282).
       ``(3) Special rule for alaska and hawaii.--In any case in 
     which the tax imposed by paragraph (1) applies to a domestic 
     segment beginning or ending in Alaska or Hawaii, such tax 
     shall apply only to departures and shall be at the rate of 
     $6.''.
       (2) Special rules.--Section 4261 is amended by 
     redesignating subsections (e), (f), and (g) as subsections 
     (f), (g), and (h), respectively, and by inserting after 
     subsection (d) the following new subsection:
       ``(e) Special Rules.--
       ``(1) Segments to and from rural airports.--
       ``(A) Exception from segment tax.--The tax imposed by 
     subsection (b)(1) shall not apply to any domestic segment 
     beginning or ending at an airport which is a rural airport 
     for the calendar year in which such segment begins or ends 
     (as the case may be).
       ``(B) Rural airport.--For purposes of this paragraph, the 
     term `rural airport' means, with respect to any calendar 
     year, any airport if--
       ``(i) there were fewer than 100,000 commercial passengers 
     departing by air during the second preceding calendar year 
     from such airport, and
       ``(ii) such airport--

       ``(I) is not located within 75 miles of another airport 
     which is not described in clause (i), or

       ``(II) is receiving essential air service subsidies as of 
     the date of the enactment of this paragraph.

       ``(C) No phasein of reduced ticket tax.--In the case of 
     transportation beginning before October 1, 1999--

[[Page H6447]]

       ``(i) In general.--Paragraph (5) shall not apply to any 
     domestic segment beginning or ending at an airport which is a 
     rural airport for the calendar year in which such segment 
     begins or ends (as the case may be).
       ``(ii) Transportation involving multiple segments.--In the 
     case of transportation involving more than 1 domestic segment 
     at least 1 of which does not begin or end at a rural airport, 
     the 7.5 percent rate applicable by reason of clause (i) shall 
     be applied by taking into account only an amount which bears 
     the same ratio to the amount paid for such transportation as 
     the number of specified miles in domestic segments which 
     begin or end at a rural airport bears to the total number of 
     specified miles in such transportation.
       ``(2) Amounts paid outside the united states.--In the case 
     of amounts paid outside the United States for taxable 
     transportation, the taxes imposed by subsections (a) and (b) 
     shall apply only if such transportation begins and ends in 
     the United States.
       ``(3) Amounts paid for right to award free or reduced rate 
     air transportation.--
       ``(A) In general.--Any amount paid (and the value of any 
     other benefit provided) to an air carrier (or any related 
     person) for the right to provide mileage awards for (or other 
     reductions in the cost of) any transportation of persons by 
     air shall be treated for purposes of subsection (a) as an 
     amount paid for taxable transportation, and such amount shall 
     be taxable under subsection (a) without regard to any other 
     provision of this subchapter.
       ``(B) Controlled group.--For purposes of subparagraph (A), 
     a corporation and all wholly owned subsidiaries of such 
     corporation shall be treated as 1 corporation.
       ``(C) Regulations.--The Secretary shall prescribe rules 
     which reallocate items of income, deduction, credit, 
     exclusion, or other allowance to the extent necessary to 
     prevent the avoidance of tax imposed by reason of this 
     paragraph. The Secretary may prescribe rules which exclude 
     from the tax imposed by subsection (a) amounts attributable 
     to mileage awards which are used other than for 
     transportation of persons by air.
       ``(4) Inflation adjustment of dollar rates of tax.--
       ``(A) In general.--In the case of taxable events in a 
     calendar year after the last nonindexed year, the $3.00 
     amount contained in subsection (b) and each dollar amount 
     contained in subsection (c) shall be increased by an amount 
     equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year by substituting the 
     year before the last nonindexed year for `calendar year 1992' 
     in subparagraph (B) thereof.

     If any increase determined under the preceding sentence is 
     not a multiple of 10 cents, such increase shall be rounded to 
     the nearest multiple of 10 cents.
       ``(B) Last nonindexed year.--For purposes of subparagraph 
     (A), the last nonindexed year is--
       ``(i) 2002 in the case of the $3.00 amount contained in 
     subsection (b), and
       ``(ii) 1998 in the case of the dollar amounts contained in 
     subsection (c).
       ``(C) Taxable event.--For purposes of subparagraph (A), in 
     the case of the tax imposed subsection (b), the beginning of 
     the domestic segment shall be treated as the taxable event.
       ``(5) Rates of ticket tax for transportation beginning 
     before october 1, 1999.--Subsection (a) shall be applied by 
     substituting for `7.5 percent'--
       ``(A) `9 percent' in the case of transportation beginning 
     after September 30, 1997, and before October 1, 1998, and
       ``(B) `8 percent' in the case of transportation beginning 
     after September 30, 1998, and before October 1, 1999.''.
       (3) Secondary liability of carrier for unpaid tax.--
     Subsection (c) of section 4263 is amended by striking 
     ``subchapter--'' and all that follows and inserting 
     ``subchapter, such tax shall be paid by the carrier providing 
     the initial segment of such transportation which begins or 
     ends in the United States.''.
       (d) Increased Airport and Airway Trust Fund Deposits.--
       (1) Paragraph (1) of section 9502(b) is amended--
       (A) by striking ``(to the extent that the rate of the tax 
     on such gasoline exceeds 4.3 cents per gallon)'' in 
     subparagraph (C),
       (B) by striking ``to the extent attributable to the Airport 
     and Airway Trust Fund financing rate'' in subparagraph (D), 
     and
       (C) by adding at the end the following flush sentence:

     ``There shall not be taken into account under paragraph (1) 
     so much of the taxes imposed by sections 4081 and 4091 as are 
     determined at the rates specified in section 4081(a)(2)(B) or 
     4091(b)(2).''.
       (2) Section 9502 is amended by striking subsection (f).
       (e) Effective Dates.--
       (1) Fuel taxes.--The amendments made by subsection (a) 
     shall apply take effect on October 1, 1997.
       (2) Ticket taxes.--
       (A) In general.--Except as otherwise provided in this 
     paragraph, the amendments made by subsections (b) and (c) 
     shall apply to transportation beginning on or after October 
     1, 1997.
       (B) Treatment of amounts paid for tickets purchased before 
     date of enactment.--The amendments made by subsection (c) 
     shall not apply to amounts paid for a ticket purchased before 
     the date of the enactment of this Act for a specified flight 
     beginning on or after October 1, 1997.
       (C) Amounts paid for right to award mileage awards.--
       (i) In general.--Paragraph (3) of section 4261(e) of the 
     Internal Revenue Code of 1986 (as added by the amendment made 
     by subsection (c)) shall apply to amounts paid (and other 
     benefits provided) after September 30, 1997.
       (ii) Payments within controlled group.--For purposes of 
     clause (i), any amount paid after June 11, 1997, and before 
     October 1, 1997, by 1 member of a controlled group for a 
     right which is described in such section 4261(e)(3) and is 
     furnished by another member of such group after September 30, 
     1997, shall be treated as paid after September 30, 1997. For 
     purposes of the preceding sentence, all persons treated as a 
     single employer under subsection (a) or (b) of section 52 of 
     such Code shall be treated as members of a controlled group.
       (3) Increased deposits into airport and airway trust 
     fund.--The amendments made by subsection (d) shall apply with 
     respect to taxes received in the Treasury on and after 
     October 1, 1997.
       (g) Delayed Deposits of Airport Trust Fund Tax Revenues.--
     Notwithstanding section 6302 of the Internal Revenue Code of 
     1986--
       (1) in the case of deposits of taxes imposed by section 
     4261 of such Code, the due date for any such deposit which 
     would (but for this subsection) be required to be made after 
     August 14, 1997, and before October 1, 1997, shall be October 
     10, 1997,
       (2) in the case of deposits of taxes imposed by section 
     4261 of such Code, the due date for any such deposit which 
     would (but for this subsection) be required to be made after 
     August 14, 1998, and before October 1, 1998, shall be October 
     5, 1998, and
       (3) in the case of deposits of taxes imposed by sections 
     4081(a)(2)(A)(ii), 4091, and 4271 of such Code, the due date 
     for any such deposit which would (but for this subsection) be 
     required to be made after July 31, 1998, and before October 
     1, 1998, shall be October 5, 1998.

     SEC. 1032. KEROSENE TAXED AS DIESEL FUEL.

       (a) In General.--Subsection (a) of section 4083 (defining 
     taxable fuel) is amended by striking ``and'' at the end of 
     subparagraph (A), by striking the period at the end of 
     subparagraph (B) and inserting ``, and'', and by adding at 
     the end the following new subparagraph:
       ``(C) kerosene.''.
       (b) Rate of Tax.--Clause (iii) of section 4081(a)(2)(A) is 
     amended by inserting ``or kerosene'' after ``diesel fuel''.
       (c) Exemptions From Tax; Refunds to Vendors.--
       (1) In general.--Section 4082 (relating to exemptions for 
     diesel fuel) is amended by striking ``diesel fuel'' each 
     place it appears in subsections (a), (c), and (d) and 
     inserting ``diesel fuel and kerosene''.
       (2) Certain kerosene exempt from dyeing requirement.--
     Section 4082 is amended by redesignating subsections (d) and 
     (e) as subsections (e) and (f), respectively, and by 
     inserting after subsection (c) the following new subsection:
       ``(d) Additional Exceptions to Dyeing Requirements for 
     Kerosene.--
       ``(1) Aviation-grade kerosene.--Subsection (a)(2) shall not 
     apply to a removal, entry, or sale of aviation-grade kerosene 
     (as determined under regulations prescribed by the Secretary) 
     if the person receiving the kerosene is registered under 
     section 4101 with respect to the tax imposed by section 4091.
       ``(2) Use for non-fuel feedstock purposes.--Subsection 
     (a)(2) shall not apply to kerosene--
       ``(A) received by pipeline or vessel for use by the person 
     receiving the kerosene in the manufacture or production of 
     any substance (other than gasoline, diesel fuel, or special 
     fuels referred to in section 4041), or
       ``(B) to the extent provided in regulations, removed or 
     entered--
       ``(i) for such a use by the person removing or entering the 
     kerosene, or
       ``(ii) for resale by such person for such a use by the 
     purchaser,

     but only if the person receiving, removing, or entering the 
     kerosene and such purchaser (if any) are registered under 
     section 4101 with respect to the tax imposed by section 4081.
       ``(3) Wholesale distributors.--To the extent provided in 
     regulations, subsection (a)(2) shall not apply to a removal, 
     entry, or sale of kerosene to a wholesale distributor of 
     kerosene if such distributor--
       ``(A) is registered under section 4101 with respect to the 
     tax imposed by section 4081 on kerosene, and
       ``(B) sells kerosene exclusively to ultimate vendors 
     described in section 6427(l)(5)(B) with respect to 
     kerosene.''
       (3) Refunds.--
       (A) Subsection (l) of section 6427 is amended by inserting 
     ``or kerosene'' after ``diesel fuel'' each place it appears 
     in paragraphs (1), (2), and (5) (including the heading for 
     paragraph (5)).
       (B) Paragraph (5) of section 6427(l) is amended by 
     redesignating subparagraph (B) as subparagraph (C) and by 
     inserting after subparagraph (A) the following new 
     subparagraph:
       ``(B) Sales of kerosene not for use in motor fuel.--
     Paragraph (1)(A) shall not apply to kerosene sold by a 
     vendor--
       ``(i) for any use if such sale is from a pump which (as 
     determined under regulations prescribed by the Secretary) is 
     not suitable for use in fueling any diesel-powered highway 
     vehicle or train, or
       ``(ii) to the extent provided by the Secretary, for 
     blending with heating oil to be used during periods of 
     extreme or unseasonable cold.''.
       (C) Subparagraph (C) of section 6427(l)(5), as redesignated 
     by subparagraph (B) of this paragraph, is amended by striking 
     ``subparagraph (A)'' and inserting ``subparagraph (A) or 
     (B)''.
       (D) The heading for subsection (l) of section 6427 is 
     amended by inserting ``, Kerosene,'' after ``Diesel Fuel''.

[[Page H6448]]

       (E) Clause (i) of section 6427(i)(5)(A) is amended by 
     inserting ``($100 or more in the case of kerosene)'' after 
     ``$200 or more''.
       (d) Certain Approved Terminals of Registered Persons 
     Required To Offer Dyed Diesel Fuel and Kerosene for 
     Nontaxable Purposes.--Section 4101 is amended by adding at 
     the end the following new subsection:
       ``(e) Certain Approved Terminals of Registered Persons 
     Required To Offer Dyed Diesel Fuel and Kerosene for 
     Nontaxable Purposes.--
       ``(1) In general.--A terminal for kerosene or diesel fuel 
     may not be an approved facility for storage of non-tax-paid 
     diesel fuel or kerosene under this section unless the 
     operator of such terminal offers dyed diesel fuel and 
     kerosene for removal for nontaxable use in accordance with 
     section 4082(a).
       ``(2) Exception.--Paragraph (1) shall not apply to any 
     terminal exclusively providing aviation-grade kerosene by 
     pipeline to an airport.''.
       (e) Conforming Amendments.--
       (1) Paragraph (2) of section 4041(a), as amended by title 
     IX, is amended by striking ``kerosene,''.
       (2) Paragraph (1) of section 4041(c) is amended by striking 
     ``any liquid'' and inserting ``kerosene and any other 
     liquid''.
       (3)(A) The heading for section 4082 is amended by inserting 
     ``AND KEROSENE'' after ``DIESEL FUEL''.
       (B) The table of sections for subpart A of part III of 
     subchapter A of chapter 32 is amended by inserting ``and 
     kerosene'' after ``diesel fuel'' in the item relating to 
     section 4082.
       (4) Subsection (b) of section 4083 is amended by striking 
     ``gasoline, diesel fuel,'' and inserting ``taxable fuels''.
       (5) Subsection (a) of section 4093 is amended by striking 
     ``any liquid'' and inserting ``kerosene and any other 
     liquid''.
       (6) The material following subparagraph (F) of section 
     6416(b)(2) is amended by inserting ``or kerosene'' after 
     ``diesel fuel''.
       (7) Paragraphs (1) and (3) of section 6427(f), and the 
     heading for section 6427(f), are each amended by inserting 
     ``kerosene,'' after ``diesel fuel,''.
       (8) Paragraph (2) of section 6427(f) is amended by striking 
     ``or diesel fuel'' each place it appears and inserting ``, 
     diesel fuel, or kerosene''.
       (9) Subparagraph (A) of section 6427(i)(3) is amended by 
     striking ``or diesel fuel'' and inserting ``, diesel fuel, or 
     kerosene''.
       (10) The heading for paragraph (4) of section 6427(i) is 
     amended to read as follows:
       ``(4) Special rule for refunds under subsection (l).--''
       (11) Paragraph (1) of section 6715(c) is amended by 
     inserting ``or kerosene'' after ``diesel fuel''.
       (12)(A) The text of section 7232 is amended by striking 
     ``gasoline, lubricating oil, diesel fuel'' and inserting 
     ``any taxable fuel (as defined in section 4083)''.
       (B) The section heading for section 7232 is amended to read 
     as follows:

     ``SEC. 7232. FAILURE TO REGISTER UNDER SECTION 4101, FALSE 
                   REPRESENTATIONS OF REGISTRATION STATUS, ETC.''.

       (C) The table of sections for part II of subchapter A of 
     chapter 75 is amended by striking the item relating to 
     section 7232 and inserting the following:

``Sec. 7232. Failure to register under section 4101, false 
              representations of registration status, etc.''.

       (13) Sections 9503(b)(1)(E) and 9508(b)(2) are each amended 
     by striking ``and diesel fuel'' and inserting ``, diesel 
     fuel, and kerosene''.
       (14) Subparagraph (B) of section 9503(b)(5) is amended by 
     striking ``or diesel fuel'' and inserting ``, diesel fuel, or 
     kerosene''.
       (f) Effective Date.--The amendments made by this section 
     shall take effect on July 1, 1998.
       (g) Floor Stock Taxes.--
       (1) Imposition of tax.--In the case of kerosene which is 
     held on July 1, 1998, by any person, there is hereby imposed 
     a floor stocks tax of 24.4 cents per gallon.
       (2) Liability for tax and method of payment.--
       (A) Liability for tax.--A person holding kerosene on July 
     1, 1998, to which the tax imposed by paragraph (1) applies 
     shall be liable for such tax.
       (B) Method of payment.--The tax imposed by paragraph (1) 
     shall be paid in such manner as the Secretary shall 
     prescribe.
       (C) Time for payment.--The tax imposed by paragraph (1) 
     shall be paid on or before August 31, 1998.
       (3) Definitions.--For purposes of this subsection--
       (A) Held by a person.--Kerosene shall be considered as 
     ``held by a person'' if title thereto has passed to such 
     person (whether or not delivery to the person has been made).
       (B) Secretary.--The term ``Secretary'' means the Secretary 
     of the Treasury or his delegate.
       (4) Exception for exempt uses.--The tax imposed by 
     paragraph (1) shall not apply to kerosene held by any person 
     exclusively for any use to the extent a credit or refund of 
     the tax imposed by section 4081 of the Internal Revenue Code 
     of 1986 is allowable for such use.
       (5) Exception for fuel held in vehicle tank.--No tax shall 
     be imposed by paragraph (1) on kerosene held in the tank of a 
     motor vehicle or motorboat.
       (6) Exception for certain amounts of fuel.--
       (A) In general.--No tax shall be imposed by paragraph (1) 
     on kerosene held on July 1, 1998, by any person if the 
     aggregate amount of kerosene held by such person on such date 
     does not exceed 2,000 gallons. The preceding sentence shall 
     apply only if such person submits to the Secretary (at the 
     time and in the manner required by the Secretary) such 
     information as the Secretary shall require for purposes of 
     this paragraph.
       (B) Exempt fuel.--For purposes of subparagraph (A), there 
     shall not be taken into account fuel held by any person which 
     is exempt from the tax imposed by paragraph (1) by reason of 
     paragraph (4) or (5).
       (C) Controlled groups.--For purposes of this paragraph--
       (i) Corporations.--

       (I) In general.--All persons treated as a controlled group 
     shall be treated as 1 person.

       (II) Controlled group.--The term ``controlled group'' has 
     the meaning given to such term by subsection (a) of section 
     1563 of such Code; except that for such purposes the phrase 
     ``more than 50 percent'' shall be substituted for the phrase 
     ``at least 80 percent'' each place it appears in such 
     subsection.

       (ii) Nonincorporated persons under common control.--Under 
     regulations prescribed by the Secretary, principles similar 
     to the principles of clause (i) shall apply to a group of 
     persons under common control where 1 or more of such persons 
     is not a corporation.
       (7) Coordination with section 4081.--No tax shall be 
     imposed by paragraph (1) on kerosene to the extent that tax 
     has been (or will be) imposed on such kerosene under section 
     4081 or 4091 of such Code.
       (8) Other laws applicable.--All provisions of law, 
     including penalties, applicable with respect to the taxes 
     imposed by section 4081 of such Code shall, insofar as 
     applicable and not inconsistent with the provisions of this 
     subsection, apply with respect to the floor stock taxes 
     imposed by paragraph (1) to the same extent as if such taxes 
     were imposed by such section 4081.

     SEC. 1033. RESTORATION OF LEAKING UNDERGROUND STORAGE TANK 
                   TRUST FUND TAXES.

       Paragraph (3) of section 4081(d) is amended by striking 
     ``shall not apply after December 31, 1995'' and inserting 
     ``shall apply after September 30, 1997, and before April 1, 
     2005''.

     SEC. 1034. APPLICATION OF COMMUNICATIONS TAX TO PREPAID 
                   TELEPHONE CARDS.

       (a) In General.--Section 4251 is amended by adding at the 
     end the following new subsection:
       ``(d) Treatment of Prepaid Telephone Cards.--
       ``(1) In general.--For purposes of this subchapter, in the 
     case of communications services acquired by means of a 
     prepaid telephone card--
       ``(A) the face amount of such card shall be treated as the 
     amount paid for such communications services, and
       ``(B) that amount shall be treated as paid when the card is 
     transferred by any telecommunications carrier to any person 
     who is not such a carrier.
       ``(2) Determination of face amount in absence of specified 
     dollar amount.--In the case of any prepaid telephone card 
     which entitles the user other than to a specified dollar 
     amount of use, the face amount shall be determined under 
     regulations prescribed by the Secretary.
       ``(3) Prepaid telephone card.--For purposes of this 
     subsection, the term `prepaid telephone card' means any card 
     or other similar arrangement which permits its holder to 
     obtain communications services and pay for such services in 
     advance.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to amounts paid in calendar months beginning more 
     than 60 days after the date of the enactment of this Act.

     SEC. 1035. EXTENSION OF TEMPORARY UNEMPLOYMENT TAX.

       Section 3301 (relating to rate of unemployment tax) is 
     amended--
       (1) by striking ``1998'' in paragraph (1) and inserting 
     ``2007'', and
       (2) by striking ``1999'' in paragraph (2) and inserting 
     ``2008''.
         Subtitle E--Provisions Relating to Tax-Exempt Entities

     SEC. 1041. EXPANSION OF LOOK-THRU RULE FOR INTEREST, 
                   ANNUITIES, ROYALTIES, AND RENTS DERIVED BY 
                   SUBSIDIARIES OF TAX-EXEMPT ORGANIZATIONS.

       (a) In General.--Paragraph (13) of section 512(b) is 
     amended to read as follows:
       ``(13) Special rules for certain amounts received from 
     controlled entities.--
       ``(A) In general.--If an organization (in this paragraph 
     referred to as the `controlling organization') receives 
     (directly or indirectly) a specified payment from another 
     entity which it controls (in this paragraph referred to as 
     the `controlled entity'), notwithstanding paragraphs (1), 
     (2), and (3), the controlling organization shall include such 
     payment as an item of gross income derived from an unrelated 
     trade or business to the extent such payment reduces the net 
     unrelated income of the controlled entity (or increases any 
     net unrelated loss of the controlled entity). There shall be 
     allowed all deductions of the controlling organization 
     directly connected with amounts treated as derived from an 
     unrelated trade or business under the preceding sentence.
       ``(B) Net unrelated income or loss.--For purposes of this 
     paragraph--
       ``(i) Net unrelated income.--The term `net unrelated 
     income' means--

       ``(I) in the case of a controlled entity which is not 
     exempt from tax under section 501(a), the portion of such 
     entity's taxable income which would be unrelated business 
     taxable income if such entity were exempt from tax under 
     section 501(a) and had the same exempt purposes (as defined 
     in section 513A(a)(5)(A)) as the controlling organization, or
       ``(II) in the case of a controlled entity which is exempt 
     from tax under section 501(a), the

[[Page H6449]]

     amount of the unrelated business taxable income of the 
     controlled entity.

       ``(ii) Net unrelated loss.--The term `net unrelated loss' 
     means the net operating loss adjusted under rules similar to 
     the rules of clause (i).
       ``(C) Specified payment.--For purposes of this paragraph, 
     the term `specified payment' means any interest, annuity, 
     royalty, or rent.
       ``(D) Definition of control.--For purposes of this 
     paragraph--
       ``(i) Control.--The term `control' means--

       ``(I) in the case of a corporation, ownership (by vote or 
     value) of more than 50 percent of the stock in such 
     corporation,
       ``(II) in the case of a partnership, ownership of more than 
     50 percent of the profits interests or capital interests in 
     such partnership, or
       ``(III) in any other case, ownership of more than 50 
     percent of the beneficial interests in the entity.

       ``(ii) Constructive ownership.--Section 318 (relating to 
     constructive ownership of stock) shall apply for purposes of 
     determining ownership of stock in a corporation. Similar 
     principles shall apply for purposes of determining ownership 
     of interests in any other entity.
       ``(E) Related persons.--The Secretary shall prescribe such 
     rules as may be necessary or appropriate to prevent avoidance 
     of the purposes of this paragraph through the use of related 
     persons.''.
       (b) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after the date of the enactment of this Act.
       (2) Binding contracts.--The amendments made by this section 
     shall not apply to any payment made during the first 2 
     taxable years beginning on or after the date of the enactment 
     of this Act if such payment is made pursuant to a written 
     binding contract in effect on June 8, 1997, and at all times 
     thereafter before such payment.

     SEC. 1042. TERMINATION OF CERTAIN EXCEPTIONS FROM RULES 
                   RELATING TO EXEMPT ORGANIZATIONS WHICH PROVIDE 
                   COMMERCIAL-TYPE INSURANCE.

       (a) In General.--Subparagraphs (A) and (B) of section 
     1012(c)(4) of the Tax Reform Act of 1986 shall not apply to 
     any taxable year beginning after December 31, 1997.
       (b) Special Rules.--In the case of an organization to which 
     section 501(m) of the Internal Revenue Code of 1986 applies 
     solely by reason of the amendment made by subsection (a)--
       (1) no adjustment shall be made under section 481 (or any 
     other provision) of such Code on account of a change in its 
     method of accounting for its first taxable year beginning 
     after December 31, 1997, and
       (2) for purposes of determining gain or loss, the adjusted 
     basis of any asset held on the 1st day of such taxable year 
     shall be treated as equal to its fair market value as of such 
     day.
       (c) Reserve Weakening After June 8, 1997.--Any reserve 
     weakening after June 8, 1997, by an organization described in 
     subsection (b) shall be treated as occurring in such 
     organization's 1st taxable year beginning after December 31, 
     1997.
       (d) Regulations.--The Secretary of the Treasury or his 
     delegate may prescribe rules for providing proper adjustments 
     for organizations described in subsection (b) with respect to 
     short taxable years which begin during 1998 by reason of 
     section 843 of the Internal Revenue Code of 1986.
                     Subtitle F--Foreign Provisions

     SEC. 1051. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY 
                   INCOME.

       (a) Income From Notional Principal Contracts and Payments 
     in Lieu of Dividends.--
       (1) In general.--Paragraph (1) of section 954(c) (defining 
     foreign personal holding company income) is amended by adding 
     at the end the following new subparagraphs:
       ``(F) Income from notional principal contracts.--Net income 
     from notional principal contracts. Any item of income, gain, 
     deduction, or loss from a notional principal contract entered 
     into for purposes of hedging any item described in any 
     preceding subparagraph shall not be taken into account for 
     purposes of this subparagraph but shall be taken into account 
     under such other subparagraph.
       ``(G) Payments in lieu of dividends.--Payments in lieu of 
     dividends which are made pursuant to an agreement to which 
     section 1058 applies.''.
       (2) Conforming amendment.--Subparagraph (B) of section 
     954(c)(1) is amended--
       (A) by striking the second sentence, and
       (B) by striking ``also'' in the last sentence.
       (b) Exception for Dealers.--Paragraph (2) of section 954(c) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) Exception for dealers.--Except as provided in 
     subparagraph (A), (E), or (G) of paragraph (1) or by 
     regulations, in the case of a regular dealer in property 
     (within the meaning of paragraph (1)(B)), forward contracts, 
     option contracts, or similar financial instruments (including 
     notional principal contracts and all instruments referenced 
     to commodities), there shall not be taken into account in 
     computing foreign personal holding income any item of income, 
     gain, deduction, or loss from any transaction (including 
     hedging transactions) entered into in the ordinary course of 
     such dealer's trade or business as such a dealer.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 1052. PERSONAL PROPERTY USED PREDOMINANTLY IN THE UNITED 
                   STATES TREATED AS NOT PROPERTY OF A LIKE KIND 
                   WITH RESPECT TO PROPERTY USED PREDOMINANTLY 
                   OUTSIDE THE UNITED STATES.

       (a) In General.--Subsection (h) of section 1031 (relating 
     to exchange of property held for productive use or 
     investment) is amended to read as follows:
       ``(h) Special Rules for Foreign Real and Personal 
     Property.--For purposes of this section--
       ``(1) Real property.--Real property located in the United 
     States and real property located outside the United States 
     are not property of a like kind.
       ``(2) Personal property.--
       ``(A) In general.--Personal property used predominantly 
     within the United States and personal property used 
     predominantly outside the United States are not property of a 
     like kind.
       ``(B) Predominant use.--Except as provided in subparagraph 
     (C) and (D), the predominant use of any property shall be 
     determined based on--
       ``(i) in the case of the property relinquished in the 
     exchange, the 2-year period ending on the date of such 
     relinquishment, and
       ``(ii) in the case of the property acquired in the 
     exchange, the 2-year period beginning on the date of such 
     acquisition.
       ``(C) Property held for less than 2 years.--Except in the 
     case of an exchange which is part of a transaction (or series 
     of transactions) structured to avoid the purposes of this 
     subsection--
       ``(i) only the periods the property was held by the person 
     relinquishing the property (or any related person) shall be 
     taken into account under subparagraph (B)(i), and
       ``(ii) only the periods the property was held by the person 
     acquiring the property (or any related person) shall be taken 
     into account under subparagraph (B)(ii).
       ``(D) Special rule for certain property.--Property 
     described in any subparagraph of section 168(g)(4) shall be 
     treated as used predominantly in the United States.''.
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     apply to transfers after June 8, 1997, in taxable years 
     ending after such date.
       (2) Binding contracts.--The amendment made by this section 
     shall not apply to any transfer pursuant to a written binding 
     contract in effect on June 8, 1997, and at all times 
     thereafter before the disposition of property. A contract 
     shall not fail to meet the requirements of the preceding 
     sentence solely because--
       (A) it provides for a sale in lieu of an exchange, or
       (B) the property to be acquired as replacement property was 
     not identified under such contract before June 9, 1997.

     SEC. 1053. HOLDING PERIOD REQUIREMENT FOR CERTAIN FOREIGN 
                   TAXES.

       (a) In General.--Section 901 is amended by redesignating 
     subsection (k) as subsection (l) and by inserting after 
     subsection (j) the following new subsection:
       ``(k) Minimum Holding Period for Certain Taxes.--
       ``(1) Withholding taxes.--
       ``(A) In general.--In no event shall a credit be allowed 
     under subsection (a) for any withholding tax on a dividend 
     with respect to stock in a corporation if--
       ``(i) such stock is held by the recipient of the dividend 
     for 15 days or less during the 30-day period beginning on the 
     date which is 15 days before the date on which such share 
     becomes ex-dividend with respect to such dividend, or
       ``(ii) to the extent that the recipient of the dividend is 
     under an obligation (whether pursuant to a short sale or 
     otherwise) to make related payments with respect to positions 
     in substantially similar or related property.
       ``(B) Withholding tax.--For purposes of this paragraph, the 
     term `withholding tax' includes any tax determined on a gross 
     basis; but does not include any tax which is in the nature of 
     a prepayment of a tax imposed on a net basis.
       ``(2) Deemed paid taxes.--In the case of income, war 
     profits, or excess profits taxes deemed paid under section 
     853, 902, or 960 through a chain of ownership of stock in 1 
     or more corporations, no credit shall be allowed under 
     subsection (a) for such taxes if--
       ``(A) any stock of any corporation in such chain (the 
     ownership of which is required to obtain credit under 
     subsection (a) for such taxes) is held for less than the 
     period described in paragraph (1)(A)(i), or
       ``(B) the corporation holding the stock is under an 
     obligation referred to in paragraph (1)(A)(ii).
       ``(3) 45-day rule in the case of certain preference 
     dividends.--In the case of stock having preference in 
     dividends and dividends with respect to such stock which are 
     attributable to a period or periods aggregating in excess of 
     366 days, paragraph (1)(A)(i) shall be applied--
       ``(A) by substituting `45 days' for `15 days' each place it 
     appears, and
       ``(B) by substituting `90-day period' for `30-day period'.
       ``(4) Exception for certain taxes paid by securities 
     dealers.--
       ``(A) In general.--Paragraphs (1) and (2) shall not apply 
     to any qualified tax with respect to any security held in the 
     active conduct in a foreign country of a securities business 
     of any person--
       ``(i) who is registered as a securities broker or dealer 
     under section 15(a) of the Securities Exchange Act of 1934,
       ``(ii) who is registered as a Government securities broker 
     or dealer under section 15C(a) of such Act, or
       ``(iii) who is licensed or authorized in such foreign 
     country to conduct securities activities in such country and 
     is subject to bona fide regulation by a securities regulating 
     authority of such country.
       ``(B) Qualified tax.--For purposes of subparagraph (A), the 
     term `qualified tax' means a

[[Page H6450]]

     tax paid to a foreign country (other than the foreign country 
     referred to in subparagraph (A)) if--
       ``(i) the dividend to which such tax is attributable is 
     subject to taxation on a net basis by the country referred to 
     in subparagraph (A), and
       ``(ii) such country allows a credit against its net basis 
     tax for the full amount of the tax paid to such other foreign 
     country.
       ``(C) Regulations.--The Secretary may prescribe such 
     regulations as may be appropriate to carry out this 
     paragraph, including regulations to prevent the abuse of the 
     exception provided by this paragraph and to treat other taxes 
     as qualified taxes.
       ``(5) Certain rules to apply.--For purposes of this 
     subsection, the rules of paragraphs (3) and (4) of section 
     246(c) shall apply.
       ``(6) Treatment of bona fide sales.--If a person's holding 
     period is reduced by reason of the application of the rules 
     of section 246(c)(4) to any contract for the bona fide sale 
     of stock, the determination of whether such person's holding 
     period meets the requirements of paragraph (2) with respect 
     to taxes deemed paid under section 902 or 960 shall be made 
     as of the date such contract is entered into.
       ``(7) Taxes allowed as deduction, etc.--Sections 275 and 78 
     shall not apply to any tax which is not allowable as a credit 
     under subsection (a) by reason of this subsection.''.
       (b) Notice of Withholding Taxes Paid by Regulated 
     Investment Company.--Subsection (c) of section 853 (relating 
     to foreign tax credit allowed to shareholders) is amended by 
     adding at the end the following new sentence: ``Such notice 
     shall also include the amount of such taxes which (without 
     regard to the election under this section) would not be 
     allowable as a credit under section 901(a) to the regulated 
     investment company by reason of section 901(k).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to dividends paid or accrued more than 30 days 
     after the date of the enactment of this Act.

     SEC. 1054. DENIAL OF TREATY BENEFITS FOR CERTAIN PAYMENTS 
                   THROUGH HYBRID ENTITIES.

       (a) In General.--Section 894 (relating to income affected 
     by treaty) is amended by inserting after subsection (b) the 
     following new subsection:
       ``(c) Denial of Treaty Benefits for Certain Payments 
     Through Hybrid Entities.--
       ``(1) Application to certain payments.--A foreign person 
     shall not be entitled under any income tax treaty of the 
     United States with a foreign country to any reduced rate of 
     any withholding tax imposed by this title on an item of 
     income derived through an entity which is treated as a 
     partnership (or is otherwise treated as fiscally transparent) 
     for purposes of this title if--
       ``(A) such item is not treated for purposes of the taxation 
     laws of such foreign country as an item of income of such 
     person,
       ``(B) the treaty does not contain a provision addressing 
     the applicability of the treaty in the case of an item of 
     income derived through a partnership, and
       ``(C) the foreign country does not impose tax on a 
     distribution of such item of income from such entity to such 
     person.
       ``(2) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to determine 
     the extent to which a taxpayer to which paragraph (1) does 
     not apply shall not be entitled to benefits under any income 
     tax treaty of the United States with respect to any payment 
     received by, or income attributable to any activities of, an 
     entity organized in any jurisdiction (including the United 
     States) that is treated as a partnership or is otherwise 
     treated as fiscally transparent for purposes of this title 
     (including a common investment trust under section 584, a 
     grantor trust, or an entity that is disregarded for purposes 
     of this title) and is treated as fiscally nontransparent for 
     purposes of the tax laws of the jurisdiction of residence of 
     the taxpayer.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply upon the date of enactment of this Act.

     SEC. 1055. INTEREST ON UNDERPAYMENTS NOT REDUCED BY FOREIGN 
                   TAX CREDIT CARRYBACKS.

       (a) In General.--Subsection (d) of section 6601 is amended 
     by redesignating paragraphs (2) and (3) as paragraphs (3) and 
     (4), respectively, and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Foreign tax credit carrybacks.--If any credit allowed 
     for any taxable year is increased by reason of a carryback of 
     tax paid or accrued to foreign countries or possessions of 
     the United States, such increase shall not affect the 
     computation of interest under this section for the period 
     ending with the filing date for the taxable year in which 
     such taxes were in fact paid or accrued, or, with respect to 
     any portion of such credit carryback from a taxable year 
     attributable to a net operating loss carryback or a capital 
     loss carryback from a subsequent taxable year, such increase 
     shall not affect the computation of interest under this 
     section for the period ending with the filing date for such 
     subsequent taxable year.''.
       (b) Conforming Amendment to Refunds Attributable to Foreign 
     Tax Credit Carrybacks.--
       (1) In general.--Subsection (f) of section 6611 is amended 
     by redesignating paragraphs (2) and (3) as paragraphs (3) and 
     (4), respectively, and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Foreign tax credit carrybacks.--For purposes of 
     subsection (a), if any overpayment of tax imposed by subtitle 
     A results from a carryback of tax paid or accrued to foreign 
     countries or possessions of the United States, such 
     overpayment shall be deemed not to have been made before the 
     filing date for the taxable year in which such taxes were in 
     fact paid or accrued, or, with respect to any portion of such 
     credit carryback from a taxable year attributable to a net 
     operating loss carryback or a capital loss carryback from a 
     subsequent taxable year, such overpayment shall be deemed not 
     to have been made before the filing date for such subsequent 
     taxable year.''.
       (2) Conforming amendments.--
       (A) Paragraph (4) of section 6611(f) (as so redesignated) 
     is amended--
       (i) by striking ``paragraphs (1) and (2)'' and inserting 
     ``paragraphs (1), (2), and (3)'', and
       (ii) by striking ``paragraph (1) or (2)'' each place it 
     appears and inserting ``paragraph (1), (2), or (3)''.
       (B) Clause (ii) of section 6611(f)(4)(B) (as so 
     redesignated) is amended by striking ``and'' at the end of 
     subclause (I), by redesignating subclause (II) as subclause 
     (III), and by inserting after subclause (I) the following new 
     subclause:

       ``(II) in the case of a carryback of taxes paid or accrued 
     to foreign countries or possessions of the United States, the 
     taxable year in which such taxes were in fact paid or accrued 
     (or, with respect to any portion of such carryback from a 
     taxable year attributable to a net operating loss carryback 
     or a capital loss carryback from a subsequent taxable year, 
     such subsequent taxable year), and''.

       (C) Subclause (III) of section 6611(f)(4)(B)(ii) (as so 
     redesignated) is amended by inserting ``(as defined in 
     paragraph (3)(B))'' after ``credit carryback'' the first 
     place it appears.
       (D) Section 6611 is amended by striking subsection (g) and 
     by redesignating subsections (h) and (i) as subsections (g) 
     and (h), respectively.
       (c) Effective Date.--The amendments made by this section 
     shall apply to foreign tax credit carrybacks arising in 
     taxable years beginning after the date of the enactment of 
     this Act.

     SEC. 1056. CLARIFICATION OF PERIOD OF LIMITATIONS ON CLAIM 
                   FOR CREDIT OR REFUND ATTRIBUTABLE TO FOREIGN 
                   TAX CREDIT CARRYFORWARD.

       (a) In General.--Subparagraph (A) of section 6511(d)(3) is 
     amended by striking ``for the year with respect to which the 
     claim is made'' and inserting ``for the year in which such 
     taxes were actually paid or accrued''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxes paid or accrued in taxable years 
     beginning after the date of the enactment of this Act.

     SEC. 1057. REPEAL OF EXCEPTION TO ALTERNATIVE MINIMUM FOREIGN 
                   TAX CREDIT LIMIT.

       (a) In General.--Section 59(a)(2) (relating to limitation 
     to 90 percent of tax) is amended by striking subparagraph 
     (C).
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.
                   Subtitle G--Partnership Provisions

     SEC. 1061. ALLOCATION OF BASIS AMONG PROPERTIES DISTRIBUTED 
                   BY PARTNERSHIP.

       (a) In General.--Subsection (c) of section 732 is amended 
     to read as follows:
       ``(c) Allocation of Basis.--
       ``(1) In general.--The basis of distributed properties to 
     which subsection (a)(2) or (b) is applicable shall be 
     allocated--
       ``(A)(i) first to any unrealized receivables (as defined in 
     section 751(c)) and inventory items (as defined in section 
     751(d)(2)) in an amount equal to the adjusted basis of each 
     such property to the partnership, and
       ``(ii) if the basis to be allocated is less than the sum of 
     the adjusted bases of such properties to the partnership, 
     then, to the extent any decrease is required in order to have 
     the adjusted bases of such properties equal the basis to be 
     allocated, in the manner provided in paragraph (3), and
       ``(B) to the extent of any basis remaining after the 
     allocation under subparagraph (A), to other distributed 
     properties--
       ``(i) first by assigning to each such other property such 
     other property's adjusted basis to the partnership, and
       ``(ii) then, to the extent any increase or decrease in 
     basis is required in order to have the adjusted bases of such 
     other distributed properties equal such remaining basis, in 
     the manner provided in paragraph (2) or (3), whichever is 
     appropriate.
       ``(2) Method of allocating increase.--Any increase required 
     under paragraph (1)(B) shall be allocated among the 
     properties--
       ``(A) first to properties with unrealized appreciation in 
     proportion to their respective amounts of unrealized 
     appreciation before such increase (but only to the extent of 
     each property's unrealized appreciation), and
       ``(B) then, to the extent such increase is not allocated 
     under subparagraph (A), in proportion to their respective 
     fair market values.
       ``(3) Method of allocating decrease.--Any decrease required 
     under paragraph (1)(A) or (1)(B) shall be allocated--
       ``(A) first to properties with unrealized depreciation in 
     proportion to their respective amounts of unrealized 
     depreciation before such decrease (but only to the extent of 
     each property's unrealized depreciation), and
       ``(B) then, to the extent such decrease is not allocated 
     under subparagraph (A), in proportion to their respective 
     adjusted bases (as adjusted under subparagraph (A)).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to distributions after the date of the enactment 
     of this Act.

     SEC. 1062. REPEAL OF REQUIREMENT THAT INVENTORY BE 
                   SUBSTANTIALLY APPRECIATED WITH RESPECT TO SALE 
                   OR EXCHANGE OF PARTNERSHIP INTEREST.

       (a) In General.--Paragraph (2) of section 751(a) is amended 
     to read as follows:

[[Page H6451]]

       ``(2) inventory items of the partnership,''.
       (b) Conforming Amendments.--
       (1)(A) Paragraph (1) of section 751(b) is amended by 
     striking subparagraphs (A) and (B) and inserting the 
     following new subparagraphs:
       ``(A) partnership property which is--
       ``(i) unrealized receivables, or
       ``(ii) inventory items which have appreciated substantially 
     in value,

     in exchange for all or a part of his interest in other 
     partnership property (including money), or
       ``(B) partnership property (including money) other than 
     property described in subparagraph (A)(i) or (ii) in exchange 
     for all or a part of his interest in partnership property 
     described in subparagraph (A)(i) or (ii),''.
       (B) Subsection (b) of section 751 is amended by adding at 
     the end the following new paragraph:
       ``(3) Substantial appreciation.--For purposes of paragraph 
     (1)--
       ``(A) In general.--Inventory items of the partnership shall 
     be considered to have appreciated substantially in value if 
     their fair market value exceeds 120 percent of the adjusted 
     basis to the partnership of such property.
       ``(B) Certain property excluded.--For purposes of 
     subparagraph (A), there shall be excluded any inventory 
     property if a principal purpose for acquiring such property 
     was to avoid the provisions of this subsection relating to 
     inventory items.''
       (2) Subsection (d) of section 751 is amended to read as 
     follows:
       ``(d) Inventory Items.--For purposes of this subchapter, 
     the term `inventory items' means--
       ``(1) property of the partnership of the kind described in 
     section 1221(1),
       ``(2) any other property of the partnership which, on sale 
     or exchange by the partnership, would be considered property 
     other than a capital asset and other than property described 
     in section 1231,
       ``(3) any other property of the partnership which, if sold 
     or exchanged by the partnership, would result in a gain 
     taxable under subsection (a) of section 1246 (relating to 
     gain on foreign investment company stock), and
       ``(4) any other property held by the partnership which, if 
     held by the selling or distributee partner, would be 
     considered property of the type described in paragraph (1), 
     (2), or (3).''.
       (3) Sections 724(d)(2), 731(a)(2)(B), 731(c)(6), 
     732(c)(1)(A) (as amended by the preceding section), 
     735(a)(2), and 735(c)(1) are each amended by striking 
     ``section 751(d)(2)'' and inserting ``section 751(d)''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to sales, exchanges, and distributions after the date 
     of the enactment of this Act.
       (2) Binding contracts.--The amendments made by this section 
     shall not apply to any sale or exchange pursuant to a written 
     binding contract in effect on June 8, 1997, and at all times 
     thereafter before such sale or exchange.

     SEC. 1063. EXTENSION OF TIME FOR TAXING PRECONTRIBUTION GAIN.

       (a) In General.--Sections 704(c)(1)(B) and 737(b)(1) are 
     each amended by striking ``5 years'' and inserting ``7 
     years''.
       (b) Effective Date.--
       (1) In general.--The amendment made by subsection (a) shall 
     apply to property contributed to a partnership after June 8, 
     1997.
       (2) Binding contracts.--The amendment made by subsection 
     (a) shall not apply to any property contributed pursuant to a 
     written binding contract in effect on June 8, 1997, and at 
     all times thereafter before such contribution if such 
     contract provides for the contribution of a fixed amount of 
     property.
                     Subtitle H--Pension Provisions

     SEC. 1071. PENSION ACCRUED BENEFIT DISTRIBUTABLE WITHOUT 
                   CONSENT INCREASED TO $5,000.

       (a) Amendment to 1986 Code.--
       (1) In general.--Subparagraph (A) of section 411(a)(11) 
     (relating to restrictions on certain mandatory distributions) 
     is amended by striking ``$3,500'' and inserting ``$5,000''.
       (2) Conforming amendments.--
       (A) Section 411(a)(7)(B), paragraphs (1) and (2) of section 
     417(e), and section 457(e)(9) are each amended by striking 
     ``$3,500'' each place it appears (other than the headings) 
     and inserting ``the dollar limit under section 
     411(a)(11)(A)''.
       (B) The headings for paragraphs (1) and (2) of section 
     417(e) and subparagraph (A) of section 457(e)(9) are each 
     amended by striking ``$3,500'' and inserting ``dollar 
     limit''.
       (b) Amendments to ERISA.--
       (1) In general.--Section 203(e)(1) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1053(e)(1)) 
     is amended by striking ``$3,500'' and inserting ``$5,000''.
       (2) Conforming amendments.--Sections 204(d)(1) and 205(g) 
     (1) and (2) (29 U.S.C. 1054(d)(1) and 1055(g) (1) and (2)) 
     are each amended by striking ``$3,500'' and inserting ``the 
     dollar limit under section 203(e)(1)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after the date of the 
     enactment of this Act.

     SEC. 1072. ELECTION TO RECEIVE TAXABLE CASH COMPENSATION IN 
                   LIEU OF NONTAXABLE PARKING BENEFITS.

       (a) In General.--Section 132(f)(4) (relating to benefits 
     not in lieu of compensation) is amended by adding at the end 
     the following new sentence: ``This paragraph shall not apply 
     to any qualified parking provided in lieu of compensation 
     which otherwise would have been includible in gross income of 
     the employee, and no amount shall be included in the gross 
     income of the employee solely because the employee may choose 
     between the qualified parking and compensation.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1073. REPEAL OF EXCESS DISTRIBUTION AND EXCESS 
                   RETIREMENT ACCUMULATION TAX.

       (a) Repeal of Excess Distribution and Excess Retirement 
     Accumulation Tax.--Section 4980A (relating to excess 
     distributions from qualified retirement plans) is repealed.
       (b) Conforming Amendments.--
       (1) Section 691(c)(1) is amended by striking subparagraph 
     (C).
       (2) Section 2013 is amended by striking subsection (g).
       (3) Section 2053(c)(1)(B) is amended by striking the last 
     sentence.
       (4) Section 6018(a) is amended by striking paragraph (4).
       (c) Effective Dates.--
       (1) Excess distribution tax repeal.--Except as provided in 
     paragraph (2), the repeal made by subsection (a) shall apply 
     to excess distributions received after December 31, 1996.
       (2) Excess retirement accumulation tax repeal.--The repeal 
     made by subsection (a) with respect to section 4980A(d) of 
     the Internal Revenue Code of 1986 and the amendments made by 
     subsection (b) shall apply to estates of decedents dying 
     after December 31, 1996.

     SEC. 1074. INCREASE IN TAX ON PROHIBITED TRANSACTIONS.

       (a) In General.--Section 4975(a) is amended by striking 
     ``10 percent'' and inserting ``15 percent''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to prohibited transactions occurring after the 
     date of the enactment of this Act.

     SEC. 1075. BASIS RECOVERY RULES FOR ANNUITIES OVER MORE THAN 
                   ONE LIFE.

       (a) In General.--Section 72(d)(1)(B) is amended by adding 
     at the end the following new clause:
       ``(iv) Number of anticipated payments where more than one 
     life.--If the annuity is payable over the lives of more than 
     1 individual, the number of anticipated payments shall be 
     determined as follows:

``If the combined ages                                                 
  of annuitants are:                                     The number is:
  Not more than 110............................................410 ....

  More than 110 but not more than 120..........................360 ....

  More than 120 but not more than 130..........................310 ....

  More than 130 but not more than 140..........................260 ....

  More than 140.............................................210.''.....

       (b) Conforming Amendment.--Section 72(d)(1)(B)(iii) is 
     amended--
       (1) by inserting ``If the annuity is payable over the life 
     of a single individual, the number of anticipated payments 
     shall be determined as follows:'' after the heading and 
     before the table, and
       (2) by striking ``primary'' in the table.
       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to annuity starting dates beginning 
     after December 31, 1997.
                  Subtitle I--Other Revenue Provisions

     SEC. 1081. TERMINATION OF SUSPENSE ACCOUNTS FOR FAMILY 
                   CORPORATIONS REQUIRED TO USE ACCRUAL METHOD OF 
                   ACCOUNTING.

       (a) In General.--Subsection (i) of section 447 (relating to 
     method of accounting for corporations engaged in farming) is 
     amended by striking paragraphs (3) and (4), by redesignating 
     paragraphs (5) and (6) as paragraphs (3) and (4), 
     respectively, and by adding at the end the following new 
     paragraph:
       ``(5) Termination.--
       ``(A) In general.--No suspense account may be established 
     under this subsection by any corporation required by this 
     section to change its method of accounting for any taxable 
     year ending after June 8, 1997.
       ``(B) Phaseout of existing suspense accounts.--
       ``(i) In general.--Each suspense account under this 
     subsection shall be reduced (but not below zero) for each 
     taxable year beginning after June 8, 1997, by an amount equal 
     to the lesser of--

       ``(I) the applicable portion of such account, or
       ``(II) 50 percent of the taxable income of the corporation 
     for the taxable year, or, if the corporation has no taxable 
     income for such year, the amount of any net operating loss 
     (as defined in section 172(c)) for such taxable year.

     For purposes of the preceding sentence, the amount of taxable 
     income and net operating loss shall be determined without 
     regard to this paragraph.
       ``(ii) Coordination with other reductions.--The amount of 
     the applicable portion for any taxable year shall be reduced 
     (but not below zero) by the amount of any reduction required 
     for such taxable year under any other provision of this 
     subsection.
       ``(iv) Inclusion in income.--Any reduction in a suspense 
     account under this paragraph shall be included in gross 
     income for the taxable year of the reduction.
       ``(C) Applicable portion.--For purposes of subparagraph 
     (B), the term `applicable portion' means, for any taxable 
     year, the amount which would ratably reduce the amount in the 
     account (after taking into account prior reductions) to zero 
     over the period consisting of such taxable year and the 
     remaining taxable years in such first 20 taxable years.
       ``(D) Amounts after 20th year.--Any amount in the account 
     as of the close of the 20th year referred to in subparagraph 
     (C) shall be treated as the applicable portion for each 
     succeeding year thereafter to the extent not reduced under 
     this paragraph for any prior taxable year after such 20th 
     year.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after June 8, 1997.

[[Page H6452]]

     SEC. 1082. MODIFICATION OF TAXABLE YEARS TO WHICH NET 
                   OPERATING LOSSES MAY BE CARRIED.

       (a) In General.--Subparagraph (A) of section 172(b)(1) 
     (relating to years to which loss may be carried) is amended--
       (1) by striking ``3'' in clause (i) and inserting ``2'', 
     and
       (2) by striking ``15'' in clause (ii) and inserting ``20''.
       (b) Retention of 3-Year Carryback for Certain Losses.--
     Paragraph (1) of section 172(b) is amended by adding at the 
     end the following new subparagraph:
       ``(F) Retention of 3-year carryback in certain cases.--
       ``(i) In general.--Subparagraph (A)(i) shall be applied by 
     substituting `3 years' for `2 years' with respect to the 
     portion of the net operating loss for the taxable year which 
     is an eligible loss with respect to the taxpayer.
       ``(ii) Eligible loss.--For purposes of clause (i), the term 
     `eligible loss' means--

       ``(I) in the case of an individual, losses of property 
     arising from fire, storm, shipwreck, or other casualty, or 
     from theft,
       ``(II) in the case of a taxpayer which is a small business, 
     net operating losses attributable to Presidentially declared 
     disasters (as defined in section 1033(h)(3)), and
       ``(III) in the case of a taxpayer engaged in the trade or 
     business of farming (as defined in section 263A(e)(4)), net 
     operating losses attributable to such Presidentially declared 
     disasters.

       ``(iii) Small business.--For purposes of this subparagraph, 
     the term `small business' means a corporation or partnership 
     which meets the gross receipts test of section 448(c) for the 
     taxable year in which the loss arose (or, in the case of a 
     sole proprietorship, which would meet such test if such 
     proprietorship were a corporation).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to net operating losses for taxable years 
     beginning after the date of the enactment of this Act.

     SEC. 1083. MODIFICATIONS TO TAXABLE YEARS TO WHICH UNUSED 
                   CREDITS MAY BE CARRIED.

       (a) In General.--Section 39(a) (relating to unused credits) 
     is amended--
       (1) in paragraph (1), by striking ``3'' each place it 
     appears and inserting ``1'' and by striking ``15'' each place 
     it appears and inserting ``20''; and
       (2) in paragraph (2), by striking ``18'' each place it 
     appears and inserting ``22'' and by striking ``17'' each 
     place it appears and inserting ``21''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to credits arising in taxable years beginning 
     after December 31, 1997.

     SEC. 1084. EXPANSION OF DENIAL OF DEDUCTION FOR CERTAIN 
                   AMOUNTS PAID IN CONNECTION WITH INSURANCE.

       (a) Denial of Deduction for Premiums.--
       (1) In general.--Paragraph (1) of section 264(a) is amended 
     to read as follows:
       ``(1) Premiums on any life insurance policy, or endowment 
     or annuity contract, if the taxpayer is directly or 
     indirectly a beneficiary under the policy or contract.''.
       (2) Exceptions.--Section 264 is amended by redesignating 
     subsections (b), (c), and (d) as subsections (c), (d), and 
     (e), respectively, and by inserting after subsection (a) the 
     following new subsection:
       ``(b) Exceptions to Subsection (a)(1).--Subsection (a)(1) 
     shall not apply to--
       ``(1) any annuity contract described in section 72(s)(5), 
     and
       ``(2) any annuity contract to which section 72(u) 
     applies.''.
       (b) Interest on Policy Loans.--
       (1) In general.--Paragraph (4) of section 264(a) is amended 
     by striking ``individual, who'' and all that follows and 
     inserting ``individual.''.
       (2) Coordination with transfers for value.--Paragraph (2) 
     of section 101(a) is amended by adding at the end the 
     following new flush sentence:

     ``The term `other amounts' in the first sentence of this 
     paragraph includes interest paid or accrued by the transferee 
     on indebtedness with respect to such contract or any interest 
     therein if such interest paid or accrued is not allowable as 
     a deduction by reason of section 264(a)(4).''.
       (c) Pro Rata Allocation of Interest Expense to Policy Cash 
     Values.--Section 264 is amended by adding at the end the 
     following new subsection:
       ``(f) Pro Rata Allocation of Interest Expense to Policy 
     Cash Values.--
       ``(1) In general.--No deduction shall be allowed for that 
     portion of the taxpayer's interest expense which is allocable 
     to unborrowed policy cash values.
       ``(2)  Allocation.--For purposes of paragraph (1), the 
     portion of the taxpayer's interest expense which is allocable 
     to unborrowed policy cash values is an amount which bears the 
     same ratio to such interest expense as--
       ``(A) the taxpayer's average unborrowed policy cash values 
     of life insurance policies, and annuity and endowment 
     contracts, issued after June 8, 1997, bears to
       ``(B) the sum of--
       ``(i) in the case of assets of the taxpayer which are life 
     insurance policies or annuity or endowment contracts, the 
     average unborrowed policy cash values of such policies and 
     contracts, and
       ``(ii) in the case of assets of the taxpayer not described 
     in clause (i), the average adjusted bases (within the meaning 
     of section 1016) of such assets.
       ``(3) Unborrowed policy cash value.--For purposes of this 
     subsection, the term `unborrowed policy cash value' means, 
     with respect to any life insurance policy or annuity or 
     endowment contract, the excess of--
       ``(A) the cash surrender value of such policy or contract 
     determined without regard to any surrender charge, over
       ``(B) the amount of any loan with respect to such policy or 
     contract.
       ``(4) Exception for certain policies and contracts.--
       ``(A) Policies and contracts covering 20-percent owners, 
     officers, directors, and employees.--Paragraph (1) shall not 
     apply to any policy or contract owned by an entity engaged in 
     a trade or business if such policy or contract covers only 1 
     individual and if  such individual is (at the time first 
     covered by the policy or contract)--
       ``(i) a 20-percent owner of such entity, or
       ``(ii) an individual (not described in clause (i)) who is 
     an officer, director, or employee of such trade or business.

     A policy or contract covering a 20-percent owner of such 
     entity shall not be treated as failing to meet the 
     requirements of the preceding sentence by reason of covering 
     the joint lives of such owner and such owner's spouse.
       ``(B) Contracts subject to current income inclusion.--
     Paragraph (1) shall not apply to any annuity contract to 
     which section 72(u) applies.
       ``(C) Coordination with paragraph (2).--Any policy or 
     contract to which paragraph (1) does not apply by reason of 
     this paragraph shall not be taken into account under 
     paragraph (2).
       ``(D) 20-percent owner.--For purposes of subparagraph (A), 
     the term `20-percent owner' has the meaning given such term 
     by subsection (e)(4).
       ``(5) Exception for policies and contracts held by natural 
     persons; treatment of partnerships and s corporations.--
       ``(A) Policies and contracts held by natural persons.--
       ``(i) In general.--This subsection shall not apply to any 
     policy or contract held by a natural person.
       ``(ii) Exception where business is beneficiary.--If a trade 
     or business is directly or indirectly the beneficiary under 
     any policy or contract, such policy or contract shall be 
     treated as held by such trade or business and not by a 
     natural person.
       ``(iii) Special rules.--

       ``(I) Certain trades or businesses not taken into 
     account.--Clause (ii) shall not apply to any trade or 
     business carried on as a sole proprietorship and to any trade 
     or business performing services as an employee.
       ``(II) Limitation on unborrowed cash value.--The amount of 
     the unborrowed cash value of any policy or contract which is 
     taken into account by reason of clause (ii) shall not exceed 
     the benefit to which the trade or business is directly or 
     indirectly entitled under the policy or contract.

       ``(iv) Reporting.--The Secretary shall require such 
     reporting from policyholders and issuers as is necessary to 
     carry out clause (ii). Any report required under the 
     preceding sentence shall be treated as a statement referred 
     to in section 6724(d)(1).
       ``(B) Treatment of partnerships and s corporations.--In the 
     case of a partnership or S corporation, this subsection shall 
     be applied at the partnership and corporate levels.
       ``(6) Special rules.--
       ``(A) Coordination with subsection (a) and section 265.--If 
     interest on any indebtedness is disallowed under subsection 
     (a) or section 265--
       ``(i) such disallowed interest shall not be taken into 
     account for purposes of applying this subsection, and
       ``(ii) the amount otherwise taken into account under 
     paragraph (2)(B) shall be reduced (but not below zero) by the 
     amount of such indebtedness.
       ``(B) Coordination with section 263a.--This subsection 
     shall be applied before the application of section 263A 
     (relating to capitalization of certain expenses where 
     taxpayer produces property).
       ``(7) Interest expense.--The term `interest expense' means 
     the aggregate amount allowable to the taxpayer as a deduction 
     for interest (within the meaning of section 265(b)(4)) for 
     the taxable year (determined without regard to this 
     subsection, section 265(b), and section 291).
       ``(8) Aggregation rules.--
       ``(A) In general.--All members of a controlled group 
     (within the meaning of subsection (d)(5)(B)) shall be treated 
     as 1 taxpayer for purposes of this subsection.
       ``(B) Treatment of insurance companies.--This subsection 
     shall not apply to an insurance company subject to tax under 
     subchapter L, and subparagraph (A) shall be applied without 
     regard to any member of an affiliated group which is an 
     insurance company.''.
       (b) Treatment of Insurance Companies.--
       (1)(A) Clause (ii) of section 805(a)(4)(C) is amended by 
     inserting ``, or out of the increase for the taxable year in 
     policy cash values (within the meaning of subparagraph (F)) 
     of life insurance policies and annuity and endowment 
     contracts to which section 264(f) applies,'' after ``tax-
     exempt interest''.
       (B) Clause (iii) of section 805(a)(4)(D) is amended by 
     striking ``and'' and inserting ``, the increase for the 
     taxable year in policy cash values (within the meaning of 
     subparagraph (F)) of life insurance policies and annuity and 
     endowment contracts to which section 264(f) applies, and''.
       (C) Paragraph (4) of section 805(a) is amended by adding at 
     the end the following new subparagraph:
       ``(F) Increase in policy cash values.--For purposes of 
     subparagraphs (C) and (D)--
       ``(i) In general.--The increase in the policy cash value 
     for any taxable year with respect to policy or contract is 
     the amount of the increase in the adjusted cash value during 
     such taxable year determined without regard to--

       ``(I) gross premiums paid during such taxable year, and

[[Page H6453]]

       ``(II) distributions (other than amounts includible in the 
     policyholder's gross income) during such taxable year to 
     which section 72(e) applies.

       ``(ii) Adjusted cash value.--For purposes of clause (i), 
     the term `adjusted cash value' means the cash surrender value 
     of the policy or contract increased by the sum of--

       ``(I) commissions payable with respect to such policy or 
     contract for the taxable year, and
       ``(II) asset management fees, surrender charges, mortality 
     and expense charges, and any other fees or charges specified 
     in regulations prescribed by the Secretary which are imposed 
     (or which would be imposed were the policy or contract 
     canceled)  with respect to such policy or contract for the 
     taxable year.''.
       (2)(A) Subparagraph (B) of section 807(a)(2) is amended by 
     striking ``interest,'' and inserting ``interest and the 
     amount of the policyholder's share of the increase for the 
     taxable year in policy cash values (within the meaning of 
     section 805(a)(4)(F)) of life insurance policies and annuity 
     and endowment contracts to which section 264(f) applies,''.
       (B) Subparagraph (B) of section 807(b)(1) is amended by 
     striking ``interest,'' and inserting ``interest and the 
     amount of the policyholder's share of the increase for the 
     taxable year in policy cash values (within the meaning of 
     section 805(a)(4)(F)) of life insurance policies and annuity 
     and endowment contracts to which section 264(f) applies,''.
       (3) Paragraph (1) of section 812(d) is amended by striking 
     ``and'' at the end of subparagraph (B), by striking the 
     period at the end of subparagraph (C) and inserting ``, 
     and'', and by adding at the end the following new 
     subparagraph:
       ``(D) the increase for any taxable year in the policy cash 
     values (within the meaning of section 805(a)(4)(F)) of life 
     insurance policies and annuity and endowment contracts to 
     which section 264(f) applies.''.
       (4) Subparagraph (B) of section 832(b)(5) is amended by 
     striking ``and'' at the end of clause (i), by striking the 
     period at the end of clause (ii) and inserting ``, and'', and 
     by adding at the end the following new clause:
       ``(iii) the increase for the taxable year in policy cash 
     values (within the meaning of section 805(a)(4)(F)) of life 
     insurance policies and annuity and endowment contracts to 
     which section 264(f) applies.''.
       (c) Conforming Amendment.--Subparagraph (A) of section 
     265(b)(4) is amended by inserting ``, section 264,'' before 
     ``and section 291''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to contracts issued after June 8, 1997, in 
     taxable years ending after such date. For purposes of the 
     preceding sentence, any material increase in the death 
     benefit or other material change in the contract shall be 
     treated as a new contract but the addition of covered lives 
     shall be treated as a new contract only with respect to such 
     additional covered lives. For purposes of this subsection, an 
     increase in the death benefit under a policy or contract 
     issued in connection with a lapse described in section 
     501(d)(2) of the Health Insurance Portability and 
     Accountability Act of 1996 shall not be treated as a new 
     contract.

     SEC. 1085. IMPROVED ENFORCEMENT OF THE APPLICATION OF THE 
                   EARNED INCOME CREDIT.

       (a) Restrictions on Availability of Earned Income Credit 
     for Taxpayers who Improperly Claimed Credit in Prior Year.--
       (1) In general.--Section 32 is amended by redesignating 
     subsections (k) and (l) as subsections (l) and (m), 
     respectively, and by inserting after subsection (j) the 
     following new subsection:
       ``(k) Restrictions on Taxpayers Who Improperly Claimed 
     Credit in Prior Year.--
       ``(1) Taxpayers making prior fraudulent or reckless 
     claims.--
       ``(A) In general.--No credit shall be allowed under this 
     section for any taxable year in the disallowance period.
       ``(B) Disallowance period.--For purposes of paragraph (1), 
     the disallowance period is--
       ``(i) the period of 10 taxable years after the most recent 
     taxable year for which there was a final determination that  
     the taxpayer's claim of credit under this section was due 
     to fraud, and
       ``(ii) the period of 2 taxable years after the most recent 
     taxable year for which there was a final determination that 
     the taxpayer's claim of credit under this section was due to 
     reckless or intentional disregard of rules and regulations 
     (but not due to fraud).
       ``(2) Taxpayers making improper prior claims.--In the case 
     of a taxpayer who is denied credit under this section for any 
     taxable year as a result of the deficiency procedures under 
     subchapter B of chapter 63, no credit shall be allowed under 
     this section for any subsequent taxable year unless the 
     taxpayer provides such information as the Secretary may 
     require to demonstrate eligibility for such credit.''.
       (2) Due diligence requirement on income tax return 
     preparers.--Section 6695 is amended by adding at the end the 
     following new subsection:
       ``(g) Failure To Be Diligent in Determining Eligibility for 
     Earned Income Credit.--Any person who is an income tax return 
     preparer with respect to any return or claim for refund who 
     fails to comply with due diligence requirements imposed by 
     the Secretary by regulations with respect to determining 
     eligibility for, or the amount of, the credit allowable by 
     section 32 shall pay a penalty of $100 for each such 
     failure.''.
       (3) Extension procedures applicable to mathematical or 
     clerical errors.--Paragraph (2) of section 6213(g) (relating 
     to the definition of mathematical or clerical errors) is 
     amended by striking ``and'' at the end of subparagraph (H), 
     by striking the period at the end of subparagraph (I) and 
     inserting ``, and'', and by inserting after subparagraph (I) 
     the following new subparagraph:
       ``(J) an omission of information required by section 
     32(k)(2) (relating to taxpayers making improper prior claims 
     of earned income credit).''.
       (b) Increase in Net Loss Disregarded for Modified Adjusted 
     gross Income.--Section 32(c)(5)(B)(iv) is amended by striking 
     ``50 percent'' and inserting ``75 percent''.
       (c) Workfare Payments Not Included in Earned Income.--
     Section 32(c)(2)(B) is amended by striking ``and'' at the end 
     of clause (iii), by striking the period at the end of clause 
     (iv) and inserting ``, and'', and by adding at the end the 
     following new clause:
       ``(v) no amount described in subparagraph (A) received for 
     service performed in work activities as defined in section 
     407(d) of the Social Security Act to which the taxpayer is 
     assigned under any State program under part A of title IV of 
     such Act, but only to the extent such amount is subsidized 
     under such State program.''.
       (d) Certain Nontaxable Income Included in Modified Adjusted 
     Gross Income.--Section 32(c)(5)(B) is amended--
       (1) by striking ``and'' at the end of clause (iii),
       (2) by striking the period at the end of clause (iv)(III),
       (3) by inserting after clause (iv)(III) the following new 
     clauses:
       ``(v) interest received or accrued during the taxable year 
     which is exempt from tax imposed by this chapter, and
       ``(vi) amounts received as a pension or annuity, and any 
     distributions or payments received from an individual 
     retirement plan, by the taxpayer during the taxable year  to 
     the extent not included in gross income.'', and
       (4) by adding at the end the following new sentence: 
     ``Clause (vi) shall not include any amount which is not 
     includible in gross income by reason of section 402(c), 
     403(a)(4), 403(b), 408(d) (3), (4), or (5), or 457(e)(10).''.
       (e) Effective Dates.--
       (1) The amendments made by subsection (a) shall apply to 
     taxable years beginning after December 31, 1996.
       (2) The amendments made by subsections (b), (c), and (d) 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1086. LIMITATION ON PROPERTY FOR WHICH INCOME FORECAST 
                   METHOD MAY BE USED.

       (a) Limitation.--Subsection (g) of section 167 is amended 
     by adding at the end the following new paragraph:
       ``(6) Limitation on property for which income forecast 
     method may be used.--The depreciation deduction allowable 
     under this section may be determined under the income 
     forecast method or any similar method only with respect to--
       ``(A) property described in paragraph (3) or (4) of section 
     168(f),
       ``(B) copyrights,
       ``(C) books,
       ``(D) patents, and
       ``(E) other property specified in regulations.

     Such methods may not be used with respect to any amortizable 
     section 197 intangible (as defined in section 197(c)).''.
       (b) Depreciation Period for Rent-To-Own Property.--
       (1) In general.--Subparagraph (A) of section 168(e)(3) 
     (relating to 3-year property) is amended by striking ``and'' 
     at the end of clause (i), by striking the period at the end 
     of clause (ii) and inserting ``, and'', and by adding at the 
     end the following new clause:
       ``(iii) any qualified rent-to-own property.''.
       (2) 4-year class life.--The table contained in section 
     168(g)(3)(B) is amended by inserting before the first item 
     the following new item:

  ``(A)(iii)..................................................4 ''.    

       (3) Definition of qualified rent-to-own property.--
     Subsection (i) of section 168 is amended by adding at the end 
     the following new paragraph:
       ``(14) Qualified rent-to-own property.--
       ``(A) In general.--The term `qualified rent-to-own 
     property' means property held by a rent-to-own dealer for 
     purposes of being subject to a rent-to-own contract.
       ``(B) Rent-to-own dealer.--The term `rent-to-own dealer' 
     means a person that, in the ordinary course of business, 
     regularly enters into rent-to-own contracts with customers 
     for the use of consumer property, if a substantial portion of 
     those contracts terminate and the property is returned to 
     such person before the receipt of all payments required to 
     transfer ownership of the property from such person to the 
     customer.
       ``(C) Consumer property.--The term `consumer property' 
     means tangible personal property of a type generally used 
     within the home for personal use.
       ``(D) Rent-to-own contract.--The term `rent-to-own 
     contract' means any lease for the use of consumer property 
     between a rent-to-own  dealer and a customer who is an 
     individual which--
       ``(i) is titled `Rent-to-Own Agreement' or `Lease Agreement 
     with Ownership Option,' or uses other similar language,
       ``(ii) provides for level (or decreasing where no payment 
     is less than 40 percent of the largest payment), regular 
     periodic payments (for a payment period which is a week or 
     month),
       ``(iii) provides that legal title to such property remains 
     with the rent-to-own dealer until the customer makes all the 
     payments described in clause (ii) or early purchase payments 
     required under the contract to acquire legal title to the 
     item of property,
       ``(iv) provides a beginning date and a maximum period of 
     time for which the contract may be in effect that does not 
     exceed 156 weeks or 36 months from such beginning date 
     (including renewals or options to extend),
       ``(v) provides for payments within the 156-week or 36-month 
     period that, in the aggregate,

[[Page H6454]]

     generally exceed the normal retail price of the consumer 
     property plus interest,
       ``(vi) provides for payments under the contract that, in 
     the aggregate, do not exceed $10,000 per item of consumer 
     property,
       ``(vii) provides that the customer does not have any legal 
     obligation to make all the payments referred to in clause 
     (ii) set forth under the contract, and that at the end of 
     each payment period the customer may either continue to use 
     the consumer property by making the payment for the next 
     payment period or return such property to the rent-to-own 
     dealer in good working order, in which case the customer does 
     not incur any further obligations under the contract and is 
     not entitled to a return of any payments previously made 
     under the contract, and
       ``(viii) provides that the customer has no right to sell, 
     sublease, mortgage, pawn, pledge, encumber, or otherwise 
     dispose of the consumer property until all the payments 
     stated in the contract have been made.''.
       (c) Effective Date.--The amendment made by this section 
     shall apply to property placed in service after the date of 
     the enactment of this Act.

     SEC. 1087. EXPANSION OF REQUIREMENT THAT INVOLUNTARILY 
                   CONVERTED PROPERTY BE REPLACED WITH PROPERTY 
                   ACQUIRED FROM AN UNRELATED PERSON.

       (a) In General.--Subsection (i) of section 1033 is amended 
     to read as follows:
       ``(i) Replacement Property Must Be Acquired From Unrelated 
     Person in Certain Cases.--
       ``(1) In general.--If the property which is involuntarily 
     converted is held by a taxpayer to which this subsection 
     applies, subsection (a) shall not apply if the replacement 
     property or stock is acquired from a related person. The 
     preceding sentence shall not apply to the extent that the 
     related person acquired the replacement property or stock 
     from an unrelated person during the period applicable under 
     subsection (a)(2)(B).
       ``(2) Taxpayers to which subsection applies.--This 
     subsection shall apply to--
       ``(A) a C corporation,
       ``(B) a partnership in which 1 or more C corporations own, 
     directly or indirectly (determined in accordance with section 
     707(b)(3)), more than 50 percent of the capital interest, or 
     profits interest, in such partnership at the time of the 
     involuntary conversion, and
       ``(C) any other taxpayer if, with respect to property which 
     is involuntarily converted during the taxable year, the 
     aggregate of the amount of realized gain on such property on 
     which there is realized gain exceeds $100,000.

     In the case of a partnership, subparagraph (C) shall apply 
     with respect to the partnership and with respect to each 
     partner. A similar rule shall apply in the case of an S 
     corporation and its shareholders.
       ``(3) Related person.--For purposes of this subsection, a 
     person is related to another person if the person bears a 
     relationship to the other person described in section 267(b) 
     or 707(b)(1).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to involuntary conversions occurring after June 
     8, 1997.

     SEC. 1088. TREATMENT OF EXCEPTION FROM INSTALLMENT SALES 
                   RULES FOR SALES OF PROPERTY BY A MANUFACTURER 
                   TO A DEALER.

       (a) In General.--Paragraph (2) of section 811(c) of the Tax 
     Reform Act of 1986 is hereby repealed.
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     apply to taxable years beginning more than 1 year after the 
     date of the enactment of this Act.
       (2) Coordination with section 481.--In the case of any 
     taxpayer required by this section to change its method of 
     accounting for any taxable year--
       (A) such changes shall be treated as initiated by the 
     taxpayer,
       (B) such changes shall be treated as made with the consent 
     of the Secretary of the Treasury, and
       (C) the net amount of the adjustments required to be taken 
     into account under section 481(a) of the Internal Revenue 
     Code of 1986 shall be taken into account ratably over the 4 
     taxable year period beginning with the first taxable year 
     beginning after the date of the enactment of this Act.

     SEC. 1089. LIMITATIONS ON CHARITABLE REMAINDER TRUST 
                   ELIGIBILITY FOR CERTAIN TRUSTS.

       (a) Limitation on Noncharitable Distributions.--
       (1) In general.--Paragraphs (1)(A) and (2)(A) of section 
     664(d) (relating to charitable remainder trusts) are each 
     amended by inserting ``nor more than 50 percent'' after ``not 
     less than 5 percent''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to transfers in trust after June 18, 1997.
       (b) Minimum Charitable Benefit.--
       (1) Charitable remainder annuity trusts.--Paragraph (1) of 
     section 664(d) is amended by striking ``and'' at the end of 
     subparagraph (B), by striking the period at the end of 
     subparagraph (C), and by adding at the end the following new 
     subparagraph:
       ``(D) the value (determined under section 7520) of such 
     remainder interest is at least 10 percent of the initial net 
     fair market value of all property placed in the trust.''
       (2) Charitable remainder unitrusts.--Paragraph (2) of 
     section 664(d) is amended by striking ``and'' at the end of 
     subparagraph (B), by striking the period at the end of 
     subparagraph (C), and by adding at the end the following new 
     subparagraph:
       ``(D) with respect to each contribution of property to the 
     trust, the value (determined under section 7520) of such 
     remainder interest in such property is at least 10 percent of 
     the net fair market value of such property as of the date 
     such property is contributed to the trust.''.
       (3) Void or reformed trust.--Paragraph (3) of section 
     2055(e) is amended by adding at the end the following new 
     subparagraph:
       ``(J) Void or reformed trust in cases of insufficient 
     remainder interests.--In the case of a trust that would 
     qualify (or could be reformed to qualify pursuant to 
     subparagraph (B)) but for failure to satisfy the requirement 
     of paragraph (1)(D) or (2)(D) of section 664(d), such trust 
     may be--
       ``(i) declared null and void ab initio, or
       ``(ii) changed by reformation, amendment, or otherwise to 
     meet such requirement by reducing the payout rate or the 
     duration (or both) of any noncharitable beneficiary's 
     interest to the extent necessary to satisfy such requirement,

     pursuant to a proceeding that is commenced within the period 
     required in subparagraph (C)(iii). In a case described in 
     clause (i), no deduction shall be allowed under this title 
     for any transfer to the trust and any transactions entered 
     into by the trust prior to being declared void shall be 
     treated as entered into by the transferor.''
       (4) Severance of certain additional contributions.--
     Subsection (d) of section 664 is amended by adding at the end 
     the following new paragraph:
       ``(4) Severance of certain additional contributions.--If--
       ``(A) any contribution is made to a trust which before the 
     contribution is a charitable remainder unitrust, and
       ``(B) such contribution would (but for this paragraph) 
     result in such trust ceasing to be a charitable unitrust by 
     reason of paragraph (2)(D),  such contribution shall be 
     treated as a transfer to a separate trust under 
     regulations prescribed by the Secretary.''
       (5) Conforming amendment.--Section 2055(e)(3)(G) is amended 
     by inserting ``(or other proceeding pursuant to subparagraph 
     (J)'' after ``reformation''.
       (6) Effective dates.--
       (A) In general.--Except as otherwise provided in this 
     paragraph, the amendments made by this subsection shall apply 
     to transfers in trust after July 28, 1997.
       (B) Special rule for certain decedents.--The amendments 
     made by this subsection shall not apply to transfers in trust 
     under the terms of a will (or other testamentary instrument) 
     executed on or before July 28, 1997, if the decedent--
       (i) dies before January 1, 1999, without having republished 
     the will (or amended such instrument) by codicil or 
     otherwise, or
       (ii) was on July 28, 1997, under a mental disability to 
     change the disposition of his property and did not regain his 
     competence to dispose of such property before the date of his 
     death.

     SEC. 1090. EXPANDED SSA RECORDS FOR TAX ENFORCEMENT.

       (a) Expansion of Coordinated Enforcement Efforts of IRS and 
     HHS Office of Child Support Enforcement.--
       (1) State reporting of ssn of child.--Section 454A(e)(4)(D) 
     of the Social Security Act (42 U.S.C. 654a(e)(4)(D)) is 
     amended by striking ``the birth date of any child'' and 
     inserting ``the birth date and, beginning not later than 
     October 1, 1999, the social security number, of any child''.
       (2) Federal case registry of child support orders.--Section 
     453(h) of such Act (42 U.S.C. 653(h)) is amended--
       (A) in paragraph (2), by adding at the end the following: 
     ``Beginning not later than October 1, 1999, the information 
     referred to in paragraph (1) shall include the names and 
     social security numbers of the children of such 
     individuals.''; and
       (B) by adding at the end the following:
       ``(3) Administration of federal tax laws.--The Secretary of 
     the Treasury shall have access to the information described 
     in paragraph (2) for the purpose of administering those 
     sections of the Internal Revenue Code of 1986 which grant tax 
     benefits based on support or residence of children.''.
       (3) Coordination between secretaries.--The Secretary of the 
     Treasury and the Secretary of Health and Human Services shall 
     consult regarding the implementation issues resulting from 
     the amendments made by this subsection, including interim 
     deadlines for States that may be able before October 1, 1999, 
     to provide the data required by such amendments. The 
     Secretaries shall report to Congress on the results of such 
     consultation.
       (4) Effective date.--The amendments made by this subsection 
     shall take effect on October 1, 1998.
       (b) Required Submission of SSN's on Applications.--
       (1) In general.--Section 205(c)(2) of the Social Security 
     Act (42 U.S.C. 405(c)(2)) is amended--
       (A) in subparagraph (B)(ii), by adding at the end the 
     following new sentence: ``With respect to an application for 
     a social security account number for an individual who has 
     not attained the age of 18 before such application, such 
     evidence shall include the information described in 
     subparagraph (C)(ii).'',
       (B) in the second sentence of subparagraph (C)(ii), insert 
     ``the Commissioner of Social Security and'' after ``available 
     to'', and
       (C) by adding at the end the following new subparagraph:
       ``(H) The Commissioner of Social Security shall share with 
     the Secretary of the Treasury the information obtained by the 
     Commissioner pursuant to the second sentence of subparagraph 
     (B)(ii) and to subparagraph (C)(ii) for the purpose of 
     administering those sections of the Internal Revenue Code of 
     1986 which grant tax

[[Page H6455]]

     benefits based on support or residence of children.''.
       (2) Effective dates.--
       (A) The amendment made by paragraph (1)(A) shall apply to 
     applications made after the date which is 180 days after the 
     date of the enactment of this Act.
       (B) The amendments made by subparagraphs (B) and (C) of 
     paragraph (1) shall apply to information obtained on, before, 
     or after the date of the enactment of this Act.

     SEC. 1091. MODIFICATION OF ESTIMATED TAX SAFE HARBORS.

       (a) In General.--Clause (i) of section 6654(d)(1)(C) 
     (relating to limitation on use of preceding year's tax) is 
     amended to read as follows:
       ``(i) In general.--If the adjusted gross income shown on 
     the return of the individual for the preceding taxable year 
     beginning in any calendar year exceeds $150,000, clause (ii) 
     of subparagraph (B) shall be applied by substituting the 
     applicable percentage for `100 percent'. For purposes of the 
     preceding sentence, the applicable percentage shall be 
     determined in accordance with the following table:

                                                ``If the The applicable
                                                   able ypercentage is:
  1998, 1999, or 2000..........................................105 ....

  2001.........................................................112 ....

  2002 or thereafter...........................................110.....

     This clause shall not apply in the case of a preceding 
     taxable year beginning in calendar year 1997.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply with respect to any installment payment for 
     taxable years beginning after December 31, 1997.
     TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS
                     Subtitle A--General Provisions

     SEC. 1101. CERTAIN INDIVIDUALS EXEMPT FROM FOREIGN TAX CREDIT 
                   LIMITATION.

       (a) General Rule.--Section 904 (relating to limitations on 
     foreign tax credit) is amended by redesignating subsection 
     (j) as subsection (k) and by inserting after subsection (i) 
     the following new subsection:
       ``(j) Certain Individuals Exempt.--
       ``(1) In general.--In the case of an individual to whom 
     this subsection applies for any taxable year--
       ``(A) the limitation of subsection (a) shall not apply,
       ``(B) no taxes paid or accrued by the individual during 
     such taxable year may be deemed paid or accrued under 
     subsection (c) in any other taxable year, and
       ``(C) no taxes paid or accrued by the individual during any 
     other taxable year may be deemed paid or accrued under 
     subsection (c) in such taxable year.
       ``(2) Individuals to whom subsection applies.--This 
     subsection shall apply to an individual for any taxable year 
     if--
       ``(A) the entire amount of such individual's gross income 
     for the taxable year from sources without the United States 
     consists of qualified passive income,
       ``(B) the amount of the creditable foreign taxes paid or 
     accrued by the individual during the taxable year does not 
     exceed $300 ($600 in the case of a joint return), and
       ``(C) such individual elects to have this subsection apply 
     for the taxable year.
       ``(3) Definitions.--For purposes of this subsection--
       ``(A) Qualified passive income.--The term `qualified 
     passive income' means any item of gross income if--
       ``(i) such item of income is passive income (as defined in 
     subsection (d)(2)(A) without regard to clause (iii) thereof), 
     and
       ``(ii) such item of income is shown on a payee statement 
     furnished to the individual.
       ``(B) Creditable foreign taxes.--The term `creditable 
     foreign taxes' means any taxes for which a credit is 
     allowable under section 901; except that such term shall not 
     include any tax unless such tax is shown on a payee statement 
     furnished to such individual.
       ``(C) Payee statement.--The term `payee statement' has the 
     meaning given to such term by section 6724(d)(2).
       ``(D) Estates and trusts not eligible.--This subsection 
     shall not apply to any estate or trust.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1102. EXCHANGE RATE USED IN TRANSLATING FOREIGN TAXES.

       (a) Accrued Taxes Translated by Using Average Rate for Year 
     to Which Taxes Relate.--
       (1) In general.--Subsection (a) of section 986 (relating to 
     translation of foreign taxes) is amended to read as follows:
       ``(a) Foreign Income Taxes.--
       ``(1) Translation of accrued taxes.--
       ``(A) In general.--For purposes of determining the amount 
     of the foreign tax credit, in the case of a taxpayer who 
     takes foreign income taxes into account when accrued, the 
     amount of any foreign income taxes (and any adjustment 
     thereto) shall be translated into dollars by using the 
     average exchange rate for the taxable year to which such 
     taxes relate.
       ``(B) Exception for certain taxes.--Subparagraph (A) shall 
     not apply to any foreign income taxes--
       ``(i) paid after the date 2 years after the close of the 
     taxable year to which such taxes relate, or
       ``(ii) paid before the beginning of the taxable year to 
     which such taxes relate.
       ``(C) Exception for inflationary currencies.--Subparagraph 
     (A) shall not apply to any foreign income taxes the liability 
     for which is denominated in any inflationary currency (as 
     determined under regulations).
       ``(D) Cross reference.--

  ``For adjustments where tax is not paid within 2 years, see section 
905(c).

       ``(2) Translation of taxes to which paragraph (1) does not 
     apply.--For purposes of determining the amount of the foreign 
     tax credit, in the case of any foreign income taxes to 
     which subparagraph (A) of paragraph (1) does not apply--
       ``(A) such taxes shall be translated into dollars using the 
     exchange rates as of the time such taxes were paid to the 
     foreign country or possession of the United States, and
       ``(B) any adjustment to the amount of such taxes shall be 
     translated into dollars using--
       ``(i) except as provided in clause (ii), the exchange rate 
     as of the time when such adjustment is paid to the foreign 
     country or possession, or
       ``(ii) in the case of any refund or credit of foreign 
     income taxes, using the exchange rate as of the time of the 
     original payment of such foreign income taxes.
       ``(3) Foreign income taxes.--For purposes of this 
     subsection, the term `foreign income taxes' means any income, 
     war profits, or excess profits taxes paid or accrued to any 
     foreign country or to any possession of the United States.''.
       (2) Adjustment when not paid within 2 years after year to 
     which taxes relate.--Subsection (c) of section 905 is amended 
     to read as follows:
       ``(c) Adjustments to Accrued Taxes.--
       ``(1) In general.--If--
       ``(A) accrued taxes when paid differ from the amounts 
     claimed as credits by the taxpayer,
       ``(B) accrued taxes are not paid before the date 2 years 
     after the close of the taxable year to which such taxes 
     relate, or
       ``(C) any tax paid is refunded in whole or in part,

     the taxpayer shall notify the Secretary, who shall 
     redetermine the amount of the tax for the year or years 
     affected. The Secretary may prescribe adjustments to the 
     pools of post-1986 foreign income taxes and the pools of 
     post-1986 undistributed earnings under sections 902 and 960 
     in lieu of the redetermination under the preceding sentence.
       ``(2) Special rule for taxes not paid within 2 years.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     in making the redetermination under paragraph (1), no credit 
     shall be allowed for accrued taxes not paid before the 
     date referred to in subparagraph (B) of paragraph (1).
       ``(B) Taxes subsequently paid.--Any such taxes if 
     subsequently paid--
       ``(i) shall be taken into account--

       ``(I) in the case of taxes deemed paid under section 902 or 
     section 960, for the taxable year in which paid (and no 
     redetermination shall be made under this section by reason of 
     such payment), and
       ``(II) in any other case, for the taxable year to which 
     such taxes relate, and

       ``(ii) shall be translated as provided in section 
     986(a)(2)(A).
       ``(3) Adjustments.--The amount of tax (if any) due on any 
     redetermination under paragraph (1) shall be paid by the 
     taxpayer on notice and demand by the Secretary, and the 
     amount of tax overpaid (if any) shall be credited or refunded 
     to the taxpayer in accordance with subchapter B of chapter 66 
     (section 6511 et seq.).
       ``(4) Bond requirements.--In the case of any tax accrued 
     but not paid, the Secretary, as a condition precedent to the 
     allowance of the credit provided in this subpart, may require 
     the taxpayer to give a bond, with sureties satisfactory to 
     and approved by the Secretary, in such sum as the Secretary 
     may require, conditioned on the payment by the taxpayer of 
     any amount of tax found due on any such redetermination. Any 
     such bond shall contain such further conditions as the 
     Secretary may require.
       ``(5) Other special rules.--In any redetermination under 
     paragraph (1) by the Secretary of the amount of tax due from 
     the taxpayer for the year or years affected by a refund, the 
     amount of the taxes refunded for which credit has been 
     allowed under this section shall be reduced by the amount of 
     any tax described in section 901 imposed by the foreign 
     country or possession of the United States with respect to 
     such refund; but no credit under this subpart, or deduction 
     under section 164, shall be allowed for any taxable year with 
     respect to any such tax imposed on the refund. No interest 
     shall be assessed or collected on any amount of tax due on 
     any redetermination by the Secretary, resulting from a refund 
     to the taxpayer, for any period before the receipt of such 
     refund, except to the extent interest was paid by the foreign 
     country or possession of the United States on such refund for 
     such period.''.
       (b) Authority To Use Average Rates.--
       (1) In general.--Subsection (a) of section 986 (as amended 
     by subsection (a)) is amended by redesignating paragraph (3) 
     as paragraph (4) and inserting after paragraph (2) the 
     following new paragraph:
       ``(3) Authority to permit use of average rates.--To the 
     extent prescribed in regulations, the average exchange rate 
     for the period (specified in such regulations) during which 
     the taxes or adjustment is paid may be used instead of the 
     exchange rate as of the time of such payment.''.
       (2) Determination of average rates.--Subsection (c) of 
     section 989 is amended by striking ``and'' at the end of 
     paragraph (4), by striking the period at the end of paragraph 
     (5) and inserting ``, and'', and by adding at the end thereof 
     the following new paragraph:
       ``(6) setting forth procedures for determining the average 
     exchange rate for any period.''.
       (3) Conforming amendments.--Subsection (b) of section 989 
     is amended by striking ``weighted'' each place it appears.
       (c) Effective Dates.--
       (1) In general.--The amendments made by subsections (a)(1) 
     and (b) shall apply to taxes

[[Page H6456]]

     paid or accrued in taxable years beginning after December 31, 
     1997.
       (2) Subsection (a)(2).--The amendment made by subsection 
     (a)(2) shall apply to taxes which relate to taxable years 
     beginning after December 31, 1997.

     SEC. 1103. ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION 
                   FOR ALTERNATIVE MINIMUM TAX.

       (a) General Rule.--Subsection (a) of section 59 (relating 
     to alternative minimum tax foreign tax credit) is amended by 
     adding at the end thereof the following new paragraph:
       ``(3) Election to use simplified section 904 limitation.--
       ``(A) In general.--In determining the alternative minimum 
     tax foreign tax credit for any taxable year to which an 
     election under this paragraph applies--
       ``(i) subparagraph (B) of paragraph (1) shall not apply, 
     and
       ``(ii) the limitation of section 904 shall be based on the 
     proportion which--

       ``(I) the taxpayer's taxable income (as determined for 
     purposes of the regular tax) from sources without the United 
     States (but not in excess of the taxpayer's entire 
     alternative minimum taxable income), bears to

       ``(II) the taxpayer's entire alternative minimum taxable 
     income for the taxable year.

       ``(B) Election.--
       ``(i) In general.--An election under this paragraph may be 
     made only for the taxpayer's first taxable year which begins 
     after December 31, 1997, and for which the taxpayer claims an 
     alternative minimum tax foreign tax credit.
       ``(ii) Election revocable only with consent.--An election 
     under this paragraph, once made, shall apply to the taxable 
     year for which made and all subsequent taxable years unless 
     revoked with the consent of the Secretary.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1104. TREATMENT OF PERSONAL TRANSACTIONS BY INDIVIDUALS 
                   UNDER FOREIGN CURRENCY RULES.

       (a) General Rule.--Subsection (e) of section 988 (relating 
     to application to individuals) is amended to read as follows:
       ``(e) Application to Individuals.--
       ``(1) In general.--The preceding provisions of this section 
     shall not apply to any section 988 transaction entered into 
     by an individual which is a personal transaction.
       ``(2) Exclusion for certain personal transactions.--If--
       ``(A) nonfunctional currency is disposed of by an 
     individual in any transaction, and
       ``(B) such transaction is a personal transaction,

     no gain shall be recognized for purposes of this subtitle by 
     reason of changes in exchange rates after such currency was 
     acquired by such individual and before such disposition. The 
     preceding sentence shall not apply if the gain which would 
     otherwise be recognized on the transaction exceeds $200.
       ``(3) Personal transactions.--For purposes of this 
     subsection, the term `personal transaction' means any 
     transaction entered into by an individual, except that such 
     term shall not include any transaction to the extent that 
     expenses properly allocable to such transaction meet the 
     requirements of--
       ``(A) section 162 (other than traveling expenses described 
     in subsection (a)(2) thereof), or
       ``(B) section 212 (other than that part of section 212 
     dealing with expenses incurred in connection with taxes).''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1105. FOREIGN TAX CREDIT TREATMENT OF DIVIDENDS FROM 
                   NONCONTROLLED SECTION 902 CORPORATIONS.

       (a) Separate Basket Only To Apply to Pre-2003 Earnings.--
       (1) In general.--Subparagraph (E) of section 904(d)(1) is 
     amended to read as follows:
       ``(E) in the case of a corporation, dividends from 
     noncontrolled section 902 corporations out of earnings and 
     profits accumulated in taxable years beginning before January 
     1, 2003,''.
       (2) Aggregation of non-pfics.--Subparagraph (E) of section 
     904(d)(2) (relating to noncontrolled section 902 
     corporations) is amended by adding at the end the following 
     new clause:
       ``(iv) All non-pfics treated as one.--All noncontrolled 
     section 902 corporations which are not passive foreign 
     investment companies (as defined in section 1297) shall be 
     treated as one noncontrolled section 902 corporation for 
     purposes of paragraph (1).''.
       (3) Conforming amendments.--Subparagraphs (C)(iii)(II) and 
     (D) of section 904(d)(2) are each amended by inserting ``out 
     of earnings and profits accumulated in taxable years 
     beginning before January 1, 2003'' after ``corporation''.
       (b) Application of Look-Thru Rules to Dividends of 
     Noncontrolled Section 902 Corporations Attributable to Post-
     2002 Earnings.--Section 904(d) is amended by redesignating 
     paragraphs (4) and (5) as paragraphs (5) and (6), 
     respectively, and by inserting after paragraph (3) the 
     following new paragraph:
       ``(4) Look-thru applies to dividends from noncontrolled 
     section 902 corporations.--
       ``(A) In general.--For purposes of this subsection, any 
     applicable dividend shall be treated as income in a separate 
     category in proportion to the ratio of--
       ``(i) the portion of the earnings and profits described in 
     subparagraph (B)(ii) attributable to income in such category, 
     to
       ``(ii) the total amount of such earnings and profits.
       ``(B) Applicable dividend.--For purposes of subparagraph 
     (A), the term `applicable dividend' means any dividend--
       ``(i) from a noncontrolled section 902 corporation with 
     respect to the taxpayer, and
       ``(ii) paid out of earnings and profits accumulated in 
     taxable years beginning after December 31, 2002.
       ``(C) Special rules.--
       ``(i) In general.--Rules similar to the rules of paragraph 
     (3)(F) shall apply for purposes of this paragraph.
       ``(ii) Earnings and profits.--For purposes of this 
     paragraph and paragraph (1)(E)--

       ``(I) In general.--The rules of section 316 shall apply.
       ``(II) Regulations.--The Secretary may prescribe 
     regulations regarding the treatment of distributions out of 
     earnings and profits for periods prior to the taxpayer's 
     acquisition of such stock.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.
        Subtitle B--Treatment of Controlled Foreign Corporations

     SEC. 1111. GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN 
                   CORPORATIONS TREATED AS DIVIDENDS.

       (a) General Rule.--Section 964 (relating to miscellaneous 
     provisions) is amended by adding at the end thereof the 
     following new subsection:
       ``(e) Gain on Certain Stock Sales by Controlled Foreign 
     Corporations Treated as Dividends.--
       ``(1) In general.--If a controlled foreign corporation 
     sells or exchanges stock in any other foreign corporation, 
     gain recognized on such sale or exchange shall be included in 
     the gross income of such controlled foreign corporation as a 
     dividend to the same extent that it would have been so 
     included under section 1248(a) if such controlled foreign 
     corporation were a United States person. For purposes of 
     determining the amount which would have been so includible, 
     the determination of whether such other foreign corporation 
     was a controlled foreign corporation shall be made without 
     regard to the preceding sentence.
       ``(2) Same country exception not applicable.--Clause (i) of 
     section 954(c)(3)(A) shall not apply to any amount treated as 
     a dividend by reason of paragraph (1).
       ``(3) Clarification of deemed sales.--For purposes of this 
     subsection, a controlled foreign corporation shall be treated 
     as having sold or exchanged any stock if, under any provision 
     of this subtitle, such controlled foreign corporation is 
     treated as having gain from the sale or exchange of such 
     stock.''.
       (b) Amendment of Section 904(d).--Clause (i) of section 
     904(d)(2)(E) is amended by striking ``and except as provided 
     in regulations, the taxpayer was a United States shareholder 
     in such corporation''.
       (c) Effective Dates.--
       (1) The amendment made by subsection (a) shall apply to 
     gain recognized on transactions occurring after the date of 
     the enactment of this Act.
       (2) The amendment made by subsection (b) shall apply to 
     distributions after the date of the enactment of this Act.

     SEC. 1112. MISCELLANEOUS MODIFICATIONS TO SUBPART F.

       (a) Section 1248 Gain Taken Into Account in Determining Pro 
     Rata Share.--
       (1) In general.--Paragraph (2) of section 951(a) (defining 
     pro rata share of subpart F income) is amended by adding at 
     the end thereof the following new sentence: ``For purposes of 
     subparagraph (B), any gain included in the gross income of 
     any person as a dividend under section 1248 shall be treated 
     as a distribution received by such person with respect to the 
     stock involved.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to dispositions after the date of the enactment 
     of this Act.
       (b) Basis Adjustments in Stock Held by Foreign 
     Corporation.--
       (1) In general.--Section 961 (relating to adjustments to 
     basis of stock in controlled foreign corporations and of 
     other property) is amended by adding at the end thereof the 
     following new subsection:
       ``(c) Basis Adjustments in Stock Held by Foreign 
     Corporation.--Under regulations prescribed by the Secretary, 
     if a United States shareholder is treated under section 
     958(a)(2) as owning any stock in a controlled foreign 
     corporation which is actually owned by another controlled 
     foreign corporation, adjustments similar to the adjustments 
     provided by subsections (a) and (b) shall be made to the 
     basis of such stock in the hands of such other controlled 
     foreign corporation, but only for the purposes of determining 
     the amount included under section 951 in the gross income of 
     such United States shareholder (or any other United States 
     shareholder who acquires from any person any portion of the 
     interest of such United States shareholder by reason of which 
     such shareholder was treated as owning such stock, but only 
     to the extent of such portion, and subject to such proof of 
     identity of such interest as the Secretary may prescribe by 
     regulations).''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply for purposes of determining inclusions for 
     taxable years of United States shareholders beginning after 
     December 31, 1997.
       (c) Clarification of Treatment of Branch Tax Exemptions or 
     Reductions.--
       (1) In general.--Subsection (b) of section 952 is amended 
     by adding at the end thereof the following new sentence: 
     ``For purposes of this subsection, any exemption (or 
     reduction) with respect to the tax imposed by section 884 
     shall not be taken into account.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply to taxable years beginning after December 31, 
     1986.

[[Page H6457]]

     SEC. 1113. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR CERTAIN 
                   LOWER TIER COMPANIES.

       (a) Section 902 Credit.--
       (1) In general.--Subsection (b) of section 902 (relating to 
     deemed taxes increased in case of certain 2nd and 3rd tier 
     foreign corporations) is amended to read as follows:
       ``(b) Deemed Taxes Increased in Case of Certain Lower Tier 
     Corporations.--
       ``(1) In general.--If--
       ``(A) any foreign corporation is a member of a qualified 
     group, and
       ``(B) such foreign corporation owns 10 percent or more of 
     the voting stock of another member of such group from which 
     it receives dividends in any taxable year,

     such foreign corporation shall be deemed to have paid the 
     same proportion of such other member's post-1986 foreign 
     income taxes as would be determined under subsection (a) if 
     such foreign corporation were a domestic corporation.
       ``(2) Qualified group.--For purposes of paragraph (1), the 
     term `qualified group' means--
       ``(A) the foreign corporation described in subsection (a), 
     and
       ``(B) any other foreign corporation if--
       ``(i) the domestic corporation owns at least 5 percent of 
     the voting stock of such other foreign corporation indirectly 
     through a chain of foreign corporations connected through 
     stock ownership of at least 10 percent of their voting stock,
       ``(ii) the foreign corporation described in subsection (a) 
     is the first tier corporation in such chain, and
       ``(iii) such other corporation is not below the sixth tier 
     in such chain.

     The term `qualified group' shall not include any foreign 
     corporation below the third tier in the chain referred to in 
     clause (i) unless such foreign corporation is a controlled 
     foreign corporation (as defined in section 957) and the 
     domestic corporation is a United States shareholder (as 
     defined in section 951(b)) in such foreign corporation. 
     Paragraph (1) shall apply to those taxes paid by a member of 
     the qualified group below the third tier only with respect to 
     periods during which it was a controlled foreign 
     corporation.''.
       (2) Conforming amendments.--
       (A) Subparagraph (B) of section 902(c)(3) is amended by 
     adding ``or'' at the end of clause (i) and by striking 
     clauses (ii) and (iii) and inserting the following new 
     clause:
       ``(ii) the requirements of subsection (b)(2) are met with 
     respect to such foreign corporation.''.
       (B) Subparagraph (B) of section 902(c)(4) is amended by 
     striking ``3rd foreign corporation'' and inserting ``sixth 
     tier foreign corporation''.
       (C) The heading for paragraph (3) of section 902(c) is 
     amended by striking ``where domestic corporation acquires 10 
     percent of foreign corporation'' and inserting ``where 
     foreign corporation first qualifies''.
       (D) Paragraph (3) of section 902(c) is amended by striking 
     ``ownership'' each place it appears.
       (b) Section 960 Credit.--Paragraph (1) of section 960(a) 
     (relating to special rules for foreign tax credits) is 
     amended to read as follows:
       ``(1) Deemed paid credit.--For purposes of subpart A of 
     this part, if there is included under section 951(a) in the 
     gross income of a domestic corporation any amount 
     attributable to earnings and profits of a foreign corporation 
     which is a member of a qualified group (as defined in section 
     902(b)) with respect to the domestic corporation, then, 
     except to the extent provided in regulations, section 902 
     shall be applied as if the amount so included were a dividend 
     paid by such foreign corporation (determined by applying 
     section 902(c) in accordance with section 904(d)(3)(B)).''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxes of foreign corporations for taxable years of 
     such corporations beginning after the date of enactment of 
     this Act.
       (2) Special rule.--In the case of any chain of foreign 
     corporations described in clauses (i) and (ii) of section 
     902(b)(2)(B) of the Internal Revenue Code of 1986 (as amended 
     by this section), no liquidation, reorganization, or similar 
     transaction in a taxable year beginning after the date of the 
     enactment of this Act shall have the effect of permitting 
     taxes to be taken into account under section 902 of the 
     Internal Revenue Code of 1986 which could not have been taken 
     into account under such section but for such transaction.
     Subtitle C--Treatment of Passive Foreign Investment Companies

     SEC. 1121. UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN 
                   CORPORATIONS NOT SUBJECT TO PFIC INCLUSION.

       Section 1296 is amended by adding at the end the following 
     new subsection:
       ``(e) Exception for United States Shareholders of 
     Controlled Foreign Corporations.--
       ``(1) In general.--For purposes of this part, a corporation 
     shall not be treated with respect to a shareholder as a 
     passive foreign investment company during the qualified 
     portion of such shareholder's holding period with respect to 
     stock in such corporation.
       ``(2) Qualified portion.--For purposes of this subsection, 
     the term `qualified portion' means the portion of the 
     shareholder's holding period--
       ``(A) which is after December 31, 1997, and
       ``(B) during which the shareholder is a United States 
     shareholder (as defined in section 951(b)) of the corporation 
     and the corporation is a controlled foreign corporation.
       ``(3) New holding period if qualified portion ends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     if the qualified portion of a shareholder's holding period 
     with respect to any stock ends after December 31, 1997, 
     solely for purposes of this part, the shareholder's holding 
     period with respect to such stock shall be treated as 
     beginning as of the first day following such period.
       ``(B) Exception.--Subparagraph (A) shall not apply if such 
     stock was, with respect to such shareholder, stock in a 
     passive foreign investment company at any time before the 
     qualified portion of the shareholder's holding period with 
     respect to such stock and no election under section 
     1298(b)(1) is made.''.

     SEC. 1122. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK IN 
                   PASSIVE FOREIGN INVESTMENT COMPANY.

       (a) In General.--Part VI of subchapter P of chapter 1 is 
     amended by redesignating subpart C as subpart D, by 
     redesignating sections 1296 and 1297 as sections 1297 and 
     1298, respectively, and by inserting after subpart B the 
     following new subpart:

      ``Subpart C--Election of Mark to Market For Marketable Stock

``Sec. 1296. Election of mark to market for marketable stock.

     ``SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK.

       ``(a) General Rule.--In the case of marketable stock in a 
     passive foreign investment company which is owned (or treated 
     under subsection (g) as owned) by a United States person at 
     the close of any taxable year of such person, at the election 
     of such person--
       ``(1) If the fair market value of such stock as of the 
     close of such taxable year exceeds its adjusted basis, such 
     United States person shall include in gross income for such 
     taxable year an amount equal to the amount of such excess.
       ``(2) If the adjusted basis of such stock exceeds the fair 
     market value of such stock as of the close of such taxable 
     year, such United States person shall be allowed a deduction 
     for such taxable year equal to the lesser of--
       ``(A) the amount of such excess, or
       ``(B) the unreversed inclusions with respect to such stock.
       ``(b) Basis Adjustments.--
       ``(1) In general.--The adjusted basis of stock in a passive 
     foreign investment company--
       ``(A) shall be increased by the amount included in the 
     gross income of the United States person under subsection 
     (a)(1) with respect to such stock, and
       ``(B) shall be decreased by the amount allowed as a 
     deduction to the United States person under subsection (a)(2) 
     with respect to such stock.
       ``(2) Special rule for stock constructively owned.--In the 
     case of stock in a passive foreign investment company which 
     the United States person is treated as owning under 
     subsection (g)--
       ``(A) the adjustments under paragraph (1) shall apply to 
     such stock in the hands of the person actually holding such 
     stock but only for purposes of determining the subsequent 
     treatment under this chapter of the United States person with 
     respect to such stock, and
       ``(B) similar adjustments shall be made to the adjusted 
     basis of the property by reason of which the United States 
     person is treated as owning such stock.
       ``(c) Character and Source Rules.--
       ``(1) Ordinary treatment.--
       ``(A) Gain.--Any amount included in gross income under 
     subsection (a)(1), and any gain on the sale or other 
     disposition of marketable stock in a passive foreign 
     investment company (with respect to which an election under 
     this section is in effect), shall be treated as ordinary 
     income.
       ``(B) Loss.--Any--
       ``(i) amount allowed as a deduction under subsection 
     (a)(2), and
       ``(ii) loss on the sale or other disposition of marketable 
     stock in a passive foreign investment company (with respect 
     to which an election under this section is in effect) to the 
     extent that the amount of such loss does not exceed the 
     unreversed inclusions with respect to such stock,

     shall be treated as an ordinary loss. The amount so treated 
     shall be treated as a deduction allowable in computing 
     adjusted gross income.
       ``(2) Source.--The source of any amount included in gross 
     income under subsection (a)(1) (or allowed as a deduction 
     under subsection (a)(2)) shall be determined in the same 
     manner as if such amount were gain or loss (as the case may 
     be) from the sale of stock in the passive foreign investment 
     company.
       ``(d) Unreversed Inclusions.--For purposes of this section, 
     the term `unreversed inclusions' means, with respect to any 
     stock in a passive foreign investment company, the excess (if 
     any) of--
       ``(1) the amount included in gross income of the taxpayer 
     under subsection (a)(1) with respect to such stock for prior 
     taxable years, over
       ``(2) the amount allowed as a deduction under subsection 
     (a)(2) with respect to such stock for prior taxable years.

     The amount referred to in paragraph (1) shall include any 
     amount which would have been included in gross income under 
     subsection (a)(1) with respect to such stock for any prior 
     taxable year but for section 1291.
       ``(e) Marketable Stock.--For purposes of this section--
       ``(1) In general.--The term `marketable stock' means--
       ``(A) any stock which is regularly traded on--
       ``(i) a national securities exchange which is registered 
     with the Securities and Exchange Commission or the national 
     market system established pursuant to section 11A of the 
     Securities and Exchange Act of 1934, or
       ``(ii) any exchange or other market which the Secretary 
     determines has rules adequate to carry out the purposes of 
     this part,

[[Page H6458]]

       ``(B) to the extent provided in regulations, stock in any 
     foreign corporation which is comparable to a regulated 
     investment company and which offers for sale or has 
     outstanding any stock of which it is the issuer and which is 
     redeemable at its net asset value, and
       ``(C) to the extent provided in regulations, any option on 
     stock described in subparagraph (A) or (B).
       ``(2) Special rule for regulated investment companies.--In 
     the case of any regulated investment company which is 
     offering for sale or has outstanding any stock of which it is 
     the issuer and which is redeemable at its net asset value, 
     all stock in a passive foreign investment company which it 
     owns directly or indirectly shall be treated as marketable 
     stock for purposes of this section. Except as provided in 
     regulations, similar treatment as marketable stock shall 
     apply in the case of any other regulated investment company 
     which publishes net asset valuations at least annually.
       ``(f) Treatment of Controlled Foreign Corporations Which 
     are Shareholders in Passive Foreign Investment Companies.--In 
     the case of a foreign corporation which is a controlled 
     foreign corporation and which owns (or is treated under 
     subsection (g) as owning) stock in a passive foreign 
     investment company--
       ``(1) this section (other than subsection (c)(2)) shall 
     apply to such foreign corporation in the same manner as if 
     such corporation were a United States person, and
       ``(2) for purposes of subpart F of part III of subchapter 
     N--
       ``(A) any amount included in gross income under subsection 
     (a)(1) shall be treated as foreign personal holding company 
     income described in section 954(c)(1)(A), and
       ``(B) any amount allowed as a deduction under subsection 
     (a)(2) shall be treated as a deduction allocable to foreign 
     personal holding company income so described.
       ``(g) Stock Owned Through Certain Foreign Entities.--Except 
     as provided in regulations--
       ``(1) In general.--For purposes of this section, stock 
     owned, directly or indirectly, by or for a foreign 
     partnership or foreign trust or foreign estate shall be 
     considered as being owned proportionately by its partners or 
     beneficiaries. Stock considered to be owned by a person by 
     reason of the application of the preceding sentence shall, 
     for purposes of applying such sentence, be treated as 
     actually owned by such person.
       ``(2) Treatment of certain dispositions.--In any case in 
     which a United States person is treated as owning stock in a 
     passive foreign investment company by reason of paragraph 
     (1)--
       ``(A) any disposition by the United States person or by any 
     other person which results in the United States person being 
     treated as no longer owning such stock, and
       ``(B) any disposition by the person owning such stock,

     shall be treated as a disposition by the United States person 
     of the stock in the passive foreign investment company.
       ``(h) Coordination With Section 851(b).--For purposes of 
     paragraphs (2) and (3) of section 851(b), any amount included 
     in gross income under subsection (a) shall be treated as a 
     dividend.
       ``(i) Stock Acquired From a Decedent.--In the case of stock 
     of a passive foreign investment company which is acquired by 
     bequest, devise, or inheritance (or by the decedent's estate) 
     and with respect to which an election under this section was 
     in effect as of the date of the decedent's death, 
     notwithstanding section 1014, the basis of such stock in the 
     hands of the person so acquiring it shall be the adjusted 
     basis of such stock in the hands of the decedent immediately 
     before his death (or, if lesser, the basis which would have 
     been determined under section 1014 without regard to this 
     subsection).
       ``(j) Coordination With Section 1291 for First Year of 
     Election.--
       ``(1) Taxpayers other than regulated investment 
     companies.--
       ``(A) In general.--If the taxpayer elects the application 
     of this section with respect to any marketable stock in a 
     corporation after the beginning of the taxpayer's holding 
     period in such stock, and if the requirements of subparagraph 
     (B) are not satisfied, section 1291 shall apply to--
       ``(i) any distributions with respect to, or disposition of, 
     such stock in the first taxable year of the taxpayer for 
     which such election is made, and
       ``(ii) any amount which, but for section 1291, would have 
     been included in gross income under subsection (a) with 
     respect to such stock for such taxable year in the same 
     manner as if such amount were gain on the disposition of such 
     stock.
       ``(B) Requirements.--The requirements of this subparagraph 
     are met if, with respect to each of such corporation's 
     taxable years for which such corporation was a passive 
     foreign investment company and which begin after December 
     31, 1986, and included any portion of the taxpayer's 
     holding period in such stock, such corporation was treated 
     as a qualified electing fund under this part with respect 
     to the taxpayer.
       ``(2) Special rules for regulated investment companies.--
       ``(A) In general.--If a regulated investment company elects 
     the application of this section with respect to any 
     marketable stock in a corporation after the beginning of the 
     taxpayer's holding period in such stock, then, with respect 
     to such company's first taxable year for which such company 
     elects the application of this section with respect to such 
     stock--
       ``(i) section 1291 shall not apply to such stock with 
     respect to any distribution or disposition during, or amount 
     included in gross income under this section for, such first 
     taxable year, but
       ``(ii) such regulated investment company's tax under this 
     chapter for such first taxable year shall be increased by the 
     aggregate amount of interest which would have been determined 
     under section 1291(c)(3) if section 1291 were applied without 
     regard to this subparagraph.

     Clause (ii) shall not apply if for the preceding taxable year 
     the company elected to mark to market the stock held by such 
     company as of the last day of such preceding taxable year.
       ``(B) Disallowance of deduction.--No deduction shall be 
     allowed to any regulated investment company for the increase 
     in tax under subparagraph (A)(ii).
       ``(k) Election.--This section shall apply to marketable 
     stock in a passive foreign investment company which is held 
     by a United States person only if such person elects to apply 
     this section with respect to such stock. Such an election 
     shall apply to the taxable year for which made and all 
     subsequent taxable years unless--
       ``(1) such stock ceases to be marketable stock, or
       ``(2) the Secretary consents to the revocation of such 
     election.
       ``(l) Transition Rule for Individuals Becoming Subject to 
     United States Tax.--If any individual becomes a United States 
     person in a taxable year beginning after December 31, 1997, 
     solely for purposes of this section, the adjusted basis 
     (before adjustments under subsection (b)) of any marketable 
     stock in a passive foreign investment company owned by such 
     individual on the first day of such taxable year shall be 
     treated as being the greater of its fair market value on such 
     first day or its adjusted basis on such first day.''.
       (b) Coordination With Interest Charge, Etc.--
       (1) Paragraph (1) of section 1291(d) is amended by adding 
     at the end the following new flush sentence:

     ``Except as provided in section 1296(j), this section also 
     shall not apply if an election under section 1296(k) is in 
     effect for the taxpayer's taxable year.''.
       (2) The subsection heading for subsection (d) of section 
     1291 is amended by striking ``Subpart B'' and inserting 
     ``Subparts B and C''.
       (3) Subparagraph (A) of section 1291(a)(3) is amended to 
     read as follows:
       ``(A) Holding period.--The taxpayer's holding period shall 
     be determined under section 1223; except that--
       ``(i) for purposes of applying this section to an excess 
     distribution, such holding period shall be treated as ending 
     on the date of such distribution, and
       ``(ii) if section 1296 applied to such stock with respect 
     to the taxpayer for any prior taxable year, such holding 
     period shall be treated as beginning on the first day of the 
     first taxable year beginning after the last taxable year for 
     which section 1296 so applied.''.
       (c) Treatment of Mark-to-Market Gain Under Section 4982.--
       (1) Subsection (e) of section 4982 is amended by adding at 
     the end thereof the following new paragraph:
       ``(6) Treatment of gain recognized under section 1296.--For 
     purposes of determining a regulated investment company's 
     ordinary income--
       ``(A) notwithstanding paragraph (1)(C), section 1296 shall 
     be applied as if such company's taxable year ended on October 
     31, and
       ``(B) any ordinary gain or loss from an actual disposition 
     of stock in a passive foreign investment company during the 
     portion of the calendar year after October 31 shall be taken 
     into account in determining such regulated investment 
     company's ordinary income for the following calendar year.

     In the case of a company making an election under paragraph 
     (4), the preceding sentence shall be applied by substituting 
     the last day of the company's taxable year for October 31.''.
       (2) Subsection (b) of section 852 is amended by adding at 
     the end thereof the following new paragraph:
       ``(10) Special rule for certain losses on stock in passive 
     foreign investment company.--To the extent provided in 
     regulations, the taxable income of a regulated investment 
     company (other than a company to which an election under 
     section 4982(e)(4) applies) shall be computed without regard 
     to any net reduction in the value of any stock of a passive 
     foreign investment company with respect to which an election 
     under section 1296(k) is in effect occurring after October 31 
     of the taxable year, and any such reduction shall be treated 
     as occurring on the first day of the following taxable 
     year.''.
       (3) Subsection (c) of section 852 is amended by inserting 
     after ``October 31 of such year'' the following: ``, without 
     regard to any net reduction in the value of any stock of a 
     passive foreign investment company with respect to which an 
     election under section 1296(k) is in effect occurring after 
     October 31 of such year,''.
       (d) Conforming Amendments.--
       (1) Sections 532(b)(4) and 542(c)(10) are each amended by 
     striking ``section 1296'' and inserting ``section 1297''.
       (2) Subsection (f) of section 551 is amended by striking 
     ``section 1297(b)(5)'' and inserting ``section 1298(b)(5)''.
       (3) Subsections (a)(1) and (d) of section 1293 are each 
     amended by striking ``section 1297(a)'' and inserting 
     ``section 1298(a)''.
       (4) Paragraph (3) of section 1297(b), as redesignated by 
     subsection (a), is hereby repealed.
       (5) The table of sections for subpart D of part VI of 
     subchapter P of chapter 1, as redesignated by subsection (a), 
     is amended to read as follows:

``Sec. 1297. Passive foreign investment company.
``Sec. 1298. Special rules.''.

       (6) The table of subparts for part VI of subchapter P of 
     chapter 1 is amended by striking

[[Page H6459]]

     the last item and inserting the following new items:

``Subpart C. Election of mark to market for marketable stock.
``Subpart D. General provisions.''.

       (e) Clarification of Gain Recognition Election.--The last 
     sentence of section 1298(b)(1), as so redesignated, is 
     amended by inserting ``(determined without regard to the 
     preceding sentence)'' after ``investment company''.

     SEC. 1123. VALUATION OF ASSETS FOR PASSIVE FOREIGN INVESTMENT 
                   COMPANY DETERMINATION.

       (a) In General.--Section 1297, as redesignated by section 
     1122, is amended by adding at the end the following new 
     subsection:
       ``(e) Methods for Measuring Assets.--
       ``(1) Determination using value.--The determination under 
     subsection (a)(2) shall be made on the basis of the value of 
     the assets of a foreign corporation if--
       ``(A) such corporation is a publicly traded corporation for 
     the taxable year, or
       ``(B) paragraph (2) does not apply to such corporation for 
     the taxable year.
       ``(2) Determination using adjusted bases.--The 
     determination under subsection (a)(2) shall be based on the 
     adjusted bases (as determined for the purposes of computing 
     earnings and profits) of the assets of a foreign corporation 
     if such corporation is not described in paragraph (1)(A) and 
     such corporation--
       ``(A) is a controlled foreign corporation, or
       ``(B) elects the application of this paragraph.

     An election under subparagraph (B), once made, may be revoked 
     only with the consent of the Secretary.
       ``(3) Publicly traded corporation.--For purposes of this 
     subsection, a foreign corporation shall be treated as a 
     publicly traded corporation if the stock in the corporation 
     is regularly traded on--
       ``(A) a national securities exchange which is registered 
     with the Securities and Exchange Commission or the national 
     market system established pursuant to section 11A of the 
     Securities and Exchange Act of 1934, or
       ``(B) any exchange or other market which the Secretary 
     determines has rules adequate to carry out the purposes of 
     this subsection.''
       (b) Conforming Amendments.--Section 1297(a), as 
     redesignated by section 1122, is amended--
       (1) by striking ``(by value)'' and inserting ``(as 
     determined in accordance with subsection (e))'', and
       (2) by striking the last two sentences.

     SEC. 1124. EFFECTIVE DATE.

       The amendments made by this subtitle shall apply to--
       (1) taxable years of United States persons beginning after 
     December 31, 1997, and
       (2) taxable years of foreign corporations ending with or 
     within such taxable years of United States persons.
   Subtitle D--Repeal of Excise Tax on Transfers to Foreign Entities

     SEC. 1131. REPEAL OF EXCISE TAX ON TRANSFERS TO FOREIGN 
                   ENTITIES; RECOGNITION OF GAIN ON CERTAIN 
                   TRANSFERS TO FOREIGN TRUSTS AND ESTATES.

       (a) Repeal of Excise Tax.--Chapter 5 (relating to transfers 
     to avoid income tax) is hereby repealed.
       (b) Recognition of Gain on Certain Transfers to Foreign 
     Trusts and Estates.--Subpart F of part I of subchapter J of 
     chapter 1 is amended by adding at the end the following new 
     section:

     ``SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO 
                   CERTAIN FOREIGN TRUSTS AND ESTATES.

       ``(a) In General.--Except as provided in regulations, in 
     the case of any transfer of property by a United States 
     person to a foreign estate or trust, for purposes of this 
     subtitle, such transfer shall be treated as a sale or 
     exchange for an amount equal to the fair market value of the 
     property transferred, and the transferor shall recognize as 
     gain the excess of--
       ``(1) the fair market value of the property so transferred, 
     over
       ``(2) the adjusted basis (for purposes of determining gain) 
     of such property in the hands of the transferor.
       ``(b) Exception.--Subsection (a) shall not apply to a 
     transfer to a trust by a United States person to the extent 
     that any person is treated as the owner of such trust under 
     section 671.
       ``(c) Treatment of Trusts Which Become Foreign Trusts.--If 
     a trust which is not a foreign trust becomes a foreign trust, 
     such trust shall be treated for purposes of this section as 
     having transferred, immediately before becoming a foreign 
     trust, all of its assets to a foreign trust.''.
       (b) Other Anti-Avoidance Provisions Replacing Repealed 
     Excise Tax.--
       (1) Gain recognition on exchanges involving foreign 
     persons.--Section 1035 is amended by redesignating subsection 
     (c) as subsection (d) and by inserting after subsection (b) 
     the following new subsection:
       ``(c) Exchanges Involving Foreign Persons.--To the extent 
     provided in regulations, subsection (a) shall not apply to 
     any exchange having the effect of transferring property to 
     any person other than a United States person.''.
       (2) Transfers to foreign corporations.--Section 367 is 
     amended by adding at the end the following new subsection:
       ``(f) Other Transfers.--To the extent provided in 
     regulations, if a United States person transfers property to 
     a foreign corporation as paid-in surplus or as a contribution 
     to capital (in a transaction not otherwise described in this 
     section), such transfer shall be treated as a sale or 
     exchange for an amount equal to the fair market value of the 
     property transferred, and the transferor shall recognize as 
     gain the excess of--
       ``(1) the fair market value of the property so transferred, 
     over
       ``(2) the adjusted basis (for purposes of determining gain) 
     of such property in the hands of the transferor.''.
       (3) Certain transfers to partnerships.--Section 721 is 
     amended by adding at the end the following new subsection:
       ``(c) Regulations Relating to Certain Transfers to 
     Partnerships.--The Secretary may provide by regulations that 
     subsection (a) shall not apply to gain realized on the 
     transfer of property to a partnership if such gain, when 
     recognized, will be includible in the gross income of a 
     person other than a United States person.''.
       (4) Repeal of u.s. source treatment of deemed royalties.--
     Subparagraph (C) of section 367(d)(2) is amended to read as 
     follows:
       ``(C) Amounts received treated as ordinary income.--For 
     purposes of this chapter, any amount included in gross income 
     by reason of this subsection shall be treated as ordinary 
     income.''.
       (5) Transfers of intangibles to partnerships.--
       (A) Subsection (d) of section 367 is amended by adding at 
     the end the following new paragraph:
       ``(3) Regulations relating to transfers of intangibles to 
     partnerships.--The Secretary may provide by regulations that 
     the rules of paragraph (2) also apply to the transfer of 
     intangible property by a United States person to a 
     partnership in circumstances consistent with the purposes of 
     this subsection.''.
       (B) Section 721 is amended by adding at the end the 
     following new subsection:
       ``(d) Transfers of Intangibles.--

  ``For regulatory authority to treat intangibles transferred to a 
partnership as sold, see section 367(d)(3).''.

       (c) Technical and Conforming Amendments.--
       (1) Subsection (h) of section 814 is amended by striking 
     ``or 1491''.
       (2) Section 1057 (relating to election to treat transfer to 
     foreign trust, etc., as taxable exchange) is hereby repealed.
       (3) Section 6422 is amended by striking paragraph (5) and 
     by redesignating paragraphs (6) through (13) as paragraphs 
     (5) through (12), respectively.
       (4) The table of chapters for subtitle A is amended by 
     striking the item relating to chapter 5.
       (5) The table of sections for part IV of subchapter O of 
     chapter 1 is amended by striking the item relating to section 
     1057.
       (6) The table of sections for subpart F of part I of 
     subchapter J of chapter 1 is amended by adding at the end the 
     following new item:

``Sec. 684. Recognition of gain on certain transfers to certain foreign 
              trusts and estates.''.

       (d) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.
                   Subtitle E--Information Reporting

     SEC. 1141. CLARIFICATION OF APPLICATION OF RETURN REQUIREMENT 
                   TO FOREIGN PARTNERSHIPS.

       (a) In General.--Section 6031 (relating to return of 
     partnership income) is amended by adding at the end the 
     following new subsection:
       ``(e) Foreign Partnerships.--
       ``(1) Exception for foreign partnership.--Except as 
     provided in paragraph (2), the preceding provisions of this 
     section shall not apply to a foreign partnership.
       ``(2) Certain foreign partnerships required to file 
     return.--Except as provided in regulations prescribed by the 
     Secretary, this section shall apply to a foreign partnership 
     for any taxable year if for such year, such partnership has--
       ``(A) gross income derived from sources within the United 
     States, or
       ``(B) gross income which is effectively connected with the 
     conduct of a trade or business within the United States.

     The Secretary may provide simplified filing procedures for 
     foreign partnerships to which this section applies.''.
       (b) Sanction for Failure by Foreign Partnership To Comply 
     With Section 6031 To Include Denial of Deductions.--
     Subsection (f) of section 6231 is amended--
       (1) by striking ``Losses and'' in the heading and inserting 
     ``Deductions, Losses, and'', and
       (2) by striking ``loss or'' each place it appears and 
     inserting ``deduction, loss, or''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 1142. CONTROLLED FOREIGN PARTNERSHIPS SUBJECT TO 
                   INFORMATION REPORTING COMPARABLE TO INFORMATION 
                   REPORTING FOR CONTROLLED FOREIGN CORPORATIONS.

       (a) In General.--So much of section 6038 (relating to 
     information with respect to certain foreign corporations) as 
     precedes paragraph (2) of subsection (a) is amended to read 
     as follows:

     ``SEC. 6038. INFORMATION REPORTING WITH RESPECT TO CERTAIN 
                   FOREIGN CORPORATIONS AND PARTNERSHIPS.

       ``(a) Requirement.--
       ``(1) In general.--Every United States person shall 
     furnish, with respect to any foreign business entity which 
     such person controls, such information as the Secretary may 
     prescribe relating to--
       ``(A) the name, the principal place of business, and the 
     nature of business of such entity, and the country under 
     whose laws such entity is incorporated (or organized in the 
     case of a partnership);

[[Page H6460]]

       ``(B) in the case of a foreign corporation, its post-1986 
     undistributed earnings (as defined in section 902(c));
       ``(C) a balance sheet for such entity listing assets, 
     liabilities, and capital;
       ``(D) transactions between such entity and--
       ``(i) such person,
       ``(ii) any corporation or partnership which such person 
     controls, and
       ``(iii) any United States person owning, at the time the 
     transaction takes place--

       ``(I) in the case of a foreign corporation, 10 percent or 
     more of the value of any class of stock outstanding of such 
     corporation, and
       ``(II) in the case of a foreign partnership, at least a 10-
     percent interest in such partnership; and

       ``(E)(i) in the case of a foreign corporation, a 
     description of the various classes of stock outstanding, and 
     a list showing the name and address of, and number of shares 
     held by, each United States person who is a shareholder of 
     record owning at any time during the annual accounting period 
     5 percent or more in value of any class of stock outstanding 
     of such foreign corporation, and
       ``(ii) information comparable to the information described 
     in clause (i) in the case of a foreign partnership.

     The Secretary may also require the furnishing of any other 
     information which is similar or related in nature to that 
     specified in the preceding sentence or which the Secretary 
     determines to be appropriate to carry out the provisions of 
     this title.''.
       (b) Definitions.--
       (1) In general.--Subsection (e) of section 6038 (relating 
     to definitions) is amended--
       (A) by redesignating paragraphs (1) and (2) as paragraphs 
     (2) and (4), respectively,
       (B) by inserting before paragraph (2) (as so redesignated) 
     the following new paragraph:
       ``(1) Foreign business entity.--The term `foreign business 
     entity' means a foreign corporation and a foreign 
     partnership.'', and
       (C) by inserting after paragraph (2) (as so redesignated) 
     the following new paragraph:
       ``(3) Partnership-related definitions.--
       ``(A) Control.--A person is in control of a partnership if 
     such person owns directly or indirectly more than a 50 
     percent interest in such partnership.
       ``(B) 50-percent interest.--For purposes of subparagraph 
     (A), a 50-percent interest in a partnership is--
       ``(i) an interest equal to 50 percent of the capital 
     interest, or 50 percent of the profits interest, in such 
     partnership, or
       ``(ii) to the extent provided in regulations, an interest 
     to which 50 percent of the deductions or losses of such 
     partnership are allocated.


     For purposes of the preceding sentence, rules similar to the 
     rules of section 267(c) (other than paragraph (3)) shall 
     apply.
       ``(C) 10-percent interest.--A 10-percent interest in a 
     partnership is an interest which would be described in 
     subparagraph (B) if `10 percent' were substituted for `50 
     percent' each place it appears.''.
       (2) Clerical amendment.--The paragraph heading for 
     paragraph (2) of section 6038(e) (as so redesignated) is 
     amended by inserting ``of corporation'' after ``Control''.
       (c) Modification of Sanctions on Partnerships and 
     Corporations for Failure To Furnish Information.--
       (1) In general.--Subsection (b) of section 6038 is 
     amended--
       (A) by striking ``$1,000'' each place it appears and 
     inserting ``$10,000'', and
       (B) by striking ``$24,000'' in paragraph (2) and inserting 
     ``$50,000''.
       (d) Reporting by 10-Percent Partners.--Subsection (a) of 
     section 6038 is amended by adding at the end the following 
     new paragraph:
       ``(5) Information required from 10-percent partner of 
     controlled foreign partnership.--In the case of a foreign 
     partnership which is controlled by United States persons 
     holding at least 10-percent interests (but not by any one 
     United States person), the Secretary may require each United 
     States person who holds a 10-percent interest in such 
     partnership to furnish information relating to such 
     partnership, including information relating to such partner's 
     ownership interests in the partnership and allocations to 
     such partner of partnership items.''.
       (e) Technical Amendments.--
       (1) The following provisions of section 6038 are each 
     amended by striking ``foreign corporation'' each place it 
     appears and inserting ``foreign business entity'':
       (A) Paragraphs (2) and (3) of subsection (a).
       (B) Subsection (b).
       (C) Subsection (c) other than paragraph (1)(B) thereof.
       (D) Subsection (d).
       (E) Subsection (e)(4) (as redesignated by subsection (b)).
       (2) Subparagraph (B) of section 6038(c)(1) is amended by 
     inserting ``in the case of a foreign business entity which is 
     a foreign corporation,'' after ``(B)''.
       (3) Paragraph (8) of section 318(b) is amended by striking 
     ``6038(d)(1)'' and inserting ``6038(d)(2)''.
       (4) Paragraph (4) of section 901(k) is amended by striking 
     ``foreign corporation'' and inserting ``foreign corporation 
     or partnership''.
       (5) The table of sections for subpart A of part III of 
     subchapter A of chapter 61 is amended by striking the item 
     relating to section 6038 and inserting the following new 
     item:

``Sec. 6038. Information reporting with respect to certain foreign 
              corporations and partnerships.''.

       (f) Effective Date.--The amendments made by this section 
     shall apply to annual accounting periods beginning after the 
     date of the enactment of this Act.

     SEC. 1143. MODIFICATIONS RELATING TO RETURNS REQUIRED TO BE 
                   FILED BY REASON OF CHANGES IN OWNERSHIP 
                   INTERESTS IN FOREIGN PARTNERSHIP.

       (a) No Return Required Unless Changes Involve 10-Percent 
     Interest in Partnership.--
       (1) In general.--Subsection (a) of section 6046A (relating 
     to returns as to interests in foreign partnerships) is 
     amended by adding at the end the following new sentence: 
     ``Paragraphs (1) and (2) shall apply to any acquisition or 
     disposition only if the United States person directly or 
     indirectly holds at least a 10-percent interest in such 
     partnership either before or after such acquisition or 
     disposition, and paragraph (3) shall apply to any change only 
     if the change is equivalent to at least a 10-percent interest 
     in such partnership.''.
       (2) 10-percent interest.--Section 6046A is amended by 
     redesignating subsection (d) as subsection (e) and by 
     inserting after subsection (c) the following new subsection:
       ``(d) 10-Percent Interest.--For purposes of subsection (a), 
     a 10-percent interest in a partnership is an interest 
     described in section 6038(e)(3)(C).''.
       (b) Modification of Penalty on Failure to Report Changes in 
     Ownership Interests in Foreign Corporations and 
     Partnerships.--Subsection (a) of section 6679 (relating to 
     failure to file returns, etc., with respect to foreign 
     corporations or foreign partnerships) is amended to read as 
     follows:
       ``(a) Civil Penalty.--
       ``(1) In general.--In addition to any criminal penalty 
     provided by law, any person required to file a return under 
     section 6035, 6046, or 6046A who fails to file such return at 
     the time provided in such section, or who files a return 
     which does not show the information required pursuant to such 
     section, shall pay a penalty of $10,000, unless it is shown 
     that such failure is due to reasonable cause.
       ``(2) Increase in penalty where failure continues after 
     notification.--If any failure described in paragraph (1) 
     continues for more than 90 days after the day on which the 
     Secretary mails notice of such failure to the United States 
     person, such person shall pay a penalty (in addition to the 
     amount required under paragraph (1)) of $10,000 for each 30-
     day period (or fraction thereof) during which such failure 
     continues after the expiration of such 90-day period. The 
     increase in any penalty under this paragraph shall not exceed 
     $50,000.
       ``(3) Reduced penalty for returns relating to foreign 
     personal holding companies.--In the case of a return required 
     under section 6035, paragraph (1) shall be applied by 
     substituting `$1,000' for `$10,000', and paragraph (2) shall 
     not apply.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to transfers and changes after the date of the 
     enactment of this Act.

     SEC. 1144. TRANSFERS OF PROPERTY TO FOREIGN PARTNERSHIPS 
                   SUBJECT TO INFORMATION REPORTING COMPARABLE TO 
                   INFORMATION REPORTING FOR SUCH TRANSFERS TO 
                   FOREIGN CORPORATIONS.

       (a) In General.--Paragraph (1) of section 6038B(a) 
     (relating to notice of certain transfers to foreign 
     corporations) is amended to read as follows:
       ``(1) transfers property to--
       ``(A) a foreign corporation in an exchange described in 
     section 332, 351, 354, 355, 356, or 361, or
       ``(B) a foreign partnership in a contribution described in 
     section 721 or in any other contribution described in 
     regulations prescribed by the Secretary,''.
       (b) Exceptions.--Section 6038B is amended by redesignating 
     subsection (b) as subsection (c) and by inserting after 
     subsection (a) the following new subsection:
       ``(b) Exceptions for Certain Transfers to Foreign 
     Partnerships; Special Rule.--
       ``(1) Exceptions.--Subsection (a)(1)(B) shall apply to a 
     transfer by a United States person to a foreign partnership 
     only if--
       ``(A) the United States person holds (immediately after the 
     transfer) directly or indirectly at least a 10-percent 
     interest (as defined in section 6046A(d)) in the partnership, 
     or
       ``(B) the value of the property transferred (when added to 
     the value of the property transferred by such person or any 
     related person to such partnership or a related partnership 
     during the 12-month period ending on the date of the 
     transfer) exceeds $100,000.

     For purposes of the preceding sentence, the value of any 
     transferred property is its fair market value at the time of 
     its transfer.
       ``(2) Special rule.--If by reason of an adjustment under 
     section 482 or otherwise, a contribution described in 
     subsection (a)(1) is deemed to have been made, such 
     contribution shall be treated for purposes of this section as 
     having been made not earlier than the date specified by the 
     Secretary.''.
        (c) Modification of Penalty Applicable to Foreign 
     Corporations and Partnerships.--
       (1) In general.--Paragraph (1) of section 6038B(b) is 
     amended by striking ``equal to'' and all that follows and 
     inserting ``equal to 10 percent of the fair market value of 
     the property at the time of the exchange (and, in the case of 
     a contribution described in subsection (a)(1)(B), such person 
     shall recognize gain as if the contributed property had been 
     sold for such value at the time of such contribution).''.
       (2) Limit on penalty.--Section 6038B(b) is amended by 
     adding at the end the following new paragraph:
       ``(3) Limit on penalty.--The penalty under paragraph (1) 
     with respect to any exchange shall not exceed $100,000 unless 
     the failure with

[[Page H6461]]

     respect to such exchange was due to intentional disregard.''.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to transfers made after the date of the enactment of 
     this Act.
       (2) Election of retroactive effect.--Section 1494(c) of the 
     Internal Revenue Code of 1986 shall not apply to any transfer 
     after August 20, 1996, if all applicable reporting 
     requirements under section 6038B of such Code (as amended by 
     this section) are satisfied. The Secretary of the Treasury or 
     his delegate may prescribe simplified reporting requirements 
     under the preceding sentence.

     SEC. 1145. EXTENSION OF STATUTE OF LIMITATIONS FOR FOREIGN 
                   TRANSFERS.

       (a) In General.--Paragraph (8) of section 6501(c) (relating 
     to failure to notify Secretary under section 6038B) is 
     amended to read as follows:
       ``(8) Failure to notify secretary of certain foreign 
     transfers.--In the case of any information which is required 
     to be reported to the Secretary under section 6038, 6038A, 
     6038B, 6046, 6046A, or 6048, the time for assessment of any 
     tax imposed by this title with respect to any event or period 
     to which such information relates shall not expire before the 
     date which is 3 years after the date on which the Secretary 
     is furnished the information required to be reported under 
     such section.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to information the due date for the reporting of 
     which is after the date of the enactment of this Act.

     SEC. 1146. INCREASE IN FILING THRESHOLDS FOR RETURNS AS TO 
                   ORGANIZATION OF FOREIGN CORPORATIONS AND 
                   ACQUISITIONS OF STOCK IN SUCH CORPORATIONS.

       (a) In General.--Subsection (a) of section 6046 (relating 
     to returns as to organization or reorganization of foreign 
     corporations and as to acquisitions of their stock) is 
     amended to read as follows:
       ``(a) Requirement of return.--
       ``(1) In general.--A return complying with the requirements 
     of subsection (b) shall be made by--
       ``(A) each United States citizen or resident who becomes an 
     officer or director of a foreign corporation if a United 
     States person (as defined in section 7701(a)(30)) meets the 
     stock ownership requirements of paragraph (2) with respect to 
     such corporation,
       ``(B) each United States person--
       ``(i) who acquires stock which, when added to any stock 
     owned on the date of such acquisition, meets the stock 
     ownership requirements of paragraph (2) with respect to a 
     foreign corporation, or
       ``(ii) who acquires stock which, without regard to stock 
     owned on the date of such acquisition, meets the stock 
     ownership requirements of paragraph (2) with respect to a 
     foreign corporation,
       ``(C) each person (not described in subparagraph (B)) who 
     is treated as a United States shareholder under section 
     953(c) with respect to a foreign corporation, and
       ``(D) each person who becomes a United States person while 
     meeting the stock ownership requirements of paragraph (2) 
     with respect to stock of a foreign corporation.

     In the case of a foreign corporation with respect to which 
     any person is treated as a United States shareholder under 
     section 953(c), subparagraph (A) shall be treated as 
     including a reference to each United States person who is an 
     officer or director of such corporation.
       ``(2) Stock ownership requirements.--A person meets the 
     stock ownership requirements of this paragraph with respect 
     to any corporation if such person owns 10 percent or more 
     of--
       ``(A) the total combined voting power of all classes of 
     stock of such corporation entitled to vote, or
       ``(B) the total value of the stock of such corporation.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on January 1, 1998.
Subtitle F--Determination of Foreign or Domestic Status of Partnerships

     SEC. 1151. DETERMINATION OF FOREIGN OR DOMESTIC STATUS OF 
                   PARTNERSHIPS.

       (a) In General.--Paragraph (4) of section 7701(a) is 
     amended by inserting before the period ``unless, in the case 
     of a partnership, the Secretary provides otherwise by 
     regulations''.
       (b) Effective Date.--Any regulations issued with respect to 
     the amendment made by subsection (a) shall apply to 
     partnerships created or organized after the date determined 
     under section 7805(b) of the Internal Revenue Code of 1986 
     (without regard to paragraph (2) thereof) with respect to 
     such regulations.
              Subtitle G--Other Simplification Provisions

     SEC. 1161. TRANSITION RULE FOR CERTAIN TRUSTS.

       (a) In General.--Paragraph (3) of section 1907(a) of the 
     Small Business Job Protection Act of 1996 is amended by 
     adding at the end the following flush sentence:

     ``To the extent prescribed in regulations by the Secretary of 
     the Treasury or his delegate, a trust which was in existence 
     on August 20, 1996 (other than a trust treated as owned by 
     the grantor under subpart E of part I of subchapter J of 
     chapter 1 of the Internal Revenue Code of 1986), and which 
     was treated as a United States person on the day before the 
     date of the enactment of this Act may elect to continue to be 
     treated as a United States person notwithstanding section 
     7701(a)(30)(E) of such Code.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect as if included in the amendments made by 
     section 1907(a) of the Small Business Job Protection Act of 
     1996.

     SEC. 1162. REPEAL OF STOCK AND SECURITIES SAFE HARBOR 
                   REQUIREMENT THAT PRINCIPAL OFFICE BE OUTSIDE 
                   THE UNITED STATES.

       (a) In General.--The last sentence of clause (ii) of 
     section 864(b)(2)(A) (relating to stock or securities) is 
     amended by striking ``, or in the case of a corporation'' and 
     all that follows and inserting a period.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1163. MISCELLANEOUS CLARIFICATIONS.

       (a) Attribution of Deemed Paid Foreign Taxes to Prior 
     Distributions.--Subparagraph (B) of section 902(c)(2) is 
     amended by striking ``deemed paid with respect to'' and 
     inserting ``attributable to''.
       (b) Financial Services Income Determined Without Regard to 
     High-Taxed Income.--Subclause (II) of section 904(d)(2)(C)(i) 
     is amended by striking ``subclause (I)'' and inserting 
     ``subclauses (I) and (III)''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.
                      Subtitle H--Other Provisions

     SEC. 1171. TREATMENT OF COMPUTER SOFTWARE AS FSC EXPORT 
                   PROPERTY.

       (a) In General.--Subparagraph (B) of section 927(a)(2) 
     (relating to property excluded from eligibility as FSC export 
     property) is amended by inserting ``, and other than computer 
     software (whether or not patented)'' before ``, for 
     commercial or home use''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to gross receipts attributable to periods after 
     December 31, 1997, in taxable years ending after such date.

     SEC. 1172. ADJUSTMENT OF DOLLAR LIMITATION ON SECTION 911 
                   EXCLUSION.

       (a) General Rule.--Paragraph (2) of section 911(b) is 
     amended by--
       (1) by striking ``of $70,000'' in subparagraph (A) and 
     inserting ``equal to the exclusion amount for the calendar 
     year in which such taxable year begins'', and
       (2) by adding at the end the following new subparagraph:
       ``(D) Exclusion amount.--
       ``(i) In general.--The exclusion amount for any calendar 
     year is the exclusion amount determined in accordance with 
     the following table (as adjusted by clause (ii)):

                                                          The exclusion
``For calendar year--                                       amount is--
  1998.....................................................$72,000 ....

  1999..................................................... 74,000 ....

  2000..................................................... 76,000 ....

  2001..................................................... 78,000 ....

  2002 and thereafter...................................... 80,000.....

       ``(ii) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2007, the $80,000 
     amount in clause (i) shall be increased by an amount equal to 
     the product of--

       ``(I) such dollar amount, and
       ``(II) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `2006' for `1992' in 
     subparagraph (B) thereof.

     If any increase determined under the preceding sentence is 
     not a multiple of $100, such increase shall be rounded to the 
     next lowest multiple of $100.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1173. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN 
                   ASSETS ACQUIRED BY DEALERS IN ORDINARY COURSE 
                   OF TRADE OR BUSINESS.

       (a) In General.--Section 956(c)(2) is amended by striking 
     ``and'' at the end of subparagraph (H), by striking the 
     period at the end of subparagraph (I) and inserting a 
     semicolon, and by adding at the end the following new 
     subparagraphs:
       ``(J) deposits of cash or securities made or received on 
     commercial terms in the ordinary course of a United States or 
     foreign person's business as a dealer in securities or in 
     commodities, but only to the extent such deposits are made or 
     received as collateral or margin for (i) a securities loan, 
     notional principal contract, options contract, forward 
     contract, or futures contract, or (ii) any other financial 
     transaction in which the Secretary determines that it is 
     customary to post collateral or margin; and
       ``(K) an obligation of a United States person to the extent 
     the principal amount of the obligation does not exceed the 
     fair market value of readily marketable securities sold or 
     purchased pursuant to a sale and repurchase agreement or 
     otherwise posted or received as collateral for the obligation 
     in the ordinary course of its business by a United States or 
     foreign person which is a dealer in securities or 
     commodities.

     For purposes of subparagraphs (J) and (K), the term `dealer 
     in securities' has the meaning given such term by section 
     475(c)(1), and the term `dealer in commodities' has the 
     meaning given such term by section 475(e), except that such 
     term shall include a futures commission merchant.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 1997, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 1174. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN 
                   INTERNATIONAL TRANSPORTATION SERVICES.

       (a) Sourcing Rules.--
       (1) In general.--Section 861(a)(3) is amended by adding at 
     the end the following new flush sentence:

     ``In addition, except for purposes of sections 79 and 105 and 
     subchapter D, compensation for labor or services performed in 
     the United States shall not be deemed to be income from 
     sources

[[Page H6462]]

     within the United States if the labor or services are 
     performed by a nonresident alien individual in connection 
     with the individual's temporary presence in the United 
     States as a regular member of the crew of a foreign vessel 
     engaged in transportation between the United States and a 
     foreign country or a possession of the United States.''.
       (2) Transportation income.--Subparagraph (B) of section 
     863(c)(2) is amended by adding at the end the following flush 
     sentence:

     ``In the case of transportation income derived from, or in 
     connection with, a vessel, this subparagraph shall only apply 
     if the taxpayer is a citizen or resident alien.''.
       (b) Presence in United States.--
       (1) In general.--Paragraph (7) of section 7701(b) is 
     amended by adding at the end the following new subparagraph:
       ``(D) Crew members temporarily present.--An individual who 
     is temporarily present in the United States on any day as a 
     regular member of the crew of a foreign vessel engaged in 
     transportation between the United States and a foreign 
     country or a possession of the United States shall not be 
     treated as present in the United States on such day unless 
     such individual otherwise engages in any trade or business in 
     the United States on such day.''.
       (2) Conforming amendment.--Subparagraph (A) of section 
     7701(b)(7) is amended by striking ``or (C)'' and inserting 
     ``, (C), or (D)''.
       (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to remuneration for services performed in taxable years 
     beginning after December 31, 1997.
       (2) Presence.--The amendment made by subsection (b) shall 
     apply to taxable years beginning after December 31, 1997.

     SEC. 1175. EXEMPTION FOR ACTIVE FINANCING INCOME.

       (a) Exemption From Foreign Personal Holding Company 
     Income.--Section 954 is amended by adding at the end the 
     following new subsection:
       ``(h) Special Rule for Income Derived in the Active Conduct 
     of Banking, Financing, or Similar Businesses.--
       ``(1) In general.--For purposes of subsection (c)(1), 
     foreign personal holding company income shall not include 
     income which is--
       ``(A) derived in the active conduct by a controlled foreign 
     corporation of a banking, financing, or similar business, but 
     only if the corporation is predominantly engaged in the 
     active conduct of such business,
       ``(B) received from a person other than a related person 
     (within the meaning of subsection (d)(3)) and derived from 
     the investments made by a qualifying insurance company of its 
     reserves or of 80 percent of its unearned premiums (as both 
     are determined in the manner prescribed under paragraph (4)), 
     or
       ``(C) received from a person other than a related person 
     (within the meaning of subsection (d)(3)) and derived from 
     investments made by a qualifying insurance company of an 
     amount of its assets equal to--
       ``(i) in the case of contracts regulated in the country in 
     which sold as property, casualty, or health insurance 
     contracts, one-third of its premiums earned on such insurance 
     contracts during the taxable year (as defined in section 
     832(b)(4)), and
       ``(ii) in the case of contracts regulated in the country in 
     which sold as life insurance or annuity contracts, the 
     greater of--

       ``(I) 10 percent of the reserves described in subparagraph 
     (B) for such contracts, or
       ``(II) in the case of a qualifying insurance company which 
     is a start-up company, $10,000,000.

       ``(2) Principles for determining applicable income.--
       ``(A) Banking and financing income.--The determination as 
     to whether income is described in paragraph (1)(A) shall be 
     made--
       ``(i) except as provided in clause (ii), in accordance with 
     the applicable principles of section 904(d)(2)(C)(ii), except 
     that such income shall include income from all leases entered 
     into in the ordinary course of the active conduct of a 
     banking, financing, or similar business, and
       ``(ii) in the case of a corporation described in paragraph 
     (3)(B), in accordance with the applicable principles of 
     section 1296(b) (as in effect on the day before the enactment 
     of the Taxpayer Relief Act of 1997) for determining what 
     is not passive income.
       ``(B) Insurance income.--Under rules prescribed by the 
     Secretary, for purposes of paragraphs (1) (B) and (C)--
       ``(i) in the case of contracts which are separate account-
     type contracts (including variable contracts not meeting the 
     requirements of section 817), only income specifically 
     allocable to such contracts shall be taken into account, and
       ``(ii) in the case of other contracts, income not allocable 
     under clause (i) shall be allocated ratably among such 
     contracts.
       ``(C) Look-thru rules.--The Secretary shall prescribe 
     regulations consistent with the principles of section 
     904(d)(3) which provide that dividends, interest, income 
     equivalent to interest, rents, or royalties received or 
     accrued from a related person (within the meaning of 
     subsection (d)(3)) shall be subject to look-thru treatment 
     for purposes of this subsection.
       ``(3) Predominantly engaged.--For purposes of paragraph 
     (1)(A), a corporation shall be deemed predominantly engaged 
     in the active conduct of a banking, financing, or similar 
     business only if--
       ``(A) more than 70 percent of its gross income is derived 
     from such business from transactions with persons which are 
     not related persons (as defined in subsection (d)(3)) and 
     which are located within the country under the laws of which 
     the controlled foreign corporation is created or organized, 
     or
       ``(B) the corporation is--
       ``(i) engaged in the active conduct of a banking or 
     securities business (within the meaning of section 1296(b), 
     as in effect before the enactment of the Taxpayer Relief Act 
     of 1997), or
       ``(ii) a qualified bank affiliate or a qualified securities 
     affiliate (within the meaning of the proposed regulations 
     under such section 1296(b)).
       ``(4) Methods for determining unearned premiums and 
     reserves.--For purposes of paragraph (1)(B)--
       ``(A) Property and casualty contracts.--The unearned 
     premiums and reserves of a qualifying insurance company with 
     respect to property, casualty, or health insurance contracts 
     shall be determined using the same methods and interest 
     rates which would be used if such company were subject to 
     tax under subchapter L.
       ``(B) Life insurance and annuity contracts.--The reserves 
     of a qualifying insurance company with respect to life 
     insurance or annuity contracts shall be determined under the 
     method described in paragraph (5) which such company elects 
     to apply for purposes of this paragraph. Such election shall 
     be made at such time and in such manner as the Secretary may 
     prescribe and, once made, shall be irrevocable without the 
     consent of the Secretary.
       ``(C) Limitation on reserves.--In no event shall the 
     reserve determined under this paragraph for any contract as 
     of any time exceed the amount which would be taken into 
     account with respect to such contract as of such time in 
     determining foreign annual statement reserves (less any 
     catastrophe or deficiency reserves).
       ``(5) Methods.--The methods described in this paragraph are 
     as follows:
       ``(A) U.S. method.--The method which would apply if the 
     qualifying insurance company were subject to tax under 
     subchapter L, except that the interest rate used shall be an 
     interest rate determined for the foreign country in which 
     such company is created or organized and which is calculated 
     in the same manner as the Federal mid-term rate under section 
     1274(d).
       ``(B) Foreign method.--A preliminary term method, except 
     that the interest rate used shall be the interest rate 
     determined for the foreign country in which such company is 
     created or organized and which is calculated in the same 
     manner as the Federal mid-term rate under section 1274(d). If 
     a qualifying insurance company uses such a preliminary term 
     method with respect to contracts insuring risks located in 
     such foreign country, such method shall apply if such company 
     elects the method under this clause.
       ``(C) Cash surrender value.--A method under which reserves 
     are equal to the net surrender value (as defined in section 
     807(e)(1)(A)) of the contract.
       ``(6) Definitions.--For purposes of this subsection--
       ``(A) Terms relating to insurance companies.--
       ``(i) Qualifying insurance company.--The term `qualifying 
     insurance company' means any entity which--

       ``(I) is subject to regulation as an insurance company 
     under the laws of its country of incorporation,
       ``(II) realizes at least 50 percent of its net written 
     premiums from the insurance or reinsurance of risks located 
     within the country in which such entity is created or 
     organized, and
       ``(III) is engaged in the active conduct of an insurance 
     business and would be subject to tax under subchapter L if it 
     were a domestic corporation.

       ``(ii) Start-up company.--A qualifying insurance company 
     shall be treated as a start-up company if such company (and 
     any predecessor) has not been engaged in the active conduct 
     of an insurance business for more than 5 years as of the 
     beginning of the taxable year of such company.
       ``(B) Located.--For purposes of paragraph (3)(A)--
       ``(i) In general.--A person shall be treated as located--

       ``(I) except as provided in subclause (II), within the 
     country in which it maintains an office or other fixed place 
     of business through which it engages in a trade or business 
     and by which the transaction is effected, or
       ``(II) in the case of a natural person, within the country 
     in which such person is physically located when such person 
     enters into a transaction.

       ``(ii) Special rule for qualified business units.--Gross 
     income derived by a corporation's qualified business unit 
     (within the meaning of section 989(a)) from transactions with 
     persons which are not related persons (as defined in 
     subsection (d)(3)) and which are located in the country in 
     which the qualified business unit both maintains its 
     principal office and conducts substantial business 
     activity shall be treated as derived from transactions 
     with persons which are not related persons (as defined in 
     subsection (d)(3)) and which are located within the 
     country under the laws of which the controlled foreign 
     corporation is created or organized.
       ``(7) Anti-abuse rules.--For purposes of applying this 
     subsection, there shall be disregarded any item of income, 
     gain, loss, or deduction with respect to any transaction or 
     series of transactions one of the principal purposes of which 
     is qualifying income or gain for the exclusion under this 
     section, including any change in the method of computing 
     reserves or any other transaction or series of transactions a 
     principal purpose of which is the acceleration or deferral of 
     any item in order to claim the benefits of such exclusion 
     through the application of this subsection.
       ``(8) Coordination with section 953.--This subsection shall 
     not apply to investment income allocable to contracts that 
     insure related party risks or risks located in a foreign 
     country other than the country in which the qualifying 
     insurance comapny is created or organized.
       ``(9) Application.--This subsection shall apply to the 
     first full taxable year of a foreign

[[Page H6463]]

     corporation beginning after December 31, 1997, and before 
     January 1, 1999, and to taxable years of United States 
     shareholders with or within which such taxable year of such 
     foreign corporation ends.''.
       (b) Exemption From Foreign Base Company Services Income.--
     Paragraph (2) of section 954(e) is amended by striking ``or'' 
     at the end of subparagraph (A), by striking the period at the 
     end of subparagraph (B) and inserting ``, or'', and by adding 
     at the end the following:
       ``(C) in the case of taxable years described in subsection 
     (h)(8), the active conduct by a controlled foreign 
     corporation of a banking, financing, insurance, or similar 
     business, but only if the corporation is predominantly 
     engaged in the active conduct of such business (within the 
     meaning of subsection (h)(3)) or is a qualifying insurance 
     company.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to the first full taxable year of a foreign 
     corporation beginning after December 31, 1997, and before 
     January 1, 1999, and to taxable years of United States 
     shareholders with or within which such taxable year of such 
     foreign corporation ends.
   TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND 
                               BUSINESSES
             Subtitle A--Provisions Relating to Individuals

     SEC. 1201. BASIC STANDARD DEDUCTION AND MINIMUM TAX EXEMPTION 
                   AMOUNT FOR CERTAIN DEPENDENTS.

       (a) Basic Standard Deduction.--
       (1) In general.--Paragraph (5) of section 63(c) (relating 
     to limitation on basic standard deduction in the case of 
     certain dependents) is amended by striking ``shall not 
     exceed'' and all that follows and inserting ``shall not 
     exceed the greater of--
       ``(A) $500, or
       ``(B) the sum of $250 and such individual's earned 
     income.''.
       (2) Conforming amendment.--Paragraph (4) of section 63(c) 
     is amended--
       (A) by striking ``(5)(A)'' in the material preceding 
     subparagraph (A) and inserting ``(5)'', and
       (B) by striking ``by substituting'' and all that follows in 
     subparagraph (B) and inserting ``by substituting for 
     `calendar year 1992' in subparagraph (B) thereof--
       ``(i) `calendar year 1987' in the case of the dollar 
     amounts contained in paragraph (2) or (5)(A) or subsection 
     (f), and
       ``(ii) `calendar year 1997' in the case of the dollar 
     amount contained in paragraph (5)(B).''.
       (b) Minimum Tax Exemption Amount.--
       (1) In general.--Subsection (j) of section 59 is amended to 
     read as follows:
       ``(j) Treatment of Unearned Income of Minor Children.--
       ``(1) In general.--In the case of a child to whom section 
     1(g) applies, the exemption amount for purposes of section 55 
     shall not exceed the sum of--
       ``(A) such child's earned income (as defined in section 
     911(d)(2)) for the taxable year, plus
       ``(B) $5,000.
       ``(2) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 1998, the dollar 
     amount in paragraph (1)(B) shall be increased by an amount 
     equal to the product of--
       ``(A) such dollar amount, and
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `1997' for `1992' in 
     subparagraph (B) thereof.

     If any increase determined under the preceding sentence is 
     not a multiple of $50, such increase shall be rounded to the 
     nearest multiple of $50.''.
       (2) Conforming amendment.--Clause (iv) of section 
     6103(e)(1)(A) is amended by striking ``or 59(j)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1202. INCREASE IN AMOUNT OF TAX EXEMPT FROM ESTIMATED 
                   TAX REQUIREMENTS.

       (a) In General.--Paragraph (1) of section 6654(e) (relating 
     to exception where tax is small amount) is amended by 
     striking ``$500'' and inserting ``$1,000''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1203. TREATMENT OF CERTAIN REIMBURSED EXPENSES OF RURAL 
                   MAIL CARRIERS.

       (a) In General.--Section 162 (relating to trade or business 
     expenses) is amended by redesignating subsection (o) as 
     subsection (p) and by inserting after subsection (n) the 
     following new subsection:
       ``(o) Treatment of Certain Reimbursed Expenses of Rural 
     Mail Carriers.--
       ``(1) General rule.--In the case of any employee of the 
     United States Postal Service who performs services involving 
     the collection and delivery of mail on a rural route and who 
     receives qualified reimbursements for the expenses incurred 
     by such employee for the use of a vehicle in performing such 
     services--
       ``(A) the amount allowable as a deduction under this 
     chapter for the use of a vehicle in performing such services 
     shall be equal to the amount of such qualified 
     reimbursements; and
       ``(B) such qualified reimbursements shall be treated as 
     paid under a reimbursement or other expense allowance 
     arrangement for purposes of section 62(a)(2)(A) (and section 
     62(c) shall not apply to such qualified reimbursements).
       ``(2) Definition of qualified reimbursements.--For purposes 
     of this subsection, the term `qualified reimbursements' means 
     the amounts paid by the United States Postal Service to 
     employees as an equipment maintenance allowance under the 
     1991 collective bargaining agreement between the United 
     States Postal Service and the National Rural Letter Carriers' 
     Association. Amounts paid as an equipment maintenance 
     allowance by such Postal Service under later collective 
     bargaining agreements that supersede the 1991 agreement shall 
     be considered qualified reimbursements if such amounts do not 
     exceed the amounts that would have been paid under the 1991 
     agreement, adjusted for changes in the Consumer Price Index 
     (as defined in section 1(f)(5)) since 1991.''.
       (b) Technical Amendment.--Section 6008 of the Technical and 
     Miscellaneous Revenue Act of 1988 is hereby repealed.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1204. TREATMENT OF TRAVELING EXPENSES OF CERTAIN FEDERAL 
                   EMPLOYEES ENGAGED IN CRIMINAL INVESTIGATIONS.

       (a) In General.--Subsection (a) of section 162 is amended 
     by adding at the end the following new sentence: ``The 
     preceding sentence shall not apply to any Federal employee 
     during any period for which such employee is certified by the 
     Attorney General (or the designee thereof) as traveling on 
     behalf of the United States in temporary duty status to 
     investigate, or provide support services for the 
     investigation of, a Federal crime.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to amounts paid or incurred with respect to 
     taxable years ending after the date of the enactment of this 
     Act.

     SEC. 1205. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.

       (a) General Rule.--Section 6311 is amended to read as 
     follows:

     ``SEC. 6311. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.

       ``(a) Authority To Receive.--It shall be lawful for the 
     Secretary to receive for internal revenue taxes (or in 
     payment for internal revenue stamps) any commercially 
     acceptable means that the Secretary deems appropriate to the 
     extent and under the conditions provided in regulations 
     prescribed by the Secretary.
       ``(b) Ultimate Liability.--If a check, money order, or 
     other method of payment, including payment by credit card, 
     debit card, or charge card so received is not duly paid, or 
     is paid and subsequently charged back to the Secretary, the 
     person by whom such check, or money order, or other method of 
     payment has been tendered shall remain liable for the payment 
     of the tax or for the stamps, and for all legal penalties and 
     additions, to the same extent as if such check, money order, 
     or other method of payment had not been tendered.
       ``(c) Liability of Banks and Others.--If any certified, 
     treasurer's, or cashier's check (or other guaranteed draft), 
     or any money order, or any other means of payment that has 
     been guaranteed by a financial institution (such as a credit 
     card, debit card, or charge card transaction which has been 
     guaranteed expressly by a financial institution) so received 
     is not duly paid, the United States shall, in addition to its 
     right to exact payment from the party originally indebted 
     therefor, have a lien for--
       ``(1) the amount of such check (or draft) upon all assets 
     of the financial institution on which drawn,
       ``(2) the amount of such money order upon all the assets of 
     the issuer thereof, or
       ``(3) the guaranteed amount of any other transaction upon 
     all the assets of the institution making such guarantee,

     and such amount shall be paid out of such assets in 
     preference to any other claims whatsoever against such 
     financial institution, issuer, or guaranteeing institution, 
     except the necessary costs and expenses of administration and 
     the reimbursement of the United States for the amount 
     expended in the redemption of the circulating notes of such 
     financial institution.
       ``(d) Payment by Other Means.--
       ``(1) Authority to prescribe regulations.--The Secretary 
     shall prescribe such regulations as the Secretary deems 
     necessary to receive payment by commercially acceptable 
     means, including regulations that--
       ``(A) specify which methods of payment by commercially 
     acceptable means will be acceptable,
       ``(B) specify when payment by such means will be considered 
     received,
       ``(C) identify types of nontax matters related to payment 
     by such means that are to be resolved by persons ultimately 
     liable for payment and financial intermediaries, without the 
     involvement of the Secretary, and
       ``(D) ensure that tax matters will be resolved by the 
     Secretary, without the involvement of financial 
     intermediaries.
       ``(2) Authority to enter into contracts.--Notwithstanding 
     section 3718(f) of title 31, United States Code, the 
     Secretary is authorized to enter into contracts to obtain 
     services related to receiving payment by other means where 
     cost beneficial to the Government. The Secretary may not pay 
     any fee or provide any other consideration under such 
     contracts.
       ``(3) Special provisions for use of credit cards.--If use 
     of credit cards is accepted as a method of payment of taxes 
     pursuant to subsection (a)--
       ``(A) a payment of internal revenue taxes (or a payment for 
     internal revenue stamps) by a person by use of a credit card 
     shall not be subject to section 161 of the Truth in Lending 
     Act (15 U.S.C. 1666), or to any similar provisions of State 
     law, if the error alleged by the person is an error relating 
     to the underlying tax liability, rather than an error 
     relating to the credit card account such as a computational 
     error or numerical transposition in the credit card 
     transaction or an issue as to whether the person authorized 
     payment by use of the credit card,

[[Page H6464]]

       ``(B) a payment of internal revenue taxes (or a payment for 
     internal revenue stamps) shall not be subject to section 170 
     of the Truth in Lending Act (15 U.S.C. 1666i), or to any 
     similar provisions of State law,
       ``(C) a payment of internal revenue taxes (or a payment for 
     internal revenue stamps) by a person by use of a debit card 
     shall not be subject to section 908 of the Electronic Fund 
     Transfer Act (15 U.S.C. 1693f), or to any similar provisions 
     of State law, if the error alleged by the person is an error 
     relating to the underlying tax liability, rather than an 
     error relating to the debit card account such as a 
     computational error or numerical transposition in the debit 
     card transaction or an issue as to whether the person 
     authorized payment by use of the debit card,
       ``(D) the term `creditor' under section 103(f) of the Truth 
     in Lending Act (15 U.S.C. 1602(f)) shall not include the 
     Secretary with respect to credit card transactions in payment 
     of internal revenue taxes (or payment for internal revenue 
     stamps), and
       ``(E) notwithstanding any other provision of law to the 
     contrary, in the case of payment made by credit card or debit 
     card transaction of an amount owed to a person as the result 
     of the correction of an error under section 161 of the Truth 
     in Lending Act (15 U.S.C. 1666) or section 908 of the 
     Electronic Fund Transfer Act (15 U.S.C. 1693f), the Secretary 
     is authorized to provide such amount to such person as a 
     credit to that person's credit card or debit card account 
     through the applicable credit card or debit card system.
       ``(e) Confidentiality of Information.--
       ``(1) In general.--Except as otherwise authorized by this 
     subsection, no person may use or disclose any information 
     relating to credit or debit card transactions obtained 
     pursuant to section 6103(k)(8) other than for purposes 
     directly related to the processing of such transactions, or 
     the billing or collection of amounts charged or debited 
     pursuant thereto.
       ``(2) Exceptions.--
       ``(A) Debit or credit card issuers or others acting on 
     behalf of such issuers may also use and disclose such 
     information for purposes directly related to servicing an 
     issuer's accounts.
       ``(B) Debit or credit card issuers or others directly 
     involved in the processing of credit or debit card 
     transactions or the billing or collection of amounts charged 
     or debited thereto may also use and disclose such information 
     for purposes directly related to--
       ``(i) statistical risk and profitability assessment;
       ``(ii) transferring receivables, accounts, or interest 
     therein;
       ``(iii) auditing the account information;
       ``(iv) complying with Federal, State, or local law; and
       ``(v) properly authorized civil, criminal, or regulatory 
     investigation by Federal, State, or local authorities.
       ``(3) Procedures.--Use and disclosure of information under 
     this paragraph shall be made only to the extent authorized by 
     written procedures promulgated by the Secretary.
       ``(4) Cross reference.--

  ``For provision providing for civil damages for violation of 
paragraph (1), see section 7431.''.

       (b) Clerical Amendment.--The table of sections for 
     subchapter B of chapter 64 is amended by striking the item 
     relating to section 6311 and inserting the following:

``Sec. 6311. Payment of tax by commercially acceptable means.''.

       (c) Amendments to Sections 6103 and 7431 With Respect to 
     Disclosure Authorization.--
       (1) Subsection (k) of section 6103 (relating to 
     confidentiality and disclosure of returns and return 
     information) is amended by adding at the end the following 
     new paragraph:
       ``(8) Disclosure of information to administer section 
     6311.--The Secretary may disclose returns or return 
     information to financial institutions and others to the 
     extent the Secretary deems necessary for the administration 
     of section 6311. Disclosures of information for purposes 
     other than to accept payments by checks or money orders shall 
     be made only to the extent authorized by written procedures 
     promulgated by the Secretary.''.
       (2) Section 7431 (relating to civil damages for 
     unauthorized disclosure of returns and return information) is 
     amended by adding at the end the following new subsection:
       ``(g) Special Rule for Information Obtained Under Section 
     6103(k)(8).--For purposes of this section, any reference to 
     section 6103 shall be treated as including a reference to 
     section 6311(e).''.
       (3) Section 6103(p)(3)(A) is amended by striking ``or (6)'' 
     and inserting ``(6), or (8)''.
       (d) Effective Date.--The amendments made by this section 
     shall take effect on the day 9 months after the date of the 
     enactment of this Act.
        Subtitle B--Provisions Relating to Businesses Generally

     SEC. 1211. MODIFICATIONS TO LOOK-BACK METHOD FOR LONG-TERM 
                   CONTRACTS.

       (a) Look-Back Method Not To Apply in Certain Cases.--
     Subsection (b) of section 460 (relating to percentage of 
     completion method) is amended by adding at the end the 
     following new paragraph:
       ``(6) Election to have look-back method not apply in de 
     minimis cases.--
       ``(A) Amounts taken into account after completion of 
     contract.--Paragraph (1)(B) shall not apply with respect to 
     any taxable year (beginning after the taxable year in which 
     the contract is completed) if--
       ``(i) the cumulative taxable income (or loss) under the 
     contract as of the close of such taxable year, is within
       ``(ii) 10 percent of the cumulative look-back taxable 
     income (or loss) under the contract as of the close of the 
     most recent taxable year to which paragraph (1)(B) applied 
     (or would have applied but for subparagraph (B)).
       ``(B) De minimis discrepancies.--Paragraph (1)(B) shall not 
     apply in any case to which it would otherwise apply if--
       ``(i) the cumulative taxable income (or loss) under the 
     contract as of the close of each prior contract year, is 
     within
       ``(ii) 10 percent of the cumulative look-back income (or 
     loss) under the contract as of the close of such prior 
     contract year.
       ``(C) Definitions.--For purposes of this paragraph--
       ``(i) Contract year.--The term `contract year' means any 
     taxable year for which income is taken into account under the 
     contract.
       ``(ii) Look-back income or loss.--The look-back income (or 
     loss) is the amount which would be the taxable income (or 
     loss) under the contract if the allocation method set forth 
     in paragraph (2)(A) were used in determining taxable income.
       ``(iii) Discounting not applicable.--The amounts taken into 
     account after the completion of the contract shall be 
     determined without regard to any discounting under the 2nd 
     sentence of paragraph (2).
       ``(D) Contracts to which paragraph applies.--This paragraph 
     shall only apply if the taxpayer makes an election under this 
     subparagraph. Unless revoked with the consent of the 
     Secretary, such an election shall apply to all long-term 
     contracts completed during the taxable year for which 
     election is made or during any subsequent taxable year.''.
       (b) Modification of Interest Rate.--
       (1) In general.--Subparagraph (C) of section 460(b)(2) is 
     amended by striking ``the overpayment rate established by 
     section 6621'' and inserting ``the adjusted overpayment rate 
     (as defined in paragraph (7))''.
       (2) Adjusted overpayment rate.--Subsection (b) of section 
     460 is amended by adding at the end the following new 
     paragraph:
       ``(7) Adjusted overpayment rate.--
       ``(A) In general.--The adjusted overpayment rate for any 
     interest accrual period is the overpayment rate in effect 
     under section 6621 for the calendar quarter in which such 
     interest accrual period begins.
       ``(B) Interest accrual period.--For purposes of 
     subparagraph (A), the term `interest accrual period' means 
     the period--
       ``(i) beginning on the day after the return due date for 
     any taxable year of the taxpayer, and
       ``(ii) ending on the return due date for the following 
     taxable year.

     For purposes of the preceding sentence, the term `return due 
     date' means the date prescribed for filing the return of the 
     tax imposed by this chapter (determined without regard to 
     extensions).''.
       (c) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to contracts 
     completed in taxable years ending after the date of the 
     enactment of this Act.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply for purposes of section 167(g) of the Internal 
     Revenue Code of 1986 to property placed in service after 
     September 13, 1995.

     SEC. 1212. MINIMUM TAX TREATMENT OF CERTAIN PROPERTY AND 
                   CASUALTY INSURANCE COMPANIES.

       (a) In General.--Clause (i) of section 56(g)(4)(B) 
     (relating to inclusion of items included for purposes of 
     computing earnings and profits) is amended by adding at the 
     end the following new sentence: ``In the case of any 
     insurance company taxable under section 831(b), this clause 
     shall not apply to any amount not described in section 
     834(b).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1213. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR 
                   SHORT-TERM LEASES.

       (a) In General.--Part III of subchapter B of chapter 1 is 
     amended by inserting after section 109 the following new 
     section:

     ``SEC. 110. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR 
                   SHORT-TERM LEASES.

       ``(a) In General.--Gross income of a lessee does not 
     include any amount received in cash (or treated as a rent 
     reduction) by a lessee from a lessor--
       ``(1) under a short-term lease of retail space, and
       ``(2) for the purpose of such lessee's constructing or 
     improving qualified long-term real property for use in such 
     lessee's trade or business at such retail space,

     but only to the extent that such amount does not exceed the 
     amount expended by the lessee for such construction or 
     improvement.
       ``(b) Consistent Treatment by Lessor.--Qualified long-term 
     real property constructed or improved in connection with any 
     amount excluded from a lessee's income by reason of 
     subsection (a) shall be treated as nonresidential real 
     property of the lessor (including for purposes of section 
     168(i)(8)(B)).
       ``(c) Definitions.--For purposes of this section--
       ``(1) Qualified long-term real property.--The term 
     `qualified long-term real property' means nonresidential real 
     property which is part of, or otherwise present at, the 
     retail space referred to in subsection (a) and which reverts 
     to the lessor at the termination of the lease.
       ``(2) Short-term lease.--The term `short-term lease' means 
     a lease (or other agreement for occupancy or use) of retail 
     space for 15 years or less (as determined under the rules of 
     section 168(i)(3)).

[[Page H6465]]

       ``(3) Retail space.--The term `retail space' means real 
     property leased, occupied, or otherwise used by a lessee in 
     its trade or business of selling tangible personal property 
     or services to the general public.
       ``(d) Information Required To Be Furnished to Secretary.--
     Under regulations, the lessee and lessor described in 
     subsection (a) shall, at such times and in such manner as may 
     be provided in such regulations, furnish to the Secretary--
       ``(1) information concerning the amounts received (or 
     treated as a rent reduction) and expended as described in 
     subsection (a), and
       ``(2) any other information which the Secretary deems 
     necessary to carry out the provisions of this section.''.
       (b) Treatment as Information Return.--Subparagraph (A) of 
     section 6724(d)(1)(A) is amended by striking ``or'' at the 
     end of clause (vii), by adding ``or'' at the end of clause 
     (viii), and by adding at the end the following new clause:
       ``(ix) section 110(d) (relating to qualified lessee 
     construction allowances for short-term leases),''.
       (c) Cross Reference.--Paragraph (8) of section 168(i) 
     (relating to treatment of leasehold improvements) is amended 
     by adding at the end the following new subparagraph:
       ``(C) Cross reference.--

  ``For treatment of qualified long-term real property constructed or 
improved in connection with cash or rent reduction from lessor to 
lessee, see section 110(b).''.

       (d) Clerical Amendment.--The table of sections for part III 
     of subchapter B of chapter 1 is amended by inserting after 
     the item relating to section 109 the following new item:

``Sec. 110. Qualified lessee construction allowances for short-term 
              leases.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to leases entered into after the date of the 
     enactment of this Act.
   Subtitle C--Simplification Relating to Electing Large Partnerships

                       PART I--GENERAL PROVISIONS

     SEC. 1221. SIMPLIFIED FLOW-THROUGH FOR ELECTING LARGE 
                   PARTNERSHIPS.

       (a) General Rule.--Subchapter K (relating to partners and 
     partnerships) is amended by adding at the end the following 
     new part:

        ``PART IV--SPECIAL RULES FOR ELECTING LARGE PARTNERSHIPS

``Sec. 771. Application of subchapter to electing large partnerships.
``Sec. 772. Simplified flow-through.
``Sec. 773. Computations at partnership level.
``Sec. 774. Other modifications.
``Sec. 775. Electing large partnership defined.
``Sec. 776. Special rules for partnerships holding oil and gas 
              properties.
``Sec. 777. Regulations.

     ``SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING LARGE 
                   PARTNERSHIPS.

       ``The preceding provisions of this subchapter to the extent 
     inconsistent with the provisions of this part shall not apply 
     to an electing large partnership and its partners.

     ``SEC. 772. SIMPLIFIED FLOW-THROUGH.

       ``(a) General Rule.--In determining the income tax of a 
     partner of an electing large partnership, such partner shall 
     take into account separately such partner's distributive 
     share of the partnership's--
       ``(1) taxable income or loss from passive loss limitation 
     activities,
       ``(2) taxable income or loss from other activities,
       ``(3) net capital gain (or net capital loss)--
       ``(A) to the extent allocable to passive loss limitation 
     activities, and
       ``(B) to the extent allocable to other activities,
       ``(4) tax-exempt interest,
       ``(5) applicable net AMT adjustment separately computed 
     for--
       ``(A) passive loss limitation activities, and
       ``(B) other activities,
       ``(6) general credits,
       ``(7) low-income housing credit determined under section 
     42,
       ``(8) rehabilitation credit determined under section 47,
       ``(9) foreign income taxes,
       ``(10) the credit allowable under section 29, and
       ``(11) other items to the extent that the Secretary 
     determines that the separate treatment of such items is 
     appropriate.
       ``(b) Separate Computations.--In determining the amounts 
     required under subsection (a) to be separately taken into 
     account by any partner, this section and section 773 shall be 
     applied separately with respect to such partner by taking 
     into account such partner's distributive share of the items 
     of income, gain, loss, deduction, or credit of the 
     partnership.
       ``(c) Treatment at Partner Level.--
       ``(1) In general.--Except as provided in this subsection, 
     rules similar to the rules of section 702(b) shall apply to 
     any partner's distributive share of the amounts referred to 
     in subsection (a).
       ``(2) Income or loss from passive loss limitation 
     activities.--For purposes of this chapter, any partner's 
     distributive share of any income or loss described in 
     subsection (a)(1) shall be treated as an item of income or 
     loss (as the case may be) from the conduct of a trade or 
     business which is a single passive activity (as defined in 
     section 469). A similar rule shall apply to a partner's 
     distributive share of amounts referred to in paragraphs 
     (3)(A) and (5)(A) of subsection (a).
       ``(3) Income or loss from other activities.--
       ``(A) In general.--For purposes of this chapter, any 
     partner's distributive share of any income or loss described 
     in subsection (a)(2) shall be treated as an item of income or 
     expense (as the case may be) with respect to property held 
     for investment.
       ``(B) Deductions for loss not subject to section 67.--The 
     deduction under section 212 for any loss described in 
     subparagraph (A) shall not be treated as a miscellaneous 
     itemized deduction for purposes of section 67.
       ``(4) Treatment of net capital gain or loss.--For purposes 
     of this chapter, any partner's distributive share of any gain 
     or loss described in subsection (a)(3) shall be treated as a 
     long-term capital gain or loss, as the case may be.
       ``(5) Minimum tax treatment.--In determining the 
     alternative minimum taxable income of any partner, such 
     partner's distributive share of any applicable net AMT 
     adjustment shall be taken into account in lieu of making the 
     separate adjustments provided in sections 56, 57, and 58 with 
     respect to the items of the partnership. Except as provided 
     in regulations, the applicable net AMT adjustment shall be 
     treated, for purposes of section 53, as an adjustment or item 
     of tax preference not specified in section 53(d)(1)(B)(ii).
       ``(6) General credits.--A partner's distributive share of 
     the amount referred to in paragraph (6) of subsection (a) 
     shall be taken into account as a current year business 
     credit.
       ``(d) Operating Rules.--For purposes of this section--
       ``(1) Passive loss limitation activity.--The term `passive 
     loss limitation activity' means--
       ``(A) any activity which involves the conduct of a trade or 
     business, and
       ``(B) any rental activity.

     For purposes of the preceding sentence, the term `trade or 
     business' includes any activity treated as a trade or 
     business under paragraph (5) or (6) of section 469(c).
       ``(2) Tax-exempt interest.--The term `tax-exempt interest' 
     means interest excludable from gross income under section 
     103.
       ``(3) Applicable net amt adjustment.--
       ``(A) In general.--The applicable net AMT adjustment is--
       ``(i) with respect to taxpayers other than corporations, 
     the net adjustment determined by using the adjustments 
     applicable to individuals, and
       ``(ii) with respect to corporations, the net adjustment 
     determined by using the adjustments applicable to 
     corporations.
       ``(B) Net adjustment.--The term `net adjustment' means the 
     net adjustment in the items attributable to passive loss 
     activities or other activities (as the case may be) which 
     would result if such items were determined with the 
     adjustments of sections 56, 57, and 58.
       ``(4) Treatment of certain separately stated items.--
       ``(A) Exclusion for certain purposes.--In determining the 
     amounts referred to in paragraphs (1) and (2) of subsection 
     (a), any net capital gain or net capital loss (as the case 
     may be), and any item referred to in subsection (a)(11), 
     shall be excluded.
       ``(B) Allocation rules.--The net capital gain shall be 
     treated--
       ``(i) as allocable to passive loss limitation activities to 
     the extent the net capital gain does not exceed the net 
     capital gain determined by only taking into account gains and 
     losses from sales and exchanges of property used in 
     connection with such activities, and
       ``(ii) as allocable to other activities to the extent such 
     gain exceeds the amount allocated under clause (i).

     A similar rule shall apply for purposes of allocating any net 
     capital loss.
       ``(C) Net capital loss.--The term `net capital loss' means 
     the excess of the losses from sales or exchanges of capital 
     assets over the gains from sales or exchange of capital 
     assets.
       ``(5) General credits.--The term `general credits' means 
     any credit other than the low-income housing credit, the 
     rehabilitation credit, the foreign tax credit, and the credit 
     allowable under section 29.
       ``(6) Foreign income taxes.--The term `foreign income 
     taxes' means taxes described in section 901 which are paid or 
     accrued to foreign countries and to possessions of the United 
     States.
       ``(e) Special Rule for Unrelated Business Tax.--In the case 
     of a partner which is an organization subject to tax under 
     section 511, such partner's distributive share of any items 
     shall be taken into account separately to the extent 
     necessary to comply with the provisions of section 512(c)(1).
       ``(f) Special Rules for Applying Passive Loss 
     Limitations.--If any person holds an interest in an electing 
     large partnership other than as a limited partner--
       ``(1) paragraph (2) of subsection (c) shall not apply to 
     such partner, and
       ``(2) such partner's distributive share of the partnership 
     items allocable to passive loss limitation activities shall 
     be taken into account separately to the extent necessary to 
     comply with the provisions of section 469.

     The preceding sentence shall not apply to any items allocable 
     to an interest held as a limited partner.

     ``SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.

       ``(a) General Rule.--
       ``(1) Taxable income.--The taxable income of an electing 
     large partnership shall be computed in the same manner as in 
     the case of an individual except that--
       ``(A) the items described in section 772(a) shall be 
     separately stated, and
       ``(B) the modifications of subsection (b) shall apply.
       ``(2) Elections.--All elections affecting the computation 
     of the taxable income of an electing large partnership or the 
     computation of any credit of an electing large partnership 
     shall be

[[Page H6466]]

     made by the partnership; except that the election under 
     section 901, and any election under section 108, shall be 
     made by each partner separately.
       ``(3) Limitations, etc.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     all limitations and other provisions affecting the 
     computation of the taxable income of an electing large 
     partnership or the computation of any credit of an electing 
     large partnership shall be applied at the partnership level 
     (and not at the partner level).
       ``(B) Certain limitations applied at partner level.--The 
     following provisions shall be applied at the partner level 
     (and not at the partnership level):
       ``(i) Section 68 (relating to overall limitation on 
     itemized deductions).
       ``(ii) Sections 49 and 465 (relating to at risk 
     limitations).
       ``(iii) Section 469 (relating to limitation on passive 
     activity losses and credits).
       ``(iv) Any other provision specified in regulations.
       ``(4) Coordination with other provisions.--Paragraphs (2) 
     and (3) shall apply notwithstanding any other provision of 
     this chapter other than this part.
       ``(b) Modifications to Determination of Taxable Income.--In 
     determining the taxable income of an electing large 
     partnership--
       ``(1) Certain deductions not allowed.--The following 
     deductions shall not be allowed:
       ``(A) The deduction for personal exemptions provided in 
     section 151.
       ``(B) The net operating loss deduction provided in section 
     172.
       ``(C) The additional itemized deductions for individuals 
     provided in part VII of subchapter B (other than section 212 
     thereof).
       ``(2) Charitable deductions.--In determining the amount 
     allowable under section 170, the limitation of section 
     170(b)(2) shall apply.
       ``(3) Coordination with section 67.--In lieu of applying 
     section 67, 70 percent of the amount of the miscellaneous 
     itemized deductions shall be disallowed.
       ``(c) Special Rules for Income From Discharge of 
     Indebtedness.--If an electing large partnership has income 
     from the discharge of any indebtedness--
       ``(1) such income shall be excluded in determining the 
     amounts referred to in section 772(a), and
       ``(2) in determining the income tax of any partner of such 
     partnership--
       ``(A) such income shall be treated as an item required to 
     be separately taken into account under section 772(a), and
       ``(B) the provisions of section 108 shall be applied 
     without regard to this part.

     ``SEC. 774. OTHER MODIFICATIONS.

       ``(a) Treatment of Certain Optional Adjustments, Etc.--In 
     the case of an electing large partnership--
       ``(1) computations under section 773 shall be made without 
     regard to any adjustment under section 743(b) or 108(b), but
       ``(2) a partner's distributive share of any amount referred 
     to in section 772(a) shall be appropriately adjusted to take 
     into account any adjustment under section 743(b) or 108(b) 
     with respect to such partner.
       ``(b) Credit Recapture Determined at Partnership Level.--
       ``(1) In general.--In the case of an electing large 
     partnership--
       ``(A) any credit recapture shall be taken into account by 
     the partnership, and
       ``(B) the amount of such recapture shall be determined as 
     if the credit with respect to which the recapture is made had 
     been fully utilized to reduce tax.
       ``(2) Method of taking recapture into account.--An electing 
     large partnership shall take into account a credit recapture 
     by reducing the amount of the appropriate current year credit 
     to the extent thereof, and if such recapture exceeds the 
     amount of such current year credit, the partnership shall be 
     liable to pay such excess.
       ``(3) Dispositions not to trigger recapture.--No credit 
     recapture shall be required by reason of any transfer of an 
     interest in an electing large partnership.
       ``(4) Credit recapture.--For purposes of this subsection, 
     the term `credit recapture' means any increase in tax under 
     section 42(j) or 50(a).
       ``(c) Partnership Not Terminated by Reason of Change in 
     Ownership.--Subparagraph (B) of section 708(b)(1) shall not 
     apply to an electing large partnership.
       ``(d) Partnership Entitled to Certain Credits.--The 
     following shall be allowed to an electing large partnership 
     and shall not be taken into account by the partners of such 
     partnership:
       ``(1) The credit provided by section 34.
       ``(2) Any credit or refund under section 852(b)(3)(D).
       ``(e) Treatment of REMIC Residuals.--For purposes of 
     applying section 860E(e)(6) to any electing large 
     partnership--
       ``(1) all interests in such partnership shall be treated as 
     held by disqualified organizations,
       ``(2) in lieu of applying subparagraph (C) of section 
     860E(e)(6), the amount subject to tax under section 
     860E(e)(6) shall be excluded from the gross income of such 
     partnership, and
       ``(3) subparagraph (D) of section 860E(e)(6) shall not 
     apply.
       ``(f) Special Rules for Applying Certain Installment Sale 
     Rules.--In the case of an electing large partnership--
       ``(1) the provisions of sections 453(l)(3) and 453A shall 
     be applied at the partnership level, and
       ``(2) in determining the amount of interest payable under 
     such sections, such partnership shall be treated as subject 
     to tax under this chapter at the highest rate of tax in 
     effect under section 1 or 11.

     ``SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.

       ``(a) General Rule.--For purposes of this part--
       ``(1) In general.--The term `electing large partnership' 
     means, with respect to any partnership taxable year, any 
     partnership if--
       ``(A) the number of persons who were partners in such 
     partnership in the preceding partnership taxable year equaled 
     or exceeded 100, and
       ``(B) such partnership elects the application of this part.

     To the extent provided in regulations, a partnership shall 
     cease to be treated as an electing large partnership for any 
     partnership taxable year if in such taxable year fewer than 
     100 persons were partners in such partnership.
       ``(2) Election.--The election under this subsection shall 
     apply to the taxable year for which made and all subsequent 
     taxable years unless revoked with the consent of the 
     Secretary.
       ``(b) Special Rules for Certain Service Partnerships.--
       ``(1) Certain partners not counted.--For purposes of this 
     section, the term `partner' does not include any individual 
     performing substantial services in connection with the 
     activities of the partnership and holding an interest in such 
     partnership, or an individual who formerly performed 
     substantial services in connection with such activities and 
     who held an interest in such partnership at the time the 
     individual performed such services.
       ``(2) Exclusion.--For purposes of this part, an election 
     under subsection (a) shall not be effective with respect to 
     any partnership if substantially all the partners of such 
     partnership--
       ``(A) are individuals performing substantial services in 
     connection with the activities of such partnership or are 
     personal service corporations (as defined in section 269A(b)) 
     the owner-employees (as defined in section 269A(b)) of which 
     perform such substantial services,
       ``(B) are retired partners who had performed such 
     substantial services, or
       ``(C) are spouses of partners who are performing (or had 
     previously performed) such substantial services.
       ``(3) Special rule for lower tier partnerships.--For 
     purposes of this subsection, the activities of a partnership 
     shall include the activities of any other partnership in 
     which the partnership owns directly an interest in the 
     capital and profits of at least 80 percent.
       ``(c) Exclusion of Commodity Pools.--For purposes of this 
     part, an election under subsection (a) shall not be effective 
     with respect to any partnership the principal activity of 
     which is the buying and selling of commodities (not described 
     in section 1221(1)), or options, futures, or forwards with 
     respect to such commodities.
       ``(d) Secretary May Rely on Treatment on Return.--If, on 
     the partnership return of any partnership, such partnership 
     is treated as an electing large partnership, such treatment 
     shall be binding on such partnership and all partners of such 
     partnership but not on the Secretary.

     ``SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING OIL AND 
                   GAS PROPERTIES.

       ``(a) Computation of Percentage Depletion.--In the case of 
     an electing large partnership, except as provided in 
     subsection (b)--
       ``(1) the allowance for depletion under section 611 with 
     respect to any partnership oil or gas property shall be 
     computed at the partnership level without regard to any 
     provision of section 613A requiring such allowance to be 
     computed separately by each partner,
       ``(2) such allowance shall be determined without regard to 
     the provisions of section 613A(c) limiting the amount of 
     production for which percentage depletion is allowable and 
     without regard to paragraph (1) of section 613A(d), and
       ``(3) paragraph (3) of section 705(a) shall not apply.
       ``(b) Treatment of Certain Partners.--
       ``(1) In general.--In the case of a disqualified person, 
     the treatment under this chapter of such person's 
     distributive share of any item of income, gain, loss, 
     deduction, or credit attributable to any partnership oil or 
     gas property shall be determined without regard to this part. 
     Such person's distributive share of any such items shall be 
     excluded for purposes of making determinations under sections 
     772 and 773.
       ``(2) Disqualified person.--For purposes of paragraph (1), 
     the term `disqualified person' means, with respect to any 
     partnership taxable year--
       ``(A) any person referred to in paragraph (2) or (4) of 
     section 613A(d) for such person's taxable year in which such 
     partnership taxable year ends, and
       ``(B) any other person if such person's average daily 
     production of domestic crude oil and natural gas for such 
     person's taxable year in which such partnership taxable year 
     ends exceeds 500 barrels.
       ``(3) Average daily production.--For purposes of paragraph 
     (2), a person's average daily production of domestic crude 
     oil and natural gas for any taxable year shall be computed as 
     provided in section 613A(c)(2)--
       ``(A) by taking into account all production of domestic 
     crude oil and natural gas (including such person's 
     proportionate share of any production of a partnership),
       ``(B) by treating 6,000 cubic feet of natural gas as a 
     barrel of crude oil, and
       ``(C) by treating as 1 person all persons treated as 1 
     taxpayer under section 613A(c)(8) or among whom allocations 
     are required under such section.

     ``SEC. 777. REGULATIONS.

       ``The Secretary shall prescribe such regulations as may be 
     appropriate to carry out the purposes of this part.''.
       (b) Clerical Amendment.--The table of parts for subchapter 
     K of chapter 1 is amended by adding at the end the following 
     new item:


[[Page H6467]]


``Part IV. Special rules for electing large partnerships.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to partnership taxable years beginning after 
     December 31, 1997.

     SEC. 1222. SIMPLIFIED AUDIT PROCEDURES FOR ELECTING LARGE 
                   PARTNERSHIPS.

       (a) General Rule.--Chapter 63 is amended by adding at the 
     end thereof the following new subchapter:

        ``Subchapter D--Treatment of electing large partnerships

``Part I. Treatment of partnership items and adjustments.
``Part II. Partnership level adjustments.
``Part III. Definitions and special rules.

        ``PART I--TREATMENT OF PARTNERSHIP ITEMS AND ADJUSTMENTS

``Sec. 6240. Application of subchapter.
``Sec. 6241. Partner's return must be consistent with partnership 
              return.
``Sec. 6242. Procedures for taking partnership adjustments into 
              account.

     ``SEC. 6240. APPLICATION OF SUBCHAPTER.

       ``(a) General Rule.--This subchapter shall only apply to 
     electing large partnerships and partners in such 
     partnerships.
       ``(b) Coordination With Other Partnership Audit 
     Procedures.--
       ``(1) In general.--Subchapter C of this chapter shall not 
     apply to any electing large partnership other than in its 
     capacity as a partner in another partnership which is not an 
     electing large partnership.
       ``(2) Treatment where partner in other partnership.--If an 
     electing large partnership is a partner in another 
     partnership which is not an electing large partnership--
       ``(A) subchapter C of this chapter shall apply to items of 
     such electing large partnership which are partnership items 
     with respect to such other partnership, but
       ``(B) any adjustment under such subchapter C shall be taken 
     into account in the manner provided by section 6242.

     ``SEC. 6241. PARTNER'S RETURN MUST BE CONSISTENT WITH 
                   PARTNERSHIP RETURN.

       ``(a) General Rule.--A partner of any electing large 
     partnership shall, on the partner's return, treat each 
     partnership item attributable to such partnership in a manner 
     which is consistent with the treatment of such partnership 
     item on the partnership return.
       ``(b) Underpayment Due to Inconsistent Treatment Assessed 
     as Math Error.--Any underpayment of tax by a partner by 
     reason of failing to comply with the requirements of 
     subsection (a) shall be assessed and collected in the same 
     manner as if such underpayment were on account of a 
     mathematical or clerical error appearing on the partner's 
     return. Paragraph (2) of section 6213(b) shall not apply to 
     any assessment of an underpayment referred to in the 
     preceding sentence.
       ``(c) Adjustments Not To Affect Prior Year of Partners.--
       ``(1) In general.--Except as provided in paragraph (2), 
     subsections (a) and (b) shall apply without regard to any 
     adjustment to the partnership item under part II.
       ``(2) Certain changes in distributive share taken into 
     account by partner.--
       ``(A) In general.--To the extent that any adjustment under 
     part II involves a change under section 704 in a partner's 
     distributive share of the amount of any partnership item 
     shown on the partnership return, such adjustment shall be 
     taken into account in applying this title to such partner for 
     the partner's taxable year for which such item was required 
     to be taken into account.
       ``(B) Coordination with deficiency procedures.--
       ``(i) In general.--Subchapter B shall not apply to the 
     assessment or collection of any underpayment of tax 
     attributable to an adjustment referred to in subparagraph 
     (A).
       ``(ii) Adjustment not precluded.--Notwithstanding any other 
     law or rule of law, nothing in subchapter B (or in any 
     proceeding under subchapter B) shall preclude the assessment 
     or collection of any underpayment of tax (or the allowance of 
     any credit or refund of any overpayment of tax) attributable 
     to an adjustment referred to in subparagraph (A) and such 
     assessment or collection or allowance (or any notice thereof) 
     shall not preclude any notice, proceeding, or determination 
     under subchapter B.
       ``(C) Period of limitations.--The period for--
       ``(i) assessing any underpayment of tax, or
       ``(ii) filing a claim for credit or refund of any 
     overpayment of tax,
     attributable to an adjustment referred to in subparagraph (A) 
     shall not expire before the close of the period prescribed by 
     section 6248 for making adjustments with respect to the 
     partnership taxable year involved.
       ``(D) Tiered structures.--If the partner referred to in 
     subparagraph (A) is another partnership or an S corporation, 
     the rules of this paragraph shall also apply to persons 
     holding interests in such partnership or S corporation (as 
     the case may be); except that, if such partner is an electing 
     large partnership, the adjustment referred to in subparagraph 
     (A) shall be taken into account in the manner provided by 
     section 6242.
       ``(d) Addition to Tax for Failure to Comply With Section.--

  ``For addition to tax in case of partner's disregard of requirements 
of this section, see part II of subchapter A of chapter 68.

     ``SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP ADJUSTMENTS 
                   INTO ACCOUNT.

       ``(a) Adjustments Flow Through To Partners for Year in 
     Which Adjustment Takes Effect.--
       ``(1) In general.--If any partnership adjustment with 
     respect to any partnership item takes effect (within the 
     meaning of subsection (d)(2)) during any partnership taxable 
     year and if an election under paragraph (2) does not apply to 
     such adjustment, such adjustment shall be taken into account 
     in determining the amount of such item for the partnership 
     taxable year in which such adjustment takes effect. In 
     applying this title to any person who is (directly or 
     indirectly) a partner in such partnership during such 
     partnership taxable year, such adjustment shall be treated as 
     an item actually arising during such taxable year.
       ``(2) Partnership liable in certain cases.--If--
       ``(A) a partnership elects under this paragraph to not take 
     an adjustment into account under paragraph (1),
       ``(B) a partnership does not make such an election but in 
     filing its return for any partnership taxable year fails to 
     take fully into account any partnership adjustment as 
     required under paragraph (1), or
       ``(C) any partnership adjustment involves a reduction in a 
     credit which exceeds the amount of such credit determined for 
     the partnership taxable year in which the adjustment takes 
     effect,

     the partnership shall pay to the Secretary an amount 
     determined by applying the rules of subsection (b)(4) to the 
     adjustments not so taken into account and any excess referred 
     to in subparagraph (C).
       ``(3) Offsetting adjustments taken into account.--If a 
     partnership adjustment requires another adjustment in a 
     taxable year after the adjusted year and before the 
     partnership taxable year in which such partnership adjustment 
     takes effect, such other adjustment shall be taken into 
     account under this subsection for the partnership taxable 
     year in which such partnership adjustment takes effect.
       ``(4) Coordination with part ii.--Amounts taken into 
     account under this subsection for any partnership taxable 
     year shall continue to be treated as adjustments for the 
     adjusted year for purposes of determining whether such 
     amounts may be readjusted under part II.
       ``(b) Partnership Liable for Interest and Penalties.--
       ``(1) In general.--If a partnership adjustment takes effect 
     during any partnership taxable year and such adjustment 
     results in an imputed underpayment for the adjusted year, the 
     partnership--
       ``(A) shall pay to the Secretary interest computed under 
     paragraph (2), and
       ``(B) shall be liable for any penalty, addition to tax, or 
     additional amount as provided in paragraph (3).
       ``(2) Determination of amount of interest.--The interest 
     computed under this paragraph with respect to any partnership 
     adjustment is the interest which would be determined under 
     chapter 67--
       ``(A) on the imputed underpayment determined under 
     paragraph (4) with respect to such adjustment,
       ``(B) for the period beginning on the day after the return 
     due date for the adjusted year and ending on the return due 
     date for the partnership taxable year in which such 
     adjustment takes effect (or, if earlier, in the case of any 
     adjustment to which subsection (a)(2) applies, the date on 
     which the payment under subsection (a)(2) is made).

     Proper adjustments in the amount determined under the 
     preceding sentence shall be made for adjustments required for 
     partnership taxable years after the adjusted year and before 
     the year in which the partnership adjustment takes effect by 
     reason of such partnership adjustment.
       ``(3) Penalties.--A partnership shall be liable for any 
     penalty, addition to tax, or additional amount for which it 
     would have been liable if such partnership had been an 
     individual subject to tax under chapter 1 for the adjusted 
     year and the imputed underpayment determined under paragraph 
     (4) were an actual underpayment (or understatement) for such 
     year.
       ``(4) Imputed underpayment.--For purposes of this 
     subsection, the imputed underpayment determined under this 
     paragraph with respect to any partnership adjustment is the 
     underpayment (if any) which would result--
       ``(A) by netting all adjustments to items of income, gain, 
     loss, or deduction and by treating any net increase in income 
     as an underpayment equal to the amount of such net increase 
     multiplied by the highest rate of tax in effect under section 
     1 or 11 for the adjusted year, and
       ``(B) by taking adjustments to credits into account as 
     increases or decreases (whichever is appropriate) in the 
     amount of tax.

     For purposes of the preceding sentence, any net decrease in a 
     loss shall be treated as an increase in income and a similar 
     rule shall apply to a net increase in a loss.
       ``(c) Administrative Provisions.--
       ``(1) In general.--Any payment required by subsection 
     (a)(2) or (b)(1)(A)--
       ``(A) shall be assessed and collected in the same manner as 
     if it were a tax imposed by subtitle C, and
       ``(B) shall be paid on or before the return due date for 
     the partnership taxable year in which the partnership 
     adjustment takes effect.
       ``(2) Interest.--For purposes of determining interest, any 
     payment required by subsection (a)(2) or (b)(1)(A) shall be 
     treated as an underpayment of tax.
       ``(3) Penalties.--
       ``(A) In general.--In the case of any failure by any 
     partnership to pay on the date prescribed therefor any amount 
     required by subsection (a)(2) or (b)(1)(A), there is hereby 
     imposed on such partnership a penalty of 10 percent of the 
     underpayment. For purposes of the preceding sentence, the 
     term `underpayment' means the excess of any payment required 
     under this section over the amount (if any) paid on or before 
     the date prescribed therefor.

[[Page H6468]]

       ``(B) Accuracy-related and fraud penalties made 
     applicable.--For purposes of part II of subchapter A of 
     chapter 68, any payment required by subsection (a)(2) shall 
     be treated as an underpayment of tax.
       ``(d) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Partnership adjustment.--The term `partnership 
     adjustment' means any adjustment in the amount of any 
     partnership item of an electing large partnership.
       ``(2) When adjustment takes effect.--A partnership 
     adjustment takes effect--
       ``(A) in the case of an adjustment pursuant to the decision 
     of a court in a proceeding brought under part II, when such 
     decision becomes final,
       ``(B) in the case of an adjustment pursuant to any 
     administrative adjustment request under section 6251, when 
     such adjustment is allowed by the Secretary, or
       ``(C) in any other case, when such adjustment is made.
       ``(3) Adjusted year.--The term `adjusted year' means the 
     partnership taxable year to which the item being adjusted 
     relates.
       ``(4) Return due date.--The term `return due date' means, 
     with respect to any taxable year, the date prescribed for 
     filing the partnership return for such taxable year 
     (determined without regard to extensions).
       ``(5) Adjustments involving changes in character.--Under 
     regulations, appropriate adjustments in the application of 
     this section shall be made for purposes of taking into 
     account partnership adjustments which involve a change in the 
     character of any item of income, gain, loss, or deduction.
       ``(e) Payments Nondeductible.--No deduction shall be 
     allowed under subtitle A for any payment required to be made 
     by an electing large partnership under this section.

                ``PART II--PARTNERSHIP LEVEL ADJUSTMENTS

``Subpart A. Adjustments by Secretary.
``Subpart B. Claims for adjustments by partnership.

                 ``Subpart A--Adjustments by Secretary

``Sec. 6245. Secretarial authority.
``Sec. 6246. Restrictions on partnership adjustments.
``Sec. 6247. Judicial review of partnership adjustment.
``Sec. 6248. Period of limitations for making adjustments.

     ``SEC. 6245. SECRETARIAL AUTHORITY.

       ``(a) General Rule.--The Secretary is authorized and 
     directed to make adjustments at the partnership level in any 
     partnership item to the extent necessary to have such item be 
     treated in the manner required.
       ``(b) Notice of Partnership Adjustment.--
       ``(1) In general.--If the Secretary determines that a 
     partnership adjustment is required, the Secretary is 
     authorized to send notice of such adjustment to the 
     partnership by certified mail or registered mail. Such notice 
     shall be sufficient if mailed to the partnership at its last 
     known address even if the partnership has terminated its 
     existence.
       ``(2) Further notices restricted.--If the Secretary mails a 
     notice of a partnership adjustment to any partnership for any 
     partnership taxable year and the partnership files a petition 
     under section 6247 with respect to such notice, in the 
     absence of a showing of fraud, malfeasance, or 
     misrepresentation of a material fact, the Secretary shall not 
     mail another such notice to such partnership with respect to 
     such taxable year.
       ``(3) Authority to rescind notice with partnership 
     consent.--The Secretary may, with the consent of the 
     partnership, rescind any notice of a partnership adjustment 
     mailed to such partnership. Any notice so rescinded shall not 
     be treated as a notice of a partnership adjustment, for 
     purposes of this section, section 6246, and section 6247, and 
     the taxpayer shall have no right to bring a proceeding under 
     section 6247 with respect to such notice. Nothing in this 
     subsection shall affect any suspension of the running of any 
     period of limitations during any period  during which the 
     rescinded notice was outstanding.

     ``SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUSTMENTS.

       ``(a) General Rule.--Except as otherwise provided in this 
     chapter, no adjustment to any partnership item may be made 
     (and no levy or proceeding in any court for the collection of 
     any amount resulting from such adjustment may be made, begun 
     or prosecuted) before--
       ``(1) the close of the 90th day after the day on which a 
     notice of a partnership adjustment was mailed to the 
     partnership, and
       ``(2) if a petition is filed under section 6247 with 
     respect to such notice, the decision of the court has become 
     final.
       ``(b) Premature Action May Be Enjoined.--Notwithstanding 
     section 7421(a), any action which violates subsection (a) may 
     be enjoined in the proper court, including the Tax Court. The 
     Tax Court shall have no jurisdiction to enjoin any action 
     under this subsection unless a timely petition has been filed 
     under section 6247 and then only in respect of the 
     adjustments that are the subject of such petition.
       ``(c) Exceptions to Restrictions on Adjustments.--
       ``(1) Adjustments arising out of math or clerical errors.--
       ``(A) In general.--If the partnership is notified that, on 
     account of a mathematical or clerical error appearing on the 
     partnership return, an adjustment to a partnership item is 
     required, rules similar to the rules of paragraphs (1) and 
     (2) of section 6213(b) shall apply to such adjustment.
       ``(B) Special rule.--If an electing large partnership is a 
     partner in another electing large partnership, any adjustment 
     on account of such partnership's failure to comply with the 
     requirements of section 6241(a) with respect to its interest 
     in such other partnership shall be treated as an adjustment 
     referred to in subparagraph (A), except that paragraph (2) of 
     section 6213(b) shall not apply to such adjustment.
       ``(2) Partnership may waive restrictions.--The partnership 
     shall at any time (whether or not a notice of partnership 
     adjustment has been issued) have the right, by a signed 
     notice in writing filed with the Secretary, to waive the 
     restrictions provided in subsection (a) on the making of any 
     partnership adjustment.
       ``(d) Limit Where No Proceeding Begun.--If no proceeding 
     under section 6247 is begun with respect to any notice of a 
     partnership adjustment during the 90-day period described in 
     subsection (a), the amount for which the partnership is 
     liable under section 6242 (and any increase in any partner's 
     liability for tax under chapter 1 by reason of any adjustment 
     under section 6242(a)) shall not exceed the amount determined 
     in accordance with such notice.

     ``SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUSTMENT.

       ``(a) General Rule.--Within 90 days after the date on which 
     a notice of a partnership adjustment is mailed to the 
     partnership with respect to any partnership taxable year, the 
     partnership may file a petition for a readjustment of the 
     partnership items for such taxable year with--
       ``(1) the Tax Court,
       ``(2) the district court of the United States for the 
     district in which the partnership's principal place of 
     business is located, or
       ``(3) the Claims Court.
       ``(b) Jurisdictional Requirement for Bringing Action in 
     District Court or Claims Court.--
       ``(1) In general.--A readjustment petition under this 
     section may be filed in a district court of the United States 
     or the Claims Court only if the partnership filing the 
     petition deposits with the Secretary, on or before the date 
     the petition is filed, the amount for which the partnership 
     would be liable under section 6242(b) (as of the date of the 
     filing of the petition) if the partnership items were 
     adjusted as provided by the notice of partnership adjustment. 
     The court may by order provide that the jurisdictional 
     requirements of this paragraph are satisfied where there has 
     been a good faith attempt to satisfy such requirement and any 
     shortfall of the amount required to be deposited is timely 
     corrected.
       ``(2) Interest payable.--Any amount deposited under 
     paragraph (1), while deposited, shall not be treated as a 
     payment of tax for purposes of this title (other than chapter 
     67).
       ``(c) Scope of Judicial Review.--A court with which a 
     petition is filed in accordance with this section shall have 
     jurisdiction to determine all partnership items of the 
     partnership for the partnership taxable year to which the 
     notice of partnership adjustment relates and the proper 
     allocation of such items among the partners (and the 
     applicability of any penalty, addition to tax, or additional 
     amount for which the partnership may be liable under section 
     6242(b)).
       ``(d) Determination of Court Reviewable.--Any determination 
     by a court under this section shall have the force and effect 
     of a decision of the Tax Court or a final judgment or decree 
     of the district court or the Claims Court, as the case may 
     be, and shall be reviewable as such. The date of any such 
     determination shall be treated as being the date of the 
     court's order entering the decision.
       ``(e) Effect of Decision Dismissing Action.--If an action 
     brought under this section is dismissed other than by reason 
     of a rescission under section 6245(b)(3), the decision of the 
     court dismissing the action shall be considered as its 
     decision that the notice of partnership adjustment is 
     correct, and an appropriate order shall be entered in the 
     records of the court.

     ``SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUSTMENTS.

       ``(a) General Rule.--Except as otherwise provided in this 
     section, no adjustment under this subpart to any partnership 
     item for any partnership taxable year may be made after the 
     date which is 3 years after the later of--
       ``(1) the date on which the partnership return for such 
     taxable year was filed, or
       ``(2) the last day for filing such return for such year 
     (determined without regard to extensions).
       ``(b) Extension by Agreement.--The period described in 
     subsection (a) (including an extension period under this 
     subsection) may be extended by an agreement entered into by 
     the Secretary and the partnership before the expiration of 
     such period.
       ``(c) Special Rule in Case of Fraud, Etc.--
       ``(1) False return.--In the case of a false or fraudulent 
     partnership return with intent to evade tax, the adjustment 
     may be made at any time.
       ``(2) Substantial omission of income.--If any partnership 
     omits from gross income an amount properly includible therein 
     which is in excess of 25 percent of the amount of gross 
     income stated in its return, subsection (a) shall be applied 
     by substituting `6 years' for `3 years'.
       ``(3) No return.--In the case of a failure by a partnership 
     to file a return for any taxable year, the adjustment may be 
     made at any time.
       ``(4) Return filed by secretary.--For purposes of this 
     section, a return executed by the Secretary under subsection 
     (b) of section 6020 on behalf of the partnership shall not be 
     treated as a return of the partnership.
       ``(d) Suspension When Secretary Mails Notice of 
     Adjustment.--If notice of a partnership adjustment with 
     respect to any taxable year is mailed to the partnership, the 
     running of the period specified in subsection (a) (as 
     modified by the other provisions of this section) shall be 
     suspended--

[[Page H6469]]

       ``(1) for the period during which an action may be brought 
     under section 6247 (and, if a petition is filed under section 
     6247 with respect to such notice, until the decision of the 
     court becomes final), and
       ``(2) for 1 year thereafter.

           ``Subpart B--Claims for Adjustments by Partnership

``Sec. 6251. Administrative adjustment requests.
``Sec. 6252. Judicial review where administrative adjustment request is 
              not allowed in full.

     ``SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.

       ``(a) General Rule.--A partnership may file a request for 
     an administrative adjustment of partnership items for any 
     partnership taxable year at any time which is--
       ``(1) within 3 years after the later of--
       ``(A) the date on which the partnership return for such 
     year is filed, or
       ``(B) the last day for filing the partnership return for 
     such year (determined without regard to extensions), and
       ``(2) before the mailing to the partnership of a notice of 
     a partnership adjustment with respect to such taxable year.
       ``(b) Secretarial Action.--If a partnership files an 
     administrative adjustment request under subsection (a), the 
     Secretary may allow any part of the requested adjustments.
       ``(c) Special Rule in Case of Extension Under Section 
     6248.--If the period described in section 6248(a) is extended 
     pursuant to an agreement under section 6248(b), the period 
     prescribed by subsection (a)(1) shall not expire before the 
     date 6 months after the expiration of the extension under 
     section 6248(b).

     ``SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE ADJUSTMENT 
                   REQUEST IS NOT ALLOWED IN FULL.

       ``(a) In General.--If any part of an administrative 
     adjustment request filed under section 6251 is not allowed by 
     the Secretary, the partnership may file a petition for an 
     adjustment with respect to the partnership items to which 
     such part of the request relates with--
       ``(1) the Tax Court,
       ``(2) the district court of the United States for the 
     district in which the principal place of business of the 
     partnership is located, or
       ``(3) the Claims Court.
       ``(b) Period for Filing Petition.--A petition may be filed 
     under subsection (a) with respect to partnership items for a 
     partnership taxable year only--
       ``(1) after the expiration of 6 months from the date of 
     filing of the request under section 6251, and
       ``(2) before the date which is 2 years after the date of 
     such request.

     The 2-year period set forth in paragraph (2) shall be 
     extended for such period as may be agreed upon in writing by 
     the partnership and the Secretary.
       ``(c) Coordination With Subpart A.--
       ``(1) Notice of partnership adjustment before filing of 
     petition.--No petition may be filed under this section after 
     the Secretary mails to the partnership a notice of a 
     partnership adjustment for the partnership taxable year to 
     which the request under section 6251 relates.
       ``(2) Notice of partnership adjustment after filing but 
     before hearing of petition.--If the Secretary mails to the 
     partnership a notice of a partnership adjustment for the 
     partnership taxable year to which the request under section 
     6251 relates after the filing of a petition under this 
     subsection but before the hearing of such petition,  such 
     petition shall be treated as an action brought under 
     section 6247 with respect to such notice, except that 
     subsection (b) of section 6247 shall not apply.
       ``(3) Notice must be before expiration of statute of 
     limitations.--A notice of a partnership adjustment for the 
     partnership taxable year shall be taken into account under 
     paragraphs (1) and (2) only if such notice is mailed before 
     the expiration of the period prescribed by section 6248 for 
     making adjustments to partnership items for such taxable 
     year.
       ``(d) Scope of Judicial Review.--Except in the case 
     described in paragraph (2) of subsection (c), a court with 
     which a petition is filed in accordance with this section 
     shall have jurisdiction to determine only those partnership 
     items to which the part of the request under section 6251 not 
     allowed by the Secretary relates and those items with respect 
     to which the Secretary asserts adjustments as offsets to the 
     adjustments requested by the partnership.
       ``(e) Determination of Court Reviewable.--Any determination 
     by a court under this section shall have the force and effect 
     of a decision of the Tax Court or a final judgment or decree 
     of the district court or the Claims Court, as the case may 
     be, and shall be reviewable as such. The date of any such 
     determination shall be treated as being the date of the 
     court's order entering the decision.

               ``PART III--DEFINITIONS AND SPECIAL RULES

``Sec. 6255. Definitions and special rules.

     ``SEC. 6255. DEFINITIONS AND SPECIAL RULES.

       ``(a) Definitions.--For purposes of this subchapter--
       ``(1) Electing large partnership.--The term `electing large 
     partnership' has the meaning given to such term by section 
     775.
       ``(2) Partnership item.--The term `partnership item' has 
     the meaning given to such term by section 6231(a)(3).
       ``(b) Partners Bound by Actions of Partnership, Etc.--
       ``(1) Designation of partner.--Each electing large 
     partnership shall designate (in the manner prescribed by the 
     Secretary) a partner (or other person) who shall have the 
     sole authority to act on behalf of such partnership under 
     this subchapter. In any case in which such a designation is 
     not in effect, the Secretary may select any partner as the 
     partner with such authority.
       ``(2) Binding effect.--An electing large partnership and 
     all partners of such partnership shall be bound--
       ``(A) by actions taken under this subchapter by the 
     partnership, and
       ``(B) by any decision in a proceeding brought under this 
     subchapter.
       ``(c) Partnerships Having Principal Place of Business 
     Outside the United States.--For purposes of sections 6247 and 
     6252, a principal place of business located outside the 
     United States shall be treated as located in the District of 
     Columbia.
       ``(d) Treatment Where Partnership Ceases To Exist.--If a 
     partnership ceases to exist before a partnership adjustment 
     under this subchapter takes effect, such adjustment shall be 
     taken into account by the former partners of such partnership 
     under regulations prescribed by the Secretary.
       ``(e) Date Decision Becomes Final.--For purposes of this 
     subchapter, the principles of section 7481(a) shall be 
     applied in determining the date on which a decision of a 
     district court or the Claims Court becomes final.
       ``(f) Partnerships in Cases Under Title 11 of the United 
     States Code.--
       ``(1) Suspension of period of limitations on making 
     adjustment, assessment, or collection.--The running of any 
     period of limitations provided in this subchapter on making a 
     partnership adjustment (or provided by section 6501 or 6502 
     on the assessment or collection of any amount required to be 
     paid under section 6242) shall, in a case under title 11 of 
     the United States Code, be suspended during the period during 
     which the Secretary is prohibited by reason of such case from 
     making the adjustment (or assessment or collection) and--
       ``(A) for adjustment or assessment, 60 days thereafter, and
       ``(B) for collection, 6 months thereafter.

     A rule similar to the rule of section 6213(f)(2) shall apply 
     for purposes of section 6246.
       ``(2) Suspension of period of limitation for filing for 
     judicial review.--The running of the period specified in 
     section 6247(a) or 6252(b) shall, in a case under title 11 of 
     the United States Code, be suspended during the period during 
     which the partnership is prohibited by reason of such case 
     from filing a petition under section 6247 or 6252 and for 60 
     days thereafter.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the provisions 
     of this subchapter, including regulations--
       ``(1) to prevent abuse through manipulation of the 
     provisions of this subchapter, and
       ``(2) providing that this subchapter shall not apply to any 
     case described in section 6231(c)(1) (or the regulations 
     prescribed thereunder) where the application of this 
     subchapter to such a case would interfere with the effective 
     and efficient enforcement of this title.

     In any case to which this subchapter does not apply by reason 
     of paragraph (2), rules similar to the rules of sections 
     6229(f) and 6255(f) shall apply.''.
       (b) Conforming Amendments.--
       (1) Subsection (a) of section 7421 is amended by inserting 
     ``6246(b),'' after ``6213(a),''.
       (2) Subsection (c) of section 7459 is amended by striking 
     ``or section 6228(a)'' and inserting ``, 6228(a), 6247, or 
     6252''.
       (3) Subparagraph (E) of section 7482(b)(1) is amended by 
     striking ``or 6228(a)'' and inserting ``, 6228(a), 6247, or 
     6252''.
       (4)(A) The text of section 7485(b) is amended by striking 
     ``or 6228(a)'' and inserting ``, 6228(a), 6247, or 6252''.
       (B) The subsection heading for section 7485(b) is amended 
     to read as follows:
       ``(b) Bond in Case of Appeal of Certain Partnership-Related 
     Decisions.--''.
       (c) Clerical Amendment.--The table of subchapters for 
     chapter 63 is amended by adding at the end thereof the 
     following new item:

``Subchapter D. Treatment of electing large partnerships.''.

     SEC. 1223. DUE DATE FOR FURNISHING INFORMATION TO PARTNERS OF 
                   ELECTING LARGE PARTNERSHIPS.

       (a) General Rule.--Subsection (b) of section 6031 (relating 
     to copies to partners) is amended by adding at the end the 
     following new sentence: ``In the case of an electing large 
     partnership (as defined in section 775), such information 
     shall be furnished on or before the first March 15 following 
     the close of such taxable year.''.
       (b) Treatment as Information Return.--Section 6724 is 
     amended by adding at the end the following new subsection:
       ``(e) Special Rule for Certain Partnership Returns.--If any 
     partnership return under section 6031(a) is required under 
     section 6011(e) to be filed on magnetic media or in other 
     machine-readable form, for purposes of this part, each 
     schedule required to be included with such return with 
     respect to each partner shall be treated as a separate 
     information return.''.

     SEC. 1224. RETURNS REQUIRED ON MAGNETIC MEDIA.

       Paragraph (2) of section 6011(e) (relating to returns on 
     magnetic media) is amended by adding at the end thereof the 
     following new sentence:

     ``Notwithstanding the preceding sentence, the Secretary shall 
     require partnerships having more than 100 partners to file 
     returns on magnetic media.''.

     SEC. 1225. TREATMENT OF PARTNERSHIP ITEMS OF INDIVIDUAL 
                   RETIREMENT ACCOUNTS.

       Subsection (b) of section 6012 is amended by adding at the 
     end thereof the following new paragraph:
       ``(6) IRA share of partnership income.--In the case of a 
     trust which is exempt from taxation under section 408(e), for 
     purposes of this

[[Page H6470]]

     section, the trust's distributive share of items of gross 
     income and gain of any partnership to which subchapter C or D 
     of chapter 63 applies shall be treated as equal to the 
     trust's distributive share of the taxable income of such 
     partnership.''.

     SEC. 1226. EFFECTIVE DATE.

       The amendments made by this part shall apply to partnership 
     taxable years ending on or after December 31, 1997.

      PART II--PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS

     SEC. 1231. TREATMENT OF PARTNERSHIP ITEMS IN DEFICIENCY 
                   PROCEEDINGS.

       (a) In General.--Subchapter C of chapter 63 is amended by 
     adding at the end the following new section:

     ``SEC. 6234. DECLARATORY JUDGMENT RELATING TO TREATMENT OF 
                   ITEMS OTHER THAN PARTNERSHIP ITEMS WITH RESPECT 
                   TO AN OVERSHELTERED RETURN.

       ``(a) General Rule.--If--
       ``(1) a taxpayer files an oversheltered return for a 
     taxable year,
       ``(2) the Secretary makes a determination with respect to 
     the treatment of items (other than partnership items) of such 
     taxpayer for such taxable year, and
       ``(3) the adjustments resulting from such determination do 
     not give rise to a deficiency (as defined in section 6211) 
     but would give rise to a deficiency if there were no net loss 
     from partnership items,

     the Secretary is authorized to send a notice of adjustment 
     reflecting such determination to the taxpayer by certified or 
     registered mail.
       ``(b) Oversheltered Return.--For purposes of this section, 
     the term `oversheltered return' means an income tax return 
     which--
       ``(1) shows no taxable income for the taxable year, and
       ``(2) shows a net loss from partnership items.
       ``(c) Judicial Review in the Tax Court.--Within 90 days, or 
     150 days if the notice is addressed to a person outside the 
     United States, after the day on which the notice of 
     adjustment authorized in subsection (a) is mailed to the 
     taxpayer, the taxpayer may file a petition with the Tax Court 
     for redetermination of the adjustments. Upon the filing of 
     such a petition, the Tax Court shall have jurisdiction to 
     make a declaration with respect to all items (other than 
     partnership items and affected items which require partner 
     level determinations as described in section 
     6230(a)(2)(A)(i)) for the taxable year to which the notice of 
     adjustment relates, in accordance with the principles of 
     section 6214(a). Any such declaration shall have the force 
     and effect of a decision of the Tax Court and shall be 
     reviewable as such.
       ``(d) Failure To File Petition.--
       ``(1) In general.--Except as provided in paragraph (2), if 
     the taxpayer does not file a petition with the Tax Court 
     within the time prescribed in subsection (c), the 
     determination of the Secretary set forth in the notice of 
     adjustment that was mailed to the taxpayer shall be deemed to 
     be correct.
       ``(2) Exception.--Paragraph (1) shall not apply after the 
     date that the taxpayer--
       ``(A) files a petition with the Tax Court within the time 
     prescribed in subsection (c) with respect to a subsequent 
     notice of adjustment relating to the same taxable year, or
       ``(B) files a claim for refund of an overpayment of tax 
     under section 6511 for the taxable year involved.

     If a claim for refund is filed by the taxpayer, then solely 
     for purposes of determining (for the taxable year involved) 
     the amount of any computational adjustment in connection with 
     a partnership proceeding under this subchapter (other than 
     under this section) or the amount of any deficiency 
     attributable to affected items in a proceeding under section 
     6230(a)(2), the items that are the subject of the notice of 
     adjustment shall be presumed to have been correctly reported 
     on the taxpayer's return during the pendency of the refund 
     claim (and, if within the time prescribed by section 6532 the 
     taxpayer commences a civil action for refund under section 
     7422, until the decision in the refund action becomes final).
       ``(e) Limitations Period.--
       ``(1) In general.--Any notice to a taxpayer under 
     subsection (a) shall be mailed before the expiration of the 
     period prescribed by section 6501 (relating to the period of 
     limitations on assessment).
       ``(2) Suspension when secretary mails notice of 
     adjustment.--If the Secretary mails a notice of adjustment to 
     the taxpayer for a taxable year, the period of limitations on 
     the making of assessments shall be suspended for the period 
     during which the Secretary is prohibited from making the 
     assessment (and, in any event, if a proceeding in respect of 
     the notice of adjustment is placed on the docket of the Tax 
     Court, until the decision of the Tax Court becomes final), 
     and for 60 days thereafter.
       ``(3) Restrictions on assessment.--Except as otherwise 
     provided in section 6851, 6852, or 6861, no assessment of a 
     deficiency with respect to any tax imposed by subtitle A 
     attributable to any  item (other than a partnership item or 
     any item affected by a partnership item) shall be made--
       ``(A) until the expiration of the applicable 90-day or 150-
     day period set forth in subsection (c) for filing a petition 
     with the Tax Court, or
       ``(B) if a petition has been filed with the Tax Court, 
     until the decision of the Tax Court has become final.
       ``(f) Further Notices of Adjustment Restricted.--If the 
     Secretary mails a notice of adjustment to the taxpayer for a 
     taxable year and the taxpayer files a petition with the Tax 
     Court within the time prescribed in subsection (c), the 
     Secretary may not mail another such notice to the taxpayer 
     with respect to the same taxable year in the absence of a 
     showing of fraud, malfeasance, or misrepresentation of a 
     material fact.
       ``(g) Coordination With Other Proceedings Under This 
     Subchapter.--
       ``(1) In general.--The treatment of any item that has been 
     determined pursuant to subsection (c) or (d) shall be taken 
     into account in determining the amount of any computational 
     adjustment that is made in connection with a partnership 
     proceeding under this subchapter (other than under this 
     section), or the amount of any deficiency attributable to 
     affected items in a proceeding under section 6230(a)(2), for 
     the taxable year involved. Notwithstanding any other law or 
     rule of law pertaining to the period of limitations on the 
     making of assessments, for purposes of the preceding 
     sentence, any adjustment made in accordance with this section 
     shall be taken into account regardless of whether any 
     assessment has been made with respect to such adjustment.
       ``(2) Special rule in case of computational adjustment.--In 
     the case of a computational adjustment that is made in 
     connection with a partnership proceeding under this 
     subchapter (other than under this section), the provisions of 
     paragraph (1) shall apply only if the computational 
     adjustment is made within the period prescribed by section 
     6229 for assessing any tax under subtitle A which is 
     attributable to any partnership item or affected item for the 
     taxable year involved.
       ``(3) Conversion to deficiency proceeding.--If--
       ``(A) after the notice referred to in subsection (a) is 
     mailed to a taxpayer for a taxable year but before the 
     expiration of the period for filing a petition with the Tax 
     Court under subsection (c) (or, if a petition is filed with 
     the Tax Court, before the Tax Court makes a declaration for 
     that taxable year), the treatment of any partnership item for 
     the taxable year is finally determined, or any such item 
     ceases to be a partnership item pursuant to section 6231(b), 
     and
       ``(B) as a result of that final determination or cessation, 
     a deficiency can be determined with respect to the items that 
     are the subject of the notice of adjustment,

     the notice of adjustment shall be treated as a notice of 
     deficiency under section 6212 and any petition filed in 
     respect of the notice shall be treated as an action brought 
     under section 6213.
       ``(4) Finally determined.--For purposes of this subsection, 
     the treatment of partnership items shall be treated as 
     finally determined if--
       ``(A) the Secretary enters into a settlement agreement 
     (within the meaning of section 6224) with the taxpayer 
     regarding such items,
       ``(B) a notice of final partnership administrative 
     adjustment has been issued and--
       ``(i) no petition has been filed under section 6226 and the 
     time for doing so has expired, or
       ``(ii) a petition has been filed under section 6226 and the 
     decision of the court has become final, or
       ``(C) the period within which any tax attributable to such 
     items may be assessed against the taxpayer has expired.
       ``(h) Special Rules if Secretary Incorrectly Determines 
     Applicable Procedure.--
       ``(1) Special rule if secretary erroneously mails notice of 
     adjustment.--If the Secretary erroneously determines that 
     subchapter B does not apply to a taxable year of a taxpayer 
     and consistent with that determination timely mails a notice 
     of adjustment to the taxpayer pursuant to subsection (a) of 
     this section, the notice of adjustment shall be treated as a 
     notice of deficiency under section 6212 and any petition that 
     is filed in respect of the notice shall be treated as an 
     action brought under section 6213.
       ``(2) Special rule if secretary erroneously mails notice of 
     deficiency.--If the Secretary erroneously determines that 
     subchapter B applies to a taxable year of a taxpayer and 
     consistent with that determination timely mails a notice of 
     deficiency to the taxpayer pursuant to section 6212, the 
     notice of deficiency shall be treated as a notice of 
     adjustment under subsection (a) and any petition that is 
     filed in respect of the notice shall be treated as an action 
     brought under subsection (c).''.
       (b) Treatment of Partnership Items in Deficiency 
     Proceedings.--Section 6211 (defining deficiency) is amended 
     by adding at the end the following new subsection:
       ``(c) Coordination With Subchapter C.--In determining the 
     amount of any deficiency for purposes of this subchapter, 
     adjustments to partnership items shall be made only as 
     provided in subchapter C.''.
       (c) Clerical Amendment.--The table of sections for 
     subchapter C of chapter 63 is amended by adding at the end 
     the following new item:

``Sec. 6234. Declaratory judgment relating to treatment of items other 
              than partnership items with respect to an oversheltered 
              return.''.

       (d) Effective Date.--The amendments made by this section 
     shall apply to partnership taxable years ending after the 
     date of the enactment of this Act.

     SEC. 1232. PARTNERSHIP RETURN TO BE DETERMINATIVE OF AUDIT 
                   PROCEDURES TO BE FOLLOWED.

       (a) In General.--Section 6231 (relating to definitions and 
     special rules) is amended by adding at the end the following 
     new subsection:
       ``(g) Partnership Return To Be Determinative of Whether 
     Subchapter Applies.--
       ``(1) Determination that subchapter applies.--If, on the 
     basis of a partnership return for a taxable year, the 
     Secretary reasonably determines that this subchapter applies 
     to such partnership for such year but such determination is 
     erroneous, then the provisions of this subchapter are hereby 
     extended to such partnership (and its items) for such taxable 
     year and to partners of such partnership.

[[Page H6471]]

       ``(2) Determination that subchapter does not apply.--If, on 
     the basis of a partnership return for a taxable year, the 
     Secretary reasonably determines that this subchapter does not 
     apply to such partnership for such year but such 
     determination is erroneous, then the provisions of this 
     subchapter shall not apply to such partnership (and its 
     items) for such taxable year or to partners of such 
     partnership.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to partnership taxable years ending after the 
     date of the enactment of this Act.

     SEC. 1233. PROVISIONS RELATING TO STATUTE OF LIMITATIONS.

       (a) Suspension of Statute Where Untimely Petition Filed.--
     Paragraph (1) of section 6229(d) (relating to suspension 
     where Secretary makes administrative adjustment) is amended 
     by striking all that follows ``section 6226'' and inserting 
     the following: ``(and, if a petition is filed under section 
     6226 with respect to such administrative adjustment, until 
     the decision of the court becomes final), and''.
       (b) Suspension of Statute During Bankruptcy Proceeding.--
     Section 6229 is amended by adding at the end the following 
     new subsection:
       ``(h) Suspension During Pendency of Bankruptcy 
     Proceeding.--If a petition is filed naming a partner as a 
     debtor in a bankruptcy proceeding under title 11 of the 
     United States Code, the running of the period of limitations 
     provided in this section with respect to such partner shall 
     be suspended--
       ``(1) for the period during which the Secretary is 
     prohibited by reason of such bankruptcy proceeding from 
     making an assessment, and
       ``(2) for 60 days thereafter.''.
       (c) Tax Matters Partner in Bankruptcy.--Section 6229(b) is 
     amended by redesignating paragraph (2) as paragraph (3) and 
     by inserting after paragraph (1) the following new paragraph:
       ``(2) Special rule with respect to debtors in title 11 
     cases.--Notwithstanding any other law or rule of law, if an 
     agreement is entered into under paragraph (1)(B) and the 
     agreement is signed by a person who would be the tax matters 
     partner but for the fact that, at the time that the agreement 
     is executed, the person is a debtor in a bankruptcy 
     proceeding under title 11 of the United States Code, such 
     agreement shall be binding on all partners in the partnership 
     unless the Secretary has been notified of the bankruptcy 
     proceeding in accordance with regulations prescribed by the 
     Secretary.''.
       (d) Effective Dates.--
       (1) Subsections (a) and (b).--The amendments made by 
     subsections (a) and (b) shall apply to partnership taxable 
     years with respect to which the period under section 6229 of 
     the Internal Revenue Code of 1986 for assessing tax has not 
     expired on or before the date of the enactment of this Act.
       (2) Subsection (c).--The amendment made by subsection (c) 
     shall apply to agreements entered into after the date of the 
     enactment of this Act.

     SEC. 1234. EXPANSION OF SMALL PARTNERSHIP EXCEPTION.

       (a) In General.--Clause (i) of section 6231(a)(1)(B) 
     (relating to exception for small partnerships) is amended to 
     read as follows:
       ``(i) In general.--The term `partnership' shall not include 
     any partnership having 10 or fewer partners each of whom is 
     an individual (other than a nonresident alien), a C 
     corporation, or an estate of a deceased partner. For purposes 
     of the preceding sentence, a husband and wife (and their 
     estates) shall be treated as 1 partner.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to partnership taxable years ending after the 
     date of the enactment of this Act.

     SEC. 1235. EXCLUSION OF PARTIAL SETTLEMENTS FROM 1-YEAR 
                   LIMITATION ON ASSESSMENT.

       (a) In General.--Subsection (f) of section 6229 (relating 
     to items becoming nonpartnership items) is amended--
       (1) by striking ``(f) Items Becoming Nonpartnership 
     Items.--If'' and inserting the following:
       ``(f) Special Rules.--
       ``(1) Items becoming nonpartnership items.--If'',
       (2) by moving the text of such subsection 2 ems to the 
     right, and
       (3) by adding at the end the following new paragraph:
       ``(2) Special rule for partial settlement agreements.--If a 
     partner enters into a settlement agreement with the Secretary 
     with respect to the treatment of some of the partnership 
     items in dispute for a partnership taxable year but other 
     partnership items for such year remain in dispute, the period 
     of limitations for assessing any tax attributable to the 
     settled items shall be determined as if such agreement had 
     not been entered into.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to settlements entered into after the date of the 
     enactment of this Act.

     SEC. 1236. EXTENSION OF TIME FOR FILING A REQUEST FOR 
                   ADMINISTRATIVE ADJUSTMENT.

       (a) In General.--Section 6227 (relating to administrative 
     adjustment requests) is amended by redesignating subsections 
     (b) and (c) as subsections (c) and (d), respectively, and by 
     inserting after subsection (a) the following new subsection:
       ``(b) Special Rule in Case of Extension of Period of 
     Limitations Under Section 6229.--The period prescribed by 
     subsection (a)(1) for filing of a request for an 
     administrative adjustment shall be extended--
       ``(1) for the period within which an assessment may be made 
     pursuant to an agreement (or any extension thereof) under 
     section 6229(b), and
       ``(2) for 6 months thereafter.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect as if included in the amendments made by 
     section 402 of the Tax Equity and Fiscal Responsibility Act 
     of 1982.

     SEC. 1237. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN CONTEXT 
                   OF PARTNERSHIP PROCEEDINGS.

       (a) In General.--Subsection (a) of section 6230 is amended 
     by adding at the end the following new paragraph:
       ``(3) Special rule in case of assertion by partner's spouse 
     of innocent spouse relief.--
       ``(A) Notwithstanding section 6404(b), if the spouse of a 
     partner asserts that section 6013(e) applies with respect to 
     a liability that is attributable to any adjustment to a 
     partnership item, then such spouse may file with the 
     Secretary within 60 days after the notice of computational 
     adjustment is mailed to the spouse a request for abatement of 
     the assessment specified in such notice. Upon receipt of such 
     request, the Secretary shall abate the assessment. Any 
     reassessment of the tax with respect to which an abatement is 
     made under this subparagraph shall be subject to the 
     deficiency procedures prescribed by subchapter B. The period 
     for making any such reassessment shall not expire before the 
     expiration of 60 days after the date of such abatement.
       ``(B) If the spouse files a petition with the Tax Court 
     pursuant to section 6213 with respect to the request for 
     abatement described in subparagraph (A), the Tax Court shall 
     only have jurisdiction pursuant to this section to determine 
     whether the requirements of section 6013(e) have been 
     satisfied. For purposes of such determination, the treatment 
     of partnership items under the settlement, the final 
     partnership administrative adjustment, or the decision of the 
     court (whichever is appropriate) that gave rise to the 
     liability in question shall be conclusive.
       ``(C) Rules similar to the rules contained in subparagraphs 
     (B) and (C) of paragraph (2) shall apply for purposes of this 
     paragraph.''.
       (b) Claims for Refund.--Subsection (c) of section 6230 is 
     amended by adding at the end the following new paragraph:
       ``(5) Rules for seeking innocent spouse relief.--
       ``(A) In general.--The spouse of a partner may file a claim 
     for refund on the ground that the Secretary failed to relieve 
     the spouse under section 6013(e) from a liability that is 
     attributable to an adjustment to a partnership item.
       ``(B) Time for filing claim.--Any claim under subparagraph 
     (A) shall be filed within 6 months after the day on which the 
     Secretary mails to the spouse the notice of computational 
     adjustment referred to in subsection (a)(3)(A).
       ``(C) Suit if claim not allowed.--If the claim under 
     subparagraph (B) is not allowed, the spouse may bring suit 
     with respect to the claim within the period specified in 
     paragraph (3).
       ``(D) Prior determinations are binding.--For purposes of 
     any claim or suit under this paragraph, the treatment of 
     partnership items under the settlement, the final partnership 
     administrative adjustment, or the decision of the court 
     (whichever is appropriate) that gave rise to the liability in 
     question shall be conclusive.''.
       (c) Technical Amendments.--
       (1) Paragraph (1) of section 6230(a) is amended by striking 
     ``paragraph (2)'' and inserting ``paragraph (2) or (3)''.
       (2) Subsection (a) of section 6503 is amended by striking 
     ``section 6230(a)(2)(A)'' and inserting ``paragraph (2)(A) or 
     (3) of section 6230(a)''.
       (d) Effective Date.--The amendments made by this section 
     shall take effect as if included in the amendments made by 
     section 402 of the Tax Equity and Fiscal Responsibility Act 
     of 1982.

     SEC. 1238. DETERMINATION OF PENALTIES AT PARTNERSHIP LEVEL.

       (a) In General.--Section 6221 (relating to tax treatment 
     determined at partnership level) is amended by striking 
     ``item'' and inserting ``item (and the applicability of any 
     penalty, addition to tax, or additional amount which relates 
     to an adjustment to a partnership item)''.
       (b) Conforming Amendments.--
       (1) Subsection (f) of section 6226 is amended--
       (A) by striking ``relates and'' and inserting ``relates,'', 
     and
       (B) by inserting before the period ``, and the 
     applicability of any penalty, addition to tax, or additional 
     amount which relates to an adjustment to a partnership 
     item''.
       (2) Clause (i) of section 6230(a)(2)(A) is amended to read 
     as follows:
       ``(i) affected items which require partner level 
     determinations (other than penalties, additions to tax, and 
     additional amounts that relate to adjustments to partnership 
     items), or''.
       (3)(A) Subparagraph (A) of section 6230(a)(3), as added by 
     section 1237, is amended by inserting ``(including any 
     liability for any penalties, additions to tax, or additional 
     amounts relating to such adjustment)'' after ``partnership 
     item''.
       (B) Subparagraph (B) of such section is amended by 
     inserting ``(and the applicability of any penalties, 
     additions to tax, or additional amounts)'' after 
     ``partnership items''.
       (C) Subparagraph (A) of section 6230(c)(5), as added by 
     section 1237, is amended by inserting before the period 
     ``(including any liability for any penalties, additions to 
     tax, or additional amounts relating to such adjustment)''.
       (D) Subparagraph (D) of section 6230(c)(5), as added by 
     section 1237, is amended by inserting ``(and the 
     applicability of any penalties, additions to tax, or 
     additional amounts)'' after ``partnership items''.
       (4) Paragraph (1) of section 6230(c) is amended by striking 
     ``or'' at the end of subparagraph (A), by striking the period 
     at the end of subparagraph (B) and inserting ``, or'', and by 
     adding at the end the following new subparagraph:

[[Page H6472]]

       ``(C) the Secretary erroneously imposed any penalty, 
     addition to tax, or additional amount which relates to an 
     adjustment to a partnership item.''.
       (5) So much of subparagraph (A) of section 6230(c)(2) as 
     precedes ``shall be filed'' is amended to read as follows:
       ``(A) Under paragraph (1) (a) or (c).--Any claim under 
     subparagraph (A) or (C) of paragraph (1)''.
       (6) Paragraph (4) of section 6230(c) is amended by adding 
     at the end the following: ``In addition, the determination 
     under the final partnership administrative adjustment or 
     under the decision of the court (whichever is appropriate) 
     concerning the applicability of any penalty, addition to tax, 
     or additional amount which relates to an adjustment to a 
     partnership item shall also be conclusive. Notwithstanding 
     the preceding sentence, the partner shall be allowed to 
     assert any partner level defenses that may apply or to 
     challenge the amount of the computational adjustment.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to partnership taxable years ending after the 
     date of the enactment of this Act.

     SEC. 1239. PROVISIONS RELATING TO COURT JURISDICTION, ETC.

       (a) Tax Court Jurisdiction To Enjoin Premature Assessments 
     of Deficiencies Attributable to Partnership Items.--
     Subsection (b) of section 6225 is amended by striking ``the 
     proper court.'' and inserting ``the proper court, including 
     the Tax Court. The Tax Court shall have no jurisdiction to 
     enjoin any action or proceeding under this subsection unless 
     a timely petition for a readjustment of the partnership items 
     for the taxable year has been filed and then only in respect 
     of the adjustments that are the subject of such petition.''.
       (b) Jurisdiction To Consider Statute of Limitations With 
     Respect to Partners.--Paragraph (1) of section 6226(d) is 
     amended by adding at the end the following new sentence:

     ``Notwithstanding subparagraph (B), any person treated under 
     subsection (c) as a party to an action shall be permitted to 
     participate in such action (or file a readjustment petition 
     under subsection (b) or paragraph (2) of this subsection) 
     solely for the purpose of asserting that the period of 
     limitations for assessing any tax attributable to partnership 
     items has expired with respect to such person, and the court 
     having jurisdiction of such action shall have jurisdiction to 
     consider such assertion.''.
       (c) Tax Court Jurisdiction To Determine Overpayments 
     Attributable to Affected Items.--
       (1) Paragraph (6) of section 6230(d) is amended by striking 
     ``(or an affected item)''.
       (2) Paragraph (3) of section 6512(b) is amended by adding 
     at the end the following new sentence:

     ``In the case of a credit or refund relating to an affected 
     item (within the meaning of section 6231(a)(5)), the 
     preceding sentence shall be applied by substituting the 
     periods under sections 6229 and 6230(d) for the periods under 
     section 6511(b)(2), (c), and (d).''.
       (d) Venue on Appeal.--
       (1) Paragraph (1) of section 7482(b) is amended by striking 
     ``or'' at the end of subparagraph (D), by striking the period 
     at the end of subparagraph (E) and inserting ``, or'', and by 
     inserting after subparagraph (E) the following new 
     subparagraph:
       ``(F) in the case of a petition under section 6234(c)--
       ``(i) the legal residence of the petitioner if the 
     petitioner is not a corporation, and
       ``(ii) the place or office applicable under subparagraph 
     (B) if the petitioner is a corporation.''.
       (2) The last sentence of section 7482(b)(1) is amended by 
     striking ``or 6228(a)'' and inserting ``, 6228(a), or 
     6234(c)''.
       (e) Other Provisions.--
       (1) Subsection (c) of section 7459 is amended by striking 
     ``or section 6228(a)'' and inserting ``, 6228(a), or 
     6234(c)''.
       (2) Subsection (o) of section 6501 is amended by adding at 
     the end the following new paragraph:
       ``(3) For declaratory judgment relating to treatment of 
     items other than partnership items with respect to an 
     oversheltered return, see section 6234.''.
       (3) Subsection (a) of section 7421, as amended by section 
     1222, is amended by inserting ``6225(b),'' after 
     ``6213(a),''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to partnership taxable years ending after the 
     date of the enactment of this Act.

     SEC. 1240. TREATMENT OF PREMATURE PETITIONS FILED BY NOTICE 
                   PARTNERS OR 5-PERCENT GROUPS.

       (a) In General.--Subsection (b) of section 6226 (relating 
     to judicial review of final partnership administrative 
     adjustments) is amended by redesignating paragraph (5) as 
     paragraph (6) and by inserting after paragraph (4) the 
     following new paragraph:
       ``(5) Treatment of premature petitions.--If--
       ``(A) a petition for a readjustment of partnership items 
     for the taxable year involved is filed by a notice partner 
     (or a 5-percent group) during the 90-day period described in 
     subsection (a), and
       ``(B) no action is brought under paragraph (1) during the 
     60-day period described therein with respect to such taxable 
     year which is not dismissed,

     such petition shall be treated for purposes of paragraph (1) 
     as filed on the last day of such 60-day period.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to petitions filed after the date of the 
     enactment of this Act.

     SEC. 1241. BONDS IN CASE OF APPEALS FROM CERTAIN PROCEEDING.

       (a) In General.--Subsection (b) of section 7485 (relating 
     to bonds to stay assessment of collection) is amended--
       (1) by inserting ``penalties,'' after ``any interest,'', 
     and
       (2) by striking ``aggregate of such deficiencies'' and 
     inserting ``aggregate liability of the parties to the 
     action''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect as if included in the amendments made by 
     section 402 of the Tax Equity and Fiscal Responsibility Act 
     of 1982.

     SEC. 1242. SUSPENSION OF INTEREST WHERE DELAY IN 
                   COMPUTATIONAL ADJUSTMENT RESULTING FROM CERTAIN 
                   SETTLEMENTS.

       (a) In General.--Subsection (c) of section 6601 (relating 
     to interest on underpayment, nonpayment, or extension of time 
     for payment, of tax) is amended by adding at the end the 
     following new sentence: ``In the case of a settlement under 
     section 6224(c) which results in the conversion of 
     partnership items to nonpartnership items pursuant to section 
     6231(b)(1)(C), the preceding sentence shall apply to a 
     computational adjustment resulting from such settlement in 
     the same manner as if such adjustment were a deficiency and 
     such settlement were a waiver referred to in the preceding 
     sentence.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to adjustments with respect to partnership 
     taxable years beginning after the date of the enactment of 
     this Act.

     SEC. 1243. SPECIAL RULES FOR ADMINISTRATIVE ADJUSTMENT 
                   REQUESTS WITH RESPECT TO BAD DEBTS OR WORTHLESS 
                   SECURITIES.

       (a) General Rule.--Section 6227 (relating to administrative 
     adjustment requests) is amended by adding at the end the 
     following new subsection:
       ``(e) Requests With Respect to Bad Debts or Worthless 
     Securities.--In the case of that portion of any request for 
     an administrative adjustment which relates to the 
     deductibility by the partnership under section 166 of a debt 
     as a debt which became worthless, or under section 165(g) of 
     a loss from worthlessness of a security, the period 
     prescribed in subsection (a)(1) shall be 7 years from the 
     last day for filing the partnership return for the year with 
     respect to which such request is made (determined without 
     regard to extensions).''.
       (b) Effective Date.--
       (1) In general.--The amendment made by subsection (a) shall 
     take effect as if included in the amendments made by section 
     402 of the Tax Equity and Fiscal Responsibility Act of 1982.
       (2) Treatment of requests filed before date of enactment.--
     In the case of that portion of any request (filed before the 
     date of the enactment of this Act) for an administrative 
     adjustment which relates to the deductibility of a debt as a 
     debt which became worthless or the deductibility of a loss 
     from the worthlessness of a security--
       (A) paragraph (2) of section 6227(a) of the Internal 
     Revenue Code of 1986 shall not apply,
       (B) the period for filing a petition under section 6228 of 
     the Internal Revenue Code of 1986 with respect to such 
     request shall not expire before the date 6 months after the 
     date of the enactment of this Act, and
       (C) such a petition may be filed without regard to whether 
     there was a notice of the beginning of an administrative 
     proceeding or a final partnership administrative adjustment.

  PART III--PROVISION RELATING TO CLOSING OF PARTNERSHIP TAXABLE YEAR 
                 WITH RESPECT TO DECEASED PARTNER, ETC.

     SEC. 1246. CLOSING OF PARTNERSHIP TAXABLE YEAR WITH RESPECT 
                   TO DECEASED PARTNER, ETC.

       (a) General Rule.--Subparagraph (A) of section 706(c)(2) 
     (relating to disposition of entire interest) is amended to 
     read as follows:
       ``(A) Disposition of entire interest.--The taxable year of 
     a partnership shall close with respect to a partner whose 
     entire interest in the partnership terminates (whether by 
     reason of death, liquidation, or otherwise).''.
       (b) Clerical Amendment.--The paragraph heading for 
     paragraph (2) of section 706(c) is amended to read as 
     follows:
       ``(2) Treatment of dispositions.--''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to partnership taxable years beginning after 
     December 31, 1997.
    Subtitle D--Provisions Relating to Real Estate Investment Trusts

     SEC. 1251. CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF 
                   SHAREHOLDERS.

       (a) Rules Relating to Determination of Ownership.--
       (1) Failure to issue shareholder demand letter not to 
     disqualify reit.--Section 857(a) (relating to requirements 
     applicable to real estate investment trusts) is amended by 
     striking paragraph (2) and by redesignating paragraph (3) as 
     paragraph (2).
       (2) Shareholder demand letter requirement; penalty.--
     Section 857 (relating to taxation of real estate investment 
     trusts and their beneficiaries) is amended by redesignating 
     subsection (f) as subsection (g) and by inserting after 
     subsection (e) the following new subsection:
       ``(f) Real Estate Investment Trusts To Ascertain 
     Ownership.--
       ``(1) In general.--Each real estate investment trust shall 
     each taxable year comply with regulations prescribed by the 
     Secretary for the purposes of ascertaining the actual 
     ownership of the outstanding shares, or certificates of 
     beneficial interest, of such trust.
       ``(2) Failure to comply.--
       ``(A) In general.--If a real estate investment trust fails 
     to comply with the requirements of

[[Page H6473]]

     paragraph (1) for a taxable year, such trust shall pay (on 
     notice and demand by the Secretary and in the same manner as 
     tax) a penalty of $25,000.
       ``(B) Intentional disregard.--If any failure under 
     paragraph (1) is due to intentional disregard of the 
     requirement under paragraph (1), the penalty under 
     subparagraph (A) shall be $50,000.
       ``(C) Failure to comply after notice.--The Secretary may 
     require a real estate investment trust to take such actions 
     as the Secretary determines appropriate to ascertain actual 
     ownership if the trust fails to meet the requirements of 
     paragraph (1). If the trust fails to take such actions, the 
     trust shall pay (on notice and demand by the Secretary and in 
     the same manner as tax) an additional penalty equal to the 
     penalty determined under subparagraph (A) or (B), whichever 
     is applicable.
       ``(D) Reasonable cause.--No penalty shall be imposed under 
     this paragraph with respect to any failure if it is shown 
     that such failure is due to reasonable cause and not to 
     willful neglect.''.
       (b) Compliance With Closely Held Prohibition.--
       (1) In general.--Section 856 (defining real estate 
     investment trust) is amended by adding at the end the 
     following new subsection:
       ``(k) Requirement That Entity Not Be Closely Held Treated 
     as Met in Certain Cases.--A corporation, trust, or 
     association--
       ``(1) which for a taxable year meets the requirements of 
     section 857(f)(1), and
       ``(2) which does not know, or exercising reasonable 
     diligence would not have known, whether the entity failed to 
     meet the requirement of subsection (a)(6),

     shall be treated as having met the requirement of subsection 
     (a)(6) for the taxable year.''.
       (2) Conforming amendment.--Paragraph (6) of section 856(a) 
     is amended by inserting ``subject to the provisions of 
     subsection (k),'' before ``which is not''.

     SEC. 1252. DE MINIMIS RULE FOR TENANT SERVICES INCOME.

       (a) In General.--Paragraph (2) of section 856(d) (defining 
     rents from real property) is amended by striking subparagraph 
     (C) and the last sentence and inserting:
       ``(C) any impermissible tenant service income (as defined 
     in paragraph (7)).''.
       (b) Impermissible Tenant Service Income.--Section 856(d) is 
     amended by adding at the end the following new paragraph:
       ``(7) Impermissible tenant service income.--For purposes of 
     paragraph (2)(C)--
       ``(A) In general.--The term `impermissible tenant service 
     income' means, with respect to any real or personal property, 
     any amount received or accrued directly or indirectly by the 
     real estate investment trust for--
       ``(i) services furnished or rendered by the trust to the 
     tenants of such property, or
       ``(ii) managing or operating such property.
       ``(B) Disqualification of all amounts where more than de 
     minimis amount.--If the amount described in subparagraph (A) 
     with respect to a property for any taxable year exceeds 1 
     percent of all amounts received or accrued during such 
     taxable year directly or indirectly by the real estate 
     investment trust with respect to such property, the 
     impermissible tenant service income of the trust with respect 
     to the property shall include all such amounts.
       ``(C) Exceptions.--For purposes of subparagraph (A)--
       ``(i) services furnished or rendered, or management or 
     operation provided, through an independent contractor from 
     whom the trust itself does not derive or receive any income 
     shall not be treated as furnished, rendered, or provided by 
     the trust, and
       ``(ii) there shall not be taken into account any amount 
     which would be excluded from unrelated business taxable 
     income under section 512(b)(3) if received by an organization 
     described in section 511(a)(2).
       ``(D) Amount attributable to impermissible services.--For 
     purposes of subparagraph (A), the amount treated as received 
     for any service (or management or operation) shall not be 
     less than 150 percent of the direct cost of the trust in 
     furnishing or rendering the service (or providing the 
     management or operation).
       ``(E) Coordination with limitations.--For purposes of 
     paragraphs (2) and (3) of subsection (c), amounts described 
     in subparagraph (A) shall be included in the gross income of 
     the corporation, trust, or association.''.

     SEC. 1253. ATTRIBUTION RULES APPLICABLE TO STOCK OWNERSHIP.

       Section 856(d)(5) (relating to constructive ownership of 
     stock) is amended by striking ``except that'' and all that 
     follows and inserting ``except that--
       ``(A) `10 percent' shall be substituted for `50 percent' in 
     subparagraph (C) of paragraphs (2) and (3) of section 318(a), 
     and
       ``(B) section 318(a)(3)(A) shall be applied in the case of 
     a partnership by taking into account only partners who own 
     (directly or indirectly) 25 percent or more of the capital 
     interest, or the profits interest, in the partnership.''.

     SEC. 1254. CREDIT FOR TAX PAID BY REIT ON RETAINED CAPITAL 
                   GAINS.

       (a) General Rule.--Paragraph (3) of section 857(b) 
     (relating to capital gains) is amended by redesignating 
     subparagraph (D) as subparagraph (E) and by inserting after 
     subparagraph (C) the following new subparagraph:
       ``(D) Treatment by shareholders of undistributed capital 
     gains.--
       ``(i) Every shareholder of a real estate investment trust 
     at the close of the trust's taxable year shall include, in 
     computing his long-term capital gains in his return for his 
     taxable year in which the last day of the trust's taxable 
     year falls, such amount as the trust shall designate in 
     respect of such shares in a written notice mailed to its 
     shareholders at any time prior to the expiration of 60 days 
     after the close of its taxable year (or mailed to its 
     shareholders or holders of beneficial interests with its 
     annual report for the taxable year), but the amount so 
     includible by any shareholder shall not exceed that part of 
     the amount subjected to tax in subparagraph (A)(ii) which he 
     would have received if all of such amount had been 
     distributed as capital gain dividends by the trust to the 
     holders of such shares at the close of its taxable year.
       ``(ii) For purposes of this title, every such shareholder 
     shall be deemed to have paid, for his taxable year under 
     clause (i), the tax imposed by subparagraph (A)(ii) on the 
     amounts required by this subparagraph to be included in 
     respect of such shares in computing his long-term capital 
     gains for that year; and such shareholders shall be allowed 
     credit or refund as the case may be, for the tax so deemed to 
     have been paid by him.
       ``(iii) The adjusted basis of such shares in the hands of 
     the holder shall be increased with respect to the amounts 
     required by this subparagraph to be included in computing his 
     long-term capital gains, by the difference between the amount 
     of such includible gains and the tax deemed paid by such 
     shareholder in respect of such shares under clause (ii).
       ``(iv) In the event of such designation, the tax imposed by 
     subparagraph (A)(ii) shall be paid by the real estate 
     investment trust within 30 days after the close of its 
     taxable year.
       ``(v) The earnings and profits of such real estate 
     investment trust, and the earnings and profits of any such 
     shareholder which is a corporation, shall be appropriately 
     adjusted in accordance with regulations prescribed by the 
     Secretary.
       ``(vi) As used in this subparagraph, the terms `shares' and 
     `shareholders' shall include beneficial interests and holders 
     of beneficial interests, respectively.''.
       (b) Conforming Amendments.--
       (1) Clause (i) of section 857(b)(7)(A) is amended by 
     striking ``subparagraph (B)'' and inserting ``subparagraph 
     (B) or (D)''.
       (2) Clause (iii) of section 852(b)(3)(D) is amended by 
     striking ``by 65 percent'' and all that follows and inserting 
     ``by the difference between the amount of such includible 
     gains and the tax deemed paid by such shareholder in respect 
     of such shares under clause (ii).''.

     SEC. 1255. REPEAL OF 30-PERCENT GROSS INCOME REQUIREMENT.

       (a) General Rule.--Subsection (c) of section 856 (relating 
     to limitations) is amended--
       (1) by adding ``and'' at the end of paragraph (3),
       (2) by striking paragraphs (4) and (8), and
       (3) by redesignating paragraphs (5), (6), and (7) as 
     paragraphs (4), (5), and (6), respectively.
       (b) Conforming Amendments.--
       (1) Subparagraph (G) of section 856(c)(5), as redesignated 
     by subsection (a), is amended by striking ``and such 
     agreement shall be treated as a security for purposes of 
     paragraph (4)(A)''.
       (2) Paragraph (5) of section 857(b) is amended by striking 
     ``section 856(c)(7)'' and inserting ``section 856(c)(6)''.
       (3) Subparagraph (C) of section 857(b)(6) is amended by 
     striking ``section 856(c)(6)(B)'' and inserting ``section 
     856(c)(5)(B)''.

     SEC. 1256. MODIFICATION OF EARNINGS AND PROFITS RULES FOR 
                   DETERMINING WHETHER REIT HAS EARNINGS AND 
                   PROFITS FROM NON-REIT YEAR.

       Subsection (d) of section 857 is amended by adding at the 
     end the following new paragraph:
       ``(3) Distributions to meet requirements of subsection 
     (a)(2)(B).--Any distribution which is made in order to comply 
     with the requirements of subsection (a)(2)(B)--
       ``(A) shall be treated for purposes of this subsection and 
     subsection (a)(2)(B) as made from the earliest accumulated 
     earnings and profits (other than earnings and profits to 
     which subsection (a)(2)(A) applies) rather than the most 
     recently accumulated earnings and profits, and
       ``(B) to the extent treated under subparagraph (A) as made 
     from accumulated earnings and profits, shall not be treated 
     as a distribution for purposes of subsection (b)(2)(B).''.

     SEC. 1257. TREATMENT OF FORECLOSURE PROPERTY.

       (a) Grace Periods.--
       (1) Initial period.--Paragraph (2) of section 856(e) 
     (relating to special rules for foreclosure property) is 
     amended by striking ``on the date which is 2 years after the 
     date the trust acquired such property'' and inserting ``as of 
     the close of the 3d taxable year following the taxable year 
     in which the trust acquired such property''.
       (2) Extension.--Paragraph (3) of section 856(e) is 
     amended--
       (A) by striking ``or more extensions'' and inserting 
     ``extension'', and
       (B) by striking the last sentence and inserting: ``Any such 
     extension shall not extend the grace period beyond the close 
     of the 3d taxable year following the last taxable year in the 
     period under paragraph (2).''.
       (b) Revocation of Election.--Paragraph (5) of section 
     856(e) is amended by striking the last sentence and 
     inserting: ``A real estate investment trust may revoke any 
     such election for a taxable year by filing the revocation (in 
     the manner provided by the Secretary) on or before the due 
     date (including any extension of time) for filing its return 
     of tax under this chapter for the taxable year. If a trust 
     revokes an election for any property, no election may be made 
     by the trust under this paragraph with respect to the 
     property for any subsequent taxable year.''.
       (c) Certain Activities Not To Disqualify Property.--
     Paragraph (4) of section 856(e) is amended by adding at the 
     end the following new flush sentence:

     ``For purposes of subparagraph (C), property shall not be 
     treated as used in a trade or business by reason of any 
     activities of the real estate

[[Page H6474]]

     investment trust with respect to such property to the extent 
     that such activities would not result in amounts received or 
     accrued, directly or indirectly, with respect to such 
     property being treated as other than rents from real 
     property.''.

     SEC. 1258. PAYMENTS UNDER HEDGING INSTRUMENTS.

       Section 856(c)(5)(G) (relating to treatment of certain 
     interest rate agreements), as redesignated by section 1255, 
     is amended to read as follows:
       ``(G) Treatment of certain hedging instruments.--Except to 
     the extent provided by regulations, any--
       ``(i) payment to a real estate investment trust under an 
     interest rate swap or cap agreement, option, futures 
     contract, forward rate agreement, or any similar financial 
     instrument, entered into by the trust in a transaction to 
     reduce the interest rate risks with respect to any 
     indebtedness incurred or to be incurred by the trust to 
     acquire or carry real estate assets, and
       ``(ii) gain from the sale or other disposition of any such 
     investment,
     shall be treated as income qualifying under paragraph (2).''.

     SEC. 1259. EXCESS NONCASH INCOME.

       Section 857(e)(2) (relating to determination of amount of 
     excess noncash income) is amended--
       (1) by striking subparagraph (B),
       (2) by striking the period at the end of subparagraph (C) 
     and inserting a comma,
       (3) by redesignating subparagraph (C) (as amended by 
     paragraph (2)) as subparagraph (B), and
       (4) by adding at the end the following new subparagraphs:
       ``(C) the amount (if any) by which--
       ``(i) the amounts includible in gross income with respect 
     to instruments to which section 860E(a) or 1272 applies, 
     exceed
       ``(ii) the amount of money and the fair market value of 
     other property received during the taxable year under such 
     instruments, and
       ``(D) amounts includible in income by reason of 
     cancellation of indebtedness.''.

     SEC. 1260. PROHIBITED TRANSACTION SAFE HARBOR.

       Clause (iii) of section 857(b)(6)(C) (relating to certain 
     sales not to constitute prohibited transactions) is amended 
     by striking ``(other than foreclosure property)'' in 
     subclauses (I) and (II) and inserting ``(other than sales of 
     foreclosure property or sales to which section 1033 
     applies)''.

     SEC. 1261. SHARED APPRECIATION MORTGAGES.

       (a) Bankruptcy Safe Harbor.--Section 856(j) (relating to 
     treatment of shared appreciation mortgages) is amended by 
     redesignating paragraph (4) as paragraph (5) and by inserting 
     after paragraph (3) the following new paragraph:
       ``(4) Coordination with 4-year holding period.--
       ``(A) In general.--For purposes of section 857(b)(6)(C), if 
     a real estate investment trust is treated as having sold 
     secured property under paragraph (3)(A), the trust shall be 
     treated as having held such property for at least 4 years 
     if--
       ``(i) the secured property is sold or otherwise disposed of 
     pursuant to a case under title 11 of the United States Code,
       ``(ii) the seller is under the jurisdiction of the court in 
     such case, and
       ``(iii) the disposition is required by the court or is 
     pursuant to a plan approved by the court.
       ``(B) Exception.--Subparagraph (A) shall not apply if--
       ``(i) the secured property was acquired by the seller with 
     the intent to evict or foreclose, or
       ``(ii) the trust knew or had reason to know that default on 
     the obligation described in paragraph (5)(A) would occur.''.
       (b) Clarification of Definition of Shared Appreciation 
     Provision.--Clause (ii) of section 856(j)(5)(A) is amended by 
     inserting before the period ``or appreciation in value as of 
     any specified date''.

     SEC. 1262. WHOLLY OWNED SUBSIDIARIES.

       Section 856(i)(2) (defining qualified REIT subsidiary) is 
     amended by striking ``at all times during the period such 
     corporation was in existence''.

     SEC. 1263. EFFECTIVE DATE.

       The amendments made by this part shall apply to taxable 
     years beginning after the date of the enactment of this Act.
   Subtitle E--Provisions Relating to Regulated Investment Companies

     SEC. 1271. REPEAL OF 30-PERCENT GROSS INCOME LIMITATION.

       (a) General Rule.--Subsection (b) of section 851 (relating 
     to limitations) is amended by striking paragraph (3), by 
     adding ``and'' at the end of paragraph (2), and by 
     redesignating paragraph (4) as paragraph (3).
       (b) Technical Amendments.--
       (1) The material following paragraph (3) of section 851(b) 
     (as redesignated by subsection (a)) is amended--
       (A) by striking out ``paragraphs (2) and (3)'' and 
     inserting ``paragraph (2)'', and
       (B) by striking out the last sentence thereof.
       (2) Subsection (c) of section 851 is amended by striking 
     ``subsection (b)(4)'' each place it appears (including the 
     heading) and inserting ``subsection (b)(3)''.
       (3) Subsection (d) of section 851 is amended by striking 
     ``subsections (b)(4)'' and inserting ``subsections (b)(3)''.
       (4) Paragraph (1) of section 851(e) is amended by striking 
     ``subsection (b)(4)'' and inserting ``subsection (b)(3)''.
       (5) Paragraph (4) of section 851(e) is amended by striking 
     ``subsections (b)(4)'' and inserting ``subsections (b)(3)''.
       (6) Section 851 is amended by striking subsection (g) and 
     redesignating subsection (h) as subsection (g).
       (7) Subsection (g) of section 851 (as redesignated by 
     paragraph (6)) is amended by striking paragraph (3).
       (8) Section 817(h)(2) is amended--
       (A) by striking ``851(b)(4)'' in subparagraph (A) and 
     inserting ``851(b)(3)'', and
       (B) by striking ``851(b)(4)(A)(i)'' in subparagraph (B) and 
     inserting ``851(b)(3)(A)(i)''.
       (9) Section 1092(f)(2) is amended by striking ``Except for 
     purposes of section 851(b)(3), the'' and inserting ``The''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.
                    Subtitle F--Taxpayer Protections

     SEC. 1281. REASONABLE CAUSE EXCEPTION FOR CERTAIN PENALTIES.

       (a) Information on Deductible Employee Contributions.--
     Subsection (g) of section 6652 (relating to information 
     required in connection with deductible employee 
     contributions) is amended by adding at the end the following 
     new sentence: ``No penalty shall be imposed under this 
     subsection on any failure which is shown to be due to 
     reasonable cause and not willful neglect.''.
       (b) Reports on Status as Qualified Small Business.--
     Subsection (k) of section 6652 (relating to failure to make 
     reports required under section 1202) is amended by adding at 
     the end the following new sentence: ``No penalty shall be 
     imposed under this subsection on any failure which is shown 
     to be due to reasonable cause and not willful neglect.''.
       (c) Returns of Personal Holding Company Tax by Foreign 
     Corporations.--Section 6683 (relating to failure of foreign 
     corporation to file return of personal holding company tax) 
     is amended by adding at the end the following new sentence: 
     ``No penalty shall be imposed under this section on any 
     failure which is shown to be due to reasonable cause and not 
     willful neglect.''.
       (d) Failure To Make Required Payments.--Subparagraph (A) of 
     section 7519(f)(4) is amended by adding at the end the 
     following new sentence: ``No penalty shall be imposed under 
     this subparagraph on any failure which is shown to be due to 
     reasonable cause and not willful neglect.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 1282. CLARIFICATION OF PERIOD FOR FILING CLAIMS FOR 
                   REFUNDS.

       (a) In General.--Paragraph (3) of section 6512(b) (relating 
     to overpayment determined by Tax Court) is amended by adding 
     at the end the following flush sentence:

     ``In a case described in subparagraph (B) where the date of 
     the mailing of the notice of deficiency is during the third 
     year after the due date (with extensions) for filing the 
     return of tax and no return was filed before such date, the 
     applicable period under subsections (a) and (b)(2) of section 
     6511 shall be 3 years.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to claims for credit or refund for taxable years 
     ending after the date of the enactment of this Act.

     SEC. 1283. REPEAL OF AUTHORITY TO DISCLOSE WHETHER 
                   PROSPECTIVE JUROR HAS BEEN AUDITED.

       (a) In General.--Subsection (h) of section 6103 (relating 
     to disclosure to certain Federal officers and employees for 
     purposes of tax administration, etc.) is amended by striking 
     paragraph (5) and by redesignating paragraph (6) as paragraph 
     (5).
       (b) Conforming Amendment.--Paragraph (4) of section 6103(p) 
     is amended by striking ``(h)(6)'' each place it appears and 
     inserting ``(h)(5)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to judicial proceedings commenced after the date 
     of the enactment of this Act.

     SEC. 1284. CLARIFICATION OF STATUTE OF LIMITATIONS.

       (a) In General.--Subsection (a) of section 6501 (relating 
     to limitations on assessment and collection) is amended by 
     adding at the end thereof the following new sentence: ``For 
     purposes of this chapter, the term `return' means the return 
     required to be filed by the taxpayer (and does not include a 
     return of any person from whom the taxpayer has received an 
     item of income, gain, loss, deduction, or credit).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 1285. AWARDING OF ADMINISTRATIVE COSTS.

       (a) Right to Appeal Tax Court Decision.--Subsection (f) of 
     section 7430 (relating to right of appeal) is amended by 
     adding at the end the following new paragraph:
       ``(3) Appeal of tax court decision.--An order of the Tax 
     Court disposing of a petition under paragraph (2) shall be 
     reviewable in the same manner as a decision of the Tax 
     Court, but only with respect to the matters determined in 
     such order.''.
       (b) Period for Applying to IRS for Costs.--Subsection (b) 
     of section 7430 (relating to limitations) is amended by 
     adding at the end the following new paragraph:
       ``(5) Period for applying to irs for administrative 
     costs.--An award may be made under subsection (a) by the 
     Internal Revenue Service for reasonable administrative costs 
     only if the prevailing party files an application with the 
     Internal Revenue Service for such costs before the 91st day 
     after the date on which the final decision of the Internal 
     Revenue Service as to the determination of the tax, interest, 
     or penalty is mailed to such party.''.
       (c) Period for Petitioning of Tax Court for Review of 
     Denial of Costs.--Paragraph

[[Page H6475]]

     (2) of section 7430(f) (relating to right of appeal) is 
     amended--
       (1) by striking ``appeal to'' and inserting ``the filing of 
     a petition for review with'', and
       (2) by adding at the end the following new sentence: ``If 
     the Secretary sends by certified or registered mail a notice 
     of such decision to the petitioner, no proceeding in the Tax 
     Court may be initiated under this paragraph unless such 
     petition is filed before the 91st day after the date of such 
     mailing.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to civil actions or proceedings commenced after 
     the date of the enactment of this Act.
TITLE XIII--SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND GIFT TAXES

     SEC. 1301. GIFTS TO CHARITIES EXEMPT FROM GIFT TAX FILING 
                   REQUIREMENTS.

       (a) In General.--Section 6019 is amended by striking ``or'' 
     at the end of paragraph (1), by adding ``or'' at the end of 
     paragraph (2), and by inserting after paragraph (2) the 
     following new paragraph:
       ``(3) a transfer with respect to which a deduction is 
     allowed under section 2522 but only if--
       ``(A)(i) such transfer is of the donor's entire interest in 
     the property transferred, and
       ``(ii) no other interest in such property is or has been 
     transferred (for less than adequate and full consideration in 
     money or money's worth) from the donor to a person, or for a 
     use, not described in subsection (a) or (b) of section 2522, 
     or
       ``(B) such transfer is described in section 2522(d),''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to gifts made after the date of the enactment of 
     this Act.

     SEC. 1302. CLARIFICATION OF WAIVER OF CERTAIN RIGHTS OF 
                   RECOVERY.

       (a) Amendment to Section 2207A.--Paragraph (2) of section 
     2207A(a) (relating to right of recovery in the case of 
     certain marital deduction property) is amended to read as 
     follows:
       ``(2) Decedent may otherwise direct.--Paragraph (1) shall 
     not apply with respect to any property to the extent that the 
     decedent in his will (or a revocable trust) specifically 
     indicates an intent to waive any right of recovery under this 
     subchapter with respect to such property.''.
       (b) Amendment to Section 2207B.--Paragraph (2) of section 
     2207B(a) (relating to right of recovery where decedent 
     retained interest) is amended to read as follows:
       ``(2) Decedent may otherwise direct.--Paragraph (1) shall 
     not apply with respect to any property to the extent that the 
     decedent in his will (or a revocable trust) specifically 
     indicates an intent to waive any right of recovery under this 
     subchapter with respect to such property.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to the estates of decedents dying 
     after the date of the enactment of this Act.

     SEC. 1303. TRANSITIONAL RULE UNDER SECTION 2056A.

       (a) General Rule.--In the case of any trust created under 
     an instrument executed before the date of the enactment of 
     the Revenue Reconciliation Act of 1990, such trust shall be 
     treated as meeting the requirements of paragraph (1) of 
     section 2056A(a) of the Internal Revenue Code of 1986 if the 
     trust instrument requires that all trustees of the trust be 
     individual citizens of the United States or domestic 
     corporations.
       (b) Effective Date.--The provisions of subsection (a) shall 
     take effect as if included in the provisions of section 
     11702(g) of the Revenue Reconciliation Act of 1990.

     SEC. 1304. TREATMENT FOR ESTATE TAX PURPOSES OF SHORT-TERM 
                   OBLIGATIONS HELD BY NONRESIDENT ALIENS.

       (a) In General.--Subsection (b) of section 2105 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 inserting after paragraph (3) the following new 
     paragraph:
       ``(4) obligations which would be original issue discount 
     obligations as defined in section 871(g)(1) but for 
     subparagraph (B)(i) thereof, if any interest thereon (were 
     such interest received by the decedent at the time of his 
     death) would not be effectively connected with the conduct of 
     a trade or business within the United States.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to estates of decedents dying after the date of 
     the enactment of this Act.

     SEC. 1305. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF 
                   ESTATE.

       (a) In General.--Subpart A of part I of subchapter J 
     (relating to estates, trusts, beneficiaries, and decedents) 
     is amended by adding at the end the following new section:

     ``SEC. 646. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF 
                   ESTATE.

       ``(a) General Rule.--For purposes of this subtitle, if both 
     the executor (if any) of an estate and the trustee of a 
     qualified revocable trust elect the treatment provided in 
     this section, such trust shall be treated and taxed as part 
     of such estate (and not as a separate trust) for all taxable 
     years of the estate ending after the date of the decedent's 
     death and before the applicable date.
       ``(b) Definitions.--For purposes of subsection (a)--
       ``(1) Qualified revocable trust.--The term `qualified 
     revocable trust' means any trust (or portion thereof) which 
     was treated under section 676 as owned by the decedent of the 
     estate referred to in subsection (a) by reason of a power in 
     the grantor (determined without regard to section 672(e)).
       ``(2) Applicable date.--The term `applicable date' means--
       ``(A) if no return of tax imposed by chapter 11 is required 
     to be filed, the date which is 2 years after the date of the 
     decedent's death, and
       ``(B) if such a return is required to be filed, the date 
     which is 6 months after the date of the final determination 
     of the liability for tax imposed by chapter 11.
       ``(c) Election.--The election under subsection (a) shall be 
     made not later than the time prescribed for filing the return 
     of tax imposed by this chapter for the first taxable year of 
     the estate (determined with regard to extensions) and, once 
     made, shall be irrevocable.''.
       (b) Comparable Treatment Under Generation-Skipping Tax.--
     Paragraph (1) of section 2652(b) is amended by adding at the 
     end the following new sentence: ``Such term shall not include 
     any trust during any period the trust is treated as part of 
     an estate under section 646.''.
       (c) Clerical Amendment.--The table of sections for such 
     subpart A is amended by adding at the end the following new 
     item:

``Sec. 646. Certain revocable trusts treated as part of estate.''.

       (d) Effective Date.--The amendments made by this section 
     shall apply with respect to estates of decedents dying after 
     the date of the enactment of this Act.

     SEC. 1306. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAXABLE YEAR 
                   OF ESTATE.

       (a) In General.--Subsection (b) of section 663 (relating to 
     distributions in first 65 days of taxable year) is amended by 
     inserting ``an estate or'' before ``a trust'' each place it 
     appears.
       (b) Conforming Amendment.--Paragraph (2) of section 663(b) 
     is amended by striking ``the fiduciary of such trust'' and 
     inserting ``the executor of such estate or the fiduciary of 
     such trust (as the case may be)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 1307. SEPARATE SHARE RULES AVAILABLE TO ESTATES.

       (a) In General.--Subsection (c) of section 663 (relating to 
     separate shares treated as separate trusts) is amended--
       (1) by inserting before the last sentence the following new 
     sentence: ``Rules similar to the rules of the preceding 
     provisions of this subsection shall apply to treat 
     substantially separate and independent shares of different 
     beneficiaries in an estate having more than 1 beneficiary as 
     separate estates.'', and
       (2) by inserting ``or estates'' after ``trusts'' in the 
     last sentence.
       (b) Conforming Amendment.--The subsection heading of 
     section 663(c) is amended by inserting ``Estates or'' before 
     ``Trusts''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying after the date of 
     the enactment of this Act.

     SEC. 1308. EXECUTOR OF ESTATE AND BENEFICIARIES TREATED AS 
                   RELATED PERSONS FOR DISALLOWANCE OF LOSSES, 
                   ETC.

       (a) Disallowance of Losses.--Subsection (b) of section 267 
     (relating to losses, expenses, and interest with respect to 
     transactions between related taxpayers) is amended by 
     striking ``or'' at the end of paragraph (11), by striking the 
     period at the end of paragraph (12) and inserting ``; or'', 
     and by adding at the end the following new paragraph:
       ``(13) Except in the case of a sale or exchange in 
     satisfaction of a pecuniary bequest, an executor of an estate 
     and a beneficiary of such estate.''.
       (b) Ordinary Income From Gain From Sale of Depreciable 
     Property.--Subsection (b) of section 1239 is amended by 
     striking the period at the end of paragraph (2) and inserting 
     ``, and'' and by adding at the end the following new 
     paragraph:
       ``(3) except in the case of a sale or exchange in 
     satisfaction of a pecuniary bequest, an executor of an estate 
     and a beneficiary of such estate.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 1309. TREATMENT OF FUNERAL TRUSTS.

       (a) In General.--Subpart F of part I of subchapter J of 
     chapter 1 is amended by adding at the end the following new 
     section:

     ``SEC. 685. TREATMENT OF FUNERAL TRUSTS.

       ``(a) In General.--In the case of a qualified funeral 
     trust--
       ``(1) subparts B, C, D, and E shall not apply, and
       ``(2) no deduction shall be allowed by section 642(b).
       ``(b) Qualified Funeral Trust.--For purposes of this 
     subsection, the term `qualified funeral trust' means any 
     trust (other than a foreign trust) if--
       ``(1) the trust arises as a result of a contract with a 
     person engaged in the trade or business of providing funeral 
     or burial services or property necessary to provide such 
     services,
       ``(2) the sole purpose of the trust is to hold, invest, and 
     reinvest funds in the trust and to use such funds solely to 
     make payments for such services or property for the benefit 
     of the beneficiaries of the trust,
       ``(3) the only beneficiaries of such trust are individuals 
     with respect to whom such services or property are to be 
     provided at their death under contracts described in 
     paragraph (1),
       ``(4) the only contributions to the trust are contributions 
     by or for the benefit of such beneficiaries,
       ``(5) the trustee elects the application of this 
     subsection, and
       ``(6) the trust would (but for the election described in 
     paragraph (5)) be treated as owned under subpart E by the 
     purchasers of the contracts described in paragraph (1).

[[Page H6476]]

       ``(c) Dollar Limitation on Contributions.--
       ``(1) In general.--The term `qualified funeral trust' shall 
     not include any trust which accepts aggregate contributions 
     by or for the benefit of an individual in excess of $7,000.
       ``(2) Related trusts.--For purposes of paragraph (1), all 
     trusts having trustees which are related persons shall be 
     treated as 1 trust. For purposes of the preceding sentence, 
     persons are related if--
       ``(A) the relationship between such persons is described in 
     section 267 or 707(b),
       ``(B) such persons are treated as a single employer under 
     subsection (a) or (b) of section 52, or
       ``(C) the Secretary determines that treating such persons 
     as related is necessary to prevent avoidance of the purposes 
     of this section.
       ``(3) Inflation adjustment.--In the case of any contract 
     referred to in subsection (b)(1) which is entered into during 
     any calendar year after 1998, the dollar amount referred to 
     paragraph (1) shall be increased by an amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year, by substituting 
     `calendar year 1997' for `calendar year 1992' in subparagraph 
     (B) thereof.

     If any dollar amount after being increased under the 
     preceding sentence is not a multiple of $100, such dollar 
     amount shall be rounded to the nearest multiple of $100.
       ``(d) Application of Rate Schedule.--Section 1(e) shall be 
     applied to each qualified funeral trust by treating each 
     beneficiary's interest in each such trust as a separate 
     trust.
       ``(e) Treatment of Amounts Refunded to Purchaser on 
     Cancellation.--No gain or loss shall be recognized to a 
     purchaser of a contract described in subsection (b)(1) by 
     reason of any payment from such trust to such purchaser by 
     reason of cancellation of such contract. If any payment 
     referred to in the preceding sentence consists of property 
     other than money, the basis of such property in the hands of 
     such purchaser shall be the same as the trust's basis in such 
     property immediately before the payment.
       ``(f) Simplified Reporting.--The Secretary may prescribe 
     rules for simplified reporting of all trusts having a single 
     trustee.''.
       (b) Clerical Amendment.--The table of sections for subpart 
     F of part I of subchapter J of chapter 1 is amended by adding 
     at the end the following new item:

``Sec. 685. Treatment of funeral trusts.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.

     SEC. 1310. ADJUSTMENTS FOR GIFTS WITHIN 3 YEARS OF DECEDENT'S 
                   DEATH.

       (a) General Rule.--Section 2035 is amended to read as 
     follows:

     ``SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 
                   YEARS OF DECEDENT'S DEATH.

       ``(a) Inclusion of Certain Property in Gross Estate.--If--
       ``(1) the decedent made a transfer (by trust or otherwise) 
     of an interest in any property, or relinquished a power with 
     respect to any property, during the 3-year period ending on 
     the date of the decedent's death, and
       ``(2) the value of such property (or an interest therein) 
     would have been included in the decedent's gross estate under 
     section 2036, 2037, 2038, or 2042 if such transferred 
     interest or relinquished power had been retained by the 
     decedent on the date of his death,

     the value of the gross estate shall include the value of any 
     property (or interest therein) which would have been so 
     included.
       ``(b) Inclusion of Gift Tax on Gifts Made During 3 Years 
     Before Decedent's Death.--The amount of the gross estate 
     (determined without regard to this subsection) shall be 
     increased by the amount of any tax paid under chapter 12 by 
     the decedent or his estate on any gift made by the decedent 
     or his spouse during the 3-year period ending on the date of 
     the decedent's death.
       ``(c) Other Rules Relating to Transfers Within 3 Years of 
     Death.--
       ``(1) In general.--For purposes of--
       ``(A) section 303(b) (relating to distributions in 
     redemption of stock to pay death taxes),
       ``(B) section 2032A (relating to special valuation of 
     certain farms, etc., real property), and
       ``(C) subchapter C of chapter 64 (relating to lien for 
     taxes),

     the value of the gross estate shall include the value of all 
     property to the extent of any interest therein of which the 
     decedent has at any time made a transfer, by trust or 
     otherwise, during the 3-year period ending on the date of 
     the decedent's death.
       ``(2) Coordination with section 6166.--An estate shall be 
     treated as meeting the 35 percent of adjusted gross estate 
     requirement of section 6166(a)(1) only if the estate meets 
     such requirement both with and without the application of 
     paragraph (1).
       ``(3) Marital and small transfers.--Paragraph (1) shall not 
     apply to any transfer (other than a transfer with respect to 
     a life insurance policy) made during a calendar year to any 
     donee if the decedent was not required by section 6019 (other 
     than by reason of section 6019(2)) to file any gift tax 
     return for such year with respect to transfers to such donee.
       ``(d) Exception.--Subsection (a) shall not apply to any 
     bona fide sale for an adequate and full consideration in 
     money or money's worth.
       ``(e) Treatment of Certain Transfers From Revocable 
     Trusts.--For purposes of this section and section 2038, any 
     transfer from any portion of a trust during any period that 
     such portion was treated under section 676 as owned by the 
     decedent by reason of a power in the grantor (determined 
     without regard to section 672(e)) shall be treated as a 
     transfer made directly by the decedent.''.
       (b) Clerical Amendment.--The table of sections for part III 
     of subchapter A of chapter 11 is amended by striking 
     ``gifts'' in the item relating to section 2035 and inserting 
     ``certain gifts''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to the estates of decedents dying after the date 
     of the enactment of this Act.

     SEC. 1311. CLARIFICATION OF TREATMENT OF SURVIVOR ANNUITIES 
                   UNDER QUALIFIED TERMINABLE INTEREST RULES.

       (a) In General.--Subparagraph (C) of section 2056(b)(7) is 
     amended by inserting ``(or, in the case of an interest in an 
     annuity arising under the community property laws of a State, 
     included in the gross estate of the decedent under section 
     2033)'' after ``section 2039''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to estates of decedents dying after the date of 
     the enactment of this Act.

     SEC. 1312. TREATMENT UNDER QUALIFIED DOMESTIC TRUST RULES OF 
                   FORMS OF OWNERSHIP WHICH ARE NOT TRUSTS.

       (a) In General.--Subsection (c) of section 2056A (defining 
     qualified domestic trust) is amended by adding at the end the 
     following new paragraph:
       ``(3) Trust.--To the extent provided in regulations 
     prescribed by the Secretary, the term `trust' includes other 
     arrangements which have substantially the same effect as a 
     trust.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to estates of decedents dying after the date of 
     the enactment of this Act.

     SEC. 1313. OPPORTUNITY TO CORRECT CERTAIN FAILURES UNDER 
                   SECTION 2032A.

       (a) General Rule.--Paragraph (3) of section 2032A(d) 
     (relating to modification of election and agreement to be 
     permitted) is amended to read as follows:
       ``(3) Modification of election and agreement to be 
     permitted.--The Secretary shall prescribe procedures which 
     provide that in any case in which the executor makes an 
     election under paragraph (1) (and submits the agreement 
     referred to in paragraph (2)) within the time prescribed 
     therefor, but--
       ``(A) the notice of election, as filed, does not contain 
     all required information, or
       ``(B) signatures of 1 or more persons required to enter 
     into the agreement described in paragraph (2) are not 
     included on the agreement as filed, or the agreement does not 
     contain all required information,

     the executor will have a reasonable period of time (not 
     exceeding 90 days) after notification of such failures to 
     provide such information or signatures.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to the estates of decedents dying after the date 
     of the enactment of this Act.

     SEC. 1314. AUTHORITY TO WAIVE REQUIREMENT OF UNITED STATES 
                   TRUSTEE FOR QUALIFIED DOMESTIC TRUSTS.

       (a) In General.--Subparagraph (A) of section 2056A(a)(1) is 
     amended by inserting ``except as provided in regulations 
     prescribed by the Secretary,'' before ``requires''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to estates of decedents dying after the date of 
     the enactment of this Act.
  TITLE XIV--SIMPLIFICATION PROVISIONS RELATING TO EXCISE TAXES, TAX-
                    EXEMPT BONDS, AND OTHER MATTERS
                 Subtitle A--Excise Tax Simplification

          PART I--EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS

     SEC. 1401. INCREASE IN DE MINIMIS LIMIT FOR AFTER-MARKET 
                   ALTERATIONS FOR HEAVY TRUCKS AND LUXURY CARS.

       (a) In General.--Sections 4003(a)(3)(C) and 4051(b)(2)(B) 
     (relating to exceptions) are each amended by striking 
     ``$200'' and inserting ``$1,000''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to installations on vehicles sold after the date 
     of the enactment of this Act.

     SEC. 1402. CREDIT FOR TIRE TAX IN LIEU OF EXCLUSION OF VALUE 
                   OF TIRES IN COMPUTING PRICE.

       (a) In General.--Subsection (e) of section 4051 is amended 
     to read as follows:
       ``(e) Credit Against Tax for Tire Tax.--If--
       ``(1) tires are sold on or in connection with the sale of 
     any article, and
       ``(2) tax is imposed by this subchapter on the sale of such 
     tires,

     there shall be allowed as a credit against the tax imposed by 
     this subchapter an amount equal to the tax (if any) imposed 
     by section 4071 on such tires.''.
       (b) Conforming Amendment.--Subparagraph (B) of section 
     4052(b)(1) is amended by striking clause (iii), by adding 
     ``and'' at the end of clause (ii), and by redesignating 
     clause (iv) as clause (iii).
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 1998.

   PART II--PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER

     SEC. 1411. CREDIT OR REFUND FOR IMPORTED BOTTLED DISTILLED 
                   SPIRITS RETURNED TO DISTILLED SPIRITS PLANT.

       (a) In General.--Section 5008(c)(1) (relating to distilled 
     spirits returned to bonded premises) is amended by striking 
     ``withdrawn from bonded premises on payment or determination 
     of tax'' and inserting ``on which tax has been determined or 
     paid''.

[[Page H6477]]

       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1412. AUTHORITY TO CANCEL OR CREDIT EXPORT BONDS WITHOUT 
                   SUBMISSION OF RECORDS.

       (a) In General.--Section 5175(c) (relating to cancellation 
     of credit of export bonds) is amended by striking ``on the 
     submission of'' and all that follows and inserting ``if there 
     is such proof of exportation as the Secretary may by 
     regulations require.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1413. REPEAL OF REQUIRED MAINTENANCE OF RECORDS ON 
                   PREMISES OF DISTILLED SPIRITS PLANT.

       (a) In General.--Section 5207(c) (relating to preservation 
     and inspection) is amended by striking ``shall be kept on the 
     premises where the operations covered by the record are 
     carried on and''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1414. FERMENTED MATERIAL FROM ANY BREWERY MAY BE 
                   RECEIVED AT A DISTILLED SPIRITS PLANT.

       (a) In General.--Section 5222(b)(2) (relating to receipt) 
     is amended to read as follows:
       ``(2) beer conveyed without payment of tax from brewery 
     premises, beer which has been lawfully removed from brewery 
     premises upon determination of tax, or''.
       (b) Clarification of Authority To Permit Removal of Beer 
     Without Payment of Tax for Use as Distilling Material.--
     Section 5053 (relating to exemptions) is amended by 
     redesignating subsection (f) as subsection (i) and by 
     inserting after subsection (e) the following new subsection:
       ``(f) Removal for Use as Distilling Material.--Subject to 
     such regulations as the Secretary may prescribe, beer may be 
     removed from a brewery without payment of tax to any 
     distilled spirits plant for use as distilling material.''.
       (c) Clarification of Refund and Credit of Tax.--Section 
     5056 (relating to refund and credit of tax, or relief from 
     liability) is amended--
       (1) by redesignating subsection (c) as subsection (d) and 
     by inserting after subsection (b) the following new 
     subsection:
       ``(c) Beer Received at a Distilled Spirits Plant.--Any tax 
     paid by any brewer on beer produced in the United States may 
     be refunded or credited to the brewer, without interest, or 
     if the tax has not been paid, the brewer may be relieved of 
     liability therefor, under regulations as the Secretary may 
     prescribe, if such beer is received on the bonded premises of 
     a distilled spirits plant pursuant to the provisions of 
     section 5222(b)(2), for use in the production of distilled 
     spirits.'', and
       (2) by striking ``or rendering unmerchantable'' in 
     subsection (d) (as so redesignated) and inserting ``rendering 
     unmerchantable, or receipt on the bonded premises of a 
     distilled spirits plant''.
       (d) Effective Date.--The amendments made by this section 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1415. REPEAL OF REQUIREMENT FOR WHOLESALE DEALERS IN 
                   LIQUORS TO POST SIGN.

       (a) In General.--Section 5115 (relating to sign required on 
     premises) is hereby repealed.
       (b) Conforming Amendments.--
       (1) Section 5681(a) is amended by striking ``, and every 
     wholesale dealer in liquors,'' and by striking ``section 
     5115(a) or''.
       (2) Section 5681(c) is amended--
       (A) by striking ``or wholesale liquor establishment, on 
     which no sign required by section 5115(a) or'' and inserting 
     ``on which no sign required by'', and
       (B) by striking ``or wholesale liquor establishment, or 
     who'' and inserting ``or who''.
       (3) The table of sections for subpart D of part II of 
     subchapter A of chapter 51 is amended by striking the item 
     relating to section 5115.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 1416. REFUND OF TAX TO WINE RETURNED TO BOND NOT LIMITED 
                   TO UNMERCHANTABLE WINE.

       (a) In General.--Section 5044(a) (relating to refund of tax 
     on unmerchantable wine) is amended by striking ``as 
     unmerchantable''.
       (b) Conforming Amendments.--
       (1) Section 5361 is amended by striking ``unmerchantable''.
       (2) The section heading for section 5044 is amended by 
     striking ``UNMERCHANTABLE''.
       (3) The item relating to section 5044 in the table of 
     sections for subpart C of part I of subchapter A of chapter 
     51 is amended by striking ``unmerchantable''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1417. USE OF ADDITIONAL AMELIORATING MATERIAL IN CERTAIN 
                   WINES.

       (a) In General.--Section 5384(b)(2)(D) (relating to 
     ameliorated fruit and berry wines) is amended by striking 
     ``loganberries, currants, or gooseberries,'' and inserting 
     ``any fruit or berry with a natural fixed acid of 20 parts 
     per thousand or more (before any correction of such fruit or 
     berry)''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1418. DOMESTICALLY PRODUCED BEER MAY BE WITHDRAWN FREE 
                   OF TAX FOR USE OF FOREIGN EMBASSIES, LEGATIONS, 
                   ETC.

       (a) In General.--Section 5053 (relating to exemptions), as 
     amended by section 1414(b), is amended by inserting after 
     subsection (f) the following new subsection:
       ``(g) Removals for Use of Foreign Embassies, Legations, 
     Etc.--
       ``(1) In general.--Subject to such regulations as the 
     Secretary may prescribe--
       ``(A) beer may be withdrawn from the brewery without 
     payment of tax for transfer to any customs bonded warehouse 
     for entry pending withdrawal therefrom as provided in 
     subparagraph (B), and
       ``(B) beer entered into any customs bonded warehouse under 
     subparagraph (A) may be withdrawn for consumption in the 
     United States by, and for the official and family use of, 
     such foreign governments, organizations, and individuals as 
     are entitled to withdraw imported beer from such warehouses 
     free of tax.

     Beer transferred to any customs bonded warehouse under 
     subparagraph (A) shall be entered, stored, and accounted for 
     in such warehouse under such regulations and bonds as the 
     Secretary may prescribe, and may be withdrawn therefrom by 
     such governments, organizations, and individuals free of tax 
     under the same conditions and procedures as imported beer.
       ``(2) Other rules to apply.--Rules similar to the rules of 
     paragraphs (2) and (3) of section 5362(e) shall apply for 
     purposes of this subsection.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1419. BEER MAY BE WITHDRAWN FREE OF TAX FOR DESTRUCTION.

       (a) In General.--Section 5053 (relating to exemptions), as 
     amended by section 1418(a), is amended by inserting after 
     subsection (g) the following new subsection:
       ``(h) Removals for Destruction.--Subject to such 
     regulations as the Secretary may prescribe, beer may be 
     removed from the brewery without payment of tax for 
     destruction.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1420. AUTHORITY TO ALLOW DRAWBACK ON EXPORTED BEER 
                   WITHOUT SUBMISSION OF RECORDS.

       (a) In General.--The first sentence of section 5055 
     (relating to drawback of tax on beer) is amended by striking 
     ``found to have been paid'' and all that follows and 
     inserting ``paid on such beer if there is such proof of 
     exportation as the Secretary may by regulations require.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1421. TRANSFER TO BREWERY OF BEER IMPORTED IN BULK 
                   WITHOUT PAYMENT OF TAX.

       (a) In General.--Part II of subchapter G of chapter 51 is 
     amended by adding at the end the following new section:

     ``SEC. 5418. BEER IMPORTED IN BULK.

       ``Beer imported or brought into the United States in bulk 
     containers may, under such regulations as the Secretary may 
     prescribe, be withdrawn from customs custody and transferred 
     in such bulk containers to the premises of a brewery without 
     payment of the internal revenue tax imposed on such beer. The 
     proprietor of a brewery to which such beer is transferred 
     shall become liable for the tax on the beer withdrawn from 
     customs custody under this section upon release of the beer 
     from customs custody, and the importer, or the person 
     bringing such beer into the United States, shall thereupon be 
     relieved of the liability for such tax.''.
       (b) Clerical Amendment.--The table of sections for such 
     part II is amended by adding at the end the following new 
     item:

``Sec. 5418. Beer imported in bulk.''.

       (c) Effective Date.--The amendments made by this section 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

     SEC. 1422. TRANSFER TO BONDED WINE CELLARS OF WINE IMPORTED 
                   IN BULK WITHOUT PAYMENT OF TAX.

       (a) In General.--Part II of subchapter F of chapter 51 is 
     amended by inserting after section 5363 the following new 
     section:

     ``SEC. 5364. WINE IMPORTED IN BULK.

       ``Wine imported or brought into the United States in bulk 
     containers may, under such regulations as the Secretary may 
     prescribe, be withdrawn from customs custody and transferred 
     in such bulk containers to the premises of a bonded wine 
     cellar without payment of the internal revenue tax imposed on 
     such wine. The proprietor of a bonded wine cellar to which 
     such wine is transferred shall become liable for the tax on 
     the wine withdrawn from customs custody under this section 
     upon release of the wine from customs custody, and the 
     importer, or the person bringing such wine into the United 
     States, shall thereupon be relieved of the liability for such 
     tax.''.
       (b) Clerical Amendment.--The table of sections for such 
     part II is amended by inserting after the item relating to 
     section 5363 the following new item:

``Sec. 5364. Wine imported in bulk.''.


[[Page H6478]]


       (c) Effective Date.--The amendments made by this section 
     shall take effect on the 1st day of the 1st calendar quarter 
     that begins at least 180 days after the date of the enactment 
     of this Act.

                 PART III--OTHER EXCISE TAX PROVISIONS

     SEC. 1431. AUTHORITY TO GRANT EXEMPTIONS FROM REGISTRATION 
                   REQUIREMENTS.

       (a) In General.--Section 4222(b)(2) (relating to export) is 
     amended--
       (1) by striking ``in the case of any sale or resale for 
     export,'', and
       (2) by striking ``Export'' and inserting ``Under 
     regulations''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall take effect on the date of the enactment of this Act.

     SEC. 1432. REPEAL OF EXPIRED PROVISIONS.

       (a) Piggy-Back Trailers.--Section 4051 (relating to 
     imposition of tax on heavy trucks and trailers sold at 
     retail) is amended by striking subsection (d) and by 
     redesignating subsection (e) as subsection (d).
       (b) Deep Seabed Mining.--
       (1) In general.--Subchapter F of chapter 36 (relating to 
     tax on removal of hard mineral resources from deep seabed) is 
     hereby repealed.
       (2) Conforming amendment.--The table of subchapters for 
     chapter 36 is amended by striking the item relating to 
     subchapter F.
       (c) Ozone-Depleting Chemicals.--
       (1) Paragraph (1) of section 4681(b) is amended by striking 
     subparagraphs (B) and (C) and inserting the following new 
     subparagraph:
       ``(B) Base tax amount.--The base tax amount for purposes of 
     subparagraph (A) with respect to any sale or use during any 
     calendar year after 1995 shall be $5.35 increased by 45 cents 
     for each year after 1995.''.
       (2) Subsection (g) of section 4682 is amended to read as 
     follows:
       ``(g) Chemicals Used as Propellants in Metered-Dose 
     Inhalers.--
       ``(1) Exemption from tax.--
       ``(A) In general.--No tax shall be imposed by section 4681 
     on--
       ``(i) any use of any substance as a propellant in metered-
     dose inhalers, or
       ``(ii) any qualified sale by the manufacturer, producer, or 
     importer of any substance.
       ``(B) Qualified sale.--For purposes of subparagraph (A), 
     the term `qualified sale' means any sale by the manufacturer, 
     producer, or importer of any substance--
       ``(i) for use by the purchaser as a propellant in metered 
     dose inhalers, or
       ``(ii) for resale by the purchaser to a 2d purchaser for 
     such use by the 2d purchaser.

     The preceding sentence shall apply only if the manufacturer, 
     producer, and importer, and the 1st and 2d purchasers (if 
     any) meet such registration requirements as may be prescribed 
     by the Secretary.
       ``(2) Overpayments.--If any substance on which tax was paid 
     under this subchapter is used by any person as a propellant 
     in metered-dose inhalers, credit or refund without interest 
     shall be allowed to such person in an amount equal to the tax 
     so paid. Amounts payable under the preceding sentence with 
     respect to uses during the taxable year shall be treated as 
     described in section 34(a) for such year unless claim thereof 
     has been timely filed under this paragraph.''.

     SEC. 1433. SIMPLIFICATION OF IMPOSITION OF EXCISE TAX ON 
                   ARROWS.

       (a) In General.--Subsection (b) of section 4161 (relating 
     to imposition of tax) is amended to read as follows:
       ``(b) Bows and Arrows, Etc.--
       ``(1) Bows.--
       ``(A) In general.--There is hereby imposed on the sale by 
     the manufacturer, producer, or importer of any bow which has 
     a draw weight of 10 pounds or more, a tax equal to 11 percent 
     of the price for which so sold.
       ``(B) Parts and accessories.--There is hereby imposed upon 
     the sale by the manufacturer, producer, or importer--
       ``(i) of any part of accessory suitable for inclusion in or 
     attachment to a bow described in subparagraph (A), and
       ``(ii) of any quiver suitable for use with arrows described 
     in paragraph (2), a tax equivalent to 11 percent of the price 
     for which so sold.
       ``(2) Arrows.--There is hereby imposed on the sale by the 
     manufacturer, producer, or importer of any shaft, point, 
     nock, or vane of a type used in the manufacture of any arrow 
     which after its assembly--
       ``(A) measures 18 inches overall or more in length, or
       ``(B) measures less than 18 inches overall in length but is 
     suitable for use with a bow described in paragraph (1)(A),

     a tax equal to 12.4 percent of the price for which so sold.
       ``(3) Coordination with subsection (a).--No tax shall be 
     imposed under this subsection with respect to any article 
     taxable under subsection (a).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to articles sold by the manufacturer, producer, 
     or importer after September 30 1997.

     SEC. 1434. MODIFICATIONS TO RETAIL TAX ON HEAVY TRUCKS.

       (a) Certain Repairs and Modifications Not Treated as 
     Manufacture.--Section 4052 is amended by redesignating the 
     subsection defining a long-term lease as subsection (e) and 
     by adding at the end the following new subsection:
       ``(f) Certain Repairs and Modifications Not Treated as 
     Manufacture.--
       ``(1) In general.--An article described in section 
     4051(a)(1) shall not be treated as manufactured or produced 
     solely by reason of repairs or modifications to the article 
     (including any modification which changes the transportation 
     function of the article or restores a wrecked article to a 
     functional condition) if the cost of such repairs and 
     modifications does not exceed 75 percent of the retail price 
     of a comparable new article.
       ``(2) Exception.--Paragraph (1) shall not apply if the 
     article (as repaired or modified) would, if new, be taxable 
     under section 4051 and the article when new was not taxable 
     under this section or the corresponding provision of prior 
     law.''.
       (b) Simplification of Certification Procedures With Respect 
     to Sales of Taxable Articles.--
       (1) Repeal of registration requirement.--Subsection (d) of 
     section 4052 is amended by striking ``rules of--'' and all 
     that follows through ``shall apply'' and inserting ``rules of 
     subsections (c) and (d) of section 4216 (relating to partial 
     payments) shall apply''.
       (2) Requirement to modify regulations.--Section 4052 is 
     amended by adding at the end the following new subsection:
       ``(g) Regulations.--The Secretary shall prescribe 
     regulations which permit, in lieu of any other certification, 
     persons who are purchasing articles taxable under this 
     subchapter for resale or leasing in a long-term lease to 
     execute a statement (made under penalties of perjury) on the 
     sale invoice that such sale is for resale. The Secretary 
     shall not impose any registration requirement as a condition 
     of using such procedure.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 1998.

     SEC. 1435. SKYDIVING FLIGHTS EXEMPT FROM TAX ON 
                   TRANSPORTATION OF PERSONS BY AIR.

       (a) In General.--Section 4261 (relating to imposition of 
     tax on transportation of persons by air), as previously 
     amended by this Act, is amended by redesignating subsection 
     (h) as subsection (i) and by inserting after subsection (g) 
     the following new subsection:
       ``(h) Exemption for Skydiving Uses.--No tax shall be 
     imposed by this section or section 4271 on any air 
     transportation exclusively for the purpose of skydiving.''.
       (b) Transportation Treated as Noncommercial Aviation.--The 
     last sentence of section 4041(c)(2) is amended by inserting 
     before the period ``or by reason of section 4261(h)''.
       (c) Effective Dates.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to amounts paid after September 30, 1997.
       (2) Subsection (b).--The amendment made by subsection (b) 
     shall take effect on October 1, 1997.

     SEC. 1436. ALLOWANCE OR CREDIT OF REFUND FOR TAX-PAID 
                   AVIATION FUEL PURCHASED BY REGISTERED PRODUCER 
                   OF AVIATION FUEL.

       (a) In General.--Section 4091 (relating to aviation fuel) 
     is amended by adding at the end the following new subsection:
       ``(d) Refund of Tax-Paid Aviation Fuel to Registered 
     Producer of Fuel.--If--
       ``(1) a producer of aviation fuel is registered under 
     section 4101, and
       ``(2) such producer establishes to the satisfaction of the 
     Secretary that a prior tax was paid (and not credited or 
     refunded) on aviation fuel held by such producer,

     then an amount equal to the tax so paid shall be allowed as a 
     refund (without interest) to such producer in the same manner 
     as if it were an overpayment of tax imposed by this 
     section.''.
       (b) Conforming Amendment.--The last sentence of section 
     6416(d) is amended by inserting before the period ``or to the 
     tax imposed by section 4091 in the case of refunds described 
     in section 4091(d)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to fuel acquired by the producer after September 
     30, 1997.
                 Subtitle B--Tax-Exempt Bond Provisions

     SEC. 1441. REPEAL OF $100,000 LIMITATION ON UNSPENT PROCEEDS 
                   UNDER 1-YEAR EXCEPTION FROM REBATE.

       Subclause (I) of section 148(f)(4)(B)(ii) (relating to 
     additional period for certain bonds) is amended by striking 
     ``the lesser of 5 percent of the proceeds of the issue or 
     $100,000'' and inserting ``5 percent of the proceeds of the 
     issue''.

     SEC. 1442. EXCEPTION FROM REBATE FOR EARNINGS ON BONA FIDE 
                   DEBT SERVICE FUND UNDER CONSTRUCTION BOND 
                   RULES.

       Subparagraph (C) of section 148(f)(4) is amended by adding 
     at the end the following new clause:
       ``(xvii) Treatment of bona fide debt service funds.--If the 
     spending requirements of clause (ii) are met with respect to 
     the available construction proceeds of a construction issue, 
     then paragraph (2) shall not apply to earnings on a bona fide 
     debt service fund for such issue.''.

     SEC. 1443. REPEAL OF DEBT SERVICE-BASED LIMITATION ON 
                   INVESTMENT IN CERTAIN NONPURPOSE INVESTMENTS.

       Subsection (d) of section 148 (relating to special rules 
     for reasonably required reserve or replacement fund) is 
     amended by striking paragraph (3).

     SEC. 1444. REPEAL OF EXPIRED PROVISIONS.

       (a) Paragraph (2) of section 148(c) is amended by striking 
     subparagraph (B) and by redesignating subparagraphs (C), (D), 
     and (E) as subparagraphs (B), (C), and (D), respectively.
       (b) Paragraph (4) of section 148(f) is amended by striking 
     subparagraph (E).

     SEC. 1445. EFFECTIVE DATE.

       The amendments made by this subtitle shall apply to bonds 
     issued after the date of the enactment of this Act.
                    Subtitle C--Tax Court Procedures

     SEC. 1451. OVERPAYMENT DETERMINATIONS OF TAX COURT.

       (a) Appeal of Order.--Paragraph (2) of section 6512(b) 
     (relating to jurisdiction to enforce)

[[Page H6479]]

     is amended by adding at the end the following new sentence: 
     ``An order of the Tax Court disposing of a motion under this 
     paragraph shall be reviewable in the same manner as a 
     decision of the Tax Court, but only with respect to the 
     matters determined in such order.''.
       (b) Denial of Jurisdiction Regarding Certain Credits and 
     Reductions.--Subsection (b) of section 6512 (relating to 
     overpayment determined by Tax Court) is amended by adding at 
     the end the following new paragraph:
       ``(4) Denial of jurisdiction regarding certain credits and 
     reductions.--The Tax Court shall have no jurisdiction under 
     this subsection to restrain or review any credit or reduction 
     made by the Secretary under section 6402.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 1452. REDETERMINATION OF INTEREST PURSUANT TO MOTION.

       (a) In General.--Subsection (c) of section 7481 (relating 
     to jurisdiction over interest determinations) is amended to 
     read as follows:
       ``(c) Jurisdiction Over Interest Determinations.--
       ``(1) In general.--Notwithstanding subsection (a), if, 
     within 1 year after the date the decision of the Tax Court 
     becomes final under subsection (a) in a case to which this 
     subsection applies, the taxpayer files a motion in the Tax 
     Court for a redetermination of the amount of interest 
     involved, then the Tax Court may reopen the case solely to 
     determine whether the taxpayer has made an overpayment of 
     such interest or the Secretary has made an underpayment of 
     such interest and the amount thereof.
       ``(2) Cases to which this subsection applies.--This 
     subsection shall apply where--
       ``(A)(i) an assessment has been made by the Secretary under 
     section 6215 which includes interest as imposed by this 
     title, and
       ``(ii) the taxpayer has paid the entire amount of the 
     deficiency plus interest claimed by the Secretary, and
       ``(B) the Tax Court finds under section 6512(b) that the 
     taxpayer has made an overpayment.
       ``(3) Special rules.--If the Tax Court determines under 
     this subsection that the taxpayer has made an overpayment of 
     interest or that the Secretary has made an underpayment of 
     interest, then that determination shall be treated under 
     section 6512(b)(1) as a determination of an overpayment of 
     tax. An order of the Tax Court redetermining interest, when 
     entered upon the records of the court, shall be reviewable in 
     the same manner as a decision of the Tax Court.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 1453. APPLICATION OF NET WORTH REQUIREMENT FOR AWARDS OF 
                   LITIGATION COSTS.

       (a) In General.--Paragraph (4) of section 7430(c) (defining 
     prevailing party) is amended by adding at the end thereof the 
     following new subparagraph:
       ``(D) Special rules for applying net worth requirement.--In 
     applying the requirements of section 2412(d)(2)(B) of title 
     28, United States Code, for purposes of subparagraph (A)(iii) 
     of this paragraph--
       ``(i) the net worth limitation in clause (i) of such 
     section shall apply to--

       ``(I) an estate but shall be determined as of the date of 
     the decedent's death, and
       ``(II) a trust but shall be determined as of the last day 
     of the taxable year involved in the proceeding, and

       ``(ii) individuals filing a joint return shall be treated 
     as separate individuals for purposes of clause (i) of such 
     section.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to proceedings commenced after the date of the 
     enactment of this Act.

     SEC. 1454. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT 
                   STATUS.

       (a) In General.--Subchapter B of chapter 76 (relating to 
     proceedings by taxpayers and third parties) is amended by 
     redesignating section 7436 as section 7437 and by inserting 
     after section 7435 the following new section:

     ``SEC. 7436. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT 
                   STATUS.

       ``(a) Creation of Remedy.--If, in connection with an audit 
     of any person, there is an actual controversy involving a 
     determination by the Secretary as part of an examination 
     that--
       ``(1) one or more individuals performing services for such 
     person are employees of such person for purposes of subtitle 
     C, or
       ``(2) such person is not entitled to the treatment under 
     subsection (a) of section 530 of the Revenue Act of 1978 with 
     respect to such an individual,

     upon the filing of an appropriate pleading, the Tax Court may 
     determine whether such a determination by the Secretary is 
     correct. Any such redetermination by the Tax Court shall have 
     the force and effect of a decision of the Tax Court and shall 
     be reviewable as such.
       ``(b) Limitations.--
       ``(1) Petitioner.--A pleading may be filed under this 
     section only by the person for whom the services are 
     performed.
       ``(2) Time for filing action.--If the Secretary sends by 
     certified or registered mail notice to the petitioner of a 
     determination by the Secretary described in subsection (a), 
     no proceeding may be initiated under this section with 
     respect to such determination unless the pleading is filed 
     before the 91st day after the date of such mailing.
       ``(3) No adverse inference from treatment while action is 
     pending.--If, during the pendency of any proceeding brought 
     under this section, the petitioner changes his treatment for 
     employment tax purposes of any individual whose employment 
     status as an employee is involved in such proceeding (or of 
     any individual holding a substantially similar position) to 
     treatment as an employee, such change shall not be taken into 
     account in the Tax Court's determination under this section.
       ``(c) Small Case Procedures.--
       ``(1) In general.--At the option of the petitioner, 
     concurred in by the Tax Court or a division thereof before 
     the hearing of the case, proceedings under this section may 
     (notwithstanding the provisions of section 7453) be conducted 
     subject to the rules of evidence, practice, and procedure 
     applicable under section 7463 if the amount of employment 
     taxes placed in dispute is $10,000 or less for each calendar 
     quarter involved.
       ``(2) Finality of decisions.--A decision entered in any 
     proceeding conducted under this subsection shall not be 
     reviewed in any other court and shall not be treated as a 
     precedent for any other case not involving the same 
     petitioner and the same determinations.
       ``(3) Certain rules to apply.--Rules similar to the rules 
     of the last sentence of subsection (a), and subsections (c), 
     (d), and (e), of section 7463 shall apply to proceedings 
     conducted under this subsection.
       ``(d) Special Rules.--
       ``(1) Restrictions on assessment and collection pending 
     action, etc.--The principles of subsections (a), (b), (c), 
     (d), and (f) of section 6213, section 6214(a), section 6215, 
     section 6503(a), section 6512, and section 7481 shall apply 
     to proceedings brought under this section in the same manner 
     as if the Secretary's determination described in subsection 
     (a) were a notice of deficiency.
       ``(2) Awarding of costs and certain fees.--Section 7430 
     shall apply to proceedings brought under this section.
       ``(e) Employment Tax.--The term `employment tax' means any 
     tax imposed by subtitle C.''.
       (b) Conforming Amendments.--
       (1) Subsection (d) of section 6511 is amended by adding at 
     the end the following new paragraph:
       ``(7) Special period of limitation with respect to self-
     employment tax in certain cases.--If--
       ``(A) the claim for credit or refund relates to an 
     overpayment of the tax imposed by chapter 2 (relating to the 
     tax on self-employment income) attributable to Tax Court 
     determination in a proceeding under section 7436, and
       ``(B) the allowance of a credit or refund of such 
     overpayment is otherwise prevented by the operation of any 
     law or rule of law other than section 7122 (relating to 
     compromises),

     such credit or refund may be allowed or made if claim 
     therefor is filed on or before the last day of the second 
     year after the calendar year in which such determination 
     becomes final.''.
       (2) Subsection (a) of section 7421 is amended by striking 
     ``and 7429(b)'' and inserting ``7429(b), and 7436''.
       (3) Sections 7453 and 7481(b) are each amended by striking 
     ``section 7463'' and inserting ``section 7436(c) or 7463''.
       (4) The table of sections for subchapter B of chapter 76 is 
     amended by striking the last item and inserting the 
     following:

``Sec. 7436. Proceedings for determination of employment status.
``Sec. 7437. Cross references.''.

       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.
                      Subtitle D--Other Provisions

     SEC. 1461. EXTENSION OF DUE DATE OF FIRST QUARTER ESTIMATED 
                   TAX PAYMENT BY PRIVATE FOUNDATIONS.

       (a) In General.--Paragraph (3) of section 6655(g) is 
     amended by adding at the end the following new sentence: ``In 
     the case of a private foundation, subsection (c)(2) shall be 
     applied by substituting `May 15' for `April 15'.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply for purposes of determining underpayments of 
     estimated tax for taxable years beginning after the date of 
     the enactment of this Act.

     SEC. 1462. CLARIFICATION OF AUTHORITY TO WITHHOLD PUERTO RICO 
                   INCOME TAXES FROM SALARIES OF FEDERAL 
                   EMPLOYEES.

       (a) In General.--Subsection (c) of section 5517 of title 5, 
     United States Code, is amended by striking ``or territory or 
     possession'' and inserting ``, territory, possession, or 
     commonwealth''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on January 1, 1998.

     SEC. 1463. CERTAIN NOTICES DISREGARDED UNDER PROVISION 
                   INCREASING INTEREST RATE ON LARGE CORPORATE 
                   UNDERPAYMENTS.

       (a) General Rule.--Subparagraph (B) of section 6621(c)(2) 
     (defining applicable date) is amended by adding at the end 
     the following new clause:
       ``(iii) Exception for letters or notices involving small 
     amounts.--For purposes of this paragraph, any letter or 
     notice shall be disregarded if the amount of the deficiency 
     or proposed deficiency (or the assessment or proposed 
     assessment) set forth in such letter or notice is not greater 
     than $100,000 (determined by not taking into account any 
     interest, penalties, or additions to tax).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply for purposes of determining interest for periods 
     after December 31, 1997.

[[Page H6480]]

                TITLE XV--PENSIONS AND EMPLOYEE BENEFITS
                       Subtitle A--Simplification

     SEC. 1501. MATCHING CONTRIBUTIONS OF SELF-EMPLOYED 
                   INDIVIDUALS NOT TREATED AS ELECTIVE EMPLOYER 
                   CONTRIBUTIONS.

       (a) In General.--Section 402(g) (relating to limitation on 
     exclusion for elective deferrals) is amended by adding at the 
     end the following:
       ``(9) Matching contributions on behalf of self-employed 
     individuals not treated as elective employer contributions.--
     Except as provided in section 401(k)(3)(D)(ii), any matching 
     contribution described in section 401(m)(4)(A) which is made 
     on behalf of a self-employed individual (as defined in 
     section 401(c)) shall not be treated as an elective employer 
     contribution under a qualified cash or deferred arrangement 
     (as defined in section 401(k)) for purposes of this title.''.
       (b) Conforming Amendment for Simple Retirement Accounts.--
     Section 408(p) (relating to simple retirement accounts) is 
     amended by adding at the end the following:
       ``(8) Matching contributions on behalf of self-employed 
     individuals not treated as elective employer contributions.--
     Any matching contribution described in paragraph (2)(A)(iii) 
     which is made on behalf of a self-employed individual (as 
     defined in section 401(c)) shall not be treated as an 
     elective employer contribution to a simple retirement account 
     for purposes of this title.''.
       (c) Effective Dates.--
       (1) Elective deferrals.--The amendment made by subsection 
     (a) shall apply to years beginning after December 31, 1997.
       (2) Simple retirement accounts.--The amendment made by 
     subsection (b) shall apply to years beginning after December 
     31, 1996.

     SEC. 1502. MODIFICATION OF PROHIBITION OF ASSIGNMENT OR 
                   ALIENATION.

       (a) Amendment to ERISA.--Section 206(d) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1056(d)) is 
     amended by adding at the end the following:
       ``(4) Paragraph (1) shall not apply to any offset of a 
     participant's benefits provided under an employee pension 
     benefit plan against an amount that the participant is 
     ordered or required to pay to the plan if--
       ``(A) the order or requirement to pay arises--
       ``(i) under a judgment of conviction for a crime involving 
     such plan,
       ``(ii) under a civil judgment (including a consent order or 
     decree) entered by a court in an action brought in connection 
     with a violation (or alleged violation) of part 4 of this 
     subtitle, or
       ``(iii) pursuant to a settlement agreement between the 
     Secretary and the participant, or a settlement agreement 
     between the Pension Benefit Guaranty Corporation and the 
     participant, in connection with a violation (or alleged 
     violation) of part 4 of this subtitle by a fiduciary or any 
     other person,
       ``(B) the judgment, order, decree, or settlement agreement 
     expressly provides for the offset of all or part of the 
     amount ordered or required to be paid to the plan against the 
     participant's benefits provided under the plan, and
       ``(C) in a case in which the survivor annuity requirements 
     of section 205 apply with respect to distributions from the 
     plan to the participant, if the participant has a spouse at 
     the time at which the offset is to be made--
       ``(i) either--
       ``(I) such spouse has consented in writing to such offset 
     and such consent is witnessed by a notary public or 
     representative of the plan (or it is established to the 
     satisfaction of a plan representative that such consent may 
     not be obtained by reason of circumstances described in 
     section 205(c)(2)(B)), or
       ``(II) an election to waive the right of the spouse to a 
     qualified joint and survivor annuity or a qualified 
     preretirement survivor annuity is in effect in accordance 
     with the requirements of section 205(c),
       ``(ii) such spouse is ordered or required in such judgment, 
     order, decree, or settlement to pay an amount to the plan in 
     connection with a violation of part 4 of this subtitle, or
       ``(iii) in such judgment, order, decree, or settlement, 
     such spouse retains the right to receive the survivor annuity 
     under a qualified joint and survivor annuity provided 
     pursuant to section 205(a)(1) and under a qualified 
     preretirement survivor annuity provided pursuant to section 
     205(a)(2), determined in accordance with paragraph (5).

     A plan shall not be treated as failing to meet the 
     requirements of section 205 solely by reason of an offset 
     under this paragraph.
       ``(5)(A) The survivor annuity described in paragraph 
     (4)(C)(iii) shall be determined as if--
       ``(i) the participant terminated employment on the date of 
     the offset,
       ``(ii) there was no offset,
       ``(iii) the plan permitted commencement of benefits only on 
     or after normal retirement age,
       ``(iv) the plan provided only the minimum-required 
     qualified joint and survivor annuity, and
       ``(v) the amount of the qualified preretirement survivor 
     annuity under the plan is equal to the amount of the survivor 
     annuity payable under the minimum-required qualified joint 
     and survivor annuity.
       ``(B) For purposes of this paragraph, the term `minimum-
     required qualified joint and survivor annuity' means the 
     qualified joint and survivor annuity which is the actuarial 
     equivalent of the participant's accrued benefit (within the 
     meaning of section 3(23)) and under which the survivor 
     annuity is 50 percent of the amount of the annuity which is 
     payable during the joint lives of the participant and the 
     spouse.''.
       (b) Amendment to 1986 Code.--Section 401(a)(13) (relating 
     to assignment and alienation) is amended by adding at the end 
     the following:
       ``(C) Special rule for certain judgments and settlements.--
     Subparagraph (A) shall not apply to any offset of a 
     participant's benefits provided under a plan against an 
     amount that the participant is ordered or required to pay to 
     the plan if--
       ``(i) the order or requirement to pay arises--

       ``(I) under a judgment of conviction for a crime involving 
     such plan,
       ``(II) under a civil judgment (including a consent order or 
     decree) entered by a court in an action brought in connection 
     with a violation (or alleged violation) of part 4 of subtitle 
     B of title I of the Employee Retirement Income Security Act 
     of 1974, or
       ``(III) pursuant to a settlement agreement between the 
     Secretary of Labor and the participant, or a settlement 
     agreement between the Pension Benefit Guaranty Corporation 
     and the participant, in connection with a violation (or 
     alleged violation) of part 4 of such subtitle by a fiduciary 
     or any other person,

       ``(ii) the judgment, order, decree, or settlement agreement 
     expressly provides for the offset of all or part of the 
     amount ordered or required to be paid to the plan against the 
     participant's benefits provided under the plan, and
       ``(iii) in a case in which the survivor annuity 
     requirements of section 401(a)(11) apply with respect to 
     distributions from the plan to the participant, if the 
     participant has a spouse at the time at which the offset is 
     to be made--

       ``(I) either such spouse has consented in writing to such 
     offset and such consent is witnessed by a notary public or 
     representative of the plan (or it is established to the 
     satisfaction of a plan representative that such consent may 
     not be obtained by reason of circumstances described in 
     section 417(a)(2)(B)), or an election to waive the right of 
     the spouse to either a qualified joint and survivor annuity 
     or a qualified preretirement survivor annuity is in effect in 
     accordance with the requirements of section 417(a),
       ``(II) such spouse is ordered or required in such judgment, 
     order, decree, or settlement to pay an amount to the plan in 
     connection with a violation of part 4 of such subtitle, or
       ``(III) in such judgment, order, decree, or settlement, 
     such spouse retains the right to receive the survivor annuity 
     under a qualified joint and survivor annuity provided 
     pursuant to section 401(a)(11)(A)(i) and under a qualified 
     preretirement survivor annuity provided pursuant to section 
     401(a)(11)(A)(ii), determined in accordance with subparagraph 
     (D).

     A plan shall not be treated as failing to meet the 
     requirements of this subsection, subsection (k), section 
     403(b), or section 409(d) solely by reason of an offset 
     described in this subparagraph.
       ``(D) Survivor annuity.--
       ``(i) In general.--The survivor annuity described in 
     subparagraph (C)(iii)(III) shall be determined as if--

       ``(I) the participant terminated employment on the date of 
     the offset,
       ``(II) there was no offset,
       ``(III) the plan permitted commencement of benefits only on 
     or after normal retirement age,
       ``(IV) the plan provided only the minimum-required 
     qualified joint and survivor annuity, and
       ``(V) the amount of the qualified preretirement survivor 
     annuity under the plan is equal to the amount of the survivor 
     annuity payable under the minimum-required qualified joint 
     and survivor annuity.

       ``(ii) Definition.--For purposes of this subparagraph, the 
     term `minimum-required qualified joint and survivor annuity' 
     means the qualified joint and survivor annuity which is the 
     actuarial equivalent of the participant's accrued benefit 
     (within the meaning of section 411(a)(7)) and under which the 
     survivor annuity is 50 percent of the amount of the annuity 
     which is payable during the joint lives of the participant 
     and the spouse.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to judgments, orders, and decrees issued, and 
     settlement agreements entered into, on or after the date of 
     the enactment of this Act.

     SEC. 1503. ELIMINATION OF PAPERWORK BURDENS ON PLANS.

       (a) Elimination of Unnecessary Filing Requirements.--
     Section 101(b) of the Employee Retirement Income Security Act 
     of 1974 (29 U.S.C. 1021(b)) is amended by striking paragraphs 
     (1), (2), and (3) and by redesignating paragraphs (4) and (5) 
     as paragraphs (1) and (2), respectively.
       (b) Elimination of Plan Description.--
       (1) In general.--Section 102(a) of the Employee Retirement 
     Income Security Act of 1974 (29 U.S.C. 1022(a)) is amended--
       (A) by striking paragraph (2), and
       (B) by striking ``(a)(1)'' and inserting ``(a)''.
       (2) Conforming amendments.--
       (A) Section 102(b) of such Act (29 U.S.C. 1022(b)) is 
     amended by striking ``The plan description and summary plan 
     description shall contain'' and inserting ``The summary plan 
     description shall contain''.
       (B) The heading for section 102 of such Act is amended by 
     striking ``plan description and''.
       (c) Furnishing of Reports.--
       (1) In general.--Section 104(a)(1) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1024(a)(1)) 
     is amended to read as follows:
       ``Sec. 104. (a)(1) The administrator of any employee 
     benefit plan subject to this part shall file with the 
     Secretary the annual report for a plan year within 210 days 
     after the close of such year (or within such time as may be 
     required by regulations promulgated by the Secretary in order 
     to reduce duplicative filing). The Secretary shall make 
     copies of such annual reports available for inspection in the 
     public document room of the Department of Labor.''.
       (2) Secretary may request documents.--
       (A) In general.--Section 104(a) of such Act (29 U.S.C. 
     1024(a)) is amended by adding at the end the following:

[[Page H6481]]

       ``(6) The administrator of any employee benefit plan 
     subject to this part shall furnish to the Secretary, upon 
     request, any documents relating to the employee benefit plan, 
     including but not limited to, the latest summary plan 
     description (including any summaries of plan changes not 
     contained in the summary plan description), and the 
     bargaining agreement, trust agreement, contract, or other 
     instrument under which the plan is established or 
     operated.''.
       (B) Penalty.--Section 502(c) of such Act (29 U.S.C. 
     1132(c)) is amended by redesignating paragraph (6) as 
     paragraph (7) and by inserting after paragraph (5) the 
     following:
       ``(6) If, within 30 days of a request by the Secretary to a 
     plan administrator for documents under section 104(a)(6), the 
     plan administrator fails to furnish the material requested to 
     the Secretary, the Secretary may assess a civil penalty 
     against the plan administrator of up to $100 a day from the 
     date of such failure (but in no event in excess of $1,000 per 
     request). No penalty shall be imposed under this paragraph 
     for any failure resulting from matters reasonably beyond the 
     control of the plan administrator.''.
       (d) Conforming Amendments.--
       (1) Section 104(b)(1) of the Employee Retirement Income 
     Security Act of 1974 (29 U.S.C. 1024(b)(1)) is amended by 
     striking ``section 102(a)(1)'' each place it appears and 
     inserting ``section 102(a)''.
       (2) Section 104(b)(2) of such Act (29 U.S.C. 1024(b)(2)) is 
     amended by striking ``the plan description and'' and 
     inserting ``the latest updated summary plan description 
     and''.
       (3) Section 104(b)(4) of such Act (29 U.S.C. 1024(b)(4)) is 
     amended by striking ``plan description''.
       (4) Section 106(a) of such Act (29 U.S.C. 1026(a)) is 
     amended by striking ``descriptions,''.
       (5) Section 107 of such Act (29 U.S.C. 1027) is amended by 
     striking ``description or''.
       (6) Section 108(2)(B) of such Act (29 U.S.C. 1028(2)(B)) is 
     amended by striking ``plan descriptions, annual reports,'' 
     and inserting ``annual reports''.
       (7) Section 502(a)(6) of such Act (29 U.S.C. 1132(a)(6)) is 
     amended by striking ``or (5)'' and inserting ``(5), or (6)''.
       (e) Technical Correction.--Section 1144(c) of the Social 
     Security Act (42 U.S.C. 1320b-14(c)) is amended by 
     redesignating paragraph (9) as paragraph (8).

     SEC. 1504. MODIFICATION OF 403(B) EXCLUSION ALLOWANCE TO 
                   CONFORM TO 415 MODIFICATIONS.

       (a) Definition of Compensation.--
       (1) In general.--Section 403(b)(3) (defining includible 
     compensation) is amended by adding at the end the following: 
     ``Such term includes--
       ``(A) any elective deferral (as defined in section 
     402(g)(3)), and
       ``(B) any amount which is contributed or deferred by the 
     employer at the election of the employee and which is not 
     includible in the gross income of the employee by reason of 
     section 125 or 457.''.
       (2) Effective date.--The amendment made by this subsection 
     shall apply to years beginning after December 31, 1997.
       (b) Repeal of Rules in Section 415(e).--The Secretary of 
     the Treasury shall modify the regulations regarding the 
     exclusion allowance under section 403(b)(2) of the 
     Internal Revenue Code of 1986 to reflect the amendment 
     made by section 1452(a) of the Small Business Job 
     Protection Act of 1996. Such modification shall take 
     effect for years beginning after December 31, 1999.

     SEC. 1505. EXTENSION OF MORATORIUM ON APPLICATION OF CERTAIN 
                   NONDISCRIMINATION RULES TO STATE AND LOCAL 
                   GOVERNMENTS.

       (a) General Nondiscrimination and Participation Rules.--
       (1) Nondiscrimination requirements.--Section 401(a)(5) 
     (relating to qualified pension, profit-sharing, and stock 
     bonus plans) is amended by adding at the end the following:
       ``(G) State and local governmental plans.--Paragraphs (3) 
     and (4) shall not apply to a governmental plan (within the 
     meaning of section 414(d)) maintained by a State or local 
     government or political subdivision thereof (or agency or 
     instrumentality thereof).''.
       (2) Additional participation requirements.--Section 
     401(a)(26)(H) (relating to additional participation 
     requirements) is amended to read as follows:
       ``(H) Exception for state and local governmental plans.--
     This paragraph shall not apply to a governmental plan (within 
     the meaning of section 414(d)) maintained by a State or local 
     government or political subdivision thereof (or agency or 
     instrumentality thereof).''.
       (3) Minimum participation standards.--Section 410(c)(2) 
     (relating to application of participation standards to 
     certain plans) is amended to read as follows:
       ``(2) A plan described in paragraph (1) shall be treated as 
     meeting the requirements of this section for purposes of 
     section 401(a), except that in the case of a plan described 
     in subparagraph (B), (C), or (D) of paragraph (1), this 
     paragraph shall apply only if such plan meets the 
     requirements of section 401(a)(3) (as in effect on September 
     1, 1974).''.
       (b) Participation and Discrimination Standards for 
     Qualified Cash or Deferred Arrangements.--Section 401(k)(3) 
     (relating to application of participation and discrimination 
     standards) is amended by adding at the end the following:
       ``(G) A governmental plan (within the meaning of section 
     414(d)) maintained by a State or local government or 
     political subdivision thereof (or agency or 
     instrumentality thereof) shall be treated as meeting the 
     requirements of this paragraph.''.
       (c) Nondiscrimination Rules for Section 403(b) Plans.--
     Section 403(b)(12) (relating to nondiscrimination 
     requirements) is amended by adding at the end the following:
       ``(C) State and local governmental plans.--For purposes of 
     paragraph (1)(D), the requirements of subparagraph (A)(i) 
     (other than those relating to section 401(a)(17)) shall not 
     apply to a governmental plan (within the meaning of section 
     414(d)) maintained by a State or local government or 
     political subdivision thereof (or agency or instrumentality 
     thereof).''.
       (d) Effective Dates.--
       (1) In general.--The amendments made by this section apply 
     to taxable years beginning on or after the date of enactment 
     of this Act.
       (2) Treatment for years beginning before date of 
     enactment.--A governmental plan (within the meaning of 
     section 414(d) of the Internal Revenue Code of 1986) 
     maintained by a State or local government or political 
     subdivision thereof (or agency or instrumentality thereof) 
     shall be treated as satisfying the requirements of sections 
     401(a)(3), 401(a)(4), 401(a)(26), 401(k), 401(m), 403 
     (b)(1)(D) and (b)(12), and 410 of such Code for all taxable 
     years beginning before the date of enactment of this Act.

     SEC. 1506. CLARIFICATION OF CERTAIN RULES RELATING TO 
                   EMPLOYEE STOCK OWNERSHIP PLANS OF S 
                   CORPORATIONS.

       (a) Certain Cash Distributions Permitted.--
       (1) Paragraph (2) of section 409(h) is amended by adding at 
     the end the following new subparagraph:
       ``(B) Exception for certain plans restricted from 
     distributing securities.--
       ``(i) In general.--A plan to which this subparagraph 
     applies shall not be treated as failing to meet the 
     requirements of this subsection or section 401(a) merely 
     because it does not permit a participant to exercise the 
     right described in paragraph (1)(A) if such plan provides 
     that the participant entitled to a distribution has a right 
     to receive the distribution in cash, except that such plan 
     may distribute employer securities subject to a requirement 
     that such securities may be resold to the employer under 
     terms which meet the requirements of paragraph (1)(B).
       ``(ii) Applicable plans.--This subparagraph shall apply to 
     a plan which otherwise meets the requirements of this 
     subsection or section 4975(e)(7) and which is established and 
     maintained by--

       ``(I) an employer whose charter or bylaws restrict the 
     ownership of substantially all outstanding employer 
     securities to employees or to a trust described in section 
     401(a), or
       ``(II) an S corporation.''

       (2) Paragraph (2) of section 409(h), as in effect before 
     the amendment made by paragraph (1), is amended--
       (A) by striking ``A plan which'' in the first sentence and 
     inserting the following:
       ``(A) In general.--A plan which'', and
       (B) by striking the last sentence.
       (b) Certain Shareholder-Employees Not Treated as Owner-
     Employees.--
       (1) Amendment to 1986 code.--
       (A) In general.--Section 4975(f) is amended by adding at 
     the end the following new paragraph:
       ``(6) Exemptions not to apply to certain transactions.--
       ``(A) In general.--In the case of a trust described in 
     section 401(a) which is part of a plan providing 
     contributions or benefits for employees some or all of whom 
     are owner-employees (as defined in section 401(c)(3)), the 
     exemptions provided by subsection (d) (other than paragraphs 
     (9) and (12)) shall not apply to a transaction in which the 
     plan directly or indirectly--
       ``(i) lends any part of the corpus or income of the plan 
     to,
       ``(ii) pays any compensation for personal services rendered 
     to the plan to, or
       ``(iii) acquires for the plan any property from, or sells 
     any property to,

     any such owner-employee, a member of the family (as defined 
     in section 267(c)(4)) of any such owner-employee, or any 
     corporation in which any such owner-employee owns, directly 
     or indirectly, 50 percent or more of the total combined 
     voting power of all classes of stock entitled to vote or 50 
     percent or more of the total value of shares of all classes 
     of stock of the corporation.
       ``(B) Special rules for shareholder-employees, etc.--
       ``(i) In general.--For purposes of subparagraph (A), the 
     following shall be treated as owner-employees:

       ``(I) A shareholder-employee.
       ``(II) A participant or beneficiary of an individual 
     retirement plan (as defined in section 7701(a)(37)).
       ``(III) An employer or association of employees which 
     establishes such an individual retirement plan under section 
     408(c).

       ``(ii) Exception for certain transactions involving 
     shareholder-employees.--Subparagraph (A)(iii) shall not apply 
     to a transaction which consists of a sale of employer 
     securities to an employee stock ownership plan (as defined in 
     subsection (e)(7)) by a shareholder-employee, a member of the 
     family (as defined in section 267(c)(4)) of such shareholder-
     employee, or a corporation in which such a shareholder-
     employee owns stock representing a 50 percent or greater 
     interest described in subparagraph (A).
       ``(C) Shareholder-employee.--For purposes of subparagraph 
     (B), the term `shareholder-employee' means an employee or 
     officer of an S corporation who owns (or is considered as 
     owning within the meaning of section 318(a)(1)) more than 5 
     percent of the outstanding stock of the corporation on any 
     day during the taxable year of such corporation.''
       (B) Conforming amendments.--Section 4975(d) is amended--
       (i) by striking ``The prohibitions'' and inserting ``Except 
     as provided in subsection (f)(6), the prohibitions'', and
       (ii) by striking the last two sentences thereof.

[[Page H6482]]

       (2) Amendment to erisa.--Section 408(d) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)) is 
     amended to read as follows:
       ``(d)(1) Section 407(b) and subsections (b), (c), and (e) 
     of this section shall not apply to a transaction in which a 
     plan directly or indirectly--
       ``(A) lends any part of the corpus or income of the plan 
     to,
       ``(B) pays any compensation for personal services rendered 
     to the plan to, or
       ``(C) acquires for the plan any property from, or sells any 
     property to,

     any person who is with respect to the plan an owner-employee 
     (as defined in section 401(c)(3) of the Internal Revenue Code 
     of 1986), a member of the family (as defined in section 
     267(c)(4) of such Code) of any such owner-employee, or any 
     corporation in which any such owner-employee owns, directly 
     or indirectly, 50 percent or more of the total combined 
     voting power of all classes of stock entitled to vote or 50 
     percent or more of the total value of shares of all classes 
     of stock of the corporation.
       ``(2)(A) For purposes of paragraph (1), the following shall 
     be treated as owner-employees:
       ``(i) A shareholder-employee.
       ``(ii) A participant or beneficiary of an individual 
     retirement plan (as defined in section 7701(a)(37) of the 
     Internal Revenue Code of 1986).
       ``(iii) An employer or association of employees which 
     establishes such an individual retirement plan under section 
     408(c) of such Code.
       ``(B) Paragraph (1)(C) shall not apply to a transaction 
     which consists of a sale of employer securities to an 
     employee stock ownership plan (as defined in section 
     407(d)(6)) by a shareholder-employee, a member of the family 
     (as defined in section 267(c)(4) of such Code) of any such 
     owner-employee, or a corporation in which such a shareholder-
     employee owns stock representing a 50 percent or greater 
     interest described in paragraph (1).
       ``(3) For purposes of paragraph (2), the term `shareholder-
     employee' means an employee or officer of an S corporation 
     (as defined in section 1361(a)(1) of such Code) who owns (or 
     is considered as owning within the meaning of section 
     318(a)(1) of such Code) more than 5 percent of the 
     outstanding stock of the corporation on any day during the 
     taxable year of such corporation.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1507. MODIFICATION OF 10-PERCENT TAX FOR NONDEDUCTIBLE 
                   CONTRIBUTIONS.

       (a) In General.--Section 4972(c)(6)(B) (relating to 
     exceptions) is amended to read as follows:
       ``(B) so much of the contributions to 1 or more defined 
     contribution plans which are not deductible when contributed 
     solely because of section 404(a)(7) as does not exceed the 
     greater of--
       ``(i) the amount of contributions not in excess of 6 
     percent of compensation (within the meaning of section 
     404(a)) paid or accrued (during the taxable year for which 
     the contributions were made) to beneficiaries under the 
     plans, or
       ``(ii) the sum of--

       ``(I) the amount of contributions described in section 
     401(m)(4)(A), plus
       ``(II) the amount of contributions described in section 
     402(g)(3)(A).''.

       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1508. MODIFICATION OF FUNDING REQUIREMENTS FOR CERTAIN 
                   PLANS.

       (a) Funding Rules for Certain Plans.--Section 769 of the 
     Retirement Protection Act of 1994 is amended by adding at the 
     end the following new subsection:
       ``(c) Transition Rules for Certain Plans.--
       ``(1) In general.--In the case of a plan that--
       ``(A) was not required to pay a variable rate premium for 
     the plan year beginning in 1996;
       ``(B) has not, in any plan year beginning after 1995 and 
     before 2009, merged with another plan (other than a plan 
     sponsored by an employer that was in 1996 within the 
     controlled group of the plan sponsor); and
       ``(C) is sponsored by a company that is engaged primarily 
     in the interurban or interstate passenger bus service,

     the transition rules described in paragraph (2) shall apply 
     for any plan year beginning after 1996 and before 2010.
       ``(2) Transition rules.--The transition rules described in 
     this paragraph are as follows:
       ``(A) For purposes of section 412(l)(9)(A) of the Internal 
     Revenue Code of 1986 and section 302(d)(9)(A) of the Employee 
     Retirement Income Security Act of 1974--
       ``(i) the funded current liability percentage for any plan 
     year beginning after 1996 and before 2005 shall be treated as 
     not less than 90 percent if for such plan year the funded 
     current liability percentage is at least 85 percent, and
       ``(ii) the funded current liability percentage for any plan 
     year beginning after 2004 and before 2010 shall be treated as 
     not less than 90 percent if for such plan year the funded 
     current liability percentage satisfies the minimum percentage 
     determined according to the following table:

                                                ``In the casThe minimum
                                                     yearpercentage is:
  2005...........................................................86....

  2006...........................................................87....

  2007...........................................................88....

  2008...........................................................89....

  2009 and thereafter...........................................90.....

       ``(B) Sections 412(c)(7)(E)(i)(I) of such Code and 
     302(c)(7)(E)(i)(I) of such Act shall be applied--
       ``(i) by substituting `85 percent' for `90 percent' for 
     plan years beginning after 1996 and before 2005, and
       ``(ii) by substituting the minimum percentage specified in 
     the table contained in subparagraph (A)(ii) for `90 percent' 
     for plan years beginning after 2004 and before 2010.
       ``(C) In the event the funded current liability percentage 
     of a plan is less than 85 percent for any plan year beginning 
     after 1996 and before 2005, the transition rules under 
     subparagraphs (A) and (B) shall continue to apply to the plan 
     if contributions for such a plan year are made to the plan in 
     an amount equal to the lesser of--
       ``(i) the amount necessary to result in a funded current 
     liability percentage of 85 percent, or
       ``(ii) the greater of--

       ``(I) 2 percent of the plan's current liability as of the 
     beginning of such plan year, or
       ``(II) the amount necessary to result in a funded current 
     liability percentage of 80 percent as of the end of such plan 
     year.

     For the plan year beginning in 2005 and for each of the 3 
     succeeding plan years, the transition rules under 
     subparagraphs (A) and (B) shall continue to apply to the plan 
     for such plan year only if contributions to the plan for such 
     plan year equal at least the expected increase in current 
     liability due to benefits accruing during such plan 
     year.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to plan years beginning after December 31, 1996.

     SEC. 1509. CLARIFICATION OF DISQUALIFICATION RULES RELATING 
                   TO ACCEPTANCE OF ROLLOVER CONTRIBUTIONS.

       The Secretary of the Treasury or his delegate shall clarify 
     that, under the Internal Revenue Service regulations 
     protecting pension plans from disqualification by reason of 
     the receipt of invalid rollover contributions under section 
     402(c) of the Internal Revenue Code of 1986, in order for the 
     administrator of the plan receiving any such contribution to 
     reasonably conclude that the contribution is a valid rollover 
     contribution it is not necessary for the distributing plan to 
     have a determination letter with respect to its status as a 
     qualified plan under section 401 of such Code.

     SEC. 1510. NEW TECHNOLOGIES IN RETIREMENT PLANS.

       (a) In General.--Not later than December 31, 1998, the 
     Secretary of the Treasury and the Secretary of Labor shall 
     each issue guidance which is designed to--
       (1) interpret the notice, election, consent, disclosure, 
     and time requirements (and related recordkeeping 
     requirements) under the Internal Revenue Code of 1986 and the 
     Employee Retirement Income Security Act of 1974 relating to 
     retirement plans as applied to the use of new technologies by 
     plan sponsors and administrators while maintaining the 
     protection of the rights of participants and beneficiaries, 
     and
       (2) clarify the extent to which writing requirements under 
     the Internal Revenue Code of 1986 relating to retirement 
     plans shall be interpreted to permit paperless transactions.
       (b) Applicability of Final Regulations.--Final regulations 
     applicable to the guidance regarding new technologies 
     described in subsection (a) shall not be effective until the 
     first plan year beginning at least 6 months after the 
     issuance of such final regulations.
Subtitle B--Other Provisions Relating to Pensions and Employee Benefits

     SEC. 1521. INCREASE IN CURRENT LIABILITY FUNDING LIMIT.

       (a) Amendment to 1986 Code.--Section 412(c)(7) (relating to 
     full-funding limitation) is amended--
       (A) by striking ``150 percent'' in subparagraph (A)(i)(I) 
     and inserting ``the applicable percentage'', and
       (B) by adding at the end the following:
       ``(F) Applicable percentage.--For purposes of subparagraph 
     (A)(i)(I), the applicable percentage shall be determined in 
     accordance with the following table:

                                              ``In the caThe applicable
                                                     yearpercentage is:
  1999 or 2000.................................................155 ....

  2001 or 2002.................................................160 ....

  2003 or 2004.................................................165 ....

  2005 and succeeding years.................................170.''.....

       (b) Amendment to ERISA.--Section 302(c)(7) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7)) 
     is amended--
       (A) by striking ``150 percent'' in subparagraph (A)(i)(I) 
     and inserting ``the applicable percentage'', and
       (B) by adding at the end the following:
       ``(F) Applicable percentage.--For purposes of subparagraph 
     (A)(i)(I), the applicable percentage shall be determined in 
     accordance with the following table:

                                              ``In the caThe applicable
                                                     yearpercentage is:
  1999 or 2000.................................................155 ....

  2001 or 2002.................................................160 ....

  2003 or 2004.................................................165 ....

  2005 and succeeding years.................................170.''.....

       (c) Special Amortization Rule.--
       (1) Code amendment.--Section 412(b)(2) is amended by 
     striking ``and'' at the end of subparagraph (C), by striking 
     the period at the end of subparagraph (D) and inserting ``, 
     and'', and by inserting after subparagraph (D) the following:
       ``(E) the amount necessary to amortize in equal annual 
     installments (until fully amortized) over a period of 20 
     years the contributions which would be required to be made 
     under the plan but for the provisions of subsection 
     (c)(7)(A)(i)(I).''.
       (2) ERISA amendment.--Section 302(b)(2) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1082(b)(2)) 
     is amended by striking ``and'' at the end of subparagraph 
     (C), by striking the period at the end of subparagraph (D) 
     and inserting ``, and'', and by inserting after subparagraph 
     (D) the following:

[[Page H6483]]

       ``(E) the amount necessary to amortize in equal annual 
     installments (until fully amortized) over a period of 20 
     years the contributions which would be required to be made 
     under the plan but for the provisions of subsection 
     (c)(7)(A)(i)(I).''.
       (3) Conforming amendments.--
       (A) Section 412(c)(7)(D) is amended by adding ``and'' at 
     the end of clause (i), by striking ``, and'' at the end of 
     clause (ii) and inserting a period, and by striking clause 
     (iii).
       (B) Section 302(c)(7)(D) of the Employee Retirement Income 
     Security Act of 1974 (29 U.S.C. 1082(c)(7)(D)) is amended by 
     adding ``and'' at the end of clause (i), by striking ``, 
     and'' at the end of clause (ii) and inserting a period, and 
     by striking clause (iii).
       (d) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to plan years beginning after December 31, 1998.
       (2) Special rule for unamortized balances under existing 
     law.--The unamortized balance (as of the close of the plan 
     year preceding the plan's first year beginning in 1999) of 
     any amortization base established under section 
     412(c)(7)(D)(iii) of such Code and section 302(c)(7)(D)(iii) 
     of such Act (as repealed by subsection (c)(3)) for any plan 
     year beginning before 1999 shall be amortized in equal annual 
     installments (until fully amortized) over a period of years 
     equal to the excess of--
       (A) 20 years, over
       (B) the number of years since the amortization base was 
     established.

     SEC. 1522. SPECIAL RULES FOR CHURCH PLANS.

       (a) In General.--Section 414(e)(5) (relating to special 
     rules for chaplains and self-employed ministers) is amended--
       (1) by striking ``not eligible to participate'' in 
     subparagraph (C) and inserting ``not otherwise 
     participating'', and
       (2) by adding at the end the following new subparagraph:
       ``(E) Exclusion.--In the case of a contribution to a church 
     plan made on behalf of a minister described in subparagraph 
     (A)(i)(II), such contribution shall not be included in the 
     gross income of the minister to the extent that such 
     contribution would not be so included if the minister was an 
     employee of a church.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 1997.

     SEC. 1523. REPEAL OF APPLICATION OF UNRELATED BUSINESS INCOME 
                   TAX TO ESOPS.

       (a) In General.--Section 512(e) is amended by adding at the 
     end the following new paragraph:
       ``(3) Exception for esops.--This subsection shall not apply 
     to employer securities (within the meaning of section 409(l)) 
     held by an employee stock ownership plan described in section 
     4975(e)(7).''
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 1524. DIVERSIFICATION OF SECTION 401(K) PLAN 
                   INVESTMENTS.

       (a) Limitations on Investment in Employer Securities and 
     Employer Real Property by Cash or Deferred Arrangements.--
     Section 407(b) of the Employee Retirement Income Security Act 
     of 1974 (29 U.S.C. 1107(b)) is amended by redesignating 
     paragraph (2) as paragraph (3) and by inserting after 
     paragraph (1) the following new paragraph:
       ``(2)(A) If this paragraph applies to an eligible 
     individual account plan, the portion of such plan which 
     consists of applicable elective deferrals (and earnings 
     allocable thereto) shall be treated as a separate plan--
       ``(i) which is not an eligible individual account plan, and
       ``(ii) to which the requirements of this section apply.
       ``(B)(i) This paragraph shall apply to any eligible 
     individual account plan if any portion of the plan's 
     applicable elective deferrals (or earnings allocable thereto) 
     are required to be invested in qualifying employer securities 
     or qualifying employer real property or both--
       ``(I) pursuant to the terms of the plan, or
       ``(II) at the direction of a person other than the 
     participant on whose behalf such elective deferrals are made 
     to the plan (or a beneficiary).
       ``(ii) This paragraph shall not apply to an individual 
     account plan for a plan year if, on the last day of the 
     preceding plan year, the fair market value of the assets of 
     all individual account plans maintained by the employer 
     equals not more than 10 percent of the fair market value of 
     the assets of all pension plans (other than multiemployer 
     plans) maintained by the employer.
       ``(iii) This paragraph shall not apply to an individual 
     account plan that is an employee stock ownership plan as 
     defined in section 4975(e)(7) of the Internal Revenue Code of 
     1986.
       ``(iv) This paragraph shall not apply to an individual 
     account plan if, pursuant to the terms of the plan, the 
     portion of any employee's applicable elective deferrals which 
     is required to be invested in qualifying employer securities 
     and qualifying employer real property for any year may not 
     exceed 1 percent of the employee's compensation which is 
     taken into account under the plan in determining the maximum 
     amount of the employee's applicable elective deferrals for 
     such year.
       ``(C) For purposes of this paragraph, the term `applicable 
     elective deferral' means any elective deferral (as defined in 
     section 402(g)(3)(A) of the Internal Revenue Code of 1986) 
     which is made pursuant to a qualified cash or deferred 
     arrangement as defined in section 401(k) of the Internal 
     Revenue Code of 1986.''
       (b) Effective Date.--The amendments made by this section 
     shall apply to elective deferrals for plan years beginning 
     after December 31, 1998.

     SEC. 1525. SECTION 401(K) PLANS FOR CERTAIN IRRIGATION AND 
                   DRAINAGE ENTITIES.

       (a) In General.--Subparagraph (B) of section 401(k)(7) 
     (relating to rural cooperative plan) is amended--
       (1) by striking ``and'' at the end of clause (iii), by 
     redesignating clause (iv) as clause (v), and by inserting 
     after clause (iii) the following new clause:
       ``(iv) any organization which--

       ``(I) is a mutual irrigation or ditch company described in 
     section 501(c)(12) (without regard to the 85 percent 
     requirement thereof), or
       ``(II) is a district organized under the laws of a State as 
     a municipal corporation for the purpose of irrigation, water 
     conservation, or drainage, and'', and

       (2) in clause (v), as so redesignated, by striking ``or 
     (iii)'' and inserting ``, (iii), or (iv)''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to years beginning after December 31, 1997.

     SEC. 1526. PORTABILITY OF PERMISSIVE SERVICE CREDIT UNDER 
                   GOVERNMENTAL PENSION PLANS.

       (a) In General.--Section 415 (relating to limitations on 
     benefits and contributions under qualified plans) is amended 
     by adding at the end the following new subsection:
       ``(n) Special Rules Relating to Purchase of Permissive 
     Service Credit.--
       ``(1) In general.--If an employee makes 1 or more 
     contributions to a defined benefit governmental plan (within 
     the meaning of section 414(d)) to purchase permissive service 
     credit under such plan, then the requirements of this section 
     shall be treated as met only if--
       ``(A) the requirements of subsection (b) are met, 
     determined by treating the accrued benefit derived from all 
     such contributions as an annual benefit for purposes of 
     subsection (b), or
       ``(B) the requirements of subsection (c) are met, 
     determined by treating all such contributions as annual 
     additions for purposes of subsection (c).
       ``(2) Application of limit.--For purposes of--
       ``(A) applying paragraph (1)(A), the plan shall not fail to 
     meet the reduced limit under subsection (b)(2)(C) solely by 
     reason of this subsection, and
       ``(B) applying paragraph (1)(B), the plan shall not fail to 
     meet the percentage limitation under subsection (c)(1)(B) 
     solely by reason of this subsection.
       ``(3) Permissive service credit.--For purposes of this 
     subsection--
       ``(A) In general.--The term `permissive service credit' 
     means service credit--
       ``(i) recognized by the governmental plan for purposes of 
     calculating a participant's benefit under the plan,
       ``(ii) which such participant has not received under such 
     governmental plan, and
       ``(iii) which such participant may receive only by making a 
     voluntary additional contribution, in an amount determined 
     under such governmental plan, which does not exceed the 
     amount necessary to fund the benefit attributable to such 
     service credit.
       ``(B) Limitation on nonqualified service credit.--A plan 
     shall fail to meet the requirements of this section if--
       ``(i) more than 5 years of permissive service credit 
     attributable to nonqualified service are taken into account 
     for purposes of this subsection, or
       ``(ii) any permissive service credit attributable to 
     nonqualified service is taken into account under this 
     subsection before the employee has at least 5 years of 
     participation under the plan.
       ``(C) Nonqualified service.--For purposes of subparagraph 
     (B), the term `nonqualified service' means service for which 
     permissive service credit is allowed other than--
       ``(i) service (including parental, medical, sabbatical, and 
     similar leave) as an employee of the Government of the United 
     States, any State or political subdivision thereof, or any 
     agency or instrumentality of any of the foregoing (other than 
     military service or service for credit which was obtained as 
     a result of a repayment described in subsection (k)(3)),
       ``(ii) service (including parental, medical, sabbatical, 
     and similar leave) as an employee (other than as an employee 
     described in clause (i)) of an educational organization 
     described in section 170(b)(1)(A)(ii) which is a public, 
     private, or sectarian school which provides elementary or 
     secondary education (through grade 12), as determined under 
     State law,
       ``(iii) service as an employee of an association of 
     employees who are described in clause (i), or
       ``(iv) military service (other than qualified military 
     service under section 414(u)) recognized by such governmental 
     plan.

     In the case of service described in clauses (i), (ii), or 
     (iii), such service will be nonqualified service if 
     recognition of such service would cause a participant to 
     receive a retirement benefit for the same service under more 
     than one plan.''
       (b) Special Rule for Repayment of Cashouts.--Section 415(k) 
     (relating to special rules) is amended by adding at the end 
     the following new paragraph:
       ``(3) Repayments of cashouts under governmental plans.--In 
     the case of any repayment of contributions (including 
     interest thereon) to the governmental plan with respect to an 
     amount previously refunded upon a forfeiture of service 
     credit under the plan or under another governmental plan 
     maintained by a State or local government employer within the 
     same State, any such repayment shall not be taken into 
     account for purposes of this section.''
       (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to permissive service credit contributions made in 
     years beginning after December 31, 1997.

[[Page H6484]]

       (2) Transition rule.--
       (A) In general.--In the case of an eligible participant in 
     a governmental plan (within the meaning of section 414(d) of 
     the Internal Revenue Code of 1986), the limitations of 
     section 415(c)(1) of such Code shall not be applied to reduce 
     the amount of permissive service credit which may be 
     purchased to an amount less than the amount which was allowed 
     to be purchased under the terms of the plan as in effect on 
     the date of the enactment of this Act.
       (B) Eligible participant.--For purposes of subparagraph 
     (A), an eligible participant is an individual who first 
     became a participant in the plan before the first plan year 
     beginning after the last day of the calendar year in which 
     the next regular session (following the date of the enactment 
     of this Act) of the governing body with authority to amend 
     the plan ends.

     SEC. 1527. REMOVAL OF DOLLAR LIMITATION ON BENEFIT PAYMENTS 
                   FROM A DEFINED BENEFIT PLAN MAINTAINED FOR 
                   CERTAIN POLICE AND FIRE EMPLOYEES.

       (a) In General.--Subparagraph (G) of section 415(b)(2) is 
     amended by striking ``participant--'' and all that follows 
     and inserting ``participant, subparagraph (C) of this 
     paragraph shall not apply.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to years beginning after December 31, 1996.

     SEC. 1528. SURVIVOR BENEFITS FOR PUBLIC SAFETY OFFICERS 
                   KILLED IN THE LINE OF DUTY.

       (a) In General.--Section 101 (relating to certain death 
     benefits) is amended by adding at the end the following new 
     subsection:
       ``(h) Survivor Benefits Attributable to Service by a Public 
     Safety Officer who is Killed in the Line of Duty.--
       ``(1) In general.--Gross income shall not include any 
     amount paid as a survivor annuity on account of the death of 
     a public safety officer (as such term is defined in section 
     1204 of the Omnibus Crime Control and Safe Streets Act of 
     1968) killed in the line of duty--
       ``(A) if such annuity is provided, under a governmental 
     plan which meets the requirements of section 401(a), to the 
     spouse (or a former spouse) of the public safety officer or 
     to a child of such officer; and
       ``(B) to the extent such annuity is attributable to such 
     officer's service as a public safety officer.
       ``(2) Exceptions.--Paragraph (1) shall not apply with 
     respect to the death of any public safety officer if, as 
     determined in accordance with the provisions of the Omnibus 
     Crime Control and Safe Streets Act of 1968--
       ``(A) the death was caused by the intentional misconduct of 
     the officer or by such officer's intention to bring about 
     such officer's death;
       ``(B) the officer was voluntarily intoxicated (as defined 
     in section 1204 of such Act) at the time of death;
       ``(C) the officer was performing such officer's duties in a 
     grossly negligent manner at the time of death; or
       ``(D) the payment is to an individual whose actions were a 
     substantial contributing factor to the death of the 
     officer.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to amounts received in taxable years beginning 
     after December 31, 1996, with respect to individuals dying 
     after such date.

     SEC. 1529. TREATMENT OF CERTAIN DISABILITY BENEFITS RECEIVED 
                   BY FORMER POLICE OFFICERS OR FIREFIGHTERS.

       (a) General Rule.--For purposes of determining whether any 
     amount to which this section applies is excludable from gross 
     income under section 104(a)(1) of the Internal Revenue Code 
     of 1986, the following conditions shall be treated as 
     personal injuries or sickness in the course of employment:
       (1) Heart disease.
       (2) Hypertension.
       (b) Amounts To Which Section Applies.--This section shall 
     apply to any amount--
       (1) which is payable--
       (A) to an individual (or to the survivors of an individual) 
     who was a full-time employee of any police department or fire 
     department which is organized and operated by a State, by any 
     political subdivision thereof, or by any agency or 
     instrumentality of a State or political subdivision thereof, 
     and
       (B) under a State law (as amended on May 19, 1992) which 
     irrebuttably presumed that heart disease and hypertension are 
     work-related illnesses but only for employees separating from 
     service before July 1, 1992; and
       (2) which was received in calendar year 1989, 1990, or 
     1991.
       (c) Waiver of Statute of Limitations.--If, on the date of 
     the enactment of this Act (or at any time within the 1-year 
     period beginning on such date of enactment), credit or refund 
     of any overpayment of tax resulting from the provisions of 
     this section is barred by any law or rule of law (including 
     res judicata), then credit or refund of such overpayment 
     shall, nevertheless, be allowed or made if claim therefore is 
     filed before the date 1 year after such date of enactment.

     SEC. 1530. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOYEES.

       (a) In General.--Subparagraph (C) of section 664(d)(1) and 
     subparagraph (C) of section 664(d)(2) are each amended by 
     striking the period at the end thereof and inserting ``or, to 
     the extent the remainder interest is in qualified employer 
     securities (as defined in subsection (g)(4)), all or part of 
     such securities are to be transferred to an employee stock 
     ownership plan (as defined in section 4975(e)(7)) in a 
     qualified gratuitous transfer (as defined by subsection 
     (g)).''.
       (b) Qualified Gratuitous Transfer Defined.--Section 664 is 
     amended by adding at the end the following new subsection:
       ``(g) Qualified Gratuitous Transfer of Qualified Employer 
     Securities.--
       ``(1) In general.--For purposes of this section, the term 
     `qualified gratuitous transfer' means a transfer of qualified 
     employer securities to an employee stock ownership plan (as 
     defined in section 4975(e)(7)) but only to the extent that--
       ``(A) the securities transferred previously passed from a 
     decedent dying before January 1, 1999, to a trust described 
     in paragraph (1) or (2) of subsection (d),
       ``(B) no deduction under section 404 is allowable with 
     respect to such transfer,
       ``(C) such plan contains the provisions required by 
     paragraph (3),
       ``(D) such plan treats such securities as being 
     attributable to employer contributions but without regard to 
     the limitations otherwise applicable to such contributions 
     under section 404, and
       ``(E) the employer whose employees are covered by the plan 
     described in this paragraph files with the Secretary a 
     verified written statement consenting to the application of 
     sections 4978 and 4979A with respect to such employer.
       ``(2) Exception.--The term `qualified gratuitous transfer' 
     shall not include a transfer of qualified employer securities 
     to an employee stock ownership plan unless--
       ``(A) such plan was in existence on August 1, 1996,
       ``(B) at the time of the transfer, the decedent and members 
     of the decedent's family (within the meaning of section 
     2032A(e)(2)) own (directly or through the application of 
     section 318(a)) no more than 10 percent of the value of the 
     stock of the corporation referred to in paragraph (4), and
       ``(C) immediately after the transfer, such plan owns (after 
     the application of section 318(a)(4)) at least 60 percent of 
     the value of the outstanding stock of the corporation.
       ``(3) Plan requirements.--A plan contains the provisions 
     required by this paragraph if such plan provides that--
       ``(A) the qualified employer securities so transferred are 
     allocated to plan participants in a manner consistent with 
     section 401(a)(4),
       ``(B) plan participants are entitled to direct the plan as 
     to the manner in which such securities which are entitled to 
     vote and are allocated to the account of such participant are 
     to be voted,
       ``(C) an independent trustee votes the securities so 
     transferred which are not allocated to plan participants,
       ``(D) each participant who is entitled to a distribution 
     from the plan has the rights described in subparagraphs (A) 
     and (B) of section 409(h)(1),
       ``(E) such securities are held in a suspense account under 
     the plan to be allocated each year, up to the limitations 
     under section 415(c), after first allocating all other annual 
     additions for the limitation year, up to the limitations 
     under sections 415 (c) and (e), and
       ``(F) on termination of the plan, all securities so 
     transferred which are not allocated to plan participants as 
     of such termination are to be transferred to, or for the use 
     of, an organization described in section 170(c).

     For purposes of the preceding sentence, the term `independent 
     trustee' means any trustee who is not a member of the family 
     (within the meaning of section 2032A(e)(2)) of the decedent 
     or a 5-percent shareholder. A plan shall not fail to be 
     treated as meeting the requirements of section 401(a) by 
     reason of meeting the requirements of this subsection.
       ``(4) Qualified employer securities.--For purposes of this 
     section, the term `qualified employer securities' means 
     employer securities (as defined in section 409(l)) which are 
     issued by a domestic corporation--
       ``(A) which has no outstanding stock which is readily 
     tradable on an established securities market, and
       ``(B) which has only 1 class of stock.
       ``(5) Treatment of securities allocated by employee stock 
     ownership plan to persons related to decedent or 5-percent 
     shareholders.--
       ``(A) In general.--If any portion of the assets of the plan 
     attributable to securities acquired by the plan in a 
     qualified gratuitous transfer are allocated to the account 
     of--
       ``(i) any person who is related to the decedent (within the 
     meaning of section 267(b)) or a member of the decedent's 
     family (within the meaning of section 2032A(e)(2)), or
       ``(ii) any person who, at the time of such allocation or at 
     any time during the 1-year period ending on the date of the 
     acquisition of qualified employer securities by the plan, is 
     a 5-percent shareholder of the employer maintaining the plan,

     the plan shall be treated as having distributed (at the time 
     of such allocation) to such person or shareholder the amount 
     so allocated.
       ``(B) 5-percent shareholder.--For purposes of subparagraph 
     (A), the term `5-percent shareholder' means any person who 
     owns (directly or through the application of section 318(a)) 
     more than 5 percent of the outstanding stock of the 
     corporation which issued such qualified employer securities 
     or of any corporation which is a member of the same 
     controlled group of corporations (within the meaning of 
     section 409(l)(4)) as such corporation. For purposes of the 
     preceding sentence, section 318(a) shall be applied without 
     regard to the exception in paragraph (2)(B)(i) thereof.
       ``(C) Cross reference.--

  ``For excise tax on allocations described in subparagraph (A), see 
section 4979A.
       ``(6) Tax on failure to transfer unallocated securities to 
     charity on termination of plan.--If the requirements of 
     paragraph (3)(F) are not met with respect to any 
     securities, there is hereby imposed a tax on the employer 
     maintaining the plan in an amount equal to the sum of--

[[Page H6485]]

       ``(A) the amount of the increase in the tax which would be 
     imposed by chapter 11 if such securities were not transferred 
     as described in paragraph (1), and
       ``(B) interest on such amount at the underpayment rate 
     under section 6621 (and compounded daily) from the due date 
     for filing the return of the tax imposed by chapter 11.''.
       (c) Conforming Amendments.--
       (1) Section 401(a)(1) is amended by inserting ``or by a 
     charitable remainder trust pursuant to a qualified gratuitous 
     transfer (as defined in section 664(g)(1)),'' after ``stock 
     bonus plans),''.
       (2) Section 404(a)(9) is amended by inserting after 
     subparagraph (B) the following new subparagraph:
       ``(C) A qualified gratuitous transfer (as defined in 
     section 664(g)(1)) shall have no effect on the amount or 
     amounts otherwise deductible under paragraph (3) or (7) or 
     under this paragraph.''.
       (3) Section 415(c)(6) is amended by adding at the end 
     thereof the following new sentence:

     ``The amount of any qualified gratuitous transfer (as defined 
     in section 664(g)(1)) allocated to a participant for any 
     limitation year shall not exceed the limitations imposed by 
     this section, but such amount shall not be taken into account 
     in determining whether any other amount exceeds the 
     limitations imposed by this section.''.
       (4) Section 415(e) is amended--
       (A) by redesignating paragraph (6) as paragraph (7), and
       (B) by inserting after paragraph (5) the following new 
     paragraph:
       ``(6) Special rule for qualified gratuitous transfers.--Any 
     qualified gratuitous transfer of qualified employer 
     securities (as defined by section 664(g)) shall not be taken 
     into account in calculating, and shall not be subject to, the 
     limitations provided in this subsection.''.
       (5) Subparagraph (B) of section 664(d)(1) and subparagraph 
     (B) of section 664(d)(2) are each amended by inserting ``and 
     other than qualified gratuitous transfers described in 
     subparagraph (C)'' after ``subparagraph (A)''.
       (6) Paragraph (4) of section 674(b) is amended by inserting 
     before the period ``or to an employee stock ownership plan 
     (as defined in section 4975(e)(7)) in a qualified 
     gratuitous transfer (as defined in section 664(g)(1))''.
       (7) Section 2055(a) is amended--
       (i) by striking ``or'' at the end of paragraph (3),
       (ii) by striking the period at the end of paragraph (4) and 
     inserting ``; or'', and
       (iii) by inserting after paragraph (4) the following new 
     paragraph:
       ``(5) to an employee stock ownership plan if such transfer 
     qualifies as a qualified gratuitous transfer of qualified 
     employer securities within the meaning of section 664(g).''.
       (8) Paragraph (8) of section 2056(b) is amended to read as 
     follows:
       ``(8) Special rule for charitable remainder trusts.--
       ``(A) In general.--If the surviving spouse of the decedent 
     is the only beneficiary of a qualified charitable remainder 
     trust who is not a charitable beneficiary nor an ESOP 
     beneficiary, paragraph (1) shall not apply to any interest in 
     such trust which passes or has passed from the decedent to 
     such surviving spouse.
       ``(B) Definitions.--For purposes of subparagraph (A)--
       ``(i) Charitable beneficiary.--The term `charitable 
     beneficiary' means any beneficiary which is an organization 
     described in section 170(c).
       ``(ii) ESOP beneficiary.--The term `ESOP beneficiary' means 
     any beneficiary which is an employee stock ownership plan (as 
     defined in section 4975(e)(7)) that holds a remainder 
     interest in qualified employer securities (as defined in 
     section 664(g)(4)) to be transferred to such plan in a 
     qualified gratuitous transfer (as defined in section 
     664(g)(1)).
       ``(iii) Qualified charitable remainder trust.--The term 
     `qualified charitable remainder trust' means a charitable 
     remainder annuity trust or a charitable remainder unitrust 
     (described in section 664).''.
       (9) Section 4947(b) is amended by inserting after paragraph 
     (3) the following new paragraph:
       ``(4) Section 507.--The provisions of section 507(a) shall 
     not apply to a trust which is described in subsection (a)(2) 
     by reason of a distribution of qualified employer 
     securities (as defined in section 664(g)(4)) to an 
     employee stock ownership plan (as defined in section 
     4975(e)(7)) in a qualified gratuitous transfer (as defined 
     by section 664(g)).''.
       (10) The last sentence of section 4975(e)(7) is amended by 
     inserting ``and section 664(g)'' after ``section 409(n)''
       (11) Subsection (a) of section 4978 is amended--
       (A) by inserting ``or acquired any qualified employer 
     securities in a qualified gratuitous transfer to which 
     section 664(g) applied'' after ``section 1042 applied'', and
       (B) by inserting before the comma at the end of paragraph 
     (2) ``60 percent of the total value of all employer 
     securities as of such disposition in the case of any 
     qualified employer securities acquired in a qualified 
     gratuitous transfer to which section 664(g) applied)''.
       (12) Paragraph (2) of section 4978(b) is amended--
       (A) by inserting ``or acquired in the qualified gratuitous 
     transfer to which section 664(g) applied'' after ``section 
     1042 applied'', and
       (B) by inserting ``or to which section 664(g) applied'' 
     after ``section 1042 applied'' in subparagraph (A) thereof.
       (13) Subsection (c) of section 4978 is amended by striking 
     ``written statement'' and all that follows and inserting 
     ``written statement described in section 664(g)(1)(E) or in 
     section 1042(b)(3) (as the case may be).''.
       (14) Paragraph (2) of section 4978(e) is amended by 
     striking the period and inserting ``; except that such 
     section shall be applied without regard to subparagraph (B) 
     thereof for purposes of applying this section and section 
     4979A with respect to securities acquired in a qualified 
     gratuitous transfer (as defined in section 664(g)(1)).''.
       (15) Subsection (a) of section 4979A is amended to read as 
     follows:
       ``(a) Imposition of Tax.--If--
       ``(1) there is a prohibited allocation of qualified 
     securities by any employee stock ownership plan or eligible 
     worker-owned cooperative, or
       ``(2) there is an allocation described in section 
     664(g)(5)(A),

     there is hereby imposed a tax on such allocation equal to 50 
     percent of the amount involved.''.
       (16) Subsection (c) of section 4979A is amended to read as 
     follows:
       ``(c) Liability for Tax.--The tax imposed by this section 
     shall be paid by--
       ``(1) the employer sponsoring such plan, or
       ``(2) the eligible worker-owned cooperative,

     which made the written statement described in section 
     664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may 
     be).''.
       (17) Section 4979A is amended by redesignating subsection 
     (d) as subsection (e) and by inserting after subsection (c) 
     the following new subsection:
       ``(d) Special Statute of Limitations for Tax Attributable 
     to Certain Allocations.--The statutory period for the 
     assessment of any tax imposed by this section on an 
     allocation described in subsection (a)(2) of qualified 
     employer securities shall not expire before the date which is 
     3 years from the later of--
       ``(1) the 1st allocation of such securities in connection 
     with a qualified gratuitous transfer (as defined in section 
     664(g)(1)), or
       ``(2) the date on which the Secretary is notified of the 
     allocation described in subsection (a)(2).''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to transfers made by trusts to, or for the use 
     of, an employee stock ownership plan after the date of the 
     enactment of this Act.
         Subtitle C--Provisions Relating to Certain Health Acts

     SEC. 1531. AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986 TO 
                   IMPLEMENT THE NEWBORNS' AND MOTHERS' HEALTH 
                   PROTECTION ACT OF 1996 AND THE MENTAL HEALTH 
                   PARITY ACT OF 1996.

       (a) In General.--Subtitle K is amended--
       (1) by striking all that precedes section 9801 and 
     inserting the following:
              ``Subtitle K--Group Health Plan Requirements
``Chapter 100. Group health plan requirements.

             ``CHAPTER 100--GROUP HEALTH PLAN REQUIREMENTS

``Subchapter A. Requirements relating to portability, access, and 
              renewability.
``Subchapter B. Other requirements.
``Subchapter C. General provisions.

   ``Subchapter A--Requirements Relating to Portability, Access, and 
                              Renewability

``Sec. 9801. Increased portability through limitation on preexisting 
              condition exclusions.
``Sec. 9802. Prohibiting discrimination against individual participants 
              and beneficiaries based on health status.
``Sec. 9803. Guaranteed renewability in multiemployer plans and certain 
              multiple employer welfare arrangements.'',
       (2) by redesignating sections 9804, 9805, and 9806 as 
     sections 9831, 9832, and 9833, respectively,
       (3) by inserting before section 9831 (as so redesignated) 
     the following:

                   ``Subchapter C--General Provisions

``Sec. 9831. General exceptions.
``Sec. 9832. Definitions.
``Sec. 9833. Regulations.'', and

       (4) by inserting after section 9803 the following:

                   ``Subchapter B--Other Requirements

``Sec. 9811. Standards relating to benefits for mothers and newborns.
``Sec. 9812. Parity in the application of certain limits to mental 
              health benefits.

     ``SEC. 9811. STANDARDS RELATING TO BENEFITS FOR MOTHERS AND 
                   NEWBORNS.

       ``(a) Requirements for Minimum Hospital Stay Following 
     Birth.--
       ``(1) In general.--A group health plan may not--
       ``(A) except as provided in paragraph (2)--
       ``(i) restrict benefits for any hospital length of stay in 
     connection with childbirth for the mother or newborn child, 
     following a normal vaginal delivery, to less than 48 hours, 
     or
       ``(ii) restrict benefits for any hospital length of stay in 
     connection with childbirth for the mother or newborn child, 
     following a caesarean section, to less than 96 hours; or
       ``(B) require that a provider obtain authorization from the 
     plan or the issuer for prescribing any length of stay 
     required under subparagraph (A) (without regard to paragraph 
     (2)).
       ``(2) Exception.--Paragraph (1)(A) shall not apply in 
     connection with any group health plan in any case in which 
     the decision to discharge the mother or her newborn child 
     prior to the expiration of the minimum length of stay 
     otherwise required under paragraph (1)(A) is made by an 
     attending provider in consultation with the mother.

[[Page H6486]]

       ``(b) Prohibitions.--A group health plan may not--
       ``(1) deny to the mother or her newborn child eligibility, 
     or continued eligibility, to enroll or to renew coverage 
     under the terms of the plan, solely for the purpose of 
     avoiding the requirements of this section;
       ``(2) provide monetary payments or rebates to mothers to 
     encourage such mothers to accept less than the minimum 
     protections available under this section;
       ``(3) penalize or otherwise reduce or limit the 
     reimbursement of an attending provider because such provider 
     provided care to an individual participant or beneficiary in 
     accordance with this section;
       ``(4) provide incentives (monetary or otherwise) to an 
     attending provider to induce such provider to provide care to 
     an individual participant or beneficiary in a manner 
     inconsistent with this section; or
       ``(5) subject to subsection (c)(3), restrict benefits for 
     any portion of a period within a hospital length of stay 
     required under subsection (a) in a manner which is less 
     favorable than the benefits provided for any preceding 
     portion of such stay.
       ``(c) Rules of Construction.--
       ``(1) Nothing in this section shall be construed to require 
     a mother who is a participant or beneficiary--
       ``(A) to give birth in a hospital; or
       ``(B) to stay in the hospital for a fixed period of time 
     following the birth of her child.
       ``(2) This section shall not apply with respect to any 
     group health plan which does not provide benefits for 
     hospital lengths of stay in connection with childbirth for a 
     mother or her newborn child.
       ``(3) Nothing in this section shall be construed as 
     preventing a group health plan from imposing deductibles, 
     coinsurance, or other cost-sharing in relation to benefits 
     for hospital lengths of stay in connection with childbirth 
     for a mother or newborn child under the plan, except that 
     such coinsurance or other cost-sharing for any portion of a 
     period within a hospital length of stay required under 
     subsection (a) may not be greater than such coinsurance or 
     cost-sharing for any preceding portion of such stay.
       ``(d) Level and Type of Reimbursements.--Nothing in this 
     section shall be construed to prevent a group health plan 
     from negotiating the level and type of reimbursement with a 
     provider for care provided in accordance with this section.
       ``(f) Preemption; Exception for Health Insurance Coverage 
     in Certain States.--The requirements of this section shall 
     not apply with respect to health insurance coverage if there 
     is a State law (including a decision, rule, regulation, or 
     other State action having the effect of law) for a State that 
     regulates such coverage that is described in any of the 
     following paragraphs:
       ``(1) Such State law requires such coverage to provide for 
     at least a 48-hour hospital length of stay following a normal 
     vaginal delivery and at least a 96-hour hospital length of 
     stay following a caesarean section.
       ``(2) Such State law requires such coverage to provide for 
     maternity and pediatric care in accordance with guidelines 
     established by the American College of Obstetricians and 
     Gynecologists, the American Academy of Pediatrics, or other 
     established professional medical associations.
       ``(3) Such State law requires, in connection with such 
     coverage for maternity care, that the hospital length of stay 
     for such care is left to the decision of (or required to be 
     made by) the attending provider in consultation with the 
     mother.

     ``SEC. 9812. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO 
                   MENTAL HEALTH BENEFITS.

       ``(a) In General.--
       ``(1) Aggregate lifetime limits.--In the case of a group 
     health plan that provides both medical and surgical benefits 
     and mental health benefits--
       ``(A) No lifetime limit.--If the plan does not include an 
     aggregate lifetime limit on substantially all medical and 
     surgical benefits, the plan may not impose any aggregate 
     lifetime limit on mental health benefits.
       ``(B) Lifetime limit.--If the plan includes an aggregate 
     lifetime limit on substantially all medical and surgical 
     benefits (in this paragraph referred to as the `applicable 
     lifetime limit'), the plan shall either--
       ``(i) apply the applicable lifetime limit both to the 
     medical and surgical benefits to which it otherwise would 
     apply and to mental health benefits and not distinguish in 
     the application of such limit between such medical and 
     surgical benefits and mental health benefits; or
       ``(ii) not include any aggregate lifetime limit on mental 
     health benefits that is less than the applicable lifetime 
     limit.
       ``(C) Rule in case of different limits.--In the case of a 
     plan that is not described in subparagraph (A) or (B) and 
     that includes no or different aggregate lifetime limits on 
     different categories of medical and surgical benefits, the 
     Secretary shall establish rules under which subparagraph (B) 
     is applied to such plan with respect to mental health 
     benefits by substituting for the applicable lifetime limit an 
     average aggregate lifetime limit that is computed taking into 
     account the weighted average of the aggregate lifetime limits 
     applicable to such categories.
       ``(2) Annual limits.--In the case of a group health plan 
     that provides both medical and surgical benefits and mental 
     health benefits--
       ``(A) No annual limit.--If the plan does not include an 
     annual limit on substantially all medical and surgical 
     benefits, the plan may not impose any annual limit on mental 
     health benefits.
       ``(B) Annual limit.--If the plan includes an annual limit 
     on substantially all medical and surgical benefits (in this 
     paragraph referred to as the `applicable annual limit'), the 
     plan shall either--
       ``(i) apply the applicable annual limit both to medical and 
     surgical benefits to which it otherwise would apply and to 
     mental health benefits and not distinguish in the application 
     of such limit between such medical and surgical benefits 
     and mental health benefits; or
       ``(ii) not include any annual limit on mental health 
     benefits that is less than the applicable annual limit.
       ``(C) Rule in case of different limits.--In the case of a 
     plan that is not described in subparagraph (A) or (B) and 
     that includes no or different annual limits on different 
     categories of medical and surgical benefits, the Secretary 
     shall establish rules under which subparagraph (B) is applied 
     to such plan with respect to mental health benefits by 
     substituting for the applicable annual limit an average 
     annual limit that is computed taking into account the 
     weighted average of the annual limits applicable to such 
     categories.
       ``(b) Construction.--Nothing in this section shall be 
     construed--
       ``(1) as requiring a group health plan to provide any 
     mental health benefits; or
       ``(2) in the case of a group health plan that provides 
     mental health benefits, as affecting the terms and conditions 
     (including cost sharing, limits on numbers of visits or days 
     of coverage, and requirements relating to medical necessity) 
     relating to the amount, duration, or scope of mental health 
     benefits under the plan, except as specifically provided in 
     subsection (a) (in regard to parity in the imposition of 
     aggregate lifetime limits and annual limits for mental health 
     benefits).
       ``(c) Exemptions.--
       ``(1) Small employer exemption.--This section shall not 
     apply to any group health plan for any plan year of a small 
     employer (as defined in section 4980D(d)(2)).
       ``(2) Increased cost exemption.--This section shall not 
     apply with respect to a group health plan if the application 
     of this section to such plan results in an increase in the 
     cost under the plan of at least 1 percent.
       ``(d) Separate Application to Each Option Offered.--In the 
     case of a group health plan that offers a participant or 
     beneficiary two or more benefit package options under the 
     plan, the requirements of this section shall be applied 
     separately with respect to each such option.
       ``(e) Definitions.--For purposes of this section:
       ``(1) Aggregate lifetime limit.--The term `aggregate 
     lifetime limit' means, with respect to benefits under a group 
     health plan, a dollar limitation on the total amount that may 
     be paid with respect to such benefits under the plan with 
     respect to an individual or other coverage unit.
       ``(2) Annual limit.--The term `annual limit' means, with 
     respect to benefits under a group health plan, a dollar 
     limitation on the total amount of benefits that may be paid 
     with respect to such benefits in a 12-month period under the 
     plan with respect to an individual or other coverage unit.
       ``(3) Medical or surgical benefits.--The term `medical or 
     surgical benefits' means benefits with respect to medical or 
     surgical services, as defined under the terms of the plan, 
     but does not include mental health benefits.
       ``(4) Mental health benefits.--The term `mental health 
     benefits' means benefits with respect to mental health 
     services, as defined under the terms of the plan, but does 
     not include benefits with respect to treatment of substance 
     abuse or chemical dependency.
       ``(f) Sunset.--This section shall not apply to benefits for 
     services furnished on or after September 30, 2001.''
       (b) Conforming Amendments.--
       (1) Chapter 100 of such Code is further amended--
       (A) in the last sentence of section 9801(c)(1), by striking 
     ``section 9805(c)'' and inserting ``section 9832(c)'';
       (B) in section 9831(b), by striking ``9805(c)(1)'' and 
     inserting ``9832(c)(1)'';
       (C) in section 9831(c)(1), by striking ``9805(c)(2)'' and 
     inserting ``9832(c)(2)'';
       (D) in section 9831(c)(2), by striking ``9805(c)(3)'' and 
     inserting ``9832(c)(3)''; and
       (E) in section 9831(c)(3), by striking ``9805(c)(4)'' and 
     inserting ``9832(c)(4)''.
       (2) Section 4980D of such Code is amended--
       (A) in subsection (a), by striking ``plan portability, 
     access, and renewability'' and inserting ``plans'';
       (B) in subsection (c)(3)(B)(i)(I), by striking 
     ``9805(d)(3)'' and inserting ``9832(d)(3)'';
       (C) in subsection (d)(1), by inserting ``(other than a 
     failure attributable to section 9811)'' after ``on any 
     failure'';
       (D) in subsection (d)(3), by striking ``9805'' and 
     inserting ``9832'';
       (E) in subsection (f)(1), by striking ``9805(a)'' and 
     inserting ``9832(a)''.
       (3) The table of subtitles for such Code is amended by 
     striking the item relating to subtitle K and inserting the 
     following new item:

``Subtitle K. Group health plan requirements.''
       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to group health plans for plan years 
     beginning on or after January 1, 1998.

     SEC. 1532. SPECIAL RULES RELATING TO CHURCH PLANS.

       (a) In General.--Section 9802 (relating to prohibiting 
     discrimination against individual participants and 
     beneficiaries based on health status) is amended by adding at 
     the end the following new subsection:
       ``(c) Special Rules for Church Plans.--A church plan (as 
     defined in section 414(e)) shall not be treated as failing to 
     meet the requirements of this section solely because such 
     plan requires evidence of good health for coverage of--

[[Page H6487]]

       ``(1) both any employee of an employer with 10 or less 
     employees (determined without regard to section 414(e)(3)(C)) 
     and any self-employed individual, or
       ``(2) any individual who enrolls after the first 90 days of 
     initial eligibility under the plan.
     This subsection shall apply to a plan for any year only if 
     the plan included the provisions described in the preceding 
     sentence on July 15, 1997, and at all times thereafter before 
     the beginning of such year.''
       (b) Effective Date.--The amendments made by subsection (a) 
     shall take effect as if included in the amendments made by 
     section 401(a) of the Health Insurance Portability and 
     Accountability Act of 1996.
           Subtitle D--Provisions Relating to Plan Amendments

     SEC. 1541. PROVISIONS RELATING TO PLAN AMENDMENTS.

       (a) In General.--If this section applies to any plan or 
     contract amendment--
       (1) such plan or contract shall be treated as being 
     operated in accordance with the terms of the plan during the 
     period described in subsection (b)(2)(A), and
       (2) such plan shall not fail to meet the requirements of 
     section 411(d)(6) of the Internal Revenue Code of 1986 or 
     section 204(g) of the Employee Retirement Income Security Act 
     of 1974 by reason of such amendment.
       (b) Amendments to Which Section Applies.--
       (1) In general.--This section shall apply to any amendment 
     to any plan or annuity contract which is made--
       (A) pursuant to any amendment made by this title or 
     subtitle H of title X, and
       (B) before the first day of the first plan year beginning 
     on or after January 1, 1999.
     In the case of a governmental plan (as defined in section 
     414(d) of the Internal Revenue Code of 1986), this paragraph 
     shall be applied by substituting ``2001'' for ``1999''.
       (2) Conditions.--This section shall not apply to any 
     amendment unless--
       (A) during the period--
       (i) beginning on the date the legislative amendment 
     described in paragraph (1)(A) takes effect (or in the case of 
     a plan or contract amendment not required by such legislative 
     amendment, the effective date specified by the plan), and
       (ii) ending on the date described in paragraph (1)(B) (or, 
     if earlier, the date the plan or contract amendment is 
     adopted),
     the plan or contract is operated as if such plan or contract 
     amendment were in effect, and
       (B) such plan or contract amendment applies retroactively 
     for such period.
     TITLE XVI--TECHNICAL AMENDMENTS RELATED TO SMALL BUSINESS JOB 
              PROTECTION ACT OF 1996 AND OTHER LEGISLATION

     SEC. 1600. COORDINATION WITH OTHER TITLES.

       For purposes of applying the amendments made by any title 
     of this Act other than this title, the provisions of this 
     title shall be treated as having been enacted immediately 
     before the provisions of such other titles.

     SEC. 1601. AMENDMENTS RELATED TO SMALL BUSINESS JOB 
                   PROTECTION ACT OF 1996.

       (a) Amendments Related to Subtitle A.--
       (1) Amendment related to section 1116.--Paragraph (1) of 
     section 6050R(c) is amended by striking ``name and address'' 
     and inserting ``name, address, and phone number of the 
     information contact''.
       (2) Amendment to section 1116.--Paragraphs (1) and (2)(C) 
     of section 1116(b) of the Small Business Job Protection Act 
     of 1996 shall each be applied as if the reference to chapter 
     68 were a reference to chapter 61.
       (b) Amendment Related to Subtitle B.--Subsection (c) of 
     section 52 is amended by striking ``targeted jobs credit'' 
     and inserting ``work opportunity credit''.
       (c) Amendments Related to Subtitle C.--
       (1) Amendment related to section 1302.--Subparagraph (B) of 
     section 1361(e)(1) is amended by striking ``and'' at the end 
     of clause (i), striking the period at the end of clause (ii) 
     and inserting ``, and'', and adding at the end the following 
     new clause:
       ``(iii) any charitable remainder annuity trust or 
     charitable remainder unitrust (as defined in section 
     664(d)).''.
       (2) Effective date for section 1307.--
       (A) Notwithstanding section 1317 of the Small Business Job 
     Protection Act of 1996, the amendments made by subsections 
     (a) and (b) of section 1307 of such Act shall apply to 
     determinations made after December 31, 1996.
       (B) In no event shall the 120-day period referred to in 
     section 1377(b)(1)(B) of the Internal Revenue Code of 1986 
     (as added by such section 1307) expire before the end of the 
     120-day period beginning on the date of the enactment of this 
     Act.
       (3) Amendment related to section 1308.--Subparagraph (A) of 
     section 1361(b)(3) is amended by striking ``For purposes of 
     this title'' and inserting ``Except as provided in 
     regulations prescribed by the Secretary, for purposes of this 
     title''.
       (4) Amendments related to section 1316.--
       (A) Paragraph (2) of section 512(e) is amended by striking 
     ``within the meaning of section 1012'' and inserting ``as 
     defined in section 1361(e)(1)(C)''.
       (B) Paragraph (7) of section 1361(c) is redesignated as 
     paragraph (6).
       (C) Subparagraph (B) of section 1361(b)(1) is amended by 
     striking ``subsection (c)(7)'' and inserting ``subsection 
     (c)(6)''.
       (D) Paragraph (1) of section 512(e) is amended by striking 
     ``section 1361(c)(7)'' and inserting ``section 1361(c)(6)''.
       (d) Amendments Related to Subtitle D.--
       (1) Amendments related to section 1421.--
       (A) Subsection (i) of section 408 is amended in the last 
     sentence by striking ``30 days'' and inserting ``31 days''.
       (B) Subparagraph (H) of section 408(k)(6) is amended by 
     striking ``if the terms of such pension'' and inserting ``of 
     an employer if the terms of simplified employee pensions of 
     such employer''.
       (C)(i) Subparagraph (B) of section 408(l)(2) is amended--
       (I) by inserting ``and the issuer of an annuity established 
     under such an arrangement'' after ``under subsection (p)'', 
     and
       (II) in clause (i), by inserting ``or issuer'' after 
     ``trustee''.
       (ii) Paragraph (2) of section 6693(c) is amended--
       (I) by inserting ``or issuer'' after ``trustee'', and
       (II) in the heading, by inserting ``and issuer'' after 
     ``trustee''.
       (D) Subsection (p) of section 408 is amended by adding at 
     the end the following new paragraph:
       ``(8) Coordination with maximum limitation under subsection 
     (a).--In the case of any simple retirement account, 
     subsections (a)(1) and (b)(2) shall be applied by 
     substituting `the sum of the dollar amount in effect under 
     paragraph (2)(A)(ii) of this subsection and the employer 
     contribution required under subparagraph (A)(iii) or 
     (B)(i) of paragraph (2) of this subsection, whichever is 
     applicable' for `$2,000'.''.
       (E) Clause (i) of section 408(p)(2)(D) is amended by adding 
     at the end the following new sentence: ``If only individuals 
     other than employees described in subparagraph (A) or (B) of 
     section 410(b)(3) are eligible to participate in such 
     arrangement, then the preceding sentence shall be applied 
     without regard to any qualified plan in which only employees 
     so described are eligible to participate.''.
       (F) Subparagraph (D) of section 408(p)(2) is amended by 
     adding at the end the following new clause:
       ``(iii) Grace period.--In the case of an employer who 
     establishes and maintains a plan under this subsection for 1 
     or more years and who fails to meet any requirement of this 
     subsection for any subsequent year due to any acquisition, 
     disposition, or similar transaction involving another such 
     employer, rules similar to the rules of section 410(b)(6)(C) 
     shall apply for purposes of this subsection.''.
       (G) Paragraph (5) of section 408(p) is amended in the text 
     preceding subparagraph (A) by striking ``simplified'' and 
     inserting ``simple''.
       (2) Amendments related to section 1422.--
       (A) Clause (ii) of section 401(k)(11)(D) is amended by 
     striking the period and inserting ``if such plan allows only 
     contributions required under this paragraph.''.
       (B) Paragraph (11) of section 401(k) is amended by adding 
     at the end the following new subparagraph:
       ``(E) Cost-of-living adjustment.--The Secretary shall 
     adjust the $6,000 amount under subparagraph (B)(i)(I) at the 
     same time and in the same manner as under section 
     408(p)(2)(E).''.
       (C) Subparagraph (A) of section 404(a)(3) is amended--
       (i) in clause (i), by striking ``not in excess of'' and all 
     that follows and inserting the following: ``not in excess of 
     the greater of--

       ``(I) 15 percent of the compensation otherwise paid or 
     accrued during the taxable year to the beneficiaries under 
     the stock bonus or profit-sharing plan, or
       ``(II) the amount such employer is required to contribute 
     to such trust under section 401(k)(11) for such year.'', and

       (ii) in clause (ii), by striking ``15 percent'' and all 
     that follows and inserting the following ``the amount 
     described in subclause (I) or (II) of clause (i), whichever 
     is greater, with respect to such taxable year.''.
       (D) Subparagraph (B) of section 401(k)(11) is amended by 
     adding at the end the following new clause:
       ``(iii) Administrative requirements.--

       ``(I) In general.--Rules similar to the rules of 
     subparagraphs (B) and (C) of section 408(p)(5) shall apply 
     for purposes of this subparagraph.
       ``(II) Notice of election period.--The requirements of this 
     subparagraph shall not be treated as met with respect to any 
     year unless the employer notifies each employee eligible to 
     participate, within a reasonable period of time before the 
     60th day before the beginning of such year (and, for the 
     first year the employee is so eligible, the 60th day before 
     the first day such employee is so eligible), of the rules 
     similar to the rules of section 408(p)(5)(C) which apply by 
     reason of subclause (I).''.

       (3) Amendment related to section 1433.--The heading of 
     paragraph (11) of section 401(m) is amended by striking 
     ``Alternative'' and inserting ``Additional alternative''.
       (4) Clarification of section 1450.--
       (A) Section 403(b)(11) of the Internal Revenue Code of 1986 
     shall not apply with respect to a distribution from a 
     contract described in section 1450(b)(1) of such Act to 
     the extent that such distribution is not includible in 
     income by reason of--
       (i) in the case of distributions before January 1, 1998, 
     section 403 (b)(8) or (b)(10) of such Code (determined after 
     the application of section 1450(b)(2) of such Act), and
       (ii) in the case of distributions on and after such date, 
     such section 403(b)(1).
       (B) This paragraph shall apply as if included in section 
     1450 of the Small Business Job Protection Act of 1996.
       (5) Amendment related to section 1451.--Clause (ii) of 
     section 205(c)(8)(A) of the Employee Retirement Income 
     Security Act of 1974 is amended by striking ``Secretary'' and 
     inserting ``Secretary of the Treasury''.
       (6) Amendments related to section 1461.--
       (A) Section 414(e)(5)(A) is amended to read as follows:
       ``(A) Certain ministers may participate.--For purposes of 
     this part--

[[Page H6488]]

       ``(i) In general.--A duly ordained, commissioned, or 
     licensed minister of a church is described in paragraph 
     (3)(B) if, in connection with the exercise of their ministry, 
     the minister--

       ``(I) is a self-employed individual (within the meaning of 
     section 401(c)(1)(B), or
       ``(II) is employed by an organization other than an 
     organization which is described in section 501(c)(3) and with 
     respect to which the minister shares common religious bonds.

       ``(ii) Treatment as employer and employee.--For purposes of 
     sections 403(b)(1)(A) and 404(a)(10), a minister described in 
     clause (i)(I) shall be treated as employed by the minister's 
     own employer which is an organization described in section 
     501(c)(3) and exempt from tax under section 501(a).''.
       (B) Section 403(b)(1)(A) is amended by striking ``or'' at 
     the end of clause (i), by inserting ``or'' at the end of 
     clause (ii), and by adding at the end the following new 
     clause:
       ``(iii) for the minister described in section 414(e)(5)(A) 
     by the minister or by an employer,''.
       (7) Amendment related to section 1462.--The paragraph (7) 
     of section 414(q) added by section 1462 of the Small Business 
     Job Protection Act of 1996 is redesignated as paragraph (9).
       (e) Amendment Related to Subtitle E.--Subparagraph (A) of 
     section 956(b)(1) is amended by inserting ``to the extent 
     such amount was accumulated in prior taxable years'' after 
     ``section 316(a)(1)''.
       (f) Amendments Related to Subtitle F.--
       (1) Amendments related to section 1601.--
       (A) The heading of section 30A is amended to read as 
     follows:

     ``SEC. 30A. PUERTO RICO ECONOMIC ACTIVITY CREDIT.''.

       (B) The table of sections for subpart B of part IV of 
     subchapter A of chapter 1 is amended in the item relating to 
     section 30A by striking ``Puerto Rican'' and inserting 
     ``Puerto Rico''.
       (C) Paragraph (1) of section 55(c) is amended by striking 
     ``Puerto Rican'' and inserting ``Puerto Rico''.
       (2) Amendments related to section 1606.--
       (A) Clause (ii) of section 9503(c)(2)(A) is amended by 
     striking ``(or with respect to qualified diesel-powered 
     highway vehicles purchased before January 1, 1999)''.
       (B) Subparagraph (A) of section 9503(e)(5) is amended by 
     striking ``; except that'' and all that follows and inserting 
     a period.
       (3) Amendments related to section 1607.--
       (A) Subsection (f) of section 4001 (relating to phasedown 
     of tax on luxury passenger automobiles) is amended--
       (i) by inserting ``and section 4003(a)'' after ``subsection 
     (a)'', and
       (ii) by inserting ``, each place it appears,'' before ``the 
     percentage''.
       (B) Subsection (g) of section 4001 (relating to 
     termination) is amended by striking ``tax imposed by this 
     section'' and inserting ``taxes imposed by this section and 
     section 4003'' and by striking ``or use'' and inserting ``, 
     use, or installation''.
       (C) The amendments made by this paragraph shall apply to 
     sales after the date of the enactment of this Act.
       (4) Amendments related to section 1609.--
       (A) Subsection (l) of section 4041 is amended--
       (i) by inserting ``or a fixed-wing aircraft'' after 
     ``helicopter'', and
       (ii) in the heading, by striking ``Helicopter''.
       (B) The last sentence of section 4041(a)(2) is amended by 
     striking ``section 4081(a)(2)(A)'' and inserting ``section 
     4081(a)(2)(A)(i)''.
       (C) Subsection (b) of section 4092 is amended by striking 
     ``section 4041(c)(4)'' and inserting ``section 4041(c)(2)''.
       (D) Subsection (g) of section 4261 (as redesignated by 
     title X) is amended by inserting ``on that flight'' after 
     ``dedicated''.
       (E) Paragraph (1) of section 1609(h) of such Act is amended 
     by striking ``paragraph (3)(A)(i)'' and inserting ``paragraph 
     (3)(A)''.
       (F) Paragraph (4) of section 1609(h) of such Act is amended 
     by inserting before the period ``or exclusively for the use 
     described in section 4092(b) of such Code''.
       (5) Amendments related to section 1616.--
       (A) Subparagraph (A) of section 593(e)(1) is amended by 
     inserting ``(and, in the case of an S corporation, the 
     accumulated adjustments account, as defined in section 
     1368(e)(1))'' after ``1951,''.
       (B) Paragraph (7) of section 1374(d) is amended by adding 
     at the end the following new sentence: ``For purposes of 
     applying this section to any amount includible in income by 
     reason of section 593(e), the preceding sentence shall be 
     applied without regard to the phrase `10-year'.''.
       (6) Amendments related to section 1621.--
       (A) Subparagraph (A) of section 860L(b)(1) is amended in 
     the text preceding clause (i) by striking ``after the startup 
     date'' and inserting ``on or after the startup date''.
       (B) Paragraph (2) of section 860L(d) is amended by striking 
     ``section 860I(c)(2)'' and inserting ``section 860I(b)(2)''.
       (C) Subparagraph (B) of section 860L(e)(2) is amended by 
     inserting ``other than foreclosure property'' after ``any 
     permitted asset''.
       (D) Subparagraph (A) of section 860L(e)(3) is amended by 
     striking ``if the FASIT'' and all that follows and inserting 
     the following new flush text after clause (ii):
     ``if the FASIT were treated as a REMIC and permitted assets 
     (other than cash or cash equivalents) were treated as 
     qualified mortgages.''.
       (E)(i) Paragraph (3) of section 860L(e) is amended by 
     adding at the end the following new subparagraph:
       ``(D) Income from dispositions of former hedge assets.--
     Paragraph (2)(A) shall not apply to income derived from the 
     disposition of--
       ``(i) an asset which was described in subsection (c)(1)(D) 
     when first acquired by the FASIT but on the date of such 
     disposition was no longer described in subsection 
     (c)(1)(D)(ii), or
       ``(ii) a contract right to acquire an asset described in 
     clause (i).''.
       (ii) Subparagraph (A) of section 860L(e)(2) is amended by 
     inserting ``except as provided in paragraph (3),'' before 
     ``the receipt''.
       (g) Amendments Related to Subtitle G.--
       (1) Extension of period for claiming refunds for alcohol 
     fuels.--Notwithstanding section 6427(i)(3)(C) of the Internal 
     Revenue Code of 1986, a claim filed under section 6427(f) of 
     such Code for any period after September 30, 1995, and before 
     October 1, 1996, shall be treated as timely filed if filed 
     before the 60th day after the date of the enactment of this 
     Act.
       (2) Amendments to Sections 1703 and 1704.--Sections 
     1703(n)(8) and 1704(j)(4)(B) of the Small Business Job 
     Protection Act of 1996 shall each be applied as if such 
     sections referred to section 1702 instead of section 1602.
       (h) Amendments Related to Subtitle H.--
       (1) Amendments related to section 1806.--
       (A) Subparagraph (B) of section 529(e)(1) is amended by 
     striking ``subsection (c)(2)(C)'' and inserting ``subsection 
     (c)(3)(C)''.
       (B) Subparagraph (C) of section 529(e)(1) is amended by 
     inserting ``(or agency or instrumentality thereof)'' after 
     ``local government''.
       (C) Paragraph (2) of section 1806(c) of the Small Business 
     Job Protection Act of 1996 is amended by striking so much of 
     the first sentence as follows subparagraph (B)(ii) and 
     inserting the following:
     ``then such program (as in effect on August 20, 1996) shall 
     be treated as a qualified State tuition program with respect 
     to contributions (and earnings allocable thereto) pursuant to 
     contracts entered into under such program before the first 
     date on which such program meets such requirements 
     (determined without regard to this paragraph) and the 
     provisions of such program (as so in effect) shall apply in 
     lieu of section 529(b) of the Internal Revenue Code of 1986 
     with respect to such contributions and earnings.''.
       (2) Amendments related to section 1807.--
       (A) Paragraph (2) of section 23(a) is amended to read as 
     follows:
       ``(2) Year credit allowed.--The credit under paragraph (1) 
     with respect to any expense shall be allowed--
       ``(A) in the case of any expense paid or incurred before 
     the taxable year in which such adoption becomes final, for 
     the taxable year following the taxable year during which such 
     expense is paid or incurred, and
       ``(B) in the case of an expense paid or incurred during or 
     after the taxable year in which such adoption becomes final, 
     for the taxable year in which such expense is paid or 
     incurred.''.
       (B) Subparagraph (B) of section 23(b)(2) is amended by 
     striking ``determined--'' and all that follows and inserting 
     the following: ``determined without regard to sections 911, 
     931, and 933.''.
       (C) Paragraph (1) of section 137(b) (relating to adoption 
     assistance programs) is amended by striking ``amount 
     excludable from gross income'' and inserting ``of the amounts 
     paid or expenses incurred which may be taken into account''.
       (D)(i) Subparagraph (C) of section 414(n)(3) is amended by 
     inserting ``137,'' after ``132,''.
       (ii) Paragraph (2) of section 414(t) is amended by 
     inserting ``137,'' after ``132,''.
       (iii) Paragraph (1) of section 6039D(d) is amended by 
     striking ``or 129'' and inserting ``129, or 137''.
       (i) Amendments Related to Subtitle I.--
       (1) Amendment related to section 1901.--Subsection (b) of 
     section 6048 is amended in the heading by striking 
     ``Grantor'' and inserting ``Owner''.
       (2) Amendments related to section 1903.--
       Clauses (ii) and (iii) of section 679(a)(3)(C) are each 
     amended by inserting ``, owner,'' after ``grantor''.
       (3) Amendments related to section 1907.--
       (A) Clause (ii) of section 7701(a)(30)(E) is amended by 
     striking ``fiduciaries'' and inserting ``persons''.
       (B) Subsection (b) of section 641 is amended by adding at 
     the end the following new sentence: ``For purposes of this 
     subsection, a foreign trust or foreign estate shall be 
     treated as a nonresident alien individual who is not present 
     in the United States at any time.''.
       (4) Effective date related to subtitle i.--The Secretary of 
     the Treasury may by regulations or other administrative 
     guidance provide that the amendments made by section 1907(a) 
     of the Small Business Job Protection Act of 1996 shall not 
     apply to a trust with respect to a reasonable period 
     beginning on the date of the enactment of such Act, if--
       (A) such trust is in existence on August 20, 1996, and is a 
     United States person for purposes of the Internal Revenue 
     Code of 1986 on such date (determined without regard to such 
     amendments),
       (B) no election is in effect under section 1907(a)(3)(B) of 
     such Act with respect to such trust,
       (C) before the expiration of such reasonable period, such 
     trust makes the modifications necessary to be treated as a 
     United States person for purposes of such Code (determined 
     with regard to such amendments), and
       (D) such trust meets such other conditions as the Secretary 
     may require.
       (j) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall take effect as if 
     included in the provisions of the Small Business Job 
     Protection Act of 1996 to which they relate.
       (2) Certain administrative requirements with respect to 
     certain pension plans.--The amendment made by subsection 
     (d)(2)(D) shall apply to calendar years beginning after the 
     date of the enactment of this Act.

[[Page H6489]]

     SEC. 1602. AMENDMENTS RELATED TO HEALTH INSURANCE PORTABILITY 
                   AND ACCOUNTABILITY ACT OF 1996.

       (a) Amendments Related to Section 301.--
       (1) Paragraph (2) of section 26(b) is amended by striking 
     ``and'' at the end of subparagraph (N), by striking the 
     period at the end of subparagraph (O) and inserting ``, 
     and'', and by adding at the end the following new 
     subparagraph:
       ``(P) section 220(f)(4) (relating to additional tax on 
     medical savings account distributions not used for qualified 
     medical expenses).''.
       (2) Paragraph (3) of section 220(c) is amended by striking 
     subparagraph (A) and redesignating subparagraphs (B) through 
     (D) as subparagraphs (A) through (C), respectively.
       (3) Subparagraph (C) of section 220(d)(2) is amended by 
     striking ``an eligible individual'' and inserting ``described 
     in clauses (i) and (ii) of subsection (c)(1)(A)''.
       (4) Subsection (a) of section 6693 is amended by adding at 
     the end the following new sentence:
     ``This subsection shall not apply to any report which is an 
     information return described in section 6724(d)(1)(C)(i) or a 
     payee statement described in section 6724(d)(2)(X).''.
       (5) Paragraph (4) of section 4975(c) is amended by striking 
     ``if, with respect to such transaction'' and all that follows 
     and inserting the following: ``if section 220(e)(2) applies 
     to such transaction.''.
       (b) Amendment Related to Section 321.--Subparagraph (B) of 
     section 7702B(c)(2) is amended in the last sentence by 
     inserting ``described in subparagraph (A)(i)'' after 
     ``chronically ill individual''.
       (c) Amendments Related to Section 322.--Subparagraph (B) of 
     section 162(l)(2) is amended by adding at the end the 
     following new sentence: ``The preceding sentence shall be 
     applied separately with respect to--
       ``(i) plans which include coverage for qualified long-term 
     care services (as defined in section 7702B(c)) or are 
     qualified long-term care insurance contracts (as defined in 
     section 7702B(b)), and
       ``(ii) plans which do not include such coverage and are not 
     such contracts.''.
       (d) Amendments Related to Section 323.--
       (1) Paragraph (1) of section 6050Q(b) is amended by 
     inserting ``, address, and phone number of the information 
     contact'' after ``name''.
       (2)(A) Paragraph (2) of section 6724(d) is amended by 
     striking so much as follows subparagraph (Q) and precedes the 
     last sentence, and inserting the following new subparagraphs:
       ``(R) section 6050R(c) (relating to returns relating to 
     certain purchases of fish),
       ``(S) section 6051 (relating to receipts for employees),
       ``(T) section 6052(b) (relating to returns regarding 
     payment of wages in the form of group-term life insurance),
       ``(U) section 6053(b) or (c) (relating to reports of tips),
       ``(V) section 6048(b)(1)(B) (relating to foreign trust 
     reporting requirements),
       ``(W) section 4093(c)(4)(B) (relating to certain purchasers 
     of diesel and aviation fuels),
       ``(X) section 408(i) (relating to reports with respect to 
     individual retirement plans) to any person other than the 
     Secretary with respect to the amount of payments made to such 
     person, or
       ``(Y) section 6047(d) (relating to reports by plan 
     administrators) to any person other than the Secretary with 
     respect to the amount of payments made to such person.''.
       (B) Subsection (e) of section 6652 is amended in the last 
     sentence by striking ``section 6724(d)(2)(X)'' and inserting 
     ``section 6724(d)(2)(Y)''.
       (e) Amendment Related to Section 325.--Clauses (ii) and 
     (iii) of section 7702B(g)(4)(B) are each amended by striking 
     ``Secretary'' and inserting ``appropriate State regulatory 
     agency''.
       (f) Amendments Related to Section 501.--
       (1) Paragraph (4) of section 264(a) is amended by striking 
     subparagraph (A) and all that follows through ``by the 
     taxpayer.'' and inserting the following:
       ``(A) is or was an officer or employee, or
       ``(B) is or was financially interested in,
     any trade or business carried on (currently or formerly) by 
     the taxpayer.''.
       (2) The last 2 sentences of section 264(d)(2)(B)(ii) are 
     amended to read as follows:
     ``For purposes of subclause (II), the term `applicable 
     period' means the 12-month period beginning on the date the 
     policy is issued (and each successive 12-month period 
     thereafter) unless the taxpayer elects a number of months 
     (not greater than 12) other than such 12-month period to be 
     its applicable period. Such an election shall be made not 
     later than the 90th day after the date of the enactment of 
     this sentence and, if made, shall apply to the taxpayer's 
     first taxable year ending on or after October 13, 1995, and 
     all subsequent taxable years unless revoked with the consent 
     of the Secretary.''.
       (3) Subparagraph (B) of section 264(d)(4) is amended by 
     striking ``the employer'' and inserting ``the taxpayer''.
       (4) Subsection (c) of section 501 of the Health Insurance 
     Portability and Accountability Act of 1996 is amended by 
     striking paragraph (3).
       (5) Paragraph (2) of section 501(d) of such Act is amended 
     by striking ``no additional premiums'' and all that follows 
     and inserting the following: ``a lapse occurring after 
     October 13, 1995, by reason of no additional premiums being 
     received under the contract.''.
       (g) Amendments Related to Section 511.--
       (1) Subparagraph (B) of section 877(d)(2) is amended by 
     striking ``the 10-year period described in subsection (a)'' 
     and inserting ``the 10-year period beginning on the date the 
     individual loses United States citizenship''.
       (2) Subparagraph (D) of section 877(d)(2) is amended by 
     adding at the end the following new sentence: ``In the case 
     of any exchange occurring during such 5 years, any gain 
     recognized under this subparagraph shall be recognized 
     immediately after such loss of citizenship.''.
       (3) Paragraph (3) of section 877(d) is amended by inserting 
     ``and the period applicable under paragraph (2)'' after 
     ``subsection (a)''.
       (4) Subparagraph (A) of section 877(d)(4) is amended--
       (A) by inserting ``during the 10-year period beginning on 
     the date the individual loses United States citizenship'' 
     after ``contributes property'' in clause (i),
       (B) by inserting ``immediately before such contribution'' 
     after ``from such property'', and
       (C) by striking ``during the 10-year period referred to in 
     subsection (a),''.
       (5) Subparagraph (C) of section 2501(a)(3) is amended by 
     striking ``decedent'' and inserting ``donor''.
       (6)(A) Clause (i) of section 2107(c)(2)(B) is amended by 
     striking ``such foreign country in respect of property 
     included in the gross estate as the value of the property'' 
     and inserting ``such foreign country as the value of the 
     property subjected to such taxes by such foreign country 
     and''.
       (B) Subparagraph (C) of section 2107(c)(2) is amended to 
     read as follows:
       ``(C) Proportionate share.--In the case of property which 
     is included in the gross estate solely by reason of 
     subsection (b), such property's proportionate share is the 
     percentage which the value of such property bears to the 
     total value of all property included in the gross estate 
     solely by reason of subsection (b).''.
       (h) Amendments Related to Section 512.--
       (1) Subpart A of part III of subchapter A of chapter 61 is 
     amended by redesignating the section 6039F added by section 
     512 of the Health Insurance Portability and Accountability 
     Act of 1996 as section 6039G and by moving such section 6039G 
     to immediately after the section 6039F added by section 1905 
     of the Small Business Job Protection Act of 1996.
       (2) The table of sections for subpart A of part III of 
     subchapter A of chapter 61 is amended by striking the item 
     relating to the section 6039F related to information on 
     individuals losing United States citizenship and inserting 
     after the item relating to the section 6039F related to 
     notice of large gifts received from foreign persons the 
     following new item:

``Sec. 6039G. Information on individuals losing United States 
              citizenship.''.

       (3) Paragraph (1) of section 877(e) is amended by striking 
     ``6039F'' and inserting ``6039G''.
       (i) Effective Date.--The amendments made by this section 
     shall take effect as if included in the provisions of the 
     Health Insurance Portability and Accountability Act of 1996 
     to which such amendments relate.

     SEC. 1603. AMENDMENTS RELATED TO TAXPAYER BILL OF RIGHTS 2.

       (a) Amendment Related to Section 1311.--Subsection (b) of 
     section 4962 is amended by striking ``subchapter A or C'' and 
     inserting ``subchapter A, C, or D''.
       (b) Amendments Related to Section 1312.--
       (1)(A) Paragraph (10) of section 6033(b) is amended by 
     striking all that precedes subparagraph (A) and inserting the 
     following:
       ``(10) the respective amounts (if any) of the taxes imposed 
     on the organization, or any organization manager of the 
     organization, during the taxable year under any of the 
     following provisions (and the respective amounts (if any) of 
     reimbursements paid by the organization during the taxable 
     year with respect to taxes imposed on any such organization 
     manager under any of such provisions):''.
       (B) Subparagraph (C) of section 6033(b)(10) is amended by 
     adding at the end the following: ``except to the extent that, 
     by reason of section 4962, the taxes imposed under such 
     section are not required to be paid or are credited or 
     refunded,''.
       (2) Paragraph (11) of section 6033(b) is amended to read as 
     follows:
       ``(11) the respective amounts (if any) of--
       ``(A) the taxes imposed with respect to the organization on 
     any organization manager, or any disqualified person, during 
     the taxable year under section 4958 (relating to taxes on 
     private excess benefit from certain charitable 
     organizations), and
       ``(B) reimbursements paid by the organization during the 
     taxable year with respect to taxes imposed under such 
     section,

     except to the extent that, by reason of section 4962, the 
     taxes imposed under such section are not required to be paid 
     or are credited or refunded,''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect as if included in the provisions of the 
     Taxpayer Bill of Rights 2 to which such amendments relate.

     SEC. 1604. MISCELLANEOUS PROVISIONS.

       (a) Amendments Related to Energy Policy Act of 1992.--
       (1) Paragraph (1) of section 263(a) is amended by striking 
     ``or'' at the end of subparagraph (F), by striking the period 
     at the end of subparagraph (G) and inserting ``; or'', and by 
     adding at the end the following new subparagraph:
       ``(H) expenditures for which a deduction is allowed under 
     section 179A.''.
       (2) Subparagraph (B) of section 312(k)(3) is amended--
       (A) by striking ``179'' in the heading and the first place 
     it appears in the text and inserting ``179 or 179A'', and
       (B) by striking ``179'' the last place it appears and 
     inserting ``179 or 179A, as the case may be''.
       (3) Paragraphs (2)(C) and (3)(C) of section 1245(a) are 
     each amended by inserting ``179A,'' after ``179,''.
       (4) The amendments made by this subsection shall take 
     effect as if included in the amendments made by section 1913 
     of the Energy Policy Act of 1992.

[[Page H6490]]

       (b) Amendments Related to Uruguay Round Agreements Act.--
       (1) Paragraph (1) of section 6621(a) is amended in the last 
     sentence by striking ``subsection (c)(3))'' and inserting 
     ``subsection (c)(3), applied by substituting `overpayment' 
     for `underpayment')''.
       (2)(A) Subclause (II) of section 412(m)(5)(E)(ii) is 
     amended by striking ``clause (i)'' and inserting ``subclause 
     (I)''.
       (B) Subclause (II) of section 302(e)(5)(E)(ii) of the 
     Employee Retirement Income Security Act of 1974 is amended by 
     striking ``clause (i)'' and inserting ``subclause (I)''.
       (3) Subparagraph (A) of section 767(d)(3) of the Uruguay 
     Round Agreements Act is amended in the last sentence by 
     striking ``(except that'' and all that follows through ``into 
     account)''.
       (4) The amendments made by this subsection shall take 
     effect as if included in the sections of the Uruguay Round 
     Agreements Act to which they relate.
       (c) Amendment Related to Omnibus Budget Reconciliation Act 
     of 1993.--
       (1) Paragraph (6) of section 168(j) (defining Indian 
     reservation) is amended by adding at the end the following 
     new flush sentence:

     ``For purposes of the preceding sentence, such section 3(d) 
     shall be applied by treating the term `former Indian 
     reservations in Oklahoma' as including only lands which are 
     within the jurisdictional area of an Oklahoma Indian tribe 
     (as determined by the Secretary of the Interior) and are 
     recognized by such Secretary as eligible for trust land 
     status under 25 CFR Part 151 (as in effect on the date of the 
     enactment of this sentence).''.
       (2) The amendment made by paragraph (1) shall apply as if 
     included in the amendments made by section 13321 of the 
     Omnibus Budget Reconciliation Act of 1993, except that such 
     amendment shall not apply--
       (A) with respect to property (with an applicable recovery 
     period under section 168(j) of the Internal Revenue Code of 
     1986 of 6 years or less) held by the taxpayer if the taxpayer 
     claimed the benefits of section 168(j) of such Code with 
     respect to such property on a return filed before March 18, 
     1997, but only if such return is the first return of tax 
     filed for the taxable year in which such property was placed 
     in service, or
       (B) with respect to wages for which the taxpayer claimed 
     the benefits of section 45A of such Code for a taxable year 
     on a return filed before March 18, 1997, but only if such 
     return was the first return of tax filed for such taxable 
     year.
       (d) Amendments Related to Tax Reform Act of 1986.--
       (1) Paragraph (3) of section 1059(d) is amended by striking 
     ``subsection (a)(2)'' and inserting ``subsection (a)''.
       (2)(A) Subparagraph (A) of section 833(b)(1) is amended--
       (i) by inserting before the comma at the end of clause (i) 
     ``and liabilities incurred during the taxable year under 
     cost-plus contracts'', and
       (ii) by inserting before the comma at the end of clause 
     (ii) ``or in connection with the administration of cost-plus 
     contracts''.
       (B) The amendment made by subparagraph (A) shall take 
     effect as if included in the amendments made by section 1012 
     of the Tax Reform Act of 1986.
       (e) Amendment Related to Tax Reform Act of 1984.--
       (1) Section 267(f) is amended by adding at the end the 
     following new paragraph:
       ``(4) Determination of relationship resulting in 
     disallowance of loss, for purposes of other provisions.--For 
     purposes of any other section of this title which refers to a 
     relationship which would result in a disallowance of losses 
     under this section, deferral under paragraph (2) shall be 
     treated as disallowance.''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall take effect as if included in section 174(b) of the Tax 
     Reform Act of 1984.
       (f) Amendments Related to Balanced Budget Act of 1997.--
       (1) The Balanced Budget Act of 1997 is amended--
       (A) in the table of contents for title IV, in the item 
     relating to section 4921, by striking ``children with'';
       (B) in the heading for section 4921, by striking ``children 
     with''; and
       (C) in the section added by section 4921--
       (i) in the heading for such section, by striking ``children 
     with''; and
       (ii) by amending subsection (a) to read as follows:
       ``(a) In General.--The Secretary, directly or through 
     grants, shall provide for research into the prevention and 
     cure of Type I diabetes.''.
       (2)(A) Section 11201(g)(2)(B)(iii) of the Balanced Budget 
     Act of 1997 shall apply as if the reference in such section 
     to ``December 31, 2003'' were a reference to ``December 31, 
     2001''.
       (B) Notwithstanding section 11104(b)(3) of the Balanced 
     Budget Act of 1997, in carrying out any of the management 
     reform plans under such section, the head of a department of 
     the government of the District of Columbia shall report 
     solely to the District of Columbia Financial Responsibility 
     and Management Assistance Authority.
       (3) Section 9302 of the Balanced Budget Act of 1997 is 
     amended by adding at the end the following new subsection:
       ``(k) Coordination With Tobacco Industry Settlement 
     Agreement.--The increase in excise taxes collected as a 
     result of the amendments made by subsections (a), (e), and 
     (g) of this section shall be credited against the total 
     payments made by parties pursuant to Federal legislation 
     implementing the tobacco industry settlement agreement of 
     June 20, 1997.
       (4) The provisions of, and amendments made by, this 
     subsection shall take effect immediately after the sections 
     referred to in this subsection take effect.
       (g) Clerical Amendments.--
       (1) Clause (iii) of section 163(j)(2)(B) is amended by 
     striking ``clause (i)'' and inserting ``clause (ii)''.
       (2) Paragraph (1) of section 665(d) is amended in the last 
     sentence by striking ``or 669(d) and (e)''.
       (3) Subsection (g) of section 1441 (relating to cross 
     reference) is amended by striking ``one-half'' and inserting 
     ``85 percent''.
       (4) Paragraph (1) of section 2523(g) is amended by striking 
     ``qualified remainder trust'' and inserting ``qualified 
     charitable remainder trust''.
       (5) Subsection (d) of section 9502 is amended by 
     redesignating the paragraph added by section 806 of the 
     Federal Aviation Reauthorization Act of 1996 as paragraph 
     (6).
TITLE XVII--IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO LINE ITEM 
                                  VETO

     SEC. 1701. IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO 
                   LINE ITEM VETO.

       Section 1021(a)(3) of the Congressional Budget and 
     Impoundment Control Act of 1974 shall only apply to--
       (1) section 101(c) (relating to high risk pools permitted 
     to cover dependents of high risk individuals);
       (2) section 222 (relating to limitation on qualified 
     501(c)(3) bonds other than hospital bonds);
       (3) section 224 (relating to contributions of computer 
     technology and equipment for elementary or secondary school 
     purposes);
       (4) section 312(a) (relating to treatment of remainder 
     interests for purposes of provision relating to gain on sale 
     of principal residence);
       (5) section 501(b) (relating to indexing of alternative 
     valuation of certain farm, etc., real property);
       (6) section 504 (relating to extension of treatment of 
     certain rents under section 2032A to lineal descendants);
       (7) section 505 (relating to clarification of judicial 
     review of eligibility for extension of time for payment of 
     estate tax);
       (8) section 508 (relating to treatment of land subject to 
     qualified conservation easement);
       (9) section 511 (relating to expansion of exception from 
     generation-skipping transfer tax for transfers to individuals 
     with deceased parents);
       (10) section 601 (relating to the research tax credit);
       (11) section 602 (relating to contributions of stock to 
     private foundations);
       (12) section 603 (relating to the work opportunity tax 
     credit);
       (13) section 604 (relating to orphan drug tax credit);
       (14) section 701 (relating to incentives for revitalization 
     of the District of Columbia) to the extent it amends the 
     Internal Revenue Code of 1986 to create sections 1400 and 
     1400A (relating to tax-exempt economic development bonds);
       (15) section 701 (relating to incentives for revitalization 
     of the District of Columbia) to the extent it amends the 
     Internal Revenue Code of 1986 to create section 1400C 
     (relating to first-time homebuyer credit for District of 
     Columbia);
       (16) section 801 (relating to incentives for employing 
     long-term family assistance recipients);
       (17) section 904(b) (relating to uniform rate of tax on 
     vaccines) as it relates to any vaccine containing pertussis 
     bacteria, extracted or partial cell bacteria, or specific 
     pertussis antigens;
       (18) section 904(b) (relating to uniform rate of tax on 
     vaccines) as it relates to any vaccine against measles;
       (19) section 904(b) (relating to uniform rate of tax on 
     vaccines) as it relates to any vaccine against mumps;
       (20) section 904(b) (relating to uniform rate of tax on 
     vaccines) as it relates to any vaccine against rubella;
       (21) section 905 (relating to operators of multiple retail 
     gasoline outlets treated as wholesale distributors for refund 
     purposes);
       (22) section 906 (relating to exemption of electric and 
     other clean-fuel motor vehicles from luxury automobile 
     classification);
       (23) section 907(a) (relating to rate of tax on liquefied 
     natural gas determined on basis of BTU equivalency with 
     gasoline);
       (24) section 907(b) (relating to rate of tax on methanol 
     from natural gas determined on basis of BTU equivalency with 
     gasoline);
       (25) section 908 (relating to modification of tax treatment 
     of hard cider);
       (26) section 914 (relating to mortgage financing for 
     residences located in disaster areas);
       (27) section 962 (relating to assignment of workmen's 
     compensation liability eligible for exclusion relating to 
     personal injury liability assignments);
       (28) section 963 (relating to tax-exempt status for certain 
     State worker's compensation act companies);
       (29) section 967 (relating to additional advance refunding 
     of certain Virgin Island bonds);
       (30) section 968 (relating to nonrecognition of gain on 
     sale of stock to certain farmers' cooperatives);
       (31) section 971 (relating to exemption of the incremental 
     cost of a clean fuel vehicle from the limits on depreciation 
     for vehicles);
       (32) section 974 (relating to clarification of treatment of 
     certain receivables purchased by cooperative hospital service 
     organizations);
       (33) section 975 (relating to deduction in computing 
     adjusted gross income for expenses in connection with service 
     performed by certain officials) with respect to taxable years 
     beginning before 1991;
       (34) section 977 (relating to elective carryback of 
     existing carryovers of National Railroad Passenger 
     Corporation);
       (35) section 1005(b)(2)(B) (relating to transition rule for 
     instruments described in a ruling request submitted to the 
     Internal Revenue Service on or before June 8, 1997);
       (36) section 1005(b)(2)(C) (relating to transition rule for 
     instruments described on or before June 8, 1997, in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission) as it relates to a public announcement;

[[Page H6491]]

       (37) section 1005(b)(2)(C) (relating to transition rule for 
     instruments described on or before June 8, 1997, in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission) as it relates to a filing with the Securities and 
     Exchange Commission;
       (38) section 1011(d)(2)(B) (relating to transition rule for 
     distributions made pursuant to the terms of a tender offer 
     outstanding on May 3, 1995);
       (39) section 1011(d)(3) (relating to transition rule for 
     distributions made pursuant to the terms of a tender offer 
     outstanding on September 13, 1995);
       (40) section 1012(d)(3)(B) (relating to transition rule for 
     distributions pursuant to an acquisition described in section 
     355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 
     described in a ruling request submitted to the Internal 
     Revenue Service on or before April 16, 1997);
       (41) section 1012(d)(3)(C) (relating to transition rule for 
     distributions pursuant to an acquisition described in section 
     355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 
     described in a public announcement or filing with the 
     Securities and Exchange Commission) as it relates to a public 
     announcement;
       (42) section 1012(d)(3)(C) (relating to transition rule for 
     distributions pursuant to an acquisition described in section 
     355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 
     described in a public announcement or filing with the 
     Securities and Exchange Commission) as it relates to a filing 
     with the Securities and Exchange Commission;
       (43) section 1013(d)(2)(B) (relating to transition rule for 
     distributions or acquisitions after June 8, 1997, described 
     in a ruling request submitted to the Internal Revenue Service 
     submitted on or before June 8, 1997);
       (44) section 1013(d)(2)(C) (relating to transition rule for 
     distributions or acquisitions after June 8, 1997, described 
     in a public announcement or filing with the Securities and 
     Exchange Commission on or before June 8, 1997) as it relates 
     to a public announcement;
       (45) section 1013(d)(2)(C) (relating to transition rule for 
     distributions or acquisitions after June 8, 1997, described 
     in a public announcement or filing with the Securities and 
     Exchange Commission on or before June 8, 1997) as it relates 
     to a filing with the Securities and Exchange Commission;
       (46) section 1014(f)(2)(B) (relating to transition rule for 
     any transaction after June 8, 1997, if such transaction is 
     described in a ruling request submitted to the Internal 
     Revenue Service on or before June 8, 1997);
       (47) section 1014(f)(2)(C) (relating to transition rule for 
     any transaction after June 8, 1997, if such transaction is 
     described in a public announcement or filing with the 
     Securities and Exchange Commission on or before June 8, 1997) 
     as it relates to a public announcement;
       (48) section 1014(f)(2)(C) (relating to transition rule for 
     any transaction after June 8, 1997, if such transaction is 
     described in a public announcement or filing with the 
     Securities and Exchange Commission on or before June 8, 1997) 
     as it relates to a filing with the Securities and Exchange 
     Commission;
       (49) section 1042(b) (relating to special rules for 
     provision terminating certain exceptions from rules relating 
     to exempt organizations which provide commercial-type 
     insurance);
       (50) section 1081(a) (relating to termination of suspense 
     accounts for family corporations required to use accrual 
     method of accounting) as it relates to the repeal of Internal 
     Revenue Code section 447(i)(3);
       (51) section 1089(b)(3) (relating to reformations);
       (52) section 1089(b)(5)(B)(i) (relating to persons under a 
     mental disability;
       (53) section 1171 (relating to treatment of computer 
     software as FSC export property);
       (54) section 1175 (relating to exemption for active 
     financing income);
       (55) section 1204 (relating to travel expenses of certain 
     Federal employees engaged in criminal investigations);
       (56) section 1236 (relating to extension of time for filing 
     a request for administrative adjustment);
       (57) section 1243 (relating to special rules for 
     administrative adjustment request with respect to bad debts 
     or worthless securities);
       (58) section 1251 (relating to clarification of limitation 
     on maximum number of shareholders);
       (59) section 1253 (relating to attribution rules applicable 
     to stock ownership);
       (60) section 1256 (relating to modification of earnings and 
     profits rules for determining whether REIT has earnings and 
     profits from non-REIT year);
       (61) section 1257 (relating to treatment of foreclosure 
     property);
       (62) section 1261 (relating to shared appreciation 
     mortgages);
       (63) section 1302 (relating to clarification of waiver of 
     certain rights of recovery);
       (64) section 1303 (relating to transitional rule under 
     section 2056A);
       (65) section 1304 (relating to treatment for estate tax 
     purposes of short-term obligations held by nonresident 
     aliens);
       (66) section 1311 (relating to clarification of treatment 
     of survivor annuities under qualified terminable interest 
     rules);
       (67) section 1312 (relating to treatment of qualified 
     domestic trust rules of forms of ownership which are not 
     trusts);
       (68) section 1313 (relating to opportunity to correct 
     failures under section 2032A);
       (69) section 1414 (relating to fermented material from any 
     brewery may be received at a distilled spirits plant);
       (70) section 1417 (relating to use of additional 
     ameliorating material in certain wines);
       (71) section 1418 (relating to domestically produced beer 
     may be withdrawn free of tax for use of foreign embassies, 
     legations, etc.);
       (72) section 1421 (relating to transfer to brewery of beer 
     imported in bulk without payment of tax);
       (73) section 1422 (relating to transfer to bonded wine 
     cellars of wine imported in bulk without payment of tax);
       (74) section 1506 (relating to clarification of certain 
     rules relating to employee stock ownership plans of S 
     corporations);
       (75) section 1507 (relating to modification of 10-percent 
     tax for nondeductible contributions);
       (76) section 1523 (relating to repeal of application of 
     unrelated business income tax to ESOPs);
       (77) section 1530 (relating to gratuitous transfers for the 
     benefit of employees);
       (78) section 1532 (relating to special rules relating to 
     church plans); and
       (79) section 1604(c)(2) (relating to amendment related to 
     Omnibus Budget Reconciliation Act of 1993).
       And the Senate agree to the same.
     For consideration of the House bill, and the Senate 
     amendment, and modifications committed to conference:
     John R. Kasich,
     Bill Archer,
     Phil Crane,
     William M. Thomas,
     Dick Armey,
     Tom Delay,
     Charles B. Rangel,
     As additional conferees from the Committee on Transportation 
     and Infrastructure, for consideration of secs. 702 and 704 of 
     the Senate amendment, and modifications committed to 
     conference:
     Bud Shuster,
     Susan Molinari,
     James L. Oberstar,
     As additional conferees from the Committee on Education and 
     the Workforce, for consideration of secs. 713-14, 717, 879, 
     1302, 1304-5, and 1311 of the Senate amendment, and 
     modifications committed to conference:
     Bill Goodling,
     Harris W. Fawell,
     Donald M. Payne,
                                Managers on the Part of the House.

     From the Committee on Finance:
     Bill Roth,
     Trent Lott,
     Daniel P. Moynihan,
     From the Committee on the Budget:
     Pete Domenici,
     Don Nickles,
     Frank R. Lautenberg,
                               Managers on the Part of the Senate.

       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

       The managers on the part of the House and the Senate at the 
     conference on the disagreeing votes of the two Houses on the 
     amendment of the Senate to the bill (H.R. 2014) to provide 
     for reconciliation pursuant to subsections (b)(2) and (d) of 
     section 105 of the concurrent resolution on the budget for 
     fiscal year 1998, submit the following joint statement to the 
     House and the Senate in explanation of the effect of the 
     action agreed upon by the managers and recommended in the 
     accompanying conference report:
       The Senate amendment struck all of the House bill after the 
     enacting clause and inserted a substitute text.
       The House recedes from its disagreement to the amendment of 
     the Senate with an amendment that is a substitute for the 
     House bill and the Senate amendment. The differences between 
     the House bill, the Senate amendment, and the substitute 
     agreed to in conference are noted below, except for clerical 
     corrections, conforming changes made necessary by agreements 
     reached by the conferees, and minor drafting and clerical 
     changes.

    I. CHILD AND DEPENDENT CARE TAX CREDIT; HEALTH CARE FOR CHILDREN

 A. Child Tax Credit (sec. 101(a), (c), and (d) of the House bill and 
                   sec. 101 of the Senate amendment)

                              Present Law

     In general
       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.
     Dependent care credit
       A nonrefundable credit against income tax liability is 
     available for up to 30 percent (phased down to 20 percent for 
     individuals with AGI above $28,000) of a limited dollar 
     amount of employment-related child and dependent care 
     expenses for certain qualified individuals: (1) a dependent 
     child under age 13; (2) a dependent physically or mentally 
     unable to care for him or herself; or (3) a spouse who is 
     physically or mentally unable to care for him or herself. 
     Eligible employment-related expenses are limited to $2,400 if 
     there is one qualifying individual and $4,800 if there are 
     two or more qualifying individuals. Employment-related 
     expenses are expenses for household services and the care of 
     a qualifying individual, if incurred to enable the taxpayer 
     to be gainfully employed. Employment-related expenses are 
     reduced to

[[Page H6492]]

     the extent the taxpayer has employer-provided dependent care 
     assistance that is excludable from gross income.

                               House Bill

     Size of credit
       The House bill provides a $500 ($400 for taxable year 1998) 
     nonrefundable tax credit for each qualifying child under the 
     age of 17.
     Qualifying child
       A qualifying child is defined as an individual for whom the 
     taxpayer can claim a dependency exemption and who is a son or 
     daughter of the taxpayer (or descendent of either), a stepson 
     or stepdaughter of the taxpayer or an eligible foster child 
     of the taxpayer.
     Savings requirement
       No provision.
     Reduction for dependent care credit
       After 1999, the child credit is reduced by one-half of the 
     dependent care credit (no reduction with respect to 
     dependents who are physically or mentally incapable of self-
     care). The reduction applies to married individuals with AGI 
     above $60,000 ($30,000 for married individuals filing 
     separately). In the case taxpayer's filing as a single or 
     head of household, the reduction applies to AGI above 
     $33,000.
     Phaseout of credit
       For taxpayers with modified AGI in excess of certain 
     thresholds, the sum of the otherwise allowable child credit 
     and the otherwise allowable dependent care credit is phased 
     out. The phaseout rate is $25 for each $1,000 of modified AGI 
     (or fraction thereof) in excess of the threshold. The 
     reduction is applied first to the child credit and then to 
     the dependent care credit. For married taxpayers filing joint 
     returns, the threshold is $110,000. For taxpayers filing 
     single or head of household returns, the threshold is 
     $75,000. For married taxpayers filing separate returns, the 
     threshold is $55,000. These thresholds are not indexed for 
     inflation.
     Maximum allowable child credit
       The maximum amount of the child credit for each taxable 
     year (after the reduction, if any, for the dependent care 
     credit after 2001) could not exceed an amount equal to the 
     excess of: (1) the taxpayer's regular income tax liability 
     (net of applicable credits) over (2) the sum of the 
     taxpayer's tentative minimum tax liability (determined 
     without regard to the alternative minimum foreign tax credit) 
     and the earned income credit allowed.
     IRS notice and withholding
       The House bill provides that the Secretary of the Treasury 
     shall submit notice to all taxpayers of the passage of the 
     child tax credit. In addition, it directs the Secretary of 
     the Treasury to modify the withholding tables for single 
     taxpayers claiming more than one exemption and for married 
     taxpayers claiming more than two exemptions to take account 
     of the effects of the child tax credit. The adjustments to 
     the withholding tables apply to employees whose annualized 
     wages from an employer are expected to be at least $30,000, 
     but not more than $100,000.
     Effective date
       Generally, the child tax credit is effective for taxable 
     years beginning after December 31, 1997. The provision to 
     reduce the other-wise allowable child credit by one-half of 
     the amount of the taxpayer's dependent care credit is 
     effective for taxable years beginning after December 31, 
     2001.

                            Senate Amendment

     Size of credit
       The Senate amendment provides a $500 ($250 in 1997 for 
     children under the age of 13) nonrefundable tax credit for 
     each qualifying child under the age of 17. For taxable years 
     beginning after December 31, 2002, the credit is allowed for 
     each qualifying child under the age of 18.
     Qualifying child
       Same as the House bill.
     Savings requirement
       In the case of each child age 13 to 16 (13 to 17 for 
     taxable years beginning after December 31, 2002), the credit 
     generally is available only for amounts contributed to 
     savings for education with respect to that child.
     Reduction for dependent care credit
       No provision.
     Phaseout
       Generally the same as the House bill, except the dependent 
     care credit is not phased out.
     Maximum allowable child credit
       The maximum amount of the child credit for each taxable 
     year cannot exceed an amount equal to the excess of: (1) the 
     taxpayer's regular income tax liability (net of applicable 
     credits) over (2) the sum of the taxpayer's tentative minimum 
     tax liability (determined without regard to the alternative 
     minimum foreign tax credit) and one-half of the earned income 
     credit allowed.
     IRS notice and withholding
       No provision.
     Effective date
       The child tax credit is effective July 1, 1997, for taxable 
     years beginning after December 31, 1996.

                          Conference Agreement

                             Size of credit

       The conference agreement provides a $500 ($400 for taxable 
     year 1998) credit for each qualifying child under the age of 
     17.

                            Qualifying child

       The conference agreement follows the House bill and the 
     Senate amendment. The conference agreement includes a 
     requirement that the taxpayer include the name and taxpayer 
     identification number (TIN) for each qualifying child. The 
     conference agreement also extends the math and clerical error 
     rule to the child tax credit.

                          Savings requirement

       The conference agreement does not include the Senate 
     amendment.

                  Reduction for dependent care credit

       The conference agreement does not include the House bill 
     provision.

                                Phaseout

       The conference agreement follows the House bill and the 
     Senate amendment with one modification. The modification is 
     to increase the phaseout rate to $50 for each $1,000 of 
     modified AGI (or fraction thereof) in excess of the 
     threshold. The threshold amounts are unchanged from both the 
     House bill and the Senate amendment.

                     Maximum allowable child credit

       In general, in the case of a taxpayer with qualifying 
     children, the amount of the child credit equals $500 times 
     the number of qualifying children.
       In the case of a taxpayer with one or two qualifying 
     children, a portion of the child credit may be treated as a 
     supplemental child credit amount. This amount equals the 
     excess of (1) $500 times the number of qualifying children up 
     to the excess of the taxpayer's income tax liability (net of 
     applicable credits other than the earned income credit) over 
     the taxpayer's tentative minimum tax liability (determined 
     without regard to the alternative minimum foreign tax credit) 
     over (2) the sum of the taxpayer's regular income tax 
     liability (net of applicable credits other than the earned 
     income credit) and the employee share of FICA (and one-half 
     of the taxpayer's SECA tax liability, if applicable) reduced 
     by any earned income credit amount. In no case will the total 
     amount of the allowable child credit exceed the amount that 
     would result from its calculation as a nonrefundable personal 
     credit.
       In the case of a taxpayer with three or more qualifying 
     children, the maximum amount of the child credit for each 
     taxable year cannot exceed the greater of: (1) the excess of 
     the taxpayer's regular tax liability (net of applicable 
     credits other than the earned income credit) over the 
     taxpayer's tentative minimum tax liability (determined 
     without regard to the alternative minimum foreign tax 
     credit), or (2) an amount equal to the excess of the sum of 
     the taxpayer's regular income tax liability (net of 
     applicable credits other than the earned income credit) and 
     the employee share of FICA (and one-half of the taxpayer's 
     SECA tax liability, if applicable) reduced by the earned 
     income credit. To the extent that the amount determined under 
     (1) is greater than the amount determined under (2), the 
     difference is treated as a supplemental child credit amount.
       The conferees anticipate that the Secretary of the Treasury 
     will determine whether a simplified method of calculating the 
     child credit, consistent with the formula described above, 
     can be achieved.

                     Refundable child credit amount

       In the case of a taxpayer with three or more qualifying 
     children, if the amount of the allowable child credit as 
     computed under the computation described immediately above 
     exceeds the taxpayer's regular tax liability before the 
     computation, then the excess is a refundable tax credit.

                       IRS notice and withholding

       The conference agreement does not include the House bill 
     provision.

                             Effective date

       Generally, the child tax credit is effective for taxable 
     years beginning after December 31, 1997.

   B. Expand Definition of High-Risk Individuals with Respect to Tax-
 Exempt State-Sponsored Organizations Providing Health Coverage (sec. 
                       101(b) of the House bill)

                              Present Law

       Present law provides tax-exempt status to any membership 
     organization that is established by a State exclusively to 
     provide coverage for medical care on a nonprofit basis to 
     certain high-risk individuals, provided certain criteria are 
     satisfied. 1 The organization may provide coverage 
     for medical care either by issuing insurance itself or by 
     entering into an arrangement with a health maintenance 
     organization (``HMO'').
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     \1\ No inference is intended as to the tax treatment of other 
     types of State-sponsored organizations.
---------------------------------------------------------------------------
       High-risk individuals eligible to receive medical care 
     coverage from the organization must be residents of the State 
     who, due to a pre-existing medical condition, are unable to 
     obtain health coverage for such condition through insurance 
     or an HMO, or are able to acquire such coverage only at a 
     rate that is substantially higher than the rate charged for 
     such coverage by the organization. The State must determine 
     the composition of membership in the organization. For 
     example, a State could mandate that all organizations that 
     are subject to insurance regulation by the State must be 
     members of the organization.
       Present law further requires the State or members of the 
     organization to fund the liabilities of the organization to 
     the extent that premiums charged to eligible individuals are 
     insufficient to cover such liabilities.

[[Page H6493]]

     Finally, no part of the net earnings of the organization can 
     inure to the benefit of any private shareholder or 
     individual.

                               House Bill

       The House bill expands the definition of high-risk 
     individuals to include a child of an individual who meets the 
     present-law definition of a high-risk individual, subject to 
     certain requirements. The requirements are: (1) the taxpayer 
     is allowed a deduction for a personal exemption for the child 
     for the taxable year; (2) the child has not attained the age 
     of 17 as of the close of the calendar year in which the 
     taxable year of the taxpayer begins; and (3) the child is a 
     son or daughter or the taxpayer (or a dependent of either), a 
     stepson or stepdaughter of the taxpayer, or an eligible 
     foster child of the taxpayer.
       Effective date.--Taxable years beginning after December 31, 
     1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with a 
     modification to further expand the definition of high-risk 
     individuals to include the spouse of an individual who meets 
     the present-law definition of a high-risk individual.

  C. Indexing of the Dependent Care Credit; Phase Out for High-Income 
                 Taxpayers (sec. 102 of the House bill)

                              Present Law

       A nonrefundable credit against income tax liability is 
     available for up to 30 percent of a limited dollar amount of 
     employment-related child and dependent care expenses. The 
     credit may be claimed by an individual who maintains a 
     household that includes one or more qualifying individuals. A 
     qualifying individual is a dependent of the taxpayer who is 
     under the age of 13, a physically or mentally incapacitated 
     dependent, or a physically or mentally incapacitated spouse.
       Employment-related expenses are expenses for household 
     services and the care of a qualifying individual, if incurred 
     to enable the taxpayer to be gainfully employed. Eligible 
     employment-related expenses are limited to $2,400 if there is 
     one qualifying individual, and $4,800 if there are two or 
     more qualifying individuals.
       The 30-percent credit rate is reduced by one percentage 
     point for each $2,000 (or fraction thereof) of adjusted gross 
     income (``AGI'') above $10,000. A married couple's combined 
     AGI is used for purposes of this computation. Individuals 
     with more than $28,000 of AGI are entitled to a credit equal 
     to 20 percent of allowable employment-related expenses.

                               House Bill

     Dollar limits
       Under the House bill, the dollar limits on eligible 
     employment-related expenses ($2,400 if there is one 
     qualifying individual and $4,800 if there are two or more 
     qualifying individuals) are indexed for inflation.
     Phaseout
       For taxpayers with modified AGI in excess of certain 
     thresholds, the sum of the otherwise allowable child credit 
     and the otherwise allowable dependent care credit is phased 
     out. The phaseout rate is $25 for each $1,000 of modified AGI 
     (or fraction thereof) in excess of the threshold. The 
     reduction is applied first to the child credit and then to 
     the dependent care credit. For married taxpayers filing joint 
     returns, the threshold is $110,000. For taxpayers filing 
     single or head of household returns, the threshold is 
     $75,000. For married taxpayers filing separate returns, the 
     threshold is $55,000. These thresholds are not indexed for 
     inflation. (See above the description of the phaseout in the 
     child tax credit.)
     Effective date
       The provision is effective for taxable years beginning 
     after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

D. Tax Credit for Employer Expenses for Child Care Facilities (sec. 103 
                        of the Senate amendment)

                              Present Law

       Ordinary and necessary business expenses are deductible by 
     an employer.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides a tax credit equal to 50 
     percent of an employers' qualified child care expenses for 
     the taxable year. The maximum credit allowable cannot exceed 
     $150,000 per year.
       Qualified child care expenses are any amounts paid or 
     incurred: (1) to acquire, construct, rehabilitate or expand 
     property which is to be used as part of a qualified child 
     care facility, with respect to which a deduction for 
     depreciation is allowable, and which is not part of the 
     principal residence of the taxpayer or an employee of the 
     taxpayer; (2) for the operating costs of a qualified child 
     care facility; (3) under a contract with a qualified child 
     care facility to provide child care services to employees of 
     the taxpayer; (4) under a contract to provide child care 
     resource and referral services to employees of the taxpayer; 
     or (5) for the costs of seeking accreditation for a child 
     care facility. A qualified child care facility is a facility 
     the principal use of which is to provide child care 
     assistance and which meets the requirements of all applicable 
     laws and regulations of the State and local government in 
     which it is located. A facility is not a qualified child care 
     facility unless enrollment in the facility is open to 
     employees of the taxpayer during the year, the facility is 
     not the principal trade or business of the taxpayer (unless 
     at least 30 percent of the enrolled are dependents of 
     employees of the taxpayer) and the use of (or eligibility to 
     use) the facility does not discriminate in favor of highly 
     compensated employees.
       A recapture of the credit applies if the facility ceases to 
     operate as a qualified child care facility or the facility is 
     disposed of.
       No deduction or credit is allowed under any other provision 
     with respect to the amount of credit determined under this 
     provision. The taxpayer's basis in property is reduced by the 
     amount of credit determined with respect to such property.
       Effective date.--The provision is effective with respect to 
     taxable years beginning after December 31, 1997, but before 
     January 1, 2000.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

 E. Expansion of Coordinated Enforcement Efforts Between the Internal 
   Revenue Service and the Health and Human Services Office of Child 
         Support Enforcement (sec. 104 of the Senate amendment)

                              Present Law

       The Internal Revenue Service (``IRS'') and various Federal 
     departments and agencies have information sharing agreements. 
     The Secretary of Health and Human Services (``HHS'') has been 
     directed to create and maintain various data bases which may 
     be used by the IRS to collect, unpaid child support amounts, 
     to administer the earned income credit and to verify a claim 
     with respect to employment on a tax return.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment gives the IRS expanded access to 
     information in the National Directory of New Hires to verify 
     any information which is required on a tax return. It also 
     gives the IRS access to the names and social security numbers 
     of custodial parents in the Federal Case Registry of Child 
     Support Orders. This information is made available to 
     administer the Internal Revenue Code provisions which grant 
     tax benefits based on the support and residence of dependent 
     children.
       Effective date.--The provision is effective on October 1, 
     1997.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

 F. Penalty-Free Withdrawals from IRAs for Adoption Expenses (sec. 105 
                        of the Senate amendment)

                              Present Law

       Under present law, amounts held in an individual retirement 
     arrangement (``IRA'') are includible in income when withdrawn 
     (except to the extent the withdrawal is a return of 
     nondeductible contributions). Amounts withdrawn prior to 
     attainment of age 59\1/2\ are subject to an additional 10-
     percent early withdrawal tax, unless the withdrawal is due to 
     death or disability, is made in the form of certain periodic 
     payments, is used to pay medical expenses in excess of 7.5 
     percent of AGI, or is used to purchase health insurance of an 
     unemployed individual.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that the 10-percent early 
     withdrawal tax does not apply to distributions from IRAs that 
     are not in excess of $2,000 if the taxpayer uses the amounts 
     to pay qualified adoption expenses.
       The penalty-free withdrawal is available for ``qualified 
     adoption expenses,'' meaning reasonable and necessary 
     adoption fees, court costs, attorney fees, and other expenses 
     which are directly related to, and the principal purpose of 
     which is for, the legal adoption of an eligible child by the 
     taxpayer. Qualified adoption expenses do not include expenses 
     (1) incurred in violation of State or Federal law, (2) 
     incurred in carrying out any surrogate parenting arrangement, 
     (3) incurred in connection with the adoption of a child of a 
     spouse, or (4) which are reimbursed under an employer program 
     or otherwise.
       Effective date.--The provision is effective for 
     distributions after December 31, 1996.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

                      II. EDUCATION TAX INCENTIVES

             A. Tax Benefits Relating to Education Expenses

     1. HOPE tax credit and Lifetime Learning tax credit for 
         higher education tuition expenses (sec. 201 of the House 
         bill and the Senate amendment)

                              Present Law

     Deductibility of education expenses
       Taxpayers generally may not deduct education and training 
     expenses. However, a deduction for education expenses 
     generally is allowed under section 162 if the education or

[[Page H6494]]

     training (1) maintains or improves a skill required in a 
     trade or business currently engaged in by the taxpayer, or 
     (2) meets the express requirements of the taxpayer's 
     employer, or requirements of applicable law or regulations, 
     imposed as a condition of continued employment (Treas. Reg. 
     sec. 1.162-5). However, education expenses are not deductible 
     if they relate to certain minimum educational requirements or 
     to education or training that enables a taxpayer to begin 
     working in a new trade or business. In the case of an 
     employee, education expenses (if not reimbursed by the 
     employer) may be claimed as an itemized deduction only if 
     such expenses meet the above-described criteria for 
     deductibility under section 162 and only to the extent that 
     the expenses, along with other miscellaneous deductions, 
     exceed 2 percent of the taxpayer's adjusted gross income 
     (AGI).
     Exclusion for employer-provided educational assistance
       A special rule allows an employee to exclude from gross 
     income for income tax purposes and from wages for employment 
     tax purposes up to $5,250 annually paid by his or her 
     employer for educational assistance (sec. 127). In order for 
     the exclusion to apply, certain requirements must be 
     satisfied, including a requirement that not more than 5 
     percent of the amounts paid or incurred by the employer 
     during the year for educational assistance under a qualified 
     educational assistance program can be provided for the class 
     of individuals consisting of more than 5-percent owners of 
     the employer and the spouses or dependents of such more than 
     5-percent owners. This special rule for employer-provided 
     educational assistance expired with respect to courses 
     beginning after June 30, 1997 (and does not apply to graduate 
     level courses beginning after June 30, 1996).
       For purposes of the special exclusion, educational 
     assistance means the payment by an employer of expenses 
     incurred by or on behalf of the employee for education of the 
     employee including, but not limited to, tuition, fees, and 
     similar payments, books, supplies, and equipment. Educational 
     assistance also includes the provision by the employer of 
     courses of instruction for the employee (including books, 
     supplies, and equipment). Educational assistance does not 
     include tools or supplies which may be retained by the 
     employee after completion of a course or meals, lodging, or 
     transportation. The exclusion does not apply to any education 
     involving sports, games, or hobbies.
       In the absence of the special exclusion, employer-provided 
     educational assistance is excludable from gross income and 
     wages as a working condition fringe benefit (sec. 132(d)) 
     only to the extent the education expenses would be deductible 
     under section 162.
     Exclusion for interest earned on savings bonds
       Another special rule (sec. 135) provides that interest 
     earned on a qualified U.S. Series EE savings bond issued 
     after 1989 is excludable from gross income if the proceeds of 
     the bond upon redemption do not exceed qualified higher 
     education expenses paid by the taxpayer during the taxable 
     year. 2 ``Qualified higher education expenses'' 
     include tuition and fees (but not room and board expenses) 
     required for the enrollment or attendance of the taxpayer, 
     the taxpayer's spouse, or a dependent of the taxpayer at 
     certain colleges, universities, or vocational schools. The 
     exclusion provided by section 135 is phased out for certain 
     higher-income taxpayers, determined by the taxpayer's 
     modified AGI during the year the bond is redeemed. For 1996, 
     the exclusion was phased out for taxpayers with modified AGI 
     between $49,450 and $64,450 ($74,200 and $104,200 for joint 
     returns). To prevent taxpayers from effectively avoiding the 
     income phaseout limitation through issuance of bonds directly 
     in the child's name, section 135(c)(1)(B) provides that the 
     interest exclusion is available only with respect to U.S. 
     Series EE savings bonds issued to taxpayers who are at least 
     24 years old.
---------------------------------------------------------------------------
     \2\ If the aggregate redemption amount (i.e., principal plus 
     interest) of all Series EE bonds redeemed by the taxpayer 
     during the taxable year exceeds the qualified education 
     expenses incurred, then the excludable portion of interest 
     income is based on the ratio that the education expenses 
     bears to the aggregate redemption amount (sec. 135(b)).
---------------------------------------------------------------------------
     Qualified scholarships
       Section 117 excludes from gross income amounts received as 
     a qualified scholarship by an individual who is a candidate 
     for a degree and used for tuition and fees required for the 
     enrollment or attendance (or for fees, books, supplies, and 
     equipment required for courses of instruction) at a primary, 
     secondary, or post-secondary educational institution. The 
     tax-free treatment provided by section 117 does not extend to 
     scholarship amounts covering regular living expenses, such as 
     room and board. There is, however, no dollar limitation for 
     the section 117 exclusion, provided that the scholarship 
     funds are used to pay for tuition and required fees. In 
     addition to the exclusion for qualified scholarships, section 
     117 provides an exclusion from gross income for qualified 
     tuition reductions for education below the graduate level 
     provided to employees (and their spouses and dependents) of 
     certain educational organizations. 3 Section 
     117(c) specifically provides that the exclusion for qualified 
     scholarships and qualified tuition reductions does not apply 
     to any amount received by a student that represents payment 
     for teaching, research, or other services by the student 
     required as a condition for receiving the scholarship or 
     tuition reduction.
---------------------------------------------------------------------------
     \3\ A special rule provides that qualified tuition reductions 
     under section 117(d) may be provided for graduate-level 
     courses in cases of graduate students who are engaged in 
     teaching or research activities for the educational 
     organization (sec. 117(d)(5)).
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     Student loan forgiveness
       In the case of an individual, section 108(f) provides that 
     gross income subject to Federal income tax does not include 
     any amount from the forgiveness (in whole or in part) of 
     certain student loans, provided that the forgiveness is 
     contingent on the student's working for a certain period of 
     time in certain professions for any of a broad class of 
     employers (e.g., providing health care services to a 
     nonprofit organization). Student loans eligible for this 
     special rule must be made to an individual to assist the 
     individual in attending an education institution that 
     normally maintains a regular faculty and curriculum and 
     normally has a regularly enrolled body of students in 
     attendance at the place where its education activities are 
     regularly carried on. Loan proceeds may be used not only for 
     tuition and required fees, but also to cover room and board 
     expenses (in contrast to tax-free scholarships under section 
     117, which are limited to tuition and required fees). In 
     addition, the loan must be made by (1) the United States (or 
     an instrumentality or agency thereof), (2) a State (or any 
     political subdivision thereof), (3) certain tax-exempt public 
     benefit corporations that control a State, county, or 
     municipal hospital and whose employees have been deemed to be 
     public employees under State law, or (4) an educational 
     organization that originally received the funds from which 
     the loan was made from the United States, a State, or a tax-
     exempt public benefit corporation. Thus, loans made with 
     private, nongovernmental funds are not qualifying student 
     loans for purposes of the section 108(f) exclusion. As with 
     section 117, there is no dollar limitation for the section 
     108(f) exclusion.
     Qualified State prepaid tuition programs
       Section 529 (enacted as part of the Small Business Job 
     Protection Act of 1996) provides tax-exempt status to 
     ``qualified State tuition programs,'' meaning certain 
     programs established and maintained by a State (or agency or 
     instrumentality thereof) under which persons may (1) purchase 
     tuition credits or certificates on behalf of a designated 
     beneficiary that entitle the beneficiary to a waiver or 
     payment of qualified higher education expenses of the 
     beneficiary, or (2) make contributions to an account that is 
     established for the purpose of meeting qualified higher 
     education expenses of the designated beneficiary of the 
     account. ``Qualified higher education expenses'' are defined 
     as tuition, fees, books, supplies, and equipment required for 
     the enrollment or attendance at a college or university (or 
     certain vocational schools). Qualified higher education 
     expenses do not include room and board expenses. Section 529 
     also provides that no amount shall be included in the gross 
     income of a contributor to, or beneficiary of, a qualified 
     State tuition program with respect to any distribution from, 
     or earnings under, such program, except that (1) amounts 
     distributed or educational benefits provided to a beneficiary 
     (e.g., when the beneficiary attends college) will be included 
     in the beneficiary's gross income (unless excludable under 
     another Code section) to the extent such amounts or the value 
     of the educational benefits exceed contributions made on 
     behalf of the beneficiary, and (2) amounts distributed to a 
     contributor (e.g., when a parent receives a refund) will be 
     included in the contributor's gross income to the extent such 
     amounts exceed contributions made by that person.4
---------------------------------------------------------------------------
     \4\  Specifically, section 529(c)(3)(A) provides that any 
     distribution under a qualified State tuition program shall be 
     includible in the gross income of the distributee in the same 
     manner as provided under present-law section 72 to the extent 
     not excluded from gross income under any other provision of 
     the Code.
---------------------------------------------------------------------------

                               House Bill

     In general
       Individual taxpayers are allowed to claim a non-refundable 
     HOPE credit against Federal income taxes up to $1,500 per 
     student per year for 50 percent of qualified tuition and 
     related expenses (but not room and board expenses) paid for 
     the first two years of the student's post-secondary education 
     in a degree or certificate program. The qualified tuition and 
     related expenses must be incurred on behalf of the taxpayer, 
     the taxpayer's spouse, or a dependent. The HOPE credit is 
     available with respect to an individual student for two 
     taxable years, provided that the student has not completed 
     the first two years of post-secondary education. Beginning in 
     1998, the maximum credit amount of $1,500 will be indexed for 
     inflation, rounded down to the closest multiple of 
     $50.5
---------------------------------------------------------------------------
     \5\ The HOPE credit may not be claimed against a taxpayer's 
     alternative minimum tax (AMT) liability.
---------------------------------------------------------------------------
       The HOPE credit amount that a taxpayer may otherwise claim 
     is phased out ratably for taxpayers with modified AGI between 
     $40,000 and $50,000 ($80,000 and $100,000 for joint returns). 
     Modified AGI includes amounts otherwise excluded with respect 
     to income earned abroad (or income from Puerto Rico or U.S. 
     possessions). The income phase-out ranges will be indexed for 
     inflation occurring after the year 1999, rounded down to the 
     closest multiple of $5,000. The first

[[Page H6495]]

     taxable year for which the inflation adjustment could be made 
     to increase the income phase-out ranges will be 2001.
       The HOPE credit is available in the taxable year the 
     expenses are paid, subject to the requirement that the 
     education commence or continue during that year or during the 
     first three months of the next year. Qualified tuition 
     expenses paid with the proceeds of a loan generally are 
     eligible for the HOPE credit (rather than repayment of the 
     loan itself).6
---------------------------------------------------------------------------
     \6\ The Treasury Department is granted authority to issue 
     regulations providing that the HOPE credit will be recaptured 
     in cases where the student or taxpayer receives a refund of 
     tuition and related expenses with respect to which a credit 
     was claimed in a prior year.
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     Dependent students
       A taxpayer may claim the HOPE credit with respect to an 
     eligible student who is not the taxpayer or the taxpayer's 
     spouse (e.g., in cases where the student is the taxpayer's 
     child) only if the taxpayer claims the student as a dependent 
     for the taxable year for which the credit is claimed. If a 
     student is claimed as a dependent by the parent or other 
     taxpayer, the eligible student him- or herself is not 
     entitled to claim a HOPE credit for that taxable year on the 
     student's own tax return. If a parent (or other taxpayer) 
     claims a student as a dependent, any qualified tuition and 
     related expenses paid by the student are treated as paid by 
     the parent (or other taxpayer) for purposes of the provision.
     Election of HOPE credit or proposed deduction for qualified 
         higher education expenses
       For each taxable year, a taxpayer may elect with respect to 
     an eligible student either the HOPE credit or the proposed 
     deduction for qualified higher education expenses (described 
     below). Thus, for example, if a parent claims a child as a 
     dependent for a taxable year, then all qualified tuition 
     expenses paid by both the parent and child are deemed paid by 
     the parent, and the parent may claim the HOPE credit 
     (assuming that the AGI phaseout does not apply) on the 
     parent's return. As an alternative, the parent may elect for 
     that taxable year the deduction for qualified higher 
     education expenses with respect to the dependent child (as 
     described below).7 On the other hand, if a child 
     is not claimed as a dependent by the parent (or by any other 
     taxpayer) for the taxable year, then the child him- or 
     herself has the option of electing either the HOPE credit or 
     deduction for qualified higher education expenses paid during 
     that year.
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     \7\ For any taxable year, a taxpayer may claim the HOPE 
     credit for qualified tuition and related expenses paid with 
     respect to one student and also claim the proposed deduction 
     (described below) for higher education expenses paid with 
     respect to one or more other students. If the HOPE credit is 
     claimed with respect to one student for one or two taxable 
     years, then the proposed deduction for higher education 
     expenses may be available with respect to that student for 
     subsequent taxable years.
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     Qualified tuition and related expenses
       The HOPE credit is available for ``qualified tuition and 
     related expenses,'' meaning tuition, fees, and books required 
     for the enrollment or attendance of an eligible student at an 
     eligible educational institution. Charges and fees associated 
     with meals, lodging, student activities, athletics, 
     insurance, transportation, and similar personal, living or 
     family expenses are not included. The expenses of education 
     involving sports, games, or hobbies are not qualified tuition 
     expenses unless this education is part of the student's 
     degree program.
       Qualified tuition and related expenses generally include 
     only out-of-pocket expenses. Qualified tuition and related 
     expenses do not include expenses covered by educational 
     assistance that is not required to be included in the gross 
     income of either the student or the taxpayer claiming the 
     credit. Thus, total qualified tuition and related expenses 
     are reduced by any scholarship or fellowship grants 
     excludable from gross income under present-law section 117 
     and any other tax-free educational benefits received by the 
     student during the taxable year. No reduction of qualified 
     tuition and related expenses is required for a gift, bequest, 
     devise, or inheritance within the meaning of section 102(a). 
     Under the provision, a HOPE credit is not allowed with 
     respect to any education expense for which a deduction is 
     claimed under section 162 or any other section of the 
     Code.8
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     \8\ In addition, the bill amends present-law section 135 to 
     provide that the amount of qualified higher education 
     expenses taken into account for purposes of that section is 
     reduced by the amount of such expenses taken into account in 
     determining the HOPE credit claimed by any taxpayer with 
     respect to the student for the taxable year.
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     Eligible students
       An eligible student for purposes of the HOPE credit is an 
     individual who is enrolled in a degree, certificate, or other 
     program (including a program of study abroad approved for 
     credit by the institution at which such student is enrolled) 
     leading to a recognized educational credential at an eligible 
     educational institution. The student must pursue a course of 
     study on at least a half-time basis. (In other words, for at 
     least one academic period which begins during the taxable 
     year, the student must carry at least one-half the normal 
     full-time work load for the course of study the student is 
     pursuing.) An eligible student may not have been convicted of 
     a Federal or State felony consisting of the possession or 
     distribution of a controlled substance.
     Eligible educational institutions
       Eligible educational institutions are defined by reference 
     to section 481 of the Higher Education Act of 1965. Such 
     institutions generally are accredited post-secondary 
     educational institutions offering credit toward a bachelor's 
     degree, an associate's degree, or another recognized post-
     secondary credential. Certain proprietary institutions and 
     post-secondary vocational institutions also are eligible 
     educational institutions. The institution must be eligible to 
     participate in Department of Education student aid programs.
     Regulations
       The Secretary of the Treasury (in consultation with the 
     Secretary of Education) is granted authority to issue 
     regulations to implement the provision. The Secretary of the 
     Treasury will have authority to issue regulations providing 
     appropriate rules for recordkeeping and information 
     reporting. These regulations may address the information 
     reports that eligible educational institutions will be 
     required to file to assist students and the IRS in 
     calculating the amount of the HOPE credit potentially 
     available.
     Effective date
       The provision is effective for expenses paid after December 
     31, 1997, for education furnished in academic periods 
     beginning after such date.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except: 
     (1) the credit rate is 75 percent (rather than 50 percent) 
     for students attending two-year community colleges and 
     vocational schools; 9 (2) an eligible student must 
     have earned a high-school diploma (or equivalent degree) 
     prior to attending any post-secondary classes with respect to 
     which the HOPE credit is claimed, with the exception of 
     students who did not receive a high-school degree by reason 
     of enrollment in an early admission program at a post-
     secondary institution; and (3) for a taxable year, a taxpayer 
     may elect with respect to an eligible student either the HOPE 
     credit or the proposed exclusion from gross income for 
     certain distributions from a qualified tuition program or 
     education IRA provided for by the Senate amendment.
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     \9\ Thus, under the Senate amendment, students attending two-
     year community colleges or vocational schools may be eligible 
     for the $1,500 maximum HOPE credit if they incur $2,000 of 
     qualified tuition and related expenses. In contrast, students 
     attending other institutions (e.g., four-year colleges) may 
     be eligible for the $1,500 maximum HOPE credit if they incur 
     $3,000 of qualified tuition and related expenses.
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                          Conference Agreement

     In general
       The conference agreement follows the House bill, except: 
     (1) the HOPE credit rate is 100 percent on the first $1,000 
     of qualified tuition and fees, and 50 percent on the next 
     $1,000 of qualified tuition and fees; 10 (2) the 
     HOPE credit is available only for tuition and fees required 
     for the enrollment or attendance of an eligible student at an 
     eligible institution, and is not available for expenses 
     incurred to purchase books; and (3) for a taxable year, a 
     taxpayer may elect with respect to an eligible student the 
     HOPE credit, the 20-percent ``Lifetime Learning'' credit (as 
     described below), or the exclusion from gross income for 
     certain distributions from an education IRA (as provided by 
     the conference agreement).
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     \10\ Thus, an eligible student who incurs $1,000 of qualified 
     tuition and fees is eligible (subject to the AGI phaseout) 
     for a $1,000 HOPE credit; and if such a student incurs $2,000 
     of qualified tuition and fees, then he or she is eligible for 
     a $1,500 HOPE credit.
     The maximum HOPE credit amount will be indexed for inflation 
     occurring after the year 2000, by increasing the cap on 
     qualified tuition and fees subject to the 100-percent credit 
     rate and the cap on such tuition and fees subject to the 50-
     percent credit rate (both caps rounded down to the closest 
     multiple of $100). The first taxable year for which the 
     inflation adjustment could be made to increase the cap on 
     qualified tuition and fees will be 2002. In addition, under 
     the conference agreement, the income phase-out ranges for the 
     HOPE credit will be indexed for inflation occurring after the 
     year 2000, rounded down to the closest multiple of $1,000. 
     The first taxable year for which the inflation adjustment 
     could be made to increase the income phase-out ranges will be 
     2002.
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     Lifetime Learning credit for qualified tuition and fees
       Allowance of credit.--The conference agreement provides 
     that individual taxpayers are allowed to claim a 
     nonrefundable ``Lifetime Learning'' credit against Federal 
     income taxes equal to 20 percent of qualified tuition and 
     fees incurred during the taxable year on behalf of the 
     taxpayer, the taxpayer's spouse, or any dependents. For 
     expenses paid after June 30, 1998, and prior to January 1, 
     2003, up to $5,000 of qualified tuition and fees per taxpayer 
     return will be eligible for the 20-percent Lifetime Learning 
     credit (i.e., the maximum credit per taxpayer return will be 
     $1,000). For expenses paid after December 31, 2002, up to 
     $10,000 of qualified tuition and fees per taxpayer return 
     will be eligible for the 20-percent Lifetime Learning credit 
     (i.e., the maximum credit per taxpayer return will be 
     $2,000).
       In contrast to the HOPE credit, a taxpayer may claim the 
     Lifetime Learning credit for an unlimited number of taxable 
     years. Also in contrast to the HOPE credit, the maximum 
     amount of the Lifetime Learning credit that may be claimed on 
     a taxpayer's return will not vary based on the number of 
     students in the taxpayer's family.

[[Page H6496]]

       The Lifetime Learning credit is phased out ratably over the 
     same phaseout range that applies for purposes of the HOPE 
     credit--i.e., taxpayers with modified AGI between $40,000 and 
     $50,000 ($80,000 and $100,000 for joint returns). The income 
     phase-out ranges will be indexed for inflation occurring 
     after the year 2000, rounded down to the closest multiple of 
     $1,000. The first taxable year for which the inflation 
     adjustment could be made to increase the income phase-out 
     ranges will be 2002.
       The Lifetime Learning credit is available in the taxable 
     year the expenses are paid, subject to the requirement that 
     the education commence or continue during that year or during 
     the first three months of the next year. Qualified tuition 
     and fees paid with the proceeds of a loan generally are 
     eligible for the Lifetime Learning credit (rather than 
     repayment of the loan itself).
       Dependent students.--As with the HOPE credit, a taxpayer 
     may claim the Lifetime Learning credit with respect to a 
     student who is not the taxpayer or the taxpayer's spouse 
     (e.g., in cases where the student is the taxpayer's child) 
     only if the taxpayer claims the student as a dependent for 
     the taxable year for which the credit is claimed. If a 
     student is claimed as a dependent by the parent or other 
     taxpayer, the student him- or herself is not entitled to 
     claim the Lifetime Learning credit for that taxable year on 
     the student's own tax return. If a parent (or other taxpayer) 
     claims a student as a dependent, any qualified tuition and 
     related expenses paid by the student are treated as paid by 
     the parent (or other taxpayer) for purposes of the provision.
       Election of Lifetime Learning credit, HOPE credit, or 
     exclusion from gross income for certain distributions from 
     education IRAs.--A taxpayer may claim the Lifetime Learning 
     credit for a taxable year with respect to one or more 
     students, even though the taxpayer also claims a HOPE credit 
     (or claims an exclusion from gross income for certain 
     distributions from qualified State tuition programs or 
     education IRAs) for that same taxable year with respect to 
     other students. If, for a taxable year, a taxpayer claims a 
     HOPE credit with respect to a student (or claims an exclusion 
     for certain distributions from an education IRA with respect 
     to a student), then the Lifetime Learning credit will not be 
     available with respect to that same student for that year 
     (although the Lifetime Learning credit may be available with 
     respect to that same student for other taxable years).
       Qualified tuition and fees.--The Lifetime Learning credit 
     is available for ``qualified tuition and fees,'' meaning 
     tuition and fees required for the enrollment or attendance of 
     the eligible student at an eligible institution. Charges and 
     fees associated with meals, lodging, student activities, 
     athletics, insurance, transportation, and similar personal, 
     living or family expenses are not included. The 20-percent 
     credit is not available for expenses incurred to purchase 
     books. The expenses of education involving sports, games, or 
     hobbies are not qualified tuition expenses unless this 
     education is part of the student's degree program.
       In contrast to the HOPE credit, qualified tuition and fees 
     for purposes of the Lifetime Learning credit include tuition 
     and fees incurred with respect to undergraduate or graduate-
     level (and professional degree) courses.11 In 
     addition to allowing a credit for the tuition and fees of a 
     student who attends classes on at least a half-time basis as 
     part of a degree or certificate program, the Lifetime 
     Learning credit also is available with respect to any course 
     of instruction at an eligible educational institution 
     (whether enrolled in by the student on a full-time, half-
     time, or less than half-time basis) to acquire or improve job 
     skills of the student.
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     \11\ The HOPE credit is available only with respect to the 
     first two years of a student's undergraduate education.
---------------------------------------------------------------------------
       Qualified tuition and fees are defined in the same manner 
     as under the HOPE credit provisions. Thus, qualified tuition 
     and fees generally include only out-of-pocket expenses. 
     Qualified tuition and fees do not include expenses covered by 
     educational assistance that is not required to be included in 
     the gross income of either the student or the taxpayer 
     claiming the credit. Thus, total qualified tuition and fees 
     are reduced by any scholarship or fellowship grants 
     excludable from gross income under present-law section 117 
     and any other tax-free educational benefits received by the 
     student during the taxable year (such as employer-provided 
     educational assistance excludable under section 127). No 
     reduction of qualified tuition and fees is required for a 
     gift, bequest, devise, or inheritance within the meaning of 
     section 102(a). Under the provision, a Lifetime Learning 
     credit is not allowed with respect to any education expense 
     for which a deduction is claimed under section 162 or any 
     other section of the Code.12
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     \12\ In addition, the conference agreement amends present-law 
     section 135 to provide that the amount of qualified higher 
     education expenses taken into account for purposes of that 
     section is reduced by the amount of such expenses taken into 
     account in determining the Lifetime Learning credit claimed 
     by any taxpayer with respect to the student for the taxable 
     year.
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       Eligible educational institutions.--Eligible educational 
     institutions are (as with the HOPE credit) defined by 
     reference to section 481 of the Higher Education Act of 1965. 
     Such institutions generally are accredited post-secondary 
     educational institutions offering credit toward a bachelor's 
     degree, an associate's degree, graduate-level or professional 
     degree, or another recognized post-secondary credential. 
     Certain proprietary institutions and post-secondary 
     vocational institutions also are eligible educational 
     institutions. The institution must be eligible to participate 
     in Department of Education student aid programs.
       Regulations.--The Secretary of the Treasury (in 
     consultation with the Secretary of Education) is granted 
     authority to issue regulations to implement the provision. 
     The Secretary of the Treasury will have authority to issue 
     regulations providing appropriate rules for recordkeeping and 
     information reporting. These regulations may address the 
     information reports that eligible educational institutions 
     will be required to file to assist students and the IRS in 
     calculating the amount of the Lifetime Learning credit 
     potentially available.
       Effective date.--The provision is effective for expenses 
     paid after June 30, 1998, for education furnished in academic 
     periods beginning after such date.
     2. Tax treatment of qualified State tuition programs and 
         education IRAs; exclusion for certain distributions from 
         education IRAs used to pay qualified higher education 
         expenses (secs. 202(a), (b), and (d) and 211-212 of the 
         House bill and secs. 211-213 of the Senate amendment)

                              Present Law

     Deductibility of education expenses
       Taxpayers generally may not deduct education and training 
     expenses. However, a deduction for education expenses 
     generally is allowed under section 162 if the education or 
     training (1) maintains or improves a skill required in a 
     trade or business currently engaged in by the taxpayer, or 
     (2) meets the express requirements of the taxpayer's 
     employer, or requirements of applicable law or regulations, 
     imposed as a condition of continued employment (Treas. Reg. 
     sec. 1.162-5). However, education expenses are not deductible 
     if they relate to certain minimum educational requirements or 
     to education or training that enables a taxpayer to begin 
     working in a new trade or business. In the case of an 
     employee, education expenses (if not reimbursed by the 
     employer) may be claimed as an itemized deduction only if 
     such expenses meet the above- described criteria for 
     deductibility under section 162 and only to the extent that 
     the expenses, along with other miscellaneous deductions, 
     exceed 2 percent of the taxpayer's adjusted gross income 
     (AGI).
     Exclusion for employer-provided educational assistance
       A special rule allows an employee to exclude from gross 
     income for income tax purposes and from wages for employment 
     tax purposes up to $5,250 annually paid by his or her 
     employer for educational assistance (sec. 127). In order for 
     the exclusion to apply, certain requirements must be 
     satisfied, including a requirement that not more than 5 
     percent of the amounts paid or incurred by the employer 
     during the year for educational assistance under a qualified 
     educational assistance program can be provided for the class 
     of individuals consisting of more than 5-percent owners of 
     the employer and the spouses or dependents of such more than 
     5-percent owners. This special rule for employer-provided 
     educational assistance expired with respect to courses 
     beginning after June 30, 1997 (and does not apply to graduate 
     level courses beginning after June 30, 1996).
       For purposes of the special exclusion, educational 
     assistance means the payment by an employer of expenses 
     incurred by or on behalf of the employee for education of the 
     employee including, but not limited to, tuition, fees, and 
     similar payments, books, supplies, and equipment. Educational 
     assistance also includes the provision by the employer of 
     courses of instruction for the employee (including books, 
     supplies, and equipment). Educational assistance does not 
     include tools or supplies which may be retained by the 
     employee after completion of a course or meals, lodging, or 
     transportation. The exclusion does not apply to any education 
     involving sports, games, or hobbies.
       In the absence of the special exclusion, employer-provided 
     educational assistance is excludable from gross income and 
     wages as a working condition fringe benefit (sec. 132(d)) 
     only to the extent the education expenses would be deductible 
     under section 162.
     Exclusion for interest earned on savings bonds
       Another special rule (sec. 135) provides that interest 
     earned on a qualified U.S. Series EE savings bond issued 
     after 1989 is excludable from gross income if the proceeds of 
     the bond upon redemption do not exceed qualified higher 
     education expenses paid by the taxpayer during the taxable 
     year.13 ``Qualified higher education expenses'' 
     include tuition and fees (but not room and board expenses) 
     required for the enrollment or attendance of the taxpayer, 
     the taxpayer's spouse, or a dependent of the taxpayer at 
     certain colleges, universities, or vocational schools. The 
     exclusion provided by section 135 is phased out for certain 
     higher-income taxpayers, determined by the taxpayer's

[[Page H6497]]

     modified AGI during the year the bond is redeemed. For 1996, 
     the exclusion was phased out for taxpayers with modified AGI 
     between $49,450 and $64,450 ($74,200 and $104,200 for joint 
     returns). To prevent taxpayers from effectively avoiding the 
     income phaseout limitation through issuance of bonds directly 
     in the child's name, section 135(c)(1)(B) provides that the 
     interest exclusion is available only with respect to U.S. 
     Series EE savings bonds issued to taxpayers who are at least 
     24 years old.
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     \13\ If the aggregate redemption amount (i.e., principal plus 
     interest) of all Series EE bonds redeemed by the taxpayer 
     during the taxable year exceeds the qualified education 
     expenses incurred, then the excludable portion of interest 
     income is based on the ratio that the education expenses 
     bears to the aggregate redemption amount (sec. 135(b)).
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     Qualified scholarships
       Section 117 excludes from gross income amounts received as 
     a qualified scholarship by an individual who is a candidate 
     for a degree and used for tuition and fees required for the 
     enrollment or attendance (or for fees, books, supplies, and 
     equipment required for courses of instruction) at a primary, 
     secondary, or post-secondary educational institution. The 
     tax-free treatment provided by section 117 does not extend to 
     scholarship amounts covering regular living expenses, such as 
     room and board. There is, however, no dollar limitation for 
     the section 117 exclusion, provided that the scholarship 
     funds are used to pay for tuition and required fees. In 
     addition to the exclusion for qualified scholarships, section 
     117 provides an exclusion from gross income for qualified 
     tuition reductions for education below the graduate level 
     provided to employees (and their spouses and dependents) of 
     certain educational organizations.14 Section 
     117(c) specifically provides that the exclusion for qualified 
     scholarships and qualified tuition reductions does not apply 
     to any amount received by a student that represents payment 
     for teaching, research, or other services by the student 
     required as a condition for receiving the scholarship or 
     tuition reduction.
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     \14\ A special rule provides that qualified tuition 
     reductions under section 117(d) may be provided for graduate-
     level courses in cases of graduate students who are engaged 
     in teaching or research activities for the educational 
     organization (sec. 117(d)(5)).
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     Student loan forgiveness
       In the case of an individual, section 108(f) provides that 
     gross income subject to Federal income tax does not include 
     any amount from the forgiveness (in whole or in part) of 
     certain student loans, provided that the forgiveness is 
     contingent on the student's working for a certain period of 
     time in certain professions for any of a broad class of 
     employers (e.g., providing health care services to a 
     nonprofit organization). Student loans eligible for this 
     special rule must be made to an individual to assist the 
     individual in attending an education institution that 
     normally maintains a regular faculty and curriculum and 
     normally has a regularly enrolled body of students in 
     attendance at the place where its education activities are 
     regularly carried on. Loan proceeds may be used not only for 
     tuition and required fees, but also to cover room and board 
     expenses (in contrast to tax-free scholarships under section 
     117, which are limited to tuition and required fees). In 
     addition, the loan must be made by (1) the United States (or 
     an instrumentality or agency thereof), (2) a State (or any 
     political subdivision thereof), (3) certain tax-exempt public 
     benefit corporations that control a State, county, or 
     municipal hospital and whose employees have been deemed to be 
     public employees under State law, or (4) an educational 
     organization that originally received the funds from which 
     the loan was made from the United States, a State, or a tax-
     exempt public benefit corporation. Thus, loans made with 
     private, nongovernmental funds are not qualifying student 
     loans for purposes of the section 108(f) exclusion. As with 
     section 117, there is no dollar limitation for the section 
     108(f) exclusion.
     Qualified State prepaid tuition programs
       Section 529 (enacted as part of the Small Business Job 
     Protection Act of 1996) provides tax-exempt status to 
     ``qualified State tuition programs,'' meaning certain 
     programs established and maintained by a State (or agency or 
     instrumentality thereof) under which persons may (1) purchase 
     tuition credits or certificates on behalf of a designated 
     beneficiary that entitle the beneficiary to a waiver or 
     payment of qualified higher education expenses of the 
     beneficiary, or (2) make contributions to an account that is 
     established for the purpose of meeting qualified higher 
     education expenses of the designated beneficiary of the 
     account. ``Qualified higher education expenses'' are defined 
     as tuition, fees, books, supplies, and equipment required for 
     the enrollment or attendance at a college or university (or 
     certain vocational schools). Qualified higher education 
     expenses do not include room and board expenses. Section 529 
     also provides that no amount shall be included in the gross 
     income of a contributor to, or beneficiary of, a qualified 
     State tuition program with respect to any distribution from, 
     or earnings under, such program, except that (1) amounts 
     distributed or educational benefits provided to a beneficiary 
     (e.g., when the beneficiary attends college) will be included 
     in the beneficiary's gross income (unless excludable under 
     another Code section) to the extent such amounts or the value 
     of the educational benefits exceed contributions made on 
     behalf of the beneficiary, and (2) amounts distributed to a 
     contributor (e.g., when a parent receives a refund) will be 
     included in the contributor's gross income to the extent such 
     amounts exceed contributions made by that 
     person.15
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     \15\ Specifically, section 529(c)(3)(A) provides that any 
     distribution under a qualified State tuition program shall be 
     includible in the gross income of the distributee in the same 
     manner as provided under present-law section 72 to the extent 
     not excluded from gross income under any other provision of 
     the Code.
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     Estate and gift tax rules
       In general, a taxpayer may exclude $10,000 of gifts made by 
     an individual ($20,000 in the case of a married couple that 
     elects to split their gifts) to any one donee during a 
     calendar year (sec. 2503(b)). This annual exclusion does not 
     apply to gifts of future interests, and thus may not be 
     applicable to contributions made to a State tuition program.
       Contributions made to a qualified State tuition program are 
     treated as incomplete gifts for Federal gift tax purposes 
     (sec. 529(c)(2)). Thus, any Federal gift tax consequences are 
     determined at the time that a distribution is made from an 
     account under the program. The waiver (or payment) of 
     qualified higher education expenses of a designated 
     beneficiary by (or to) an educational institution under a 
     qualified State tuition program is treated as a qualified 
     transfer for purposes of present-law section 2503(e). Amounts 
     contributed to a qualified State tuition program (and 
     earnings thereon) are includible in the contributor's 
     estate for Federal estate tax purposes in the event that 
     the contributor dies before such amounts are distributed 
     under the program (sec. 529(c)(4)).
     Individual retirement arrangements (``IRAs'')
       An individual may make deductible contributions to an 
     individual retirement arrangement (``IRA'') for each taxable 
     year up to the lesser of $2,000 or the amount of the 
     individual's compensation for the year if the individual is 
     not an active participant in an employer-sponsored qualified 
     retirement plan (and, if married, the individual's spouse 
     also is not an active participant). Contributions may be made 
     to an IRA for a taxable year up to April 15th of the 
     following year. An individual who makes excess contributions 
     to an IRA, i.e., contributions in excess of $2,000, is 
     subject to an excise tax on such excess contributions unless 
     they are distributed from the IRA before the due date for 
     filing the individual's tax return for the year (including 
     extensions). If the individual (or his or her spouse, if 
     married) is an active participant, the $2,000 limit is phased 
     out between $40,000 and $50,000 of adjusted gross income 
     (``AGI'') for married couples and between $25,000 and $35,000 
     of AGI for single individuals.
       Present law permits individuals to make nondeductible 
     contributions (up to $2,000 per year) to an IRA to the extent 
     an individual is not permitted to (or does not) make 
     deductible contributions. Earnings on such contributions are 
     includible in gross income when withdrawn.
       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. Amounts 
     withdrawn from an IRA are includible in gross income (except 
     to the extent of nondeductible contributions). In addition, a 
     10-percent additional tax generally applies to distributions 
     from IRAs made before age 59\1/2\, unless the distribution is 
     made (1) on account of death or disability, (2) in the form 
     of annuity payments, (3) for medical expenses of the 
     individual and his or her spouse and dependents that exceed 
     7.5 percent of AGI, or (4) for medical insurance of the 
     individual and his or her spouse and dependents (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.

                               House Bill

     In general
       Individual taxpayers are allowed a deduction of up to 
     $10,000 per student per year for qualified higher education 
     expenses paid by the taxpayer during the taxable year for 
     education furnished to the taxpayer, the taxpayer's spouse, 
     or a dependent. The deduction is allowed regardless of 
     whether the taxpayer otherwise itemizes deductions or claims 
     the standard deduction.16 A deduction is not 
     allowed under the House bill with respect to an otherwise 
     eligible student if the HOPE credit (as described previously) 
     is claimed with respect to that student for the same taxable 
     year.17
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     \16\ The deduction will be claimed after a taxpayer computes 
     adjusted gross income (AGI). The deduction is not a 
     preference item for alternative minimum tax (AMT) purposes.
     \17\ If a HOPE credit was claimed with respect to a student 
     for an earlier taxable year (i.e., the student's first or 
     second year of post-secondary education), the deduction 
     provided for by the House bill may be claimed with respect to 
     that student for a subsequent taxable year.
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        The deduction is allowed only to the extent that the 
     taxpayer is required to include in gross income for the 
     taxable year amounts distributed from a ``qualified tuition 
     program'' or ``education investment account.'' In other 
     words, amounts distributed from a qualified tuition program 
     or education investment account that are includible in the 
     taxpayer's gross income (i.e., earnings) and that are used to 
     pay for qualified higher education expenses during the 
     taxable year will be deductible under the provision (subject 
     to a $10,000 annual limit per student). Amounts distributed 
     from qualified tuition programs or education investment 
     accounts generally will be includible in the gross income of 
     the distributee in the same manner as provided under present-
     law section 72 (to the extent not excluded under any other 
     section, such as section 117).

[[Page H6498]]

       Under the House bill, the deduction is limited to $10,000 
     per student for each taxable year. Aggregate deductions under 
     the bill with respect to any one student may not exceed 
     $40,000 for all taxable years. A deduction is not permitted 
     with respect to a student after he or she completes the 
     equivalent of the first four years of post-secondary 
     education at an eligible educational institution.
     Dependent students
       If a parent (or other taxpayer) claims a student as a 
     dependent for a taxable year, then only the parent (or other 
     taxpayer)--and not the student--may claim the deduction for 
     qualified higher education expenses for that taxable year. In 
     such a case where the parent claims the proposed deduction 
     for qualified higher education expenses, amounts includible 
     in gross income by reason of a distribution from a qualified 
     tuition program or education investment account will be 
     includible in the parent's (or other taxpayer's) gross income 
     for that taxable year.18 If a parent (or other 
     taxpayer) claims a student as a dependent for a taxable year, 
     then all qualified higher education expenses paid that year 
     by both the parent (or other taxpayer) and the student are 
     deemed to be paid by the parent (or other taxpayer). If the 
     student is not claimed as a dependent by another taxpayer, 
     then only the student him- or herself may claim the deduction 
     provided for by the bill (or, as an alternative, the HOPE 
     credit described above) on the student's own tax return for 
     the taxable year.19
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     \18\ Such an income inclusion is required on the parent's 
     return only if the parent both claims the student as a 
     dependent and elects the deduction provided for by the bill. 
     In contrast, if the parent claims the student as a dependent 
     but elects the HOPE credit, then, if there is any 
     distribution from a qualified tuition program or education 
     investment account during that year, the earnings portion of 
     such distributions will be includible in the student's (or 
     other distributee's) gross income, as provided for by 
     present-law section 529(c)(3).
     \19\ For example, assume an education investment account (or 
     qualified tuition program account) has a balance of $20,000, 
     of which $12,000 represents contributions of principal and 
     $8,000 represents accumulated earnings. If the student has 
     expenses of $10,000 consisting of $7,000 tuition and related 
     expenses and $3,000 in room and board, a distribution of 
     $10,000 from such account to pay these expenses will, under 
     present-law section 72, be deemed to consist of the pro-rata 
     share of principal and accumulated earnings in the account--
     in this case, $6,000 in principal and $4,000 in accumulated 
     earnings. If the parent claims the student as a dependent and 
     elects the proposed deduction for qualified higher education 
     expenses, the parent will include the $4,000 of accumulated 
     earnings in the parent's gross income and then is allowed to 
     claim an offsetting deduction for the same $4,000, thus 
     resulting in no tax liability for the $4,000 in earnings. 
     Under no circumstances will the principal portion of any 
     distribution from the account be includible in gross income, 
     nor will a deduction be allowed under the bill for education 
     expenses paid with such principal. Alternatively, the parent 
     may elect to claim the HOPE credit (assuming that the AGI 
     phaseout does not apply and the student is claimed as a 
     dependent and has not yet completed the first two years of 
     post-secondary education), and the $4,000 in accumulated 
     earnings will be includible in the distributee's (i.e., the 
     student's) gross income and an offsetting deduction will not 
     be available. Additionally, the qualified expenses for 
     purposes of the HOPE credit will not include room and board 
     expenses, so only $7,000 in expenses will qualify for the 
     HOPE credit. The 50-percent HOPE credit rate will then be 
     applied to this amount, which indicates a credit amount of 
     $3,500, but the credit that could be claimed will be limited 
     to the statutory maximum of $1,500 per student. As a final 
     alternative, if the parent does not claim the student as a 
     dependent, then the student may elect to claim either the 
     HOPE credit or the deduction as described above.
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     Qualified higher education expenses
       Under the House bill, the term ``qualified higher education 
     expenses'' means tuition, fees, books, supplies, and 
     equipment required for the enrollment or attendance of a 
     student at an eligible education institution, as well as room 
     and board expenses (meaning the minimum room and board 
     allowance applicable to the student as determined by the 
     institution in calculating costs of attendance for Federal 
     financial aid programs under sec. 472 of the Higher Education 
     Act of 1965). Qualified higher education expenses do not 
     include expenses for any graduate level course of a kind 
     normally taken by an individual pursuing a program leading to 
     a law, business, medical, or other advanced academic or 
     professional degree.
       Qualified higher education expenses generally include only 
     out-of-pocket expenses. Qualified higher education expenses 
     do not include expenses covered by educational assistance 
     that is not required to be included in the gross income of 
     either the student or the taxpayer claiming the credit. Thus, 
     total qualified higher education expenses are reduced by any 
     scholarship or fellowship grants excludable from gross income 
     under present-law section 117 and any other tax-free 
     educational benefits received by the student during the 
     taxable year. In addition, no deduction is allowed under the 
     bill for expenses paid with amounts that are excludible under 
     section 135. No reduction of qualified tuition expenses is 
     required for a gift, bequest, devise, or inheritance within 
     the meaning of section 102(a). If a student's education 
     expenses for a taxable year are deducted under section 162 or 
     any other section of the Code, then no deduction is available 
     for such expenses under the bill.
     Eligible students
       To be eligible for the deduction provided for by the bill, 
     a student must be at least a half-time student in a degree or 
     certificate program at an eligible educational institution. 
     For this purpose, a student is at least a half-time student 
     if, during at least one academic period which begins during 
     the taxable year, he or she is carrying at least one-half the 
     normal full-time work load for the course of study the 
     student is pursuing. A student will no longer be an eligible 
     student once he or she has completed the equivalent of the 
     first four years of post-secondary education at an eligible 
     educational institution. An eligible student may not have 
     been convicted of a Federal or State felony consisting of the 
     possession or distribution of a controlled substance.
     Eligible educational institution
       Eligible educational institutions are defined by reference 
     to section 481 of the Higher Education Act of 1965. Such 
     institutions generally are accredited post-secondary 
     educational institutions offering credit toward a bachelor's 
     degree, an associate's degree, or another recognized post-
     secondary credential. Certain proprietary institutions and 
     post-secondary vocational institutions also are eligible 
     educational institutions. The institution must be eligible to 
     participate in Department of Education student aid programs.
     Qualified tuition programs and education investment accounts
       Under the House bill, a ``qualified tuition program'' means 
     any qualified State tuition program, generally as defined 
     under present-law section 529, as well as any program 
     established and maintained by one or more eligible 
     educational institutions (which may be private institutions 
     that are not State-owned) that satisfy the requirements under 
     section 529 (other than present-law, State ownership rule). 
     An ``education investment account'' means a trust which is 
     created or organized in the United States exclusively for the 
     purpose of paying the qualified higher education expenses of 
     the account holder and which satisfies certain other 
     requirements.
       Contributions to qualified tuition programs or education 
     investment accounts may be made only in cash.20 
     Such contributions may not be made after the designated 
     beneficiary or account holder reaches age 18. Any balance 
     remaining in a qualified tuition program or education 
     investment account must be distributed within 30 days after 
     the earlier of the date that the beneficiary or account 
     holder becomes 30 years old (or dies) or the date that the 
     beneficiary or account holder completes the equivalent of the 
     first four years of post-secondary education at one or more 
     eligible institutions. Transfers or rollovers of credits or 
     account balances from one account benefiting one beneficiary 
     to another account benefiting another beneficiary will not be 
     considered a distribution from a qualified tuition program or 
     education investment account (nor will a change in the 
     designated beneficiary or account holder) if the new 
     beneficiary is a member of the family of the old 
     beneficiary.21 In the case of an education 
     investment account or qualified tuition program maintained by 
     one or more private educational institutions, contributions 
     to an account established on behalf of a particular 
     beneficiary (or to a program on behalf of a named 
     beneficiary) may not exceed $5,000 per year, with an 
     aggregate limit of $50,000 for contributions on behalf of 
     that beneficiary for all years. The $50,000 aggregate 
     contribution limit per beneficiary is applied by taking into 
     account all amounts contributed to all education investment 
     accounts for the beneficiary for the current taxable year and 
     all prior taxable years, as well as all amounts contributed 
     to all qualified tuition programs on behalf of such 
     beneficiary for the current taxable year and all prior 
     taxable years.22
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     \20\ The House bill allows taxpayers to redeem U.S. Savings 
     Bonds and be eligible for the exclusion under section 135 (as 
     if the proceeds were used to pay qualified higher education 
     expenses) if the proceeds from the redemption are contributed 
     to a qualified tuition program or education investment 
     account on behalf of the taxpayer, the taxpayer's spouse, or 
     a dependent. In such a case, the beneficiary's or account 
     holder's basis in the bond proceeds contributed on his or her 
     behalf to the qualified tuition program or education 
     investment will be the contributor's basis in the bonds 
     (i.e., the original purchase price paid by the contributor 
     for such bonds).
     The House bill also provides that funds from an education 
     investment account are deemed to be distributed to pay 
     qualified higher education expenses if the funds are used to 
     purchase tuition credits from, or to make contributions to, a 
     qualified tuition program for the benefit of the account 
     holder.
     \21\ For this purpose, a ``member of the family'' means 
     persons described in paragraphs (1) through (8) of section 
     152(a), and any spouse of such persons.
     \22\ To the extent contributions exceed the $50,000 aggregate 
     limit, an excise tax penalty may be imposed on the 
     contributor under present-law section 4973, unless the excess 
     contributions (and any earnings thereon) are returned to the 
     contributor before the due date for the return for the 
     taxable year during which the excess contribution is made.
     State-sponsored qualified tuition programs will continue to 
     be governed by the rule contained in present-law section 
     529(b)(7) that such programs provide adequate safeguards to 
     prevent contributions on behalf of a designated beneficiary 
     in excess of those necessary to provide for the qualified 
     higher education expenses of the beneficiary. State-sponsored 
     qualified tuition programs will not be subject to a specific 
     dollar cap under section 529 on annual (or aggregate) 
     contributions that can be made under the program on behalf of 
     a named beneficiary.
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       Qualified tuition programs and education investment 
     accounts (as separate legal entities) will be exempt from 
     Federal income tax, other than taxes imposed under the 
     present-law unrelated business income tax (UBIT) 
     rules.23
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     \23\ An interest in a qualified tuition program is not 
     treated as debt for purposes of the debt-financed property 
     UBIT rules of section 514.
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       Under the House bill, an additional tax of 10 percent will 
     be imposed on distributions

[[Page H6499]]

     from qualified tuition programs or education investment 
     account to the extent the distribution exceeds qualified 
     higher education expenses paid by the taxpayer (and is not 
     made on account of the death, disability, or scholarship 
     received by the designated beneficiary or account holder).
     Estate and gift tax treatment
       For Federal estate and gift tax purposes, any contribution 
     to a qualified tuition program or education investment 
     account will be treated as a completed gift of a present 
     interest from the contributor to the beneficiary at the time 
     of the contribution. Thus, annual contributions--which cannot 
     exceed $5,000 per year in the case of an education investment 
     account or qualified tuition program maintained by one or 
     more private education institutions--will be eligible for the 
     present-law gift tax exclusion provided by Code section 
     2503(b) and also will be excludable for purposes of the 
     generation-skipping transfer tax (provided that the 
     contribution, when combined with any other contributions made 
     by the donor to that same beneficiary, does not exceed the 
     annual $10,000 gift-tax exclusion limit). Similar gift tax 
     and generation-skipping tax treatment will apply to 
     contributions of up to $10,000 per donor per beneficiary made 
     to a State-sponsored qualified tuition program. Contributions 
     to a qualified tuition program (either a State-sponsored 
     program or one maintained by a private education institution) 
     or to an education investment account will not, however, be 
     eligible for the educational expense exclusion provided by 
     Code section 2503(e). In no event will a distribution from a 
     qualified tuition program or education investment account be 
     treated as a taxable gift.
       Transfers or rollovers of credits or account balances from 
     an account benefiting one beneficiary to an account 
     benefiting another beneficiary (or a change in the designated 
     beneficiary) will not be treated as a taxable gift to the 
     extent that the new beneficiary is: (1) a member of the 
     family of the old beneficiary (as defined above), and (2) 
     assigned to the same generation as the old beneficiary 
     (within the meaning of Code section 2651). In all other 
     cases, a transfer from one beneficiary to another beneficiary 
     (or a change in the designated beneficiary) will be treated 
     as a taxable gift from the old beneficiary to the new 
     beneficiary to the extent it exceeds the $10,000 present-law 
     gift tax exclusion. Thus, a transfer of an account from a 
     brother to his sister will not be treated as a taxable gift, 
     whereas a transfer from a father to his son will be treated 
     as a taxable gift (to the extent it exceeds the $10,000 
     present-law gift tax exclusion).
       For estate tax purposes, the value of any interest in a 
     qualified tuition program or education investment account 
     will be includible in the estate of the designated 
     beneficiary. In no event will such interests be includible in 
     the estate of the contributor.
     Effective date
       The deduction for qualified higher education expenses, and 
     the expansion of the definition of qualified higher education 
     expenses under section 529 to cover room and board expenses, 
     are effective for expenses paid after December 31, 1997, for 
     education furnished in academic periods beginning after such 
     date. The provisions governing the tax-exempt status of 
     qualified tuition plans and education investment accounts 
     generally are effective after December 31, 1997. The gift tax 
     provisions are effective for contributions (or transfers) 
     made after the date of enactment, and the estate tax 
     provisions are effective for decedents dying after June 8, 
     1997.

                            Senate Amendment

     In general
       Under the Senate amendment, amounts distributed from 
     qualified tuition programs and certain education investment 
     accounts (referred to as ``education IRAs'') are excludable 
     from gross income to the extent that the amounts distributed 
     do not exceed qualified higher education expenses of an 
     eligible student incurred during the year the distribution is 
     made.24 In addition, distributions from education 
     IRAs (but not qualified tuition programs) in taxable years 
     beginning in 2001 or later will be excludable from gross 
     income to the extent that the amounts distributed do not 
     exceed certain qualified elementary and secondary education 
     expenses. An exclusion is not allowed under the bill with 
     respect to an otherwise eligible student if the HOPE credit 
     (as described previously) is claimed with respect to that 
     student for the taxable year the distribution is 
     made.25
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     \24\ The exclusion will not be a preference item for 
     alternative minimum tax (AMT) purposes.
     \25\ If a HOPE credit was claimed with respect to a student 
     for an earlier taxable year (i.e., the student's first or 
     second year of post-secondary education), the exclusion 
     provided for by the bill may be claimed with respect to that 
     student for a subsequent taxable year.
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       Distributions from a qualified tuition program or education 
     IRA generally will be deemed to consist of distributions of 
     principal (which, under all circumstances, are excludable 
     from gross income) and earnings (which may be excludable from 
     gross income under the Senate amendment) by applying the 
     ratio that the aggregate amount of contributions to the 
     program or account for the beneficiary bears to the total 
     balance (or value) of the program or account for the 
     beneficiary at the time the distribution is 
     made.26 If the qualified higher education expenses 
     of the student for the year are at least equal to the total 
     amount of the distribution (i.e., principal and earnings 
     combined) from a qualified tuition program or education IRA, 
     then the earnings in their entirety will be excludable from 
     gross income. If, on the other hand, the qualified higher 
     education expenses of the student for the year are less than 
     the total amount of the distribution (i.e., principal and 
     earnings combined) from a qualified tuition program or 
     education IRA, then the qualified higher education expenses 
     will be deemed to be paid from a pro-rata share of both the 
     principal and earnings components of the distribution. Thus, 
     in such a case, only a portion of the earnings will be 
     excludable under the bill (i.e., a portion of the earnings 
     based on the ratio that the qualified higher education 
     expenses bear to the total amount of the distribution) and 
     the remaining portion of the earnings will be includible in 
     the gross income of the distributee.27
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     \26\ Specifically, the Senate amendment provides as a general 
     rule that distributions from a qualified tuition program or 
     education IRA are includible in gross income to the extent 
     allocable to income on the program or account and are not 
     includible in gross income to the extent allocable to the 
     investment (i.e., contributions) in the program or account. 
     However, the Senate amendment further provides that, if the 
     HOPE credit is not claimed with respect to the student for 
     the taxable year, then a distribution from a qualified 
     tuition program or education IRA will not be includible in 
     gross income to the extent that the distribution does not 
     exceed the qualified higher expenses of the student for the 
     year. If a distribution consists of providing in-kind 
     education benefits to the student which, if paid for by the 
     student, would constitute payment of qualified higher 
     education expenses, then no portion of such distribution will 
     be includible in gross income.
     At the time that a final distribution is made from a 
     qualified tuition program or education IRA, the distribution 
     will be deemed to include the full amount of any basis 
     remaining with respect to the program or account.
     \27\ For example, if a $1,000 distribution from a qualified 
     tuition program or education IRA consists of $600 of 
     principal (i.e., contributions) and $400 of earnings, and if 
     the student incurs $750 of qualified higher education 
     expenses during the year, then $300 of the earnings will be 
     excludable from gross income under the bill (i.e., an 
     exclusion will be provided for the pro-rata portion of the 
     earnings, based on the ratio that the $750 of qualified 
     expenses bears to the $1,000 total distribution) and the 
     remaining $100 of earnings will be includible in the 
     distributee's gross income.
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     Eligible students
       To be an eligible student, an individual must be at least a 
     half-time student in a degree or certificate undergraduate or 
     graduate program at an eligible educational institution. For 
     this purpose, a student is at least a half-time student if he 
     or she is carrying at least one-half the normal full-time 
     work load for the course of study the student is pursuing. An 
     eligible student may not have been convicted of a Federal or 
     State felony consisting of the possession or distribution of 
     a controlled substance.
     Eligible educational institution
       Eligible educational institutions are defined by reference 
     to section 481 of the Higher Education Act of 1965. Such 
     institutions generally are accredited post-secondary 
     educational institutions offering credit toward a bachelor's 
     degree, an associate's degree, a graduate-level or 
     professional degree, or another recognized post-secondary 
     credential. Certain proprietary institutions and post-
     secondary vocational institutions also are eligible 
     institutions. The institution must be eligible to participate 
     in Department of Education student aid programs.
     Qualified education expenses
       ``Qualified higher education expenses'' include tuition, 
     fees, books, supplies, and equipment required for the 
     enrollment or attendance of a student at an eligible 
     education institution, as well as room and board expenses 
     (meaning the minimum room and board allowance applicable to 
     the student as determined by the institution in calculating 
     costs of attendance for Federal financial aid programs under 
     sec. 472 of the Higher Education Act of 1965) for any period 
     during which the student is at least a half-time student. 
     Qualified higher education expenses include expenses with 
     respect to undergraduate or graduate-level courses.
       In addition, in taxable years beginning after December 31, 
     2000, the exclusion is available to the extent that 
     distributions from an education IRA (but not a qualified 
     tuition program) do not exceed ``qualified elementary and 
     secondary education expenses,'' meaning tuition, fees, 
     tutoring, special needs services, books, supplies, equipment, 
     transportation, and supplementary expenses (including 
     homeschooling expenses if the requirements of State or local 
     law are satisfied with respect to such homeschooling) 
     required for the enrollment or attendance of a dependent of 
     the taxpayer at a public, private, or sectarian elementary or 
     secondary school (through grade 12).
       Qualified higher education expenses (and qualified 
     elementary and secondary education expenses) generally 
     include only out-of-pocket expenses. Such qualified education 
     expenses do not include expenses covered by educational 
     assistance that is not required to be included in the gross 
     income of either the student or the taxpayer claiming the 
     credit. Thus, total qualified education expenses are reduced 
     by scholarship or fellowship grants excludable from gross 
     income under present-law section 117, as well as any other 
     tax-free educational benefits, such as

[[Page H6500]]

     employer-provided educational assistance that is excludable 
     from the employee's gross income under section 127. In 
     addition, qualified education expenses do not include 
     expenses paid with amounts that are excludible under section 
     135. No reduction of qualified education expenses is required 
     for a gift, bequest, devise, or inheritance within the 
     meaning of section 102(a). If education expenses for a 
     taxable year are deducted under section 162 or any other 
     section of the Code, then such expenses are not qualified 
     education expenses under the Senate amendment.
     Qualified tuition programs and education IRAs
       Under the Senate amendment, a ``qualified tuition program'' 
     means any qualified State- sponsored tuition program, defined 
     under section 529 (as modified by the bill), as well as any 
     program established and maintained by one or more eligible 
     educational institutions (which could be private 
     institutions) that satisfy the requirements under section 529 
     (other than present-law State ownership rule). An ``education 
     IRA'' means a trust (or custodial account) which is created 
     or organized in the United States exclusively for the purpose 
     of paying the qualified higher education expenses (and 
     qualified elementary and secondary education expenses) of the 
     account holder and which satisfies certain other 
     requirements.
       Contributions to qualified tuition programs or education 
     IRAs may be made only in cash. 28 Such 
     contributions may not be made after the designated 
     beneficiary or account holder reaches age 18. Annual 
     contributions to a qualified tuition program not maintained 
     by a State (i.e., a qualified tuition program operated by one 
     or more private schools) or to an education IRA are limited 
     to $2,000 per beneficiary or account holder, plus the amount 
     of any child credit (as provided for by the Senate amendment) 
     that is allowed for the taxable year with respect to the 
     beneficiary or account holder. 29 Thus, in the 
     case of any child with respect to whom the maximum $500 child 
     credit is allowed for the taxable year, the contribution 
     limit with respect to such child for the year will be $2,500. 
     30 Trustees of qualified tuition programs not 
     maintained by a State and trustees of education IRAs are 
     prohibited from accepting contributions to any account on 
     behalf of a beneficiary in excess of $2,500 for any year 
     (except in cases involving certain tax-free rollovers, as 
     described below). 31
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     \28\ The Senate amendment allows taxpayers to redeem U.S. 
     Savings Bonds and be eligible for the exclusion under section 
     135 (as if the proceeds were used to pay qualified higher 
     education expenses) if the proceeds from the redemption are 
     contributed to a qualified tuition program or education IRA 
     on behalf of the taxpayer, the taxpayer's spouse, or a 
     dependent. In such a case, the beneficiary's or account 
     holder's basis in the bond proceeds contributed on his or her 
     behalf to the qualified tuition program or education IRA will 
     be the contributor's basis in the bonds (i.e., the original 
     purchase price paid by the contributor for such bonds).
     The Senate amendment also provides that funds from an 
     education IRA are deemed to be distributed to pay qualified 
     higher education expenses if the funds are used to make 
     contributions to (or purchase tuition credits from) a 
     qualified tuition program for the benefit of the account 
     holder.
     \29\ State-sponsored qualified tuition programs will continue 
     to be governed by the rule contained in present-law section 
     529(b)(7) that such programs provide adequate safeguards to 
     prevent contributions on behalf of a designated beneficiary 
     in excess of those necessary to provide for the qualified 
     higher education expenses of the beneficiary. State-sponsored 
     qualified tuition programs will not be subject to a specific 
     dollar limit on annual contributions that can be made under 
     the program on behalf of a designated beneficiary.
     \30\ The maximum contribution limit for the year is increased 
     even if the child is younger than age 13--that is, even in 
     cases where the parent is not required (under the provision 
     described previously) but may elect to deposit an amount 
     equal to the child credit into a qualified tuition program or 
     education IRA on behalf of the child.
     \31\ The annual $2,000 to $2,500 contribution limit is 
     applied by taking into account all contributions made to any 
     qualified tuition program not maintained by a State and any 
     education IRA on behalf of a designated individual (but not 
     any contributions made to State-sponsored qualified tuition 
     programs). To the extent contributions exceed the annual 
     contribution limit, an excise tax penalty may be imposed on 
     the contributor under present-law section 4973, unless the 
     excess contributions (and any earnings thereon) are returned 
     to the contributor before the due date for the return for the 
     taxable year during which the excess contribution is made.
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        If any balance remaining in an education IRA is not 
     distributed by the time that the account holder becomes 30 
     years old, then the account will be deemed to be an IRA Plus 
     account (as provided for by the bill and described below) 
     established on behalf of the same account holder. 
     32 The Senate amendment allows (but does not 
     require) tax-free transfers or rollovers of account balances 
     from a qualified tuition program to an IRA Plus account when 
     the beneficiary becomes 30 years old, provided that the funds 
     from the qualified tuition program account are deposited in 
     the IRA Plus account within 60 days after being distributed 
     from the qualified tuition program. 33 In 
     addition, the Senate amendment allows tax-free transfers or 
     rollovers of credits or account balances from one qualified 
     tuition program or education IRA account benefiting one 
     beneficiary to another program or account benefiting another 
     beneficiary (as well as redesignations of the named 
     beneficiary), provided that the new beneficiary is a member 
     of the family of the old beneficiary. 34
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     \32\  In such cases, the 5-year holding period applicable to 
     IRA Plus accounts begins with the taxable year in which the 
     education IRA is deemed to be an IRA Plus account.
     \33\  In the event of such a rollover, the 5-year holding 
     period applicable to IRA Plus accounts begins with the 
     taxable year in which the rollover occurs.
     \34\  For this purpose, a ``member of the family'' means 
     persons described in paragraphs (1) through (8) of section 
     152(a), and any spouse of such persons.
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        Qualified tuition programs and education IRAs (as separate 
     legal entities) will be exempt from Federal income tax, other 
     than taxes imposed under the present-law unrelated business 
     income tax (UBIT) rules. 35
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     \35\  An interest in a qualified tuition program is not 
     treated as debt for purposes of the debt-financed property 
     UBIT rules of section 514.
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       Under the Senate amendment, an additional 10-percent 
     penalty tax will be imposed on any distribution from a 
     qualified tuition program not maintained by a State or from 
     an education IRA to the extent that the distribution exceeds 
     qualified higher education expenses (or, in the case of an 
     education IRA, qualified elementary and secondary education 
     expenses) incurred by the taxpayer (and is not made on 
     account of the death, disability, or scholarship received by 
     the designated beneficiary or account holder). 36
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     \36\ Distributions from State-sponsored qualified tuition 
     programs will not be subject to this 10-percent additional 
     penalty tax, but will continue to be governed by the present-
     law section 529(b)(3) rule that the State-sponsored programs 
     themselves are required to impose a ``more than de minimis 
     penalty'' on any refund of earnings not used for qualified 
     higher education expenses (other than in cases where the 
     refund is made on account of death or disability of, or 
     receipt of a scholarship by, the beneficiary).
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     Estate and gift tax treatment
       Contributions to qualified tuition programs and education 
     IRAs will not be considered taxable gifts for Federal gift 
     tax purposes, and in no event will distributions from a 
     qualified tuition programs or education IRAs be treated as 
     taxable gifts. 37 For estate tax purposes, the 
     value of any interest in a qualified tuition program or 
     education IRA will be includible in the estate of the 
     designated beneficiary. In no event will such an interest be 
     includible in the estate of the contributor.
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     \37\ Contributions to only one State-sponsored qualified 
     tuition program per beneficiary will be excluded from the 
     gift tax by reason of the bill (although a contributor may 
     also make contributions excluded from the gift tax on behalf 
     of other beneficiaries to the same State-sponsored program or 
     any other State-sponsored program).
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     Effective date
       The provision applies to distributions made, and qualified 
     higher education expenses paid, after December 31, 1997, for 
     education furnished in academic periods beginning after such 
     date. In addition, in the case of education IRAs, the 
     provision applies to qualified elementary and secondary 
     expenses paid in taxable years beginning after December 31, 
     2000. The provisions governing contributions to, and the tax-
     exempt status of, qualified tuition plans and education IRAs 
     generally apply after December 31, 1997. The gift tax 
     provisions are effective for contributions (or transfers) 
     made after the date of enactment, and the estate tax 
     provisions are effective for decedents dying after June 8, 
     1997.

                          Conference Agreement

     Qualified State tuition programs
       The conference agreement makes the following modifications 
     to present-law section 529, which governs the tax treatment 
     of qualified State tuition programs.
       Room and board expenses.--The conference agreement expands 
     the definition of ``qualified higher education expenses'' 
     under section 529(e)(3) to include room and board expenses 
     (meaning the minimum room and board allowance applicable to 
     the student as determined by the institution in calculating 
     costs of attendance for Federal financial aid programs under 
     sec. 472 of the Higher Education Act of 1965) for any period 
     during which the student is at least a half-time student.
       Eligible educational institution.--The conference agreement 
     expands the definition of ``eligible educational 
     institution'' for purposes of section 529 by defining such 
     term by reference to section 481 of the Higher Education Act 
     of 1965. Such institutions generally are accredited post-
     secondary educational institutions offering credit toward a 
     bachelor's degree, an associate's degree, a graduate-level or 
     professional degree, or another recognized post-secondary 
     credential. Certain proprietary institutions and post-
     secondary vocational institutions also are eligible 
     institutions. The institution must be eligible to participate 
     in Department of Education student aid programs.
       Definition of ``member of family''.--The conference 
     agreement expands the definition of the term ``member of the 
     family'' for purposes of allowing tax-free transfers or 
     rollovers of credits or account balances in qualified State 
     tuition programs (and redesignations of named beneficiaries), 
     so that the term means persons described in paragraphs (1) 
     through (8) of section 152(a)--e.g., sons, daughters, 
     brothers, sisters, nephews and nieces, certain in-laws, 
     etc.--and any spouse of such persons. 38
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     \38\ The conference agreement also provides a special rule 
     that, in the case of any contract issued prior to August 20, 
     1996 (i.e., the date of enactment of section 529), section 
     529(c)(3)(C) will be applied without regard to the 
     requirement that a distribution be transferred to a member of 
     the family or the requirement that a change in beneficiaries 
     may be made only to a member of the family.
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       Prohibition against investment direction.--The conference 
     clarifies the present-law rule

[[Page H6501]]

     contained in section 529(b)(5) that qualified State tuition 
     programs may not allow contributors or designated 
     beneficiaries to direct the investment of contributions to 
     the program (or earnings thereon) by specifically providing 
     that contributors and beneficiaries may not ``directly or 
     indirectly'' direct the investment of contributions to the 
     program (or earnings thereon).
       Interaction with HOPE credit and Lifetime Learning 
     credit.--Under the conference agreement (as under present 
     law), no amount will be includible in the gross income of a 
     contributor to, or beneficiary of, a qualified State tuition 
     program with respect to any contribution to or earnings on 
     such a program until a distribution is made from the program, 
     at which time the earnings portion of the distribution 
     (whether made in cash or in-kind) will be includible in the 
     gross income of the distributee. However, to the extent that 
     a distribution from a qualified State tuition program is used 
     to pay for qualified tuition and fees, the distributee (or 
     another taxpayer claiming the distributee as a dependent) 
     will be able to claim the HOPE credit or Lifetime Learning 
     credit provided for by the conference agreement with respect 
     to such tuition and fees (assuming that the other 
     requirements for claiming the HOPE credit or Lifetime 
     Learning credit are satisfied and the modified AGI phaseout 
     for those credits does not apply).39
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     \39\ In cases where in-kind benefits are provided to a 
     beneficiary under a qualified State prepaid tuition program, 
     present-law section 529(c)(3)(B) provides that the provision 
     of such benefits is treated as a distribution to the 
     beneficiary. Thus, to the extent such in-kind benefits, if 
     paid for by the beneficiary, would constitute payment of 
     qualified tuition and fees for purposes of the HOPE credit or 
     Lifetime Learning credit, the beneficiary (or another 
     taxpayer claiming the beneficiary as a dependent) may be able 
     to claim the HOPE credit or Lifetime Learning credit with 
     respect to payments that are deemed to be made by the 
     beneficiary with respect to the in-kind benefit.
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       Effective date.--The modifications to section 529 generally 
     are effective after December 31, 1997. The expansion of the 
     term ``qualified higher education expenses'' to cover certain 
     room and board expenses is effective as if included in the 
     Small Business Job Protection Act of 1996 (enacted on August 
     20, 1996).
     Education IRAs
       The conference agreement generally follows the Senate 
     amendment with respect to the treatment of education IRAs, 
     with the following modifications.
       Contribution limit.--Under the conference agreement, annual 
     contributions to education IRAs are limited to $500 per 
     beneficiary. This $500 annual contribution limit for 
     education IRAs is phased out ratably for contributors with 
     modified AGI between $95,000 and $110,000 ($150,000 and 
     $160,000 for joint returns). Individuals with modified AGI 
     above the phase-out range are not allowed to make 
     contributions to an education IRA established on behalf of 
     any other individual.40
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     \40\ The conference agreement clarifies that no amount is 
     includible in the gross income of a beneficiary of an 
     education IRA with respect to any contribution to or earnings 
     on such account.
---------------------------------------------------------------------------
       Qualified expenses.--Education IRAs must be created 
     exclusively for the purpose of paying qualified higher 
     education expenses, meaning post-secondary tuition, fees, 
     books, supplies, equipment, and certain room and board 
     expenses, and not including elementary or secondary school 
     expenses.
       Expansion of exclusion for part-time students.--The 
     conference agreement provides that distributions from an 
     education IRA are excludable from gross income to the extent 
     that the distribution does not exceed qualified higher 
     education expenses incurred by the beneficiary during the 
     year the distribution is made, regardless of whether the 
     beneficiary is enrolled at an eligible educational 
     institution on a full-time, half-time, or less than half-
     time basis. However, room and board expenses (meaning the 
     minimum room and board allowance applicable to the student 
     as determined by the institution in calculating costs of 
     attendance for Federal financial aid programs under sec. 
     472 of the Higher Education Act of 1965) are qualified 
     higher education expenses only if the student incurring 
     such expenses is enrolled at an eligible educational 
     institution on at least a half-time basis.
       Termination of education IRAs.--Under the conference 
     agreement, any balance remaining in an education IRA at the 
     time a beneficiary becomes 30 years old must be distributed, 
     and the earnings portion of such a distribution will be 
     includible in gross income of the beneficiary and subject to 
     an additional 10-percent penalty tax because the distribution 
     was not for educational purposes. However, as under the 
     Senate amendment, prior to the beneficiary reaching age 30, 
     the conference agreement allows tax-free (and penalty-free) 
     transfers and rollovers of account balances from one 
     education IRA benefiting one beneficiary to another education 
     IRA benefiting a different beneficiary (as well as 
     redesignations of the named beneficiary), provided that the 
     new beneficiary is a member of the family of the old 
     beneficiary. 41
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     \41\ For this purpose, a ``member of the family'' means--as 
     under the conference agreement modifications to section 529--
     persons described in paragraphs (1) through (8) of section 
     152(a), and any spouse of such persons.
---------------------------------------------------------------------------
       Interaction with qualified State tuition programs.--The 
     conference agreement provides that no contribution may be 
     made by any person to an education IRA established on behalf 
     of a beneficiary during any taxable year in which any 
     contributions are made by anyone to a qualified State tuition 
     program (defined under sec. 529) on behalf of the same 
     beneficiary.
       Interaction with HOPE credit and Lifetime Learning 
     credit.--The conference agreement provides that, in any 
     taxable year in which an exclusion from gross income is 
     claimed with respect to a distribution from an education IRA 
     on behalf of a beneficiary, neither a HOPE credit nor a 
     Lifetime Learning credit may be claimed with respect to 
     educational expenses incurred during that year on behalf of 
     the same beneficiary. The HOPE credit or Lifetime Learning 
     credit will be available in other taxable years with respect 
     to that beneficiary (provided that no exclusion is claimed in 
     such other taxable years for distributions from an education 
     IRA on behalf of the beneficiary and provided that the 
     requirements of the HOPE credit or Lifetime Learning credit 
     are satisfied in such other taxable years).
       Effective date.--The provisions governing education IRAs 
     apply to taxable years beginning after December 31, 1997.
     Estate and gift tax treatment
       The conference agreement follows the House bill with 
     respect to the estate and gift tax treatment of contributions 
     to qualified State tuition programs and education IRAs, 
     except that a special rule is provided in the case of 
     contributions that exceed the annual gift tax exclusion limit 
     (presently $10,000 in the case of an individual or $20,000 in 
     the case of a married couple that splits their gifts, but 
     this amount is scheduled to increase under other provisions 
     of the conference agreement). For such contributions, the 
     contributor may elect to have the contribution treated as if 
     made ratably over a five-year period.
       Thus, for Federal estate and gift tax purposes, any 
     contribution to a qualified tuition program or education IRA 
     will be treated as a completed gift of a present interest 
     from the contributor to the beneficiary at the time of the 
     contribution. Annual contributions are eligible for the 
     present-law gift tax exclusion provided by Code section 
     2503(b) and also are excludable for purposes of the 
     generation-skipping transfer tax (provided that the 
     contribution, when combined with any other contributions made 
     by the donor to that same beneficiary, does not exceed the 
     annual gift-tax exclusion limit of $10,000, or $20,000 in the 
     case of a married couple).
       If a contribution in excess of $10,000 ($20,000 in the case 
     of a married couple) is made in one year--which, under the 
     conference agreement, can occur only in the case of a 
     qualified State tuition program and not an education IRA 
     (which cannot receive contributions in excess of $500 per 
     year)--the contributor may elect to have the contribution 
     treated as if made ratably over five years beginning in the 
     year the contribution is made. For example, a $30,000 
     contribution to a qualified State tuition program would be 
     treated as five annual contributions of $6,000, and the donor 
     could therefore make up to $4,000 in other transfers to the 
     beneficiary each year without payment of gift tax. Under this 
     rule, a donor may contribute up to $50,000 every five years 
     ($100,000 in the case of a married couple) with no gift tax 
     consequences, assuming no other gifts are made from the donor 
     to the beneficiary in the five-year period. A gift tax return 
     must be filed with respect to any contribution in excess of 
     the annual gift-tax exclusion limit, and the election for 
     five-year averaging must be made on the contributor's gift 
     tax return.
       If a donor making an over-$10,000 contribution dies during 
     the five-year averaging period, the portion of the 
     contribution that has not been allocated to the years prior 
     to death is includible in the donor's estate. For example, if 
     a donor makes a $40,000 contribution, elects to treat the 
     transfer as being made over a five-year period, and dies the 
     following year, $8,000 would be allocated to the year of 
     contribution, another $8,000 would be allocated to the year 
     of death, and the remaining $24,000 would be includible in 
     the estate.
       If a beneficiary's interest is rolled over to another 
     beneficiary, there are no transfer tax consequences if the 
     two beneficiaries are in the same generation. If a 
     beneficiary's interest is rolled over to a beneficiary in a 
     lower generation (e.g., parent to child or uncle to niece), 
     the five-year averaging rule described above may be applied 
     to exempt up to $50,000 of the transfer from gift tax.
       The Federal estate and gift tax treatment of educational 
     accounts has no effect on the actual rights and obligations 
     of the parties pursuant to the terms of the contracts under 
     State law.
       Effective date.--The gift tax provisions are effective for 
     contributions (or transfers) made after the date of 
     enactment, and the estate tax provisions are effective for 
     decedents dying after June 8, 1997.
     3. Phase out qualified tuition reduction exclusion (sec. 
         202(c) of the House bill)

                              Present Law

       Under present law, a ``qualified tuition reduction'' is 
     excluded from gross income (sec. 117(d)). A ``qualified 
     tuition reduction'' means any reduction in tuition provided 
     to an employee of an educational organization for the 
     education of the employee,42 the employee's 
     spouse, and dependent children at

[[Page H6502]]

     that organization or another such organization. For this 
     purpose, qualifying educational organizations are those that 
     normally maintain a regular faculty and curriculum and 
     normally have a regularly enrolled body of pupils or students 
     in attendance at the place where the educational activities 
     are regularly carried out. In general, the qualified tuition 
     reduction is limited to education below the graduate level; 
     however, this limitation does not apply to graduate students 
     engaged in teaching or research activities. The exclusion 
     does not apply to any amount that represents payment for 
     teaching, research, or other services rendered by the student 
     in exchange for receiving the tuition reduction.
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     \42\ Eligible beneficiaries also include retired and disabled 
     employees, surviving spouses of retired or disabled 
     employees, and children of deceased employees if the children 
     are under the age of 25.
---------------------------------------------------------------------------

                               House Bill

       The House bill phases out the special rule contained in 
     section 117(d) that excludes qualified tuition reductions 
     from gross income. For 1998, 80 percent of a qualified 
     tuition reduction is excludable from gross income. For 1999, 
     the excludable percentage is 60 percent; for 2000, the 
     excludable percentage is 40 percent; and for 2001, the 
     excludable percentage is 20 percent. No exclusion for a 
     qualified tuition reduction is permitted after 2001.
       Effective date.--The provision is effective for qualified 
     tuition reductions with respect to courses of instruction 
     beginning after December 31, 1997 (subject to the phaseout 
     described above).

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     4. Deduction for student loan interest (sec. 202 of the 
         Senate amendment)

                              Present Law

       The Tax Reform Act of 1986 repealed the deduction for 
     personal interest. Student loan interest generally is treated 
     as personal interest and thus is not allowable as an itemized 
     deduction from income.
       Taxpayers generally may not deduct education and training 
     expenses. However, a deduction for education expenses 
     generally is allowed under section 162 if the education or 
     training (1) maintains or improves a skill required in a 
     trade or business currently engaged in by the taxpayer, or 
     (2) meets the express requirements of the taxpayer's 
     employer, or requirements of applicable law or regulations, 
     imposed as a condition of continued employment (Treas. Reg. 
     sec. 1.162-5). Education expenses are not deductible if they 
     relate to certain minimum educational requirements or to 
     education or training that enables a taxpayer to begin 
     working in a new trade or business. In the case of an 
     employee, education expenses (if not reimbursed by the 
     employer) may be claimed as an itemized deduction only if 
     such expenses relate to the employee's current job and only 
     to the extent that the expenses, along with other 
     miscellaneous deductions, exceed 2 percent of the taxpayer's 
     adjusted gross income (AGI).

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, certain individuals who have 
     paid interest on qualified education loans may claim an 
     above-the-line deduction for such interest expenses, up to a 
     maximum deduction of $2,500 per year. The deduction is 
     allowed only with respect to interest paid on a qualified 
     education loan during the first 60 months in which interest 
     payments are required. Months during which the qualified 
     education loan is in deferral or forbearance do not count 
     against the 60-month period. No deduction is allowed to an 
     individual if that individual is claimed as a dependent on 
     another taxpayer's return for the taxable year. Beginning in 
     1999, the maximum deduction of $2,500 is indexed for 
     inflation, rounded down to the closest multiple of $50.
       A qualified education loan generally is defined as any 
     indebtedness incurred to pay for the qualified higher 
     education expenses of the taxpayer, the taxpayer's spouse, or 
     any dependent of the taxpayer as of the time the indebtedness 
     was incurred in attending (1) post-secondary educational 
     institutions and certain vocational schools defined by 
     reference to section 481 of the Higher Education Act of 1965, 
     or (2) institutions conducting internship or residency 
     programs leading to a degree or certificate from an 
     institution of higher education, a hospital, or a health care 
     facility conducting postgraduate training. Qualified higher 
     education expenses are 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), reduced by (1) any amount excluded from 
     gross income under section 135 (i.e., United States 
     savings bonds used to pay higher education tuition and 
     fees), (2) any amount distributed from a qualified tuition 
     program or education investment account and excluded from 
     gross income (under the provision described above), and 
     (3) the amount of any scholarship or fellowship grants 
     excludable from gross income under present-law section 
     117, as well as any other tax-free educational benefits, 
     such as employer-provided educational assistance that is 
     excludable from the employee's gross income under section 
     127. Such expenses must be paid or incurred within a 
     reasonable period before or after the indebtedness is 
     incurred, and must be attributable to a period when the 
     student is at least a half-time student.
       The deduction is phased out ratably for taxpayers with 
     modified adjusted gross income (AGI) between $40,000 and 
     $50,000 ($80,000 and $100,000 for joint returns). Modified 
     AGI includes amounts otherwise excluded with respect to 
     income earned abroad (or income from Puerto Rico or U.S. 
     possessions), and is calculated after application of section 
     86 (income inclusion of certain Social Security benefits), 
     section 219 (deductible IRA contributions), and section 469 
     (limitation on passive activity losses and 
     credits).43 Beginning in 2001, the income phase-
     out ranges are indexed for inflation, rounded down to the 
     closest multiple of $5,000.
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     \43\ For purposes of sections 86, 135, 219, and 469, adjusted 
     gross income is determined without regard to the deduction 
     for student loan interest.
---------------------------------------------------------------------------
       Any person in a trade or business or any governmental 
     agency that receives $600 or more in qualified education loan 
     interest from an individual during a calendar year must 
     provide an information report on such interest to the IRS and 
     to the payor.
       Effective date.--The provision is effective for payments of 
     interest due after December 31, 1996, on any qualified 
     education loan. Thus, in the case of already existing 
     qualified education loans, interest payments qualify for the 
     deduction to the extent that the 60-month period has not 
     expired. For purposes of counting the 60 months, any 
     qualified education loan and all refinancing (that is treated 
     as a qualified education loan) of such loan are treated as a 
     single loan.

                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that the maximum deduction is phased in over 4 years, 
     with a $1,000 maximum deduction in 1998, $1,500 in 1999, 
     $2,000 in 2000, and $2,500 in 2001. The maximum deduction 
     amount is not indexed for inflation. In addition, the 
     deduction is phased out ratably for individual taxpayers with 
     modified AGI of $40,000-$55,000 ($60,000-$75,000 for joint 
     returns); such income ranges will be indexed for inflation 
     occurring after the year 2002, rounded down to the closest 
     multiple of $5,000. Thus, the first taxable year for which 
     the inflation adjustment could be made will be 2003. For 
     purposes of the deduction, modified AGI includes amounts 
     excludable from gross income under section 137 (qualified 
     adoption expenses).44
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     \44\ For purposes of section 137, adjusted gross income is 
     determined without regard to the deduction for student loan 
     interest.
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       Qualified higher education expenses are 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), reduced by (1) any amount 
     excluded from gross income under section 135, (2) any amount 
     distributed from an education IRA and excluded from gross 
     income, and (3) the amount of any scholarship or fellowship 
     grants excludable from gross income under present-law section 
     117, as well as any other tax-free educational benefits, such 
     as employer-provided educational assistance that is 
     excludable from the employee's gross income under section 
     127.
       The conferees expect that the Secretary of Treasury will 
     issue regulations setting forth reporting procedures that 
     will facilitate the administration of this provision. 
     Specifically, such regulations should require lenders 
     separately to report to borrowers the amount of interest that 
     constitutes deductible student loan interest (i.e., interest 
     on a qualified education loan during the first 60 months in 
     which interest payments are required). In this regard, the 
     regulations should include a method for borrower 
     certification to a lender that the loan proceeds are being 
     used to pay for qualified higher education expenses.
       The provision is effective for interest payments due and 
     paid after December 31, 1997, on any qualified education 
     loan.
     5. Penalty-free withdrawals from IRAs for higher education 
         expenses (sec. 203 of the House bill and Senate 
         amendment)

                              Present Law

       Under present law, amounts held in an individual retirement 
     arrangement (``IRA'') are includible in income when withdrawn 
     (except to the extent the withdrawal is a return of 
     nondeductible contributions). Amounts withdrawn prior to 
     attainment of age 59\1/2\ are subject to an additional 10-
     percent early withdrawal tax, unless the withdrawal is due to 
     death or disability, is made in the form of certain periodic 
     payments, is used to pay medical expenses in excess of 7.5 
     percent of AGI, or is used to purchase health insurance of an 
     unemployed individual.

                               House Bill

       The House bill provides that the 10-percent early 
     withdrawal tax does not apply to distributions from IRAs if 
     the taxpayer used the amounts to pay qualified higher 
     education expenses (including those related to graduate level 
     courses) of the taxpayer, the taxpayer's spouse, or any 
     child, or grandchild of the individual or the individual's 
     spouse.
       The penalty-free withdrawal is available for ``qualified 
     higher education expenses,'' meaning tuition, fees, books, 
     supplies, equipment required for enrollment or attendance, 
     and room and board at a post-secondary educational 
     institution (defined by reference to

[[Page H6503]]

     sec 481 of the Higher Education Act of 1965). Qualified 
     higher education expenses are reduced by any amount 
     excludable from gross income under section 135 relating to 
     the redemption of a qualified U.S. savings bond and certain 
     scholarships and veterans benefits.
       Effective date.--The provision is effective for 
     distributions made after December 31, 1997, which respect to 
     expenses paid after such date for education furnished in 
     academic periods beginning after such date.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     6. Tax credit for expenses for education which supplements 
         elementary and secondary education (sec. 204 of the House 
         bill)

                              Present Law

       In general, taxpayers may not deduct education and training 
     expenses that relate to basic elementary or secondary 
     education. (Treas. reg. sec. 1.162-5). Students who are 
     employed may be eligible for the special exclusion for 
     employer-provided educational assistance under section 127. 
     In addition, qualified scholarships received by such students 
     are excluded from gross income under section 117, and such 
     students may be eligible for the special rules for student 
     loan forgiveness under section 108(f). No tax credit is 
     available under present law for expenses incurred with 
     respect to elementary or secondary education.

                               House Bill

       The House bill provides a nonrefundable tax credit equal to 
     the lesser of (1) $150 or (2) 50 percent of qualified 
     educational assistance expenses paid with respect to an 
     eligible student.
       Eligible students are children under age 18 enrolled full-
     time in elementary or secondary school. Qualified educational 
     assistance expenses are costs of supplementary education 
     (e.g., tutoring). Such supplementary education must be 
     provided with respect to a student's current classes by a 
     supplementary education service provider that is accredited 
     by an accreditation organization recognized by the Secretary 
     of Education. Qualified expenses do not include the cost of 
     courses that prepare students for college entrance exams.
       The credit is phased out for taxpayers with adjusted gross 
     income between $80,000-$92,000 for joint filers and between 
     $50,000-$62,000 for individual filers.
       Effective date.--The credit is available for taxable years 
     beginning after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     7. Certain teacher education expenses not subject to 2-
         percent floor on miscellaneous itemized deductions (sec. 
         224 of the Senate amendment)

                              Present Law

       In general, taxpayers are not permitted to deduct education 
     expenses. However, employees may deduct the cost of certain 
     work-related education. For costs to be deductible, the 
     education must either be required by the taxpayer's employer 
     or by law to retain taxpayer's current job or be necessary to 
     maintain or improve skills required in the taxpayer's current 
     job. Expenses incurred for education that is necessary to 
     meet minimum education requirements of an employee's present 
     trade or business or that can qualify an employee for a new 
     trade or business are not deductible.
       An employee is allowed to deduct work-related education and 
     other business expenses only to the extent such expenses 
     (together with other miscellaneous itemized deductions) 
     exceed 2 percent of the taxpayer's adjusted gross income.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, qualified professional 
     development expenses incurred by an elementary or secondary 
     school teacher \45\ with respect to certain courses of 
     instruction are not subject to the 2-percent floor on 
     miscellaneous itemized deductions. Qualified professional 
     development expenses mean expenses for tuition, fees, books, 
     supplies, equipment and transportation required for 
     enrollment or attendance in a qualified course, provided that 
     such expenses are otherwise deductible under present law 
     section 162. A qualified course of instruction means a course 
     at an institution of higher education (as defined in sec. 481 
     of the Higher Education Act of 1965) which is part of a 
     program of professional development that is approved and 
     certified by the appropriate local educational agency as 
     furthering the individual's teaching skills.
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     \45\ To be eligible, a teacher must have completed at least 
     two academic years as a K-12 teacher in an elementary or 
     secondary school before the qualified professional 
     development expenses are incurred.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

               B. Other Education-Related Tax Provisions

     1. Extension of exclusion for employer-provided educational 
         assistance (sec. 221 of the House bill and sec. 221 of 
         the Senate amendment)

                              Present Law

       Under present law, an employee's gross income and wages do 
     not include amounts paid or incurred by the employer for 
     educational assistance provided to the employee if such 
     amounts are paid or incurred pursuant to an educational 
     assistance program that meets certain requirements. This 
     exclusion is limited to $5,250 of educational assistance with 
     respect to an individual during a calendar year. The 
     exclusion does not apply to graduate-level courses beginning 
     after June 30, 1996. The exclusion expires with respect to 
     courses of instruction beginning after June 30, 1997.\46\ In 
     the absence of the exclusion, educational assistance is 
     excludable from income only if it is related to the 
     employee's current job.
---------------------------------------------------------------------------
     \46\ The legislative history reflects congressional intent 
     that the provision expire with respect to courses beginning 
     after May 31, 1997.
---------------------------------------------------------------------------

                               House Bill

       The exclusion for employer-provided educational assistance 
     is extended through courses beginning on or before December 
     31, 1997.
       Effective date.--The provision is effective with respect to 
     taxable years beginning after December 31, 1996.

                            Senate Amendment

       The exclusion for employer-provided educational assistance 
     is extended permanently. Beginning in 1997, the exclusion 
     applies to graduate-level courses.
       Effective date.--The extension of the exclusion with 
     respect to undergraduate courses applies with respect to 
     taxable years beginning after December 31, 1996. The 
     extension of the exclusion with respect to graduate-level 
     courses applies to courses beginning after December 31, 1996.

                          Conference Agreement

       The conference agreement follows the House bill, with 
     modifications. Under the conference agreement, the exclusion 
     for undergraduate education is extended with respect to 
     courses beginning before June 1, 2000. As under the House 
     bill, the exclusion does not apply with respect to graduate-
     level courses.
     2. Modification of $150 million limit on qualified 501(c)(3) 
         bonds other than hospital bonds (sec. 222 of the House 
         bill and sec. 222 of the Senate amendment)

                              Present Law

       Interest on State and local government bonds generally is 
     excluded from income if the bonds are issued to finance 
     activities carried out and paid for with revenues of these 
     governments. Interest on bonds issued by these governments to 
     finance activities of other persons, e.g., private activity 
     bonds, is taxable unless a specific exception is included in 
     the Code. One such exception is for private activity bonds 
     issued to finance activities of private, charitable 
     organizations described in Code section 501(c)(3) (``section 
     501(c)(3) organizations'') when the activities do not 
     constitute an unrelated trade or business.
       Present law treats section 501(c)(3) organizations as 
     private persons; thus, bonds for their use may only be issued 
     as private activity ``qualified 501(1)(3) bonds,'' subject to 
     the restrictions of Code section 145. The most significant of 
     these restrictions limits the amount of outstanding bonds 
     from which a section 501(c)(3) organization may benefit to 
     $150 million. In applying this ``$150 million limit,'' all 
     section 501(c)(3) organizations under common management or 
     control are treated as a single organization. The limit does 
     not apply to bonds for hospital facilities, defined to 
     include only acute care, primarily inpatient, organizations.

                               House Bill

       Under the House bill, the $150 million limit is increased 
     annually in $10 million increments until it is $200 million. 
     Specifically, the limitation is $160 million in 1998, $170 
     million in 1999, $180 million in 2000, $190 million in 2001, 
     and $200 million in 2002 and thereafter.
       Effective date.--The provision is effective on January 1, 
     1998.

                            Senate Amendment

       The Senate amendment repeals the $150 million limit for 
     bonds issued after the date of enactment to finance capital 
     expenditures incurred after the date of enactment.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment to finance capital 
     expenditures incurred after such date.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment. Because this provision of 
     the conference agreement applies only to bonds issued with 
     respect to capital expenditures incurred after the date of 
     enactment, the $150 million limit will continue to govern 
     issuance of other non-hospital qualified 501(c)(3) bonds 
     (e.g., refunding bonds or new-money bonds for capital 
     expenditures incurred before the date of enactment). Thus, 
     the conferees understand that bond issuers will continue 
     to need Treasury Department guidance on the application of 
     this limit in the future and expect that the Treasury will 
     continue to provide interpretative rules on this limit.

[[Page H6504]]

     3. Enhanced deduction for corporate contributions of computer 
         technology and equipment (sec. 223 of the House bill)

                              Present Law

       In computing taxable income, a taxpayer who itemizes 
     deductions generally is allowed to deduct the fair market 
     value of property contributed to a charitable 
     organization.\47\ However, in the case of a charitable 
     contribution of inventory or other ordinary-income property, 
     short-term capital gain property, or certain gifts to private 
     foundations, the amount of the deduction is limited to the 
     taxpayer's basis in the property. In the case of a charitable 
     contribution of tangible personal property, a taxpayer's 
     deduction is limited to the adjusted basis in such property 
     if the use by the recipient charitable organization is 
     unrelated to the organization's tax-exempt purpose (sec. 
     170(e)(1)(B)(I)).
---------------------------------------------------------------------------
     \47\ The amount of the deduction allowable for a taxable year 
     with respect to a charitable contribution may be reduced 
     depending on the type of property contributed, the type of 
     charitable organization to which the property is contributed, 
     and the income of the taxpayer (secs. 170(b) and 170(e)). 
     Corporations are entitled to claim a deduction for charitable 
     contributions, generally limited to 10 percent of their 
     taxable income (computed without regard to the contributions) 
     for the taxable year.
---------------------------------------------------------------------------
       Special rules in the Code provide augmented deductions for 
     certain corporate \48\ contributions of inventory property 
     for the care of the ill, the needy, or infants (sec. 
     170(e)(3)), and certain corporate contributions of scientific 
     equipment constructed by the taxpayer, provided the original 
     use of such donated equipment is by the donee for research or 
     research training in the United States in physical or 
     biological sciences (sec. 170(e)(4)).\49\ Under these special 
     rules, the amount of the augmented deduction available to a 
     corporation making a qualified contribution is equal to its 
     basis in the donated property plus one-half of the amount of 
     ordinary income that would have been realized if the property 
     had been sold. However, the augmented deduction cannot exceed 
     twice the basis of the donated property.
---------------------------------------------------------------------------
     \48\ S corporations are not eligible donors for purposes of 
     section 170(e)(3) or section 170(e)(4).
     \49\ Eligible donees under section 170(e)(4) are limited to 
     post-secondary educational institutions, scientific research 
     organizations, and certain other organizations that support 
     scientific research.
---------------------------------------------------------------------------

                               House Bill

       The House bill expands the list of qualified contributions 
     that would qualify for the augmented deduction currently 
     available under Code section 170(e)(3) and 170(e)(4). Under 
     the House bill, qualified contributions mean gifts of 
     computer technology and equipment (i.e., computer software, 
     computer or peripheral equipment, and fiber optic cable 
     related to computer use) to be used within the United States 
     for educational purposes in any of grades K-12.
       Eligible donees are: (1) any educational organization that 
     normally maintains a regular faculty and curriculum and has a 
     regularly enrolled body of pupils in attendance at the place 
     where its educational activities are regularly carried on; 
     and (2) Code section 501(c)(3) entities that are organized 
     primarily for purposes of supporting elementary and secondary 
     education. A private foundation also is an eligible donee, 
     provided that, within 30 days after receipt of the 
     contribution, the private foundation contributes the property 
     to an eligible donee described above.
       Qualified contributions are limited to gifts made no later 
     than two years after the date the taxpayer acquired or 
     substantially completed the construction of the donated 
     property. Such donated property could be computer technology 
     or equipment that is inventory or depreciable trade or 
     business property in the hands of the donor. The House bill 
     permits payment by the donee organization of shipping, 
     transfer, and installation costs.\50\ The special treatment 
     applies only to donations made by C corporations; as under 
     present law section 170(e)(4), S corporations, personal 
     holding companies, and service organizations are not eligible 
     donors.
---------------------------------------------------------------------------
     \50\ In the case of contributions made through private 
     foundations, the bill permits the payment by the private 
     foundation of shipping, transfer, and installation costs.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for 
     contributions made in taxable years beginning after 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, except 
     that the provision is sunset after three years. Thus, the 
     provision is effective for contributions made in taxable 
     years beginning after 1997 and before January 1, 2001. In 
     addition, the conference agreement clarifies that the 
     original use of the donated property must commence with the 
     donor or the donee. Accordingly, qualified contributions 
     generally are limited to property that is no more than two 
     years old.
     4. Expansion of arbitrage rebate exception for certain bonds 
         (sec. 223 of the Senate amendment)

                              Present Law

       Generally, all arbitrage profits earned on investments 
     unrelated to the purpose of the borrowing (``nonpurpose 
     investments'') when such earnings are permitted must be 
     rebated to the Federal Government.
       An exception is provided for bonds issued by governmental 
     units having general taxing powers if the governmental unit 
     (and all subordinate units) issue $5 million or less of 
     governmental bonds during the calendar year (``the small-
     issuer exception'). This exception does not apply to private 
     activity bonds.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that up to $5 million of 
     bonds used to finance public school capital expenditures 
     incurred after December 31, 1997, are excluded from 
     application of the present-law $5 million limit. Thus, small 
     issuers will continue to benefit from the small issue 
     exception from arbitrage rebate if they issue no more than 
     $10 million in governmental bonds per calendar year and no 
     more than $5 million of the bonds is used to finance 
     expenditures other than for public school capital 
     expenditures.
       Effective date.--The provision is effective for bonds 
     issued after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     5. Treatment of cancellation of certain student loans (sec. 
         224 of the House bill and sec. 225 of the Senate 
         amendment)

                              Present Law

       In the case of an individual, gross income subject to 
     Federal income tax does not include any amount from the 
     forgiveness (in whole or in part) of certain student loans, 
     provided that the forgiveness is contingent on the student's 
     working for a certain period of time in certain professions 
     for any of a broad class of employers (sec. 108(f)).
       Student loans eligible for this special rule must be made 
     to an individual to assist the individual in attending an 
     educational institution that normally maintains a regular 
     faculty and curriculum and normally has a regularly enrolled 
     body of students in attendance at the place where its 
     education activities are regularly carried on. Loan proceeds 
     may be used not only for tuition and required fees, but also 
     to cover room and board expenses (in contrast to tax-free 
     scholarships under section 117, which are limited to tuition 
     and required fees). In addition, the loan must be made by (1) 
     the United States (or an instrumentality or agency thereof), 
     (2) a State (or any political subdivision thereof), (3) 
     certain tax-exempt public benefit corporations that control a 
     State, county, or municipal hospital and whose employees have 
     been deemed to be public employees under State law, or (4) an 
     educational organization that originally received the funds 
     from which the loan was made from the United States, a State, 
     or a tax-exempt public benefit corporation. Thus, loans made 
     with private, nongovernmental funds are not qualifying 
     student loans for purposes of the section 108(f) exclusion.

                               House Bill

       The House bill expands section 108(f) so that an 
     individual's gross income does not include forgiveness of 
     loans made by tax-exempt charitable organizations (e.g., 
     educational organizations or private foundations) if the 
     proceeds of such loans are used to pay costs of attendance at 
     an educational institution or to refinance outstanding 
     student loans and the student is not employed by the lender 
     organization. As under present law, the section 108(f) 
     exclusion applies only if the forgiveness is contingent on 
     the student's working for a certain period of time in certain 
     professions for any of a broad class of employers. In 
     addition, in the case of loans made by tax-exempt charitable 
     organizations, the student's work must fulfill a public 
     service requirement. The student must work in an occupation 
     or area with unmet needs and such work must be performed for 
     or under the direction of a tax-exempt charitable 
     organization or a governmental entity.
       The exclusion also is expanded to cover forgiveness of 
     direct student loans made through the William D. Ford Federal 
     Direct Loan Program where loan repayment and forgiveness are 
     contingent on the borrower's income level and any unpaid 
     amounts are forgiven in full by the Secretary of Education at 
     the end of a 25-year period. Thus, Federal Direct Loan 
     borrowers who have elected the income-contingent repayment 
     option and who have not repaid their loans in full at the end 
     of a 25-year period would not be required to include the 
     outstanding loan balance in income as a result of the 
     forgiveness of the loan.
       Effective date.--The provision applies to discharges of 
     indebtedness after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, except that the conference agreement does 
     not include the provision expanding the exclusion to cover 
     forgiveness of direct student loans made through the 
     William D. Ford Federal Direct Loan Program where loan 
     repayment and forgiveness are contingent on the borrower's 
     income level and any unpaid amounts are forgiven in full 
     by the Secretary of Education at the end of a 25-year 
     period.
     6. Tax credit for holders of qualified zone academy bonds

                              Present Law

       Under present law, interest on bonds issued for general 
     governmental purposes, including

[[Page H6505]]

     public schools, is exempt from Federal income tax.

                               House Bill

       No provision.

                            Senate Amendment

       No provision.

                          Conference Agreement

       Under the conference agreement, certain financial 
     institutions (i.e., banks, insurance companies, and 
     corporations actively engaged in the business of lending 
     money) that hold ``qualified zone academy bonds'' are 
     entitled to a nonrefundable tax credit in an amount equal to 
     a credit rate (set by the Treasury Department) multiplied by 
     the face amount of the bond. The credit rate applies to all 
     such bonds purchased in each month. A taxpayer holding a 
     qualified zone academy bond is entitled to a credit for each 
     year the taxpayer holds the bond. The credit is includible in 
     gross income, but may be claimed against regular income tax 
     and AMT liability.
       The Treasury Department will set the credit rate each month 
     so that such bonds can be issued without discount and without 
     any interest cost to the issuer. The maximum term of the bond 
     issued in a given month also is determined by the Treasury 
     Department so that the present value of the obligation to 
     repay the bond is 50 percent of the face value of the bond. 
     Such present value will be determined using as a discount 
     rate the average annual interest rate of tax- exempt 
     obligations with a term of 10 years or more issued during the 
     month.
       ``Qualified zone academy bonds'' are defined as any bond 
     issued by a State or local government, provided that (1) 95 
     percent of the proceeds are used for the purpose of 
     renovating, providing equipment to, developing course 
     materials for use at, or training teachers and other school 
     personnel in a ``qualified zone academy'' and (2) private 
     entities have promised to contribute to the qualified zone 
     academy certain equipment, technical assistance or training, 
     employee services, or other property or services with a value 
     equal to at least 10 percent of the bond proceeds.
       A school is a ``qualified zone academy'' if (1) the school 
     is a public school that provides education and training below 
     the college level, (2) the school operates a special academic 
     program in cooperation with businesses to enhance the 
     academic curriculum and increase graduation and employment 
     rates, and (3) either (a) the school is located in an 
     empowerment zone or enterprise community (including 
     empowerment zones designated or authorized to be designated 
     under the conference agreement), or (b) it is reasonably 
     expected that at least 35 percent of the students at the 
     school will be eligible for free or reduced-cost lunches 
     under the school lunch program established under the National 
     School Lunch Act.
       A total of $400 million of ``qualified zone academy bonds'' 
     may be issued in each of 1998 and 1999. The $800 million 
     aggregate bond cap will be allocated to the States according 
     to their respective populations of individuals below the 
     poverty line. A State may carry over any unused allocation 
     into subsequent years. Each State, in turn, will allocate the 
     credit to qualified zone academies within such State.
       Effective date.--The provision is effective for bonds 
     issued after 1997.

               III. SAVINGS AND INVESTMENT TAX INCENTIVES

                 A. Individual Retirement Arrangements

     1. Increase deductible IRA phase-out range and modify active 
         participant rule (sec. 301 of the Senate amendment)

                              Present Law

       If an individual (or, if married, the individual's spouse) 
     is an active participant in an employer-sponsored retirement 
     plan, the $2,000 IRA deduction limit is phased out over the 
     following levels of adjusted gross income (``AGI''): $25,000 
     to $35,000 in the case of a single taxpayer and $40,000 to 
     $50,000 in the case of married taxpayers.

                               House Bill

       No provision.

                            Senate Amendment

       An individual is not considered to be an active participant 
     in an employer-sponsored retirement plan merely because the 
     individual's spouse is such an active participant.
       The income phase-out range for single individuals is 
     increased as follows: for 1998 and 1999, the phase-out range 
     is $30,000 to $40,000; for 2000 and 2001, $35,000 to $45,000; 
     for 2002 and 2003, $40,000 to $50,000; and for 2004 and 
     thereafter, $50,000 to $60,000.
       The income phase-out range for married individuals is 
     increased as follows: for 1998 and 1999, the phase-out range 
     is $50,000 to $60,000; for 2000 and 2001, $60,000 to $70,000; 
     for 2002 and 2003, $70,000 to $80,000; and 2004 and 
     thereafter, $80,000 to $100,000.
       Effective date.--The provisions are effective for taxable 
     years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications.
       Under the conference agreement, as under the Senate 
     amendment, an individual is not considered an active 
     participant in an employer-sponsored retirement plan merely 
     because the individual's spouse is an active participant. 
     However, under the conference agreement, the maximum 
     deductible IRA contribution for an individual who is not an 
     active participant, but whose spouse is, is phased out for 
     taxpayers with AGI between $150,000 and $160,000.
       Under the conference agreement, the deductible IRA income 
     phase-out limits are increased as follows:

------------------------------------------------------------------------
                                                       Phase-out range  
------------------------------------------------------------------------
                              Joint Returns                             
                                                                        
Taxable years beginning in:                                             
    1998..........................................      $50,000--$60,000
    1999..........................................      $51,000--$61,000
    2000..........................................      $52,000--$62,000
    2001..........................................      $53,000--$63,000
    2002..........................................      $54,000--$64,000
    2003..........................................      $60,000--$70,000
    2004..........................................      $65,000--$75,000
    2005..........................................      $70,000--$80,000
    2006..........................................      $75,000--$85,000
    2007 and thereafter...........................     $80,000--$100,000
                                                                        
                            Single Taxpayers                            
                                                                        
Taxable years beginning in:                                             
    1998..........................................      $30,000--$40,000
    1999..........................................      $31,000--$41,000
    2000..........................................      $32,000--$42,000
    2001..........................................      $33,000--$43,000
    2002..........................................      $34,000--$44,000
    2003..........................................      $40,000--$50,000
    2004..........................................      $45,000--$55,000
    2005 and thereafter...........................      $50,000--$60,000
------------------------------------------------------------------------

       The following examples illustrate the income phase-out 
     rules.
       Example 1.--Suppose for a year W is an active participant 
     in an employer-sponsored retirement plan, and W's husband, H, 
     is not. Further assume that the combined AGI of H and W for 
     the year is $200,000. Neither W nor H is entitled to make 
     deductible contributions to an IRA for the year.
       Example 2.--Same as example 1, except that the combined AGI 
     of W and H is $125,000. H can make deductible contributions 
     to an IRA. However, a deductible contribution could not be 
     made for W.
     2. Tax-free nondeductible IRAs (sec. 301 of the House bill 
         and sec. 302 of the Senate amendment)

                              Present Law

       No provision. However, present law provides that an 
     individual can make nondeductible contributions to an IRA to 
     the extent the individual cannot or does not make deductible 
     contributions. Earnings on nondeductible contributions are 
     includible in income when withdrawn.

                               House Bill

     In general
       The House bill replaces present-law nondeductible IRAs with 
     new American Dream IRAs (``AD IRAs'') to which individuals 
     may make nondeductible contributions of up to $2,000 
     annually. No income limits apply to AD IRAs, and 
     contributions to AD IRAs are in addition to other IRA 
     contributions. The $2,000 contribution limit is indexed for 
     inflation in $50 increments.
     Taxation of distributions
       Qualified distributions from an AD IRA are not includible 
     in income. Qualified distributions are distributions (1) made 
     after the 5-taxable year period beginning with the first 
     taxable year for which a contribution was made to an AD IRA 
     and (2) which are (a) made on or after the date on which the 
     individual attains age 59\1/2\, (b) made to a beneficiary on 
     or after the death of the individual, (c) attributable to the 
     individual's being disabled, or (d) for a qualified special 
     purpose distribution. A qualified special purpose 
     distribution is a distribution for first-time homebuyer 
     expenses.
     Conversions of IRAs to AD IRAs
       An IRA may be converted to an AD IRA before January 1, 
     1999. Amounts that would have been includible in income had 
     the amounts converted been withdrawn are includible in income 
     ratably over 4 years. The additional tax on early withdrawals 
     does not apply to conversions of IRAs to AD IRAs.
     Effective date
       Taxable years beginning after December 31, 1997.

                            Senate Amendment

     In general
       Same as the House bill, except that: (1) the new IRAs are 
     called IRA Plus accounts and (2) no more than $2,000 of 
     annual contributions can be made to all an individual's IRAs.
     Taxation of distributions
       Same as the House bill, except that special purpose 
     distributions also include distributions to long-term 
     unemployed individuals.
     Conversions of IRAs to AD IRAs
       Same as the House bill, except that conversions of an IRA 
     to an IRA Plus can be made at any time. If the conversion is 
     made before January 1, 1999, the amounts that would have been 
     includible in income had the amounts converted been withdrawn 
     are includible in income ratably over 4 years. In any case, 
     the 10-percent tax on early withdrawals does not apply.

                             Effective date

       Same as the House bill.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications. Under

[[Page H6506]]

     the conference agreement, the new IRA is called the ``Roth 
     IRA'' rather than the IRA Plus. The maximum contribution that 
     can be made to a Roth IRA is phased out for individuals with 
     AGI between $95,000 and $110,000 and for joint filers with 
     AGI between $150,000 and $160,000. Under the conference 
     agreement, distributions to long-term unemployed individuals 
     do not qualify as special purpose distributions. Thus, only 
     first-time homebuyer expenses (as defined under the Senate 
     amendment) qualify as special purpose distributions.
       Under the conference agreement, only taxpayers with AGI of 
     less than $100,000 51 are eligible to roll over or 
     convert an IRA into a Roth IRA.
---------------------------------------------------------------------------
     \51\ For this purpose, AGI is determined before any amount 
     includible in income as a result of the rollover or 
     conversion.
---------------------------------------------------------------------------
        The conference agreement retains present-law nondeductible 
     IRAs. Thus, an individual who cannot (or does not) make 
     contributions to a deductible IRA or a Roth IRA can make 
     contributions to a nondeductible IRA. In no case can 
     contributions to all an individual's IRAs for a taxable year 
     exceed $2,000.
     3. Modifications to early withdrawal tax (sec. 301 of the 
         House bill and sec. 303 of the Senate amendment)

                              Present Law

       Under present law, a 10-percent additional tax applies to 
     distributions from an IRA prior to age 59\1/2\, unless an 
     exception applies.

                               House Bill

       The House bill adds an additional exception to the early 
     withdrawal tax for AD IRAs only. The early withdrawal tax 
     does not apply to distributions from an AD IRA for first-time 
     homebuyer expenses, subject to a $10,000 life-time cap.
       Effective date,--Taxable years beginning after December 31, 
     1997.

                            Senate Amendment

       The early withdrawal tax does not apply to distributions 
     from any IRA for first-time homebuyer expenses or for long-
     term unemployed individuals.
       Effective date.--Same as the House bill.

                          Conference Agreement

       The conference agreement follows the Senate amendment but 
     does not include the provision relating to long-term 
     unemployed individuals.52
---------------------------------------------------------------------------
     \52\ As under the House bill and Senate amendment, the 
     conference agreement includes a penalty-free withdrawal 
     provision for education expenses.
---------------------------------------------------------------------------
     4. IRA investments in coins and bullion (sec. 304 of the 
         Senate amendment)

                              Present Law

       IRA assets may not be invested in collectibles. This 
     prohibition does not apply to certain gold and silver coins 
     or to coins issued by a State.

                               House Bill

       No provision.

                            Senate Amendment

       IRA assets may be invested in certain platinum coins and in 
     certain gold, silver, platinum or palladium bullion.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

                      B. Capital Gains Provisions

     1. Maximum rate of tax on net capital gain of individuals 
         (sec. 311 of the House bill and sec. 311 of the Senate 
         amendment)

                              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. Gain from the disposition of depreciable personal 
     property is not treated as capital gain to the extent of all 
     previous depreciation allowances. Gain from the disposition 
     of depreciable real property is generally not treated as 
     capital gain to the extent of the depreciation allowances in 
     excess of the allowances that would have been available under 
     the straight-line method of depreciation.

                               House Bill

       Under the House bill, the maximum rate of tax on the net 
     capital gain of an individual is reduced from 28 percent to 
     20 percent. In addition, any net capital gain which otherwise 
     would be taxed at a 15-percent rate is taxed at a rate of 10 
     percent. These rates apply for purposes of both the regular 
     tax and the minimum tax.
       The tax on the net capital gain attributable to any long-
     term capital gain from the sale or exchange of collectibles 
     will remain at a maximum rate of 28 percent; any long-term 
     capital gain from the sale or exchange of section 1250 
     property (i.e., depreciable real estate) to the extent the 
     gain would have been treated as ordinary income if the 
     property had been section 1245 property will be taxed at a 
     maximum rate of 26 percent. Gain from the disposition of a 
     collectible which is an indexed asset (described below) will 
     not be eligible for the 28-percent rate unless the taxpayer 
     elects to forgo indexing.
       Effective date.--The provision generally applies to sales 
     and exchanges (and installment payments received) after May 
     6, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill except 
     the maximum rate on gain attributable to the depreciation of 
     section 1250 property is 24 percent (rather than 26 percent). 
     (Differences in the provisions relating to indexing and small 
     business stock are described below.)
       Effective date.--The effective date is the same as the 
     House bill.

                          Conference Agreement

       The conference agreement generally follows the House bill 
     and the Senate amendment. The maximum rate of tax on gain 
     attributable to the depreciation of section 1250 property 
     will be 25 percent.
       In addition, for taxable years beginning after December 31, 
     2000, the maximum capital gains rates for assets which are 
     held more than 5 years, are 8 percent and 18 percent (rather 
     than 10 percent and 20 percent). The 18-percent rate only 
     applies to assets the holding period for which begins after 
     December 31, 2000. A taxpayer holding a capital asset or 
     asset used in the taxpayer's trade or business on January 1, 
     2001, may elect to treat the asset as having been sold on 
     such date for an amount equal to its fair market value, and 
     as having been reacquired for an amount equal to such value. 
     If the election is made, any gain is recognized (and any loss 
     disallowed). The conference agreement allows the Treasury 
     Department to issue regulations coordinating the capital gain 
     provisions with other rules involving the treatment of sales 
     and exchanges by pass-thru entities and of interests therein.
       Under the conference agreement, the lower capital gains 
     rates do not apply to the sale or exchange of assets held for 
     18 months or less, effective for amounts properly taken into 
     account after July 28, 1997. The 28-percent maximum rate will 
     continue to apply to the sale or exchange of capital assets 
     held more than 1 year but not more than 18 months.
     2. Small business stock (sec. 311 of the House bill and secs. 
         312 and 313 of the Senate amendment)

                              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) 10 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.

                               House Bill

       Under the House bill, the lower capital gains rates do not 
     apply to the includible portion of the gain from the 
     qualifying sale of small business stock. Thus, the maximum 
     rate of regular tax on the sale of small business stock 
     remains at 14 percent.

                            Senate Amendment

       Under the Senate amendment, the 50-percent exclusion will 
     apply to small business stock (other than stock of a 
     subsidiary corporation) held by a corporation. The minimum 
     tax preference is repealed. Under the provision, in the case 
     of a qualifying sale of small business stock by an 
     individual, the maximum rate of tax, will be 10 percent.
       The Senate amendment increases the size of an eligible 
     corporation from gross assets of $50 million to gross assets 
     of $100 million. The Senate amendment also repeals the 
     limitation on the amount of gain a taxpayer can exclude with 
     respect to the stock of any corporation.
       The Senate amendment provides that certain working capital 
     must be expended within five 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 is imposed.
       The Senate amendment provides that if the corporation 
     establishes a business purpose for a redemption of its stock, 
     that redemption is disregarded in determining whether other 
     newly issued stock could qualify as eligible stock.
       The Senate amendment allows a taxpayer to roll over gain 
     from the sale or exchange of small business stock held more 
     than five years where the taxpayer uses the proceeds to 
     purchase other small business stock within 60 days of the 
     sale of the original stock. If the taxpayer sells the 
     replacement stock, any gain attributable to the original 
     stock is treated as gain from the sale or exchange of small 
     business stock held more than five

[[Page H6507]]

     years, and any remaining gain will be so treated after the 
     replacement stock is held for at least five years. In 
     addition, any gain that otherwise would be recognized from 
     the sale of the replacement stock can be rolled over to other 
     small business stock purchased within 60 days.
       Effective date.--The increase in the size of corporations 
     whose stock is eligible for the exclusion applies to stock 
     issued after the date of the enactment of the proposal. The 
     remaining provisions apply to stock issued after August 10, 
     1993 (the original effective date of the small business stock 
     provision).

                          Conference Agreement

       The conference agreement follows the provisions in the 
     House bill. The conference agreement reduces the minimum tax 
     preference from one-half of the excluded gain to 42 percent 
     of such gain.
       In addition, the conference agreement allows an individual 
     to roll over tax-free gain from the sale or exchange of 
     qualified small business stock held more than 6 months where 
     the taxpayer uses the proceeds to purchase other qualified 
     small business stock within 60 days of the sale. For purposes 
     of the rollover provision, the replacement stock must meet 
     the active business requirement for the 6-month period 
     following the purchase. Generally, the holding period of the 
     stock purchased will include the holding period of the stock 
     sold, except for purposes of determining whether the 6-month 
     holding period is met. The provision applies to sales after 
     the date of enactment of this Act.
     3. Indexing of basis of certain assets for purposes of 
         determining gain (sec. 312 of the House bill)

                              Present Law

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

                               House Bill

       The House bill generally provides for an inflation 
     adjustment to (i.e., indexing of) the adjusted basis of 
     certain assets (called ``indexed assets'') held more than 
     three years 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 eligible for the inflation adjustment generally 
     include common (but not preferred) stock of C corporations 
     and tangible property that are capital assets or property 
     used in a trade or business. A personal residence is not 
     eligible for indexing. To be eligible for indexing, an asset 
     must be held by the taxpayer for more than three years.
       The inflation adjustment under the provision is computed by 
     multiplying the taxpayer's adjusted basis in the indexed 
     asset by an inflation adjustment percentage, based on the 
     chain- type price index for GDP (``Gross Domestic Product').
       Special rules apply to RICS, REITS, partnerships, S 
     corporations and common trust funds.
       Effective date.--The provision applies to property the 
     holding period of which begins after December 31, 2000. A 
     taxpayer holding any indexed asset on January 1, 2001, may 
     elect to treat the indexed asset as having been sold on such 
     date for an amount equal to its fair market value, and as 
     having been reacquired for an amount equal to such value. If 
     the election is made, any gain is recognized (and any loss is 
     disallowed).

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     4. Exclusion of gain on sale of principal residence (sec. 313 
         of the House bill and sec. 314 of the Senate amendment)

                              Present Law

       Under present law, no gain is recognized on the sale of a 
     principal residence if a new residence at least equal in cost 
     to the sales price of the old residence is purchased and used 
     by the taxpayer as his or her principal residence within a 
     specified period of time (sec. 1034). This replacement period 
     generally begins two years before and ends two years after 
     the date of sale of the old residence. The basis of the 
     replacement residence is reduced by the amount of any gain 
     not recognized on the sale of the old residence by reason of 
     this gain rollover rule.
       Also, under present law, in general, an individual, on a 
     one-time basis, may exclude from gross income up to $125,000 
     of gain from the sale or exchange of a principal residence if 
     the taxpayer (1) has attained age 55 before the sale, and (2) 
     has owned the property and used it as a principal residence 
     for three or more of the five years preceding the sale (sec. 
     121).

                               House Bill

       Under the House bill, a taxpayer generally is able to 
     exclude up to $250,000 ($500,000 if married filing a joint 
     return) of gain realized on the sale or exchange of a 
     principal residence. The exclusion is allowed each time a 
     taxpayer selling or exchanging a principal residence meets 
     the eligibility requirements, but generally no more 
     frequently than once every two years. The House bill provides 
     that gain would be recognized to the extent of any 
     depreciation allowable with respect to the rental or business 
     use of such principal residence for periods after May 6, 
     1997.
       To be eligible for the exclusion, a taxpayer must have 
     owned the residence and occupied it as a principal residence 
     for at least two of the five years prior to the sale or 
     exchange. A taxpayer who fails to meet these requirements by 
     reason of a change of place of employment, health, or other 
     unforseen circumstances is able to exclude the fraction of 
     the $250,000 ($500,000 if married filing a joint return) 
     equal to the fraction of two years that these requirements 
     are met.
       In the case of joint filers not sharing a principal 
     residence, an exclusion of $250,000 is available on a 
     qualifying sale or exchange of the principal residence of one 
     of the spouses. Similarly, if a single taxpayer who is 
     otherwise eligible for an exclusion marries someone who 
     has used the exclusion within the two years prior to the 
     marriage, the bill would allow the newly married taxpayer 
     a maximum exclusion of $250,000. Once both spouses satisfy 
     the eligibility rules and two years have passed since the 
     last exclusion was allowed to either of them, the 
     taxpayers may exclude $500,000 of gain on their joint 
     return.
       Under the bill, the gain from the sale or exchange of the 
     remainder interest in the taxpayer's principal residence may 
     qualify for the otherwise allowable exclusion.
       Effective date.--The provision is available for all sales 
     or exchanges of a principal residence occurring after May 6, 
     1997, and replaces the present-law rollover and one-time 
     exclusion provisions applicable to principal residences.
       A taxpayer may elect to apply present law (rather than the 
     new exclusion) to a sale or exchange (1) made before the date 
     of enactment of the Act, (2) made after the date of enactment 
     pursuant to a binding contract in effect on such date or (3) 
     where the replacement residence was acquired on or before the 
     date of enactment (or pursuant to a binding contract in 
     effect of the date of enactment) and the rollover provision 
     would apply. If a taxpayer acquired his or her current 
     residence in a rollover transaction, periods of ownership and 
     use of the prior residence would be taken into account in 
     determining ownership and use of the current residence.

                            Senate Amendment

       The Senate amendment is the same as the House bill with 
     technical modifications.

                          Conference Agreement

       The conference agreement generally follows the House bill 
     and the Senate amendment.
       The conferees wish to clarify that the provision limiting 
     the exclusion to only one sale every two years by the 
     taxpayer does not prevent a husband and wife filing a joint 
     return from each excluding up to $250,000 of gain from the 
     sale or exchange of each spouse's principal residence 
     provided that each spouse would be permitted to exclude up to 
     $250,000 of gain if they filed separate returns.
     5. Corporate capital gains (sec. 321 of the House 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.

                               House Bill

       The House bill provides an maximum rate of tax on the net 
     capital gain of a corporation to the extent the gain is 
     attributable to the sale or exchange of property held more 
     than 8 years. The alternative tax is 32 percent on gain 
     attributable to calendar year 1998; 31 percent on gain 
     attributable to calendar year 1999; and 30 percent on gain 
     attributable to calendar years after 1999. The House bill 
     also modifies the application of the corporate alternative 
     capital gains tax so that the alternative capital gains tax 
     applies to the lesser of 8-year gain or taxable income. Gain 
     from the disposition of a collectible or attributable to the 
     depreciation of section 1250 property is not eligible for the 
     lower rate.
       Effective date.--The provision applies to taxable years 
     ending after December 31, 1997. However, the lower rate does 
     not apply to amounts properly taken into account before 
     January 1, 1998. For fiscal years beginning in 1998 and 1999, 
     the tax is computed by applying the applicable percentage to 
     the 8-year gain for the first portion of the year (or, if 
     less, the 8-year gain for the entire year), but in an amount 
     not to exceed the taxable income for the entire year and then 
     by applying the applicable percentage to an amount equal to 
     the 8-year gain for the entire year (or, if less, taxable 
     income) reduced by the amount taxed at the applicable 
     percentage for the first portion of the year.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
       The conference agreement provides that the amount of gain 
     subject to the alternative rate of tax under section 
     1201(a)(2) may not exceed the corporation's taxable income. 
     Because the section 1201 alternative tax does not presently 
     apply, this change has no effect under the rate structure of 
     present law.

[[Page H6508]]

                 IV. ALTERNATIVE MINIMUM TAX PROVISIONS

   A. Increase Exemption Amount Applicable to Individual Alternative 
  Minimum Tax (sec. 401 of the House bill and sec. 102 of the Senate 
                               amendment)

                              Present Law

       Present law imposes a minimum tax on an individual to the 
     extent the taxpayer's minimum tax liability exceeds his or 
     her regular tax liability. This alternative minimum tax is 
     imposed upon individuals at rates of (1) 26 percent on the 
     first $175,000 of alternative minimum taxable income in 
     excess of a phased-out exemption amount and (2) 28 percent on 
     the amount in excess of $175,000. The exemptions amounts are 
     $45,000 in the case of married individuals filing a joint 
     return and surviving spouses; $33,750 in the case of other 
     unmarried individuals; and $22,500 in the case of married 
     individuals filing a separate return. These exemption amounts 
     are phased-out by an amount equal to 25 percent of the amount 
     that the individual's alternative minimum taxable income 
     exceeds a threshold amount. These threshold amounts are 
     $150,000 in the case of married individuals filing a joint 
     return and surviving spouses; $112,500 in the case of other 
     unmarried individuals; and $75,000 in the case of married 
     individuals filing a separate return, estates, and trusts. 
     The exemption amounts, the threshold phase-out amounts, and 
     the $175,000 break-point amount are not indexed for 
     inflation.

                               House Bill

       For taxable years beginning in 1999, 2001, 2003, 2005 and 
     2007, the exemption amounts of the individual alternative 
     minimum tax are increased as follows for each such year: (1) 
     by $1,000 in the case of married individuals filing a joint 
     return and surviving spouses; (2) by $750 in the case of 
     other unmarried individuals; and (3) by $500 in the case of 
     married individuals filing a separate return. For taxable 
     years beginning after 2007, the exemption amounts are indexed 
     for inflation.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1998.

                            Senate Amendment

       For taxable years beginning after 2000 and before 2003, the 
     exemption amounts of the individual alternative minimum tax 
     are increased as follows in each year: (1) by $600 in the 
     case of married individuals filing a joint return and 
     surviving spouses; (2) by $450 in the case of other unmarried 
     individuals; and (3) by $300 in the case of married 
     individuals filing separate returns. For taxable years 
     beginning after 2003, the exemption amounts of the individual 
     alternative minimum tax are increased as follows in each 
     year: (1) by $950 in the case of married individuals filing a 
     joint return and surviving spouses; (2) by $700 in the case 
     of other unmarried individuals; and (3) by $475 in the case 
     of married individuals filing separate returns.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement contains neither the House bill 
     nor the Senate amendment.

 B. Repeal Alternative Minimum Tax for Small Businesses and Repeal the 
     Depreciation Adjustment (secs. 402 and 403 of the House bill)

                              Present Law

       Present law imposes a minimum tax on an individual or a 
     corporation to the extent the taxpayer's minimum tax 
     liability exceeds its regular tax liability. The individual 
     minimum tax is imposed at rates of 26 and 28 percent on 
     alternative minimum taxable income in excess of a phased-out 
     exemption amount; the corporate minimum tax is imposed at a 
     rate of 20 percent on alternative minimum taxable income in 
     excess of a phased-out $40,000 exemption amount. Alternative 
     minimum taxable income (``AMTI'') is the taxpayer's taxable 
     income increased by certain preference items and adjusted by 
     determining the tax treatment of certain items in a manner 
     that negates the deferral of income resulting from the 
     regular tax treatment of those items. In the case of a 
     corporation, in addition to the regular set of adjustments 
     and preferences, there is a second set of adjustments known 
     as the ``adjusted current earnings'' adjustment.
       The most significant alternative minimum tax adjustment 
     relates to depreciation. In computing AMTI, depreciation on 
     property placed in service after 1986 must be computed by 
     using the class lives prescribed by the alternative 
     depreciation system of section 168(g) and either (1) the 
     straight-line method in the case of property subject to the 
     straight-line method under the regular tax or (2) the 150-
     percent declining balance method in the case of other 
     property. For regular tax purposes, depreciation on tangible 
     personal property generally is computed using shorter 
     recovery periods and more accelerated methods than are 
     allowed for alternative minimum tax purposes.

                               House Bill

     Repeal of the corporate alternative minimum tax for small 
         businesses
       The corporate alternative minimum tax is repealed for small 
     business corporations for taxable years beginning after 
     December 31, 1997. A corporation that had average gross 
     receipts of less than $5 million for the three-year period 
     beginning after December 31, 1994, is a small business 
     corporation for any taxable year beginning after December 31, 
     1997. A corporation that meets the $5 million gross receipts 
     test will continue to be treated as small business 
     corporation exempt from the alternative minimum tax so long 
     as its average gross receipts do not exceed $7.5 million. A 
     corporation that fails to meet the $7.5 million gross 
     receipts test will become subject to corporate alternative 
     minimum tax only with respect to preferences and adjustments 
     that relate to transactions and investments entered into 
     after the corporation loses its status as a small business 
     corporation.
       In addition, the alternative minimum tax credit allowable 
     to a small business corporation is limited to the amount by 
     which corporation's regular tax liability (reduced by other 
     credits) exceeds 25 percent of the excess (if any) of the 
     corporation's regular tax (reduced by other credits) over 
     $25,000.
     Repeal of the depreciation adjustment
       The alternative minimum tax adjustment relating to 
     depreciation is repealed for all taxpayers for property 
     placed in service after December 31, 1998.
     Effective date
       Except as provided above, the provision is effective for 
     taxable years beginning after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement generally follows the House bill 
     with respect to the repeal of the corporate alternative 
     minimum tax for small businesses. In addition, for property 
     (including pollution control facilities) placed in service 
     after December 31, 1998, the conference agreement conforms 
     the recovery periods used for purposes of the alternative 
     minimum tax depreciation adjustment to the recovery periods 
     used for purposes of the regular tax under present law.

 C. Repeal AMT Installment Method Adjustment for Farmers (sec. 404 of 
          the House bill and sec. 732 of the Senate amendment)

                              Present Law

       The installment method allows gain on the sale of property 
     to be recognized as payments are received. Under the regular 
     tax, dealers in personal property are not allowed to defer 
     the recognition of income by use of the installment method on 
     the installment sale of such property. For this purpose, 
     dealer dispositions do not include sales of any property used 
     or produced in the trade or business of farming. For 
     alternative minimum tax purposes, the installment method is 
     not available with respect to the disposition of any property 
     that is the stock in trade of the taxpayer or any other 
     property of a kind which would be properly included in the 
     inventory of the taxpayer if held at year end, or property 
     held by the taxpayer primarily for sale to customers. No 
     explicit exception is provided for installment sales of farm 
     property under the alternative minimum tax.

                               House Bill

       The House bill generally provides that for purposes of the 
     alternative minimum tax, farmers may use the installment 
     method of accounting.
       Effective date.--The provision generally is effective for 
     dispositions in taxable years beginning after December 31, 
     1987, with a special rule for dispositions occurring in 1987.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

        V. ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS

                   A. Estate and Gift Tax Provisions

     1. Increase in estate and gift tax unified credit (sec. 
         501(a) of the House bill and sec. 401(a) of the Senate 
         amendment)

                              Present Law

       A gift tax is imposed on lifetime transfers by gift and an 
     estate tax is imposed on transfers at death. Since 1976, the 
     gift tax and the estate tax have been unified so that a 
     single graduated rate schedule applies to cumulative taxable 
     transfers made by a taxpayer during his or her lifetime and 
     at death.53 A unified credit of $192,800 is 
     provided against the estate and gift tax, which effectively 
     exempts the first $600,000 in cumulative taxable transfers 
     from tax (sec. 2010). For transfers in excess of $600,000, 
     estate and gift tax rates begin at 37 percent and reach 55 
     percent on cumulative taxable transfers over $3 million (sec. 
     2001(c)). In addition, a 5-percent surtax is imposed upon 
     cumulative taxable transfers between $10 million and 
     $21,040,000, to phase out the benefits of the graduated rates 
     and the unified credit (sec. 2001(c)(2)).54
---------------------------------------------------------------------------
     \53\ Prior to 1976, separate tax rate schedules applied to 
     the gift tax and the estate tax.
     \54\ Thus, if a taxpayer has made cumulative taxable 
     transfers equaling $21,040,000 or more, his or her average 
     transfer tax rate is 55 percent. The phaseout has the effect 
     of creating a 60-percent marginal transfer tax rate on 
     transfers in the phaseout range.
---------------------------------------------------------------------------

                               House Bill

       The House bill increases the present-law unified credit 
     beginning in 1998, from an effective exemption of $600,000 to 
     an effective exemption of $1,000,000 in 2007. The increase in 
     the effective exemption is phased in according to the 
     following schedule: the effective exemption is $650,000 for 
     decedents dying and gifts made in 1998; $750,000 in 1999; 
     $765,000 in 2000; $775,000 in 2001 through 2004;

[[Page H6509]]

     $800,000 in 2005; $825,000 in 2006; $1 million in 2007. After 
     2007, the effective exemption is indexed annually for 
     inflation. The indexed exemption amount is rounded to the 
     next lowest multiple of $10,000.
       Conforming amendments to reflect the increased unified 
     credit are made (1) to the 5-percent surtax to conform the 
     phase out of the increased unified credit and graduated 
     rates, (2) to the general filing requirements for an estate 
     tax return under section 6018(a), and (3) 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 is effective for decedents 
     dying, and gifts made, after December 31, 1997.

                            Senate Amendment

       The Senate amendment increases the present-law unified 
     credit beginning in 1998, from an effective exemption of 
     $600,000 to an effective exemption of $1,000,000 in 2006. The 
     increase in the effective exemption is phased in according to 
     the following schedule: the effective exemption is $625,000 
     for decedents dying and gifts made in 1998; $640,000 in 1999; 
     $660,000 in 2000; $675,000 in 2001; $725,000 in 2002; 
     $750,000 in 2003; $800,000 in 2004; $900,000 in 2005; and $1 
     million in 2006. After 2006, the effective exemption is 
     indexed annually for inflation. The indexed exemption amount 
     is rounded to the next lowest multiple of $10,000.
       The Senate amendment includes the same conforming 
     amendments as were made in the House bill.
       Effective date.--The provision is effective for decedents 
     dying, and gifts made, after December 31, 1997.

                          Conference Agreement

       The conference agreement increases the present-law unified 
     credit beginning in 1998, from an effective exemption of 
     $600,000 to an effective exemption of $1,000,000 in 2006. The 
     increase in the effective exemption is phased in according to 
     the following schedule: the effective exemption is $625,000 
     for decedents dying and gifts made in 1998; $650,000 in 1999; 
     $675,000 in 2000 and 2001; $700,000 in 2002 and 2003; 
     $850,000 in 2004; $950,000 in 2005; and $1 million in 2006 
     and thereafter. The conference does not index the effective 
     exemption for inflation.
       The conference agreement includes the conforming amendments 
     made in the House bill and the Senate amendment.
       Effective date.--The provision is effective for decedents 
     dying, and gifts made, after December 31, 1997.
     2. Indexing of certain other estate and gift tax provisions 
         (sec. 501(b)-(e) of the House bill and sec. 401(b)-(e) of 
         the Senate amendment)

                              Present Law

       Annual exclusion for gifts.--A taxpayer may exclude $10,000 
     of gifts of present interests in property made by an 
     individual ($20,000 per married couple) to each donee during 
     a calendar year (sec. 2503).
       Special use valuation.--An executor may elect for estate 
     tax purposes to value certain qualified real property used in 
     farming or a closely-held trade or business at its current 
     use value, rather than its ``highest and best use'' value 
     (sec. 2032A). The maximum reduction in value under such an 
     election is $750,000.
       Generation-skipping transfer (``GST'') tax.--An individual 
     is allowed an exemption from the GST tax of up to $1,000,000 
     for generation-skipping transfers made during life or at 
     death (sec. 2631).
       Installment payment of estate tax.--An executor may elect 
     to pay the Federal estate tax attributable to an interest in 
     a closely held business in installments over, at most, a 14-
     year period (sec. 6166). The tax on the first $1,000,000 in 
     value of a closely-held business is eligible for a special 4-
     percent interest rate (sec. 6601(j)).

                               House Bill

       The House bill provides that, after 1998, the $10,000 
     annual exclusion for gifts, the $750,000 ceiling on special 
     use valuation, the $1,000,000 generation-skipping transfer 
     tax exemption, and the $1,000,000 ceiling on the value of a 
     closely-held business eligible for the special low interest 
     rate (as modified below), are indexed annually for inflation. 
     Indexing of the annual exclusion is rounded to the next 
     lowest multiple of $1,000 and indexing of the other amounts 
     is rounded to the next lowest multiple of $10,000.
       Effective date.--The proposal is effective for decedents 
     dying, and gifts made, after December 31, 1998.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Estate tax exclusion for qualified family-owned businesses 
         (sec. 402 of the Senate amendment)

                              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)).

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment allows an executor to elect special 
     estate tax treatment for qualified ``family-owned business 
     interests'' if such interests comprise more than 50 percent 
     of a decedent's estate and certain other requirements are 
     met. In general, the provision excludes the first $1 million 
     of value in qualified family-owned business interests from a 
     decedent's taxable estate.
       This new exclusion for qualified family-owned business 
     interests is provided in addition to the unified credit 
     (which currently effectively exempts $600,000 of taxable 
     transfers from the estate and gift tax, and will be increased 
     to an effective exemption of $1,000,000 of taxable transfers 
     under other provisions of the Senate amendment), the special-
     use provisions of section 2032A (which permit the exclusion 
     of up to $750,000 in value of a qualifying farm or other 
     closely-held business from a decedent's estate), and the 
     provisions of section 6166 (which provide for the installment 
     payment of estate taxes attributable to closely held 
     businesses).
     Qualified family-owned business interests
       For purposes of the provision, a qualified family-owned 
     business interest is 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 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. Under the provision, 
     members of an individual's family are defined using the same 
     definition as is used for the special-use valuation rules of 
     section 2032A, and thus include (1) the individual's spouse, 
     (2) the individual's ancestors, (3) lineal descendants of the 
     individual, of the individual's spouse, or of the 
     individual's parents, and (4) the spouses of any such lineal 
     descendants. For purposes of applying the ownership tests in 
     the case of a corporation, the decedent and members of the 
     decedent's family are required to own the requisite 
     percentage of the total combined voting power of all classes 
     of stock entitled to vote and the requisite percentage of the 
     total value of all shares of all classes of stock of the 
     corporation. In the case of a partnership, the decedent and 
     members of the decedent's family are required to own the 
     requisite percentage of the capital interest, and the 
     requisite percentage of the profits interest, in the 
     partnership.
       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 apply. Each trade or business 
     owned (directly or indirectly) by the decedent and members of 
     the decedent's family is separately tested to determine 
     whether that trade or business meets the requirements of a 
     qualified family-owned business interest. In applying these 
     tests, any interest that a trade or business owns in another 
     trade or business is disregarded in determining whether the 
     first trade or business is a qualified family-owned business 
     interest. The value of any qualified family-owned business 
     interest held by an entity is treated as being 
     proportionately owned by or for the entity's partners, 
     shareholders, or beneficiaries. In the case of a multi-tiered 
     entity, such rules are sequentially applied to look through 
     each separate tier of the entity.
       For example, if a holding company owns interests in two 
     other companies, each of the three entities will be 
     separately tested under the qualified family-owned business 
     interest rules. In determining whether the holding company is 
     a qualified family-owned business interest, its ownership 
     interest in the other two companies is disregarded. Even if 
     the holding company itself does not qualify as a family-owned 
     business interest, the other two companies still may qualify 
     if the direct and indirect interests held by the decedent and 
     his or her family members satisfy the requisite ownership 
     percentages and other requirements of a qualified family-
     owned business interest. If either (or both) of the lower-
     tier entities qualify, the value of the qualified family-
     owned business interests owned by the holding company are 
     treated as proportionately owned by the holding company's 
     shareholders.
       An interest in a trade or business does not qualify if the 
     business's (or a related entity's) stock or securities were 
     publicly-traded at any time within three years of the 
     decedent's death. An interest in a trade or business also 
     does 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 section 543). This personal holding company 
     restriction does not apply to banks or domestic building and 
     loan associations.
       The value of a trade or business qualifying as a family-
     owned business interest is reduced to the extent the business 
     holds passive assets or excess cash or marketable securities. 
     Under the provision, the value of

[[Page H6510]]

     qualified family-owned business interests does not include 
     any cash or marketable securities in excess of the reasonably 
     expected day-to-day working capital needs of the trade or 
     business. For this purpose, it is intended that day-to-day 
     working capital needs be determined based on a historical 
     average of the business's working capital needs in the past, 
     using an analysis similar to that set forth in Bardahl Mfg. 
     Corp., 24 T.C.M. 1030 (1965). It is further intended that 
     accumulations for capital acquisitions not be considered 
     ``working capital'' for this purpose. The value of the 
     qualified family-owned business interests also does not 
     include certain other passive assets. For this purpose, 
     passive assets include any assets that: (1) produce 
     dividends, interest, rents, royalties, annuities and certain 
     other types of passive income (as described in sec. 543(a)); 
     (2) are an interest in a trust, partnership or REMIC (as 
     described in sec. 954(c)(1)(B)(ii)); (3) produce no income 
     (as described in sec. 954(c)(1)(B)(iii)); (4) give rise to 
     income from commodities transactions or foreign currency 
     gains (as described in sec. 954(c)(1)(C) and (D)); (5) 
     produce income equivalent to interest (as described in sec. 
     954(c)(1)(E)); or (6) produce income from notional principal 
     contracts or payments in lieu of dividends (as described in 
     new secs. 954(c)(1)(F) and (G), added elsewhere in the Senate 
     amendment). In the case of a regular dealer in property, such 
     property is not considered to produce passive income under 
     these rules, and thus, is not considered to be a passive 
     asset.
     Qualifying estates
       A decedent's estate qualifies for the special treatment 
     only if the decedent was a U.S. citizen or resident at the 
     time of death, and the aggregate value of the decedent's 
     qualified family-owned business interests that are passed to 
     qualified heirs exceeds 50 percent of the decedent's adjusted 
     gross estate (the ``50-percent liquidity test''). For this 
     purpose, qualified heirs include any individual who has been 
     actively employed by the trade or business for at least 10 
     years prior to the date of the decedent's death, and members 
     of the decedent's family. If a qualified heir is not a 
     citizen of the United States, any qualified family-owned 
     business interest acquired by that heir must be held in a 
     trust meeting requirements similar to those imposed on 
     qualified domestic trusts (under present-law sec. 2056A(a)), 
     or through certain other security arrangements that meet the 
     satisfaction of the Treasury Secretary. The 50-percent 
     liquidity test generally is applied by adding all transfers 
     of qualified family-owned business interests made by the 
     decedent to qualified heirs at the time of the decedent's 
     death, plus certain lifetime gifts of qualified family-owned 
     business interests made to members of the decedent's family, 
     and comparing this total to the decedent's adjusted gross 
     estate. To the extent that a decedent held qualified family-
     owned business interests in more than one trade or business, 
     all such interests are aggregated for purposes of applying 
     the 50-percent liquidity test.
       The 50-percent liquidity test is calculated using a ratio, 
     the numerator and denominator of which are described below.
       The numerator is determined by aggregating the value of all 
     qualified family-owned business interests that are includible 
     in the decedent's gross estate and are passed from the 
     decedent to a qualified heir, plus any lifetime transfers of 
     qualified business interests that are made by the decedent to 
     members of the decedent's family (other than the decedent's 
     spouse), provided such interests have been continuously held 
     by members of the decedent's family and were not otherwise 
     includible in the decedent's gross estate. For this purpose, 
     qualified business interests transferred to members of the 
     decedent's family during the decedent's lifetime are valued 
     as of the date of such transfer. This amount is then reduced 
     by all indebtedness of the estate, except for the following: 
     (1) indebtedness on a qualified residence of the decedent 
     (determined in accordance with the requirements for 
     deductibility of mortgage interest set forth in section 
     163(h)(3)); (2) indebtedness incurred to pay the educational 
     or medical expenses of the decedent, the decedent's spouse or 
     the decedent's dependents; and (3) other indebtedness of up 
     to $10,000.
       The denominator is equal to the decedent's gross estate, 
     reduced by any indebtedness of the estate, and increased by 
     the amount of the following transfers, to the extent not 
     already included in the decedent's gross estate: (1) any 
     lifetime transfers of qualified business interests that were 
     made by the decedent to members of the decedent's family 
     (other than the decedent's spouse), provided such 
     interests have been continuously held by members of the 
     decedent's family, plus (2) any other transfers from the 
     decedent to the decedent's spouse that were made within 10 
     years of the date of the decedent's death, plus (3) any 
     other transfers made by the decedent within three years of 
     the decedent's death, except non-taxable transfers made to 
     members of the decedent's family. The Secretary of 
     Treasury is granted authority to disregard de minimis 
     gifts. In determining the amount of gifts made by the 
     decedent, any gift that the donor and the donor's spouse 
     elected to have treated as a split gift (pursuant to sec. 
     2513) is treated as made one-half by each spouse for 
     purposes of this provision.
     Participation requirements
       To qualify for the beneficial treatment provided under the 
     Senate amendment, 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) 
     is required to materially participate in the trade or 
     business for at least five years of any eight-year period 
     within 10 years following the decedent's death. For this 
     purpose, ``material participation'' is defined as under 
     present-law section 2032A (special use valuation) and the 
     regulations promulgated thereunder. See, e.g., Treas. Reg. 
     sec. 20.2032A-3. Under such regulations, no one factor is 
     determinative of the presence of material participation and 
     the uniqueness of the particular industry (e.g., timber, 
     farming, manufacturing, etc.) must be considered. Physical 
     work and participation in management decisions are the 
     principal factors to be considered. For example, an 
     individual generally is considered to be materially 
     participating in the business if he or she personally manages 
     the business fully, regardless of the number of hours worked, 
     as long as any necessary functions are performed.
       If a qualified heir rents qualifying property to a member 
     of the qualified heir's family on a net cash basis, and that 
     family member materially participates in the business, the 
     material participation requirement will be considered to have 
     been met with respect to the qualified heir for purposes of 
     this provision.
     Recapture provisions
       The benefit of the exclusions for qualified family-owned 
     business interests are 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 (i.e., if neither the qualified heir nor any 
     member of his or her family has materially participated in 
     the trade or business for at least five years of any eight-
     year period); (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 conservation contribution under section 
     170(h); (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. A qualified heir 
     who loses U.S. citizenship may avoid such recapture by 
     placing the qualified family-owned business assets into a 
     trust meeting requirements similar to a qualified domestic 
     trust (as described in present law sec. 2056A(a)), or through 
     certain other security arrangements.
       If one of the above recapture events occurs, an additional 
     tax is imposed on the date of such event. As under section 
     2032A, each qualified heir is personally liable for the 
     portion of the recapture tax that is imposed with respect to 
     his or her interest in the qualified family-owned business. 
     Thus, for example, if a brother and sister inherit a 
     qualified family-owned business from their father, and only 
     the sister materially participates in the business, her 
     participation will cause both her and her brother to meet the 
     material participation test. If she ceases to materially 
     participate in the business within 10 years after her 
     father's death (and the brother still does not materially 
     participate), the sister and brother would both be liable for 
     the recapture tax; that is, each would be liable for the 
     recapture tax attributable to his or her interest.
       The portion of the reduction in estate taxes that is 
     recaptured would be dependent upon the number of years that 
     the qualified heir (or members of the qualified heir's 
     family) materially participated in the trade or business 
     after the decedent's death. 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 is recaptured; if the participation was 
     for at least six years but less than seven years, 80 percent 
     of the reduction in estate taxes is recaptured; if the 
     participation was for at least seven years but less than 
     eight years, 60 percent is recaptured; if the participation 
     was for at least eight years but less than nine years, 40 
     percent is recaptured; and if the participation was for at 
     least nine years but less than 10 years, 20 percent of the 
     reduction in estate taxes is recaptured. In general, there is 
     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 may be extended for a period of up to two 
     years if the qualified heir does not begin to use the 
     property for a period of up to two years after the decedent's 
     death.
       If a recapture event occurs with respect to any qualified 
     family-owned business interest (or portion thereof), the 
     amount of reduction in estate taxes attributable to that 
     interest is determined on a proportionate basis. For example, 
     if the decedent's estate included $2 million in qualified 
     family-owned business interests and $1 million of such 
     interests received beneficial treatment under this proposal, 
     one-half of the value of the interest disposed of is deemed 
     to have received the benefits provided under this proposal.
     Effective date
       The provision is effective with respect to the estates of 
     decedents dying after December 31, 1997.

[[Page H6511]]

                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that the exclusion for family-owned business interests 
     may be taken only to the extent that the exclusion for 
     family-owned business interests, plus the amount 
     effectively exempted by the unified credit, does not 
     exceed $1.3 million.
       The conferees clarify that a sale or disposition, in the 
     ordinary course of business, of assets such as inventory or a 
     piece of equipment used in the business (e.g., the sale of 
     crops or a tractor) would not result in recapture of the 
     benefits of the qualified family-owned business exclusion.
     4. Reduction in estate tax for certain land subject to 
         permanent conservation easement (sec. 403 of the Senate 
         amendment)

                              Present Law

       A deduction is allowed for estate and gift tax purposes for 
     a contribution of a qualified real property interest to a 
     charity (or other qualified organization) exclusively for 
     conservation purposes (secs. 2055(f), 2522(d)). For this 
     purpose, a qualified real property interest means the entire 
     interest of the transferor in real property (other than 
     certain mineral interests), a remainder interest in real 
     property, or a perpetual restriction on the use of real 
     property (sec. 170(h)). A ``conservation purpose'' is (1) 
     preservation of land for outdoor recreation by, or the 
     education of, the general public, (2) preservation of natural 
     habitat, (3) preservation of open space for scenic enjoyment 
     of the general public or pursuant to a governmental 
     conservation policy, and (4) preservation of historically 
     important land or certified historic structures. Also, a 
     contribution will be treated as ``exclusively for 
     conservation purposes'' only if the conservation purpose is 
     protected in perpetuity.
       A donor making a qualified conservation contribution 
     generally is not allowed to retain an interest in minerals 
     which may be extracted or removed by any surface mining 
     method. However, deductions for contributions of conservation 
     interests satisfying all of the above requirements will be 
     permitted if two conditions are satisfied. First, the surface 
     and mineral estates in the property with respect to which the 
     contribution is made must have been separated before June 13, 
     1976 (and remain so separated) and, second, the probability 
     of surface mining on the property with respect to which a 
     contribution is made must be so remote as to be negligible 
     (sec. 170(h)(5)(B)).
       The same definition of qualified conservation contributions 
     also applies for purposes of determining whether such 
     contributions qualify as charitable deductions for income tax 
     purposes.

                               House Bill

       No provision.

                            Senate Amendment

     Reduction in estate taxes for certain land subject to 
         permanent conservation easement
       The Senate amendment allows an executor to elect to exclude 
     from the taxable estate 40 percent of the value of any land 
     subject to a qualified conservation easement that meets the 
     following requirements: (1) the land is located within 25 
     miles of a metropolitan area (as defined by the Office of 
     Management and Budget) or a national park or wilderness area, 
     or within 10 miles of an Urban National Forest (as designated 
     by the Forest Service of the U.S. Department of Agriculture); 
     (2) the land has been owned by the decedent or a member of 
     the decedent's family at all times during the three-year 
     period ending on the date of the decedent's death; and (3) a 
     qualified conservation contribution (within the meaning of 
     sec. 170(h)) of a qualified real property interest (as 
     generally defined in sec. 170(h)(2)(C)) was granted by the 
     decedent or a member of his or her family. For purposes of 
     the provision, preservation of a historically important land 
     area or a certified historic structure does not qualify as a 
     conservation purpose. To the extent that the value of such 
     land is excluded from the taxable estate, the basis of such 
     land acquired at death is a carryover basis (i.e., the basis 
     is not stepped-up to its fair market value at death). Debt-
     financed property is not eligible for the exclusion.
       The exclusion amount is calculated based on the value of 
     the property after the conservation easement has been placed 
     on the property. The exclusion from estate taxes does not 
     extend to the value of any development rights retained by the 
     decedent or donor, although payment for estate taxes on 
     retained development rights may be deferred for up to two 
     years, or until the disposition of the property, whichever is 
     earlier. For this purpose, retained development rights are 
     any rights retained to use the land for any commercial 
     purpose which is not subordinate to and directly supportive 
     of farming purposes, as defined in section 6420 (e.g., tree 
     farming, ranching, viticulture, and the raising of other 
     agricultural or horticultural commodities).
     Maximum benefit allowed
       The 40-percent estate tax exclusion for land subject to a 
     qualified conservation easement (described above) may be 
     taken only to the extent that the total exclusion for 
     qualified conservation easements, plus the exclusion for 
     qualified family-owned business interests (described in 
     V.A.3., above), does not exceed $1 million. The executor of 
     an estate holding land subject to a qualified conservation 
     easement and/or qualified family-owned business interests is 
     required to designate which of the two benefits is being 
     claimed with respect to each property on which a benefit is 
     claimed.
       If the value of the conservation easement is less than 30 
     percent of (1) the value of the land without the easement, 
     reduced by (2) the value of any retained development rights, 
     then the exclusion percentage is reduced. The reduction in 
     the exclusion percentage is equal to two percentage points 
     for each point that the above ratio falls below 30 percent. 
     Thus, for example, if the value of the easement is 25 percent 
     of the value of the land before the easement less the value 
     of the retained development rights, the exclusion percentage 
     is 30 percent (i.e., the 40 percent amount is reduced by 
     twice the difference between 30 percent and 25 percent). 
     Under this calculation, if the value of the easement is 10 
     percent or less of the value of the land before the easement 
     less the value of the retained development rights, the 
     exclusion percentage is equal to zero.
     Treatment of land subject to a conservation easement for 
         purposes of special-use valuation
       The granting of a qualified conservation easement (as 
     defined above) is not treated as a disposition triggering the 
     recapture provisions of section 2032A. In addition, the 
     existence of a qualified conservation easement does not 
     prevent such property from subsequently qualifying for 
     special-use valuation treatment under section 2032A.
     Retained mineral interests
       The Senate amendment also allows a charitable deduction 
     (for income tax purposes or estate tax purposes) to taxpayers 
     making a contribution of a permanent conservation easement on 
     property where a mineral interest has been retained and 
     surface mining is possible, but its probability is ``so 
     remote as to be negligible.'' Present law provides for a 
     charitable deduction in such a case if the mineral interests 
     have been separated from the land prior to June 13, 1976. The 
     provision allows such a charitable deduction to be taken 
     regardless of when the mineral interests had been separated.
     Effective date
       The estate tax exclusion applies to decedents dying after 
     December 31, 1997. The rules with respect to the treatment of 
     conservation easements under section 2032A and with respect 
     to retained mineral interests are effective for easements 
     granted after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that the maximum exclusion for land subject to a 
     qualified conservation easement is limited to $100,000 in 
     1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, 
     and $500,000 in 2002 and thereafter. The exclusion for land 
     subject to a qualified conservation easement may be taken in 
     addition to the maximum exclusion for qualified family-owned 
     business interests (i.e., there is no coordination between 
     the two provisions).
       The conference agreement provides that de minimis 
     commercial recreational activity that is consistent with the 
     conservation purpose, such as the granting of hunting and 
     fishing licenses, will not cause the property to fail to 
     qualify under this provision. It is anticipated that the 
     Secretary of the Treasury will provide guidance as to the 
     definition of ``de minimis'' activities. In addition, the 
     conference agreement makes technical modifications (a) to 
     provide that the definition of farming for purposes of this 
     provision is the same as the definition set forth in section 
     2032A(e)(5), and (b) to clarify that a post-mortem 
     conservation easement may be placed on the property, as long 
     as the easement has been made no later than the date of the 
     election.
       The conferees clarify that debt-financed property is 
     eligible for this provision to the extent of the net equity 
     in the property. For example, if a $1 million property is 
     subject to an outstanding debt balance of $100,000, it is 
     treated in the same manner as a $900,000 property that is not 
     debt-financed.
     5. Installment payments of estate tax attributable to closely 
         held businesses (secs. 502-503 of the House bill and 
         secs. 404-405 of the Senate amendment)
     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 H6512]]

     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, 
     or if at least 20 percent of the value of the voting stock is 
     included in determining the decedent's gross estate.

                               House Bill

       The House bill extends the period for which Federal estate 
     tax installments can be made under section 6166 to a maximum 
     period of 24 years. If the election is made, the estate pays 
     only interest for the first four years, followed by up to 20 
     annual installments of principal and interest.
       In addition, the House bill provides that no interest is 
     imposed on the amount of deferred estate tax attributable to 
     the first $1,000,000 in taxable value of the closely held 
     business (i.e., the first $1,000,000 in value in excess of 
     the effective exemption provided by the unified credit).
       The interest rate imposed on the amount of deferred estate 
     tax attributable to the taxable value of the closely held 
     business in excess of $1,000,000 is reduced to an amount 
     equal to 45 percent of the rate applicable to underpayments 
     of tax. The interest paid on estate taxes deferred under 
     section 6166 is not deductible for estate or income tax 
     purposes.
       Effective date.--The provision is effective for decedents 
     dying after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement reduces the 4-percent interest 
     rate to 2 percent, and makes the interest paid on estate 
     taxes deferred under section 6166 non-deductible for estate 
     or income tax purposes. The 2-percent interest rate is 
     imposed on the amount of deferred estate tax attributable to 
     the first $1,000,000 in taxable value of the closely held 
     business (i.e., the first $1,000,000 in value in excess of 
     the effective exemption provided by the unified credit and 
     any other exclusions). 55 The interest rate 
     imposed on the amount of deferred estate tax attributable to 
     the taxable value of the closely held business in excess of 
     $1,000,000 is reduced to an amount equal to 45 percent of the 
     rate applicable to underpayments of tax.
---------------------------------------------------------------------------
     \55\  The $1,000,000 threshold is indexed under other 
     provisions of the bill.
---------------------------------------------------------------------------
       The conference agreement does not include the provision 
     that extends the repayment period to a maximum period of 24 
     years or the provision that provides a zero-percent interest 
     rate for a portion of the deferred estate tax attributable to 
     closely held businesses.
       Effective date.--The provision is effective for decedents 
     dying after December 31, 1997. Estates deferring estate tax 
     under current law may make a one-time election to use the 
     lower interest rates and forego the interest deduction for 
     installments due after the date of the election (but such 
     estates do not receive the benefit of the increase in the 
     amount eligible for the 6601(j) interest rate--i.e., only the 
     amount that was previously eligible for the 4-percent rate 
     would be eligible for the 2-percent rate).
     6. Estate tax recapture from cash leases of specially-valued 
         property (sec. 504 of the House bill and sec. 406 of the 
         Senate amendment)

                              Present Law

       A Federal estate tax is imposed on the value of property 
     passing at death. Generally, such property is included in the 
     decedent's estate at its fair market value. Under section 
     2032A, the executor may elect to value certain ``qualified 
     real property'' used in farming or other qualifying trade or 
     business at its current use value rather than its highest and 
     best use. If, after the special-use valuation election is 
     made, the heir who acquired the real property ceases to use 
     it in its qualified use within 10 years (15 years for 
     individuals dying before 1982) of the decedent's death, an 
     additional estate tax is imposed in order to ``recapture'' 
     the benefit of the special-use valuation (sec. 2032A(c)).
       Some courts have held that cash rental of specially-valued 
     property after the death of the decedent is not a qualified 
     use under section 2032A because the heirs no longer bear the 
     financial risk of working the property, and, therefore, 
     results in the imposition of the additional estate tax under 
     section 2032A(c). See Martin v. Commissioner, 783 F.2d 81 
     (7th Cir. 1986) (cash lease to unrelated party not qualified 
     use); Williamson v. Commissioner, 93 T.C. 242 (1989), aff'd, 
     974 F.2d 1525 (9th Cir. 1992) (cash lease to family member 
     not a qualified use); Fisher v. Commissioner, 65 T.C.M. 2284 
     (1993) (cash lease to family member not a qualified use); cf. 
     Minter v. U.S., 19 F.3d 426 (8th Cir. 1994) (cash lease to 
     family's farming corporation is qualified use); Estate of 
     Gavin v. U.S., 1997 U.S. App. Lexis 10383 (8th Cir. 1997) 
     (heir's option to pay cash rent or 50 percent crop share is 
     qualified use).
       With respect to a decedent's surviving spouse, a special 
     rule provides that the surviving spouse will not be treated 
     as failing to use the property in a qualified use solely 
     because the spouse rents the property to a member of the 
     spouse's family on a net cash basis. (sec. 2032A(b)(5)). 
     Under section 2032A, members of an individual's family 
     include (1) the individual's spouse, (2) the individual's 
     ancestors, (3) lineal descendants of the individual, of the 
     individual's spouse, or of the individual's parents, and (4) 
     the spouses of any such lineal descendants.

                               House Bill

       The House bill provides that the cash lease of specially-
     valued real property by a lineal descendant of the decedent 
     to a member of the lineal descendant's family, who continues 
     to operate the farm or closely held business, does not cause 
     the qualified use of such property to cease for purposes of 
     imposing the additional estate tax under section 2032A(c).
       Effective date.--The provision is effective for cash 
     rentals occurring after December 31, 1976.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     7. Clarify eligibility for extension of time for payment of 
         estate tax (sec. 505 of the House 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. To qualify for the installment 
     payment election, the business must meet certain 
     requirements. If certain events occur during the repayment 
     period (e.g., the closely held business is sold), full 
     payment of all deferred estate taxes is required at that 
     time.
       Under present law, there is limited access to judicial 
     review of disputes regarding initial or continuing 
     eligibility for the deferral and installment election under 
     section 6166. If the Commissioner determines that an estate 
     was not initially eligible for deferral under section 6166, 
     or has lost its eligibility for such deferral, the estate is 
     required to pay the full amount of estate taxes asserted by 
     the Commissioner as being owed in order to obtain judicial 
     review of the Commissioner's determination.

                               House Bill

       The House bill authorizes the U.S. Tax Court to provide 
     declaratory judgments regarding initial or continuing 
     eligibility for deferral under section 6166.
       Effective date.--The provision applies to decedents dying 
     after date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     8. Gifts may not be revalued for estate tax purposes after 
         expiration of statute of limitations (sec. 506 of the 
         House bill)

                              Present Law

       The Federal estate and gift taxes are unified so that a 
     single progressive rate schedule is applied to an 
     individual's cumulative gifts and bequests. The tax on gifts 
     made in a particular year is computed by determining the tax 
     on the sum of the taxable gifts made that year and all prior 
     years and then subtracting the tax on the prior years taxable 
     gifts and the unified credit. Similarly, the estate tax is 
     computed by determining the tax on the sum of the taxable 
     estate and prior taxable gifts and then subtracting the tax 
     on taxable gifts and the unified credit. Under a special rule 
     applicable to the computation of the gift tax (sec. 2504(c)), 
     the value of gifts made in prior years is the value that was 
     used to determine the prior year's gift tax. There is no 
     comparable rule in the case of the computation of the estate 
     tax.
       Generally, any estate or gift tax must be assessed within 
     three years after the filing of the return. No proceeding in 
     a court for the collection of an estate or gift tax can be 
     begun without an assessment within the three-year period. 
     If no return is filed, the tax may be assessed, or a suit 
     commenced to collect the tax without assessment, at any 
     time. If an estate or gift tax return is filed, and the 
     amount of unreported items exceeds 25 percent of the 
     amount of the reported items, the tax may be assessed or a 
     suit commenced to collect the tax without assessment, 
     within six years after the return was filed (sec. 6501).
       Commencement of the statute of limitations generally does 
     not require that a particular gift be disclosed. A special 
     rule, however, applies to certain gifts that are valued under 
     the special valuation rules of Chapter 14. The gift tax 
     statute of limitations runs for such a gift only if it is 
     disclosed on a gift tax return in a manner adequate to 
     apprise the Secretary of the Treasury of the nature of the 
     item.
       Most courts have permitted the Commissioner to redetermine 
     the value of a gift for which the statute of limitations 
     period for the gift tax has expired in order to determine the 
     appropriate tax rate bracket and unified credit for the 
     estate tax. See, e.g., Evanson v. United States, 30 F.3d 960 
     (9th Cir. 1994); Stalcup v. United States, 946 F. 2d 1125 
     (5th Cir. 1991); Estate of Levin, 1991 T.C. Memo 1991-208, 
     aff'd 986 F. 2d 91 (4th Cir. 1993); Estate of Smith v. 
     Commissioner, 94 T.C. 872 (1990). But see Boatman's First 
     National Bank v. United States, 705 F. Supp. 1407 (W.D. Mo. 
     1988) (Commissioner not permitted to revalue gifts).

[[Page H6513]]

                               House Bill

       The House bill provides that a gift for which the 
     limitations period has passed cannot be revalued for purposes 
     of determining the applicable estate tax bracket and 
     available unified credit. For gifts made in calendar years 
     after the date of enactment, the House bill also extends the 
     special rule governing gifts valued under Chapter 14 to all 
     gifts. Thus, the statute of limitations will not run on an 
     inadequately disclosed transfer in calendar years after the 
     date of enactment, regardless of whether a gift tax return 
     was filed for other transfers in that same year.
       It is intended that, in order to revalue a gift that has 
     been adequately disclosed on a gift tax return, the IRS must 
     issue a final notice of redetermination of value (a ``final 
     notice'') within the statute of limitations applicable to the 
     gift for gift tax purposes (generally, three years). This 
     rule is applicable even where the value of the gift as shown 
     on the return does not result in any gift tax being owed 
     (e.g., through use of the unified credit). It also is 
     anticipated that the IRS will develop an administrative 
     appeals process whereby a taxpayer can challenge a 
     redetermination of value by the IRS prior to issuance of a 
     final notice.
       A taxpayer who is mailed a final notice may challenge the 
     redetermined value of the gift (as contained in the final 
     notice) by filing a motion for a declaratory judgment with 
     the Tax Court. The motion must be filed on or before 90 days 
     from the date that the final notice was mailed. The statute 
     of limitations is tolled during the pendency of the Tax Court 
     proceeding.
       Effective date.--The provision generally applies to gifts 
     made after the date of enactment. The extension of the 
     special rule under chapter 14 to all gifts applies to gifts 
     made in calendar years after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     9. Repeal of throwback rules applicable to domestic trusts 
         (sec. 507 of the House bill)

                              Present Law

       A nongrantor trust is treated as a separate taxpayer for 
     Federal income tax purposes. Such a trust generally is 
     treated as a conduit with respect to amounts distributed 
     currently 56 and taxed with respect to any income 
     which is accumulated in the trust rather than distributed. A 
     separate graduated tax rate structure applies to trusts which 
     historically has permitted accumulated trust income to be 
     taxed at lower rates than the rates applicable to trust 
     beneficiaries. This benefit often was compounded through the 
     creation of multiple trusts.
---------------------------------------------------------------------------
     \56\ The conduit treatment is achieved by allowing the trust 
     a deduction for amounts distributed to beneficiaries during 
     the taxable year to the extent of distributable net income 
     and by including such distributions in the beneficiaries' 
     income.
---------------------------------------------------------------------------
       The Internal Revenue Code has several rules intended to 
     limit the benefit that would otherwise occur from using the 
     lower rates applicable to one or more trusts. Under the so-
     called ``throwback'' rules, the distribution of previously 
     accumulated trust income to a beneficiary will be subject to 
     tax (in addition to any tax paid by the trust on that income) 
     where the beneficiary's average top marginal rate in the 
     previous five years is higher than those of the trust.
       Under section 643(f), two or more trusts are treated as one 
     trust if (1) the trusts have substantially the same grantor 
     or grantors and substantially the same primary beneficiary or 
     beneficiaries, and (2) a principal purpose for the existence 
     of the trusts is to avoid Federal income tax. For trusts that 
     were irrevocable as of March 1, 1984, section 643(f) applies 
     only to contributions to corpus after that date.
       Under section 644, if property is sold within two years of 
     its contribution to a trust, the gain that would have been 
     recognized had the contributor sold the property is taxed at 
     the contributor's marginal tax rates. In effect, section 644 
     treats such gains as if the contributor had realized the gain 
     and then transferred the net after-tax proceeds from the sale 
     to the trust as corpus.
       Sections 665 through 668 apply different rules to 
     distributions of previously accumulated trust income from a 
     foreign trust than to distributions of such income from 
     domestic trusts. If a foreign trust accumulates income, 
     changes its situs so as to become a domestic trust, and then 
     makes a distribution that is deemed to have been made in a 
     year in which the trust was a foreign trust, the distribution 
     is treated as a distribution from a foreign trust for 
     purposes of the accumulation distribution rules. Rev. Rul. 
     91-6, 1991-1 C.B. 89.

                               House Bill

       The House bill exempts from the throwback rules amounts 
     distributed by a domestic trust after the date of enactment. 
     The House bill also provides that precontribution gain on 
     property sold by a domestic trust no longer is subject to 
     section 644 (i.e., taxed at the contributor's marginal tax 
     rates).
       The treatment of foreign trusts, including the treatment of 
     foreign trusts that become domestic trusts,57 
     remains unchanged.
---------------------------------------------------------------------------
     \57\ Rev. Rul. 91-6, 1991-1 C.B. 89.
---------------------------------------------------------------------------
        Effective date.--The provision with respect to the 
     throwback rules is effective for distributions made in 
     taxable years beginning after the date of enactment. The 
     modification to section 644 applies to sales or exchanges 
     after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, except 
     that the throwback rules continue to apply with respect to 
     (a) foreign trusts, (b) domestic trusts that were once 
     treated as foreign trusts (except as provided in Treasury 
     regulations), and (c) domestic trusts created before March 1, 
     1984, that would be treated as multiple trusts under sec. 
     643(f) of the Code.
     10. Unified credit of decedent increased by unified credit of 
         spouse used on split gift included in decedent's gross 
         estate (sec. 508 of the House bill)

                              Present Law

       A gift tax is imposed on transfers by gift during life and 
     an estate tax is imposed on transfers at death. The gift and 
     estate taxes are a unified transfer tax system in that one 
     progressive tax is imposed on the cumulative transfers during 
     lifetime and at death. The first $10,000 of gifts of present 
     interests to each donee during any one calendar year are 
     excluded from Federal gift tax. Under section 2513, one 
     spouse can elect to treat a gift made by the other spouse to 
     a third person as made one-half by each spouse (i.e., ``gift-
     splitting'').
       The amount of estate tax payable generally is determined by 
     multiplying the applicable tax rate (from the unified rate 
     schedule) by the cumulative post-1976 taxable transfers made 
     by the taxpayer and then subtracting any transfer taxes 
     payable for prior taxable periods. This amount is reduced by 
     any remaining available unified credit (and other applicable 
     credits) to determine the estate tax liability. The estate 
     tax is imposed on all of the assets held by the decedent at 
     his death, including the value of certain property previously 
     transferred by the decedent in which the decedent had certain 
     retained powers or interests. In such circumstances, property 
     that has been treated as a gift made one-half by each spouse 
     may be includible in both spouses' estates.

                               House Bill

       With respect to any split-gift property that is 
     subsequently includible in both spouses' estates, the House 
     bill increases the unified credit allowable to the decedent's 
     estate by the amount of the unified credit previously allowed 
     to the decedent's spouse with respect to the split gift.
       Effective date.--The provision applies to gifts made after 
     the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     11. Reformation of defective bequests to spouse of decedent 
         (sec. 509 of the House bill)

                              Present Law

       A ``marital deduction'' generally is allowed for estate and 
     gift tax purposes for the value of property passing to a 
     spouse. However, ``terminable interest'' property (i.e., an 
     interest in property that will terminate or fail) transferred 
     to a spouse generally will only qualify for the marital 
     deduction under certain special rules designed to ensure that 
     there will be an estate or gift tax to the transferee spouse 
     on unspent transferred proceeds. Thus, the effect of a 
     marital deduction with the terminable interest rule is to 
     provide only a method of deferral of the estate or gift tax, 
     not exemption. One of the special terminable interest rules 
     (Code sec. 2056(b)(5)) provides that the marital deduction is 
     allowed where the decedent transfers property to a trust that 
     is required to pay income to the surviving spouse and the 
     surviving spouse has a general power of appointment at that 
     spouse's death (under this so-called ``power of appointment 
     trust,'' the power of appointment both provides the surviving 
     spouse with power to control the ultimate disposition of 
     the trust assets and assures that the trust assets will be 
     subject to estate or gift tax). Another special terminable 
     interest rule called the ``qualified terminable interest 
     property'' rule (``QTIP'') generally permits a marital 
     deduction for transfers by the decedent to a trust that is 
     required to distribute all of the income to the surviving 
     spouse at least annually and an election is made to 
     subject the transferee spouse to transfer tax on the trust 
     property. To qualify for the marital deduction, a power of 
     appointment trust or QTIP trust must meet certain specific 
     requirements. If there is a technical defect in meeting 
     those requirements, the marital deduction may be lost.

                               House Bill

       The House bill allows the marital deduction with respect to 
     a defective power of appointment or QTIP trust if there is a 
     ``qualified reformation'' of the trust that corrects the 
     defect. In order to qualify, the reformation must change the 
     governing instrument in a manner that cures the defects to 
     qualification of the trust for the marital deduction. In 
     addition, where a reformation proceeding is commenced after 
     the due date for the estate tax return (including 
     extensions), the reformation would qualify only if, prior to 
     reformation, the governing instrument

[[Page H6514]]

     provides (1) that the surviving spouse is entitled to all of 
     the income from the property for life, and (2) no person 
     other than the surviving spouse is entitled to any 
     distributions during the surviving spouse's life. With 
     respect to QTIP, an election to qualify must be made by the 
     executor on the estate tax return as required by section 
     2056(b)(7)(B)(v).
       The determination of whether a marital deduction should be 
     allowed (i.e., the reformation has cured the defects to 
     qualification and otherwise qualifies under this provision) 
     is made either as of the due date for filing the estate or 
     gift tax return (including any extensions) or the time that 
     changes are completed pursuant to a reformation proceeding. 
     The statute of limitations is extended with respect to the 
     estate or gift tax attributable to the trust property until 
     one year after the date the Treasury Department is notified 
     that a qualified reformation has been completed or that the 
     reformation proceeding has otherwise terminated.
       Effective date.--The provision applies to decedents dying 
     after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

                 B. Generation-Skipping Tax Provisions

     1. Severing of trusts holding property having an inclusion 
         ratio of greater than zero (sec. 511 of the House bill)

                              Present Law

       A generation-skipping transfer tax (``GST'' tax) generally 
     is imposed on transfers, either directly or through a trust 
     or similar arrangement, to a skip person (i.e., a beneficiary 
     in more than one generation below that of the transferor). 
     Transfers subject to the GST tax include direct skips, 
     taxable terminations and taxable distributions. An exemption 
     of $1 million is provided for each person making generation-
     skipping transfers. The exemption may be allocated by a 
     transferor (or his or her executor) to transferred property.
       If the value of the transferred property exceeds the amount 
     of the GST exemption allocated to that property, the GST tax 
     generally is determined by multiplying a flat tax rate equal 
     to the highest estate tax rate (i.e., currently 55 percent) 
     by the ``inclusion percentage'' and the value of the taxable 
     property at the time of the taxable event. The ``inclusion 
     percentage'' is the number one minus the ``exclusion 
     percentage''. The exclusion percentage generally is 
     calculated by dividing the amount of the GST exemption 
     allocated to the property by the value of the property.
       Under Treasury regulations, trusts that are included in the 
     transferor's gross estate or created under the transferor's 
     will may be validly severed only if (1) the trust is severed 
     according to a direction in the governing instrument; or (2) 
     the trust is severed pursuant to the trustee's discretionary 
     powers, but only if certain other conditions are satisfied 
     (e.g., the severance occurs or a reformation proceeding 
     begins before the estate tax return is due). Treas. Reg. 
     26.2654-1(b).

                               House Bill

       If a trust with an inclusion ratio of greater than zero is 
     severed into two separate trusts, the House bill allows the 
     trustee to elect to treat one of the separate trusts as 
     having an inclusion ratio of zero and the other separate 
     trust as having an inclusion ratio of one. To qualify for 
     this treatment, the separate trust with the inclusion ratio 
     of one must receive an interest in each property held by the 
     single trust (prior to severance) equal to the single trust's 
     inclusion ratio, except to the extent otherwise provided by 
     regulation. The remaining interests in each property will be 
     transferred to the separate trust with the inclusion ratio of 
     zero. The election must be irrevocable, and must be made at a 
     time and in a manner prescribed by the Treasury Department.
       Effective date.--The provision is effective for severances 
     of trusts occurring after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     2. Modification of generation-skipping transfer tax for 
         transfers to individuals with deceased parents (sec. 512 
         of the House bill and sec. 407 of the Senate amendment)

                              Present Law

       Under the ``predeceased parent exception'', a direct skip 
     transfer to a transferor's grandchild is not subject to the 
     generation-skipping transfer (``GST'') tax if the child of 
     the transferor who was the grandchild's parent is deceased at 
     the time of the transfer (sec. 2612(c)(2)). This 
     ``predeceased parent exception'' to the GST tax is not 
     applicable to (1) transfers to collateral heirs, e.g., 
     grandnieces or grandnephews, or (2) taxable terminations or 
     taxable distributions.

                               House Bill

       The House bill extends the predeceased parent exception to 
     transfers to collateral heirs, provided that the decedent has 
     no living lineal descendants at the time of the transfer. For 
     example, the exception would apply to a transfer made by an 
     individual (with no living lineal heirs) to a grandniece 
     where the transferor's nephew or niece who is the parent of 
     the grandniece is deceased at the time of the transfer.
       In addition, the House bill extends the predeceased parent 
     exception (as modified by the change in the preceding 
     paragraph) to taxable terminations and taxable distributions, 
     provided that the parent of the relevant beneficiary was dead 
     at the earliest time that the transfer (from which the 
     beneficiary's interest in the property was established) was 
     subject to estate or gift tax. For example, where a trust was 
     established to pay an annuity to a charity for a term for 
     years with a remainder interest granted to a grandson, the 
     termination of the term for years would not be a taxable 
     termination subject to the GST tax if the grandson's parent 
     (who is the son or daughter of the transferor) is deceased at 
     the time the trust was created and the transfer creating the 
     trust was subject to estate or gift tax.
       Effective date.--The provision is effective for generation 
     skipping transfers occurring after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

            VI. EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS

A. Research Tax Credit (sec. 601 of the House bill and sec. 501 of the 
                           Senate amendment)

                              Present Law

     General rule
       Section 41 provides for a research tax credit equal to 20 
     percent of the amount by which a taxpayer's qualified 
     research expenditures for a taxable year exceeded its base 
     amount for that year. The research tax credit expired and 
     generally will not apply to amounts paid or incurred after 
     May 31, 1997.1
---------------------------------------------------------------------------
     \1\ When originally enacted, the research tax credit applied 
     to qualified expenses incurred after June 30, 1981. The 
     credit was modified several times and was extended through 
     June 30, 1995. The credit later was extended for the period 
     July 1, 1996, through May 31, 1997 (with a special 11-month 
     extension for taxpayers that elect to be subject to the 
     alternative incremental research credit regime).
---------------------------------------------------------------------------
       A 20-percent research tax credit also applied to the excess 
     of (1) 100 percent of corporate cash expenditures (including 
     grants or contributions) paid for basic research conducted by 
     universities (and certain nonprofit scientific research 
     organizations) over (2) the sum of (a) the greater of two 
     minimum basic research floors plus (b) an amount reflecting 
     any decrease in nonresearch giving to universities by the 
     corporation as compared to such giving during a fixed-base 
     period, as adjusted for inflation. This separate credit 
     computation is commonly referred to as the ``university basic 
     research credit'' (see sec. 41(e)).
     Computation of allowable credit
       Except for certain university basic research payments made 
     by corporations, the research tax credit applies only to the 
     extent that the taxpayer's qualified research expenditures 
     for the current taxable year exceed its base amount. The base 
     amount for the current year generally is computed by 
     multiplying the taxpayer's ``fixed-base percentage'' by the 
     average amount of the taxpayer's gross receipts for the four 
     preceding years. If a taxpayer both incurred qualified 
     research expenditures and had gross receipts during each of 
     at least three years from 1984 through 1988, then its 
     ``fixed-base percentage'' is the ratio that its total 
     qualified research expenditures for the 1984-1988 period 
     bears to its total gross receipts for that period (subject to 
     a maximum ratio of .16). All other taxpayers (so-called 
     ``start-up firms'') are assigned a fixed-base percentage of 3 
     percent.2
---------------------------------------------------------------------------
     \2\ The Small Business Job Protection Act of 1996 expanded 
     the definition of ``start-up firms'' under section 
     41(c)(3)(B)(I) to include any firm if the first taxable year 
     in which such firm had both gross receipts and qualified 
     research expenses began after 1983.
     A special rule (enacted in 1993) is designed to gradually 
     recompute a start-up firm's fixed-base percentage based on 
     its actual research experience. Under this special rule, a 
     start-up firm will be assigned a fixed-base percentage of 3 
     percent for each of its first five taxable years after 1993 
     in which it incurs qualified research expenditures. In the 
     event that the research credit is extended beyond the 
     scheduled expiration date, a start-up firm's fixed-base 
     percentage for its sixth through tenth taxable years after 
     1993 in which it incurs qualified research expenditures will 
     be a phased-in ratio based on its actual research experience. 
     For all subsequent taxable years, the taxpayer's fixed-base 
     percentage will be its actual ratio of qualified research 
     expenditures to gross receipts for any five years selected by 
     the taxpayer from its fifth through tenth taxable years after 
     1993 (sec. 41(c)(3)(B)).
---------------------------------------------------------------------------
       In computing the credit, a taxpayer's base amount may not 
     be less than 50 percent of its current-year qualified 
     research expenditures.
       To prevent artificial increases in research expenditures by 
     shifting expenditures among commonly controlled or otherwise 
     related entities, a special aggregation rule provides that 
     all members of the same controlled group of corporations are 
     treated as a single taxpayer (sec. 41(f)(1)). Special rules 
     apply for computing the credit when a major portion of a 
     business changes hands, under which qualified research 
     expenditures and gross receipts for periods prior to the 
     change of ownership of a trade or business are treated as 
     transferred with the trade or business that gave rise to 
     those expenditures and receipts for purposes of recomputing a 
     taxpayer's fixed-base percentage (sec. 41(f)(3)).

[[Page H6515]]

     Alternative incremental research credit regime
       As part of the Small Business Job Protection Act of 1996, 
     taxpayers are allowed to elect an alternative incremental 
     research credit regime. If a taxpayer elects to be subject to 
     this alternative regime, the taxpayer is assigned a three-
     tiered fixed-base percentage (that is lower than the fixed-
     base percentage otherwise applicable under present law) and 
     the credit rate likewise is reduced. Under the alternative 
     credit regime, a credit rate of 1.65 percent applies to the 
     extent that a taxpayer's current-year research expenses 
     exceed a base amount computed by using a fixed-base 
     percentage of 1 percent (i.e., the base amount equals 1 
     percent of the taxpayer's average gross receipts for the four 
     preceding years) but do not exceed a base amount computed by 
     using a fixed-base percentage of 1.5 percent. A credit rate 
     of 2.2 percent applies to the extent that a taxpayer's 
     current-year research expenses exceed a base amount computed 
     by using a fixed-base percentage of 1.5 percent but do not 
     exceed a base amount computed by using a fixed-base 
     percentage of 2 percent. A credit rate of 2.75 percent 
     applies to the extent that a taxpayer's current-year research 
     expenses exceed a base amount computed by using a fixed-base 
     percentage of 2 percent. An election to be subject to this 
     alternative incremental credit regime may be made only for a 
     taxpayer's first taxable year beginning after June 30, 1996, 
     and before July 1, 1997, and such an election applies to that 
     taxable year and all subsequent years (in the event that the 
     credit subsequently is extended by Congress) unless revoked 
     with the consent of the Secretary of the Treasury. If a 
     taxpayer elects the alternative incremental research credit 
     regime for its first taxable year beginning after June 30, 
     1996, and before July 1, 1997, then all qualified research 
     expenses paid or incurred during the first 11 months of such 
     taxable year are treated as qualified research expenses for 
     purposes of computing the taxpayer's credit.
     Eligible expenditures
       Qualified research expenditures eligible for the research 
     tax credit consist of: (1) ``in-house'' expenses of the 
     taxpayer for wages and supplies attributable to qualified 
     research; (2) certain time-sharing costs for computer use in 
     qualified research; and (3) 65 percent of amounts paid by the 
     taxpayer for qualified research conducted on the taxpayer's 
     behalf (so-called ``contract research 
     expenses'').3
---------------------------------------------------------------------------
     \3\ Under a special rule enacted as part of the Small 
     Business Job Protection Act of 1996, 75 percent of amounts 
     paid to a research consortium for qualified research is 
     treated as qualified research expenses eligible for the 
     research credit (rather than 65 percent under the general 
     rule under section 41(b)(3) governing contract research 
     expenses) if (1) such research consortium is a tax-exempt 
     organization that is described in section 501(c)(3) (other 
     than a private foundation) or section 501(c)(6) and is 
     organized and operated primarily to conduct scientific 
     research, and (2) such qualified research is conducted by the 
     consortium on behalf of the taxpayer and one or more persons 
     not related to the taxpayer.
---------------------------------------------------------------------------
       To be eligible for the credit, the research must not only 
     satisfy the requirements of present-law section 174 
     (described below) but must be undertaken for the purpose of 
     discovering information that is technological in nature, the 
     application of which is intended to be useful in the 
     development of a new or improved business component of the 
     taxpayer, and must pertain to functional aspects, 
     performance, reliability, or quality of a business component. 
     Research does not qualify for the credit if substantially all 
     of the activities relate to style, taste, cosmetic, or 
     seasonal design factors (sec. 41(d)(3)). In addition, 
     research does not qualify for the credit if conducted after 
     the beginning of commercial production of the business 
     component, if related to the adaptation of an existing 
     business component to a particular customer's requirements, 
     if related to the duplication of an existing business 
     component from a physical examination of the component itself 
     or certain other information, or if related to certain 
     efficiency surveys, market research or development, or 
     routine quality control (sec. 41(d)(4)).
       Expenditures attributable to research that is conducted 
     outside the United States do not enter into the credit 
     computation. In addition, the credit is not available for 
     research in the social sciences, arts, or humanities, nor is 
     it available for research to the extent funded by any grant, 
     contract, or otherwise by another person (or governmental 
     entity).
     Relation to deduction
       Under section 174, taxpayers may elect to deduct currently 
     the amount of certain research or experimental expenditures 
     incurred in connection with a trade or business, 
     notwithstanding the general rule that business expenses to 
     develop or create an asset that has a useful life extending 
     beyond the current year must be capitalized. However, 
     deductions allowed to a taxpayer under section 174 (or any 
     other section) are reduced by an amount equal to 100 percent 
     of the taxpayer's research tax credit determined for the 
     taxable year. Taxpayers may alternatively elect to claim a 
     reduced research tax credit amount under section 41 in lieu 
     of reducing deductions otherwise allowed (sec. 280C(c)(3)).

                               House Bill

       The research tax credit is extended for 19 months--i.e., 
     generally for the period June 1, 1997, through December 31, 
     1998.
       Under the House bill, taxpayers are permitted to elect the 
     alternative incremental research credit regime under section 
     41(c)(4) for any taxable year beginning after June 30, 1996, 
     and such election will apply to that taxable year and all 
     subsequent taxable years unless revoked with the consent of 
     the Secretary of the Treasury.
       Effective date.--The provision generally is effective for 
     qualified research expenditures paid or incurred during the 
     period June 1, 1997, through December 31, 1998. A special 
     rule provides that, notwithstanding the general termination 
     date for the research credit of December 31, 1998, if a 
     taxpayer elects to be subject to the alternative incremental 
     research credit regime for its first taxable year beginning 
     after June 30, 1996, and before July 1, 1997, the alternative 
     incremental research credit will be available during the 
     entire 30-month period beginning with the first month of such 
     taxable year--i.e., the equivalent of the 11-month extension 
     provided for by the Small Business Job Protection Act of 1996 
     plus an additional 19-month extension provided for by this 
     bill. However, to prevent taxpayers from effectively 
     obtaining more than 30-months of research credits from the 
     Small Business Job Protection Act of 1996 and this bill, the 
     30-month period for taxpayers electing the alternative 
     incremental research credit regime is reduced by the number 
     of months (if any) after June 1996 with respect to which the 
     taxpayer claimed research credit amounts under the regular, 
     20-percent research credit rules.

                            Senate Amendment

       The research tax credit is extended for 24 months--i.e., 
     generally for the period June 1, 1997, through May 31, 1999.
       Under the Senate amendment, taxpayers are permitted to 
     elect the alternative incremental research credit regime 
     under section 41(c)(4) for any taxable year beginning after 
     June 30, 1996, and such election will apply to that taxable 
     year and all subsequent taxable years unless revoked with the 
     consent of the Secretary of the Treasury.
       Effective date.--The provision generally is effective for 
     qualified research expenditures paid or incurred during the 
     period June 1, 1997, through December 31, 1999. A special 
     rule provides that, notwithstanding the general termination 
     date for the research credit of December 31, 1999, if a 
     taxpayer elects to be subject to the alternative incremental 
     research credit regime for its first taxable year beginning 
     after June 30, 1996, and before July 1, 1997, the alternative 
     incremental research credit will be available during the 
     entire 35-month period beginning with the first month of such 
     taxable year--i.e., the equivalent of the 11-month extension 
     provided for by the Small Business Job Protection Act of 1996 
     plus an additional 24-month extension provided for by the 
     Senate amendment. However, to prevent taxpayers from 
     effectively obtaining more than 35-months of research credits 
     from the Small Business Job Protection Act of 1996 and this 
     bill, the 35-month period for taxpayers electing the 
     alternative incremental research credit regime is reduced by 
     the number of months (if any) after June 1996 with respect to 
     which the taxpayer claimed research credit amounts under the 
     regular, 20-percent research credit rules.

                          Conference Agreement

       Under the conference agreement, the research tax credit is 
     extended for 13 months--i.e., generally for the period June 
     1, 1997, through June 30, 1998.
       Under the provision, taxpayers are permitted to elect the 
     alternative incremental research credit regime under section 
     41(c)(4) for any taxable year beginning after June 30, 1996, 
     and such election will apply to that taxable year and all 
     subsequent taxable years unless revoked with the consent of 
     the Secretary of the Treasury.
       Effective date.--The provision generally is effective for 
     qualified research expenditures paid or incurred during the 
     period June 1, 1997, through June 30, 1998. A special rule 
     provides that, notwithstanding the general termination date 
     for the research credit of June 30, 1998, if a taxpayer 
     elects to be subject to the alternative incremental research 
     credit regime for its first taxable year beginning after June 
     30, 1996, and before July 1, 1997, the alternative 
     incremental research credit will be available during the 
     entire 24-month period beginning with the first month of such 
     taxable year--i.e., the equivalent of the 11-month extension 
     provided for by the Small Business Job Protection Act of 1996 
     plus an additional 13-month extension provided for by the 
     conference agreement. However, to prevent taxpayers from 
     effectively obtaining more than 24- months of research 
     credits from the Small Business Job Protection Act of 1996 
     and this bill, the 24-month period for taxpayers electing the 
     alternative incremental research credit regime is reduced by 
     the number of months (if any) after June 1996 with respect to 
     which the taxpayer claimed research credit amounts under the 
     regular, 20-percent research credit rules.

B. Contributions of Stock to Private Foundations (sec. 602 of the House 
               bill and sec. 502 of the Senate amendment)

                              Present Law

       In computing taxable income, a taxpayer who itemizes 
     deductions generally is allowed to deduct the fair market 
     value of property contributed to a charitable 
     organization.4

[[Page H6516]]

     However, in the case of a charitable contribution of short-
     term gain, inventory, or other ordinary income property, the 
     amount of the deduction generally is limited to the 
     taxpayer's basis in the property. In the case of a charitable 
     contribution of tangible personal property, the deduction is 
     limited to the taxpayer's basis in such property if the use 
     by the recipient charitable organization is unrelated to the 
     organization's tax-exempt purpose.5
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     \4\ The amount of the deduction allowable for a taxable year 
     with respect to a charitable contribution may be reduced 
     depending on the type of property contributed, the type of 
     charitable organization to which the property is contributed, 
     and the income of the taxpayer (secs. 170(b) and 170(e)).
     \5\ As part of the Omnibus Budget Reconciliation Act of 1993, 
     Congress eliminated the treatment of contributions of 
     appreciated property (real, personal, and intangible) as a 
     tax preference for alternative minimum tax (AMT) purposes. 
     Thus, if a taxpayer makes a gift to charity of property 
     (other than short-term gain, inventory, or other ordinary 
     income property, or gifts to private foundations) that is 
     real property, intangible property, or tangible personal 
     property the use of which is related to the donee's tax-
     exempt purpose, the taxpayer is allowed to claim the same 
     fair-market-value deduction for both regular tax and AMT 
     purposes (subject to present-law percentage limitations).
---------------------------------------------------------------------------
       In cases involving contributions to a private foundation 
     (other than certain private operating foundations), the 
     amount of the deduction is limited to the taxpayer's basis in 
     the property. However, under a special rule contained in 
     section 170(e)(5), taxpayers are allowed a deduction equal to 
     the fair market value of ``qualified appreciated stock'' 
     contributed to a private foundation prior to May 31, 
     1997.6 Qualified appreciated stock is defined as 
     publicly traded stock which is capital gain property. The 
     fair-market-value deduction for qualified appreciated stock 
     donations applies only to the extent that total donations 
     made by the donor to private foundations of stock in a 
     particular corporation did not exceed 10 percent of the 
     outstanding stock of that corporation. For this purpose, an 
     individual is treated as making all contributions that were 
     made by any member of the individual's family.
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     \6\ The special rule contained in section 170(e)(5), which 
     was originally enacted in 1984, expired January 1, 1995. The 
     Small Business Job Protection Act of 1996 reinstated the rule 
     for 11 months--for contributions of qualified appreciated 
     stock made to private foundations during the period July 1, 
     1996, through May 31, 1997.
---------------------------------------------------------------------------

                               House Bill

       The House bill extends the special rule contained in 
     section 170(e)(5) for contributions of qualified appreciated 
     stock made to private foundations during the period June 1, 
     1997, through December 31, 1998.
       Effective date.--The provision is effective for 
     contributions of qualified appreciated stock to private 
     foundations made during the period June 1, 1997, through 
     December 31, 1998.

                            Senate Amendment

       The Senate amendment extends the special rule contained in 
     section 170(e)(5) for contributions of qualified appreciated 
     stock made to private foundations during the period June 1, 
     1997, through May 31, 1999.
       Effective date.--The provision is effective for 
     contributions of qualified appreciated stock to private 
     foundations made during the period June 1, 1997, through May 
     31, 1999.

                          Conference Agreement

       The conference agreement provides that the special rule 
     contained in section 170(e)(5) is extended for the period 
     June 1, 1997, through June 30, 1998. The provision is 
     effective for contributions of qualified appreciated stock to 
     private foundations made during the period June 1, 1997, 
     through June 30, 1998.

C. Work Opportunity Tax Credit (sec. 603 of the House bill and sec. 503 
                        of the Senate amendment)

                              Present Law

     In general
       The work opportunity tax credit is available on an elective 
     basis for employers hiring individuals from one or more of 
     seven targeted groups. The credit generally is equal to 35 
     percent of qualified wages. Generally, qualified wages 
     consist of wages attributable to service rendered by a member 
     of a targeted group during the one-year period beginning with 
     the day the individual begins work for the employer.
       Generally, no more than $6,000 of wages during the first 
     year of employment is permitted to be taken into account with 
     respect to any individual. Thus, the maximum credit per 
     individual is $2,100. With respect to qualified summer youth 
     employees, the maximum credit is 35 percent of up to $3,000 
     of qualified first-year wages, for a maximum credit of 
     $1,050.
       The deduction for wages is reduced by the amount of the 
     credit.
     Targeted groups eligible for the credit
       (1) Families receiving AFDC
       An eligible recipient is an individual certified by the 
     designated local employment agency as being a member of a 
     family eligible to receive benefits under AFDC or its 
     successor program for a period of at least nine months part 
     of which is during the 9-month period ending on the hiring 
     date. For these purposes, members of the family are defined 
     to include only those individuals taken into account for 
     purposes of determining eligibility for the AFDC or its 
     successor program.
       (2) Qualified ex-felon
       A qualified ex-felon is an individual certified as: (1) 
     having been convicted of a felony under any State or Federal 
     law, (2) being a member of a family that had an income during 
     the six months before the earlier of the date of 
     determination or the hiring date which on an annual basis is 
     70 percent or less of the Bureau of Labor Statistics lower 
     living standard, and (3) having a hiring date within one year 
     of release from prison or date of conviction.
       (3) High-risk-youth
       A high-risk youth is an individual certified as being at 
     least 18 but not yet 25 on the hiring date and as having a 
     principal place of abode within an empowerment zone or 
     enterprise community (as defined under Subchapter U of the 
     Internal Revenue Code). Qualified wages will not include 
     wages paid or incurred for services performed after the 
     individual moves outside an empowerment zone or enterprise 
     community.
       (4) Vocational rehabilitation referral
       Vocational rehabilitation referrals are those individuals 
     who have a physical or mental disability that constitutes a 
     substantial handicap to employment and who have been referred 
     to the employer while receiving, or after completing, 
     vocational rehabilitation services under an individualized, 
     written rehabilitation plan under a State plan approved under 
     the Rehabilitation Act of 1973 or under a rehabilitation plan 
     for veterans carried out under Chapter 31 of Title 38, U.S. 
     Code. Certification will be provided by the designated local 
     employment agency upon assurances from the vocational 
     rehabilitation agency that the employee has met the above 
     conditions.
       (5) Qualified summer youth employee
       Qualified summer youth employees are individuals: (1) who 
     perform services during any 90-day period between May 1 and 
     September 15, (2) who are certified by the designated local 
     agency as being 16 or 17 years of age on the hiring date, (3) 
     who have not been an employee of that employer before, and 
     (4) who are certified by the designated local agency as 
     having a principal place of abode within an empowerment zone 
     or enterprise community (as defined under Subchapter U of the 
     Internal Revenue Code). As with high-risk youths, no credit 
     is available on wages paid or incurred for service performed 
     after the qualified summer youth moves outside of an 
     empowerment zone or enterprise community. If, after the end 
     of the 90-day period, the employer continues to employ a 
     youth who was certified during the 90-day period as a member 
     of another targeted group, the limit on qualified first-year 
     wages will take into account wages paid to the youth while a 
     qualified summer youth employee.
       (6) Qualified veteran
       A qualified veteran is a veteran who is a member of a 
     family certified as receiving assistance under: (1) AFDC for 
     a period of at least nine months part of which is during the 
     12-month period ending on the hiring date, or (2) a food 
     stamp program under the Food Stamp Act of 1977 for a period 
     of at least three months part of which is during the 12-month 
     period ending on the hiring date. For these purposes, members 
     of a family are defined to include only those individuals 
     taken into account for purposes of determining eligibility 
     for: (I) the AFDC or its successor program, and (ii) a food 
     stamp program under the Food Stamp Act of 1977, respectively.
       Further, a qualified veteran is an individual who has 
     served on active duty (other than for training) in the Armed 
     Forces for more than 180 days or who has been discharged or 
     released from active duty in the Armed Forces for a service-
     connected disability. However, any individual who has served 
     for a period of more than 90 days during which the individual 
     was on active duty (other than for training) is not an 
     eligible employee if any of this active duty occurred during 
     the 60-day period ending on the date the individual was 
     hired by the employer. This latter rule is intended to 
     prevent employers who hire current members of the armed 
     services (or those departed from service within the last 
     60 days) from receiving the credit.
       (7) Families receiving food stamps
       An eligible recipient is an individual aged 18 but not yet 
     25 certified by a designated local employment agency as being 
     a member of a family receiving assistance under a food stamp 
     program under the Food Stamp Act of 1977 for a period of at 
     least six months ending on the hiring date. In the case of 
     families that cease to be eligible for food stamps under 
     section 6(o) of the Food Stamp Act of 1977, the six-month 
     requirement is replaced with a requirement that the family 
     has been receiving food stamps for at least three of the five 
     months ending on the date of hire. For these purposes, 
     members of the family are defined to include only those 
     individuals taken into account for purposes of determining 
     eligibility for a food stamp program under the Food Stamp Act 
     of 1977.
     Minimum employment period
       No credit is allowed for wages paid unless the eligible 
     individual is employed by the employer for at least 180 days 
     (20 days in the case of a qualified summer youth employee) or 
     400 hours (120 hours in the case of a qualified summer youth 
     employee).
     Expiration date
       The credit is effective for wages paid or incurred to a 
     qualified individual who begins work for an employer after 
     September 30, 1996, and before October 1, 1997.

[[Page H6517]]

                               House Bill

     Extension
       The House bill provides a one-year extension of the work 
     opportunity tax credit.
     Targeted categories
       The bill extends eligibility to members of families 
     receiving AFDC benefits for any nine months during the 
     eighteen month period ending on the hiring date.
     Minimum employment period
       The minimum employment period is reduced from 400 to 120 
     hours.
     Credit percentage
       The House bill provides a credit percentage of 25 percent 
     for employment of less than 400 hours of employment and 40 
     percent for employment of 400 or more hours.
     Alternative minimum tax (AMT)
       The House bill allows the credit against the AMT.
     Effective date
       Generally, the provision is effective for wages paid or 
     incurred to qualified individuals who begin work for the 
     employer after September 30, 1997, and before October 1, 
     1998. The provision allowing the credit against the AMT is 
     effective for taxable years beginning after December 31, 
     1997.

                            Senate Amendment

     Extension
       The Senate amendment provides a 20-month extension of the 
     work opportunity tax credit.
     Targeted categories
       Same as the House bill, except the Senate amendment adds 
     SSI beneficiaries as a new category of workers for which the 
     credit is available.
     Minimum employment period
       Same as the House bill.
     Credit percentage
       Same as the House bill.
     Alternative minimum tax (AMT)
       No provision.
     Effective date
       The provision is effective for wages paid or incurred to 
     qualified individuals who begin work for the employer after 
     September 30, 1997, and before June 1, 1999.

                          Conference Agreement

     Extension
       The conference agreement provides for a 9-month extension 
     of the work opportunity tax credit.
     Targeted categories
       The conference agreement follows the Senate amendment.
     Minimum employment period
       The conference agreement follows the House bill and the 
     Senate amendment.
     Credit percentage
       The conference agreement follows the House bill and the 
     Senate amendment.
     Alternative minimum tax (AMT)
       The conference agreement does not include the House bill 
     provision.
     Effective date
       The conference agreement is generally effective for wages 
     paid to qualified individuals who begin work for an employer 
     after September 30, 1997, and before July 1, 1998.

 D. Orphan Drug Tax Credit (sec. 604 of the House bill and sec. 504 of 
                         the Senate amendment)

                              Present Law

       A 50-percent nonrefundable tax credit is allowed for 
     qualified clinical testing expenses incurred in testing of 
     certain drugs for rare diseases or conditions, generally 
     referred to as ``orphan drugs.'' Qualified testing expenses 
     are costs incurred to test an orphan drug after the drug has 
     been approved for human testing by the Food and Drug 
     Administration (``FDA'') but before the drug has been 
     approved for sale by the FDA. A rare disease or condition is 
     defined as one that (1) affects less than 200,000 persons in 
     the United States, or (2) affects more than 200,000 persons, 
     but for which there is no reasonable expectation that 
     businesses could recoup the costs of developing a drug for 
     such disease or condition from U.S. sales of the drug. These 
     rare diseases and conditions include Huntington's disease, 
     myoclonus, ALS (Lou Gehrig's disease), Tourette's syndrome, 
     and Duchenne's dystrophy (a form of muscular dystrophy).
       As with other general business credits (sec. 38), taxpayers 
     are allowed to carry back unused credits to three years 
     preceding the year the credit is earned (but not to a taxable 
     year ending before July 1, 1996) and to carry forward unused 
     credits to 15 years following the year the credit is earned. 
     The credit cannot be used to offset a taxpayer's alternative 
     minimum tax liability.
       The orphan drug tax credit expired and does not apply to 
     expenses paid or incurred after May 31, 1997. 7
---------------------------------------------------------------------------
     \7\ The orphan drug tax credit originally was enacted in 1983 
     and was extended on several occasions. The credit expired on 
     December 31, 1994, and later was reinstated for the period 
     July 1, 1996, through May 31, 1997.
---------------------------------------------------------------------------

                               House Bill

       The orphan drug tax credit provided for by section 45C is 
     permanently extended.
       Effective date.--The provision is effective for qualified 
     clinical testing expenses paid or incurred after May 31, 
     1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and Senate 
     amendment--i.e., the orphan drug tax credit is permanently 
     extended.

 VII. DISTRICT OF COLUMBIA TAX INCENTIVES (secs. 701-702 of the House 
               bill and sec. 601 of the Senate amendment)

                              Present Law

     Empowerment zones and enterprise communities
       In general
       Pursuant to the Omnibus Budget Reconciliation Act of 1993 
     (OBRA 1993), the Secretaries of the Department of Housing and 
     Urban Development (HUD) and the Department of Agriculture 
     designated a total of nine empowerment zones and 95 
     enterprise communities on December 21, 1994. As required by 
     law, six empowerment zones are located in urban areas (with 
     aggregate population for the six designated urban empowerment 
     zones limited to 750,000) and three empowerment zones are 
     located in rural areas.8 Of the enterprise 
     communities, 65 are located in urban areas and 30 are located 
     in rural areas (sec. 1391). Designated empowerment zones and 
     enterprise communities were required to satisfy certain 
     eligibility criteria, including specified poverty rates and 
     population and geographic size limitations (sec. 1392). 
     Portions of the District of Columbia were designated as an 
     enterprise community.
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     \8\ The six designated urban empowerment zones are located in 
     New York City, Chicago, Atlanta, Detroit, Baltimore, and 
     Philadelphia-Camden (New Jersey). The three designated rural 
     empowerment zones are located in Kentucky Highlands (Clinton, 
     Jackson, and Wayne counties, Kentucky), Mid-Delta Mississippi 
     (Bolivar, Holmes, Humphreys, Leflore counties, Mississippi), 
     and Rio Grande Valley Texas (Cameron, Hidalgo, Starr, and 
     Willacy counties, Texas).
---------------------------------------------------------------------------
       The following tax incentives are available for certain 
     businesses located in empowerment zones: (1) an annual 20-
     percent wage credit for the first $15,000 of wages paid to a 
     zone resident who works in the zone; (2) an additional 
     $20,000 of expensing under Code section 179 for ``qualified 
     zone property'' placed in service by an ``enterprise zone 
     business'' (accordingly, certain businesses operating in 
     empowerment zones are allowed up to $38,000 of expensing for 
     1997; the allowable amount will increase to $38,500 for 
     1998); and (3) special tax-exempt financing for certain zone 
     facilities (described in more detail below).
       The 95 enterprise communities are eligible for the special 
     tax-exempt financing benefits but not the other tax 
     incentives available in the nine empowerment zones. In 
     addition to these tax incentives, OBRA 1993 provided that 
     Federal grants would be made to designated empowerment zones 
     and enterprise communities.
       The tax incentives for empowerment zones and enterprise 
     communities generally will be available during the period 
     that the designation remains in effect, i.e., a 10-year 
     period.
       Definition of ``qualified zone property''
       Present-law section 1397C defines ``qualified zone 
     property'' as depreciable tangible property (including 
     buildings), provided that: (1) the property is acquired by 
     the taxpayer (from an unrelated party) after the zone or 
     community designation took effect; (2) the original use of 
     the property in the zone or community commences with the 
     taxpayer; and (3) substantially all of the use of the 
     property is in the zone or community in the active conduct of 
     a trade or business by the taxpayer in the zone or community. 
     In the case of property which is substantially renovated by 
     the taxpayer, however, the property need not be acquired by 
     the taxpayer after zone or community designation or 
     originally used by the taxpayer within the zone or community 
     if, during any 24-month period after zone or community 
     designation, the additions to the taxpayer's basis in the 
     property exceed the greater of 100 percent of the taxpayer's 
     basis in the property at the beginning of the period, or 
     $5,000.
       Definition of ``enterprise zone business''
       Present-law section 1397B defines the term ``enterprise 
     zone business'' as a corporation or partnership (or 
     proprietorship) if for the taxable year: (1) the sole trade 
     or business of the corporation or partnership is the active 
     conduct of a qualified business within an empowerment zone or 
     enterprise community; (2) at least 80 percent of the total 
     gross income is derived from the active conduct of a 
     ``qualified business'' within a zone or community; (3) 
     substantially all of the business's tangible property is used 
     within a zone or community; (4) substantially all of the 
     business's intangible property is used in, and exclusively 
     related to, the active conduct of such business; (5) 
     substantially all of the services performed by employees are 
     performed within a zone or community; (6) at least 35 percent 
     of the employees are residents of the zone or community; and 
     (7) no more than 5 percent of the average of the aggregate 
     unadjusted bases of the property owned by the business is 
     attributable to (a) certain financial property, or (b) 
     collectibles not held primarily for sale to customers in the 
     ordinary course of an active trade or business.
       A ``qualified business'' is defined as any trade or 
     business other than a trade or business that consists 
     predominantly of the development or holding of intangibles 
     for sale

[[Page H6518]]

     or license. 9 In addition, the leasing of real 
     property that is located within the empowerment zone or 
     community to others is treated as a qualified business only 
     if (1) the leased property is not residential property, and 
     (2) at least 50 percent of the gross rental income from the 
     real property is from enterprise zone businesses. The rental 
     of tangible personal property to others is not a qualified 
     business unless substantially all of the rental of such 
     property is by enterprise zone businesses or by residents of 
     an empowerment zone or enterprise community.
---------------------------------------------------------------------------
     \9\ Also, a qualified business does not include certain 
     facilities described in section 144(c)(6)(B) (e.g., massage 
     parlor, hot tub facility, or liquor store) or certain large 
     farms.
---------------------------------------------------------------------------
       Tax-exempt financing rules
       Tax-exempt private activity bonds may be issued to finance 
     certain facilities in empowerment zones and enterprise 
     communities. These bonds, along with most private activity 
     bonds, are subject to an annual private activity bond State 
     volume cap equal to $50 per resident of each State, or (if 
     greater) $150 million per State.
       Qualified enterprise zone facility bonds are bonds 95 
     percent or more of the net proceeds of which are used to 
     finance (1) ``qualified zone property'' (as defined above) 
     the principal user of which is an ``enterprise zone 
     business'' (also defined above 10), or (2) 
     functionally related and subordinate land located in the 
     empowerment zone or enterprise community. These bonds may 
     only be issued while an empowerment zone or enterprise 
     community designation is in effect.
---------------------------------------------------------------------------
     \10\ For purposes of the tax-exempt financing rules, an 
     ``enterprise zone business'' also includes a business located 
     in a zone or community which would qualify as an enterprise 
     zone business if it were separately incorporated.
---------------------------------------------------------------------------
       The aggregate face amount of all qualified enterprise zone 
     bonds for each qualified enterprise zone business may not 
     exceed $3 million per zone or community. In addition, total 
     qualified enterprise zone bond financing for each principal 
     user of these bonds may not exceed $20 million for all zones 
     and communities.
     Taxation of capital gains
       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 generally is taxed at the same 
     rate as ordinary income, except that the maximum rate of tax 
     is limited to 28 percent of the net capital 
     gain.11 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.
---------------------------------------------------------------------------
     \11\ The Revenue Reconciliation Act of 1993 added Code 
     section 1202, which provides a 50-percent exclusion for gain 
     from the sale of certain small business stock acquired at 
     original issue and held for at least five years.
---------------------------------------------------------------------------
       Capital losses generally are deductible in full against 
     capital gains. In addition, individual taxpayers may deduct 
     capital losses against up to $3,000 of ordinary income in 
     each year. Any remaining unused capital losses may be carried 
     forward indefinitely to another taxable 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, 
     and (5) certain publications of the Federal Government.
       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. Gain from the disposition of 
     depreciable personal property is not treated as capital gain 
     to the extent of all previous depreciation allowances. Gain 
     from the disposition of depreciable real property generally 
     is not treated as capital gain to the extent of the 
     depreciation allowances in excess of the allowances that 
     would have been available under the straight-line method.
     Individual tax rates
       To determine tax liability, an individual taxpayer 
     generally must apply the tax rate schedules (or the tax 
     tables) to his or her taxable income. The rate schedules are 
     broken into several ranges of income, known as income 
     brackets, and the marginal tax rate increases as a taxpayer's 
     income increases. Separate rate schedules apply based on an 
     individual's filing status. For 1997, the individual income 
     tax rate schedules are as follows:

------------------------------------------------------------------------
         If taxable income is--               Then income tax equals    
------------------------------------------------------------------------
                           Single individuals                           
                                                                        
$0 to $24,650..........................  15 percent of taxable income   
$24,651 to $59,750.....................  $3,698, plus 28% of the amount 
                                          over $24,650                  
$59,751 to $124,650....................  $13,526, plus 31% of the amount
                                          over $59,750                  
$124,651 to $271,050...................  $33,645, plus 36% of the amount
                                          over $124,650                 
Over $271,050..........................  $86,349, plus 39.6% of the     
                                          amount over $271,050          
                                                                        
                           Heads of households                          
                                                                        
$0 to $33,050..........................  15 percent of taxable income   
$33,051 to $85,350.....................  $4,958, plus 28% of the amount 
                                          over $33,050                  
$85,351 to $138,200....................  $19,602 plus 31% of the amount 
                                          over $85,350                  
$138,201 to $271,050...................  $35,985, plus 36% of the amount
                                          over $138,200                 
Over $271,050..........................  $83,811, plus 39.6% of the     
                                          amount over $271,050          
                                                                        
                Married individuals filing joint returns                
                                                                        
$0 to $41,200..........................  15 percent of taxable income   
$41,201 to $99,600.....................  $6,180, plus 28% of the amount 
                                          over $41,200                  
$99,601 to $151,750....................  $22,532, plus 31% of the amount
                                          over $99,600                  
$151,751 to $271,050...................  $38,698, plus 36% of the amount
                                          over $151,750                 
Over $271,050..........................  $81,646, plus 39.6% of the     
                                          amount over $271,050          
                                                                        
               Married individuals filing separate returns              
                                                                        
$0 to $20,600..........................  15 percent of taxable income   
$20,601 to $49,800.....................  $3,090, plus 28% of the amount 
                                          over $20,600                  
$49,801 to $75,875.....................  $11,266, plus 31% of the amount
                                          over $49,800                  
$75,876 to $135,525....................  $19,349, plus 36% of the amount
                                          over $75,875                  
Over $135,525..........................  $40,823 plus 39.6% of the      
                                          amount over $135,525          
------------------------------------------------------------------------

                               House Bill

     Designation of D.C. Enterprise Zone
       Certain economically depressed census tracts within the 
     District of Columbia are designated as the ``D.C. Enterprise 
     Zone,'' within which businesses and individual residents are 
     eligible for special tax incentives. The census tracts that 
     compose the D.C. Enterprise Zone are (1) all census tracts 
     that presently are part of the D.C. enterprise community 
     designated under section 1391 (i.e., portions of Anacostia, 
     Mt. Pleasant, Chinatown, and the easternmost part of the 
     District) and (2) all additional census tracts within the 
     District of Columbia where the poverty rate is at least 35 
     percent. The D.C. Enterprise Zone designation generally will 
     remain in effect for five years for the period from January 
     1, 1998, through December 31, 2002.12
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     \12\ The status of certain census tracts within the District 
     as an enterprise community designated under section 1391 also 
     terminates on December 31, 2002.
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       The following tax incentives will take effect only if, 
     prior to January 1, 1998, a Federal law is enacted creating a 
     District of Columbia economic development corporation that is 
     an instrumentality of the District of Columbia 
     government.13
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     \13\ In addition, the House bill assumes the enactment of 
     certain modifications to Federal law (other than Federal tax 
     laws contained in the Internal Revenue Code) similar to those 
     proposed by the Administration that would clarify and expand 
     the District's authority to issue revenue bonds.
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     Business development incentives
       Empowerment zone wage credit, expensing, and tax-exempt 
           financing
       The following tax incentives that are available under 
     present law in empowerment zones would be available in the 
     D.C. Enterprise Zone (modified as described below): (1) a 20-
     percent wage credit for the first $15,000 of wages paid to 
     D.C. Enterprise Zone residents who work in the D.C. 
     Enterprise Zone; (2) an additional $20,000 of expensing under 
     Code section 179 for qualified zone property; and (3) special 
     tax-exempt financing for certain zone facilities.
       In general, the wage credit for certain D.C. Enterprise 
     Zone residents who work in the D.C. Enterprise Zone is the 
     same as is available in empowerment zones under present 
     law. However, the wage credit rate remains at 20 percent 
     for the D.C. Enterprise Zone for the period 1998 through 
     2002 (and does not phase down to 15 percent in the year 
     2002 as under present-law section 1396). The wage credit 
     is effective for wages paid (or incurred) to a qualified 
     individual after December 31, 1997, and before January 1, 
     2003.
       The increased expensing under Code section 179 is effective 
     for property placed in service in taxable years beginning 
     after December 31, 1997, and before January 1, 2003. Thus, 
     qualified D.C. Zone property placed in service in taxable 
     years beginning in 1998 is eligible for up to $38,500 of 
     expensing.
       A qualified D.C. Zone business (defined as under present 
     law section 1394(b)(3)) is permitted to borrow proceeds from 
     the issuance of qualified enterprise zone facility bonds. 
     Such bonds can be issued only by a newly created economic 
     development corporation and are subject to the requirements 
     applicable under present law to enterprise zone facility 
     bonds, except that the amount of outstanding bond proceeds 
     that can be borrowed by any qualified District business 
     cannot exceed $15 million (rather than $3 million). The 
     special tax-exempt bond provisions apply to bonds issued 
     after December 31, 1997, and prior to January 1, 2003.
       Tax credits for equity investments in and loans to 
           businesses located in the District of Columbia
       A newly created economic development corporation is 
     authorized to allocate $75 million in tax credits to 
     taxpayers that make certain equity investments in, or loans 
     to, businesses (either corporations or partnerships) engaged 
     in an active trade or business in the District of Columbia. 
     The business need not be located in the D.C. Enterprise Zone, 
     although factors to be considered in the allocation of 
     credits include whether the project would provide job 
     opportunities for low and moderate income residents of the 
     D.C. Enterprise Zone and whether the business is located in 
     the D.C. Enterprise Zone.

[[Page H6519]]

     Eligible businesses are not be required to satisfy the 
     criteria of a qualified D.C. Zone business, described above. 
     Such credits are nonrefundable and can be used to offset a 
     taxpayer's alternative minimum tax (AMT) liability.
       Under the House bill, the amount of credit cannot exceed 25 
     percent of the amount invested (or loaned) by the taxpayer. 
     Thus, the economic development corporation may allocate the 
     full $75 million in tax credits to no less than $300 million 
     in equity investments in, or loans, to eligible businesses.
       Under the House bill, credits may be allocated to loans 
     made to an eligible business only if the business uses the 
     loan proceeds to purchase depreciable tangible property and 
     any functionally related and subordinate land. Credits may be 
     allocated to equity investments only if the equity interest 
     was acquired for cash. Any credits allocated to a taxpayer 
     making an equity investment are subject to recapture if the 
     equity interest is disposed of by the taxpayer within five 
     years. A taxpayer's basis in an equity investment is reduced 
     by the amount of the credit.
       The House bill applies to credit amounts allocated for 
     taxable years beginning after December 31, 1997, and before 
     January 1, 2003.14
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     \14\ As a general business credit, the credit can be carried 
     back three years (but not before January 1, 1998) and forward 
     for 15 years.
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       Zero-percent capital gains rate
       The House bill provides a zero-percent capital gains rate 
     for capital gains from the sale of certain qualified ``D.C. 
     Zone assets'' held for more than five years. In general, 
     qualified ``D.C. Zone assets'' mean stock or partnership 
     interests held in or tangible property held by a D.C. Zone 
     business. For this purpose, a qualified D.C. Zone business is 
     defined as an enterprise zone business under present-law 
     section 1397B.
       ``D.C. Zone business stock'' is stock in a domestic 
     corporation originally issued after December 31, 1997, that, 
     at the time of issuance 15 and during 
     substantially all of the taxpayer's holding period, was a 
     qualified D.C. Zone business, provided that such stock was 
     acquired by the taxpayer on original issue from the 
     corporation solely in exchange for cash before January 1, 
     2003.16 A ``D.C. Zone partnership interest'' is a 
     domestic partnership interest originally issued after 
     December 31, 1997, that is acquired by the taxpayer from the 
     partnership solely in exchange for cash before January 1, 
     2003, provided that, at the time such interest was acquired 
     17 and during substantially all of the taxpayer's 
     holding period, the partnership was a qualified D.C. Zone 
     business. Finally, ``D.C. Zone business property'' is 
     tangible property acquired by the taxpayer by purchase 
     (within the meaning of present law section 179(d)(2)) after 
     December 31, 1997, and before January 1, 2003, provided that 
     the original use of such property in the D.C. Enterprise Zone 
     commences with the taxpayer and substantially all of the use 
     of such property during substantially all of the taxpayer's 
     holding period was in a qualified D.C. Zone business of the 
     taxpayer.
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     \15\ In the case of a new corporation, it is sufficient if 
     the corporation is being organized for purposes of being a 
     qualified D.C. Zone business.
     \16\ D.C. Zone business stock does not include any stock 
     acquired from a corporation which made a substantial stock 
     redemption or distribution (without a bona fide business 
     purpose therefore) in an attempt to avoid the purposes of the 
     provision. A similar rule applies with respect to D.C. Zone 
     partnership interests.
     \17\ In the case of a new partnership, it is sufficient if 
     the partnership is being formed for purposes of being a 
     qualified D.C. Zone business.
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       A special rule provides that, in the case of business 
     property that is ``substantially renovated,'' such property 
     need not be acquired by the taxpayer after December 31, 1997, 
     nor need the original use of such property in the D.C. 
     Enterprise Zone commence with the taxpayer. For these 
     purposes, property is treated as ``substantially renovated'' 
     if, prior to January 1, 2003, additions to basis with respect 
     to such property in the hands of the taxpayer during any 24-
     month period beginning after December 31, 1997, exceed the 
     greater of (1) an amount equal to the adjusted basis at the 
     beginning of such 24-month period in the hands of the 
     taxpayer, or (2) $5,000. Thus, substantially renovated real 
     estate located in the D.C. Enterprise Zone may constitute 
     D.C. Zone business property. However, the House bill 
     specifically excludes land that is not an integral part of a 
     qualified D.C. Zone business from the definition of D.C. Zone 
     business property.
       In addition, qualified D.C. Zone assets include property 
     that was a qualified D.C. Zone asset in the hands of a prior 
     owner, provided that at the time of acquisition, and during 
     substantially all of the subsequent purchaser's holding 
     period, either (1) substantially all of the use of the 
     property is in a qualified D.C. Zone business, or (2) the 
     property is an ownership interest in a qualified D.C. Zone 
     business.18
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     \18\ The termination of the D.C. Zone designation will not, 
     by itself, result in property failing to be treated as a 
     qualified D.C. Zone asset. However, capital gain eligible for 
     the zero-percent capital gains rate does not include any gain 
     attributable to periods after December 31, 2007.
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       In general, gain eligible for the zero-percent tax rate 
     means gain from the sale or exchange of a qualified D.C. Zone 
     asset that is (1) a capital asset or (2) property used in the 
     trade or business as defined in section 1231(b). Gain 
     attributable to periods before December 31, 1997, and after 
     December 31, 2007, is not qualified capital gain. No gain 
     attributable to real property, or an intangible asset, which 
     is not an integral part of a qualified D.C. Zone business 
     qualifies for the zero-percent rate.
       The House bill provides that property that ceases to be a 
     qualified D.C. Zone asset because the property is no longer 
     used in (or no longer represents an ownership interest in) a 
     qualified D.C. Zone business after the five-year period 
     beginning on the date the taxpayer acquired such property 
     would continue to be treated as a qualified D.C. Zone asset. 
     Under this rule, the amount of gain eligible for the zero-
     percent capital gains rate cannot exceed the amount which 
     would be qualified capital gain had the property been sold on 
     the date of such cessation.
       Special rules are provided for pass-through entities (i.e., 
     partnerships, S corporations, regulated investment companies, 
     and common trust funds). In the case of a sale or exchange of 
     an interest in a pass-through entity that was not a qualified 
     D.C. Zone business during substantially all of the period 
     that the taxpayer held the interest, the zero-percent capital 
     gains rate applies to the extent that the gain is 
     attributable to amounts that would have been qualified 
     capital gain had the assets been sold for their fair market 
     value on the date of the sale or exchange of the interest in 
     the pass-through entity. This rule applies only if the 
     interest in the pass-through entity were held by the taxpayer 
     for more than five years. In addition, the rule applies only 
     to qualified D.C. Zone assets that were held by the pass-
     through entity for more than five years, and throughout the 
     period that the taxpayer held the interest in the pass-
     through entity.
       The House bill also provides that in the case of a transfer 
     of a qualified D.C. Zone asset by gift, at death, or from a 
     partnership to a partner that held an interest in the 
     partnership at the time that the qualified D.C. Zone asset 
     was acquired, (1) the transferee is to be treated as having 
     acquired the asset in the same manner as the transferor, and 
     (2) the transferee's holding period includes that of the 
     transferor. In addition, rules similar to those contained in 
     section 1202(i)(2) regarding treatment of contributions to 
     capital after the original issuance date and section 1202(j) 
     regarding treatment of certain short positions apply.
     Individual resident tax rate reduction
       Individuals who have their principal place of abode in any 
     census tract that is part of the D.C. Enterprise Zone are 
     entitled to a 10-percent tax rate on all taxable income that 
     currently is subject to a 15-percent Federal income tax rate. 
     Thus, using the 1997 tax rate schedule, a single taxpayer who 
     resides in the D.C. Enterprise Zone with $24,650 or more of 
     taxable income will receive a Federal income tax reduction of 
     $1,233 under the House bill. Married taxpayers who reside in 
     the D.C. Enterprise Zone and file a joint return with taxable 
     income of $41,200 or more of taxable income will receive a 
     Federal income tax reduction of $2,060 under the House bill.
       The special 10-percent rate provision is in effect for the 
     period 1998-2007.
     Effective date
       The D.C. tax incentives generally are effective January 1, 
     1998, and remain in effect for five years until the 
     termination of the D.C. Enterprise Zone designation on 
     December 31, 2002. However, the zero-percent tax rate for 
     capital gains and the special 10-percent rate bracket are 
     effective for the period 1998-2007. All of the D.C. tax 
     incentives are contingent upon the enactment of a Federal 
     law, prior to January 1, 1998, creating a District of 
     Columbia economic development corporation that is an 
     instrumentality of the District of Columbia government.

                            Senate Amendment

     First-time homebuyer credit
       The Senate amendment provides first-time homebuyers of a 
     principal residence in the District a tax credit of up to 
     $5,000 of the amount of the purchase price. The $5,000 
     maximum credit amount applies both to individuals and married 
     couples. Married individuals filing separately can claim a 
     maximum credit of $2,500 each. The Secretary of Treasury is 
     directed to prescribe regulations allocating the credit among 
     unmarried purchasers of a residence.19
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     \19\ The provision of the Senate amendment that excludes 
     sales of certain personal residences from the real estate 
     transaction reporting requirement would not apply to sales of 
     personal residences in the District of Columbia. In addition, 
     the Senate amendment anticipates that the Secretary of 
     Treasury will require such information as may be necessary to 
     verify eligibility for the D.C. first-time homebuyer credit.
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       To qualify as a ``first-time homebuyer,'' neither the 
     individual (nor the individual's spouse, if married) can have 
     had a present ownership interest in a principal residence in 
     the District for the one-year period prior to the date of 
     acquisition of the principal residence.20
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     \20\ Special rules apply to members of the Armed Forces and 
     certain individuals with tax homes outside the United States 
     with respect to whom the rollover period available under 
     section 1034 (as in effect prior to the enactment of the 
     bill) is suspended pursuant to sections 1034(h) or (k).
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       A taxpayer will be treated as a first-time homebuyer with 
     respect to only one residence--i.e., the credit may be 
     claimed one time only. The date of acquisition is the date on 
     which a binding contract to purchase the principal residence 
     is entered into or the

[[Page H6520]]

     date on which construction or reconstruction of such 
     residence commences.
       The credit applies to purchases after the date of enactment 
     and before January 1, 2002. Any excess credit may be carried 
     forward indefinitely to succeeding taxable years.
     Tax credits for equity investments in and loans to businesses 
         located in the District of Columbia
       The Senate amendment is the same as the House bill, except 
     that the economic development corporation is authorized to 
     allocate $60 million (rather than $75 million) in credits.
     Zero-percent capital gains rate
       Like the House bill, the Senate amendment provides a zero-
     percent capital gains rate for capital gains from the sale of 
     certain qualified D.C. assets held for more than five years. 
     In general, qualified D.C. assets mean stock or partnership 
     interests held in, or tangible property held by, a qualified 
     D.C. business. However; the Senate amendment provides that 
     capital gain from the sale of any D.C. asset acquired during 
     calendar year 1998 shall be subject to tax at a 10 percent 
     rate. A special rule provides that if the basis of any D.C. 
     asset is determined in whole or part by reference to a D.C. 
     asset acquired in 1998, all gain from the sale or exchange of 
     such asset is taxed at the 10 percent rate.
       Qualified D.C. business
       A ``qualified D.C. business'' generally is required to 
     satisfy the requirements of an ``enterprise zone business'' 
     under present law, applied as if the District (in its 
     entirety) were an empowerment zone. Thus, a corporation or 
     partnership is a qualified D.C. business if: (1) its sole 
     trade or business is the active conduct of a ``qualified 
     business'' within the District; (2) at least 80 percent of 
     the total gross income is derived from the active conduct of 
     a ``qualified business'' within the District; (3) 
     substantially all of the business's tangible property is used 
     within the District; (4) substantially all of the business's 
     intangible property is used in, and exclusively related to, 
     the active conduct of such business; (5) substantially all of 
     the services performed by employees are performed within the 
     District; and (6) no more than 5 percent of the average of 
     the aggregate unadjusted bases of the property owned by the 
     business is attributable to (a) certain financial property, 
     or (b) collectibles not held primarily for sale to customers 
     in the ordinary course of an active trade or 
     business.21 A ``qualified business'' means any 
     trade or business other than a trade or business that 
     consists predominantly of the development or holding of 
     intangibles for sale or license.22 In addition, 
     the leasing of real property that is located within the 
     District to others is treated as a qualified business only if 
     (1) the leased property is not residential property, and (2) 
     at least 50 percent of the gross rental income from the real 
     property is from qualified D.C. businesses. The rental of 
     tangible personal property to others is not a qualified 
     business unless substantially all of the rental of such 
     property is by qualified D.C. businesses or by residents of 
     the District.
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     \21\ The requirement under present-law section 1397B(b)(6) 
     that at least 35 percent of the employees of the business be 
     zone residents does not apply when determining whether an 
     entity is a qualified D.C. business.
     \22\ Also, as under present law, a qualified business does 
     not include certain facilities described in section 
     144(c)(6)(B) (e.g., massage parlor, hot tub facility, or 
     liquor store) or certain large farms.
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       Qualified D.C. assets
       For purposes of the Senate amendment, qualified ``D.C. 
     assets'' include (1) D.C. business stock, (2) D.C. 
     partnership interests, and (3) D.C. business property.
       ``D.C. business stock'' means stock in a domestic 
     corporation originally issued after December 31, 1997, that, 
     at the time of issuance 23 and during 
     substantially all of the taxpayer's holding period, was a 
     qualified D.C. business, provided that such stock was 
     acquired by the taxpayer on original issue from the 
     corporation solely in exchange for cash before January 1, 
     2003.24 A ``D.C. partnership interest'' means a 
     domestic partnership interest originally issued after 
     December 31, 1997, that is acquired by the taxpayer from the 
     partnership solely in exchange for cash before January 1, 
     2003, provided that, at the time such interest was acquired 
     25 and during substantially all of the taxpayer's 
     holding period, the partnership was a qualified D.C. 
     business. Finally, ``D.C. business property'' means tangible 
     property acquired by the taxpayer by purchase (within the 
     meaning of present law section 179(d)(2)) after December 31, 
     1997, and before January 1, 2003, provided that the original 
     use of such property in the District commences with the 
     taxpayer and substantially all of the use of such property 
     during substantially all of the taxpayer's holding period was 
     in a qualified D.C. business of the taxpayer.
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     \23\ In the case of a new corporation, it is sufficient if 
     the corporation is being organized for purposes of being a 
     qualified D.C. business.
     \24\ As under section 1202(c)(3), D.C. business stock does 
     not include any stock acquired from a corporation which made 
     a substantial stock redemption or distribution (without a 
     bona fide business purpose therefore) in an attempt to avoid 
     the purposes of the provision. A similar rule applies with 
     respect to D.C. partnership interests.
     \25\ In the case of a new partnership, it is sufficient if 
     the partnership is being formed for purposes of being a 
     qualified D.C. business.
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       A special rule provides that, in the case of business 
     property that is ``substantially renovated,'' such property 
     need not be acquired by the taxpayer after December 31, 1997, 
     nor need the original use of such property in the District 
     commence with the taxpayer. For these purposes, property is 
     treated as ``substantially renovated'' if, prior to January 
     1, 2003, additions to basis with respect to such property in 
     the hands of the taxpayer during any 24-month period 
     beginning after December 31, 1997, exceed the greater of (1) 
     an amount equal to the adjusted basis at the beginning of 
     such 24-month period in the hands of the taxpayer, or (2) 
     $5,000. Thus, substantially renovated real estate located in 
     the District can constitute D.C. business property. However, 
     the bill specifically excludes land that is not an integral 
     part of a qualified D.C. business from the definition of D.C. 
     business property.
       In addition, qualified D.C. assets include property that 
     was a qualified D.C. asset in the hands of a prior owner, 
     provided that at the time of acquisition, and during 
     substantially all of the subsequent purchaser's holding 
     period, either (1) substantially all of the use of the 
     property is in a qualified D.C. business, or (2) the property 
     is an ownership interest in a qualified D.C. business.
       In general, gain eligible for the zero-percent tax rate 
     means gain from the sale or exchange of a qualified D.C. 
     asset that is (1) a capital asset or (2) property used in the 
     trade or business as defined in section 1231(b). Gain 
     attributable to periods before December 31, 1997, is not 
     qualified capital gain. No gain attributable to real 
     property, or an intangible asset, which is not an integral 
     part of a qualified D.C. business qualifies for the zero-
     percent rate.
       The Senate amendment provides that property that ceases to 
     be a qualified D.C. asset because the property is no longer 
     used in (or no longer represents an ownership interest in) a 
     qualified D.C. business after the five-year period beginning 
     on the date the taxpayer acquired such property continues to 
     be treated as a qualified D.C. asset. Under this rule, the 
     amount of gain eligible for the zero-percent capital gains 
     rate cannot exceed the amount which would be qualified 
     capital gain had the property been sold on the date of such 
     cessation.
       Special rules are provided for pass-through entities (i.e., 
     partnerships, S corporations, regulated investment companies, 
     and common trust funds). In the case of a sale or exchange of 
     an interest in a pass-through entity that was not a qualified 
     D.C. business during substantially all of the period that the 
     taxpayer held the interest, the zero-percent capital gains 
     rate applies to the extent that the gain is attributable to 
     amounts that would have been qualified capital gain had the 
     underlying assets been sold for their fair market value on 
     the date of the sale or exchange of the interest in the pass-
     through entity. This rule applies only if the interest in the 
     pass-through entity were held by the taxpayer for more than 
     five years. In addition, the rule applies only to qualified 
     D.C. assets that were held by the pass-through entity for 
     more than five years, and throughout the period that the 
     taxpayer held the interest in the pass-through entity.
       The Senate amendment also provides that, in the case of a 
     transfer of a qualified D.C. asset by gift, at death, or from 
     a partnership to a partner that held an interest in the 
     partnership at the time that the qualified D.C. asset was 
     acquired, (1) the transferee is to be treated as having 
     acquired the asset in the same manner as the transferor, and 
     (2) the transferee's holding period includes that of the 
     transferor. In addition, rules similar to those contained in 
     section 1202(i)(2) regarding treatment of contributions to 
     capital after the original issuance date and section 1202(j) 
     regarding treatment of certain short positions apply.
     Trust fund for D.C. schools
       The Senate amendment provides for a total of $50 million 
     ($5 million for each year 1998 through 2007) to be 
     transferred from Federal income taxes paid by District 
     individual residents to a Trust Fund for D.C. schools. 
     Amounts in the Trust Fund are to be used to pay debt service 
     on qualified D.C. school bonds, which are taxable bonds 
     issued after March 31, 1998, by the District to finance the 
     rehabilitation and repair of District schools.
     Effective dates
       The D.C. first-time homebuyer credit is effective for 
     purchases after the date of enactment and before January 1, 
     2002. The tax credit for equity investments and loans applies 
     to credit amounts allocated for taxable years beginning after 
     December 31, 1997, and before January 1, 2003. The zero-
     percent tax rate for capital gains is effective for qualified 
     D.C. assets purchased (or substantially renovated) during the 
     period January 1, 1998, through December 31, 2002, for any 
     gain accruing with respect to such assets after the date or 
     purchase (or substantial renovation). The Trust Fund for D.C. 
     schools will be funded $5 million per year for 1998 through 
     2007.

                          Conference Agreement

       The conference agreement follows the House bill in part and 
     the Senate amendment in part.
     Designation of D.C Enterprise Zone
       The conference agreement includes the House bill provision 
     that designates certain economically depressed census tracts 
     within the District of Columbia as the ``D.C. Enterprise 
     Zone,'' within which businesses and individual residents are 
     eligible for special tax incentives. Under the conference 
     agreement, however, the census tracts that compose the

[[Page H6521]]

     D.C. Enterprise Zone for purposes of the wage credit, 
     expensing, and tax-exempt financing incentives are expanded 
     to include census tracts within the District of Columbia 
     where the poverty rate is not less than 20 percent. Thus, the 
     D.C. Enterprise Zone consists of (1) all census tracts that 
     presently are part of the D.C. enterprise community 
     designated under Code section 1391 (i.e., portions of 
     Anacostia, Mt. Pleasant, Chinatown, and the easternmost part 
     of the District) and (2) all additional census tracts within 
     the District of Columbia where the poverty rate is not less 
     than 20 percent. As under the House bill, the D.C. Enterprise 
     Zone designation generally will remain in effect for five 
     years for the period from January 1, 1998, through December 
     31, 2002.
     Empowerment zone wage credit, expensing, and tax-exempt 
         financing
       The conference agreement includes the House bill provision 
     with respect to the tax incentives that are available in the 
     D.C. Enterprise Zone, modified to provide that the wage 
     credit is available with respect to all residents of the 
     District and is not limited to residents of the D.C. 
     Enterprise Zone and to eliminate the requirement that 35 
     percent of the employees of a qualified ``D.C. Zone 
     business'' must be residents of the D.C. Enterprise Zone. 
     26 Thus, the following tax incentives that are 
     available under present law in empowerment zones generally 
     will be available in the D.C. Enterprise Zone: (1) a 20-
     percent wage credit for the first $15,000 of wages paid to 
     D.C. residents who work in the D.C. Enterprise Zone; (2) an 
     additional $20,000 of expensing under Code section 179 for 
     qualified zone property; and (3) special tax-exempt financing 
     for certain zone facilities. 27 The conference 
     agreement does not include the provision limiting the special 
     tax-exempt financing benefits to bonds issued by the Economic 
     Development Corporation.
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     \26\ The provision of the conference agreement that 
     authorizes the designation of additional empowerment zones 
     also modifies the definition of an enterprise zone business 
     to provide that, in addition to satisfying the other 
     requirements of section 1397B, at least 50 percent (as 
     opposed to 80 percent under present law) of the total gross 
     income of a qualified enterprise zone business must be 
     derived from the active conduct of a ``qualified business'' 
     within a zone or community. The conference agreement makes 
     certain other modifications to the definition of an 
     enterprise zone business as well. This modified definition of 
     enterprise zone business, determined without regard to the 
     35-percent zone resident employee requirement, generally 
     applies for purposes of the increased expensing and tax-
     exempt financing available in the D.C. Enterprise Zone.
     \27\ The provision of the conference agreement that 
     authorizes the designation of additional empowerment zones 
     contains certain modifications to the rules applicable to 
     present-law empowerment zone facility bonds. Such 
     modifications (not including the exception to the volume cap) 
     will apply in the D.C. Enterprise Zone as well.
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     Zero-percent capital gains rate
       The conference agreement includes the House bill provision 
     that provides a zero-percent capital gains rate for capital 
     gains from the sale of certain qualified D.C Zone assets held 
     for more than five years. For purposes of the zero-percent 
     capital gains rate, the D.C. Enterprise Zone is defined to 
     include all census tracts within the District of Columbia 
     where the poverty rate is not less than 10 percent.
       For purposes of the zero-percent capital gains rate, the 
     definition of qualified ``D.C. Zone business'' generally is 
     the same as the definition applicable for purposes of the 
     increased expensing described above. However, solely for 
     purposes of the zero-percent capital gains rate, a qualified 
     ``D.C. Zone business'' must derive at least 80 percent (as 
     opposed to 50 percent) of its total gross income from the 
     active conduct of a ``qualified business'' within the D.C. 
     Enterprise Zone.
     First-time homebuyer tax credit
       The conference agreement includes the Senate amendment 
     provision that allows first-time homebuyers of a principal 
     residence in the District a tax credit of up to $5,000 of the 
     amount of the purchase price, except that the credit phases 
     out for individual taxpayers with adjusted gross income 
     between $70,000 and $90,000 ($110,000-$130,000 for joint 
     filers). The conference agreement clarifies that the credit 
     is available with respect to purchases of existing property 
     as well as new construction, and specifies that a taxpayer's 
     basis in a property is reduced by the amount of any homebuyer 
     tax credit claimed with respect to such property. In 
     addition, the conference agreement sunsets the credit after 
     December 31, 2000. Thus, the credit is available with respect 
     to property purchased after the date of enactment and before 
     January 1, 2001.

                    VIII. WELFARE-TO-WORK TAX CREDIT

                      (sec. 801 of the House bill)

                              Present Law

       The work opportunity tax credit is available on an elective 
     basis for employers hiring individuals from one or more of 
     seven targeted groups. The credit generally is equal to 35 
     percent of qualified wages. Generally, qualified wages 
     consist of wages attributable to service rendered by a member 
     of a targeted group during the one-year period beginning with 
     the day the individual begins work for the employer.
       For purposes of the work opportunity tax credit, the 
     targeted groups for which the credit is available include: 
     (1) families receiving Aid to Families with Dependent 
     Children (``AFDC'); (2) qualified ex-felons; (3) high-risk 
     youth; (4) vocational rehabilitation referrals; (5) qualified 
     summer youth employees; (6) qualified veterans; and (7) 
     families receiving food stamps.
       Generally, no more than $6,000 of wages during the first 
     year of employment is permitted to be taken into account with 
     respect to any individual. Thus, the maximum credit per 
     individual is $2,100. With respect to qualified summer youth 
     employees, the maximum credit is 35 percent of up to $3,000 
     of qualified first-year wages, for a maximum credit of 
     $1,050.
       The deduction for wages is reduced by the amount of the 
     credit.
       The work opportunity tax credit is effective for wages paid 
     or incurred to a qualified individual who begins work for an 
     employer after September 30, 1996, and before October 1, 
     1997.

                               House Bill

       The House bill provides to employers a tax credit on the 
     first $20,000 of eligible wages paid to qualified long-term 
     family assistance (AFDC or its successor program) recipients 
     during the first two years of employment. The credit is 35 
     percent of the first $10,000 of eligible wages in the first 
     year of employment and 50 percent of the first $10,000 of 
     eligible wages in the second year of employment. The maximum 
     credit is $8,500 per qualified employee.
       Qualified long-term family assistance recipients are: (1) 
     members of a family that has received family assistance for 
     at least 18 consecutive months ending on the hiring date; (2) 
     members of a family that has received family assistance for a 
     total of at least 18 months (whether or not consecutive) 
     after the date of enactment of this credit if they are hired 
     within 2 years after the date that the 18-month total is 
     reached; and (3) members of a family who are no longer 
     eligible for family assistance because of either Federal or 
     State time limits, if they are hired within 2 years after the 
     Federal or State time limits made the family ineligible for 
     family assistance.
       Eligible wages include cash wages paid to an employee plus 
     amounts paid by the employer for the following: (1) 
     educational assistance excludable under a section 127 program 
     (or that would be excludable but for the expiration of sec. 
     127); (2) health plan coverage for the employee, but not more 
     than the applicable premium defined under section 
     4980B(f)(4); and (3) dependent care assistance excludable 
     under section 129.
       Effective date.--The provision is effective for wages paid 
     or incurred to a qualified individual who begins work for an 
     employer on or after January 1, 1998 and before May 1, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

                      IX. MISCELLANEOUS PROVISIONS

                        A. Excise Tax Provisions

     1. Repeal excise tax on diesel fuel used in recreational 
         motorboats (sec. 901 of the House bill and sec. 701 of 
         the Senate amendment)

                              Present Law

       Before a temporary suspension through December 31, 1997 was 
     enacted in 1996, diesel fuel used in recreational motorboats 
     was subject to the 24.3-cents-per-gallon diesel fuel excise 
     tax. Revenues from this tax were retained in the General 
     Fund.

                               House Bill

       The House bill repeals the application of the diesel fuel 
     tax to fuel used in recreational motorboats.
       Effective date.--The provision is effective for fuel sold 
     after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Continued application of tax on imported recycled halon-
         1211 (sec. 902 of the House bill)

                              Present Law

       An excise tax is imposed on the sale or use by the 
     manufacturer or importer of certain ozone-depleting chemicals 
     (Code sec. 4681). The amount of tax generally is determined 
     by multiplying the base tax amount applicable for the 
     calendar year by an ozone-depleting factor assigned to each 
     taxable chemical. The base tax amount is $6.25 per pound in 
     1997, and is scheduled to increase by 45 cents per pound per 
     year thereafter. The ozone-depleting factors for taxable 
     halons are 3 for halon-1211, 10 for halon-1301, and 6 for 
     halon-2402.
       Taxable chemicals that are recovered and recycled within 
     the United States are exempt from tax. In addition, exemption 
     is provided for imported recycled halon-1301 and halon-2402 
     if such chemicals are imported from countries that are 
     signatories to the Montreal Protocol on Substances that 
     Deplete the Ozone Layer. Present law further provides that 
     exemption is to be provided for imported recycled halon-1211, 
     for such chemicals imported from countries that are 
     signatories to the Montreal Protocol on Substances that 
     Deplete the Ozone Layer after December 31, 1997.

                               House Bill

       The House bill repeals the present-law exemption for 
     imported recycled halon-1211.
       Effective date.--The provision is effective on the date of 
     enactment.

[[Page H6522]]

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     3. Transfer of General Fund highway fuels tax revenues to the 
         Highway Trust Fund (sec. 704 of the Senate amendment)

                              Present Law

       The Highway Trust Fund receives revenues from taxes on 
     gasoline and special motor fuels (14 cents per gallon) and 
     diesel fuel (20 cents per gallon) used in highway vehicles, 
     through September 30, 1999. These fuels also are subject to 
     an additional, permanent 4.3-cents-per-gallon rate. Revenues 
     from the 4.3-cents-per-gallon rate are retained in the 
     General Fund.
       Excise taxes imposed on these three motor fuels (gasoline, 
     diesel fuel, and special motor fuels) generally must be paid 
     to the Treasury in semi-monthly deposits, which are credited 
     to tax liability that is reported on quarterly returns. 
     Subject to special rules for deposits attributable to taxes 
     for the period September 16-26, deposits generally must be 
     made 9 days after the end of each semi-monthly period (14 
     days in the case of gasoline and diesel fuel taxes deposited 
     electronically).

                               House Bill

       No provision.

                            Senate Amendment

       Transfer of revenues to Highway Trust Fund.--Revenues from 
     the General Fund 4.3-cents-per-gallon tax (net of 0.5-cent-
     per-gallon transferred to a new Intercity Passenger Rail Fund 
     under sec. 702 of the Senate amendment for the period, 
     October 1, 1997-April 15, 2001) are transferred to the 
     Highway Trust Fund. Of such amounts transferred to the 
     Highway Trust Fund, 20 percent are to be credited to the Mass 
     Transit Account and 80 percent to the Highway Account.
       Conforming amendments ensure that no direct spending 
     increases will occur as a result of the provision.
       Deposit rules for highway motor fuels taxes.--No provision.
       Effective date.--October 1, 1997.

                          Conference Agreement

       Transfer of revenues to Highway Trust Fund.--The conference 
     agreement follows the Senate amendment with a modification to 
     reflect deletion from the agreement of the Senate amendment 
     provision transferring 0.5 cents per gallon of these revenues 
     to a new Intercity Passenger Rail Fund. As under the Senate 
     amendment, revenues from the 4.3-cents-per-gallon tax will be 
     divided between the Highway Trust Fund's Highway Account 
     (3.45 cents per gallon) and Mass Transit Account (0.85 cents 
     per gallon).
       Deposit rules for highway motor fuels taxes.--The 
     conference agreement provides that the excise taxes imposed 
     on gasoline (sec. 4081), diesel fuel (sec. 4081), special 
     motor fuels (sec. 4041), and kerosene (sec. 4081) that 
     otherwise would be required to be deposited with the Treasury 
     after July 31, 1998, and before September 30, 1998, are not 
     required to be deposited until October 5, 1998.
     4. Tax certain alternative fuels based on energy equivalency 
         to gasoline (sec. 705 of the Senate amendment)

                              Present Law

       Special motor fuels are subject to an 18.3-cents-per-gallon 
     excise tax: 14 cents per gallon of the tax is dedicated to 
     the Highway Trust Fund, and the remaining 4.3 cents per 
     gallon is retained in the General Fund. Special motor fuels 
     include propane, methanol derived from natural gas, liquefied 
     natural gas, and compressed natural gas. Reduced tax rates 
     apply to methanol from natural gas and compressed natural 
     gas.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment adjusts the aggregate tax rates 
     imposed on propane, liquefied natural gas, and methanol 
     derived from natural gas to reflect the energy content of 
     these fuels relative to gasoline. The revised tax rates 
     per gallon (through September 30, 1999) are--

                                                                        
                                                                        
                                                                        
Propane..............................................        13.6 cents.
Methanol.............................................        9.15 cents.
Liquified natural gas................................        11.9 cents.
                                                                        


       After September 30, 1999, these three fuels will be taxed 
     based on Btu equivalency to gasoline's 4.3-cents-per-gallon 
     rate. No change is made to the current reduced tax rate on 
     compressed natural gas.
       Effective date.--October 1, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     5. Extend and modify tax benefits for ethanol (sec. 605 of 
         the House bill and sec. 707 of the Senate amendment)

                              Present Law

       Ethanol used as a fuel is eligible for a 54-cents-per 
     gallon tax benefit. The benefit may be claimed either as an 
     income tax credit, through reduced excise tax on sales of 
     gasoline that is blended with ethanol, or by expedited 
     refunds of tax paid on such gasoline. This benefit is 
     scheduled to expire after September 30, 1999. However, 
     provisions relating to excise taxes dedicated to trust funds 
     generally are assumed to be permanent for budget scorekeeping 
     purposes.

                               House Bill

       The House bill provides that preferential excise tax rates 
     (and associated credits and refunds) that statutorily are 
     scheduled to expire are not assumed to be permanent for 
     budget scorekeeping purposes.

                            Senate Amendment

       The Senate amendment extends the ethanol tax benefit 
     through 2007, and modifies the benefit rate per gallon of 
     alcohol, as follows: 2001 and 2002--53 cents; 2003 and 2004--
     52 cents; and 2005, 2006, and 2007--51 cents.
       Effective date.--Date of enactment.

                          Conference Agreement

       No provision (i.e., the conference agreement does not 
     include either the House bill or the Senate amendment 
     provision).
     6. Treat certain gasoline ``chain retailers'' as wholesale 
         distributors under the gasoline excise tax refund rules 
         (sec. 904 of the House bill)

                              Present Law

       Gasoline is taxed at 18.3 cents per gallon upon removal 
     from a registered pipeline or barge terminal facility. The 
     position holder in the terminal at the time of removal is 
     liable for payment of the tax. Certain uses of gasoline, 
     including use by States and local governments, are exempt 
     from tax. In general, these exemptions are realized by 
     refunds to the exempt users of tax paid by the party that 
     removed the gasoline from a terminal facility. Present law 
     includes an exception to the general rule that refunds are 
     made to consumers in the case of gasoline sold to States and 
     local governments and certain other exempt users. In those 
     cases, wholesale distributors sell the gasoline net of tax 
     previously paid and receive the refunds. The term wholesale 
     distributor includes only persons that sell gasoline to 
     producers, retailers, or to users in bulk quantities. 
     Retailers that are not also wholesale distributors do not 
     qualify, regardless of their size.

                               House Bill

       The definition of wholesale distributor is expanded to 
     include certain ``chain retailers''--retailers who own and 
     make retail sales from 10 or more retail gasoline outlets. 
     This modification conforms the definition of wholesale 
     distributor to that which existed before 1987 when the point 
     of collection of the gasoline tax was moved from the 
     wholesale distribution level to removal from a terminal 
     facility.
       Effective date.--The provision is effective after September 
     30, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     7. Exemption of electric and other clean-fuel motor vehicles 
         from luxury automobile classification (sec. 905 of the 
         House bill)

                              Present Law

       Present law imposes an excise tax on the sale of 
     automobiles whose price exceeds a designated threshold, 
     currently $36,000. The excise tax is imposed at a rate of 8 
     percent for 1997 on the excess of the sales price above the 
     designated threshold. The 8-percent rate declines by one 
     percentage point per year until reaching 3 percent in 2002, 
     and no tax thereafter. The $36,000 threshold is indexed for 
     inflation. The present-law indexed threshold of $36,000 is 
     the result of adjusting a $30,000 threshold specified in the 
     Code for inflation occurring after 1990 (sec. 4001(e)).
       The tax generally applies only to the first retail sale 
     after manufacture, production, or importation of an 
     automobile. It does not apply to subsequent sales of taxable 
     automobiles. A 10-percent tax is imposed on the separate 
     purchase of parts and accessories for a vehicle within six 
     months of the first retail sale when the sum of the separate 
     purchases of the vehicle, parts, and accessories exceeds the 
     luxury tax threshold (sec. 4003).28
---------------------------------------------------------------------------
     \28\ The rate of tax under section 4003 is not determined by 
     reference to section 4001. However, a technical correction 
     under the bill (Title XV) conforms the tax rate applicable 
     under section 4003 to that applicable under section 4001.
---------------------------------------------------------------------------
       The tax under section 4001 applies to sales before January 
     1, 2003. The tax under section 4003 has no termination 
     date.29
---------------------------------------------------------------------------
     \29\ A technical correction under both the House bill (Title 
     XV) and the Senate amendment (Title XIV) conforms the 
     expiration date of the tax under section 4003 to the 
     expiration date under section 4001.
---------------------------------------------------------------------------

                               House Bill

       The House bill modifies the threshold above which the 
     luxury excise tax on automobiles will apply for each of two 
     identified classes of automobiles both in the case of a 
     purchase of a vehicle and in the case of the separate 
     purchase of a vehicle and parts and accessories therefor. 
     First, for an automobile that is not a clean-burning fuel 
     vehicle to which retrofit parts and components are installed 
     to make the vehicle a clean-burning vehicle, the threshold 
     would be $30,000, as adjusted for inflation under present 
     law, plus an amount equal to the increment to the retail 
     value of the automobile attributable to the retrofit parts 
     and components installed.
       In the case of a passenger vehicle designed to be propelled 
     primarily by electricity and built by an original equipment 
     manufacturer, the threshold applicable for any year is 
     modified to equal 150 percent of $30,000, with the result 
     increased for inflation occurring after 1990 and rounded to 
     the next lowest multiple of $2,000.
       Effective date.--The provision is effective for sales and 
     installations occurring on or after the date of enactment.

[[Page H6523]]

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with a 
     modification to the effective date that provides that the 
     provision is effective for sales and installations occurring 
     after the date of enactment.
     8. Reduce rate of alcohol excise tax on certain hard ciders 
         (sec. 703 of the Senate amendment)

                              Present Law

       Distilled spirits are taxed at a rate of $13.50 per proof 
     gallon; beer is taxed at a rate of $18 per barrel 
     (approximately 58 cents per gallon); and still wines of 14 
     percent alcohol or less are taxed at a rate of $1.07 per wine 
     gallon. Higher rates of tax are applied to wines with greater 
     alcohol content and to sparkling wines (champagne).
       Certain small wineries may claim a credit against the 
     excise tax on wine of 90 cents per wine gallon on the first 
     100,000 gallons of wine produced annually (i.e., net tax rate 
     of 17 cents per wine gallon). Certain small breweries pay a 
     reduced tax of $7.00 per barrel (approximately 22.6 cents per 
     gallon) on the first 60,000 barrels of beer produced 
     annually.
       Apple cider containing alcohol (``hard cider'') is 
     classified and taxed as wine.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment adjusts the tax rate on apple cider 
     having an alcohol content of no more than 7 percent to 22.6 
     cents per gallon for those persons who produce more than 
     100,000 gallons of ``hard cider'' during a calendar year. The 
     tax rate applicable to hard cider produced by persons who 
     produce 100,000 gallons or less in a calendar year will 
     remain as under present law and those persons may continue to 
     claim the 90 cents per wine gallon credit permitted for small 
     wineries. Hard cider production will continue to be counted 
     in determining whether other production of a producer 
     qualifies for the tax credit for small producers. The Senate 
     amendment does not change the classification of qualifying 
     hard cider as wine.
       Effective date.--The provision is effective for hard cider 
     removed after September 30, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     9. Study feasibility of moving collection point for distilled 
         spirits excise tax (sec. 706 of the Senate amendment)

                              Present Law

       Distilled spirits are subject to tax at $13.50 per proof 
     gallon. (A proof gallon is a liquid gallon consisting of 50 
     percent alcohol.) In the case of domestically produced 
     distilled spirits and distilled spirits imported into the 
     United States in bulk containers for domestic bottling, the 
     tax is imposed on removal of the beverage from the distillery 
     (without regard to whether a sale occurs at that time). 
     Bottled distilled spirits that are imported into the United 
     States comprise approximately 15 percent of the current 
     market for these beverages; tax is imposed on these imports 
     when the distilled spirits are removed from the first customs 
     bonded warehouse in which they are deposited upon entry into 
     the United States.
       In the case of certain distilled spirits products, a tax 
     credit for alcohol derived from fruit is allowed. This credit 
     reduces the effective tax paid on those beverages. The credit 
     is determined when the tax is paid (i.e., at the distillery 
     or on importation).

                               House Bill

       No provision.

                            Senate Amendment

       The Treasury Department is directed to study options for 
     changing the point at which the distilled spirits excise tax 
     is collected. One of the options evaluated should be 
     collecting the tax at the point at which the distilled 
     spirits are removed from registered wholesale warehouses. As 
     part of this study, the Treasury is to focus on 
     administrative issues associated with the identified options, 
     including the effects on tax compliance. For example, the 
     Treasury is to evaluate the actual compliance record of 
     wholesale dealers that currently pay the excise tax on 
     imported bottled distilled spirits, and the compliance 
     effects of allowing additional wholesale dealers to be 
     distilled spirts taxpayers. The study also is to address the 
     number of taxpayers involved, the types of financial 
     responsibility requirements that might be needed, and any 
     special requirements regarding segregation of non-tax-paid 
     distilled spirits from other products carried by 
     the potential new taxpayers. The study further is to 
     review the effects of the options on Treasury staffing and 
     other budgetary resources as well as projections of the 
     time between when tax currently is collected and the time 
     when tax otherwise would be collected.
       The study is required to be completed and transmitted to 
     the Senate Committee on Finance and the House Committee on 
     Ways and Means no later than January 31, 1998.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     a modification delaying the due date of the study to March 
     31, 1998.
     10. Codify Treasury Department regulations regulating wine 
         labels (sec. 708 of the Senate amendment)

                              Present Law

       The Code includes provisions regulating the labeling of 
     wine when it is removed from a winery for marketing. In 
     general, the regulations under these provisions allow the use 
     of semi-generic names for wine that reflect geographic 
     identifications understood in the industry, provided that the 
     labels include clear indication of any deviation from that 
     which is generally understood in the source of the grapes or 
     the process by which the wine is produced.

                               House Bill

       No provision.

                            Senate Amendment

       The current Treasury Department regulations governing the 
     use of semi-generic wine designations which reflect 
     geographic origin are codified into the Code's wine labeling 
     provisions.
       Effective date.--The provision is effective on the date of 
     enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     a modification deleting the Secretary of the Treasury's 
     discretion to eliminate currently listed semi-generic names.
     11. Uniform rate of excise tax on vaccines (sec. 903 of the 
         House bill and sec. 844 of the Senate amendment)

                              Present Law

       A manufacturer's excise tax is imposed on the following 
     vaccines routinely recommended for administration to 
     children: DPT (diphtheria, pertussis, tetanus,), $4.56 per 
     dose; DT (diphtheria, tetanus), $0.06 per dose; MMR (measles, 
     mumps, or rubella), $4.44 per dose; and polio, $0.29 per 
     dose. In general, if any vaccine is administered by combining 
     more than one of the listed taxable vaccines, the amount of 
     tax imposed is the sum of the amounts of tax imposed for each 
     taxable vaccine. However, in the case of MMR and its 
     components, any component vaccine of MMR is taxed at the same 
     rate as the MMR-combined vaccine.
       Amounts equal to net revenues from this excise tax are 
     deposited in the Vaccine Injury Compensation Trust Fund to 
     finance compensation awards under the Federal Vaccine Injury 
     Compensation Program for individuals who suffer certain 
     injuries following administration of the taxable vaccines.

                               House Bill

       The House bill replaces the present-law excise tax rates, 
     that differ by vaccine, with a single rate tax of $0.84 per 
     dose on any listed vaccine component. Thus, the House bill 
     provides that the tax applied to any vaccine that is a 
     combination of vaccine components is 84 cents times the 
     number of components in the combined vaccine. For example, 
     the MMR vaccine is to be taxed at a rate of $2.52 per dose 
     and the DT vaccine is to be taxed at rate of $1.68 per dose.
       In addition, the House bill adds three new taxable vaccines 
     to the present-law taxable vaccines: (1) HIB (haemophilus 
     influenza type B); (2) Hepatitis B; and (3) varicella 
     (chickenpox). The three newly listed vaccines also are 
     subject to the 84-cents per dose excise tax.
       Effective date.--The provision is effective for vaccine 
     purchases after September 30, 1997. No tax is to be collected 
     or refunds permitted for amounts held for sale on October 1, 
     1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill 
     regarding rates of tax and taxable vaccines. In addition, the 
     committee report on the Senate amendment directs the 
     Secretary of the Treasury to undertake a study of the 
     efficacy of the new flat-rate vaccine tax system as a means 
     to finance the Vaccine Injury Compensation Trust Fund. 
     Results of the Treasury study are to be submitted to the 
     Senate Committee on Finance and the House Committee on Ways 
     and Means by September 30, 1999.
       Effective date.--The provision is effective for vaccine 
     purchases after September 30, 1997. No floor stocks tax is to 
     be collected or refunds permitted for amounts held for sale 
     on October 1, 1997. Returns to the manufacturer occurring on 
     or after October 1, 1997, are assumed to be returns of 
     vaccines to which the new rates of tax apply.

                          Conference Agreement

       The conference agreement generally follows the House bill 
     and the Senate amendment by imposing a uniform rate of tax, 
     but at a rate of $0.75 per dose on any listed vaccine 
     component. The conference agreement also adds the HIB 
     (haemophilus influenza type B), Hepatitis B, and varicella 
     (chickenpox) vaccines to the list of taxable vaccines.
       The conference agreement does not require the Secretary to 
     study the new vaccine tax structure.
       Effective date.--The provision is effective for sales after 
     the date of enactment. No floor stocks tax is to be 
     collected, or floor stocks refunds permitted, for vaccines 
     held on the effective date. For the purpose of determining 
     the amount of refund of tax on a vaccine returned to the 
     manufacturer or importer, for vaccines returned after the 
     date of enactment and before January 1, 1999, the amount of 
     tax assumed to have been paid on the initial purchase of the 
     returned vaccine shall not exceed $0.75 per dose.

[[Page H6524]]

                     B. Disaster Relief Provisions

     1. Authority to postpone certain tax-related deadlines by 
         reason of presidentially declared disaster (sec. 921 of 
         the House bill)

                              Present Law

       In the case of a Presidentially declared disaster, the 
     Secretary of the Treasury has the authority to postpone some 
     (but not all) tax-related deadlines.

                               House Bill

       The House bill provides that, in the case of a taxpayer 
     determined to be affected by a Presidentially declared 
     disaster, the Secretary may specify that, for a period of up 
     to 90 days, certain taxpayer deadlines are postponed. The 
     deadlines that may be postponed are the same as are postponed 
     by reason of service in a combat zone. The provision does not 
     apply for purposes of determining interest on any overpayment 
     or underpayment.
       Effective date.--The provision is effective for any period 
     for performing an act that has not expired before the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, except 
     that it is applicable to all deadlines (not just taxpayer 
     deadlines).
     2. Use of certain appraisals to establish amount of disaster 
         loss (sec. 922 of the House bill)

                              Present Law

       In order to claim a disaster loss, a taxpayer must 
     establish the amount of the loss. This may, for example, be 
     done through the use of an appraisal.

                               House Bill

       The House bill provides that nothing in the Code should be 
     construed to prohibit Treasury from issuing guidance 
     providing that an appraisal for the purpose of obtaining a 
     Federal loan or Federal loan guarantee as the result of a 
     Presidentially declared disaster may be used to establish the 
     amount of a disaster loss.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     3. Treatment of livestock sold on account of weather-related 
         conditions (sec. 923 of the House bill and sec. 721 of 
         the Senate amendment)

                              Present Law

       In general, cash-method taxpayers report income in the year 
     it is actually or constructively received. However, present 
     law contains two special rules applicable to livestock sold 
     on account of drought conditions. Code section 451(e) 
     provides that a cash-method taxpayer whose principal trade or 
     business is farming who is forced to sell livestock due to 
     drought conditions may elect to include income from the sale 
     of the livestock in the taxable year following the taxable 
     year of the sale. This elective deferral of income is 
     available only if the taxpayer establishes that, under the 
     taxpayer's usual business practices, the sale would not have 
     occurred but for drought conditions that resulted in the area 
     being designated as eligible for Federal assistance. This 
     exception is generally intended to put taxpayers who receive 
     an unusually high amount of income in one year in the 
     position they would have been in absent the drought.
       In addition, the sale of livestock (other than poultry) 
     that is held for draft, breeding, or dairy purposes in excess 
     of the number of livestock that would have been sold but for 
     drought conditions is treated as an involuntary conversion 
     under section 1033(e). Consequently, gain from the sale of 
     such livestock could be deferred by reinvesting the proceeds 
     of the sale in similar property within a two-year period.

                               House Bill

       The House bill amends Code section 451(e) to provide that a 
     cash-method taxpayer whose principal trade or business is 
     farming and who is forced to sell livestock due not only to 
     drought (as under present law), but also to floods or other 
     weather-related conditions, may elect to include income from 
     the sale of the livestock in the taxable year following the 
     taxable year of the sale. This elective deferral of income is 
     available only if the taxpayer establishes that, under the 
     taxpayer's usual business practices, the sale would not have 
     occurred but for the drought, flood or other weather-related 
     conditions that resulted in the area being designated as 
     eligible for Federal assistance.
       In addition, the bill amends Code section 1033(e) to 
     provide that the sale of livestock (other than poultry) that 
     are held for draft, breeding, or dairy purposes in excess of 
     the number of livestock that would have been sold but for 
     drought (as under present law), flood or other weather-
     related conditions is treated as an involuntary conversion.
       Effective date.--The provision applies to sales and 
     exchanges after December 31, 1996.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Mortgage bond financing for residences located in 
         Presidentially declared disaster areas (sec. 924 of the 
         House bill and sec. 723 of the Senate amendment)

                              Present Law

       Qualified mortgage bonds are private activity tax-exempt 
     bonds issued by States and local governments acting as 
     conduits to provide mortgage loans to first-time home buyers 
     who satisfy specified income limits and who purchase homes 
     that cost less than statutory maximums.
       Present law waives the three buyer targeting requirements 
     for a portion of the loans made with proceeds of a qualified 
     mortgage bond issue if the loans are made to finance homes in 
     statutorily prescribed economically distressed areas.

                               House Bill

       The House bill waives the first-time homebuyer requirement, 
     the income limits, and the purchase price limits for loans to 
     finance homes in certain Presidentially declared disaster 
     areas. The waiver applies only during the one-year period 
     following the date of the disaster declaration.
       Effective date.--The provision applies to loans financed 
     with bonds issued after December 31, 1996, and before January 
     1, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill except 
     for the effective date.
       Effective date.--The provision applies to loans financed 
     with bonds issued after December 31, 1996, and before January 
     1, 1999.

                          Conference Agreement

       The conference agreement allows the waivers of the first-
     time homebuyer requirement, the income limits, and the 
     purchase price limits for loans to finance homes in certain 
     Presidentially declared disaster areas. The waiver applies 
     only during the two-year period following the date of 
     disaster declaration.
       Effective date.--The provision applies to loans financed 
     with bonds issued after December 31, 1996 and before January 
     1, 1999 (i.e., is the same as the Senate amendment).
     5. Rules relating to denial of earned income credit on basis 
         of disqualified income (sec. 722 of the Senate amendment)

                              Present Law

       For taxable years beginning after December 31, 1995, an 
     individual is not eligible for the earned income credit if 
     the aggregate amount of ``disqualified income'' of the 
     taxpayer for the taxable year exceeds $2,200. This threshold 
     is indexed for inflation. Disqualified income is the sum of:
       (1) interest (taxable and tax-exempt);
       (2) dividends;
       (3) net rent and royalty income (if greater than zero);
       (4) capital gain net income and;
       (5) net passive income (if greater than zero) that is not 
     self-employment income.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment clarifies that gain or loss from the 
     sale of livestock (as defined under sec.1231(b)(3) of the 
     Code) is disregarded for purposes of the calculation of 
     capital gain net income under the disqualified income test of 
     the earned income credit.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1995.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     6. Penalty-free withdrawals from IRAs for disaster-related 
         expenses (sec. 724 of the Senate amendment)

                              Present Law

       Under present law, amounts held in an individual retirement 
     arrangement (``IRA'') are includible in income when withdrawn 
     (except to the extent the withdrawal is a return of 
     nondeductible contributions). Amounts withdrawn prior to 
     attainment of age 59-1/2 are subject to an additional 10-
     percent early withdrawal tax, unless the withdrawal is due to 
     death or disability, is made in the form of certain periodic 
     payments, is used to pay medical expenses in excess of 7.5 
     percent of AGI, or is used to purchase health insurance of an 
     unemployed individual.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that the 10-percent early 
     withdrawal tax does not apply to distributions from IRAs made 
     to a taxpayer for qualified disaster-related expenses.
       The penalty-free withdrawal is available for ``qualified 
     disaster-related distributions'' meaning distributions made 
     to pay for the repair or replacement of tangible property 
     which was located in a disaster area and was destroyed or 
     substantially damaged as a result of the disaster. The term 
     ``disaster area'' means an area determined by the President 
     of the United States during 1997 to warrant assistance by the 
     Federal Government under the Robert T. Stafford Disaster 
     Relief and Emergency Assistance Act.
       The penalty-free withdrawal rule only applies to qualified 
     disaster distributions that (1) are made within the 2-year 
     period beginning on the date the determination is made that 
     the area is a disaster area, (2) are used by the taxpayer 
     within 60 days of the payment or distribution to pay for the 
     disaster-related expenses, and (3) do on exceed $10,000 
     during the 2-year period.
       Effective date.--The provision is effective for 
     distributions after December 31, 1996,

[[Page H6525]]

     with respect to disasters occurring after such date.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     7. Elimination of 10-percent floor for casualty losses 
         resulting from Presidentially declared disaster (sec. 725 
         of the Senate amendment)

                              Present Law

       Non-business casualty and theft losses are deductible as an 
     itemized deduction only to the extent each loss is more than 
     $100 and the total of all losses during the year is more than 
     10 percent of adjusted gross income (``AGI'').

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment eliminates the 10-percent of AGI floor 
     for casualty losses resulting from a Presidentially declared 
     disaster that occurs in 1997.
       Effective date.--Disasters occurring in 1997.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     8. Requirement to abate interest by reason of Presidentially 
         declared disaster (sec. 726 of the Senate amendment)

                              Present Law

       In the case of a Presidentially declared disaster, the 
     Secretary of the Treasury has the authority to postpone some 
     tax-related deadlines, but there is no authority to abate 
     interest.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment requires the IRS to abate interest for 
     the same period of time for which the IRS has provided an 
     extension of time to file tax returns and pay taxes for 
     individuals located in Presidentially declared disaster areas 
     during 1997.
       Effective date.--Disasters occurring in 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

               C. Provisions Relating to Employment Taxes

     1. Employment tax status of distributors of bakery products 
         (sec. 931 of the House bill)

                              Present Law

       Under a special statutory rule, bakery distributors are 
     treated as employees for Social Security payroll tax purposes 
     (even if they are independent contractors for income tax 
     purposes) if: (1) their services are part of a continuing 
     relationship with the person for whom they are performed; (2) 
     the distributor's service contract contemplates that he or 
     she will perform substantially all of the services 
     personally; and (3) the distributor does not have a 
     substantial investment in facilities used in the performance 
     of services, excluding facilities used for transportation. 
     Bakery drivers generally take the position that they are not 
     employees under the statutory rule.

                               House Bill

       The House bill deletes distributors of bakery products from 
     the list of product and service distributors treated as 
     statutory employees for Social Security payroll tax purposes. 
     Thus, the status of such workers is determined under the 
     generally applicable rules.
       Effective date.--The provision is effective for services 
     performed after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     2. Clarification of standard to be used in determining tax 
         status of retail securities brokers (sec. 932 of the 
         House bill and sec. 779 of the Senate amendment)

                              Present Law

       Under present law, whether a worker is an employee or 
     independent contractor generally is determined under a 
     common-law facts and circumstances test. An employer-employee 
     relationship is generally found to exist if the service 
     recipient has not only the right to control the result to be 
     accomplished by the work, but also the means by which the 
     result is to be accomplished. Whether such control exists is 
     determined based on the relevant facts and circumstances. The 
     IRS training manual provides that if a business requires its 
     workers to comply with rules established by a third party 
     (e.g., municipal building codes related to construction), the 
     fact that such rules are imposed should be given little 
     weight in determining the worker's status.

                               House Bill

       Under the House bill, in determining the status of a 
     registered representative of a broker-dealer for Federal tax 
     purposes, no weight is to be given to instructions from the 
     service recipient which are imposed only in compliance with 
     governmental investor protection standards or investor 
     protection standards imposed by a governing body pursuant to 
     a delegation by a Federal or State agency.
       Effective date.--Services performed after December 31, 
     1997. No inference is intended that the provision is not 
     present law.

                            Senate Amendment

       Same as the House bill, except that the provision applies 
     only for Federal income tax purposes.
       Effective date.--Same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill.
     3. Clarification of exemption from self-employment tax for 
         certain termination payments received by former insurance 
         salesmen (sec. 933 of the House bill)

                              Present Law

       Under the self-employment contributions act (``SECA''), 
     taxes are imposed on an individual's net earnings from self 
     employment. In general, net earnings from self employment 
     means the gross income derived by an individual from any 
     trade or business carried on by such individual, less the 
     deductions allowed which are attributable to such trade or 
     business. The SECA tax rate is the same as the combined 
     employer and employee FICA rates (i.e., 12.4 percent for old 
     age, survivors, and disability income (OASDI) and 2.9 percent 
     for Medicare Hospital Insurance taxes) and the maximum amount 
     of earnings subject to the OASDI portion of SECA taxes is 
     coordinated with and is set at the same level as the maximum 
     level of wages and salaries subject to the OASDI portion of 
     FICA taxes ($65,400 for 1997). There is no limit on the 
     amount of self-employment income subject to the HI portion of 
     the tax.
       Certain insurance salesmen are independent contractors and 
     therefore subject to tax under SECA. Under case law, certain 
     payments received by a former insurance salesmen who had sold 
     insurance as an independent contractor are not net earnings 
     from self employment and therefore are not subject to SECA. 
     See, e.g., Jackson v. Comm'r, 108 TC No. 10 (1997); Gump 
     v. U.S., 86 F. 3d 1126 (CA FC 1996); Milligan v. Comm'r, 
     38 F. 3d 1094 (9th Cir. 1994).

                               House Bill

       The House bill codifies case law by providing that net 
     earnings from self employment do not include any amount 
     received during the taxable year from an insurance company on 
     account of services performed by such individual as an 
     insurance salesman for such company if (1) such amount is 
     received after termination of the individual's agreement to 
     perform services for the company, (2) the individual performs 
     no services for the company after such termination and before 
     the close of the taxable year, (3) the amount of the payment 
     depends solely on policies sold by the individual during the 
     last year of the agreement and the extent to which such 
     policies remain in force for some period after such 
     termination, and does not depend on the length of service or 
     overall earnings from services performed for the company, and 
     (4) the payments are conditioned upon the salesman agreeing 
     not to compete with the company for at least one year 
     following such termination.
       The House bill also amends the Social Security Act to 
     provide that such termination payments are not treated as 
     earnings for purposes of determining social security 
     benefits.
       No inference is intended with respect to the SECA tax 
     treatment of payments that are not described in the proposal.
       Effective date.--The provision is effective with respect to 
     payments after December 31, 1997. No inference is intended 
     that the proposal is not present law.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with 
     clarifications with respect to the requirement as to the 
     amount of the payments. The conference agreement clarifies 
     that the provision applies if the amount of the payment 
     depends primarily on policies sold by or credited to the 
     account of the individual during the last year of the service 
     agreement and/or the extent to which such policies remain in 
     force for some period after such termination and does not 
     depend on length of service or overall earnings. The 
     conference agreement clarifies that the eligibility for the 
     payment can be based on length of service or overall 
     earnings.
     4. Safe harbor for independent contractors (sec. 934 of the 
         House bill)

                              Present Law

       Under present law, whether a worker is an employee or 
     independent contractor is generally determined under a 
     common-law facts and circumstances test. An employer-employee 
     relationship is generally found to exist if the service 
     recipient has not only the right to control the result to be 
     accomplished by the work, but also the means by which the 
     result is to be accomplished. The Internal Revenue Service 
     (``IRS'') has developed a set of 20 factors for use in 
     applying the common-law test.
       Under a special safe harbor rule (section 530 of the 
     Revenue Act of 1978), a service recipient may treat a worker 
     as an independent contractor for employment tax purposes even 
     though the worker is in fact an employee if the service 
     recipient has a reasonable basis for treating the worker as 
     an independent contractor and certain other requirements are 
     met. Section 530 does not apply to the worker and does not 
     apply for income tax purposes. Section 530 does not apply to 
     technical services personnel.

[[Page H6526]]

                               House Bill

     In general
       The House bill provides a statutory safe harbor for 
     determining worker classification for Federal tax purposes. 
     If the standards set forth in the bill are met, the worker is 
     not treated as an employee and the service recipient (or 
     payor) is not treated as an employer. If the safe harbor is 
     not satisfied, the determination of the worker's status is 
     made under the present-law rules.
     Standards for determining whether individuals are not 
         employees
       Under the House bill, the following three sets of 
     requirements have to be satisfied in order for a worker not 
     to be treated as an employee: (1) worker requirements 
     regarding the service recipient; (2) worker requirements 
     regarding others; and (3) documentation requirements. The 
     requirements regarding the worker are satisfied if, in 
     connection with performing the services, the worker: (1) has 
     a significant investment in assets and/or training; (2) 
     incurs significant unreimbursed expenses; (3) agrees to 
     perform the services for a particular amount of time or to 
     complete a specific result and is liable for damages for 
     early termination without cause; (4) is paid primarily on a 
     commissioned basis; or (5) purchases products for resale.
       The requirements regarding others are satisfied if one of 
     the following two requirements is met: (1) a place of 
     business requirement; or (2) a services available to the 
     public requirement. The place of business requirement is 
     satisfied if the worker: (1) has a principal place of 
     business; (2) does not primarily perform services in the 
     service recipient's place of business; or (3) pays a fair 
     market rent for use of the service recipient's place of 
     business. The services available to the public requirement is 
     satisfied if the worker is not required to perform services 
     exclusively for the service recipient, and during the year 
     (or the preceding or subsequent year) the worker: (1) has 
     performed a significant amount of services for other persons; 
     (2) has offered to perform services for other persons through 
     advertising, individual written or oral solicitations, 
     listings with agencies, brokers, or other organizations that 
     provide referrals, or other similar activities; or (3) 
     provides service under a business name that is registered 
     with (or licensed by) a State or a political subdivision (or 
     an agency or instrumentality of a State or political 
     subdivision).
       The documentation requirement is satisfied if the services 
     performed by the worker are performed pursuant to a written 
     contract between the worker and the service recipient (or 
     payor) and the contract provides that the worker will not be 
     treated as an employee.
       If the service recipient (or payor) fails to file the 
     appropriate Federal tax returns (including information 
     returns) with respect to a worker for a taxable year, the 
     safe harbor is not available for such year.
     Effective date
       The provision is effective with respect to services 
     performed after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     5. Combined employment tax reporting demonstration project 
         (sec. 769 of the Senate amendment)

                              Present Law

       Traditionally, Federal tax forms are filed with the Federal 
     Government and State tax forms are filed with individual 
     states. This necessitates duplication of items common to both 
     returns. Some States have recently been working with the IRS 
     to implement combined State and Federal reporting of certain 
     types of items on one form as a way of reducing the burdens 
     on taxpayers. The State of Montana and the IRS have 
     cooperatively developed a system to combine State and Federal 
     employment tax reporting on one form. The one form would 
     contain exclusively Federal data, exclusively State data, and 
     information common to both: the taxpayer's name, address, 
     TIN, and signature.
       The Internal Revenue Code prohibits disclosure of tax 
     returns and return information, except to the extent 
     specifically authorized by the Internal Revenue Code (sec. 
     6103). Unauthorized disclosure is a felony punishable by a 
     fine not exceeding $5,000 or imprisonment of not more than 
     five years, or both (sec. 7213). An action for civil damages 
     also may be brought for unauthorized disclosure (sec. 7431). 
     No tax information may be furnished by the Internal Revenue 
     Service (``IRS'') to another agency unless the other agency 
     establishes procedures satisfactory to the IRS for 
     safeguarding the tax information it receives (sec. 6103(p)).
       Implementation of the combined Montana-Federal employment 
     tax reporting project has been hindered because the IRS 
     interprets section 6103 to apply that provision's 
     restrictions on disclosure to information common to both the 
     State and Federal portions of the combined form, although 
     these restrictions would not apply to the State with respect 
     to the State's use of State-requested information if that 
     information were supplied separately to both the State and 
     the IRS.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment permits implementation of a 
     demonstration project to assess the feasibility and 
     desirability of expanding combined reporting in the future. 
     There are several limitations on the demonstration project. 
     First, it is limited to the State of Montana and the IRS. 
     Second, it is limited to employment tax reporting. Third, it 
     is limited to disclosure of the name, address, TIN, and 
     signature of the taxpayer, which is information common to 
     both the Montana and Federal portions of the combined form. 
     Fourth, it is limited to a period of five years.
       Effective date.--The provision is effective on the date of 
     enactment, and will expire on the date five years after the 
     date of enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     a technical modification providing a cross-reference to the 
     provision in section 6103 of the Code.

                D. Provisions Relating to Small Business

     1. Delay imposition of penalties for failure to make payments 
         electronically through EFTPS (sec. 941 of the House bill 
         and sec. 731 of the Senate amendment)

                              Present Law

       Employers are required to withhold income taxes and FICA 
     taxes from wages paid to their employees. Employers also are 
     liable for their portion of FICA taxes, excise taxes, and 
     estimated payments of their corporate income tax liability.
       The Code requires the development and implementation of an 
     electronic fund transfer system to remit these taxes and 
     convey deposit information directly to the Treasury (Code 
     sec. 6302(h) 30). The Electronic Federal Tax 
     Payment System (``EFTPS'') was developed by Treasury in 
     response to this requirement.31 Employers must 
     enroll with one of two private contractors hired by the 
     Treasury. After enrollment, employers generally initiate 
     deposits either by telephone or by computer.
---------------------------------------------------------------------------
     \30\ This requirement was enacted in 1993 (sec. 523 of P.L. 
     103-182).
     \31\ Treasury had earlier developed TAXLINK as the prototype 
     for EFTPS. TAXLINK has been operational for several years; 
     EFTPS is currently operational. Employers currently using 
     TAXLINK will ultimately be required to participate in EFTPS.
---------------------------------------------------------------------------
       The new system is phased in over a period of years by 
     increasing each year the percentage of total taxes subject to 
     the new EFTPS system. For fiscal year 1994, 3 percent of the 
     total taxes are required to be made by electronic fund 
     transfer. These percentages increased gradually for fiscal 
     years 1995 and 1996. For fiscal year 1996, the percentage was 
     20.1 percent (30 percent for excise taxes and corporate 
     estimated tax payments). For fiscal year 1997, these 
     percentages increased significantly, to 58.3 percent (60 
     percent for excise taxes and corporate estimated tax 
     payments). The specific implementation method required to 
     achieve the target percentages is set forth in Treasury 
     regulations. Implementation began with the largest 
     depositors.
       Treasury had originally implemented the 1997 percentages by 
     requiring that all employers who deposit more than $50,000 in 
     1995 must begin using EFTPS by January 1, 1997. The Small 
     Business Job Protection Act of 1996 provided that the 
     increase in the required percentages for fiscal year 1997 
     (which, pursuant to Treasury regulations, was to take effect 
     on January 1, 1997) will not take effect until July 1, 
     1997.32 This was done to provide additional time 
     prior to implementation of the 1997 requirements so that 
     employers could be better informed about their 
     responsibilities.
---------------------------------------------------------------------------
     \32\ Sec. 1809 of P.L. 104-188.
---------------------------------------------------------------------------
       On June 2, 1997, the IRS announced 33 that it 
     will not impose penalties through December 31, 1997, on 
     businesses that make timely deposits using paper Federal tax 
     deposit coupons while converting to the EFTPS system.
---------------------------------------------------------------------------
     \33\ IR-97-32.
---------------------------------------------------------------------------

                               House Bill

       The House bill provides that no penalty shall be imposed 
     solely by reason of a failure to use EFTPS prior to January 
     1, 1999, if the taxpayer was first required to use the EFTPS 
     system on or after July 1, 1997.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     it applies to penalties for failures to use EFTPS prior to 
     July 1, 1998.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     2. Home office deduction: clarification of definition of 
         principal place of business (sec. 942 of the House bill)

                              Present Law

       A taxpayer's business use of his or her home may give rise 
     to a deduction for the business portion of expenses related 
     to operating the home (e.g., a portion of rent or 
     depreciation and repairs). Code section 280A(c)(1) provides, 
     however, that business deductions generally are allowed only 
     with respect to a portion of a home that is used exclusively 
     and regularly in one of the following ways: (1) as the 
     principal place of business for a trade or business; (2) as a 
     place of business used to meet with patients, clients, or 
     customers in the normal course of the taxpayer's trade or 
     business; or (3) in connection with the taxpayer's trade or 
     business, if the portion so used constitutes a separate 
     structure not attached to the dwelling unit. In the case of 
     an employee, the Code further requires that the business use 
     of the

[[Page H6527]]

     home must be for the convenience of the employer (sec. 
     280A(c)(1)).34 These rules apply to houses, 
     apartments, condominiums, mobile homes, boats, and other 
     similar property used as the taxpayer's home (sec. 
     280A(f)(1)). Under Internal Revenue Service (IRS) rulings, 
     the deductibility of expenses incurred for local 
     transportation between a taxpayer's home and a work location 
     sometimes depends on whether the taxpayer's home office 
     qualifies under section 280A(c)(1) as a principal place of 
     business (see Rev. Rul. 94-47, 1994-29 I.R.B. 6).
---------------------------------------------------------------------------
     \34\ If an employer provides access to suitable space on the 
     employer's premises for the conduct by an employee of 
     particular duties, then, if the employee opts to conduct such 
     duties at home as a matter of personal preference, the 
     employee's use of the home office is not ``for the 
     convenience of the employer.'' See, e.g., W. Michael Mathes, 
     (1990) T.C. Memo 1990-483.
---------------------------------------------------------------------------
       Prior to 1976, expenses attributable to the business use of 
     a residence were deductible whenever they were ``appropriate 
     and helpful'' to the taxpayer's business. In 1976, Congress 
     adopted section 280A, in order to provide a narrower scope 
     for the home office deduction, but did not define the term 
     ``principal place of business.'' In Commissioner v. Soliman, 
     113 S.Ct. 701 (1993), the Supreme Court reversed lower court 
     rulings and upheld an IRS interpretation of section 280A that 
     disallowed a home office deduction for a self-employed 
     anesthesiologist who practiced at several hospitals but was 
     not provided office space at the hospitals. Although the 
     anesthesiologist used a room in his home exclusively to 
     perform administrative and management activities for his 
     profession (i.e., he spent two or three hours a day in his 
     home office on bookkeeping, correspondence, reading medical 
     journals, and communicating with surgeons, patients, and 
     insurance companies), the Supreme Court upheld the IRS 
     position that the ``principal place of business'' for the 
     taxpayer was not the home office, because the taxpayer 
     performed the ``essence of the professional service'' at the 
     hospitals.35 Because the taxpayer did not meet 
     with patients at his home office and the room was not a 
     separate structure, a deduction was not available under the 
     second or third exception under section 280A(c)(1) (described 
     above).
---------------------------------------------------------------------------
     \35\ In response to the Supreme Court's decision in Soliman, 
     the IRS revised its Publication 587, Business Use of Your 
     Home, to more closely follow the comparative analysis used in 
     Soliman by focusing on the following two primary factors in 
     determining whether a home office is a taxpayer's principal 
     place of business: (1) the relative importance of the 
     activities performed at each business location; and (2) the 
     amount of time spent at each location.
---------------------------------------------------------------------------
       Section 280A(c)(2) contains a special rule that allows a 
     home office deduction for business expenses related to a 
     space within a home that is used on a regular (even if not 
     exclusive) basis as a storage unit for the inventory or 
     product samples of the taxpayer's trade or business of 
     selling products at retail or wholesale, but only if the home 
     is the sole fixed location of such trade or business.
       Home office deductions may not be claimed if they create 
     (or increase) a net loss from a business activity, although 
     such deductions may be carried over to subsequent taxable 
     years (sec. 280A(c)(5)).

                               House Bill

       Section 280A is amended to specifically provide that a home 
     office qualifies as the ``principal place of business'' if 
     (1) the office is used by the taxpayer to conduct 
     administrative or management activities of a trade or 
     business and (2) there is no other fixed location of the 
     trade or business where the taxpayer conducts substantial 
     administrative or management activities of the trade or 
     business. As under present law, deductions will be allowed 
     for a home office meeting the above two-part test only if the 
     office is exclusively used on a regular basis as a place of 
     business by the taxpayer and, in the case of an employee, 
     only if such exclusive use is for the convenience of the 
     employer.
       Thus, under the House bill, a home office deduction is 
     allowed (subject to the present-law ``convenience of the 
     employer'' rule governing employees) if a portion of a 
     taxpayer's home is exclusively and regularly used to conduct 
     administrative or management activities for a trade or 
     business of the taxpayer, who does not conduct substantial 
     administrative or management activities at any other fixed 
     location of the trade or business, regardless of whether 
     administrative or management activities connected with his 
     trade or business (e.g., billing activities) are performed by 
     others at other locations. The fact that a taxpayer also 
     carries out administrative or management activities at sites 
     that are not fixed locations of the business, such as a car 
     or hotel room, will not affect the taxpayer's ability to 
     claim a home office deduction under the bill. Moreover, if a 
     taxpayer conducts some administrative or management 
     activities at a fixed location of the business outside the 
     home, the taxpayer still is eligible to claim a deduction so 
     long as the administrative or management activities conducted 
     at any fixed location of the business outside the home are 
     not substantial (e.g., the taxpayer occasionally does minimal 
     paperwork at another fixed location of the business). In 
     addition, a taxpayer's eligibility to claim a home office 
     deduction under the bill will not be affected by the fact 
     that the taxpayer conducts substantial non-administrative or 
     non-management business activities at a fixed location of the 
     business outside the home (e.g., meeting with, or providing 
     services to, customers, clients, or patients at a fixed 
     location of the business away from home).
       If a taxpayer in fact does not perform substantial 
     administrative or management activities at any fixed location 
     of the business away from home, then the second part of the 
     test will be satisfied, regardless of whether or not the 
     taxpayer opted not to use an office away from home that was 
     available for the conduct of such activities. However, in the 
     case of an employee, the question whether an employee chose 
     not to use suitable space made available by the employer for 
     administrative activities is relevant to determining whether 
     the present-law ``convenience of the employer'' test is 
     satisfied. In cases where a taxpayer's use of a home office 
     does not satisfy the provision's two-part test, the taxpayer 
     nonetheless may be able to claim a home office deduction 
     under the present-law ``principal place of business'' 
     exception or any other provision of section 280A.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, except 
     that the provision is effective for taxable years beginning 
     after December 31, 1998.
     3. Increase deduction for health insurance costs of self-
         employed individuals (sec. 733 of the Senate amendment)

                              Present Law

       Under present law, self-employed individuals are entitled 
     to deduct the amount paid for health insurance for the self-
     employed individual and the individual's spouse and 
     dependents as follows: the deduction is 40 percent in 1997; 
     45 percent in 1998 through 2002; 50 percent in 2003; 60 
     percent in 2004; 70 percent in 2005; and 80 percent in 2006 
     and thereafter. The deduction for health insurance expenses 
     of self-employed individuals is not available for any month 
     in which the taxpayer is eligible to participate in a 
     subsidized health plan maintained by the employer of the 
     taxpayer or the taxpayer's spouse.
       Under present law employees can exclude from income 100 
     percent of employee-provided health insurance.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment permits self-employed individuals to 
     deduct a higher percentage of the amount paid for health 
     insurance as follows: the deduction is 50 percent in 1997 and 
     1998; 60 percent in 1999 through 2002; 70 percent in 2003; 80 
     percent in 2004; 85 percent in 2005; 90 percent in 2006; and 
     100 percent in 2007 and all years thereafter.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications. Under the conference agreement, the self-
     employed health deduction is phased up as follows: the 
     deduction is 40 percent in 1997, 45 percent in 1998 and 1999, 
     50 percent in 2000 and 2001, 60 percent in 2002, 80 percent 
     in 2003 through 2005, 90 percent in 2006, and 100 percent in 
     2007 and thereafter.

                          E. Other Provisions

     1. Shrinkage estimates for inventory accounting (sec. 951 of 
         the House bill and sec. 1013 of the Senate amendment)

                              Present Law

       Section 471(a) provides that ``(w)henever in the opinion of 
     the Secretary the use of inventories is necessary in order 
     clearly to determine the income of any taxpayer, inventories 
     shall be taken by such taxpayer on such basis as the 
     Secretary may prescribe as conforming as nearly as may be to 
     the best accounting practice in the trade or business and as 
     most clearly reflecting income.'' Where a taxpayer maintains 
     book inventories in accordance with a sound accounting 
     system, the net value of the inventory will be deemed to be 
     the cost basis of the inventory, provided that such book 
     inventories are verified by physical inventories at 
     reasonable intervals and adjusted to conform 
     therewith.36 The physical count is used to 
     determine and adjust for certain items; such as undetected 
     theft, breakage, and bookkeeping errors; collectively 
     referred to as ``shrinkage''.
---------------------------------------------------------------------------
     \36\ Treas. reg. sec. 1.471-2(d).
---------------------------------------------------------------------------
       Some taxpayers verify and adjust their book inventories by 
     a physical count taken on the last day of the taxable year. 
     Other taxpayers may verify and adjust their inventories by 
     physical counts taken at other times during the year. Still 
     other taxpayers take physical counts at different locations 
     at different times during the taxable year (cycle counting).
       If a physical inventory is taken at year-end, the amount of 
     shrinkage for the year is known. If a physical inventory is 
     not taken at year-end, shrinkage through year-end will have 
     to be based on an estimate, or not taken into account until 
     the following year. In the first decision in Dayton Hudson v. 
     Commissioner,37 the U.S. Tax Court held that a 
     taxpayer's method of accounting may include the use of an 
     estimate of shrinkage occurring through year-end, provided 
     the

[[Page H6528]]

     method is sound and clearly reflects income. In the second 
     decision in Dayton Hudson v. Commissioner,38 the 
     U.S. Tax Court adhered to this holding. However, the U.S. Tax 
     Court in the second decision determined that this taxpayer 
     had not established that its method of accounting clearly 
     reflected income. Other cases decided by the U.S. Tax Court 
     39 have held that taxpayers' methods of accounting 
     that included shrinkage estimates do clearly reflect income.
---------------------------------------------------------------------------
     \37\ 101 T.C. 462 (1993).
     \38\ T.C. Memo 1997-260.
     \39\ Wal-Mart v. Commissioner, T.C. Memo 1997-1 and Kroger v. 
     Commissioner, T.C. Memo 1997-2.
---------------------------------------------------------------------------
       The U.S. Tax Court in the second Dayton Hudson opinion 
     noted that ``(I)n most cases, generally accepted accounting 
     principles (GAAP), consistently applied, will pass muster for 
     tax purposes. The Supreme Court has made clear, however, that 
     GAAP does not enjoy a presumption of accuracy that must be 
     rebutted by the Commissioner.''

                               House Bill

       The House bill provides that a method of keeping 
     inventories will not be considered unsound, or to fail to 
     clearly reflect income, solely because it includes an 
     adjustment for the shrinkage estimated to occur through year-
     end, based on inventories taken other than at year-end. Such 
     an estimate must be based on actual physical counts. Where 
     such an estimate is used in determining ending inventory 
     balances, the taxpayer is required to take a physical count 
     of inventories at each location on a regular and consistent 
     basis. A taxpayer is required to adjust its ending inventory 
     to take into account all physical counts performed through 
     the end of its taxable year.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment.
       A taxpayer is permitted to change its method of accounting 
     by this section if the taxpayer is currently using a method 
     that does not utilize estimates of inventory shrinkage and 
     wishes to change to a method for inventories that includes 
     shrinkage estimates based on physical inventories taken other 
     than at year-end. Such a change is treated as a voluntary 
     change in method of accounting, initiated by the taxpayer 
     with the consent of the Secretary of the Treasury, provided 
     the taxpayer changes to a permissible method of accounting. 
     The period for taking into account any adjustment required 
     under section 481 as a result of such a change in method is 4 
     years.
       No inference is intended by the adoption of this provision 
     with regard to whether any particular method of accounting 
     for inventories is permissible under present law.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with the following clarifications regarding 
     safe harbor methods for the estimation of inventory 
     shrinkage.
       In general.--The conferees expect that the Secretary of the 
     Treasury will issue guidance establishing one or more safe 
     harbor methods for the estimation of inventory shrinkage that 
     will be deemed to result in a clear reflection of income, 
     provided such safe harbor method is consistently applied and 
     the taxpayer's inventory methods otherwise satisfy the clear 
     reflection of income standard.
       Safe harbors applicable to retail trade.--In the case of 
     taxpayers primarily engaged in retail trade (the resale of 
     personal property to the general public), where physical 
     inventories are normally taken at each location at least 
     annually, the conferees anticipate that a safe harbor method 
     will be established that will use a historical ratio of 
     shrinkage to sales, multiplied by total sales between the 
     date of the last physical inventory and year-end. This 
     historical ratio is based on the actual shrinkage established 
     by all physical inventories taken during the most recent 
     three taxable years and the sales for related periods. The 
     historical ratio should be separately determined for each 
     store or department in a store of the taxpayer. The 
     historical ratio, or estimated shrinkage determined using the 
     historical ratio, cannot be adjusted by judgmental or other 
     factors (e.g., floors or caps). The conferees expect that 
     estimated shrinkage determined in accordance with the 
     consistent application of the safe harbor method will not be 
     required to be recalculated, through a lookback adjustment or 
     otherwise, to reflect the results of physical inventories 
     taken after year-end.
       In the case of a new store or department in a store that 
     has not verified shrinkage by a physical inventory in each of 
     the most recent three taxable years, the historical ratio is 
     the average of the historical ratios of the retailer's other 
     stores or departments. Retailers using last in, first out 
     (LIFO) methods of inventory are expected to be required to 
     allocate shrinkage among their various inventory pools in a 
     reasonable and consistent manner.
       The conferees expect that procedures will be provided 
     allowing an automatic election of such method of accounting 
     for a taxpayer's first taxable year ending after the date of 
     enactment. Any adjustment required by section 481 as a result 
     of the change in method of accounting generally will be taken 
     into account over a period of four years.

   2. Treatment of workmen's compensation liability under rules for 
 certain personal injury liability assignments (sec. 952 of the House 
                                 bill)

                              Present Law

       Under present law, an exclusion from gross income is 
     provided for amounts received for agreeing to a qualified 
     assignment to the extent that the amount received does not 
     exceed the aggregate cost of any qualified funding asset 
     (sec. 130). A qualified assignment means any assignment of a 
     liability to make periodic payments as damages (whether by 
     suit or agreement) on account of a personal injury or 
     sickness (in a case involving physical injury or physical 
     sickness), provided the liability is assumed from a person 
     who is a party to the suit or agreement, and the terms of the 
     assignment satisfy certain requirements. Generally, these 
     requirements are that: (1) the periodic payments are fixed as 
     to amount and time; (2) the payments cannot be accelerated, 
     deferred, increased, or decreased by the recipient; (3) the 
     assignee's obligation is no greater than that of the 
     assignor; and (4) the payments are excludable by the 
     recipient under section 104(a)(2) as damages on account of 
     personal injuries or sickness. Present law provides a 
     separate exclusion under section 104(a)(1) for the recipient 
     of amounts received under workmen's compensation acts as 
     compensation for personal injuries or sickness, but a 
     qualified assignment under section 130 does not include 
     the assignment of a liability to make such payments.

                               House Bill

       The House bill extends the exclusion for qualified 
     assignments under Code section 130 to amounts assigned for 
     assuming a liability to pay compensation under any workmen's 
     compensation act. The provision requires that the assignee 
     assume the liability from a person who is a party to the 
     workmen's compensation claim, and requires that the periodic 
     payment be excludable from the recipient's gross income under 
     section 104(a)(1), in addition to the requirements of present 
     law.
       Effective date.--Effective for workmen's compensation 
     claims filed after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     3. Tax-exempt status for certain State workmen's compensation 
         act companies (sec. 953 of the House bill and sec. 761 of 
         the Senate amendment)

                              Present Law

       In general, the Internal Revenue Service (``IRS'') takes 
     the position that organizations that provide insurance for 
     their members or other individuals are not considered to be 
     engaged in a tax-exempt activity. The IRS maintains that such 
     insurance activity is either (1) a regular business of a kind 
     ordinarily carried on for profit, or (2) an economy or 
     convenience in the conduct of members' businesses because it 
     relieves the members from obtaining insurance on an 
     individual basis.
       Certain insurance risk pools have qualified for tax 
     exemption under Code section 501(c)(6). In general, these 
     organizations (1) assign any insurance policies and 
     administrative functions to their member organizations 
     (although they may reimburse their members for amounts paid 
     and expenses), (2) serve an important common business 
     interest of their members, and (3) must be membership 
     organizations financed, at least in part, by membership dues.
       State insurance risk pools may also qualify for tax exempt 
     status under section 501(c)(4) as a social welfare 
     organizations or under section 115 as serving an essential 
     governmental function of a State. In seeking qualification 
     under section 501(c)(4), insurance organizations generally 
     are constrained by the restrictions on the provision of 
     ``commercial-type insurance'' contained in section 501(m). 
     Section 115 generally provides that gross income does not 
     include income derived from the exercise of any essential 
     governmental function and accruing to a State or any 
     political subdivision thereof.

                               House Bill

       The House bill clarifies the tax-exempt status of any 
     organization that is created by State law, and organized and 
     operated exclusively to provide workmen's compensation 
     insurance and related coverage that is incidental to 
     workmen's compensation insurance, 40 and that 
     meets certain additional requirements. The workmen's 
     compensation insurance must be required by State law, or be 
     insurance with respect to which State law provides 
     significant disincentives if it is not purchased by an 
     employer (such as loss of exclusive remedy or forfeiture of 
     affirmative defenses such as contributory negligence). The 
     organization must provide workmen's compensation to any 
     employer in the State (for employees in the State or 
     temporarily assigned out-of-State) seeking such insurance and 
     meeting other reasonable requirements. The State must either 
     extend its full faith and credit to debt of the organization 
     or provide the initial operating capital of such 
     organization. For this purpose, the initial operating capital 
     can be provided by providing the proceeds of bonds issued by 
     a

[[Page H6529]]

     State authority; the bonds may be repaid through exercise of 
     the State's taxing authority, for example. For periods after 
     the date of enactment, the assets of the organization must 
     revert to the State upon dissolution. Finally, the majority 
     of the board of directors (or comparable oversight body) of 
     the organization must be appointed by an official of the 
     executive branch of the State or by the State legislature, or 
     by both.
---------------------------------------------------------------------------
     \40\ Related coverage that is incidental to workmen's 
     compensation insurance includes liability under Federal 
     workmen's compensation laws, for example.
---------------------------------------------------------------------------
       Effective date.--Taxable years beginning after December 31, 
     1997. No inference is intended as to the status of such 
     organizations under present law.

                            Senate Amendment

       The Senate amendment is the same as the House bill. The 
     Senate Finance committee report clarifies that related 
     coverage that is incidental to workmen's compensation 
     insurance includes liability under Federal workmen's 
     compensation laws, the Jones Act, and the Longshore and 
     Harbor Workers Compensation Act, for example. The Senate 
     Finance committee report also clarifies that many 
     organizations described in the provision have been operating 
     as tax-exempt organizations. No inference is intended that 
     organizations described in the provision are not tax-exempt 
     under present law.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with modifications.
       The conference agreement modifies the full-faith-and-credit 
     portion of the requirement that the State must extend its 
     full faith and credit to debt of the organization (or provide 
     the initial operating capital of such organization). Under 
     the conference agreement, the State must extend its full 
     faith and credit to the initial debt of the organization.
       The conference agreement also modifies the requirement 
     relating to reversion of assets to the State upon 
     dissolution. The conference agreement requires that, in the 
     case of periods after the date of enactment, either the 
     assets of the organization must revert to the State upon 
     dissolution, or State law must not permit the dissolution of 
     the organization, absent an act of the State legislature. 
     Should dissolution of the organization become permissible 
     under applicable State law, then the requirement that the 
     assets of the organization revert to the State upon 
     dissolution applies.
       Many organizations described in the provision have been 
     operating as organizations that are exempt from tax (e.g., as 
     an organization that is exempt from tax because it is serving 
     an essential governmental function of a State). No inference 
     is intended that organizations described in the provision are 
     not exempt from tax under present law. In addition, no 
     inference is intended that the benefit plans of such 
     organizations are not properly maintained by the 
     organization. It is anticipated that Federal regulatory 
     agencies will take appropriate action to address transition 
     issues faced by organizations to conform to their benefit 
     plans under the provision. For example, it is intended that 
     an organization that has been maintaining a section 457 plan 
     as an agency or instrumentality of a State could (without 
     creating any inference with respect to present-law treatment) 
     freeze future contributions to the section 457 plan and 
     establish a retirement arrangement (e.g., a section 401(k) 
     plan) that is consistent with the treatment of the 
     organization as a tax-exempt employer under the provision.
     4. Election for 1987 partnerships to continue exception from 
         treatment of publicly traded partnerships as corporations 
         (sec. 954 of the House bill and sec. 762 of the Senate 
         amendment)

                              Present Law

       A publicly traded partnership generally is treated as a 
     corporation for Federal tax purposes (sec. 7704). An 
     exception to the rule treating the partnership as a 
     corporation applies if 90 percent of the partnership's gross 
     income consists of ``passive-type income,'' which includes 
     (1) interest (other than interest derived in a financial or 
     insurance business, or certain amounts determined on the 
     basis of income or profits), (2) dividends, (3) real property 
     rents (as defined for purposes of the provision), (4) gain 
     from the sale or other disposition of real property, (5) 
     income and gains relating to minerals and natural resources 
     (as defined for purposes of the provision), and (6) gain from 
     the sale or disposition of a capital asset (or certain trade 
     or business property) held for the production of income of 
     the foregoing types (subject to an exception for certain 
     commodities income).
       The exception for publicly traded partnerships with 
     ``passive-type income'' does not apply to any partnership 
     that would be described in section 851(a) of the Code 
     (relating to regulated investment companies, or ``RICs''), if 
     that partnership were a domestic corporation. Thus, a 
     publicly traded partnership that is registered under the 
     Investment Company Act of 1940 generally is treated as a 
     corporation under the provision. Nevertheless, if a principal 
     activity of the partnership consists of buying and selling of 
     commodities (other than inventory or property held primarily 
     for sale to customers) or futures, forwards and options with 
     respect to commodities, and 90 percent of the partnership's 
     income is such income, then the partnership is not treated as 
     a corporation.
       A publicly traded partnership is a partnership whose 
     interests are (1) traded on an established securities market, 
     or (2) readily tradable on a secondary market (or the 
     substantial equivalent thereof).
       Treasury regulations provide detailed guidance as to when 
     an interest is treated as readily tradable on a secondary 
     market or the substantial equivalent. Generally, an interest 
     is so treated ``if, taking into account all of the facts and 
     circumstances, the partners are readily able to buy, sell, or 
     exchange their partnership interests in a manner that is 
     comparable, economically, to trading on an established 
     securities market'' (Treas. Reg. sec. 1.7704-1(c)(1)).
       When the publicly traded partnership rules were enacted in 
     1987, a 10-year grandfather rule provided that the provisions 
     apply to certain existing publicly traded partnerships only 
     for taxable years beginning after December 31, 1997. 
     41 An existing publicly traded partnership is any 
     partnership, if (1) it was a publicly traded partnership on 
     December 17, 1987, (2) a registration statement indicating 
     that the partnership was to be a publicly traded partnership 
     was filed with the Securities and Exchange Commission with 
     respect to the partnership on or before December 17, 1987, or 
     (3) with respect to the partnership, an application was filed 
     with a State regulatory commission on or before December 17, 
     1987, seeking permission to restructure a portion of a 
     corporation as a publicly traded partnership. A partnership 
     that otherwise would be treated as an existing publicly 
     traded partnership ceases to be so treated as of the first 
     day after December 17, 1987, on which there has been an 
     addition of a substantial new line of business with respect 
     to such partnership. A rule is provided to coordinate this 
     grandfather rule with the exception to the rule treating the 
     partnership as a corporation applies if 90 percent of the 
     partnership's gross income consists of passive-type income. 
     The coordination rule provides that passive-type income 
     exception applies only after the grandfather rule ceases to 
     apply (whether by passage of time or because the partnership 
     ceases to qualify for the grandfather rule).
---------------------------------------------------------------------------
     \41\ Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203) 
     (the ``1987 Act''), sec. 10211(c).
---------------------------------------------------------------------------

                               House Bill

       Under the House bill, in the case of an existing publicly 
     traded partnership that elects under the provision to be 
     subject to a tax on gross income from the active conduct of a 
     trade or business, the rule of present law treating a 
     publicly traded partnership as a corporation does not apply. 
     An existing publicly traded partnership is any publicly 
     traded partnership that is not treated as a corporation, so 
     long as such treatment is not determined under the passive-
     type income exception of Code section 7704(c)(1). The 
     election to be subject to the tax on gross trade or business 
     income, once made, remains in effect until revoked by the 
     partnership, and cannot be reinstated.
       The tax is 15 percent of the partnership's gross income 
     from the active conduct of a trade or business. The 
     partnership's gross trade or business income includes its 
     share of gross trade or business income of any lower-tier 
     partnership. The tax imposed under the provision may not be 
     offset by tax credits.
       Effective date.--Taxable years beginning after December 31, 
     1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that the tax is 3.5 percent of the partnership's gross income 
     from the active conduct of a trade or business.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     technical modifications. The conference agreement clarifies 
     that the provision applies to any electing 1987 partnership, 
     which means any publicly traded partnership, if (1) it is an 
     existing partnership within the meaning of section 
     10211(c)(2) of the 1987 Act, (2) it has not been treated as a 
     corporation for taxable years beginning after December 31, 
     1987, and before January 1, 1998 (and would not have been 
     treated as a corporation even without regard to section 
     7704(c), the exception for partnerships with ``passive-type'' 
     income), and (3) the partnership elects under the provision 
     to be subject to a tax on gross income from the active 
     conduct of a trade or business. An electing 1987 partnership 
     ceases to be treated as such as of the first day after 
     December 31, 1997, on which there has been the addition of a 
     substantial new line of business with respect to the 
     partnership.
     5. Exclusion from UBIT for certain corporate sponsorship 
         payments (sec. 955 of the House bill and sec. 763 of the 
         Senate amendment)

                              Present Law

       Although generally exempt from Federal income tax, tax-
     exempt organizations are subject to the unrelated business 
     income tax (``UBIT'') on income derived from a trade or 
     business regularly carried on that is not substantially 
     related to the performance of the organization's tax-exempt 
     functions (secs. 511-514). Contributions or gifts received by 
     tax-exempt organizations generally are not subject to the 
     UBIT. However, present-law section 513(c) provides that an 
     activity (such as advertising) does not lose its identity as 
     a separate trade or business merely because it is carried on 
     within a larger complex of

[[Page H6530]]

     other endeavors.42 If a tax-exempt organization 
     receives sponsorship payments in connection with an event or 
     other activity, the solicitation and receipt of such 
     sponsorship payments may be treated as a separate activity. 
     The Internal Revenue Service (IRS) has taken the position 
     that, under some circumstances, such sponsorship payments are 
     subject to the UBIT.43
---------------------------------------------------------------------------
     \42\ See United States v. American College of Physicians, 475 
     U.S. 834 (1986)(holding that activity of selling advertising 
     in medical journal was not substantially related to the 
     organization's exempt purposes and, as a separate business 
     under section 513(c), was subject to tax).
     \43\ See Prop.Treas. Reg. sec. 1.513-4 (issued January 19, 
     1993, EE-74-92, IRB 1993-7, 71). These proposed regulations 
     generally exclude from the UBIT financial arrangements under 
     which the tax-exempt organization provides so-called 
     ``institutional'' or ``good will'' advertising to a sponsor 
     (i.e., arrangements under which a sponsor's name, logo, or 
     product line is acknowledged by the tax-exempt organization). 
     However, specific product advertising (e.g., ``comparative or 
     qualitative descriptions of the sponsor's products'') 
     provided by a tax-exempt organization on behalf of a sponsor 
     is not shielded from the UBIT under the proposed regulations.
---------------------------------------------------------------------------

                               House Bill

       Under the House bill, qualified sponsorship payments 
     received by a tax-exempt organization (or State college or 
     university described in section 511(a)(2)(B)) are exempt from 
     the UBIT.
       ``Qualified sponsorship payments'' are defined as any 
     payment made by a person engaged in a trade or business with 
     respect to which the person will receive no substantial 
     return benefit other than the use or acknowledgment of the 
     name or logo (or product lines) of the person's trade or 
     business in connection with the organization's 
     activities.44 Such a use or acknowledgment does 
     not include advertising of such person's products or 
     services--meaning qualitative or comparative language, price 
     information or other indications of savings or value, or an 
     endorsement or other inducement to purchase, sell, or use 
     such products or services. Thus, for example, if, in return 
     for receiving a sponsorship payment, an organization promises 
     to use the sponsor's name or logo in acknowledging the 
     sponsor's support for an educational or fundraising event 
     conducted by the organization, such payment will not be 
     subject to the UBIT. In contrast, if the organization 
     provides advertising of a sponsor's products, the payment 
     made to the organization by the sponsor in order to receive 
     such advertising will be subject to the UBIT (provided that 
     the other, present-law requirements for UBIT liability are 
     satisfied).
---------------------------------------------------------------------------
     \44\ In determining whether a payment is a qualified 
     sponsorship payment, it is irrelevant whether the sponsored 
     activity is related or unrelated to the organization's exempt 
     purpose.
---------------------------------------------------------------------------
       The House bill specifically provides that a qualified 
     sponsorship payment does not include any payment where the 
     amount of such payment is contingent, by contract or 
     otherwise, upon the level of attendance at an event, 
     broadcast ratings, or other factors indicating the degree of 
     public exposure to an activity. However, the fact that a 
     sponsorship payment is contingent upon an event actually 
     taking place or being broadcast, in and of itself, will not 
     cause the payment to fail to be a qualified sponsorship 
     payment. Moreover, mere distribution or display of a 
     sponsor's products by the sponsor or the tax-exempt 
     organization to the general public at a sponsored event, 
     whether for free or for remuneration, will be considered to 
     be ``use or acknowledgment'' of the sponsor's product lines 
     (as opposed to advertising), and thus will not affect the 
     determination of whether a payment made by the sponsor is a 
     qualified sponsorship payment.
       The provision does not apply to the sale of advertising or 
     acknowledgments in tax-exempt organization periodicals. For 
     this purpose, the term ``periodical'' means regularly 
     scheduled and printed material published by (or on behalf of) 
     the payee organization that is not related to and primarily 
     distributed in connection with a specific event conducted by 
     the payee organization. For example, the provision will not 
     apply to payments that lead to acknowledgments in a monthly 
     journal, but will apply if a sponsor receives an 
     acknowledgment in a program or brochure distributed at a 
     sponsored event.
       The provision specifically provides that, to the extent 
     that a portion of a payment would (if made as a separate 
     payment) be a qualified sponsorship payment, such portion of 
     the payment will be treated as a separate payment. Thus, if a 
     sponsorship payment made to a tax-exempt organization 
     entitles the sponsor to both product advertising and use or 
     acknowledgment of the sponsor's name or logo by the 
     organization, then the UBIT will not apply to the amount of 
     such payment that exceeds the fair market value of the 
     product advertising provided to the sponsor. Moreover, the 
     provision of facilities, services or other privileges by an 
     exempt organization to a sponsor or the sponsor's designees 
     (e.g., complimentary tickets, pro-am playing spots in golf 
     tournaments, or receptions for major donors) in connection 
     with a sponsorship payment will not affect the determination 
     of whether the payment is a qualified sponsorship payment. 
     Rather, the provision of such goods or services will be 
     evaluated as a separate transaction in determining whether 
     the organization has unrelated business taxable income from 
     the event. In general, if such services or facilities do not 
     constitute a substantial return benefit or if the provision 
     of such services or facilities is a related business 
     activity, then the payments attributable to such services or 
     facilities will not be subject to the UBIT. Moreover, just as 
     the provision of facilities, services or other privileges by 
     a tax-exempt organization to a sponsor or the sponsor's 
     designees (complimentary tickets, pro-am playing spots in 
     golf tournaments, or receptions for major donors) will be 
     treated as a separate transaction that does not affect the 
     determination of whether a sponsorship payment is a qualified 
     sponsorship payment, a sponsor's receipt of a license to use 
     an intangible asset (e.g., trademark, logo, or designation) 
     of the tax-exempt organization likewise will be treated as 
     separate from the qualified sponsorship transaction in 
     determining whether the organization has unrelated business 
     taxable income.
       The exemption provided by the provision will be in addition 
     to other present-law exceptions from the UBIT (e.g., the 
     exceptions for activities substantially all the work for 
     which is performed by volunteers and for activities not 
     regularly carried on). No inference is intended as to whether 
     any sponsorship payment received prior to 1998 was subject to 
     the UBIT.
       Effective date.--The provision applies to qualified 
     sponsorship payments solicited or received after December 31, 
     1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and Senate 
     amendment, except that the conference agreement clarifies 
     that the qualified sponsorship payment provision does not 
     apply to payments that entitle the payor to the use or 
     acknowledgment of the payor's trade or business name or logo 
     (or product lines) in tax-exempt organization periodicals. 
     Similarly, the qualified sponsorship payment provision does 
     not apply to payments made in connection with ``qualified 
     convention or trade show activities,'' as defined in present-
     law section 513(d)(3). Such payments are outside the 
     qualified sponsorship payment provision's safe-harbor 
     exclusion, and, therefore, will be governed by present-law 
     rules that determine whether the payment is subject to the 
     UBIT. Thus, for example, payments that entitle the payor to a 
     depiction of the payor's name or logo in a tax-exempt 
     organization periodical may or may not be subject to the UBIT 
     depending on the application of present-law rules regarding 
     periodical advertising and nontaxable donor 
     recognition.45
---------------------------------------------------------------------------
     \45\ For guidance regarding the treatment of periodical 
     advertising under the UBIT, see section 513(c); United States 
     v. American College of Physicians, 475 U.S. 834 (1986); 
     Treas. Reg. 1.513-1(d)(4)(iv), Example 7; Rev. Rul. 82-139, 
     1982-2 C.B. 108; Rev. Rul. 74-38, 1974-1 C.B. 144; PLR 
     9137049; and PLR 9234002. For guidance regarding the 
     treatment of donor acknowledgments under the UBIT, see Rev. 
     Rul. 76-93, 1976-1 C.B. 170; PLR 8749085; and PLR 9044071. In 
     the interest of administrative convenience, the conferees 
     encourage the Treasury Department to permit tax-exempt 
     entities to provide combined reporting of payments that are 
     both qualified sponsorship payments and nontaxable payments 
     made in exchange for donor acknowledgments in a periodical or 
     in connection with a qualified convention or trade show. In 
     addition, to the extent tax-exempt entities are required to 
     allocate portions of payments, the conferees encourage the 
     Treasury Department to minimize the reporting burden 
     associated with any such allocation.
---------------------------------------------------------------------------
       As a further clarification, the conferees intend that, as 
     provided under Prop. Treas. Reg. sec. 1.513-4, the use of 
     promotional logos or slogans that are an established part of 
     the sponsor's identity would not, by itself, constitute 
     advertising for purposes of determining whether a payment is 
     a qualified sponsorship payment.
     6. Timeshare associations (sec. 956 of the House bill and 
         sec. 764 of the Senate amendment)

                              Present Law

       Taxation of homeowners associations making the section 528 
     election.--Under present law (sec. 528), condominium 
     management associations and residential real estate 
     management associations may elect to be taxable at a 30-
     percent rate on their ``homeowners association income'' if 
     they meet certain income, expenditure, and organizational 
     requirements.
       ``Homeowners association income'' is the excess of the 
     association's gross income, excluding ``exempt function 
     income,'' over allowable deductions directly connected with 
     nonexempt function gross income. ``Exempt function income'' 
     includes membership dues, fees, and assessments for a common 
     activity undertaken by association members or owners of 
     residential units in the condominium or subdivision. 
     Homeowners association income includes passive income (e.g., 
     interest and dividends) earned on reserves and fees for use 
     of association property (e.g., swimming pools, meeting rooms, 
     etc.).
       For an association to qualify for this treatment: (1) at 
     least 60 percent of the association's gross income must 
     consist of membership dues, fees, or assessments on owners; 
     (2) at least 90 percent of its expenditures must be for the 
     acquisition, management, maintenance, or care of 
     ``association property;'' and (3) no part of its net earnings 
     can inure to the benefit of any private shareholder. 
     ``Association property'' means: (1) property held by the 
     association; (2) property commonly held by association 
     members; (3) property within the association privately held 
     by association members; and (4) property held by a 
     governmental unit for the benefit of association members. In 
     addition to these statutory requirements, Treasury 
     regulations require that the units of the association be

[[Page H6531]]

     used for residential purposes. Use is not a residential use 
     if the unit is occupied by a person or series of persons less 
     than 30 days for more than half of the association's taxable 
     year. Treas. Reg. sec. 1.528-4(d).
       Taxation of homeowners associations not making the section 
     528 election.--Homeowners associations that do not (or 
     cannot) make the section 528 election are taxed either as a 
     tax-exempt social welfare organization under section 
     501(c)(4) or as a regular C corporation. In order for an 
     organization to qualify as a tax-exempt social welfare 
     organization, the organization must meet the following three 
     requirements: (1) the association must serve a ``community'' 
     which bears a reasonable, recognizable relationship to an 
     area ordinarily identified as a governmental subdivision or 
     unit; (2) the association may not conduct activities directed 
     to exterior maintenance of any private residence, and (3) 
     common areas of association facilities must be for the use 
     and enjoyment of the general public (Rev. Rul. 74-99, 1974-1 
     C.B. 131).
       Non-exempt homeowners associations are taxed as C 
     corporations, except that: (1) the association may exclude 
     excess assessments that it refunds to its members or applies 
     to the subsequent year's assessments (Rev. Rul. 70-604, 1970-
     2 C.B. 9); (2) gross income does not include special 
     assessments held in a special bank account (Rev. Rul. 75-370, 
     75-2 C.B. 25); and (3) assessments for capital improvements 
     are treated as non-taxable contributions to capital (Rev. 
     Rul. 75-370, 1975-2 C.B. 25).
       Taxation of timeshare associations.--Under present law, 
     timeshare associations are taxed as regular C corporations 
     because (1) they cannot meet the requirement of the Treasury 
     regulations for the section 528 election that the units be 
     used for residential purposes (i.e., the 30-day rule) and 
     they have relatively large amount of services performed for 
     its owners (e.g., maid and janitorial services) and (2) they 
     cannot meet any of requirements of Rev. Rul. 74-99 for tax-
     exempt status under section 501(c)(4).

                               House Bill

       In general.--The House bill amends section 528 to permit 
     timeshare associations to qualify for taxation under that 
     section. Timeshare associations will have to meet the 
     requirements of section 528 (e.g., the 60-percent gross 
     income, 90-percent expenditure, and the non-profit 
     organizational and operational requirements). Timeshare 
     associations electing to be taxed under section 528 are 
     subject to a tax on their ``timeshare association income'' at 
     a rate of 32 percent.
       60-percent test.--A qualified timeshare association must 
     receive at least 60 percent of its income from membership 
     dues, fees and assessments from owners of either (a) 
     timeshare rights to use of, or (b) timeshare ownership in, 
     property the timeshare association.
       90-percent test.--At least 90 percent of the expenditures 
     of the timeshare association must be for the acquisition, 
     management, maintenance, or care of ``association property,'' 
     and activities provided by the association to, or on behalf 
     of, members of the timeshare association. ``Activities 
     provided to or on behalf of members of the [timeshare] 
     association'' includes events located on association property 
     (e.g., member's meetings at the association's meeting room, 
     parties at the association's swimming pool, golf lessons on 
     association's golf range, transportation to and from 
     association property, etc.).
       Organizational and operational tests.--No part of the net 
     earnings of the timeshare association can inure to the 
     benefit (other than by acquiring, constructing, or providing 
     management, maintenance, and care of property of the 
     timeshare association or rebate of excess membership dues, 
     fees, or assessments) of any private shareholder or 
     individual. A member of a qualified timeshare association 
     must hold a timeshare right to use (or timeshare ownership 
     in) real property of the association. A qualified timeshare 
     association cannot be a condominium management association. 
     Lastly, the timeshare association must elect to be taxed 
     under section 528.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that the Senate amendment provides that association property 
     includes property in which a timeshare association or members 
     of the association have rights arising out of recorded 
     easements, covenants, and other recorded instruments to use 
     property related to the timeshare project.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1996.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

   7. Deferral of gain on certain sales of farm product refiners and 
                processors (sec. 958 of the House bill)

                              Present Law

       Under present law, if certain requirements are satisfied, a 
     taxpayer may defer recognition of gain on the sale of 
     qualified securities to an employee stock ownership plan 
     (``ESOP'') or an eligible worker-owned cooperative to the 
     extent that the taxpayer reinvests the proceeds in qualified 
     replacement property (sec. 1042). Gain is recognized when the 
     taxpayer disposes of the qualified replacement property. One 
     of the requirements that must be satisfied for deferral to 
     apply is that, immediately after the sale, the ESOP must own 
     at least 30 percent of the stock of the corporation issuing 
     the qualified securities. In general, qualified securities 
     are securities issued by a domestic C corporation that has no 
     stock outstanding that is readily tradeable on an established 
     securities market. Deferral treatment does not apply to gain 
     on the sale of qualified securities by a C corporation.

                               House Bill

       The House bill extends the deferral provided under section 
     1042 to the sale of stock of a qualified refiner or processor 
     to an eligible farmer's cooperative. A qualified refiner or 
     processor is a domestic corporation substantially all of the 
     activities of which consist of the active conduct of the 
     trade or business of refining or processing agricultural or 
     horticultural products and which purchases more than one-half 
     of such products to be refined or processed from farmers who 
     make up the cooperative which is purchasing the stock of the 
     cooperative. An eligible farmers' cooperative is an 
     organization which is treated as a cooperative for Federal 
     income tax purposes and which is engaged in the marketing of 
     agricultural or horticultural products.
       The deferral of gain is available only if, immediately 
     after the sale, the eligible farmers' cooperative owns 100 
     percent of the qualified refiner or processor. The provision 
     applies even if the stock of the qualified refiner or 
     processor is publicly traded. In addition, the House bill 
     applies to gain on the sale of stock by a C corporation.
       Effective date.--The provision applies to sales after 
     December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with the 
     modification that the requirement that the refiner or 
     processor purchase more than one-half of the products to be 
     refined or processed from farmers who make up the cooperative 
     which is purchasing the stock or the cooperative must be 
     satisfied for at least one year prior to the sale.
     8. Exception from real estate reporting requirements for 
         certain sales of principal residences (sec. 959 of the 
         House bill and secs. 314(c) and 601 of the Senate 
         amendment)

                              Present Law

       Persons who close real estate transactions are required to 
     file information returns with the IRS. These returns, filed 
     on Form 1099S, are required to show the name and address of 
     the seller of the real estate, details with regard to the 
     gross proceeds of the sale, and the portion of any real 
     property tax which is treated as a tax imposed on the 
     purchaser. Code section 6045(e) also provides for reporting 
     whether any financing of the seller was federally-subsidized 
     indebtedness, but Treasury regulations do not currently 
     require the reporting of this information.

                               House Bill

       The House bill excludes sales of personal residences with a 
     gross sales price of $500,000 or less ($250,000 or less in 
     the case of a seller who is not married) from the real estate 
     transaction reporting requirement. In order to be eligible 
     for this exclusion, the person who would otherwise be 
     required to file the information return must obtain written 
     assurances from the seller of the real estate, in a form 
     acceptable to the Secretary of the Treasury, that any gain 
     will be exempt from Federal income tax under section 121(a) 
     and that no financing of the seller was federally-subsidized 
     indebtedness.
       Effective date.--The provision is effective with regard to 
     sales or exchanges occurring after the date of enactment.

                            Senate Amendment

       The Senate amendment follows the House bill, with two 
     modifications.
       First, the requirement that the person who would otherwise 
     be required to file the information return obtain written 
     assurances that no financing of the seller was federally- 
     subsidized indebtedness does not apply until such time as 
     the Secretary of the Treasury requires this information to 
     be included in information returns reporting real estate 
     transactions.
       Second, the Senate amendment does not exclude from the 
     information reporting requirement any sale of a personal 
     residence in the District of Columbia, if such sale is 
     required to be reported for the purpose of verifying 
     eligibility for the D.C. first-time homeowner credit. The 
     Senate amendment separately establishes a credit of $5,000 
     for first-time home buyers in the District of Columbia. The 
     Senate amendment anticipates that the Secretary of the 
     Treasury will require such information as is necessary to 
     verify eligibility for the D.C. first-time home buyer credit.
       Effective date.--Same as the House bill.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     one modification, allowing the Secretary of the Treasury the 
     discretion to increase the dollar thresholds if he determines 
     that such an increase will not materially reduce revenues to 
     the Treasury.

[[Page H6532]]

     9. Increased deduction for business meals for individuals 
         operating under Department of Transportation hours of 
         service limitations (sec. 960 of the House bill and sec. 
         765 of the Senate amendment)

                              Present Law

       Ordinary and necessary business expenses, as well as 
     expenses incurred for the production of income, are generally 
     deductible, subject to a number of restrictions and 
     limitations. Generally, the amount allowable as a deduction 
     for food and beverage is limited to 50 percent of the 
     otherwise deductible amount. Exceptions to this 50 percent 
     rule are provided for food and beverages provided to crew 
     members of certain vessels and offshore oil or gas platforms 
     or drilling rigs.

                               House Bill

       The House bill increases to 80 percent the deductible 
     percentage of the cost of food and beverages consumed while 
     away from home by an individual during, or incident to, a 
     period of duty subject to the hours of service limitations of 
     the Department of Transportation.
       Individuals subject to the hours of service limitations of 
     the Department of Transportation include:
       (1) certain air transportation employees such as pilots, 
     crew, dispatchers, mechanics, and control tower operators 
     pursuant to Federal Aviation Administration regulations,
       (2) interstate truck operators and interstate bus drivers 
     pursuant to Department of Transportation regulations,
       (3) certain railroad employees such as engineers, 
     conductors, train crews, dispatchers and control operations 
     personnel pursuant to Federal Railroad Administration 
     regulations, and
       (4) certain merchant mariners pursuant to Coast Guard 
     regulations.
       The increase in the deductible percentage is phased in 
     according to the following schedule:


        Taxable years beginning in--              Deductible percentage
1998, 1999...........................................................55
2000, 2001...........................................................60
2002, 2003...........................................................65
2004, 2005...........................................................70
2006, 2007...........................................................75
2008 and thereafter..................................................80

       Effective date.--The provision is effective for taxable 
     years beginning after 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     10. Deductibility of meals provided for the convenience of 
         the employer and provided by remote seafood processors 
         (secs. 765 and 778 of the Senate amendment)

                              Present Law

       In general, subject to several exceptions, only 50 percent 
     of business meal and entertainment expenses are allowed as a 
     deduction (sec. 274(n)). Under one exception, the value of 
     meals that are excludable from employees' incomes as a de 
     minimis fringe benefit (sec. 132) are fully deductible by the 
     employer.
       In addition, the courts that have considered the issue have 
     held that if meals are provided for the convenience of the 
     employer pursuant to section 119 they are fully deductible 
     pursuant to section 274(n)(2)(B) provided they satisfy the 
     relevant section 132 requirements. (Boyd Gaming Corp. v. 
     Commissioner \46\ and Gold Coast Hotel & Casino v. 
     I.R.S.\47\).
---------------------------------------------------------------------------
     \46\ 106 T.C. No. 19 (May 23, 1996).
     \47\ U.S. D.C. Nev. CV-5-94-1146-HDM(LRL) (September 26, 
     1996).
---------------------------------------------------------------------------
       Exceptions to this 50-percent rule are also provided for 
     food and beverages provided to crew members of certain 
     vessels and offshore oil or gas platforms or drilling rigs.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that meals that are 
     excludable from employees' incomes because they are provided 
     for the convenience of the employer pursuant to section 119 
     of the Code are excludable as a de minimis fringe benefit and 
     therefore are fully deductible by the employer, provided they 
     satisfy the relevant section 132 requirements. No inference 
     is intended as to whether such meals are fully deductible 
     under present law.
       The Senate amendment also increases to 80 percent the 
     deductible percentage of the cost of food and beverages 
     consumed by workers at remote seafood processing facilities 
     located in the United States north of 53 degrees north 
     latitude. A seafood processing facility is remote when there 
     are insufficient eating facilities in the vicinity of the 
     employer's premises.\48\
---------------------------------------------------------------------------
     \48\ See Treas. Reg. Sec. 1.119-1(a)(2)(ii)(c) and 1.119-1(f) 
     (Example 7).
---------------------------------------------------------------------------
       The increase in the deductible percentage is phased in 
     according to the following schedule:


        Taxable years beginning in--              Deductible percentage
1998, 1999...........................................................55
2000, 2001...........................................................60
2002, 2003...........................................................65
2004, 2005...........................................................70
2006, 2007...........................................................75
2008 and thereafter..................................................80

       Effective dates.--The provisions are effective for taxable 
     years beginning after 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment as to 
     meals provided pursuant to section 119. Because food and 
     beverages consumed by workers at these specified remote 
     seafood processing facilities are provided for the 
     convenience of the employer pursuant to section 119 and 
     therefore will be deductible under the Senate amendment 
     provision as to meals provided pursuant to section 119 
     (provided they satisfy the relevant section 132 
     requirements), the conference agreement does not include the 
     Senate amendment provision relating to remote seafood 
     processors because it is subsumed by the section 119 
     provision.
     11. Deduction of traveling expenses while working away from 
         home on qualified construction projects (sec. 775 of the 
         Senate amendment)

                              Present Law

       A taxpayer is allowed, subject to limitations, to deduct 
     the ordinary and necessary expenses of carrying on a trade or 
     business, including the trade or business of being an 
     employee. Expenses of carrying on the trade or business of 
     being an employee are miscellaneous itemized deductions, 
     deductible only to the extent they exceed 2 percent of 
     adjusted gross income.
       Deductible expenses include travel expenses (including 
     amounts expended for meals and lodging) while temporarily 
     away from home in pursuit of a trade or business. In the 
     absence of facts and circumstances indicating otherwise, a 
     taxpayer is considered to be temporarily away from home if 
     the period of employment away from home does not exceed one 
     year. If the period of employment away from home exceeds one 
     year, the taxpayer is considered to be on an indefinite or 
     permanent work assignment, and travel expenses (including 
     amounts expended for meals and lodging) are not deductible.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that, in the absence of facts 
     and circumstances indicating otherwise, taxpayers employed on 
     qualified construction projects will be considered to be 
     temporarily away from home if the period of their employment 
     away from home does not exceed 18 months (24 months if the 
     qualified construction project is in a remote location), 
     rather than one year as under present law. A qualified 
     construction project is one that is identifiable and that has 
     a completion date that is reasonably expected to occur within 
     five years of its starting date. A qualified construction 
     project is considered to be in a remote location if it is 
     located in an area which lacks adequate housing, educational, 
     medical or other facilities necessary for families.
       These revised standards for workers on qualified 
     construction projects apply only to taxpayers who continue to 
     maintain a household, and therefore incur duplicative 
     expenses, at their place of principal residence.
       Effective date.--The provision is effective for amounts 
     paid or incurred in taxable years beginning after December 
     31, 1997.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     12. Provide above-the-line deduction for certain business 
         expenses (sec. 766 of the Senate amendment)

                              Present Law

       Under present law, individuals may generally deduct 
     ordinary and necessary business expenses in determining 
     adjusted gross income (``AGI''). This deduction does not 
     apply in the case of an individual performing services as an 
     employee. Employee business expenses are generally deductible 
     only as a miscellaneous itemized deduction, i.e., only to the 
     extent all the taxpayer's miscellaneous itemized deductions 
     exceed 2 percent of the taxpayer's AGI. Employee business 
     expenses are not allowed as a deduction for alternative 
     minimum tax purposes.

                               House Bill

       No provision.

                            Senate Amendment

       Employee business expenses relating to service as an 
     official of a State or local government (or political 
     subdivision thereof) are deductible in computing AGI (``above 
     the line''), provided the official is compensated in whole or 
     in part on a fee basis. Consequently, such expenses are also 
     deductible for minimum tax purposes.
       Effective date.--The provision applies to expenses paid or 
     incurred in taxable years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The conference agreement is effective with 
     respect to expenses paid or incurred in taxable years 
     beginning after December 31, 1986.
     13. Increase in standard mileage rate for purposes of 
         computing charitable deduction (sec. 767 of the Senate 
         amendment)

                              Present Law

       In general, individuals who itemize their deductions may 
     deduct charitable contributions. For purposes of computing 
     the charitable deduction for the use of a passenger 
     automobile, the standard mileage rate is 12 cents per mile 
     (sec. 170(i)).

                               House Bill

       No provision.

[[Page H6533]]

                            Senate Amendment

       The Senate amendment increases this mileage rate to 15 
     cents per mile. This rate is indexed for inflation, rounded 
     down to the nearest whole cent.
       Effective date.--The increase to 15 cents is effective for 
     taxable years beginning after December 31, 1997. The 
     indexation is effective for inflation occurring after 1997. 
     Accordingly, the first adjustment for indexing will occur in 
     1999 to reflect inflation in 1998.

                          Conference Agreement

       The conference agreement increases this mileage rate to 14 
     cents per mile (not indexed for inflation), effective for 
     taxable years beginning after December 31, 1997.
     14. Expensing of environmental remediation costs 
         (``brownfields'') (sec. 768 of the Senate amendment)

                              Present Law

       Code section 162 allows a deduction for ordinary and 
     necessary expenses paid or incurred in carrying on any trade 
     or business. Treasury Regulations provide that the cost of 
     incidental repairs which neither materially add to the value 
     of property nor appreciably prolong its life, but keep it in 
     an ordinarily efficient operating condition, may be deducted 
     currently as a business expense. Section 263(a)(1) limits the 
     scope of section 162 by prohibiting a current deduction for 
     certain capital expenditures. Treasury Regulations define 
     ``capital expenditures'' as amounts paid or incurred to 
     materially add to the value, or substantially prolong the 
     useful life, of property owned by the taxpayer, or to adapt 
     property to a new or different use. Amounts paid for repairs 
     and maintenance do not constitute capital expenditures. The 
     determination of whether an expense is deductible or 
     capitalizable is based on the facts and circumstances of each 
     case.
       Treasury regulations provide that capital expenditures 
     include the costs of acquiring or substantially improving 
     buildings, machinery, equipment, furniture, fixtures and 
     similar property having a useful life substantially beyond 
     the current year. In INDOPCO, Inc. v. Commissioner, 112 S. 
     Ct. 1039 (1992), the Supreme Court required the 
     capitalization of legal fees incurred by a taxpayer in 
     connection with a friendly takeover by one of its customers 
     on the grounds that the merger would produce significant 
     economic benefits to the taxpayer extending beyond the 
     current year; capitalization of the costs thus would match 
     the expenditures with the income produced. Similarly, the 
     amount paid for the construction of a filtration plant, 
     with a life extending beyond the year of completion, and 
     as a permanent addition to the taxpayer's mill property, 
     was a capital expenditure rather than an ordinary and 
     necessary current business expense. Woolrich Woolen Mills 
     v. United States, 289 F.2d 444 (3d Cir. 1961).
       Although Treasury regulations provide that expenditures 
     that materially increase the value of property must be 
     capitalized, they do not set forth a method of determining 
     how and when value has been increased. In Plainfield-Union 
     Water Co. v. Commissioner, 39 T.C. 333 (1962), nonacq., 1964-
     2 C.B. 8, the U.S. Tax Court held that increased value was 
     determined by comparing the value of an asset after the 
     expenditure with its value before the condition necessitating 
     the expenditure. The Tax Court stated that ``an expenditure 
     which returns property to the state it was in before the 
     situation prompting the expenditure arose, and which does not 
     make the relevant property more valuable, more useful, or 
     longer-lived, is usually deemed a deductible repair.''
       In several Technical Advice Memoranda (TAM), the Internal 
     Revenue Service (IRS) declined to apply the Plainfield Union 
     valuation analysis, indicating that the analysis represents 
     just one of several alternative methods of determining 
     increases in the value of an asset. In TAM 9240004 (June 29, 
     1992), the IRS required certain asbestos removal costs to be 
     capitalized rather than expensed. In that instance, the 
     taxpayer owned equipment that was manufactured with 
     insulation containing asbestos; the taxpayer replaced the 
     asbestos insulation with less thermally efficient, non-
     asbestos insulation. The IRS concluded that the expenditures 
     resulted in a material increase in the value of the equipment 
     because the asbestos removal eliminated human health risks, 
     reduced the risk of liability to employees resulting from the 
     contamination, and made the property more marketable. 
     Similarly, in TAM 9411002 (November 19, 1993), the IRS 
     required the capitalization of expenditures to remove and 
     replace asbestos in connection with the conversion of a 
     boiler room to garage and office space. However, the IRS 
     permitted deduction of costs of encapsulating exposed 
     asbestos in an adjacent warehouse.
       In 1994, the IRS issued Rev. Rul. 94-38, 1994-1 C.B. 35, 
     holding that soil remediation expenditures and ongoing water 
     treatment expenditures incurred to clean up land and water 
     that a taxpayer contaminated with hazardous waste are 
     deductible. In this ruling, the IRS explicitly accepted the 
     Plainfield Union valuation analysis.49 However, 
     the IRS also held that costs allocable to constructing a 
     groundwater treatment facility are capital expenditures.
---------------------------------------------------------------------------
     \49\ Rev. Rul. 94-38 generally rendered moot the holding in 
     TAM 9315004 (December 17, 1992) requiring a taxpayer to 
     capitalize certain costs associated with the remediation of 
     soil contaminated with polychlorinated biphenyls (PCBs).
---------------------------------------------------------------------------
       In 1995, the IRS issued TAM 9541005 (October 13, 1995) 
     requiring a taxpayer to capitalize certain environmental 
     study costs, as well as associated consulting and legal fees. 
     The taxpayer acquired the land and conducted activities 
     causing hazardous waste contamination. After the 
     contamination, but before it was discovered, the company 
     donated the land to the county to be developed into a 
     recreational park. After the county discovered the 
     contamination, it reconveyed the land to the company for $1. 
     The company incurred the costs in developing a remediation 
     strategy. The IRS held that the costs were not deductible 
     under section 162 because the company acquired the land in a 
     contaminated state when it purchased the land from the 
     county. In January, 1996, the IRS revoked and superseded TAM 
     9541005 (PLR 9627002). Noting that the company's 
     contamination of the land and liability for remediation were 
     unchanged during the break in ownership by the county, the 
     IRS concluded that the break in ownership should not, in and 
     of itself, operate to disallow a deduction under section 162.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that taxpayers could elect to 
     treat certain environmental remediation expenditures that 
     would otherwise be chargeable to capital account as 
     deductible in the year paid or incurred. The deduction 
     applies for both regular and alternative minimum tax 
     purposes. The expenditure must be incurred in connection with 
     the abatement or control of hazardous substances at a 
     qualified contaminated site. In general, any expenditure for 
     the acquisition of depreciable property used in connection 
     with the abatement or control of hazardous substances at a 
     qualified contaminated site does not constitute a qualified 
     environmental remediation expenditure. However, depreciation 
     deductions allowable for such property which would otherwise 
     be allocated to the site under the principles set forth in 
     Comm'r v. Idaho Power Co.50 and section 263A are 
     treated as qualified environmental remediation expenditures.
---------------------------------------------------------------------------
     \50\ Comm'r v. Idaho Power Co., 418 U.S. 1 (1974) (holding 
     that equipment depreciation allocable to the taxpayer's 
     construction of capital facilities must be capitalized under 
     section 263(a)(1)).
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       A ``qualified contaminated site'' generally is any property 
     that (1) is held for use in a trade or business, for the 
     production of income, or as inventory; (2) is certified by 
     the appropriate State environmental agency to be located 
     within a targeted area; and (3) contains (or potentially 
     contains) a hazardous substance (so-called ``brownfields''). 
     Targeted areas would mean (1) empowerment zones and 
     enterprise communities (as designated under present law, 
     including any supplemental zone designated on December 21, 
     1994); and (2) sites announced before February, 1997, as 
     being subject to one of the 76 Environmental Protection 
     Agency (EPA) Brownfields Pilots.
       Both urban and rural sites qualify. However, sites that are 
     identified on the national priorities list under the 
     Comprehensive Environmental Response, Compensation, and 
     Liability Act of 1980 (CERCLA) cannot be targeted areas. 
     Appropriate State environmental agencies are designated by 
     the EPA; if no State agency is designated, the EPA is 
     responsible for providing the certification. Hazardous 
     substances generally are defined by reference to sections 
     101(14) and 102 of CERCLA, subject to additional 
     limitations applicable to asbestos and similar substances 
     within buildings, certain naturally occurring substances 
     such as radon, and certain other substances released into 
     drinking water supplies due to deterioration through 
     ordinary use.
       The Senate amendment further provides that, in the case of 
     property to which a qualified environmental remediation 
     expenditure otherwise would have been capitalized, any 
     deduction allowed under the bill would be treated as a 
     depreciation deduction and the property would be treated as 
     subject to section 1245. Thus, deductions for qualified 
     environmental remediation expenditures would be subject to 
     recapture as ordinary income upon sale or other disposition 
     of the property.
       Effective date.--The provision applies to eligible 
     expenditures incurred after the date of enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that the definition of ``targeted areas'' is expanded 
     to include population census tracts with a poverty rate of 20 
     percent or more and certain industrial and commercial areas 
     that are adjacent to such census tracts. Thus, targeted areas 
     generally would include: (1) empowerment zones and enterprise 
     communities as designated under present law and under the 
     conference agreement 51 (including any 
     supplemental empowerment zone designated on December 21, 
     1994); (2) sites announced before February 1997, as being 
     subject to one of the 76 Environmental Protection Agency 
     (EPA) Brownfields Pilots; (3) any population census tract 
     with a poverty rate of 20 percent or more; and (4) certain 
     industrial and commercial areas that are adjacent to tracts 
     described in (3) above.
---------------------------------------------------------------------------
     \51\ Thus, the 20 additional empowerment zones authorized to 
     be designated under the conference agreement as well as the 
     D.C. Enterprise Zone established under the conference 
     agreement are ``targeted areas'' for purposes of this 
     provision.
---------------------------------------------------------------------------
       With respect to certification of targeted areas, the 
     conference agreement provides

[[Page H6534]]

     that the chief executive officer of a State may, in 
     consultation with the Administrator of the EPA, designate an 
     appropriate State environmental agency. If no State 
     environmental agency is so designated within 60 days of the 
     date of enactment, the appropriate environmental agency for 
     such State shall be designated by the Administrator of the 
     EPA.
       In addition, the conference agreement sunsets the provision 
     after three years. Thus, the provision applies only to 
     eligible expenditures incurred in taxable years ending after 
     date of enactment and before January 1, 2001.
       Finally, the conferees wish to clarify that providing 
     current deductions for certain environmental remediation 
     expenditures under the conference agreement creates no 
     inference as to the proper treatment of other remediation 
     expenditures not described in the agreement.
     15. Treatment of consolidation of certain mutual savings bank 
         life insurance departments (sec. 962 of the House bill)

                              Present Law

     Special rules for mutual savings banks with life insurance 
         business
       Present law provides for special treatment of a mutual 
     savings bank conducting a life insurance business in a 
     separate life insurance department (Code sec. 594). Under the 
     special rule, the insurance and noninsurance businesses of 
     such banks are bifurcated, and the tax imposed is the sum of 
     the partial taxes computed on (a) the taxable income of the 
     mutual savings bank determined without regard to items 
     properly allocable to the life insurance business, and (b) 
     the income of the life insurance department, calculated in 
     accordance with the rules applicable to life insurance 
     companies (subchapter L of the Code). This special treatment 
     applies so long as the mutual savings bank is authorized 
     under State law to engage in the business of issuing life 
     insurance contracts, the life insurance business is conducted 
     in a separate department the accounts of which are maintained 
     separately from the other accounts of the mutual savings 
     bank, and the life insurance department would qualify as a 
     life insurance company under Code section 816 if it were 
     treated as a separate corporation.
     Rules for corporate reorganizations
       Present law provides that certain corporate reorganization 
     transactions, including recapitalizations, generally are 
     treated as tax-free transactions (sec. 368(a)(1)(E)). No gain 
     or loss is recognized if stock or securities in a corporation 
     that is a party to a reorganization are (in pursuance of the 
     plan of reorganization) exchanged solely for stock or 
     securities in that corporation or in another corporation that 
     is a party to the reorganization, except that gain (if any) 
     to the recipient is recognized to the extent the principal 
     amount of securities received exceeds the principal amount of 
     the securities surrendered (secs. 354, 356(a)(1)). If such an 
     exchange has the effect of distribution of a dividend, then 
     the portion of the distributee's gain that does not exceed 
     his ratable share of the corporation's earnings and profits 
     is treated as a dividend (sec. 356(a)(2)).
     Rules for life insurance companies
       A life insurance company generally is permitted to deduct 
     the amount of policyholder dividends paid or accrued during 
     the taxable year (sec. 808). In the case of a mutual life 
     insurance company, the amount of the deduction for 
     policyholder dividends is reduced (but not below zero) by the 
     differential earnings amount (sec. 809). The term 
     policyholder dividend includes (1) any amount paid or 
     credited (including as an increase in benefits) if the amount 
     is not fixed in the contract but depends on the experience of 
     the company or the discretion of the management; (2) excess 
     interest; (3) premium adjustments; and (4) experience-rated 
     refunds.

                               House Bill

       The House bill provides that the consolidation of two or 
     more life insurance departments of mutual savings banks into 
     a single life insurance company by requirement of State law 
     is treated as a tax-free reorganization described in section 
     368(a)(1)(E) (i.e., a recapitalization). Any payments 
     required to be made to policyholders in connection with the 
     consolidation are treated as policyholder dividends 
     deductible by the company under section 808, provided that 
     certain requirements are met. The requirements are: (1) the 
     payments are only with respect to policies in effect 
     immediately before the consolidation; (2) the payments are 
     only with respect to policies that are participating (i.e., 
     on which policyholder dividends are paid) before and after 
     the consolidation; (3) the payments cease with respect to any 
     policy if the policy lapses after the consolidation; (4) the 
     policyholders before the consolidation had no divisible right 
     to the surplus of any life insurance department and had no 
     right to vote; and (5) the approval of the policyholders was 
     not required for the consolidation. No inference is intended 
     as to the tax treatment of (1) consolidation, demutualization 
     or other transactions involving, or (2) payments to 
     policyholders of, any insurer or financial institution other 
     than the life insurance departments of mutual savings banks.
       Effective date.--The provision takes effect on December 31, 
     1991.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     16. Offset of past-due, legally enforceable State tax 
         obligations against Federal overpayments (sec. 963 of the 
         House bill)

                              Present Law

       Overpayments of Federal tax are credited against any 
     liability in respect of an internal revenue tax on the part 
     of the person who made the overpayment. Any overpayment not 
     so credited may be offset against any past-due support 
     payments and past-due legally enforceable debts owed to 
     Federal agencies of the person making the overpayment. Any 
     remaining overpayment is refunded to the person making the 
     overpayment.

                               House Bill

       The House bill provides that an overpayment of Federal tax 
     could be offset by the amount of any past-due, legally 
     enforceable State tax obligation, provided the person making 
     the overpayment has shown on the return establishing the 
     overpayment an address that is within the State seeking the 
     offset. For this purpose, a past-due, legally enforceable 
     State tax obligation is a debt which resulted from a 
     judgement rendered by a court of competent jurisdiction, or a 
     determination after an administrative hearing, which 
     determined an amount of State tax to be due and which is no 
     longer subject to judicial review, as well as from an 
     assessment the time for which redetermination has expired 
     that has not been delinquent for more than 10 years. A State 
     tax obligation includes any local tax administered by the 
     chief tax administration agency of the State.
       The offset for a past-due, legally enforceable State tax 
     obligation of a State resident will apply after the offsets 
     provided in present law for internal revenue tax liabilities, 
     past-due support, and past-due, legally enforceable 
     obligations owed a Federal agency.
       The Secretary of the Treasury is authorized to issue 
     regulations establishing procedures for the implementation of 
     this proposal, including regulations prescribing the time and 
     manner in which States may submit notices of past-due, 
     legally enforceable State tax obligations. The Secretary of 
     the Treasury may require States to pay a fee to reimburse the 
     Secretary for the cost of applying the offset procedure.
       Effective date.--The provision is effective for refunds 
     payable after December 31, 1998.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     17. Modify limits on depreciation of luxury automobiles for 
         certain clean-burning fuel and electric vehicles (sec. 
         964 of the House bill)

                              Present Law

       The amount the taxpayer may claim as a depreciation 
     deduction for any passenger automobile is limited to: $2,560 
     for the first taxable year in the recovery period; $4,100 for 
     the second taxable year in the recovery period; $2,450 for 
     the third taxable year in the recovery period; and $1,475 for 
     each succeeding taxable year in the recovery period. Each of 
     the dollar limitations is indexed for inflation after October 
     1987 by automobile component of the Consumer Price Index. 
     Consequently, the limitations applicable for 1997 are $3,160, 
     $5,000, $3,050, and $1,775.

                               House Bill

       The House bill modifies the present-law limitation on 
     depreciation in the case of qualified clean-burning fuel 
     vehicles and certain electric vehicles. With respect to 
     qualified clean-burning fuel vehicles, those that are 
     modified to permit such vehicle to be propelled by a clean 
     burning fuel, the bill generally modifies present-law by 
     applying the current limitation to that portion of the 
     vehicles cost not represented by the installed qualified 
     clean-burning fuel property. The taxpayer may claim an 
     amount otherwise allowable as a depreciation deduction on 
     the installed qualified clean-burning fuel, without regard 
     to the present-law limitation. Generally, this has the 
     same effect as only subjecting the cost of the vehicle 
     before modification to the present-law limitations.
       In the case of a passenger vehicle designed to be propelled 
     primarily by electricity and built by an original equipment 
     manufacturer, the base-year limitation amounts of $2,560 for 
     the first taxable year in the recovery period, $4,100 for the 
     second taxable year in the recovery period, $2,450 for the 
     third taxable year in the recovery period, and $1,475 for 
     each succeeding taxable year in the recovery period are 
     tripled to $7,680, $12,300, $7,350, and $4,425, respectively, 
     and then adjusted for inflation after October 1987 by the 
     automobile component of the Consumer Price Index.
       Effective date.--The provision is effective for property 
     placed in service on or after the date of enactment and 
     before January 1, 2005.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with a 
     modification to the effective date that provides that the 
     provision is effective for property placed in service after 
     the date of enactment and before January 1, 2005.

[[Page H6535]]

     18. Survivor benefits of public safety officers killed in the 
         line of duty (sec. 965 of the House bill and sec. 784 of 
         the Senate amendment)

                              Present Law

       Survivors of military service personnel (such as those 
     killed in combat) are generally entitled to survivor benefits 
     (38 U.S.C. sec. 1310). These survivor benefits are generally 
     exempt from income taxation (38 U.S.C. sec. 5301). 
     ``Survivor'' means the surviving spouse or surviving 
     dependent child of the military service personnel.
       Survivor annuity benefits paid under a governmental 
     retirement plan to a survivor of a law enforcement officer 
     killed in the line of duty are generally includible in income 
     except to the extent the benefits are a return of after-tax 
     employee contributions. Survivor benefits paid under a 
     government plan only to survivors of officers who died as a 
     result of injuries sustained in the line of duty are in the 
     nature of workers'' compensation and are generally excludable 
     from income.

                               House Bill

       The House bill generally provides that an amount paid as a 
     survivor annuity on account of the death of a law enforcement 
     officer who is killed in the line of duty is excludable from 
     income to the extent the survivor annuity is attributable to 
     the officer's service as a law enforcement officer. The 
     survivor annuity must be provided under a governmental plan 
     to the surviving spouse (or former spouse) of the law 
     enforcement officer or to a child of the officer.
       Effective date.--The provision applies to amounts received 
     in taxable years beginning after December 31, 1996, with 
     respect to individuals dying after that date.

                            Senate Amendment

       The Senate amendment is the same as the House bill except 
     that the provision applies to public safety officers killed 
     in the line of duty. Public safety officers include law 
     enforcement officers, firefighters, rescue squad or ambulance 
     crew.

                          Conference Agreement

       The conference agreement follows the Senate amendment. The 
     conference agreement clarifies that the provision does not 
     apply with respect to the death of a public safety officer if 
     it is determined by the appropriate supervising authority 
     that (1) the death was caused by the intentional misconduct 
     of the officer or by the officers intention to bring about 
     the death, (2) the officer was voluntarily intoxicated at the 
     time of death, (3) the officer was performing his or her 
     duties in a grossly negligent manner at the time of death, or 
     (4) the actions of the individual to whom payment is to be 
     made were a substantial contributing factor to the death of 
     the officer.
     19. Temporary suspension of income limitations on percentage 
         depletion for production from marginal wells (sec. 966 of 
         the House bill and sec. 772 of the Senate amendment)

                              Present Law

       The Code permits taxpayers to recover their investments in 
     oil and gas wells through depletion deductions. In the case 
     of certain properties, the deductions may be determined using 
     the percentage depletion method. Certain limitations apply in 
     calculating percentage depletion deductions. One limitation 
     is a restriction that these deductions may not exceed 65 
     percent of the taxpayer's taxable income. Another limitation 
     is a restriction that the amount deducted may not exceed 100 
     percent of the net income from that property in any year.
       Specific percentage depletion rules apply to oil and gas 
     production from ``marginal'' properties. Marginal production 
     is defined as domestic crude oil and natural gas production 
     from stripper well property or from property from which 
     substantially all of the production during the calendar year 
     is heavy oil. Stripper well property is property from which 
     the average daily production is 15 barrel equivalents or 
     less, determined by dividing the average daily production 
     of domestic crude oil and domestic natural gas from 
     producing wells on the property for the calendar year by 
     the number of wells.

                               House Bill

       The 65-percent-of-net-income limitation is suspended for 
     domestic oil and gas production from marginal properties 
     during taxable years beginning after December 31, 1997, and 
     before January 1, 2000.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       The 100-percent-of-net-income property limitation with 
     respect to oil and gas produced from marginal properties does 
     not apply for any taxable year beginning in a calendar year 
     in which the annual average wellhead price for crude oil 
     (within the meaning of section 29(d)(2)(C)) is below $14 per 
     barrel.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                          Conference Agreement

       The 100-percent-of-net-income property limitation is 
     suspended for domestic oil and gas production from marginal 
     properties during taxable years beginning after December 31, 
     1997, and before January 1, 2000.
       Effective date.--The provision is effective on the date of 
     enactment.
     20. Extend production credit for electricity produced from 
         wind and ``closed loop'' biomass (sec. 771 of the Senate 
         amendment)

                              Present Law

       An income tax credit is allowed for the production of 
     electricity from either qualified wind energy or qualified 
     ``closed-loop'' biomass facilities. The credit is equal to 
     1.5 cents (plus adjustments for inflation since 1992) per 
     kilowatt hour of electricity produced from these qualified 
     sources during the 10-year period after the facility is 
     placed in service.
       The credit applies to electricity produced by qualified 
     wind or closed-loop biomass facilities placed in service 
     before July 1, 1999. In order to claim the credit, a taxpayer 
     must own the facility and sell the electricity produced by 
     the facility to an unrelated party.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment extends the income tax credit for 
     electricity produced from wind and closed-loop biomass for 
     two years. Thus, the credit is available for qualifying 
     electricity produced from facilities placed in service before 
     July 1, 2001. As under present law, the credit is allowable 
     for a period of 10 years after the facility is placed in 
     service.
       Effective date.--The provision is effective as of the date 
     of enactment.

                          Conference Agreement

       The conference agreement does not include the provision in 
     the Senate amendment.
     21. Modification of advance refunding rules for certain tax-
         exempt bonds issued by the Virgin Islands (sec. 957 of 
         the House bill)

                              Present Law

     Advance refundings
       Generally, a governmental bond originally issued after 
     December 31, 1985, may be advance refunded one time. An 
     advance refunding is any refunding where all of the refunded 
     bonds are not redeemed within 90 days after the refunding 
     bonds are issued.
     Virgin Island bonds
       Under present law, the Virgin Islands is required to secure 
     its bonds with a priority first lien claim on specified 
     revenue streams rather than being permitted to issue multiple 
     bond issues secured on a parity basis by a common pool of 
     revenues. Under a proposed non-tax law change, the priority 
     lien requirement would be repealed.

                               House Bill

       Under the House bill, one additional advance refunding 
     would be allowed for governmental bonds issued by the Virgin 
     Islands that were advance refunded before June 9, 1997, if 
     the Virgin Islands debt provisions are changed to repeal the 
     current priority first lien requirement.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     22. Qualified small-issue bonds (sec. 770 of the Senate 
         amendment)

                              Present Law

       Interest on certain small issues of private activity bonds 
     issued by State or local governments (``qualified small-issue 
     bonds'') is excluded from gross income if certain conditions 
     are met. First, at least 95 percent of the bond proceeds must 
     be used to finance manufacturing facilities or certain 
     agricultural land or equipment. Second, the bond issue must 
     have an aggregate face amount of $1 million or less, or 
     alternatively, the aggregate face amount of the issue, 
     together with the aggregate amount of certain related capital 
     expenditures during the six-year period beginning three years 
     before the date of the issue and ending three years after 
     that date, must not exceed $10 million. (The maximum face 
     amount of bonds would not be increased over present-law 
     amounts.)
       Issuance of qualified small-issue bonds, like most other 
     private activity bonds, is subject to annual State volume 
     limitations and to other rules.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment increases the maximum capital 
     expenditure limit under present law from $10 million to $20 
     million. The maximum amount of bonds is not increased over 
     present-law amounts.
       Effective date.--The provision is effective for bonds 
     issued after December 31, 1997.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     23. Treatment of bonds issued by the Federal Home Loan Bank 
         Board under the Federal guarantee rules (sec. 774 of the 
         Senate amendment)

                              Present Law

       Generally, interest on bonds which are Federally guaranteed 
     do not qualify for tax- exemption for Federal income tax 
     purposes. Certain exceptions are provided including otherwise 
     qualifying bonds guaranteed by the Federal Housing 
     Administration, the Veterans'' Administration, the Federal 
     National Mortgage Association, the Federal Home Loan Mortgage 
     Corporation, and the Government National Mortgage 
     Association.

                               House Bill

       No provision.

[[Page H6536]]

                            Senate Amendment

       Under the Senate amendment, bonds guaranteed by the Federal 
     Home Loan Bank Board are not treated as Federally guaranteed 
     for purposes of the Federal guarantee prohibition generally 
     applicable to tax-exempt bonds.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     24. Current refundings of certain bonds issued by Indian 
         tribal governments (sec. 789 of the Senate amendment)

                              Present Law

       Indian tribal governments are permitted to issue tax-exempt 
     bonds for essential government functions. Since 1987, this 
     term has been defined to include only those activities that 
     traditionally are carried out as governmental functions by 
     State governments.
       Before 1987, some Indian tribes issued tax-exempt bonds to 
     acquire existing businesses as investments. Under present 
     law, tax-exempt bonds may not be issued for this purpose, and 
     outstanding pre-1987 bonds issued for such acquisitions may 
     not be refunded.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment allows pre-1987 tax-exempt bonds 
     issued by Indian tribal governments for business acquisitions 
     to be refunded if:
       (1) the refunded bonds are redeemed within 90 days after 
     the refunding bonds are issued;
       (2) the outstanding principal amount of the bonds is not 
     increased; and
       (3) the maturity date of the bonds is not extended.
       Effective date.--The provision applies to bonds issued 
     after the date of enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     25. Purchasing of receivables by tax-exempt hospital 
         cooperative service organizations (sec. 773 of the Senate 
         amendment)

                               Present Law

       Section 501(e) provides that an organization organized on a 
     cooperative basis by tax- exempt hospitals will itself be 
     tax-exempt if the organization is operated solely to perform, 
     on a centralized basis, one or more of certain enumerated 
     services for its members. These services are: data 
     processing, purchasing (including the purchase of insurance 
     on a group basis), warehousing, billing and collection , 
     food, clinical, industrial engineering, laboratory, printing, 
     communications, record center, and personnel services. An 
     organization does not qualify under section 501(e) if it 
     performs services other than the enumerated services. (Treas. 
     reg. sec. 1.501(e)(-1(c)).

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment clarifies that, for purposes of 
     section 501(e), billing and collection services include the 
     purchase of patron accounts receivable on a recourse basis. 
     Thus, hospital cooperative service organizations are 
     permitted to advance cash on the basis of member accounts 
     receivable, provided that each member hospital retains the 
     risk of non-payment with respect to its accounts receivable.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996. No inference is 
     intended with respect to taxable years prior to the effective 
     date.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     26. Charitable contribution deduction for certain expenses 
         incurred in support of Native Alaskan subsistence whaling 
         (sec. 776 of the Senate amendment)

                              Present Law

       In computing taxable income, individuals who do not elect 
     the standard deduction may claim itemized deductions, 
     including a deduction (subject to certain limitations) for 
     charitable contributions or gifts made during the taxable 
     year to a qualified charitable organization or governmental 
     entity (sec. 170). Individuals who elect the standard 
     deduction may not claim a deduction for charitable 
     contributions made during the taxable year.
       No charitable contribution deduction is allowed for a 
     contribution of services. However, unreimbursed expenditures 
     made incident to the rendition of services to an 
     organization, contributions to which are deductible, may 
     constitute a deductible contribution (Treas. Reg. sec. 
     1.170A-1(g)). Specifically, section 170(j) provides that no 
     charitable contribution deduction is allowed for traveling 
     expenses (including amounts expended for meals and lodging) 
     while away from home, whether paid directly or by 
     reimbursement, unless there is no significant element of 
     personal pleasure, recreation, or vacation in such travel.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment allows individuals to claim a 
     deduction under section 170 not exceeding $7,500 per taxable 
     year for certain expenses incurred in carrying out sanctioned 
     whaling activities. The deduction is available only to an 
     individual who is recognized by the Alaska Eskimo Whaling 
     Commission as a whaling captain charged with the 
     responsibility of maintaining and carrying out sanctioned 
     whaling activities. The deduction is available for reasonable 
     and necessary expenses paid by the taxpayer during the 
     taxable year for (1) the acquisition and maintenance of 
     whaling boats, weapons, and gear used in sanctioned whaling 
     activities, (2) the supplying of food for the crew and other 
     provisions for carrying out such activities, and (3) storage 
     and distribution of the catch from such activities.
       For purposes of the provision, the term ``sanctioned 
     whaling activities'' means subsistence bowhead whale hunting 
     activities conducted pursuant to the management plan of the 
     Alaska Eskimo Whaling Commission. No inference is intended 
     regarding the deductibility of any whaling expenses incurred 
     in a taxable year ending before the date of enactment.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     27. Designation of additional empowerment zones; modification 
         of empowerment zone and enterprise community criteria 
         (sec. 777 of the Senate amendment)

                              Present Law

     In general
       Pursuant to the Omnibus Budget Reconciliation Act of 1993 
     (OBRA 1993), the Secretaries of the Department of Housing and 
     Urban Development (HUD) and the Department of Agriculture 
     designated a total of nine empowerment zones and 95 
     enterprise communities on December 21, 1994. As required by 
     law, six empowerment zones are located in urban areas (with 
     aggregate population for the six designated urban empowerment 
     zones limited to 750,000) and three empowerment zones are 
     located in rural areas.\52\ Of the enterprise communities, 65 
     are located in urban areas and 30 are located in rural areas 
     (sec. 1391). Designated empowerment zones and enterprise 
     communities were required to satisfy certain eligibility 
     criteria, including specified poverty rates and population 
     and geographic size limitations (sec. 1392).
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     \52\ The six designated urban empowerment zones are located 
     in New York City, Chicago, Atlanta, Detroit, Baltimore, and 
     Philadelphia-Camden (New Jersey). The three designated rural 
     empowerment zones are located in Kentucky Highlands (Clinton, 
     Jackson, and Wayne counties, Kentucky), Mid-Delta Mississippi 
     (Bolivar, Holmes, Humphreys, Leflore counties, Mississippi), 
     and Rio Grande Valley Texas (Cameron, Hidalgo, Starr, and 
     Willacy counties, Texas).
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       The following tax incentives are available for certain 
     businesses located in empowerment zones: (1) A 20-percent 
     wage credit for the first $15,000 of wages paid to a zone 
     resident who works in the zone; (2) an additional $20,000 of 
     section 179 expensing for ``qualified zone property'' placed 
     in service by an ``enterprise zone business'' (accordingly, 
     certain businesses operating in empowerment zones are allowed 
     up to $38,000 of expensing for 1997); and (3) special tax-
     exempt financing for certain zone facilities (described in 
     more detail below).
       The 95 enterprise communities are eligible for the special 
     tax-exempt financing benefits but not the other tax 
     incentives available in the nine empowerment zones. In 
     addition to these tax incentives, OBRA 1993 provided that 
     Federal grants would be made to designated empowerment zones 
     and enterprise communities.
       The tax incentives for empowerment zones and enterprise 
     communities generally will be available during the period 
     that the designation remains in effect, i.e., a 10-year 
     period.
     Definition of ``qualified zone property''
       Present-law section 1397C defines ``qualified zone 
     property'' as depreciable tangible property (including 
     buildings), provided that: (1) The property is acquired by 
     the taxpayer (from an unrelated party) after the zone or 
     community designation took effect; (2) the original use of 
     the property in the zone or community commences with the 
     taxpayer; and (3) substantially all of the use of the 
     property is in the zone or community in the active conduct of 
     a trade or business by the taxpayer in the zone or community. 
     In the case of property which is substantially renovated by 
     the taxpayer, however, the property need not be acquired by 
     the taxpayer after zone or community designation or 
     originally used by the taxpayer within the zone or community 
     if, during any 24-month period after zone or community 
     designation, the additions to the taxpayer's basis in the 
     property exceed 100 percent of the taxpayer's basis in the 
     property at the beginning of the period, or $5,000 (whichever 
     is greater).
     Definition of ``enterprise zone business''
       Present-law section 1397B defines the term ``enterprise 
     zone business'' as a corporation or partnership (or 
     proprietorship) if for the taxable year: (1) The sole trade 
     or business of the corporation or partnership is the active 
     conduct of a qualified business within an empowerment zone or 
     enterprise community; (2) at least 80 percent of the total 
     gross income is derived from the active conduct of a 
     ``qualified business'' within a zone or community; (3) 
     substantially all of the business's tangible property is used 
     within a zone or community; (4) substantially all of the 
     business's intangible property is used in, and

[[Page H6537]]

     exclusively related to, the active conduct of such business; 
     (5) substantially all of the services performed by employees 
     are performed within a zone or community; (6) at least 35 
     percent of the employees are residents of the zone or 
     community; and (7) no more than five percent of the average 
     of the aggregate unadjusted bases of the property owned by 
     the business is attributable to (a) certain financial 
     property, or (b) collectibles not held primarily for sale to 
     customers in the ordinary course of an active trade or 
     business.
        A ``qualified business'' is defined as any trade or 
     business other than a trade or business that consists 
     predominantly of the development or holding of intangibles 
     for sale or license. 53 In addition, the leasing 
     of real property that is located within the empowerment zone 
     or community to others is treated as a qualified business 
     only if (1) the leased property is not residential property, 
     and (2) at least 50 percent of the gross rental income from 
     the real property is from enterprise zone businesses. The 
     rental of tangible personal property to others is not a 
     qualified business unless substantially all of the rental of 
     such property is by enterprise zone businesses or by 
     residents of an empowerment zone or enterprise community.
---------------------------------------------------------------------------
     \53\ Also, a qualified business does not include certain 
     facilities described in section 144(c)(6)(B)(e.g., massage 
     parlor, hot tub facility, or liquor store) or certain large 
     farms.
---------------------------------------------------------------------------
     Tax-exempt financing rules
       Tax-exempt private activity bonds may be issued to finance 
     certain facilities in empowerment zones and enterprise 
     communities. These bonds, along with most private activity 
     bonds, are subject to an annual private activity bond State 
     volume cap equal to $50 per resident of each State, or (if 
     greater) $150 million per State.
       Qualified enterprise zone facility bonds are bonds 95 
     percent or more of the net proceeds of which are used to 
     finance (1) ``qualified zone property'' (as defined above) 
     the principal user of which is an ``enterprise zone 
     business'' (also defined above 54), or (2) 
     functionally related and subordinate land located in the 
     empowerment zone or enterprise community. These bonds may 
     only be issued while an empowerment zone or enterprise 
     community designation is in effect.
---------------------------------------------------------------------------
     \54\ For purposes of the tax-exempt financing rules, an 
     ``enterprise zone business'' also includes a business located 
     in a zone or community which would qualify as an enterprise 
     zone business if it were separately incorporated.
---------------------------------------------------------------------------
       The aggregate face amount of all qualified enterprise zone 
     bonds for each qualified enterprise zone business may not 
     exceed $3 million per zone or community. In addition, total 
     qualified enterprise zone bond financing for each principal 
     user of these bonds may not exceed $20 million for all zones 
     and communities.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment modifies the present-law empowerment 
     zone and enterprise community designation criteria under 
     section 1392 so that, in the event that additional 
     empowerment zones or enterprise communities are authorized to 
     be designated in the future, any zones or communities 
     designated in the States of Alaska or Hawaii will not be 
     subject to the general size limitations under section 
     1392(a)(3), nor will such zones or communities be subject to 
     the general poverty-rate criteria under section 1392(a)(4). 
     Instead, nominated areas in either State will be eligible for 
     designation as an empowerment zone or enterprise community 
     if, for each census tract or block group within such area, at 
     least 20 percent of the families have incomes which are 50 
     percent or less of the State-wide median family income. Such 
     zones and communities will be subject to the population 
     limitations under present-law section 1392(a)(1).
       Effective date.--The provision is effective on the date of 
     enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment. In 
     addition, the conference agreement provides for the 
     designation of 20 additional empowerment zones pursuant to 
     slightly expanded eligibility criteria, and includes certain 
     modifications to the definition of an enterprise zone 
     business and the tax-exempt financing rules.
     Two additional empowerment zones with same tax incentives as 
         previously designated empowerment zones
       Under the conference agreement, the Secretary of HUD is 
     authorized to designate two additional empowerment zones 
     located in urban areas (thereby increasing to eight the total 
     number of empowerment zones located in urban areas) with 
     respect to which generally apply the same tax incentives 
     (i.e., the wage credit, additional expensing, and special 
     tax-exempt financing) as are available within the empowerment 
     zones authorized by the Omnibus Budget Reconciliation Act of 
     1993 (OBRA 1993). The wage credit available in the two new 
     urban empowerment zones is modified slightly to provide that 
     the percentage of wages taken into account for purposes of 
     determining the wage credit is 20 percent for 2000-2004, 15 
     percent for 2005, 10 percent for 2006, and 5 percent for 
     2007. No wage credit is available in the two new urban 
     empowerment zones after 2007.
       The two additional empowerment zones are subject to the 
     same eligibility criteria under present-law section 1392 that 
     applies to the original six urban empowerment zones. In order 
     to permit designation of these two additional empowerment 
     zones, the conference agreement increases the present-law 
     750,000 aggregate population cap applicable to empowerment 
     zones located in urban areas to a cap of 1,000,000 aggregate 
     population for the eight urban empowerment zones.
       The two empowerment zones must be designated within 180 
     days after the date of enactment. However, the designations 
     will not take effect before January 1, 2000, and generally 
     will remain in effect for 10 years.
     Designation of additional empowerment zones
       The conference agreement authorizes the Secretaries of HUD 
     and Agriculture to designate an additional 20 empowerment 
     zones (no more than 15 in urban areas and no more than five 
     in rural areas).55 With respect to these 
     additional empowerment zones, the present-law eligibility 
     criteria are expanded slightly. First, the square mileage 
     limitations of present law (i.e., 20 square miles for urban 
     areas and 1,000 for rural areas) are expanded to allow the 
     empowerment zones to include an additional 2,000 acres. This 
     additional acreage, which could be developed for commercial 
     or industrial purposes, is not subject to the poverty rate 
     criteria and could be divided among up to three noncontiguous 
     parcels. In addition, the present-law requirement that at 
     least half of the nominated area consist of census tracts 
     with poverty rates of 35 percent or more does not apply. 
     Thus, under present-law section 1392(a)(4), at least 90 
     percent of the census tracts within a nominated area must 
     have a poverty rate of 25 percent or more, and the remaining 
     census tracts must have a poverty rate of 20 percent or 
     more.56 For this purpose, census tracts with 
     populations under 2,000 are treated as satisfying the 25-
     percent poverty rate criteria if (1) at least 75 percent of 
     the tract is zoned for commercial or industrial use and (2) 
     the tract is contiguous to one or more other tracts that 
     actually have a poverty rate of 25 percent or more.
---------------------------------------------------------------------------
     \55\ Under the conference agreement, areas located within 
     Indian reservations are eligible for designation as 
     empowerment zones.
     \56\ In lieu of the poverty criteria, outmigration may be 
     taken into account in designating one rural empowerment zone.
---------------------------------------------------------------------------
       Within the 20 additional empowerment zones, qualified 
     ``enterprise zone businesses'' are eligible to receive up to 
     $20,000 of additional section 179 expensing 57 and 
     to utilize special tax-exempt financing benefits. The 
     ``brownfields'' tax incentive provided under the conference 
     agreement also is available within all designated empowerment 
     zones. Businesses within the 20 additional empowerment zones 
     are not, however, eligible to receive the present-law wage 
     credit available within the 11 other designated empowerment 
     zones (i.e., the wage credit would be available only in the 
     nine present-law zones and two new urban empowerment zones 
     designated under the conference agreement).
---------------------------------------------------------------------------
     \57\ However, the additional section 179 expensing is not 
     available within the additional 2,000 acres allowed to be 
     included under the conference agreement within an empowerment 
     zone.
---------------------------------------------------------------------------
       The 20 additional empowerment zones are required to be 
     designated before 1999, and the designations generally will 
     remain in effect for 10 years.
     Modification of definition of enterprise zone business
       The conference agreement modifies the present-law 
     requirement of section 1397B that an entity may qualify as an 
     ``enterprise zone business'' only if (in addition to the 
     other present-law criteria) at least 80 percent of the total 
     gross income of such entity is derived from the active 
     conduct of a qualified business within an empowerment zone or 
     enterprise community. The conference agreement liberalizes 
     this present-law requirement by reducing the percentage 
     threshold so that an entity could qualify as an enterprise 
     zone business if at least 50 percent of the total gross 
     income of such entity is derived from the active conduct of a 
     qualified business within an empowerment zone or enterprise 
     community (assuming that the other criteria of section 1397B 
     are satisfied).
       In addition, section 1397B is modified so that rather than 
     requiring that ``substantially all'' tangible and intangible 
     property (and employee services) of an enterprise zone 
     business be used (and performed) within a designated zone or 
     community, a ``substantial portion'' of tangible and 
     intangible property (and employee services) of an enterprise 
     zone business would be required to be used (and performed) 
     within a designated zone or community. Moreover, the 
     conference agreement further amends the section 1397B rule 
     governing intangible assets so that a substantial portion of 
     an entity's intangible property must be used in the active 
     conduct of a qualified business within a zone or community, 
     but there is no need (as under present law) to determine 
     whether the use of such assets is ``exclusively related to'' 
     such business. However, the present-law rule of section 
     1397B(d)(4) continues to apply, such that a ``qualified 
     business'' would not include any trade or business consisting 
     predominantly of the development or holding or intangibles 
     for sale or license. The conference agreement also clarifies 
     that an enterprise zone business that leases to others 
     commercial property within a zone or community may rely on a 
     lessee's certification that the lessee is an enterprise zone 
     business. Finally, the conference agreement provides that the 
     rental to others of tangible

[[Page H6538]]

     personal property shall be treated as a qualified business if 
     and only if at least 50 percent of the rental of such 
     property is by enterprise zone businesses or by residents of 
     a zone or community (rather than the present-law requirement 
     that ``substantially all'' tangible personal property rentals 
     of an enterprise zone business satisfy this test).
       This modified ``enterprise zone business'' definition 
     applies to all previously designated empowerment zones and 
     enterprise communities, the two urban empowerment zones 
     designated under the conference agreement, as well as to the 
     20 additional empowerment zones authorized to be designated 
     pursuant to the conference agreement. 58
---------------------------------------------------------------------------
     \58\ In addition, the modifications to the enterprise zone 
     business definition will apply for purposes of defining a 
     ``D.C. Zone business'' under certain provisions of the 
     conference agreement that provide certain tax incentives for 
     the District of Columbia.
---------------------------------------------------------------------------
     Tax-exempt financing rules
       Exceptions to volume cap
       The conference agreement allows ``new empowerment zone 
     facility bonds'' to be issued for qualified enterprise zone 
     businesses in the 20 additional empowerment zones. These 
     bonds are not subject to the State private activity bond 
     volume caps or the special limits on issue size applicable to 
     qualified enterprise zone facility bonds under present law. 
     The maximum amount of these bonds that can be issued is 
     limited to $60 million per rural zone, $130 million per urban 
     zone with a population of less than 100,000, and $230 million 
     per urban zone with a population of 100,000 or more.
       Changes to certain rules applicable to both empowerment 
           zone facility bonds and qualified enterprise community 
           facility bonds
       Qualified enterprise zone businesses located in newly 
     designated empowerment zones, as well as those located in 
     previously designated empowerment zones and enterprise 
     communities, would be eligible for special tax-exempt bond 
     financing under present-law rules, subject to the 
     modifications described below (and the exception to the 
     volume cap described above for newly designated empowerment 
     zones).
       The conference agreement waives until the end of a 
     ``startup period'' the requirement that 95 percent or more of 
     the proceeds of bond issue be used by a qualified enterprise 
     zone business. With respect to each property, the startup 
     period ends at the beginning of the first taxable year 
     beginning more than two years after the later of (1) the date 
     of the bond issue financing such property, or (2) the date 
     the property was placed in service (but in no event more than 
     three years after the date of bond issuance). This waiver is 
     only available if, at the beginning of the startup period, 
     there is a reasonable expectation that the use by a qualified 
     enterprise zone business would be satisfied at the end of the 
     startup period and the business makes bona fide efforts to 
     satisfy the enterprise zone business definition.
       The conference agreement also waives the requirements of an 
     enterprise zone business (other than the requirement that at 
     least 35 percent of the business' employees be residents of 
     the zone or community) for all years after a prescribed 
     testing period equal to first three taxable years after the 
     startup period.
       Finally, the conference agreement relaxes the 
     rehabilitation requirement for financing existing property 
     with qualified enterprise zone facility bonds. In the case of 
     property which is substantially renovated by the taxpayer, 
     the property need not be acquired by the taxpayer after zone 
     or community designation or originally used by the taxpayer 
     within the zone if, during any 24-month period after zone or 
     community designation, the additions to the taxpayer's basis 
     in the property exceeded 15 percent of the taxpayer's basis 
     at the beginning of the period, or $5,000 (whichever is 
     greater).
     Effective date
       The two additional urban empowerment zones (within which 
     generally are available the same tax incentives as are 
     available in the empowerment zones designated pursuant to 
     OBRA 1993) must be designated within 180 days after 
     enactment, but the designation will not take effect before 
     January 1, 2000. The 20 additional empowerment zones (within 
     which the wage credit is not available) are to be designated 
     after enactment but prior to January 1, 1999. For purposes of 
     the additional section 179 expensing available within 
     empowerment zones, the modifications to the definition of 
     ``enterprise zone business'' are effective for taxable years 
     beginning on or after the date of enactment.
       The changes to the tax-exempt financing rules are effective 
     for qualified enterprise zone facility bonds and the new 
     empowerment zone facility bonds issued after the date of 
     enactment.
     28. Conducting of certain games of chance not treated as 
         unrelated trade or business (sec. 783 of the Senate 
         amendment)

                              Present Law

       Although generally exempt from Federal income tax, tax-
     exempt organizations are subject to the unrelated business 
     income tax (UBIT) on income derived from a trade or business 
     regularly carried on that is not substantially related to the 
     performance of the organization's tax-exempt functions (secs. 
     511-514).59 Certain income, however, is exempted 
     from the UBIT (such as interest, dividends, royalties, and 
     certain rents), unless derived from debt-financed property 
     (sec. 512(b)). Other exemptions from the UBIT are provided 
     for activities in which substantially all the work is 
     performed by volunteers and for income from the sale of 
     donated goods (sec. 513(a)).
---------------------------------------------------------------------------
     \59\ The UBIT applies not only to private, tax-exempt 
     entities but also to colleges and universities that are 
     agencies or instrumentalities of (or are owned or operated 
     by) a State or local government or Indian tribal government 
     (secs. 511(a)(2)(B) and 7871(a)(5)). In the case of such a 
     college or university, the ``substantially related'' test is 
     applied by determining whether the trade or business activity 
     at issue is substantially related to the exercise or 
     performance of any purpose or function described in section 
     501(c)(3) (see sec. 513(a)).
---------------------------------------------------------------------------
       A specific exemption from the UBIT is provided for certain 
     bingo games 60 conducted by tax-exempt 
     organizations, provided that the conducting of the bingo 
     games is not an activity ordinarily carried out on a 
     commercial basis and the conducting of which does not violate 
     any State or local law (sec. 513(f)).61 In 
     addition, a specific exemption from the UBIT is provided for 
     qualified public entertainment activities (meaning 
     entertainment or recreation activities of a kind 
     traditionally conducted at fairs or expositions promoting 
     agricultural and educational purposes) conducted by an 
     organization described in section 501(c)(3), (c)(4), or 
     (c)(5) which regularly conducts an agricultural and 
     educational fair or exposition as one of its substantial 
     exempt purposes (sec. 513(d)).62
---------------------------------------------------------------------------
     \60\ For purposes of this exemption, the term ``bingo game'' 
     is defined as any game of bingo of a type in which usually 
     (1) the wagers are placed, (2) the winners are determined, 
     and (3) the distribution of prizes or other property is made 
     in the presence of all persons placing wagers in such game 
     (sec. 513(f)(2)). See Julius M. Israel Lodge of B'nai B'rith 
     v. Comm'r, No. 96-60087 (Fifth Cir., October 25, 1996) 
     (holding that ``instant bingo'' game did not fall within sec. 
     513(f) exemption, because each player's participation in the 
     game is wholly independent of any other's and requires only 
     that the player remove a pull-tab to determine whether he or 
     she has a winning card).
     \61\ In 1978, at the same time that Congress enacted section 
     513(f), section 527 was modified to provide that bingo income 
     of political organizations is to be treated as ``exempt 
     function income'' and, thus, not subject to Federal income 
     tax if such income is used for certain political purposes 
     (sec. 527(c)(3)(D)).
     \62\ In addition, section 311 of the Deficit Reduction Act of 
     1984 (as modified by the Tax Reform Act of 1986) provides a 
     special, off-Code exemption from the UBIT for games of chance 
     conducted by nonprofit organizations in the State of North 
     Dakota.
---------------------------------------------------------------------------
       In South End Italian Independent Club, Inc. v. 
     Commissioner, 87 T.C. 168 (1986), acq. 1987-2 C.B. 1, the Tax 
     Court held that gambling profits of a social club described 
     in section 501(c)(7) that were required by State law to be 
     used for charitable purposes were fully deductible under 
     section 162 in computing the UBIT liability of the social 
     club. The effect of this decision was to exempt gambling 
     income of that social club from UBIT. The IRS has indicated 
     that, until further guidance is available with respect to 
     this issue, the issue of the deductibility of amounts 
     required under State law to be used for charitable or other 
     so-called ``lawful'' purposes should be resolved consistent 
     with the South End case, regardless of whether the gaming 
     proceeds are donated to other charitable organizations or 
     spent internally on the organization's own charitable 
     activities.63
---------------------------------------------------------------------------
     \63\ See IRS, Exempt Organizations: Technical Instruction 
     Program for FY 1996 (Training 4277-048 (7-95)) at page 96.
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that the UBIT will not apply 
     to income from a ``qualified game of chance,'' meaning any 
     game of chance (other than a bingo game exempt under present-
     law sec. 513(f)) conducted by a tax-exempt organization if 
     (1) such organization is licensed pursuant to State law to 
     conduct such game, (2) only organizations which are organized 
     as nonprofit corporations or are exempt from Federal income 
     tax under section 501(a) may be so licensed to conduct such 
     game within the State, and (3) the conduct of such game does 
     not violate State or local law.
       No inference is intended regarding the treatment for 
     purposes of the UBIT of games of chance conducted by tax-
     exempt organizations prior to the date of enactment.
       Effective date.--The provision is effective on the date of 
     enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     29. Exclusion from income of certain severance payments (sec. 
         788(a) of the Senate amendment)

                              Present Law

       Severance payments are includible in income.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, certain severance payments are 
     excludable from income. The provision applies to payments of 
     up to $2,000 received by an individual who was separated from 
     service in connection with a reduction in the work force of 
     the employer and who does not attain employment within 6 
     months of the separation from service at a compensation level 
     that is at least 95 percent of the compensation the 
     individual was receiving before the separation from

[[Page H6539]]

     service. The exclusion does not apply if the total separation 
     payments received by the individual exceed $125,000.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1997, and before July 1, 2002.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     30. Special rule for thrift institutions that became large 
         banks (sec. 790 of the Senate amendment)

                              Present Law

       A provision of the Small Business Job Protection Act of 
     1996 repealed the percentage-of-taxable-income method of 
     determining bad debt deductions of thrift institutions for 
     taxable years beginning after 1995. A large bank (i.e., one 
     with assets in excess of $500 million as of the end of its 
     1995 taxable year) that was required to change its method of 
     accounting by reason of the provision generally is required 
     to recapture its post-1987 bad debt reserve over a 6-year 
     period. The amount of recapture for a small bank generally is 
     reduced to the extent the bank's reserve for bad debts 
     determined under the experience method applicable to such 
     institutions exceeded its pre-1988 reserve.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment allows a thrift institution that first 
     became a large bank in its first taxable year beginning after 
     1994 to be treated as a small bank for purposes of the Small 
     Business Job Protection Act provision. In addition, such 
     institutions may apply the required change in accounting 
     method on a cut-off basis.
       Effective date.--The provision is effective as if included 
     in the Small Business Job Protection Act of 1996.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     31. Income averaging for farmers (sec. 792 of the Senate 
         amendment)

                              Present Law

       The ability for an individual taxpayer to reduce his or her 
     tax liability by averaging his or her income over a number of 
     years was repealed by the Tax Reform Act of 1986.

                               House Bill

       No provision.

                            Senate Amendment

       An individual taxpayer is allowed to elect to compute his 
     or her current year tax liability by averaging, over the 
     prior three-year period, all or a portion of his or her 
     taxable income from the trade of business of farming.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment and before 
     January 1, 2001.

                          Conference Agreement

       The conference agreement includes the Senate amendment with 
     modifications. The conference agreement clarifies that the 
     provision operates such that an electing eligible taxpayer 
     (1) designates all or a portion of his or her taxable income 
     from the trade or business of farming from the current year 
     as ``elected farm income;'' (2) allocates one-third of such 
     ``elected farm income'' to each of the prior three taxable 
     years; and (3) determines his or her current year section 1 
     tax liability by determining the sum of (a) his or her 
     current year section 1 liability without the elected farm 
     income allocated to the three prior taxable years plus (b) 
     the increases in the section 1 tax for each of the three 
     prior taxable years by taking into account the allocable 
     share of the elected farm income for such years. If a 
     taxpayer elects the operation the provision for a taxable 
     year, the allocation of elected farm income among taxable 
     years pursuant to the election shall apply for purposes of 
     any election in a subsequent taxable year.
       The provision does not apply for employment tax purposes, 
     or to an estate or a trust. Further, the provision does not 
     apply for purposes of the alternative minimum tax under 
     section 55. Finally, the provision does not require the 
     recalculation of the tax liability of any other taxpayer, 
     including a minor child required to use the tax rates of his 
     or her parents under section 1(g).
       The election shall be made in the manner prescribed by the 
     Secretary of the Treasury and, except as provided by the 
     Secretary, shall be irrevocable. In addition, the Secretary 
     of the Treasury shall prescribe such regulations as are 
     necessary to carry out the purposes of the provision, 
     including regulations regarding the order and manner in which 
     items of income, gain, deduction, loss, and credits (and any 
     limitations thereon) are to be taken into account for 
     purposes of the provision and the application of the 
     provision to any short taxable year. It is expected that such 
     regulations will deny the multiple application of items that 
     carryover from one taxable year to the next (e.g., net 
     operating loss or tax credit carryovers).
       The provision applies to taxable years beginning after 
     December 31, 1997, and before January 1, 2001.
     32. Intercity Passenger Rail Fund; Elective carryback of 
         existing net operating losses of the National Railroad 
         Passenger Corporation (Amtrak) (sec. 702 of the Senate 
         amendment)

                              Present Law

       In addition to current transportation-related trust fund 
     fuels excise taxes, there is a permanent 4.3-cents-per-gallon 
     General Fund excise tax on transportation fuels.
       Generally, net operating losses may be carried back to the 
     three taxable years preceding the year of loss (10 taxable 
     years preceding the year of loss in certain circumstances).

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment dedicates net revenues from 0.5 cent 
     per gallon of the 4.3-cents-per gallon transportation motor 
     fuels excise tax to a new Intercity Passenger Rail Fund 
     (``Rail Fund'') to finance capital improvements of National 
     Railroad Passenger Corporation (Amtrak) and certain 
     transportation activities in States not receiving Amtrak 
     service. Dedicated revenues are those from fuels taxes 
     imposed from October 1, 1997 through April 15, 2001.
       The Senate amendment also expands the purposes for which 
     non-Amtrak States may use Rail Fund monies to include: (1) 
     local transit needs such as transportation for the elderly 
     and handicapped; (2) rail/highway crossing safety projects 
     (generally financed through the Highway Trust Fund); (3) 
     certain capital expenditures of smaller freight railroads; 
     and (4) certain rural airport capital expenditures.
       Amounts received from the Rail Fund are not included in 
     income. No tax deduction or addition to basis is allowed by 
     the recipient with respect to expenditure of the amount.
       Rail Fund spending is subject to appropriation, and is 
     provided for under provisions of the Fiscal Year 1998 Budget 
     Resolution.
       Effective date.--The provision is effective on the date of 
     enactment.

                          Conference Agreement

       The conference agreement follows the approach of the Senate 
     amendment with modifications. The conference agreement 
     provides elective procedures that allows Amtrak to consider 
     the tax attributes of its predecessors, those railroads that 
     were relieved of their responsibility to provide intercity 
     rail passenger service as a result of the Rail Passenger 
     Service Act of 1970, in the use of its net operating losses. 
     The benefit allowable under these procedures is limited to 
     the least of: (1) 35 percent of Amtrak's existing qualified 
     carryovers, (2) the net tax liability for the carryback 
     period, or (3) $2,323,000,000. One half of the amount so 
     calculated will be treated as a payment of the tax imposed by 
     chapter 1 of the Internal Revenue Code of 1986 for each of 
     the first two taxable years ending after the date of 
     enactment.
       The existing qualified carryovers are the net operating 
     loss carryovers that are available under section 172(b) in 
     Amtrak's first taxable year ending after September 30, 1997. 
     The net tax liability for the carryback period is the 
     aggregate of the net tax liability of Amtrak's railroad 
     predecessors for all taxable years beginning before January 
     1, 1971, for which there is a net Federal tax liability. 
     Amtrak's railroad predecessors are those railroads that were 
     relieved of their responsibility to provide intercity rail 
     passenger service as a result of the Rail Passenger Service 
     Act of 1970, and their predecessors. In the case of a 
     railroad predecessor who joined in the filing of a 
     consolidated tax return, the net tax liability of the 
     predecessor will be the net tax liability of the consolidated 
     group.
       The net operating losses of Amtrak are required to be 
     reduced by an amount equal to the amount obtained by Amtrak 
     under this provision, divided by 0.35. The Secretary of the 
     Treasury is to adjust, as he deems appropriate, the tax 
     account of each predecessor railroad for the carryback period 
     to reflect the utilization of the net operating losses. The 
     amount of the adjustment is equal to the amount of the 
     benefit and is to be taken into consideration on the tax 
     accounts of the predecessor railroads on a first-in, first-
     out basis, starting with balances for the earliest year for 
     which any predecessor railroad has a net tax liability. No 
     additional refund to any taxpayer other than Amtrak is to be 
     allowed as a result of these adjustments.
       The availability of the elective procedures is conditioned 
     on Amtrak (1) agreeing to make payments of one percent (1%) 
     of the amount it receives to each of the non-Amtrak States to 
     offset certain transportation related expenditures and (2) 
     using the balance for certain qualified expenses. Non-Amtrak 
     States are those States that are not receiving Amtrak service 
     at any time during the period beginning on the date of 
     enactment and ending on the date of payment.
       No deduction is allowed with respect to any qualified 
     expense whose payment is attributable to the proceeds made 
     available as a result of this provision. The basis of any 
     property must be reduced by the portion of its cost that is 
     attributable to such proceeds. An item of cost or expense is 
     attributable to such proceeds if it is (1) paid from the 
     proceeds of the refund or (2) to the extent the principal and 
     interest of any borrowings are paid from the proceeds of the 
     refund, from the proceeds of such borrowings.
       Amtrak's earnings and profits will be increased by the 
     amount of the refund. However, the conferees expect that this 
     amount will not be included in adjusted current earnings for 
     alternative minimum tax purposes, consistent with Treas. Reg. 
     sec. 1.56(g)-1(c)(4) (ii).
       Effective date.--The provision is effective on the date of 
     enactment. However, no refund shall be made as a result of 
     this provision earlier than the date of enactment of Federal 
     legislation which authorizes reforms

[[Page H6540]]

     of Amtrak. No interest shall accrue with respect to the 
     payment of any refund until 45 days after the later of (1) 
     the enactment of such reform legislation, or (2) the filing 
     by Amtrak of a Federal income tax return which includes the 
     election to use the procedures described in this provision.

                     X. REVENUE-INCREASE PROVISIONS

                         A. Financial Products

     1. Require recognition of gain on certain appreciated 
         financial positions in personal property (sec. 1001(a) of 
         the House bill and sec. 801(a) of the Senate amendment)

                              Present Law

       In general, gain or loss is taken into account for tax 
     purposes when realized. Gain or loss generally is realized 
     with respect to a capital asset at the time the asset is 
     sold, exchanged, or otherwise disposed of. Special rules 
     under the Code can defer or accelerate recognition in certain 
     circumstances. Transactions designed to reduce or eliminate 
     risk of loss, such as a ``short sale against the box,'' or an 
     ``equity swap,'' generally do not cause realization.

                               House Bill

       The House bill requires recognition of gain (but not loss) 
     upon a constructive sale of any ``appreciated financial 
     position'' in stock, a partnership interest or debt other 
     than certain ``straight'' debt instruments (as defined in 
     sec. 1361(c)(5)(B)). A constructive sale occurs when the 
     taxpayer enters into one of the following transactions with 
     respect to the same or substantially identical property: (1) 
     a short sale, (2) an offsetting notional principal contract, 
     or (3) a futures or forward contact. For a taxpayer who has 
     one of these transactions, a constructive sale occurs when it 
     acquires the related long position. Other transactions will 
     be treated as constructive sales to the extent provided in 
     Treasury regulations.
       The House bill provides an exception for transactions that 
     are closed before the end of the 30th day after the close of 
     the taxable year. This exception does not apply to 
     transactions closed during the 90-day period ending on such 
     day unless, for the 60 days after closing, (1) the taxpayer 
     holds the appreciated financial position and (2) at no time 
     is the taxpayer's risk of loss reduced by holding certain 
     other positions.
       Effective date.--The constructive sale provision is 
     effective for constructive sales entered into after June 8, 
     1997. In the case of a decedent dying after June 8, 1997, if 
     (1) a constructive sale occurred before such date, (2) the 
     transaction remains open for not less than two years, and (3) 
     the transaction is not closed in a taxable transaction within 
     30 days after the date of enactment, all positions comprising 
     the constructive sale will be treated as property 
     constituting rights to receive income in respect of a 
     decedent under section 691. A special rule is also provided 
     for transactions entered into before June 8, 1997, that in 
     some circumstances prevents such transactions from resulting 
     in constructive sales after the effective date.

                            Senate Amendment

       The Senate amendment is the same as the House bill with two 
     modifications. Under the Senate amendment, the types of debt 
     instruments excluded from the definition of ``appreciated 
     financial position'' are instruments that are not convertible 
     and the interest on which is either fixed, payable at certain 
     variable rates or based on certain interest payments on a 
     pool of mortgages. In addition, the Senate amendment provides 
     an exception for transactions closed during the 90-day period 
     ending on the 30th day after the close of the taxable year 
     that are reestablished during such period, so long as the 
     normal requirements for positions closed within such 90-day 
     period are met by the reestablished position.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     the following modifications.
       A trust instrument that is actively traded is generally 
     treated as stock for purposes of determining whether the 
     instrument is an appreciated financial position. The 
     conference agreement provides that a trust instrument will 
     not be treated as stock if substantially all (by value) of 
     the property held by the trust is debt that qualifies for the 
     exception to the definition of appreciated financial position 
     for certain debt instruments. In addition, the conference 
     agreement clarifies that only debt instruments that entitle 
     the holder to receive an unconditional principal amount 
     qualify for the exception.
       The conference agreement modifies the exception to 
     constructive sale treatment for transactions that are closed 
     in the 90-day period ending with the 30th day after the close 
     of the taxable year by applying similar requirements to all 
     transactions closed prior to such day. Under the conference 
     agreement, the exception is available only if, for the 60 
     days after closing a transaction, (1) the taxpayer holds the 
     appreciated financial position and (2) at no time is the 
     taxpayer's risk of loss reduced by holding certain other 
     positions. If a transaction that is closed is reestablished 
     in a substantially similar position, the exception applies 
     provided that the reestablished position is closed prior to 
     the end of the 30th day after the close of the taxable year 
     and the above two requirements are met after such closing.
       The conferees also wish to clarify some aspects of the 
     application of the provision. The conferees do not intend 
     that an agreement that is not a contract for purposes of 
     applicable contract law will be treated as a forward 
     contract. Thus, contingencies to which the contract is 
     subject will generally be taken into account.
       The conferees intend that the constructive sale provision 
     generally will apply to transactions that are identified 
     hedging or straddle transactions under other Code provisions 
     (secs. 1092(a)(2), (b)(2) and (e), 1221 and 1256(e)). Where 
     either position in such an identified transaction is an 
     appreciated financial position and a constructive sale of 
     such position results from the other position, the conferees 
     intend that the constructive sale will be treated as having 
     occurred immediately before the identified transaction. The 
     constructive sale will not, however, prevent qualification of 
     the transaction as an identified hedging or straddle 
     transaction. Where, after the establishment of such an 
     identified transaction, there is a constructive sale of 
     either position in the transaction, gain will generally be 
     recognized and accounted for under the relevant hedging or 
     straddle provision. However, the conferees intend that 
     future Treasury regulations may except certain 
     transactions from the constructive sale provision where 
     the gain recognized would be deferred under an identified 
     hedging or straddle provision (e.g. Treas. reg. sec. 
     1.446-4(b)).
       The conferees wish to clarify certain other aspects of the 
     Treasury's regulatory authority under the provision. The 
     conferees urge that the Treasury issue prompt guidance, 
     including safe harbors, with respect to common transactions 
     entered into by taxpayers.
       The legislative history to both the House bill and the 
     Senate amendment describe ``collar'' transactions and 
     recommend that Treasury regulations provide standards for 
     determining which collar transactions result in constructive 
     sales. The conferees expect that these Treasury regulations 
     with respect to collars will be applied prospectively, except 
     in cases to prevent abuse.
       The legislative history states that, under the regulations 
     to be issued by the Treasury, either a taxpayer's appreciated 
     financial position or an offsetting transaction may in 
     certain circumstances be considered on a disaggregated basis 
     for purposes of the constructive sale determination. The 
     conferees wish to clarify that this authority is intended to 
     be used only where such disaggregated treatment reflects the 
     economic reality of the transaction and is administratively 
     feasible. For example, one transaction for which 
     disaggregated treatment might be appropriate is an equity 
     swap that references a small group of stocks, where the 
     transaction is entered into by a taxpayer owning only one of 
     the stocks. 1
---------------------------------------------------------------------------
     \1\ A standard similar to that of Treas. reg. sec. 1.246-5 
     would be appropriate for determining whether the relationship 
     between the stock held and the group of stocks shorted is 
     sufficient for constructive sale purposes.
---------------------------------------------------------------------------
       Effective date.--The conference agreement modifies the 
     special rule for decedents dying after June 8, 1997, to 
     require that a position be open at some time during the 
     three-year period ending on the decedent's death. Thus, no 
     amount will be treated as income in respect of a decedent 
     under the rule unless this requirement is met, as well as the 
     requirements that the transaction remains open for not less 
     than two years and that the transaction is not closed within 
     30 days after the date of enactment. Finally, the conference 
     agreement modifies the special rule to provide that gain with 
     respect to a position that accrues after the transaction is 
     closed will not be included in income in respect of a 
     decedent.
     2. Election of mark-to-market for securities traders and for 
         traders and dealers in commodities (sec. 1001(b) of the 
         House bill and sec. 801(b) of the Senate amendment)

                              Present Law

       A dealer in securities must compute its income pursuant to 
     the mark-to-market method of accounting. Mark-to-market 
     treatment does not apply to traders in securities or dealers 
     in other property.

                               House Bill

       The House bill allows securities traders and commodities 
     traders and dealers to elect mark-to-market accounting 
     similar to that currently required for securities dealers. 
     All securities held by an electing taxpayer in connection 
     with a trade or business as a securities trader, and all 
     commodities held by an electing taxpayer in connection with a 
     trade or business as a commodities dealer or trader, are 
     subject to mark-to-market treatment. Property not held in 
     connection with its trade or business is not subject to the 
     election provided that it is identified by the taxpayer under 
     rules similar to the present law rules for securities 
     dealers. Gain or loss recognized by an electing taxpayer 
     under the provision is ordinary gain or loss.
       Under the House bill, commodities for purposes of the 
     provision would include only commodities of a kind 
     customarily dealt in on an organized commodities exchange.
       Effective date.--The election applies to taxable years 
     ending after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and Senate 
     amendment with the following modifications.

[[Page H6541]]

       The conference agreement clarifies that if a securities 
     trader elects application of the provision, all securities 
     held in connection with its trade or business will generally 
     be subject to mark-to-market accounting. An exception is 
     provided for securities that have no connection with 
     activities as a trader and that are identified on the day 
     acquired (or at such other times as provided in Treasury 
     regulations). The conferees do not intend that an electing 
     taxpayer can mark-to-market loans made to customers or 
     receivables or debt instruments acquired from customers that 
     are not received or acquired in connection with a trade or 
     business as a securities trader. Because the conferees are 
     concerned about issues of taxpayer selectivity, the conferees 
     intend that an electing taxpayer must be able to demonstrate 
     by clear and convincing evidence that a security bears no 
     relation to activities as a trader in order to be identified 
     as not subject to the mark-to-market regime. Any security 
     that hedges another security that is held in connection with 
     the taxpayer's trade or business as a trader will be treated 
     as so held. Any position that is properly subject to the 
     mark-to-market regime will not be taken into account for 
     purposes of the constructive sale rules of section 1259. 
     Similar rules apply to commodities traders.
       The conference agreement expands the definition of a 
     commodity for purposes of the provision to include any 
     commodity that is actively traded (within the meaning of 
     section 1092(d)(1)), any option, forward contract, futures 
     contract, short position, notional principal contract or 
     derivative instrument that references such a commodity, 
     and any other evidence of an interest in such a commodity. 
     Also included are positions that hedge the listed items 
     and that are identified by the taxpayer under rules 
     similar to the rules for securities.
       The conferees anticipate that Treasury regulations applying 
     section 475(b)(4), which prevents a dealer from treating 
     certain notional principal contracts and other derivative 
     financial instruments as held for investment, will in the 
     case of a commodities trader or dealer apply only to 
     contracts and instruments referenced to commodities.
       Effective date.--The conferees wish to clarify that the 
     special rule with respect to the section 481 adjustment 
     applies only to taxpayers making the election for the taxable 
     year which includes the date of enactment. Any elections made 
     thereafter will be governed by rules and procedures 
     established by the Secretary of the Treasury.
     3. Limitation on exception for investment companies under 
         section 351 (sec. 1002 of the House bill and sec. 802 of 
         the Senate amendment)

                              Present Law

       Gain or loss is recognized upon a contribution by a 
     shareholder to a corporation that is an investment company. 
     Gain, but not loss, is recognized upon a contribution by a 
     partner to a partnership that would be treated as an 
     investment company. Under Treasury regulations, a 
     contribution of property is treated as made to an investment 
     company only if (1) the contribution results, directly or 
     indirectly, in a diversification of the transferor's interest 
     and (2) the transferee is (a) a regulated investment company 
     (``RIC''), (b) a real estate investment trust (``REIT'') or 
     (c) a corporation more than 80 percent of the assets of which 
     by value (excluding cash and non- convertible debt 
     instruments) are readily marketable stocks or securities or 
     interests in RICs or REITs that are held for investment

                               House Bill

       The House bill modifies the definition of an investment 
     company by requiring that the following assets also be taken 
     into account for purposes of the 80-percent test: money, 
     financial instruments, foreign currency, and interests in 
     RICs, REITs, common trust funds, publicly-traded partnerships 
     and precious metals. The House bill provides an exception for 
     precious metals that are produced, used or held in an active 
     trade or business by a partnership. The House bill also 
     provides ``look through'' rules for certain entities that 
     hold the above-listed items.
       Effective date.--The provision is effective for transfers 
     after June 8, 1997, in taxable years ending after such date, 
     with an exception for transfers pursuant to certain binding 
     written contracts in effect on that date.

                            Senate Amendment

       The Senate amendment follows the House bill, but clarifies 
     that equity interests in non-corporate entities will be taken 
     into account for purposes of the investment company 
     determination only if (1) the entity is a REIT, publicly-
     traded partnership or common trust fund, (2) the interest is 
     convertible into or exchangeable for one of the other listed 
     assets or (3) the entity holds listed assets and is subject 
     to the ``look-through'' rules. The Senate amendment also 
     clarifies that the exception for precious metals used or held 
     in an active trade or business applies to both corporations 
     and partnerships. The Senate amendment deletes the exception 
     for precious metals that are produced by a partnership. The 
     Senate amendment also provides the Treasury with regulatory 
     authority to remove items from the list in appropriate 
     circumstances.

                          Conference Agreement

       The conference agreement is the same as the Senate 
     amendment.
     4. Disallowance of interest on indebtedness allocable to tax-
         exempt obligations (sec. 1003 of the House bill)

                              Present Law

     In general
       Present law disallows a deduction for interest on 
     indebtedness incurred or continued to purchase or carry 
     obligations the interest on which is not subject to tax (tax-
     exempt obligations) (sec. 265). This rule applies to tax-
     exempt obligations held by individual and corporate 
     taxpayers. The rule also applies to certain cases in which a 
     taxpayer incurs or continues indebtedness and a related 
     person acquires or holds tax-exempt obligations. 2
---------------------------------------------------------------------------
     \2\ Code section 7701(f) (as enacted in the Deficit Reduction 
     Act of 1984 (sec. 53(c) of P.L. 98-369)) provides that the 
     Treasury Secretary shall prescribe such regulations as may be 
     necessary or appropriate to prevent the avoidance of any 
     income tax rules which deal with linking of borrowing to 
     investment or diminish risk through the use of related 
     persons, pass-through entities, or other intermediaries.
---------------------------------------------------------------------------
     Application to non-financial corporations
       General guidelines.--In Rev. Proc. 72-18, 1972-1 C.B. 740, 
     the IRS provided guidelines for application of the 
     disallowance provision to individuals, dealers in tax-exempt 
     obligations, other business enterprises, and banks in certain 
     situations. Under Rev. Proc. 72-18, a deduction is disallowed 
     only when indebtedness is incurred or continued for the 
     purpose of purchasing or carrying tax-exempt obligations.
       This purpose may be established either by direct or 
     circumstantial evidence. Direct evidence of a purpose to 
     purchase tax-exempt obligations exists when the proceeds of 
     indebtedness are directly traceable to the purchase of tax-
     exempt obligations or when such obligations are used as 
     collateral for indebtedness. In the absence of direct 
     evidence, a deduction is disallowed only if the totality of 
     facts and circumstances establishes a sufficiently direct 
     relationship between the borrowing and the investment in tax-
     exempt obligations.
       Two-percent de minimis exception.--In the case of an 
     individual, interest on indebtedness generally is not 
     disallowed if during the taxable year the average adjusted 
     basis of the tax-exempt obligations does not exceed 2 percent 
     of the average adjusted basis of the individual's portfolio 
     investments and trade or business assets. In the case of a 
     corporation other than a financial institution or a dealer in 
     tax-exempt obligations, interest on indebtedness generally is 
     not disallowed if during the taxable year the average 
     adjusted basis of the tax-exempt obligations does not exceed 
     2 percent of the average adjusted basis of all assets held in 
     the active conduct of the trade or business. These safe 
     harbors are inapplicable to financial institutions and 
     dealers in tax-exempt obligations.
       Interest on installment sales to State and local 
     governments.--If a taxpayer sells property to a State or 
     local government in exchange for an installment obligation, 
     interest on the obligation may be exempt from tax. Present 
     law has been interpreted to not disallow interest on a 
     taxpayer's indebtedness if the taxpayer acquires nonsalable 
     tax-exempt obligations in the ordinary course of business in 
     payment for services performed for, or goods supplied to, 
     State or local governments. 3
---------------------------------------------------------------------------
     \3\ R.B. George Machinery Co., 26 B.T.A. 594 (1932) acq. C.B. 
     XI-2, 4; Rev. Proc. 72-18, as modified by Rev. Proc. 87-53, 
     1987-2 C.B. 669.
---------------------------------------------------------------------------
     Application to financial corporations and dealers in tax-
         exempt obligations
       In the case of a financial institution, the allocation of 
     the interest expense of the financial institution (which is 
     not otherwise allocable to tax-exempt obligations) is based 
     on the ratio of the average adjusted basis of the tax-exempt 
     obligations acquired after August 7, 1987, to the average 
     adjusted basis of all assets of the taxpayer (sec. 265). In 
     the case of an obligation of an issuer which reasonably 
     anticipates to issue not more than $10 million of tax-exempt 
     obligations (other than certain private activity bonds) 
     within a calendar year (the ``small issuer exception''), only 
     20 percent of the interest allocable to such tax-exempt 
     obligations is disallowed (sec. 291(a)(3)). A similar pro 
     rata rule applies to dealers in tax-exempt obligations, but 
     there is no small issuer exception, and the 20-percent 
     disallowance rule does not apply (Rev. Proc. 72-18).
     Treatment of insurance companies
       Present law provides that a life insurance company's 
     deduction for additions to reserves is reduced by a portion 
     of the company's income that is not subject to tax 
     (generally, tax-exempt interest and deductible intercorporate 
     dividends) (secs. 807 and 812). The portion by which the life 
     insurance company's reserve deduction is reduced is related 
     to its earnings rate. Similarly, in the case of property and 
     casualty insurance companies, the deduction for losses 
     incurred is reduced by a percentage (15 percent) of (1) the 
     insurer's tax-exempt interest and (2) the deductible portion 
     of dividends received (with special rules for dividends from 
     affiliates) (sec. 832(b)(5)(B)). If the amount of this 
     reduction exceeds the amount otherwise deductible as losses 
     incurred, the excess is includible in the property and 
     casualty insurer's income.

                               House Bill

     General rule
       The House bill extends to all corporations (other than 
     insurance companies) the rule that applies to financial 
     institutions that disallows interest deductions of a taxpayer

[[Page H6542]]

     (that are not otherwise disallowed as allocable under present 
     law to tax-exempt obligations) in the same proportion as the 
     average basis of its tax-exempt obligations bears to the 
     average basis of all of the taxpayer's assets. However, the 
     House bill does not extend the small-issuer exception to 
     taxpayers which are not financial institutions.
     Exceptions
       The House bill does not apply to nonsalable tax-exempt debt 
     acquired by a corporation in the ordinary course of business 
     in payment for goods or services sold to a State or local 
     government. In addition, the House bill provides a de minimis 
     exception under which the disallowance rule does not apply to 
     corporations, other than financial institutions and dealers 
     in tax-exempt obligations, if the average adjusted basis of 
     tax-exempt obligations acquired after August 7, 1986, is less 
     than the lesser of $1 million or 2 percent of the basis of 
     all of the corporation's assets. Under the House bill, 
     insurance companies are not subject to the pro rata rule but 
     would continue to be subject to present law.
     Holdings by related persons
       The House bill applies the interest disallowance provision 
     to all related persons that are members of the same 
     consolidated group as if all the members of the group were a 
     single taxpayer. The consolidated group rule is to be applied 
     without regard to any member that is an insurance company. In 
     the case of affiliated corporations that are not members of 
     the same consolidated group, tracing rules apply as if all of 
     the related persons are a single entity.
       In the case of a corporation (other than a financial 
     institution) that is a partner in a partnership, the 
     corporate partners are treated as holding their allocable 
     shares of all of the assets of the partnership.
       The provision is not intended to affect the application of 
     section 265 to related parties under present law.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment with respect to 
     obligations acquired after June 8, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the provision of 
     the House bill.
     5. Gains and losses from certain terminations with respect to 
         property (sec. 1004 of the House bill and sec. 803 of the 
         Senate amendment)

                              Present Law

       Extinguishment treated as sale or exchange.--The definition 
     of capital gains and losses in section 1222 requires that 
     there be a ``sale or exchange'' of a capital asset. Court 
     decisions interpreted this requirement to mean that when a 
     disposition is not a sale or exchange of a capital asset, for 
     example, a lapse, cancellation, or abandonment, the 
     disposition produces ordinary income or loss,4 
     Under a special provision, gains and losses attributable to 
     the cancellation, lapse, expiration, or other termination of 
     a right or obligation with respect to certain personal 
     property are treated as gains or losses from the sale of a 
     capital asset (sec. 1234A). Personal property subject to this 
     rule is (1) personal property (other than stock that is not 
     part of straddle or of a corporation that is not formed or 
     availed of to take positions which offset positions in 
     personal property of its shareholders) of a type which is 
     actively traded and which is, or would be on acquisition, a 
     capital asset in the hands of the taxpayer and (2) a 
     ``section 1256 contract'' 5 which is capital asset 
     in the hands of the taxpayer. Section 1234A does not apply to 
     the retirement of a debt instrument.
---------------------------------------------------------------------------
     \4\ See Fairbanks v. U.S., 306 U.S. 436 (1039); Comm'r v. 
     Pittston Co., 252 F. 2d 344 (2nd Cir.), cert. denied, 357 
     U.S. 919 (1958).
     \5\ A ``section 1256 contract'' means (1) any regulated 
     futures contract, (2) foreign currency contract, (3) 
     nonequity option, or (4) dealer equity option.
---------------------------------------------------------------------------
       Character of gain on retirement of debt obligations.--
     Amounts received on the retirement of any debt instrument are 
     treated as amounts received in exchange therefor (sec. 
     1271(a)(1)). In addition, gain on the sale or exchange of a 
     debt instrument with OID 6 generally is treated as 
     ordinary income to the extent of its OID if there was an 
     intention at the time of its issuance to call the debt 
     instrument before maturity (sec. 1271(a)(2)). These rules do 
     not apply to (1) debt issued by a natural person or (2) debt 
     issued before July 2, 1982, by a noncorporate or 
     nongovernment issuer.
---------------------------------------------------------------------------
     \6\ The issuer of a debt instrument with OID generally 
     accrues and deducts the discount, as interest, over the life 
     of the obligation even though the amount of such interest is 
     not paid until the debt matures. The holder of such a debt 
     instrument also generally includes the OID in income as it 
     accrues as interest. The mandatory inclusion of OID in income 
     does not apply, among other exceptions, to debt obligations 
     issued by natural persons before March 2, 1984, and loans of 
     less than $10,000 between natural persons if such loan is not 
     made in the ordinary course of business of the lender (secs. 
     1272(a)(2) (D) and (E)).
---------------------------------------------------------------------------

                               House Bill

       Extension of relinquishment rule to all types of 
     property.--The House bill extends the rule which treats gain 
     or loss from the cancellation, lapse, expiration, or other 
     termination of a right or obligation which is (or on 
     acquisition would be) a capital asset in the hands of the 
     taxpayer to all types of property.
       Character of gain on retirement of debt obligations issued 
     by natural persons.--The House bill repeals the provision 
     that exempts debt obligations issued by natural persons from 
     the rule which treats gain realized on retirement of the debt 
     as exchanges. Thus, under the House bill, gain or loss on the 
     retirement of such debt will be capital gain or loss if the 
     debt is a capital asset. The House bill retains the present-
     law exceptions for debt issued before July 2, 1982, by 
     noncorporations or nongovernments.
       Effective date.--The extension of the extinguishment rule 
     applies to property acquired or positions established 30 days 
     after the date of enactment. The repeal of the exception to 
     the character of gain on retirement of debt instruments 
     issued by natural persons or obligations issued before July 
     2, 1982, applies to debt issued or purchased after June 8, 
     1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     for the effective date.
       Effective date.--The extension of the extinguishment rule 
     applies to property acquired or positions established 30 days 
     after the date of enactment. The repeal of the exception to 
     the character of gain on retirement of debt instruments 
     issued by natural persons or obligations issued before July 
     2, 1982, applies to debt issued or purchased (within the 
     meaning of section 1272(d)(1)) after June 8, 1997. Thus, the 
     repeal of the exception to the character of gain on 
     retirement of debt instruments issued by natural persons or 
     obligations issued before July 2, 1982, does not apply to 
     transfers after June 8, 1997, where the basis of the debt 
     instrument to the transferee is determined in whole or in 
     part by reference to the adjusted basis of that instrument in 
     the hands of the transferor (i.e., the basis to the 
     transferee is a carryover basis). However, the repeal of the 
     except to the character of gain on retirement of debt 
     instruments issued by natural person applies to any debt 
     instruments issued after June 8, 1997.

                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment.
       In addition, the conference agreement provides that if a 
     taxpayer enters into a short sale of property and such 
     property becomes substantially worthless, the taxpayer shall 
     recognize gain as if the short sale were closed when the 
     property becomes substantially worthless. The conference 
     agreement also extends the statute of limitations with 
     respect to such gain recognition to the earlier of: (1) three 
     years after the Treasury Secretary is notified that the 
     position has become substantially worthless; or (2) six years 
     after the date of filing of the income tax return for the 
     taxable year during which the position became substantially 
     worthless. To the extent provided in Treasury regulations, 
     similar gain recognition rules shall apply to any option with 
     respect to property, any offsetting notional principal 
     contract with respect to property, any futures or forward 
     contract to deliver property, or with respect to any similar 
     transaction or position that becomes substantially worthless. 
     The provision applies to property that becomes substantially 
     worthless after the date of enactment of the Act. No 
     inference is intended as to the proper treatment of these or 
     similar transactions or positions under present law.
     6. Determination of original issue discount where pooled debt 
         obligations subject to acceleration (sec. 1005 of the 
         House bill)

                              Present Law

     Inclusion of interest income, in general
       A taxpayer generally must include in gross income the 
     amount of interest received or accrued within the taxable 
     year on indebtedness held by the taxpayer. If the principal 
     amount of an indebtedness may be paid without interest by a 
     specified date (as is the case with certain credit card 
     balances), under present law, the holder of the indebtedness 
     is not required to accrue interest until after the specified 
     date has passed.
     Original issue discount
       The holder of a debt instrument with original issue 
     discount (``OID'') generally accrues and incudes in gross 
     income, as interest, the OID over the life of the obligation, 
     even though the amount of the interest may not be received 
     until the maturity of the instrument.
       Special rules for determining the amount of OID allocated 
     to a period apply to certain instruments that may be subject 
     to prepayment. First, if a borrower can reduce the yield on a 
     debt by exercising a prepayment option, the OID rules assume 
     that the borrower will prepay the debt. In addition, in the 
     case of (1) any regular interest in a REMIC, (2) qualified 
     mortgages held by a REMIC, or (3) any other debt instrument 
     if payments under the instrument may be accelerated by reason 
     of prepayments of other obligations securing the instrument, 
     the daily portions of the OID on such debt instruments are 
     determined by taking into account an assumption regarding the 
     prepayment of principal for such instruments.

                               House Bill

       The bill applies the special OID rule applicable to any 
     regular interest in a REMIC, qualified mortgages held by a 
     REMIC, or certain other debt instruments to any pool of debt 
     instruments the yield on which may be reduced by reason of 
     prepayments. Thus, under the bill, if a taxpayer holds a pool 
     of credit card receivables that require interest

[[Page H6543]]

     to be paid if the borrowers do not pay their accounts by a 
     specified date, the taxpayer would be required to accrue 
     interest or OID on such pool based upon a reasonable 
     assumption regarding the timing of the payments of the 
     accounts in the pool. In addition, the Secretary of the 
     Treasury is authorized to provide appropriate exemptions from 
     the provision, including exemptions for taxpayers that hold a 
     limited amount of debt instruments, such as small retailers.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment. If a taxpayer is 
     required to change its method of accounting under the bill, 
     such change would be treated as initiated by the taxpayer 
     with the consent of the Secretary of the Treasury and any 
     section 481 adjustment would be included in income ratably 
     over a four-year period. It is understood that some taxpayers 
     presently use a method of accounting similar to the method 
     required to be used under the bill and have asked the 
     Secretary of the Treasury for permission to change to a 
     different method for pre-effective date years. So as not to 
     require taxpayers to change methods of accounting multiple 
     times, it is expected that the Secretary would not grant 
     these pending requests.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement generally follows the House bill, 
     with modifications. The conference agreement applies to any 
     pool of debt instruments the yield on which may be affected 
     by reason of prepayments. In addition, the conferees wish to 
     clarify that it is within the discretion of the Secretary of 
     the Treasury to grant changes of methods of accounting that 
     are pending for pre-effective date years.
     7. Deny interest deduction on certain debt instruments (sec. 
         1006 of the House bill)

                              Present Law

       Whether an instrument qualifies for tax purposes as debt or 
     equity is determined under all the facts and circumstances 
     based on principles developed in case law. If an instrument 
     qualifies as equity, the issuer generally does not receive a 
     deduction for dividends paid and the holder generally 
     includes such dividends in income (although corporate holders 
     generally may obtain a dividends-received deduction of at 
     least 70 percent of the amount of the dividend). If an 
     instrument qualifies as debt, the issuer may receive a 
     deduction for accrued interest and the holder generally 
     includes interest in income, subject to certain 
     limitations.
       Original issue discount (``OID'') on a debt instrument is 
     the excess of the stated redemption price at maturity over 
     the issue price of the instrument. An issuer of a debt 
     instrument with OID generally accrues and deducts the 
     discount as interest over the life of the instrument even 
     though interest may not be paid until the instrument matures. 
     The holder of such a debt instrument also generally includes 
     the OID in income on an accrual basis.

                               House Bill

       Under the House bill, no deduction is allowed for interest 
     or OID on an instrument issued by a corporation (or issued by 
     a partnership to the extent of its corporate partners) that 
     is payable in stock of the issuer or a related party (within 
     the meaning of sections 267(b) and 707(b)), including an 
     instrument a substantial portion of which is mandatorily 
     convertible or convertible at the issuer's option into stock 
     of the issuer or a related party. In addition, an instrument 
     is to be treated as payable in stock if a substantial portion 
     of the principal or interest is required to be determined, or 
     may be determined at the option of the issuer or related 
     party, by reference to the value of stock of the issuer or 
     related party. An instrument also is treated as payable in 
     stock if it is part of an arrangement designed to result in 
     such payment of the instrument with or by reference to such 
     stock, such as in the case of certain issuances of a forward 
     contract in connection with the issuance of debt, nonrecourse 
     debt that is secured principally by such stock, or certain 
     debt instruments that are convertible at the holder's option 
     when it is substantially certain that the right will be 
     exercised. For example, it is not expected that the provision 
     will affect debt with a conversion feature where the 
     conversion price is significantly higher than the market 
     price of the stock on the issue date of the debt. The House 
     bill does not affect the treatment of a holder of an 
     instrument.
       The House bill is not intended to affect the 
     characterization of instruments as debt or equity under 
     present law; and no inference is intended as to the treatment 
     of any instrument under present law.
       Effective date.--The provision is effective for instruments 
     issued after June 8, 1997, but will not apply to such 
     instruments (1) issued pursuant to a written agreement which 
     was binding on such date and at all times thereafter, (2) 
     described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or (3) described in a 
     public announcement or filing with the Securities and 
     Exchange Commission on or before such date.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill. The 
     conference agreement clarifies that for purposes of the 
     provision, principal or interest shall be treated as required 
     to be paid in, converted to, or determined with reference to 
     the value of equity if it may be so required at the option of 
     the holder or a related party and there is a substantial 
     certainty that the option will be exercised.

             B. Corporate Organizations and Reorganizations

     1. Require gain recognition for certain extraordinary 
         dividends (sec. 1011 of the House bill and sec. 811 of 
         the Senate amendment)

                              Present Law

       A corporate shareholder generally can deduct at least 70 
     percent of a dividend received from another corporation. This 
     dividends received deduction is 80 percent if the corporate 
     shareholder owns at least 20 percent of the distributing 
     corporation and generally 100 percent if the shareholder owns 
     at least 80 percent of the distributing corporation.
       Section 1059 of the Code requires a corporate shareholder 
     that receives an ``extraordinary dividend'' to reduce the 
     basis of the stock with respect to which the dividend was 
     received by the nontaxed portion of the dividend. Whether a 
     dividend is ``extraordinary'' is determined, among other 
     things, by reference to the size of the dividend in relation 
     to the adjusted basis of the shareholder's stock. Also, a 
     dividend resulting from a non pro rata redemption or a 
     partial liquidation is an extraordinary dividend. If the 
     reduction in basis of stock exceeds the basis in the stock 
     with respect to which an extraordinary dividend is received, 
     the excess is taxed as gain on the sale or disposition of 
     such stock, but not until that time (sec. 1059(a)(2)). The 
     reduction in basis for this purpose occurs immediately before 
     any sale or disposition of the stock (sec. 1059(d)(1)(A)). 
     The Treasury Department has general regulatory authority to 
     carry out the purposes of the section.
       Except as provided in regulations, the extraordinary 
     dividend provisions do not apply to result in a double 
     reduction in basis in the case of distributions between 
     members of an affiliated group filing consolidated returns, 
     where the dividend is eliminated or excluded under the 
     consolidated return regulations. Double inclusion of earnings 
     and profits (i.e., from both the dividend and from gain on 
     the disposition of stock with a reduced basis) also should 
     generally be prevented.7 Treasury regulations 
     provide for application of the provision when a corporation 
     is a partner in a partnership that receives a 
     distribution.8
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     \7\ See H. Rept. 99-841, II-166, 99th Cong. 2d Sess. 
     (September 18, 1986).
     \8\ See Treas. reg. sec. 1.701-2(f), Example (2).
---------------------------------------------------------------------------
       In general, a distribution in redemption of stock is 
     treated as a dividend, rather than as a sale of the stock, if 
     it is essentially equivalent to a dividend (sec. 302). A 
     redemption of the stock of a shareholder generally is 
     essentially equivalent to a dividend if it does not result in 
     a meaningful reduction in the shareholder's proportionate 
     interest in the distributing corporation. Section 302(b) also 
     contains several specific tests (e.g., a substantial 
     reduction computation and a termination test) to identify 
     redemptions that are not essentially equivalent to dividends. 
     The determination whether a redemption is essentially 
     equivalent to a dividend includes reference to the 
     constructive ownership rules of section 318, including the 
     option attribution rules of section 318(a)(4). The rules 
     relating to treatment of cash or other property received in a 
     reorganization contain a similar reference (sec. 356(a)(2)).

                               House Bill

       Under the House bill, except as provided in regulations, a 
     corporate shareholder recognizes gain immediately with 
     respect to any redemption treated as a dividend (in whole or 
     in part) when the nontaxed portion of the dividend exceeds 
     the basis of the shares surrendered, if the redemption is 
     treated as a dividend due to options being counted as stock 
     ownership.9
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     \9\ Thus, for example, where a portion of such a distribution 
     would not have been treated as a dividend due to insufficient 
     earnings and profits, the rule applies to the portion treated 
     as a dividend.
---------------------------------------------------------------------------
       In addition, the House bill requires immediate gain 
     recognition whenever the basis of stock with respect to which 
     any extraordinary dividend was received is reduced below 
     zero. The reduction in basis of stock would be treated as 
     occurring at the beginning of the ex-dividend date of the 
     extraordinary dividend to which the reduction relates.
       Reorganizations or other exchanges involving amounts that 
     are treated as dividends under section 356 of the Code are 
     treated as redemptions for purposes of applying the rules 
     relating to redemptions under section 1059(e). For example, 
     if a recapitalization or other transaction that involves a 
     dividend under section 356 has the effect of a non pro rata 
     redemption or is treated as a dividend due to options being 
     counted as stock, the rules of section 1059 apply. 
     Redemptions of shares, or other extraordinary dividends on 
     shares, held by a partnership will be subject to section 1059 
     to the extent there are corporate partners (e.g., appropriate 
     adjustments to the basis of the shares held by the 
     partnership and to the basis of the corporate partner's 
     partnership interest will be required).
       Under continuing section 1059(g) of present law, the 
     Treasury Department is authorized to issue regulations where 
     necessary to carry

[[Page H6544]]

     out the purposes and prevent the avoidance of the provision.
       Effective date.--The provision generally is effective for 
     distributions after May 3, 1995, unless made pursuant to the 
     terms of a written binding contract in effect on May 3, 1995 
     and at all times thereafter before such distribution, or a 
     tender offer outstanding on May 3, 1995.10 
     However, in applying the new gain recognition rules to any 
     distribution that is not a partial liquidation, a non pro 
     rata redemption, or a redemption that is treated as a 
     dividend by reason of options, September 13, 1995 is 
     substituted for May 3, 1995 in applying the transition rules.
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     \10\ Thus, for example, in the case of a distribution prior 
     to the effective date, the provisions of present law would 
     continue to apply, including the provisions of present-law 
     sections 1059(a) and 1059(d)(1), requiring reduction in basis 
     immediately before any sale or disposition of the stock, and 
     requiring recognition of gain at the time of such sale or 
     disposition.
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       No inference is intended regarding the tax treatment under 
     present law of any transaction within the scope of the 
     provision, including transactions utilizing options.
       In addition, no inference is intended regarding the rules 
     under present law (or in any case where the treatment is not 
     specified in the provision) for determining the shares of 
     stock with respect to which a dividend is received or that 
     experience a basis reduction.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Require gain recognition on certain distributions of 
         controlled corporation stock (sec. 1012 of the House bill 
         and sec. 812 of the Senate amendment)

                              Present Law

       A corporation generally is required to recognize gain on 
     the distribution of property (including stock of a 
     subsidiary) as if such property had been sold for its fair 
     market value. The shareholders generally treat the receipt of 
     property as a taxable event as well. Section 355 of the 
     Internal Revenue Code provides an exception to this rule for 
     certain ``spin-off'' type distributions of stock of a 
     controlled corporation, provided that various requirements 
     are met, including certain restrictions relating to 
     acquisitions and dispositions of stock of the distributing 
     corporation (``distributing'') or the controlled corporation 
     (``controlled'') prior and subsequent to a distribution.
       In cases where the form of the transaction involves a 
     contribution of assets to the particular controlled 
     corporation that is distributed in connection with the 
     distribution, there are specific Code requirements that 
     distributing corporation's shareholders own ``control'' of 
     the distributed corporation immediately after the 
     distribution. Control is defined for this purpose as 80 
     percent of the voting power of all classes of stock entitled 
     to vote and 80 percent of each other class of stock. (secs. 
     368(a)(1)(D), 368(c), and 351(a) and (c)). In addition, it is 
     a requirement for qualification of any section 355 
     distribution that the distributing corporation distribute 
     control of the controlled corporation (defined by reference 
     to the same 80-percent test).11 Present law has 
     the effect of imposing more restrictive requirements on 
     certain types of acquisitions or other transfers following a 
     distribution if the company involved is the controlled 
     corporation rather than the distributing corporation.
---------------------------------------------------------------------------
     \11\ If a controlled corporation is acquired after a 
     distribution, an issue may arise whether the acquisition can 
     be viewed under step-transaction concepts as having occurred 
     before the distribution, with the result that the 
     distributing corporation would not be viewed as having 
     distributed the necessary 80 percent control. The Internal 
     Revenue Service has indicated that it will not rule on 
     requests for section 355 treatment in cases in which there 
     have been negotiations, agreements, or arrangements with 
     respect to transactions or events which, if consummated 
     before the distribution, would result in the distribution of 
     stock or securities of a corporation which is not 
     ``controlled'' by the distributing corporation. Rev. Proc. 
     96-39, 1996-33 I.R.B. 11; see also Rev. Rul. 96-30, 1996-1 
     C.B. 36; Rev. Rul. 70-225, 1970-1 C.B. 80.
---------------------------------------------------------------------------
       After a spin-off transaction, the amount of a stockholder's 
     basis in the stock of the distributing corporation is 
     generally allocated between the stock of distributing and 
     controlled received by that shareholder, in proportion to 
     their relative fair market values. (sec. 358(c); see Treas. 
     reg. sec. 1.358-2). In the case of an affiliated group of 
     corporations filing a consolidated return, this basis 
     allocation rule generally eliminates any excess loss account 
     in the stock of a controlled corporation that is distributed 
     within the group, and its basis is generally determined with 
     reference to the basis of the distributing 
     corporation.12
---------------------------------------------------------------------------
     \12\ Excess loss accounts in consolidation generally are 
     created when a subsidiary corporation makes a distribution 
     (or has a loss that is used by other members of the group) 
     that exceeds the parent's basis in the stock of the 
     subsidiary. In general, such excess loss accounts in 
     consolidation are permitted to be deferred rather than 
     causing immediate taxable gain. Nevertheless, they are 
     recaptured when a subsidiary leaves the group or in certain 
     other situations. However, such excess loss accounts are not 
     recaptured in certain cases where there is an internal spin-
     off prior to the subsidiary leaving the group. See, Treas. 
     reg. sec. 1.1502-19(g). In addition, an excess loss account 
     may not be created at all in certain cases that are similar 
     economically to a distribution that would reduce the stock 
     basis of the distributing subsidiary corporation, if the 
     distribution from the subsidiary is structured to meet the 
     form of a section 355 distribution.
---------------------------------------------------------------------------
       The treatment of basis of the distributing and controlled 
     corporations in a section 355 distribution differs from a 
     distribution of stock that is not a qualified section 355 
     spin-off. In a non-qualified distribution within an 
     affiliated group of corporations filing a consolidated 
     return, not only is gain generally recognized (though 
     deferred) on the excess of value over basis at the 
     distributing corporation level, the basis of the distributing 
     corporation's stock is increased by any gain recognized in 
     the distribution (when that gain is taken into account under 
     the relevant regulations), and reduced by the fair market 
     value of the distribution if the distribution is within an 
     affiliated group filing a consolidated return. The basis of 
     the stock of the distributed corporation within the group is 
     a fair market value basis. In the case of a distribution 
     between members of an affiliated group that is not filing a 
     consolidated return, the distribution causes a reduction of 
     basis of the distributing corporation only to the extent it 
     exceeds the earnings and profits of the distributing 
     corporation or it is an extraordinary dividend.

                               House Bill

       The House bill adopts additional restrictions under section 
     355 on acquisitions and dispositions of the stock of the 
     distributing or controlled corporation.
       Under the House bill, if, pursuant to a plan or arrangement 
     in existence on the date of distribution, either the 
     controlled or distributing corporation is acquired, gain is 
     recognized by the other corporation as of the date of the 
     distribution.
       In the case of an acquisition of a controlled corporation, 
     the amount of gain recognized by the distributing corporation 
     is the amount of gain that the distributing corporation would 
     have recognized had stock of the controlled corporation been 
     sold for fair market value on the date of distribution. In 
     the case of an acquisition of the distributing corporation, 
     the amount of gain recognized by the controlled corporation 
     is the amount of net gain that the distributing corporation 
     would have recognized had it sold its assets for fair market 
     value immediately after the distribution. This gain is 
     treated as long-term capital gain. No adjustment to the basis 
     of the stock or assets of either corporation is allowed by 
     reason of the recognition of the gain.
       Whether a corporation is acquired is determined under rules 
     similar to those of present law section 355(d), except that 
     acquisitions would not be restricted to ``purchase'' 
     transactions. Thus, an acquisition occurs if one or more 
     persons acquire 50 percent or more of the vote or value of 
     the stock of the controlled or distributing corporation 
     pursuant to a plan or arrangement. For example, assume a 
     corporation (``P'') distributes the stock of its wholly owned 
     subsidiary (``S'') to its shareholders. If, pursuant to a 
     plan or arrangement, 50 percent or more of the vote or value 
     of either P or S is acquired by one or more persons, the bill 
     proposal requires gain recognition by the corporation not 
     acquired. Except as provided in Treasury regulations, if the 
     assets of the distributing or controlled corporation are 
     acquired by a successor in a merger or other transaction 
     under section 368(a)(1)(A), (C) or (D) of the Code, the 
     shareholders (immediately before the acquisition) of the 
     corporation acquiring such assets are treated as acquiring 
     stock in the corporation from which the assets were acquired. 
     Under Treasury regulations, other asset transfers also could 
     be subject to this rule. However, in any transaction, stock 
     received directly or indirectly by former shareholders of 
     distributing or controlled, in a successor or new controlling 
     corporation of either, is not be treated as acquired stock if 
     it is attributable to such shareholders' stock in 
     distributing or controlled that was not acquired as part of a 
     plan or arrangement to acquire 50 percent or more of such 
     successor or other corporation.
       Acquisitions occurring within the four-year period 
     beginning two years before the date of distribution are 
     presumed to have occurred pursuant to a plan or arrangement. 
     Taxpayers can avoid gain recognition by showing that an 
     acquisition occurring during this four-year period was 
     unrelated to the distribution.
       The House bill does not apply to distributions that would 
     otherwise be subject to section 355(d) of present law, which 
     imposes corporate level tax on certain disqualified 
     distributions.
       The House bill does not apply to a distribution pursuant to 
     a title 11 or similar case.
       The Treasury Department is authorized to prescribe 
     regulations as necessary to carry out the purposes of the 
     proposal, including regulations to provide for the 
     application of the proposal in the case of multiple 
     transactions.
       Except as provided in regulations, in the case of 
     distributions of stock within an affiliated group of 
     corporations filing a consolidated return, section 355 does 
     not apply to any distribution of the stock of one member of 
     the group to another member. In the case of such a 
     distribution of stock, the Secretary of the Treasury is to 
     provide appropriate rules for the treatment of the 
     distribution, including rules governing adjustments to the 
     adjusted basis of the stock and the earnings and profits of 
     the members of the group.
       The House bill also modifies certain rules for determining 
     control immediately after a distribution in the case of 
     certain divisive transactions in which a controlled 
     corporation is distributed and the transaction meets

[[Page H6545]]

     the requirements of section 355. In such cases, under section 
     351 and modified section 368(a)(2)(H) with respect to certain 
     reorganizations under section 368(a)(1)(D), those 
     shareholders receiving stock in the distributed corporation 
     are treated as in control of the distributed corporation 
     immediately after the distribution if they hold stock 
     representing a 50 percent or greater interest in the vote and 
     value of stock of the distributed corporation.
       The House bill does not change the present-law requirement 
     under section 355 that the distributing corporation must 
     distribute 80 percent of the voting power and 80 percent of 
     each other class of stock of the controlled corporation. It 
     is expected that this requirement will be applied by the 
     Internal Revenue Service taking account of the provisions of 
     the proposal regarding plans that permit certain types of 
     planned restructuring of the distributing corporation 
     following the distribution, and to treat similar 
     restructurings of the controlled corporation in a similar 
     manner. Thus, the 80-percent control requirement is expected 
     to be administered in a manner that would prevent the tax-
     free spin-off of a less-than-80-percent controlled 
     subsidiary, but would not generally impose additional 
     restrictions on post-distribution restructurings of the 
     controlled corporation if such restrictions would not apply 
     to the distributing corporation.
       Effective date.--The provision is generally effective for 
     distributions after April 16, 1997. However, the part of the 
     provision that provides a 50-percent control requirement 
     immediately after certain section 351 and 368(a)(1)(D) 
     distributions governed by section 355 is effective for 
     transfers after the date of enactment.
       No part of the provision will apply to a distribution (or 
     transfer, as the case may be) after April 16, 1997, if such 
     distribution or transfer is: (1) made pursuant to a written 
     agreement which was binding on such date and at all times 
     thereafter; (2) described in a ruling request submitted to 
     the Internal Revenue Service on or before such date; or 
     (3) described on or before such date in a public 
     announcement or in a filing with the Securities and 
     Exchange Commission (``SEC'') required solely by reason of 
     the distribution. Any written agreement, ruling request, 
     or public announcement is not within the scope of these 
     transition provisions unless it identifies the unrelated 
     acquiror of the distributing corporation or of any 
     controlled corporation, whichever is applicable.

                            Senate Amendment

       The Senate amendment generally follows the House bill with 
     a number of modifications.
       The Senate amendment modifies the House bill denial of 
     section 355 treatment to certain distributions within an 
     affiliated group of corporations. Under the Senate amendment, 
     except as provided in Treasury regulations, in the case of 
     distributions of stock within an affiliated group of 
     corporations (as defined in section 1504(a), and whether or 
     not filing a consolidated return), section 355 does not apply 
     to any distribution of the stock of one member of the group 
     to another member if the distribution is part of a 
     transaction that results in an acquisition that would be 
     taxable to either the distributing or the controlled 
     corporation under the provision.
       In addition, in the case of any distribution of stock of 
     one member of an affiliated group of corporations to another 
     member, the Secretary of the Treasury is authorized under 
     section 358(c) to provide adjustments to the basis of any 
     stock in a corporation which is a member of such group, to 
     reflect appropriately the proper treatment of such 
     distribution. As one example, the Secretary of the Treasury 
     may consider providing rules that require a carryover basis 
     within the group for the stock of the distributed corporation 
     (including a carryover of an excess loss account, if any, in 
     a consolidated return) and that also provide a reduction in 
     the basis of the stock of the distributing corporation to 
     reflect the change in the value and basis of the distributing 
     corporation's assets. The Treasury Department may determine 
     that the aggregate stock basis of distributing and controlled 
     after the distribution may be adjusted to an amount that is 
     less than the aggregate basis of the stock of the 
     distributing corporation before the distribution, to prevent 
     inappropriate potential for artificial losses or diminishment 
     of gain on disposition of any of the corporations involved in 
     the spin off.
       The Senate amendment modifies the House bill rules for 
     determining control immediately after a distribution in the 
     case of certain divisive transactions in which a controlled 
     corporation is distributed and the transaction meets the 
     requirements of section 355. In such cases, under section 351 
     and modified section 368(a)(2)(H) with respect to certain 
     reorganizations under section 368(a)(1)(D), those 
     shareholders receiving stock in the distributed corporation 
     are treated as in control of the distributed corporation 
     immediately after the distribution if they hold stock 
     representing a greater than 50 percent interest (rather than 
     a 50- percent or greater interest, as under the House bill) 
     in the vote and value of stock of the distributed 
     corporation.
       Effective date.--The provision is generally effective for 
     distributions after April 16, 1997. However, the part of the 
     amendment providing a greater-than-50-percent control 
     requirement immediately after certain section 351 and 
     368(a)(1)(D) distributions governed by section 355 is 
     effective for transfers after the date of enactment.
       The provision will not apply to a distribution after April 
     16, 1997 that is part of an acquisition that would otherwise 
     cause gain recognition to the distributing or controlled 
     corporation under the bill, if such acquisition is: (1) made 
     pursuant to a written agreement which was binding on April 
     16, 1997 and at all times thereafter; (2) described in a 
     ruling request submitted to the Internal Revenue Service on 
     or before such date; or (3) described on or before such date 
     in a public announcement or in a filing with the Securities 
     and Exchange Commission (``SEC'') required solely by reason 
     of the distribution or acquisition. Any written agreement, 
     ruling request, or public announcement or SEC filing is not 
     within the scope of these transition provisions unless it 
     identifies the acquiror of the distributing corporation or of 
     any controlled corporation, whichever is applicable.
       The part of the provision that provides a greater-than-50-
     percent control provision for certain transfers after the 
     date of enactment will not apply if such transfer meets the 
     requirements of (1), (2), or (3) of the preceding paragraph.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     additional modifications.

       Amount and timing of gain recognition under section 355(e)

       Under the conference agreement, in the case of an 
     acquisition of either the distributing corporation or the 
     controlled corporation, the amount of gain recognized is the 
     amount that the distributing corporation would have 
     recognized had the stock of the controlled corporation been 
     sold for fair market value on the date of the distribution. 
     Such gain is recognized immediately before the distribution. 
     As under the House bill and Senate amendment, no adjustment 
     to the basis of the stock or assets of either corporation is 
     allowed by reason of the recognition of the 
     gain.13
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     \13\ There is no intention to limit the otherwise applicable 
     Treasury regulatory authority under section 336(e) of the 
     Code. There is also no intention to limit the otherwise 
     applicable provisions of section 1367 with respect to the 
     effect on shareholder stock basis of gain recognized by an S 
     corporation under this provision.
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               Acquisitions resulting in gain recognition

       Under the conference agreement, as under the House bill and 
     Senate amendment, the gain recognition provisions of section 
     355(e) apply when one or more persons acquire 50 percent 
     or more of the voting power or value of the stock of 
     either the distributing corporation or the controlled 
     corporation, pursuant to a plan or series of related 
     transactions.
       The conference agreement provides certain additions and 
     clarifications to identify cases that do not cause gain 
     recognition under the provisions of section 355(e).
       Single affiliated group
       Under the conference agreement, a plan (or series of 
     related transactions) is not one that will cause gain 
     recognition if, immediately after the completion of such plan 
     or transactions, the distributing corporation and all 
     controlled corporations are members of a single affiliated 
     group of corporations (as defined in section 1504 without 
     regard to subsection (b) thereof).
       Example 1: P corporation is a member of an affiliated group 
     of corporations that includes subsidiary corporation S and 
     subsidiary corporation S1. P owns all the stock of S. S owns 
     all the stock of S1. P corporation is merged into unrelated X 
     corporation in a transaction in which the former shareholders 
     of X corporation will own 50 percent or more of the vote or 
     value of the stock of surviving X corporation after the 
     merger. As part of the plan of merger, S1 will be distributed 
     by S to X, in a transaction that otherwise qualifies under 
     section 355. After this distribution, S, S1, and X will 
     remain members of a single affiliated group of corporations 
     under section 1504 (without regard to whether any of the 
     corporations is a foreign corporation, an insurance company, 
     a tax exempt organization, or an electing section 936 
     company). Even though there has been an acquisition of P, S, 
     and S1 by X, and a distribution of S1 by S that is part of a 
     plan or series of related transactions, the plan is not 
     treated as one that requires gain recognition on the 
     distribution of S1 to X. This is because the distributing 
     corporation S and the controlled corporation S1 remain within 
     a single affiliated group after the distribution (even though 
     the P group has changed ownership).
       Continuing direct or indirect ownership
       The conference agreement clarifies that an acquisition does 
     not require gain recognition if the same persons own 50 
     percent or more of both corporations, directly or indirectly 
     (rather than merely indirectly, as in the House bill and 
     Senate amendment), before and after the acquisition and 
     distribution, provided the stock owned before the acquisition 
     was not acquired as part of a plan (or series of related 
     transactions) to acquire a 50-percent or greater interest in 
     either distributing or controlled.
       Example 2: Individual A owns all the stock of P 
     corporation. P owns all the stock of a subsidiary 
     corporation, S. Subsidiary S is distributed to individual A 
     in a transaction that otherwise qualifies under section 355. 
     As part of a plan, P then merges with corporation X, also 
     owned entirely by individual A. There is not an acquisition 
     that requires

[[Page H6546]]

     gain recognition under the provision, because individual A 
     owns directly or indirectly 100 percent of all the stock of 
     both X, the successor to P, and S before and after the 
     transaction.14 The same result would occur if P 
     were contributed to a holding company, all the stock of which 
     is owned by A.
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     \14\ The example assumes that A did not acquire his or her 
     stock in P as part of a plan or series of related 
     transactions that results in the direct or indirect ownership 
     of 50 percent or more of S or P separately by A. If A's stock 
     in P was acquired as part of such a plan, the transaction 
     would be one requiring gain recognition on the spin-off of S.
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       The conference agreement, following the House bill and 
     Senate amendment, continues to provide that except as 
     provided in Treasury regulations, certain other acquisitions 
     are not taken into account. For example, under section 
     355(e)(3)(A), the following other types of acquisitions of 
     stock are not subject to the provision, provided that the 
     stock owned before the acquisition was not acquired pursuant 
     to a plan or series of related transactions to acquire a 50-
     percent or greater ownership interest in either distributing 
     or controlled:
       First, the acquisition of stock in the controlled 
     corporation by the distributing corporation (as one example, 
     in the case of a drop-down of property by the distributing 
     corporation to the corporation to be distributed in exchange 
     for the stock of the controlled corporation);
       Second, the acquisition by a person of stock in any 
     controlled corporation by reason of holding stock or 
     securities in the distributing corporation (as one example, 
     the receipt by a distributing corporation shareholder of 
     controlled corporation stock in a distribution--including a 
     split-off distribution in which a shareholder that did not 
     own 50 percent of the stock of distributing owns 50 percent 
     or more of the stock of controlled); and
       Third, the acquisition by a person of stock in any 
     successor corporation of the distributing corporation or any 
     controlled corporation by reason of holding stock or 
     securities in such distributing or controlled corporation 
     (for example, the receipt by former shareholders of 
     distributing of 50 percent or more of the stock of a 
     successor corporation in a merger of distributing).
       As under the House bill and Senate amendment, a public 
     offering of sufficient size can result in an acquisition that 
     causes gain recognition under the provision.
       Attribution
       The conference agreement also modifies the attribution rule 
     for determining when an acquisition has occurred. Rather than 
     apply section 355(d)(8)(A), which attributes stock owned by a 
     corporation to a corporate shareholder only if that 
     shareholder owns 10 percent of the corporation, the 
     conference agreement provides that, except as provided in 
     regulations, section 318(a)(2)(C) applies without regard to 
     the amount of stock ownership of the corporation.
       Example 3: Assume the facts are the same as in the 
     immediately preceding example except that corporations P and 
     X are each owned by the same 20 individual 5-percent 
     shareholders (rather than wholly by individual A). The 
     transaction described in the previous example, in which S 
     is spun off by P to P's shareholders and P is acquired by 
     X, would not cause gain recognition, because the same 
     shareholders would own directly or indirectly 50 percent 
     or more of the stock of each corporation both before and 
     after the transaction.
     Section 355(f)
       The conference agreement follows the Senate amendment in 
     providing that, except as provided in Treasury regulations, 
     section 355 (or so much of section 356 as relates to section 
     355) shall not apply to the distribution of stock from one 
     member of an affiliated group of corporations (as defined in 
     section 1504(a)) to another member of such group (an 
     ``intragroup spin-off'') if such distribution is part of a 
     plan (or series of related transactions) described in 
     subsection (e)(2)(A)(ii), pursuant to which one or more 
     persons acquire directly or indirectly stock representing a 
     50-percent or greater interest in the distributing 
     corporation or any controlled corporation.
       Example 4: P corporation owns all the stock of subsidiary 
     corporation S. S owns all the stock of subsidiary corporation 
     T. S distributes the stock of T corporation to P as part of a 
     plan or series of related transactions in which P then 
     distributes S to its shareholders and then P is merged into 
     unrelated X corporation. After the merger, former 
     shareholders of X corporation own 50 percent or more of the 
     voting power or value of the stock of the merged corporation. 
     Because the distribution of T by S is part of a plan or 
     series of related transactions in which S is distributed by P 
     outside the P affiliated group and P is then acquired under 
     section 355(e), section 355 in its entirety does not apply to 
     the intragroup spin-off of T to P, under section 355(f). 
     Also, the distribution of S by P is subject to section 
     355(e).
       The conference agreement clarifies that, in determining 
     whether an acquisition described in subsection (e)(2)(A)(ii) 
     occurs, all the provisions of new subsection 355(e) are 
     applied. For example, an intragroup spin-off in connection 
     with an overall transaction that does not cause gain 
     recognition under section 355(e) because it is described in 
     section 355(e)(2)(C), or because of section 355(e)(3), is not 
     subject to the rule of section 355(f).
       The Treasury Department has regulatory authority to vary 
     the result that the intragroup distribution under section 
     355(f) does not qualify for section 355 treatment. In this 
     connection, the Treasury Department could by regulation 
     eliminate some or all of the gain recognition required under 
     section 355(f) in connection with the issuance of regulations 
     that would cause appropriate basis results with respect to 
     the stock of S and T in the above example so that concerns 
     regarding present law section 355 basis rules (described 
     below in connection with section 358(c)) would be 
     eliminated.\15\
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     \15\ Examples of approaches that the Treasury Department may 
     consider are discussed in connection with section 358(c), 
     infra.)
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     Treasury regulatory authority under section 358(c)
       As under the Senate amendment, the conference agreement 
     provides that in the case of any distribution of stock of one 
     member of an affiliated group of corporations to another 
     member under section 355 (``intragroup spin-off'), the 
     Secretary of the Treasury is authorized under section 358(c) 
     to provide adjustments to the basis of any stock in a 
     corporation which is a member of such group, to reflect 
     appropriately the proper treatment of such distribution. It 
     is understood that the approach of any such regulations 
     applied to intragroup spin-offs that do not involve an 
     acquisition may also be applied under the Treasury regulatory 
     authority to modify the rule of section 355(f) as may be 
     appropriate.
       The conferees believe that the concerns relating to basis 
     adjustments in the case of intragroup spin offs are 
     essentially similar, whether or not an acquisition is 
     currently intended as part of a plan or series of related 
     transactions. The concerns include the following. First, 
     under present law consolidated return regulations, it is 
     possible that an excess loss account of a lower tier 
     subsidiary may be eliminated. This creates the potential for 
     the subsidiary to leave the group without recapture of the 
     excess loss account, even though the group has benefitted 
     from the losses or distributions in excess of basis that led 
     to the existence of the excess loss account.
       Second, under present law, a shareholder's stock basis in 
     its stock of the distributing corporation is allocated after 
     a spin-off between the stock of the distributing and 
     controlled corporations, in proportion to the relative fair 
     market values of the stock of those companies. If a 
     disproportionate amount of asset basis (as compared to value) 
     is in one of the companies (including but not limited to a 
     shift of value and basis through a borrowing by one company 
     and contribution of the borrowed cash to the other), present 
     law rules under section 358(c) can produce an increase in 
     stock basis relative to asset basis in one corporation, and a 
     corresponding decrease in stock basis relative to asset basis 
     in the other company. Because the spin-off has occurred 
     within the corporate group, the group can continue to benefit 
     from high inside asset basis either for purposes of sale or 
     depreciation, while also choosing to benefit from the 
     disproportionately high stock basis in the other corporation. 
     If, for example, both corporations were sold at a later date, 
     a prior distribution can result in a significant decrease in 
     the amount of gain recognized than would have occurred if the 
     two corporations had been sold together without a prior spin 
     off (or separately, without a prior spin-off).
       Example 5: P owns all the stock of S1 and S1 owns all the 
     stock of S2. P's basis in the stock of S1 is 50; the inside 
     asset basis of S1's assets is 50; and the total value of S1's 
     stock and assets (including the value of S2) is 150. S1's 
     basis in the stock of S2 is 0; the inside basis of S2's 
     assets is 0; and the value of S2's stock and assets is 100. 
     If S1 were sold, holding S2, the total gain would be 100. S1 
     distributes S2 to P in a section 355 transaction. After this 
     spin-off, under present law, P's basis in the stock of S1 is 
     approximately 17 (50/150 times the total 50 stock basis in S1 
     prior to the spin-off) and the inside asset basis of S1 is 
     50. P's basis in the stock of S2 is 33 (100/150 times the 
     total 50 stock basis in S1 prior to the spin-off) and the 
     inside asset basis of S2 is 0. After a period of time, S2 
     can be sold for its value of 100, with a gain of 67 rather 
     than 100. Also, since S1 remains in the corporate group, 
     the full 50 inside asset basis can continue to be used. 
     S1's assets could be sold for 50 with no gain or loss. 
     Thus, S1 and S2 can be sold later at a total gain of 67, 
     rather than the total gain of 100 that would have occurred 
     had they been sold without the spin-off.
       As one variation on the foregoing concern, taxpayers have 
     attempted to utilize spin-offs to extract significant amounts 
     of asset value and basis, (including but not limited to 
     transactions in which one corporation decreases its value by 
     incurring debt, and increases the asset basis and value of 
     the other corporation by contributing the proceeds of the 
     debt to the other corporation) without creation of an excess 
     loss account or triggering of gain, even when the extraction 
     is in excess of the basis in the distributing corporation's 
     stock.
       The Treasury Department may promulgate any regulations 
     necessary to address these concerns and other collateral 
     issues. As one example, the Treasury Department may consider 
     providing rules that require a carryover basis within the 
     group (or stock basis conforming to asset basis as 
     appropriate) for the distributed corporation (including a 
     carryover of an excess loss account, if any, in a

[[Page H6547]]

     consolidated return). Similarly, the Treasury Department may 
     provide a reduction in the basis of the stock of the 
     distributing corporation to reflect the change in the value 
     and basis of the distributing corporation's assets. The 
     Treasury Department may determine that the aggregate stock 
     basis of distributing and controlled after the distribution 
     may be adjusted to an amount that is less than the aggregate 
     basis of the stock of the distributing corporation before the 
     distribution, to prevent inappropriate potential for 
     artificial losses or diminishment of gain on disposition of 
     any of the corporations involved in the spin-off. The 
     Treasury Department may provide separate regulations for 
     corporations in affiliated groups filing a consolidated 
     return and for affiliated groups not filing a consolidated 
     return, as appropriate to each situation.
     Effective date
       The conferees wish to clarify certain aspects of the 
     effective date and transitional relief under the provision.
       First, the conference agreement clarifies that an 
     acquisition of stock that occurs on or before April 16, 1997 
     will not cause gain recognition under the provision, even if 
     there is a distribution after that date that is part of a 
     plan or series of related transactions that would otherwise 
     be subject to the provision.
       Second, any contract that is in fact binding under State 
     law as of April 16, 1997, even though not written, is 
     eligible for transition relief. It would be expected, in such 
     a case, that some form of contemporaneous written evidence of 
     such contract would be in existence. As one example, if under 
     State law acceptance of the terms and conditions of a 
     contract by a corporate board of directors creates a binding 
     contract with an acquiror, then such contract, and the terms 
     and conditions presented to the board, could satisfy the 
     requirement for binding contract transitional relief under 
     the conference agreement. If there was such an offer and 
     acceptance on or before April 16, 1997 and a ruling request 
     filed on or before April 16, 1997, with respect to a proposed 
     spin-off and acquisition, which identifies the acquiror as 
     one of a list of prospective acquirors, then the transaction 
     may be eligible for relief under the transition rules.
       Finally, with respect to the Treasury Department regulatory 
     authority under section 358(c) as applied to intragroup spin-
     off transactions that are not part of a plan or series of 
     related transactions under new section 355(f), the conferees 
     expect that any Treasury regulations will be applied 
     prospectively, except in cases to prevent abuse.
     3. Reform tax treatment of certain corporate stock transfers 
         (sec. 1013 of the House bill and sec. 813 of the Senate 
         amendment)
     Present Law
       Under section 304, if one corporation purchases stock of a 
     related corporation, the transaction generally is 
     recharacterized as a redemption. In determining whether a 
     transaction so recharacterized is treated as a sale or a 
     dividend, reference is made to the changes in the selling 
     corporation's ownership of stock in the issuing corporation 
     (applying the constructive ownership rules of section 318(a) 
     with modifications under section 304(c)). Sales proceeds 
     received by a corporate transferor that are characterized as 
     a dividend may qualify for the dividends received deduction 
     under section 243, and such dividend may bring with it 
     foreign tax credits under section 902. Section 304 does not 
     apply to transfers of stock between members of a consolidated 
     group.
       Section 1059 applies to ``extraordinary dividends,'' 
     including certain redemption transactions treated as 
     dividends qualifying for the dividends received deduction. If 
     a redemption results in an extraordinary dividend, section 
     1059 generally requires the shareholder to reduce its basis 
     in the stock of the redeeming corporation by the nontaxed 
     portion of such dividend.
     House Bill
       Under the House bill, to the extent that a section 304 
     transaction is treated as a distribution under section 301, 
     the transferor and the acquiring corporation are treated as 
     if (1) the transferor had transferred the stock involved in 
     the transaction to the acquiring corporation in exchange for 
     stock of the acquiring corporation in a transaction to which 
     section 351(a) applies, and (2) the acquiring corporation had 
     then redeemed the stock it is treated as having issued. Thus, 
     the acquiring corporation is treated for all purposes as 
     having redeemed the stock it is treated as having issued to 
     the transferor. In addition, the bill amends section 1059 so 
     that, if the section 304 transaction is treated as a dividend 
     to which the dividends received deduction applies, the 
     dividend is treated as an extraordinary dividend in which 
     only the basis of the transferred shares would be taken into 
     account under section 1059.
       Under the House bill, a special rule applies to section 304 
     transactions involving acquisitions by foreign corporations. 
     The bill limits the earnings and profits of the acquiring 
     foreign corporation that are taken into account in applying 
     section 304. The earnings and profits of the acquiring 
     foreign corporation to be taken into account will not exceed 
     the portion of such earnings and profits that (1) is 
     attributable to stock of such acquiring corporation held by a 
     corporation or individual who is the transferor (or a person 
     related thereto) and who is a U.S. shareholder (within the 
     meaning of sec, 951(b)) of such corporation, and (2) was 
     accumulated during periods in which such stock was owned by 
     such person while such acquiring corporation was a controlled 
     foreign corporation. For purposes of this rule, except as 
     otherwise provided by the Secretary of the Treasury, the 
     rules of section 1248(d) (relating to certain exclusions from 
     earnings and profits) would apply. The Secretary of the 
     Treasury is to prescribe regulations as appropriate, 
     including regulations determining the earnings and profits 
     that are attributable to particular stock of the acquiring 
     corporation.
       No inference is intended as to the treatment of any 
     transaction under present law.
       Effective date.--The provision is effective for 
     distributions or acquisitions after June 8, 1997 except that 
     the provision will not apply to any such distribution or 
     acquisition (1) made pursuant to a written agreement which 
     was binding on such date and at all times thereafter, (2) 
     described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or (3) described in a 
     public announcement or filing with the Securities and 
     Exchange Commission on or before such date.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House Bill and the 
     Senate amendment.
     4. Modify holding period for dividends-received deduction 
         (sec. 1014 of the House bill and sec. 814 of the Senate 
         amendment)

                              Present Law

       If an instrument issued by a U.S. corporation is classified 
     for tax purposes as stock, a corporate holder of the 
     instrument generally is entitled to a dividends received 
     deduction for dividends received on that instrument. This 
     deduction is 70 percent of dividends received if the 
     recipient owns less than 20 percent (by vote and value) of 
     stock of the payor. If the recipient owns more than 20 
     percent of the stock the deduction is increased to 80 
     percent. If the recipient owns more than 80 percent of the 
     payor's stock, the deduction is further increased to 100 
     percent for qualifying dividends.
       The dividends-received deduction is allowed to a corporate 
     shareholder only if the shareholder satisfies a 46-day 
     holding period for the dividend-paying stock (or a 91-day 
     period for certain dividends on preferred stock). The 46- or 
     91-day holding period generally does not include any time in 
     which the shareholder is protected from the risk of loss 
     otherwise inherent in the ownership of an equity interest. 
     The holding period must be satisfied only once, rather than 
     with respect to each dividend received.

                               House Bill

       The House bill provides that a taxpayer is not entitled to 
     a dividends-received deduction if the taxpayer's holding 
     period for the dividend-paying stock is not satisfied over a 
     period immediately before or immediately after the taxpayer 
     becomes entitled to receive the dividend.
       Effective date.--The provision is effective for dividends 
     paid or accrued after the 30th day after the date of the 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill except 
     for the effective date.
       Effective date.-- The Senate amendment is generally 
     effective for dividends paid or accrued after the 30th day 
     after the date of enactment. However, the provision will not 
     apply to dividends received within two years of the date of 
     enactment if: (1) the dividend is paid with respect to stock 
     held on June 8, 1997, and all times thereafter until the 
     dividend is received; (2) the stock is continuously subject 
     to a position described in section 246(c)(4) on June 8, 1997, 
     and all times thereafter until the dividend is received; and 
     (3) such stock and related position is identified by the 
     taxpayer within 30 days after enactment of this Act. A stock 
     will not be considered to be continuously subject to a 
     position if such position is sold, closed or otherwise 
     terminated and is reestablished.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

                     C. Other Corporate Provisions

     1. Registration of confidential corporate tax shelters and 
         substantial understatement penalty (sec. 1021 of the 
         House bill and sec. 821 of the Senate amendment)

                              Present Law

     Tax shelter registration
       An organizer of a tax shelter is required to register the 
     shelter with the Internal Revenue Service (IRS) (sec. 6111). 
     If the principal organizer does not do so, the duty may fall 
     upon any other participant in the organization of the shelter 
     or any person participating in its sale or management. The 
     shelter's identification number must be furnished to each 
     investor who purchases or acquires an interest in the 
     shelter. Failure to furnish this number to the tax shelter 
     investors will subject the organizer to a $100 penalty for 
     each such failure (sec. 6707(b)).
       A penalty may be imposed against an organizer who fails 
     without reasonable cause to timely register the shelter or 
     who provides false or incomplete information with respect to 
     it. The penalty is the greater of one percent of the 
     aggregate amount invested in the shelter or $500. Any person 
     claiming any tax benefit with respect to a shelter must 
     report

[[Page H6548]]

     its registration number on her return. Failure to do so 
     without reasonable cause will subject that person to a $250 
     penalty (sec. 6707(b)(2)).
       A person who organizes or sells an interest in a tax 
     shelter subject to the registration rule or in any other 
     potentially abusive plan or arrangement must maintain a list 
     of the investors (sec. 6112). A $50 penalty may be assessed 
     for each name omitted from the list. The maximum penalty per 
     year is $100,000 (sec. 6708).
       For this purpose, a tax shelter is defined as any 
     investment that meets two requirements. First, the investment 
     must be (1) required to be registered under a Federal or 
     state law regulating securities, (2) sold pursuant to an 
     exemption from registration requiring the filing of a notice 
     with a Federal or state agency regulating the offering or 
     sale of securities, or (3) a substantial investment. Second, 
     it must be reasonable to infer that the ratio of deductions 
     and 350 percent of credits to investment for any investor 
     (i.e., the tax shelter ratio) may be greater than two to one 
     as of the close of any of the first five years ending after 
     the date on which the investment is offered for sale. An 
     investment that meets these requirements will be considered a 
     tax shelter regardless of whether it is marketed or 
     customarily designated as a tax shelter (sec. 6111(c)(1)).
     Accuracy-related penalty
       The accuracy-related penalty, which is imposed at a rate of 
     20 percent, applies to the portion of any underpayment that 
     is attributable to (1) negligence, (2) any substantial 
     understatement of income tax, (3) any substantial valuation 
     misstatement, (4) any substantial overstatement of pension 
     liabilities, or (5) any substantial estate or gift tax 
     valuation understatement.
       The substantial understatement penalty applies in the 
     following manner. If the correct income tax liability of a 
     taxpayer for a taxable year exceeds that reported by the 
     taxpayer by the greater of 10 percent of the correct tax or 
     $5,000 ($10,000 in the case of most corporations), then a 
     substantial understatement exists and a penalty may be 
     imposed equal to 20 percent of the underpayment of tax 
     attributable to the understatement. In determining whether a 
     substantial understatement exists, the amount of the 
     understatement is reduced by any portion attributable to an 
     item if (1) the treatment of the item on the return is or was 
     supported by substantial authority, or (2) facts relevant to 
     the tax treatment of the item were adequately disclosed on 
     the return or on a statement attached to the return and there 
     was a reasonable basis for the tax treatment of the item. 
     Special rules apply to tax shelters.
       With respect to tax shelter items of non-corporate 
     taxpayers, the penalty may be avoided only if the taxpayer 
     establishes that, in addition to having substantial authority 
     for his position, he reasonably believed that the treatment 
     claimed was more likely than not the proper treatment of the 
     item. This reduction in the penalty is unavailable to 
     corporate tax shelters. The reduction in the understatement 
     for items disclosed on the return is inapplicable to both 
     corporate and non-corporate tax shelters. For this purpose, a 
     tax shelter is a partnership or other entity, plan, or 
     arrangement the principal purpose of which is the avoidance 
     or evasion of Federal income tax.
       The Secretary may waive the penalty with respect to any 
     item if the taxpayer establishes reasonable cause for his 
     treatment of the item and that he acted in good faith.

                               House Bill

     Tax shelter registration
       The House bill requires a promoter of a corporate tax 
     shelter to register the shelter with the Secretary. 
     Registration is required not later than the next business day 
     after the day when the tax shelter is first offered to 
     potential users. If the promoter is not a U.S. person, or if 
     a required registration is not otherwise made, then any U.S. 
     participant is required to register the shelter. An exception 
     to this special rule provides that registration would not be 
     required if the U.S. participant notifies the promoter in 
     writing not later than 90 days after discussions began that 
     the U.S. participant will not participate in the shelter and 
     the U.S. person does not in fact participate in the shelter.
       A corporate tax shelter is any investment, plan, 
     arrangement or transaction (1) a significant purpose of the 
     structure of which is tax avoidance or evasion by a corporate 
     participant, (2) that is offered to any potential participant 
     under conditions of confidentiality, and (3) for which the 
     tax shelter promoters may receive total fees in excess of 
     $100,000.
       A transaction is offered under conditions of 
     confidentiality if: (1) an offeree (or any person acting on 
     its behalf) has an understanding or agreement with or for the 
     benefit of any promoter to restrict or limit its disclosure 
     of the transaction or any significant tax features of the 
     transaction; or (2) the promoter claims, knows or has 
     reason to know (or the promoter causes another person to 
     claim or otherwise knows or has reason to know that a 
     party other than the potential offeree claims) that the 
     transaction (or one or more aspects of its structure) is 
     proprietary to the promoter or any party other than the 
     offeree, or is otherwise protected from disclosure or use. 
     The promoter includes specified related parties.
       Registration will require the submission of information 
     identifying and describing the tax shelter and the tax 
     benefits of the tax shelter, as well as such other 
     information as the Treasury Department may require.
       Tax shelter promoters are required to maintain lists of 
     those who have signed confidentiality agreements, or 
     otherwise have been subjected to nondisclosure requirements, 
     with respect to particular tax shelters. In addition, 
     promoters must retain lists of those paying fees with respect 
     to plans or arrangements that have previously been registered 
     (even though the particular party may not have been subject 
     to confidentiality restrictions).
       All registrations will be treated as taxpayer information 
     under the provisions of section 6103 and will therefore not 
     be subject to any public disclosure.
       The penalty for failing to timely register a corporate tax 
     shelter is the greater of $10,000 or 50 percent of the fees 
     payable to any promoter with respect to offerings prior to 
     the date of late registration (i.e., this part of the penalty 
     does not apply to fee payments with respect to offerings 
     after late registration). A similar penalty is applicable to 
     actual participants in any corporate tax shelter who were 
     required to register the tax shelter but did not. With 
     respect to participants, however, the 50-percent penalty is 
     based only on fees paid by that participant. Intentional 
     disregard of the requirement to register by either a promoter 
     or a participant increases the 50-percent penalty to 75 
     percent of the applicable fees.
     Substantial understatement penalty
       The House bill makes two modifications to the substantial 
     understatement penalty. The first modification affects the 
     reduction in the amount of the understatement which is 
     attributable to an item if there is a reasonable basis for 
     the treatment of the item. The House bill provides that in no 
     event would a corporation have a reasonable basis for its tax 
     treatment of an item attributable to a multi-party financing 
     transaction if such treatment does not clearly reflect the 
     income of the corporation. No inference is intended that such 
     a multi-party financing transaction could not also be a tax 
     shelter as defined under the modification described below or 
     under present law.
       The second modification affects the special tax shelter 
     rules, which define a tax shelter as an entity the principal 
     purpose of which is the avoidance or evasion of Federal 
     income tax. The House bill instead provides that a 
     significant purpose (rather than the principal purpose) of 
     the entity must be the avoidance or evasion of Federal income 
     tax for the entity to be considered a tax shelter. This 
     modification conforms the definition of tax shelter for 
     purposes of the substantial understatement penalty to the 
     definition of tax shelter for purposes of these new 
     confidential corporate tax shelter registration requirements.
     Treasury report
       The House bill also directs the Treasury Department, in 
     consultation with the Department of Justice, to issue a 
     report to the tax-writing committees on the following tax 
     shelter issues: (1) a description of enforcement efforts 
     under section 7408 of the Code (relating to actions to enjoin 
     promoters of abusive tax shelters) with respect to corporate 
     tax shelters and the lawyers, accountants, and others who 
     provide opinions (whether or not directly addressed to the 
     taxpayer) regarding aspects of corporate tax shelters; (2) an 
     evaluation of whether the penalties regarding corporate tax 
     shelters are generally sufficient; and (3) an evaluation of 
     whether confidential tax shelter registration should be 
     extended to transactions where the investor (or potential 
     investor) is not a corporation. The report is due one year 
     after the date of enactment.
     Effective date
       The tax shelter registration provision applies to any tax 
     shelter offered to potential participants after the date the 
     Treasury Department issues guidance with respect to the 
     filing requirements. The modifications to the substantial 
     understatement penalty apply to items with respect to 
     transactions entered into after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.
     Conference Agreement
       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Treat certain preferred stock as ``boot'' (sec. 1022 of 
         the House bill and sec. 822 of the Senate amendment)

                              Present Law

       In reorganization transactions within the meaning of 
     section 368 and certain other restructurings, no gain or loss 
     is recognized except to the extent ``other property'' (often 
     called ``boot'') is received, that is, property other than 
     certain stock, including preferred stock. Thus, preferred 
     stock can be received tax-free in a reorganization. Upon the 
     receipt of ``other property,'' gain but not loss can be 
     recognized. A special rule permits debt securities to be 
     received tax-free, but only to the extent debt securities of 
     no lesser principal amount are surrendered in the exchange. 
     Other than this debt-for-debt rule, similar rules generally 
     apply to transactions under section 351.

                               House Bill

       The House bill amends the relevant provisions (secs. 351, 
     354, 355, 356 and 1036) to treat certain preferred stock as 
     ``other property'' (i.e., ``boot'') subject to certain 
     exceptions. Thus, when a taxpayer exchanges property

[[Page H6549]]

     for this preferred stock in a transaction that qualifies 
     under either section 351, 355, 368, or 1036, gain but not 
     loss is recognized.
       The House bill applies to preferred stock (i.e., stock that 
     is limited and preferred as to dividends and does not 
     participate, including through a conversion privilege, in 
     corporate growth to any significant extent), where (1) the 
     holder has the right to require the issuer or a related 
     person (within the meaning of secs. 267(b) and 707(b)) to 
     redeem or purchase the stock, (2) the issuer or a related 
     person is required to redeem or purchase the stock, (3) the 
     issuer (or a related person) has the right to redeem or 
     purchase the stock and, as of the issue date, it is more 
     likely than not that such right will be exercised, or (4) the 
     dividend rate on the stock varies in whole or in part 
     (directly or indirectly) with reference to interest rates, 
     commodity prices, or other similar indices, regardless of 
     whether such varying rate is provided as an express term of 
     the stock (for example, in the case of an adjustable rate 
     stock) or as a practical result of other aspects of the stock 
     (for example, in the case of auction rate stock). For this 
     purpose, the rules of (1), (2), and (3) apply if the right or 
     obligation may be exercised within 20 years of the date the 
     instrument is issued and such right or obligation is not 
     subject to a contingency which, as of the issue date, makes 
     remote the likelihood of the redemption or purchase. In 
     addition, if neither the stock surrendered nor the stock 
     received in the exchange is stock of a corporation any class 
     of stock of which (or of a related corporation) is publicly 
     traded, a right or obligation is disregarded if it may be 
     exercised only upon the death, disability, or mental 
     incompetency of the holder. Also, a right or obligation is 
     disregarded in the case of stock transferred in connection 
     with the performance of services if it may be exercised only 
     upon the holder's separation from service.
       The following exchanges are excluded from this gain 
     recognition: (1) certain exchanges of preferred stock for 
     comparable preferred stock of the same or lesser value; (2) 
     an exchange of preferred stock for common stock; (3) certain 
     exchanges of debt securities for preferred stock of the same 
     or lesser value; and (4) exchanges of stock in certain 
     recapitalization of family-owned corporations. For this 
     purpose, a family-owned corporation is defined as any 
     corporation if at least 50 percent of the total voting power 
     and value of the stock of such corporation is owned by 
     members of the same family for five years preceding the 
     recapitalization. In addition, a recapitalization does not 
     qualify for the exception if the same family does not own 50 
     percent of the total voting power and value of the stock 
     throughout the three-year period following the 
     recapitalization. Members of the same family are defined by 
     reference to the definition in section 447(e). Thus, a family 
     includes children, parents, brothers, sisters, and spouses, 
     with a limited attribution for directly and indirectly owned 
     stock of the corporation. Shares held by a family member are 
     treated as not held by a family member to the extent a non-
     family member had a right, option or agreement to acquire the 
     shares (directly or indirectly, for example, through 
     redemptions by the issuer), or with respect to shares as to 
     which a family member has reduced its risk of loss with 
     respect to the share, for example, through an equity swap. 
     Even though the provision excepts certain family 
     recapitalizations, the special valuation rules of section 
     2701 for estate and gift tax consequences continue to apply.
       An exchange of nonqualified preferred stock for 
     nonqualified preferred stock in an acquiring corporation may 
     qualify for tax-free treatment under section 354, but not 
     section 351. In cases in which both sections 354 and 351 may 
     apply to a transaction, section 354 generally will apply for 
     purposes of this proposal. Thus, in that situation, the 
     exchange would be tax free.
       The Treasury Secretary has regulatory authority to (1) 
     apply installment sale-type rules to preferred stock that is 
     subject to this proposal in appropriate cases and (2) 
     prescribe treatment of preferred stock subject to this 
     provision under other provisions of the Code (e.g., secs. 
     304, 306, 318, and 368(c)). Until regulations are issued, 
     preferred stock that is subject to the proposal shall 
     continue to be treated as stock under other provisions of the 
     Code.
       Effective date.--The provision is effective for 
     transactions after June 8, 1997, but will not apply to such 
     transactions (1) made pursuant to a written agreement which 
     was binding on such date and at all times thereafter, (2) 
     described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or (3) described in a 
     public announcement or filing with the Securities and 
     Exchange Commission on or before such date.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with certain clarifications.
       The conference agreement clarifies that nonqualified 
     preferred stock is treated as ``boot'' under section 351(b). 
     The transferor receiving such stock thus is not treated as 
     receiving nonrecognition treatment under section 351(a). 
     However, the nonqualified preferred stock continues to be 
     treated as stock received by a transferor for purposes of 
     qualification of a transaction under section 351(a), unless 
     and until regulations may provide otherwise.
       Thus, for example, if A contributes appreciated property to 
     new corporation X for all the common stock (representing 90 
     percent of the value and all the voting power) of X stock and 
     B contributes cash for nonqualified preferred stock 
     representing 10 percent of the value of X stock, B has 
     received ``boot,'' but the preferred stock is still treated 
     as stock for purposes of sections 351(a) and 368(c), unless 
     and until Treasury Regulations are issued requiring a 
     different result. Thus, the transaction qualifies for non-
     recognition under section 351. If B had received other stock 
     in addition to nonqualified preferred stock, B would be 
     required to recognize gain only to the extent of the fair 
     market value of the nonqualified preferred stock B receives.
       The conference agreement also clarifies the treatment of 
     certain conversion or exchange rights, by deleting any 
     statutory reference to the existence of a ``conversion 
     privilege.'' The conferees wish to clarify that in no event 
     will a conversion privilege into stock of the issuer 
     automatically be considered to constitute participation in 
     corporate growth to any significant extent. The conferees 
     also wish to clarify that stock that is convertible or 
     exchangeable into stock of a corporation other than the 
     issuer (including, for example, stock of a parent corporation 
     or other related corporation) is not considered to be stock 
     that participates in corporate growth to any significant 
     extent for purposes of the provision.

                      D. Administrative Provisions

     1. Reporting of certain payments made to attorneys (sec. 1031 
         of the House bill)

                              Present Law

       Information reporting is required by persons engaged in a 
     trade or business and making payments in the course of that 
     trade or business of ``rent, salaries, wages, . . . or other 
     fixed or determinable gains, profits, and income'' (Code sec. 
     6041(a)). Treas. reg. sec. 1.6041-1(d)(2) provides that 
     attorney's fees are required to be reported if they are paid 
     by a person in a trade or business in the course of a trade 
     or business. Reporting is required to be done on Form 1099-
     Misc. If, on the other hand, the payment is a gross amount 
     and it is not known what portion is the attorney's fee, no 
     reporting is required on any portion of the payment.

                               House Bill

       The House bill requires gross proceeds reporting on all 
     payments to attorneys made by a trade or business in the 
     course of that trade or business. It is anticipated that 
     gross proceeds reporting would be required on Form 1099-B 
     (currently used by brokers to report gross proceeds). The 
     only exception to this new reporting requirement would be for 
     any payments reported on either Form 1099-Misc under section 
     6041 (reports of payment of income) or on Form W-2 under 
     section 6051 (payments of wages).
       In addition, the present exception in the regulations 
     exempting from reporting any payments made to corporations 
     will not apply to payments made to attorneys. Treasury 
     regulation section 1.6041-3(c) exempts payments to 
     corporations generally (although payments to most 
     corporations providing medical services must be reported). 
     Reporting will be required under both Code sections 6041 and 
     6045 (as proposed) for payments to corporations that provide 
     legal services. The exception of Treasury regulation section 
     1.6041-3(g) exempting from reporting payments of salaries or 
     profits paid or distributed by a partnership to the 
     individual partners would continue to apply to both sections 
     (since these amounts are required to be reported on Form K-
     1).
       First, the provision applies to payments made to attorneys 
     regardless of whether the attorney is the exclusive payee. 
     Second, payments to law firms are payments to attorneys, and 
     therefore are subject to this reporting provision. Third, 
     attorneys are required to promptly supply their TINs to 
     persons required to file these information reports, pursuant 
     to section 6109. Failure to do so could result in the 
     attorney being subject to penalty under section 6723 and the 
     payments being subject to backup withholding under section 
     3406. Fourth, the IRS should administer this provision so 
     that there is no overlap between reporting under section 6041 
     and reporting under section 6045. For example, if two 
     payments are simultaneously made to an attorney, one of which 
     represents the attorney's fee and the second of which 
     represents the settlement with the attorney's client, the 
     first payment would be reported under section 6041 and the 
     second payment would not be reported under either section 
     6041 or section 6045, since it is known that the entire 
     payment represents the settlement with the client (and 
     therefore no portion of it represents income to the 
     attorney).
       Effective date.--The provision is effective for payments 
     made after December 31, 1997. Consequently, the first 
     information reports will be filed with the IRS (and copies 
     will be provided to recipients of the payments) in 1999, with 
     respect to payments made in 1998.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

[[Page H6550]]

     2. Information reporting on persons receiving contract 
         payments from certain Federal agencies (sec. 1032 of the 
         House bill and sec. 831 of the Senate amendment)

                              Present Law

       A service recipient (i.e., a person for whom services are 
     performed) engaged in a trade or business who makes payments 
     of remuneration in the course of that trade or business to 
     any person for services performed must file with the IRS an 
     information return reporting such payments (and the name, 
     address, and taxpayer identification number of the recipient) 
     if the remuneration paid to the person during the calendar 
     year is $600 or more (sec. 6041A(a)). A similar statement 
     must also be furnished to the person to whom such payments 
     were made (sec. 6041A(e)). Treasury regulations explicitly 
     exempt from this reporting requirement payments made to a 
     corporation (Treas. reg. sec. 1.6041A-1(d)(2)).
       The head of each Federal executive agency must file an 
     information return indicating the name, address, and taxpayer 
     identification number (TIN) of each person (including 
     corporations) with which the agency enters into a contract 
     (sec. 6050M). The Secretary of the Treasury has the authority 
     to require that the returns be in such form and be made at 
     such time as is necessary to make the returns useful as a 
     source of information for collection purposes. The Secretary 
     is given the authority both to establish minimum amounts for 
     which no reporting is necessary as well as to extend the 
     reporting requirements to Federal license grantors and 
     subcontractors of Federal contracts. Treasury regulations 
     provide that no reporting is required if the contract is for 
     $25,000 or less (Treas. reg. sec. 1.6050M-1(c)(1)(i)).

                               House Bill

       The House bill requires reporting of all payments of $600 
     or more made by a Federal executive agency to any person 
     (including a corporation) for services. In addition, the 
     provision requires that a copy of the information return be 
     sent by the Federal agency to the recipient of the payment. 
     An exception is provided for certain classified or 
     confidential contracts.
       Effective date.--The provision is effective for returns the 
     due date for which (without regard to extensions) is more 
     than 90 days after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Disclosure of tax return information for administration of 
         certain veterans programs (sec. 1033 of the House bill 
         and sec. 832 of the Senate amendment)

                              Present Law

       The Internal Revenue Code prohibits disclosure of tax 
     returns and return information, except to the extent 
     specifically authorized by the Internal Revenue Code (sec. 
     6103). Unauthorized disclosure is a felony punishable by a 
     fine not exceeding $5,000 or imprisonment of not more than 
     five years, or both (sec. 7213). An action for civil damages 
     also may be brought for unauthorized disclosure (sec. 7431). 
     No tax information may be furnished by the Internal Revenue 
     Service (``IRS'') to another agency unless the other agency 
     establishes procedures satisfactory to the IRS for 
     safeguarding the tax information it receives (sec. 6103(p)).
       Among the disclosures permitted under the Code is 
     disclosure to the Department of Veterans Affairs (``DVA'') of 
     self-employment tax information and certain tax information 
     supplied to the Internal Revenue Service and Social Security 
     Administration by third parties. Disclosure is permitted to 
     assist DVA in determining eligibility for, and establishing 
     correct benefit amounts under, certain of its needs-based 
     pension, health care, and other programs (sec. 
     6103(l)(7)(D)(viii)). The income tax returns filed by the 
     veterans themselves are not disclosed to DVA.
       The DVA is required to comply with the safeguards currently 
     contained in the Code and in section 1137(c) of the Social 
     Security Act (governing the use of disclosed tax 
     information). These safeguards include independent 
     verification of tax data, notification to the individual 
     concerned, and the opportunity to contest agency findings 
     based on such information.
       The DVA disclosure provision is scheduled to expire after 
     September 30, 1998.

                               House Bill

       The House bill permanently extends the DVA disclosure 
     provision.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement extends the DVA disclosure 
     provision through September 30, 2003.
     4. Establish IRS continuous levy and improve debt collection 
         (secs. 1034, 1035, and 1036 of the House bill and secs. 
         834, 835, and 836 of the Senate amendment)

                           A. Continuous levy

                              Present Law

       If any person is liable for any internal revenue tax and 
     does not pay it within 10 days after notice and demand 
     16 by the IRS, the IRS may then collect the tax by 
     levy upon all property and rights to property belonging to 
     the person,17 unless there is an explicit 
     statutory restriction on doing so. A levy is the seizure of 
     the person's property or rights to property. Property that is 
     not cash is sold pursuant to statutory 
     requirements.18
---------------------------------------------------------------------------
     \16\ Notice and demand is the notice given to a person liable 
     for tax stating that the tax has been assessed and demanding 
     that payment be made. The notice and demand must be mailed to 
     the person's last known address or left at the person's 
     dwelling or usual place of business (Code sec. 6303).
     \17\ Code sec. 6331.
     \18\ Code secs. 6335-6343.
---------------------------------------------------------------------------
       In general, a levy does not apply to property acquired 
     after the date of the levy,19 regardless of 
     whether the property is held by the taxpayer or by a third 
     party (such as a bank) on behalf of a taxpayer. Successive 
     seizures may be necessary if the initial seizure is 
     insufficient to satisfy the liability.20 The only 
     exception to this rule is for salary and wages.21 
     A levy on salary and wages is continuous from the date it is 
     first made until the date it is fully paid or becomes 
     unenforceable.
---------------------------------------------------------------------------
     \19\ Code sec. 6331(b).
     \20\ Code sec. 6331(c).
     \21\ Code sec. 6331(e).
---------------------------------------------------------------------------
       A minimum exemption is provided for salary and 
     wages.22 It is computed on a weekly basis by 
     adding the value of the standard deduction plus the aggregate 
     value of personal exemptions to which the taxpayer is 
     entitled, divided by 52.23 For a family of four 
     for taxable year 1996, the weekly minimum exemption is 
     $325.24
---------------------------------------------------------------------------
     \22\ Code sec. 6334(a)(9).
     \23\ Code sec. 6334(d).
     \24\ Standard deduction of $6,700 plus four personal 
     exemptions at $2,550 each equals $16,900, which when divided 
     by 52 equals $325.
---------------------------------------------------------------------------

                               House Bill

       The House bill amends the Code to provide that a continuous 
     levy is also applicable to non-means tested recurring Federal 
     payments. This is defined as a Federal payment for which 
     eligibility is not based on the income and/or assets of a 
     payee. For example, Social Security payments, which are 
     subject to levy under present law, would become subject to 
     continuous levy.
       In addition, the House bill provides that this levy would 
     attach up to 15 percent of any specified payment due the 
     taxpayer. This rule explicitly replaces the other 
     specifically enumerated exemptions from levy in the Code. A 
     continuous levy of up to 15 percent would also apply to 
     unemployment benefits and means-tested public assistance.
       The House bill also permits the disclosure of otherwise 
     confidential tax return information to the Treasury 
     Department's Financial Management Service only for the 
     purpose of, and to the extent necessary in, implementing 
     these levy provisions.
       Effective date.--The provision is effective for levies 
     issued after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

                  B. Modifications of levy exemptions

                              Present Law

       The Code exempts from levy workmen's compensation payments 
     25 and annuity or pension payments under the 
     Railroad Retirement Act and benefits under the Railroad 
     Unemployment Insurance Act,26 unemployment 
     benefits 27 and means-tested public 
     assistance.28
---------------------------------------------------------------------------
     \25\ Code sec. 6334(a)(7).
     \26\ Code sec. 6334(a)(6).
     \27\ Sec. 6334(a)(4).
     \28\ Sec. 6334(a)(11).
---------------------------------------------------------------------------

                               House Bill

       The House bill provides that the following property is not 
     exempt from continuous levy if the Secretary of the Treasury 
     (or his delegate) approves the levy of such property:
       (1) workmen's compensation payments;
       (2) annuity or pension payments under the Railroad 
     Retirement Act and benefits under the Railroad Unemployment 
     Insurance Act;
       (3) unemployment benefits; and
       (4) means-tested public assistance.
       Effective date.--The provision applies to levies issued 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that it does not apply to annuity or pension payments under 
     the Railroad Retirement Act and benefits under the Railroad 
     Unemployment Insurance Act.

                          Conference Agreement

       The conference agreement follows the House bill.
     5. Consistency rule for beneficiaries of trusts and estates 
         (sec. 1037 of the House bill and sec. 833 of the Senate 
         amendment)

                              Present Law

       An S corporation is required to file a return for the 
     taxable year and is required to furnish to its shareholders a 
     copy of certain information shown on such return. The 
     shareholder is required to file its return in a manner that 
     is consistent with the information received from the S 
     corporation, unless the shareholder files with the Secretary 
     of the Treasury a notification of inconsistent treatment 
     (sec. 6037(c)). Similar rules apply in the case of 
     partnerships and their partners (sec. 6222).
       The fiduciary of an estate or trust that is required to 
     file a return for any taxable year is required to furnish to 
     beneficiaries certain

[[Page H6551]]

     information shown on such return (generally via a Schedule K-
     1) (sec. 6034A). In addition, a U.S. person that is treated 
     as the owner of any portion of a foreign trust is required to 
     ensure that the trust files a return for the taxable year and 
     furnishes certain required information to each U.S. person 
     who is treated as an owner of a portion of the trust or who 
     receives any distribution from the trust (sec. 6048(b)). 
     However, rules comparable to the consistency rules that apply 
     to S corporation shareholders and partners in partnerships 
     are not specified in the case of beneficiaries of estates and 
     trusts.

                               House Bill

       Under the House bill, a beneficiary of an estate or trust 
     is required to file its return in a manner that is consistent 
     with the information received from the estate or trust, 
     unless the beneficiary files with its return a notification 
     of inconsistent treatment identifying the inconsistency.
       Effective date.--The provision is effective for returns 
     filed after date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

                        E. Excise Tax Provisions

     1. Extension and modification of Airport and Airway Trust 
         Fund excise taxes (sec. 1041 of the House bill and sec. 
         841 of the Senate amendment)

                              Present Law

       In general.--Excise taxes imposed on commercial air 
     transportation of passengers (10 percent of fare) and cargo 
     (6.25 percent of shipping charge) and on noncommercial 
     aviation fuels (15 cents per gallon on aviation gasoline and 
     17.5 cents per gallon on jet fuel) are transferred to the 
     Airport and Airway Trust Fund to finance a portion of the 
     cost of programs administered by the Federal Aviation 
     Administration. The Airport and Airway Trust Fund excise 
     taxes are scheduled to expire after September 30, 1997.
       Commercial passenger tax.--Domestic passenger 
     transportation is taxed at 10 percent of the fare. There is 
     no special tax rate for flight segments to or from small, 
     rural airports. Application of the 10-percent tax to 
     transportation sold through credit card frequent flyer award 
     and similar arrangements is unclear.
       Passengers traveling on domestic flights that connect to or 
     from international flights are not subject to tax. 
     International departures are taxed at $6 per passenger; no 
     tax is imposed on international arrivals.
       Travel between the 48 contiguous States and Alaska or 
     Hawaii (and between those two States) is taxed at 10 percent 
     of the fare attributable to U.S.-territorial miles plus a $6 
     per passenger international departure tax.
       Passengers are liable for the tax; air carrier liability is 
     only for collection and remittance to the government. Air 
     carriers deposit collected taxes semimonthly, generally no 
     later than the 10th day of the second semimonthly period 
     after the transportation is deemed sold.
       Advertising.--Airlines are required to advertise their 
     fares either tax-inclusive or, if separately stated, to state 
     the pre-tax fare, tax, and total in equal sized type.
       General Fund fuels tax.--In addition to the Airport and 
     Airway Trust fuel taxes, aviation fuels used in both 
     commercial and noncommercial aviation are subject to a 4.3-
     cents-per-gallon excise tax. Revenues from this tax are 
     retained in the General Fund.

                               House Bill

       Extension.--Subject to the modifications described below, 
     the House bill extends the present-law Airport and Airway 
     Trust Fund excise taxes for 10 years, through September 30, 
     2007.
       Commercial passenger tax modifications.--Domestic passenger 
     transportation is taxed at 7.5 percent of the fare plus $2 
     per flight segment. (A flight segment is a flight involving 
     one take-off). The $2 rate increases to $3 in four equal 
     annual increments (1999-2002), and is indexed to the consumer 
     price index (``CPI'') thereafter. The House bill specifies 
     that payments for the right to award frequent flyer-type 
     points and similar price reductions through credit card and 
     other arrangements are subject to the 7.5-percent tax rate.
       The House bill retains the present-law exemption for 
     passengers traveling on domestic flights that connect to or 
     from international flights. Both international departures and 
     arrivals are taxed at $15.50 per passenger. The $15.50-per-
     passenger rate is indexed to the CPI after 1998.
       Travel between the 48 contiguous States and Alaska or 
     Hawaii (or between those States) is taxed at 7.5 percent of 
     the fare attributable to U.S. territorial miles, plus $2 per 
     flight segment, plus the $15.50 per passenger rate 
     international departure tax.
       The House bill imposes secondary liability for tax on air 
     carriers. The House bill also provides two special delays in 
     deposits: (1) taxes otherwise due in the period August 15- 
     September 30, 1997, are due October 10, 1997; and (2) taxes 
     otherwise due in the period July 1-September 30, 1998, are 
     due October 13, 1998.
       Advertising.--The House bill requires airlines to state 
     separately pre-tax fare and tax, with tax being stated in 
     print at least 50 percent the size of print in which fare is 
     stated.
       Transfer of General Fund fuels tax revenues.--The House 
     bill transfers revenues from the 4.3-cents-per-gallon fuels 
     tax to the Airport and Airway Trust Fund for taxes received 
     in the Treasury on or after October 1, 1997.
       Effective date.--The provisions apply generally to 
     transportation beginning after September 30, 1997, with 
     special rules for (1) prepayments between related parties 
     under credit card and similar arrangements after June 11, 
     1997, that are related to rights to transportation to be 
     awarded or otherwise distributed after September 30, 1997, 
     and (2) tickets sold after date of enactment and before 
     October 1, 1997 for transportation beginning after September 
     30, 1997.

                            Senate Amendment

       Extension.--Subject to the modifications described below, 
     the Senate amendment extends the present-law Airport and 
     Airway excise taxes for 10 years, the same period as in the 
     House bill.
       Commercial passenger tax modifications.--Domestic passenger 
     transportation is taxed at 10 percent (the same rate as under 
     present law). The Senate amendment also includes a 7.5-
     percent rate for flight segments to or from airports that 
     enplaned no more than 100,000 passengers in the second 
     preceding calendar year and that either (1) are at least 75 
     miles from a airport that had more than 100,000 passenger 
     enplanements in that year, or (2) qualify for essential air 
     service subsidies as of the date of the amendment's 
     enactment. The Senate amendment specifies that payments 
     for frequent-flyer-type awards or similar price reductions 
     through credit card and other arrangements are subject to 
     the 10-percent tax.
       The Senate amendment taxes passengers traveling on domestic 
     flights that connect to or from international flights the 
     same as other domestic passengers (i.e., at 10 percent of 
     fare, or 7.5 percent for certain rural airport flight 
     segments, for the domestic flight). Both international 
     departures and arrivals are taxed at $8 per passenger. Unlike 
     under the comparable House bill provision, the $8 per 
     passenger rate is not indexed.
       Travel between the 48 contiguous States and Alaska or 
     Hawaii (or between those two States) is taxed the same as 
     under present law.
       The Senate amendment is the same as the House bill on 
     liability for tax. The Senate amendment provides two special 
     delays in deposits: (1) taxes otherwise due in the period 
     August 15-September 30, 1997, are due October 10, 1997; and 
     (2) taxes otherwise due in the period July 1-September 30, 
     2001, are due October 10, 2001.
       Advertising.--No provision.
       Transfer of General Fund fuels tax.--No provision.
       Effective date.--The Senate amendment is the same as the 
     House bill, except the credit card prepayment rule applies to 
     payments after June 16, 1997.

                          Conference Agreement

       Extension.--The conference agreement follows the House bill 
     and the Senate amendment (i.e., extends the present-law 
     Airport and Airway Trust Fund excise taxes for 10 years, 
     subject to the modifications described below).
       Commercial passenger tax modifications.--The conference 
     agreement follows the House bill's domestic passenger tax 
     structure with the following modifications to the rates:

                                                                        
                                                                        
                                                                        
October 1, 1997-September 30, 1998........  9 percent of the fare, plus 
                                             $1 per domestic flight     
                                             segment.                   
October 1, 1998-September 30, 1999........  8 percent of the fare, plus 
                                             $2 per domestic flight     
                                             segment.                   
September 30, 1999-December 31, 1999......  7.5 percent of the fare,    
                                             plus $2.25 per domestic    
                                             flight segment.            
                                                                        

       After December 31, 1999, the ad valorem rate will remain at 
     7.5 percent. The domestic flight segment component of the tax 
     will increase to $2.50 (January 1, 2000-December 31, 2000), 
     to $2.75 (January 1, 2001-December 31, 2001), and to $3 
     (January 1, 2002-December 31, 2002). Beginning on January 1, 
     2003, the $3 rate will be indexed to the CPI as under the 
     House bill.29
---------------------------------------------------------------------------
     \29\ Similar to a provision of the House bill, the conference 
     agreement includes a rule of administrative convenience that 
     there is no change in the number of segment taxes imposed if 
     a passenger's route between two locations is changed (with a 
     resulting change in the number of domestic segments) if there 
     is no change in the fare charged (including no imposition of 
     any additional administrative or other fee associated with 
     the route change).
---------------------------------------------------------------------------
       The conference agreement follows the Senate amendment on 
     the treatment of certain domestic flight segments to and from 
     qualified rural airports, with a modification. Under the 
     conference agreement, the tax rate on these flight segments 
     will be 7.5 percent of fare, with no flight segment rate 
     being imposed on eligible flight segments.
       The conference agreement follows the House bill and the 
     Senate amendment provisions extending the tax on 
     international departures and expanding that tax to include 
     international arrivals, with a modification setting the tax 
     rate on both international departures and arrivals at $12 per 
     passenger (indexed to the CPI beginning on January 1, 1999, 
     as under the House bill). The conferees believe this 
     increased tax level is consistent with the user tax 
     principles of the Airport and Airway Trust Fund taxes which 
     include the recovery from international passengers of a 
     greater percentage of the costs those passengers impose on 
     FAA-programs than

[[Page H6552]]

     are collected by the present-law international departure tax, 
     so that purely domestic passengers and the General Fund will 
     not be required to subsidize the costs imposed by 
     international travelers to the extent occurring under present 
     law.
       The conference agreement does not include the provision of 
     the Senate amendment extending tax to domestic flights that 
     connect to or from international flights. Rather, those 
     flights will continue to be tax-free when the flights 
     constitute segments of uninterrupted international 
     transportation (i.e., the scheduled interval at any 
     intermediate stop does not exceed 12 hours). If an 
     intermediate stop exceeds 12 hours, subsequent domestic 
     segments are taxed as domestic transportation.
       The conference agreement follows the Senate amendment 
     provision retaining the $6 per passenger rate applicable to 
     the international airspace component of flights between the 
     48 contiguous States and Alaska or Hawaii (or to flights 
     between Alaska and Hawaii).30 For example, a 
     passenger traveling from Los Angeles to Honolulu in December 
     1997 would be taxed at 9 percent of the fare applicable to 
     U.S. territorial miles plus $1 per flight segment plus $6. As 
     with the general $12 international arrival and departure 
     rate, this $6-per-passenger rate will be indexed to the CPI 
     beginning on January 1, 1999.
---------------------------------------------------------------------------
     \30\ In contrast, transportation between Alaska or Hawaii and 
     foreign countries (including U.S. possessions) is taxed 
     exclusively as international travel, subject to the $12 per 
     passenger arrival and departure tax.
---------------------------------------------------------------------------
       The conference agreement follows the House bill and Senate 
     amendment provisions clarifying that the air passenger excise 
     tax applies to payments to air carriers (and related parties) 
     for the right to award air travel benefits. The tax rate is 
     7.5 percent. Examples of such taxable payments include (1) 
     payments for frequent flyer miles (including other rights to 
     air transportation) purchased by credit card companies, 
     telephone companies, rental car companies, television 
     networks, restaurants and hotels, air carriers and related 
     parties, and other businesses, and (2) amounts received by 
     air carriers (or related parties) pursuant to joint venture 
     credit card or other marketing arrangements. The conference 
     agreement includes an exception to this general rule in the 
     case of payments for air transportation rights between 
     corporations that are members of a 100 percent commonly owned 
     controlled group (e.g., transportation purchased from an air 
     carrier by a 100 percent commonly owned corporation operating 
     a frequent flyer award program for the air carrier).
       The conferees are aware that consumers accrue mileage 
     awards from numerous sources, including actual air travel as 
     well as programs giving rise to taxable payments under this 
     provision of the conference agreement. Once awarded to 
     consumers, these miles are commingled in the consumer's 
     account such that any miles used for a specific purpose may 
     not be traceable to the source which gave rise to them. The 
     conference agreement authorizes the Treasury Department to 
     develop regulations excluding from the tax base a portion of 
     otherwise taxable payments, if any, with respect to awarded 
     frequent flyer miles if the Treasury determines that a 
     portion properly can be allocated (traced) to miles which are 
     used by consumers for purposes other than air transportation. 
     Miles that are unused should not be treated as used for 
     purposes other than air transportation. As part of any 
     rulemaking process it undertakes, the Treasury is authorized 
     to review airline frequent flyer programs and other 
     information from all available sources, including industry 
     and third-party data, in determining whether mileage awards 
     can be adequately traced to support tax-base allocations 
     based on the ultimate use of the awards. The conferees intend 
     that an adjustment to the tax base will be prescribed only if 
     the Treasury finds a consistent pattern of non-air 
     transportation usage by consumers at levels indicating that 
     significant mileage awarded pursuant to payments taxable 
     under this provision is being used for purposes other than 
     air transportation. In making any such adjustment, the 
     Treasury Department should treat mileage used for non-air 
     transportation purposes as coming first from mileage awarded 
     to consumers from actual air travel (and other sources not 
     subject to tax under this provision).
       The conference agreement follows the House bill and the 
     Senate amendment provisions extending secondary liability for 
     the passenger taxes to air carriers.
       The conference agreement includes the provision of the 
     House bill changing certain commercial air passenger excise 
     tax deposit dates for taxes otherwise due after August 14, 
     1997, and before October 1, 1997, to October 10, 1997. 
     Additionally, the conference agreement provides that deposits 
     of commercial air passenger taxes that otherwise would be 
     required after August 14, 1998, and before October 1, 1998, 
     will be due on October 5, 1998. Deposits of the commercial 
     air cargo and aviation fuels taxes that otherwise would be 
     required to be made after July 31, 1998, and before October 
     1, 1998, will be due on October 5, 1998.
       Advertising.--The conference agreement does not include the 
     House bill provision changing the rules governing airline 
     fare advertising.
       Transfer of General Fund fuels tax revenues.--The 
     conference agreement includes the House bill provision 
     transferring gross receipts from the 4.3-cents-per-gallon 
     general fund tax on aviation fuels to the Airport and Airway 
     Trust Fund.
       Effective date.--The conference agreement follows the House 
     bill.
     2. Extend diesel fuel excise tax rules to kerosene (sec. 1042 
         of the House bill)

                              Present Law

       Diesel fuel is taxed at 24.3 cents per gallon when the fuel 
     is removed from a registered terminal storage facility unless 
     the fuel is dyed and is destined for a nontaxable use.
       Kerosene is taxed at the wholesale level if it is sold as 
     an aviation fuel. If kerosene is blended with diesel fuel, 
     tax is due from the blender unless the kerosene, and the 
     diesel fuel with which it is blended, are dyed and destined 
     for a nontaxable use.

                               House Bill

       The diesel fuel tax rules are extended to kerosene, with 
     the following modifications:
       (1) Undyed kerosene can be removed from terminals without 
     tax by registered aviation wholesalers;
       (2) Undyed kerosene can be removed from terminals by 
     pipeline without tax for use as an industrial feedstock (and 
     other than by pipeline as permitted in Treasury Department 
     rules for such a use); and
       (3) Expedited refunds to ultimate vendors are allowed for 
     tax-paid kerosene sold for use in space heaters.
       Effective date.--July 1, 1998.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill with 
     modifications. First, registration as a terminal facility 
     eligible to handle non-tax-paid diesel fuel and kerosene is 
     conditional on the facility offering its customers dyeing for 
     nontaxable sales of diesel fuel and kerosene. Second, the 
     minimum amount for vendor refunds of tax paid on kerosene is 
     reduced from $200 to $100. Third, the Treasury Department is 
     given regulatory authority to allow tax-free sales of 
     kerosene to wholesale dealers that (a) satisfy such 
     registration and other compliance measures as Treasury may 
     prescribe and (b) sell kerosene exclusively to retailers 
     eligible for refunds with respect to undyed kerosene sold by 
     them for a nontaxable use.
     3. Reinstate Leaking Underground Storage Tank Trust Fund 
         excise tax (sec. 1043 of the House bill and sec. 842 of 
         the Senate amendment)

                              Present Law

       Before January 1, 1996, a 0.1-cent-per-gallon excise tax 
     was imposed on gasoline, diesel fuel, special motor fuels, 
     aviation fuels, and inland waterway fuels. Revenues were 
     transferred to a Leaking Underground Storage Tank Trust Fund 
     to finance cleanup of damage from leaking underground storage 
     tanks.

                               House Bill

       The House bill reinstates the tax for approximately five 
     years, from the date of enactment through September 30, 2002.
       Effective date.--Date of enactment.

                            Senate Amendment

       The Senate amendment reinstates the tax for 10 years, from 
     October 1, 1997, through September 30, 2007.
       Effective date.--Date of enactment.

                          Conference Agreement

       The conference agreement follows the House bill and Senate 
     amendment with a modification to the reinstatement period. 
     The modified period is October 1, 1997, through March 31, 
     2005.
     4. Application of communications excise tax to prepaid 
         telephone cards (sec. 1044 of the House bill and sec. 843 
         of the Senate amendment)

                              Present Law

       A 3-percent excise tax is imposed on amounts paid for local 
     and toll (long-distance) telephone service and teletypewriter 
     exchange service. The tax is collected by the provider of the 
     service from the consumer (business and personal service).

                               House Bill

       Under the House bill, any amounts paid to communications 
     service providers (in cash or in kind) for the right to award 
     or otherwise distribute free or reduced-rate long-distance 
     telephone service are treated as amounts paid for taxable 
     communication services, subject to the 3-percent ad valorem 
     tax rate. Examples of such taxable amounts include (1) 
     prepaid telephone cards offered through service stations, 
     convenience stores and other businesses to their customers 
     and others and (2) amounts received by communication service 
     providers pursuant to joint venture credit card or other 
     marketing arrangements. The Treasury Department is authorized 
     specifically to disregard accounting allocations or other 
     arrangements which have the effect of reducing artificially 
     the base to which the 3-percent tax is applied. No inference 
     is intended from this provision as to the proper treatment of 
     these payments under present law.
       Effective date.--The provision is effective for amounts 
     paid on or after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with

[[Page H6553]]

     technical modifications. The conference agreement clarifies 
     that any amounts paid to communications service providers (in 
     cash or in kind) for the right to award or otherwise 
     distribute free or reduced-rate telephone service (i.e., 
     local or toll telephone service) are treated as amounts paid 
     for taxable communication services, subject to the 3-percent 
     ad valorem tax rate.
       The conference agreement also clarifies that the base to 
     which the communications tax applies in the case of prepaid 
     telephone cards and similar arrangements is the retail value 
     of the service provided by the use of the card or 
     arrangement. The conferees understand that prepaid telephone 
     cards are offered to the public in two forms. The first type 
     of prepaid telephone card can be called a ``dollar value 
     card.'' In this case, the final customer purchases a card or 
     account which allows him to utilize $X worth of telephone 
     service provided by an underlying telecommunications carrier. 
     In this case, following the House bill and the Senate 
     amendment, the conference agreement provides that the 3-
     percent communications excise tax apply to the value X at the 
     time the prepaid telephone card is sold by a 
     telecommunications carrier to a person who is not a 
     telecommunications carrier.
       The second type of prepaid telephone card can be called a 
     ``unit card'' or a ``minute card.'' In this case the final 
     customer purchases a card or account which allows him to use 
     Y number of units or minutes of telephone service provided by 
     an underlying telecommunications carrier. The conferees 
     intend that the tax applicable to such cards be based on the 
     retail value of the telephone service offered to a consumer 
     and the conference agreement grants the Treasury Department 
     regulatory authority to determine the appropriate retail 
     value. Presently, the Federal Communications Commission 
     generally requires telecommunications carriers to file a 
     tariff listing the prices of their various service offerings 
     including the price of units or minutes offered via prepaid 
     telephone cards. In this case, following the House bill and 
     the Senate amendment, the conference agreement provides that 
     the 3-percent communications excise tax will apply to Y (the 
     number of units or minutes) multiplied by the tariffed price 
     of those units or minutes at the time the prepaid telephone 
     card is sold by a telecommunications carrier to a person who 
     is not a telecommunications carrier. The conferees recognize 
     that such a tariffed value may not in all cases correspond to 
     the over-the-counter price that a final customer may pay for 
     the card. However, the conferees believe that looking to the 
     tariffed price, at present, is the best way to achieve 
     neutral treatment of ``dollar cards'' and ``unit'' or 
     ``minute cards.'' The conferees understand that not all 
     prepaid telephone cards may have an underlying tariff that 
     applies to that particular card. In such cases, the conferees 
     intend that tariffs for comparable telephone service be 
     applied if applicable. The conferees believe that tariffs 
     should continue to be filed for service offered via prepaid 
     telephone cards, but if, in the future, tariff filings are 
     not generally filed the conference agreement authorizes the 
     Treasury Department to determine the appropriate retail value 
     of the units or minutes of service offered on such cards.
       The conferees understand that sometimes a communications 
     service provider may require certain customers to prepay for 
     their service as assurance that payment is made by the 
     customer for services to be provided. The conferees do not 
     consider such arrangements to constitute payment for 
     communications services for the purposes of this provision if 
     the customer is entitled to a full refund, in cash, for the 
     value of any unused service. The conferees consider such 
     arrangements to be deposits to assure payment of service to 
     be provided in the future.
       No inference is intended from this provision as to the 
     proper treatment of payments received by communications 
     service providers for prepaid telephone cards and amounts 
     received by communication service providers pursuant to joint 
     venture credit card or other marketing arrangements under 
     present law.
       Effective date.--The conference agreement modifies the 
     effective date so that the provision is effective for cards 
     sold on or after the first day of the month which commences 
     more than 60 days after the date of enactment.
     5. Modify treatment of tires under the heavy highway vehicle 
         retail excise tax (sec. 1402 of the House bill and sec. 
         845 of the Senate amendment)

                              Present Law

       A 12-percent retail excise tax is imposed on certain heavy 
     highway trucks and trailers, and on highway tractors. A 
     separate manufacturers' excise tax is imposed on tires 
     weighing more than 40 pounds. This tire tax is imposed as a 
     fixed dollar amount which varies based on the weight of the 
     tire. Because tires are taxed separately, the value of tires 
     installed on a highway vehicle is excluded from the 12-
     percent excise tax on heavy highway vehicles. The 
     determination of value is factual and has given rise to 
     numerous tax audit challenges.

                               House Bill

       The current exclusion of the value of tires installed on a 
     taxable highway vehicle is repealed. Instead, a credit for 
     the amount of manufacturers' excise tax actually paid on the 
     tires is allowed.
       Effective date.--The provision is effective after December 
     31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     6. Increase tobacco excise taxes (sec. 846 of the Senate 
         amendment)

                              Present Law

       The following excise taxes are imposed on tobacco products:

Cigarettes--
    Small cigarettes--24 cents/pack of 20
    Large cigarettes--$25.20/1000
Cigars--
    Large cigars--12.75% of mfgr. price, up to $30/1000
    Small cigars--$1.125/1000
Cigarette papers--$0.0075/50 papers
Cigarette tubes--$0.15/50 tubes
Chewing tobacco--$0.12/lb.
Snuff--$0.36/lb.
Pipe tobacco--$0.675/lb.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment increases the small cigarette tax rate 
     by 20 cents per pack of 20 (i.e., to 44 cents per pack), and 
     increases the tax rates on other tobacco products 
     proportionately. The Senate amendment also extends the tax to 
     ``roll-your-own'' cigarette tobacco at $0.66/lb., and 
     includes compliance provisions for untaxed cigarettes 
     destined for export.
       Floor stocks taxes are imposed on cigarettes and other 
     currently taxed tobacco products held for sale on October 1, 
     1997 (including articles held in foreign trade zones).
       Effective date.--October 1, 1997.

                          Conference Agreement

       The conference agreement on H.R. 2014 does not include the 
     Senate amendment. However, the conference agreement on H.R. 
     2015 follows the Senate amendment, with modifications. First, 
     the tax rate on small cigarettes is increased by $5 per 
     thousand (10 cents per pack of 20 cigarettes) and the tax 
     rates on other currently taxed tobacco products are increased 
     proportionately beginning on January 1, 2000. On January 1, 
     2002, the small cigarette tax rate is increased by an 
     additional $2.50 per thousand (5 cents per pack) with the tax 
     rates on other currently taxed tobacco products also being 
     increased proportionately at that time. Thus, the aggregate 
     tax increase on small cigarettes is 15 cents per pack of 20 
     cigarettes. The conference agreement imposes tax on ``roll-
     your-own'' tobacco at the same rate as pipe tobacco.
       The conference agreement includes a technical amendment to 
     H.R. 2015, which provides that an amount equal to the 
     increase in tobacco excise taxes included in H.R. 2015 will 
     be credited against total payments made by parties pursuant 
     to future Federal legislation implementing the proposed 
     tobacco industry settlement agreement of June 20, 1997.
       Effective date.--The conference agreement on H.R. 2015 is 
     effective on the date of enactment for tobacco products 
     removed after December 31, 1999, and December 31, 2001, 
     respectively. Appropriate floor stocks taxes are imposed on 
     January 1, 2000, and on January 1, 2002.

           F. Provisions Relating to Tax-Exempt Organizations

     1. Extend UBIT rules to second-tier subsidiaries and amend 
         control test (sec. 1051 of the House bill and sec. 851 of 
         the Senate amendment)

                              Present Law

       In general, interest, rents, royalties and annuities are 
     excluded from unrelated taxable business income (UBTI) of 
     tax-exempt organizations. However, section 512(b)(13) treats 
     otherwise excluded rent, royalty, annuity, and interest 
     income as UBTI if such income is received from a taxable or 
     tax-exempt subsidiary that is 80 percent controlled by the 
     parent tax-exempt organization.31 In the case of a 
     stock subsidiary, the 80 percent control test is met if the 
     parent organization owns 80 percent or more of the voting 
     stock and all other classes of stock of the 
     subsidiary.32 In the case of a non-stock 
     subsidiary, the applicable Treasury regulations look to 
     factors such as the representation of the parent corporation 
     on the board of directors of the nonstock subsidiary, or the 
     power of the parent corporation to appoint or remove the 
     board of directors of the subsidiary.33
---------------------------------------------------------------------------
     \31\ For this purpose, a ``controlled organization'' is 
     defined under section 368(c). Under present law, rent, 
     royalty, annuity, and interest payments are treated as UBTI 
     when received by the parent organization based on the 
     percentage of the subsidiary's income that is UBTI (either in 
     the hands of the subsidiary if the subsidiary is tax-exempt, 
     or in the hands of the parent organization if the subsidiary 
     is taxable).
     \32\ Treas. reg. sec. 1.512(b)-1(l)(4)(I)(a).
     \33\ Treas. reg. sec. 1.512(b)-l(1)(4)(I)(b).
---------------------------------------------------------------------------
       The control test under section 512(b)(13) does not, 
     however, incorporate any indirect ownership 
     rules.34 Consequently, rents, royalties, annuities 
     and interest derived from

[[Page H6554]]

     second-tier subsidiaries generally do not constitute UBTI to 
     the tax-exempt parent organization.35
---------------------------------------------------------------------------
     \34\ See PLR 9338003 (June 16, 1993) (holding that because no 
     indirect ownership rules are applicable under section 
     512(b)(13), rents paid by a second-tier taxable subsidiary 
     are not UBTI to a tax-exempt parent organization). In 
     contrast, an example of an indirect ownership rule can be 
     found in Code section 318. Section 318(a)(2)(C) provides that 
     if 50 percent or more in value of the stock in a corporation 
     is owned, directly or indirectly, by or for any person, such 
     person shall be considered as owning the stock owned, 
     directly or indirectly by or for such corporation, in the 
     proportion the value of the person's stock ownership bears to 
     the total value of all stock in the corporation.
     \35\ See PLR 9542045 (July 28, 1995) (holding that first-tier 
     holding company and second- tier operating subsidiary were 
     organized with bona fide business functions and were not 
     agents of the tax-exempt parent organization; therefore, 
     rents, royalties, and interest received by tax-exempt parent 
     organization from second-tier subsidiary were not UBTI).
---------------------------------------------------------------------------

                               House Bill

       The House bill modifies the test for determining control 
     for purposes of section 512(b)(13). Under the House bill, 
     ``control'' means (in the case of a stock corporation) 
     ownership by vote or value of more than 50 percent of the 
     stock. In the case of a partnership or other entity, control 
     means ownership of more than 50 percent of the profits, 
     capital or beneficial interests.
       In addition, the House bill applies the constructive 
     ownership rules of section 318 for purposes of section 
     512(b)(13). Thus, a parent exempt organization is deemed to 
     control any subsidiary in which it holds more than 50 percent 
     of the voting power or value, directly (as in the case of a 
     first-tier subsidiary) or indirectly (as in the case of a 
     second-tier subsidiary).
       The House bill also makes technical modifications to the 
     method provided in section 512(b)(13) for determining how 
     much of an interest, rent, annuity, or royalty payment made 
     by a controlled entity to a tax-exempt organization is 
     includible in the latter organization's UBTI. Such payments 
     are subject to the unrelated business income tax to the 
     extent the payment reduces the net unrelated income (or 
     increases any net unrelated loss) of the controlled entity.
       Effective date.--The modification of the control test to 
     one based on vote or value, the application of the 
     constructive ownership rules of section 318, and the 
     technical modifications to the flow-through method apply to 
     taxable years beginning after the date of enactment. The 
     reduction of the ownership threshold for purposes of the 
     control test from 80 percent to more than 50 percent applies 
     to taxable years beginning after December 31, 1998.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, except that the effective date is modified 
     to provide temporary transition relief for certain payments. 
     The provision does not apply to payments made during the 
     first two taxable years beginning on or after the date of 
     enactment if such payments are made pursuant to a binding 
     written contract in effect as of June 8, 1997, and at all 
     times thereafter before such payment. In addition, the 
     conference agreement does not include the delayed application 
     of the reduction of the ownership threshold for purposes of 
     the control test from 80 percent to more than 50 percent.
     2. Limitation on increase in basis of property resulting from 
         sale by tax-exempt entity to related person (sec. 1052 of 
         the House bill and sec. 852 of the Senate amendment)

                              Present law

       If a tax-exempt entity transfers assets to a controlled 
     taxable entity in a transaction that is treated as a sale, 
     the transferee taxable entity obtains a fair market value 
     basis in the assets. Because the transferor is tax-exempt, no 
     gain is recognized on the transfer except to the extent of 
     certain unrelated business taxable income, if any.
       Other provisions of the Code deny certain tax benefits when 
     a transferor and transferee are related parties. For example, 
     losses on sales between related parties are not recognized 
     (sec. 267). As another example, ordinary income treatment, 
     rather than capital gain treatment, is required on a sale of 
     depreciable property between related parties.(sec.1239).

                               House Bill

       In the case of a sale or exchange of property directly or 
     indirectly between a tax-exempt entity and a related person, 
     the basis of the related person in the property will not 
     exceed the adjusted basis of such property immediately before 
     the sale in the hands of the tax-exempt entity, increased by 
     the amount of any gain recognized to the tax-exempt entity 
     under the unrelated business taxable income rules of section 
     511.
       A related person means any person having a relationship to 
     the tax-exempt entity described in section 267(b) or 
     707(b)(1) (generally, certain more-than-50-percent 
     relationships, with specified attribution rules). For 
     purposes of applying section 267(b)(2), such an entity is 
     treated as if it were an individual.
       Effective date.--The provision applies to sales or 
     exchanges after June 8, 1997, except that it will not apply 
     to a sale or exchange made pursuant to a written agreement 
     which was binding on such date and at all times thereafter.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that it is clarified that the term ``tax-exempt entity'' for 
     purposes of the provision is defined as in section 
     168(h)(2)(A), without regard to section 168(h)(2)(A)(iii).

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment.
     3. Reporting and proxy tax requirements for political and 
         lobbying expenditures of certain tax-exempt organizations 
         (sec. 1053 of the House bill)

                              Present Law

       Section 162(e) denies deductions as a trade or business 
     expense for certain lobbying and political expenditures. 
     Section 162(e)(3) provides a flow-through rule to disallow a 
     deduction for a portion of membership dues or similar 
     payments paid to a tax-exempt organization if the 
     organization notifies the member under section 6033(e) that 
     such portion of the membership dues is allocable to political 
     or lobbying activities engaged in by the organization.
       Under section 6033(e), tax-exempt organizations (other than 
     charities described in section 501(c)(3)) that engage in 
     lobbying or political campaign activities must disclose the 
     amount of members' dues allocable to lobbying or political 
     campaign expenditures to their members and to the Internal 
     Revenue Service (IRS), except for certain in-house, de 
     minimis expenses \36\ If an organization fails to meet the 
     disclosure requirement under section 6033(e), then the 
     organization generally is subject to a so-called ``proxy 
     tax'' equal to 35 percent of the amount of members' dues 
     allowable to lobbying or political campaign expenditures. 
     However, under section 6033(e)(3), organizations are exempt 
     from the disclosure requirements and proxy tax if they can 
     establish to the satisfaction of the Secretary of the 
     Treasury that substantially all dues or other similar amounts 
     received by the organization are not deductible without 
     regard to whether or not the organization conducts lobbying 
     or political campaign activities. In Rev. Proc. 95-35, the 
     IRS announced that all tax-exempt organizations--other than 
     (1) organizations described in section 501(c)(4) that are not 
     veterans organizations, (2) agricultural and horticultural 
     organizations described in section 501(c)(5), and (3) trade 
     associations and other organizations described in section 
     501(c)(6)--are deemed automatically to qualify for the 
     section 6033(e)(3) exemption from the general disclosure 
     requirements and proxy tax. Rev. Proc. 95-35 further provides 
     that an organization described in section 501(c)(4) or an 
     agricultural or horticultural organization described in 
     section 501(c)(5) qualified for the section 6033(e)(3) 
     exemption if the organization receives at least 90 percent of 
     its dues from (1) members with annual dues of less than $50 
     or (2) other tax-exempt organizations. Under Rev. Proc. 95-
     35, a trade association or other organization described in 
     section 501(c)(6) qualifies for the section 6033(e)(3) 
     exemption if the organization receives at least 90 percent of 
     its dues from other tax-exempt organizations.37
---------------------------------------------------------------------------
     \36\ Such disclosure is not required, however with respect to 
     political expenditures if tax is imposed on the organization 
     with respect to such expenditures under section 527(f) (see 
     sec. 6033(e)(1)(B)(iii)).
     \37\ In addition, Rev. Proc. 95-35 provides that any 
     organization may establish that it satisfies the section 
     6033(e)(3) exemption by (1) maintaining records establishing 
     that 90 percent or more of the annual dues paid to the 
     organization are not deductible without regard to whether or 
     not the organization conducts lobbying or political campaign 
     activities, and (2) notifying the IRS that it is described in 
     section 6033(e)(3) on any Form 990 (i.e., annual information 
     return) that it is required to file. Additionally, an 
     organization may request a private letter ruling that the 
     organization is eligible for the section 6033(e)(3) 
     exemption.
---------------------------------------------------------------------------

                               House Bill

       Section 6033(e)(3) is amended to provide that an exemption 
     from the general disclosure requirements and proxy tax of 
     section 6033(e) is available to a tax-exempt organization if 
     more than 90 percent of the amount of aggregate annual dues 
     (or similar payments) received by the organization are paid 
     by (1) individuals or families whose annual dues (or similar 
     amounts) are less than $100,38 or (2) tax-exempt 
     entities. For purposes of the provision, all organizations 
     sharing a name, charter, historic affiliation, or similar 
     characteristics and coordinating their activities would be 
     treated as a single entity. As under present law, charities 
     described in section 501(c)(3) are not subject to the section 
     6033(e) disclosure requirements and proxy tax.
---------------------------------------------------------------------------
     \38\ The $100 amount will be indexed for inflation after 
     December 31, 1997 (rounded to the nearest multiple of $5).
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     4. Repeal grandfather rule with respect to pension business 
         of certain insurers (sec. 1054 of the bill and sec. 853 
         of the Senate amendment)

                              Present Law

       Present law provides that an organization described in 
     sections 501(c)(3) or (4) of the Code is exempt from tax only 
     if no substantial part of its activities consists of 
     providing commercial-type insurance. When this rule was 
     enacted in 1986, certain treatment

[[Page H6555]]

     (described below) applied to Blue Cross and Blue Shield 
     organizations providing health insurance that (1) were in 
     existence on August 16, 1986; (2) were determined at any time 
     to be tax-exempt under a determination that had not been 
     revoked; and (3) were tax-exempt for the last taxable year 
     beginning before January 1, 1987 (when the present-law rule 
     became effective), provided that no material change occurred 
     in the structure or operations of the organizations after 
     August 16, 1986, and before the close of 1986 or any 
     subsequent taxable year.
       The treatment applicable to such organizations, which 
     became taxable organizations under the provision, is as 
     follows. A special deduction applies with respect to health 
     business equal to 25 percent of the claims and expenses 
     incurred during the taxable year less the adjusted surplus at 
     the beginning of the year. An exception is provided for such 
     organizations from the application of the 20-percent 
     reduction in the deduction for increases in unearned premiums 
     that applies generally to property and casualty insurance 
     companies. A fresh start was provided with respect to changes 
     in accounting methods resulting from the change from tax-
     exempt to taxable status. Thus, no adjustment was made under 
     section 481 on account of an accounting method change. Such 
     an organization was required to compute its ending 1986 loss 
     reserves without artificial changes that would reduce 1987 
     income. Thus, any reserve weakening after August 16, 1986 was 
     treated as occurring in the organization's first taxable year 
     beginning after December 31, 1986. The basis of such an 
     organization's assets was deemed to be equal to the amount of 
     the assets' fair market value on the first day of the 
     organization's taxable year beginning after December 31, 
     1986, for purposes of determining gain or loss (but not for 
     determining depreciation or for other purposes).
       Grandfather rules were provided in the 1986 Act relating to 
     the provision. It was provided that the provision does not 
     apply to that portion of the business of the Teachers 
     Insurance Annuity Association-College Retirement Equities 
     Fund which is attributable to pension business, nor does the 
     provision apply with respect to that portion of the business 
     of Mutual of America which is attributable to pension 
     business. Pension business means the administration of any 
     plan described in section 401(a) of the Code which includes a 
     trust exempt from tax under section 501(a), and plan under 
     which amounts are contributed by an individual's employer for 
     an annuity contract described in section 403(b) of the Code, 
     any individual retirement plan described in section 408 of 
     the Code, and any eligible deferred compensation plan to 
     which section 457(a) of the Code applies.

                               House Bill

       The House bill repeals the grandfather rules applicable to 
     that portion of the business of the Teachers Insurance 
     Annuity Association-College Retirement Equities Fund which is 
     attributable to pension business and to that portion of the 
     business of Mutual of America which is attributable to 
     pension business. The Teachers Insurance Annuity Association 
     and College Retirement Equities Fund and Mutual of America 
     are to be treated for Federal tax purposes as life insurance 
     companies.
       A fresh start is provided with respect to changes in 
     accounting methods resulting from the change from tax-exempt 
     to taxable status. Thus, no adjustment is made under section 
     481 on account of an accounting method change. The Teachers 
     Insurance Annuity Association and College Retirement Equities 
     Fund and Mutual of America are required to compute ending 
     1997 loss reserves without artificial changes that would 
     reduce 1998 income. Thus, any reserve weakening after June 8, 
     1997, is treated as occurring in the organization's first 
     taxable year beginning after December 31, 1997. The basis of 
     assets of Teachers Insurance Annuity Association and College 
     Retirement Equities Fund and Mutual of America is deemed to 
     be equal to the amount of the assets' fair market value on 
     the first day of the organization's taxable year beginning 
     after December 31, 1997, for purposes of determining gain or 
     loss (but not for determining depreciation or for other 
     purposes).
       Effective date.--Taxable years beginning after December 31, 
     1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that the Senate amendment repeals only the grandfather rule 
     applicable to that portion of the business of Mutual of 
     America which is attributable to pension business.
       Effective date.--Same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill.

                         G. Foreign Provisions

     1. INCLUSION OF INCOME FROM NOTIONAL PRINCIPAL CONTRACTS AND 
                   STOCK LENDING TRANSACTIONS UNDER SUBPART F 
                   (SEC. 1171 OF THE HOUSE BILL AND SEC. 861 OF 
                   THE SENATE AMENDMENT)

                              Present Law

       Under the subpart F rules, the U.S. 10-percent shareholders 
     of a controlled foreign corporation (``CFC'') are subject to 
     U.S. tax currently on certain income earned by the CFC, 
     whether or not such income is distributed to the 
     shareholders. The income subject to current inclusion under 
     the subpart F rules includes, among other things, ``foreign 
     personal holding company income.''
       Foreign personal holding company income generally consists 
     of the following: dividends, interest, royalties, rents and 
     annuities; net gains from sales or exchanges of (1) property 
     that gives rise to the foregoing types of income, (2) 
     property that does not give rise to income, and (3) interests 
     in trusts, partnerships, and REMICs; net gains from 
     commodities transactions; net gains from foreign currency 
     transactions; and income that is equivalent to interest. 
     Income from notional principal contracts referenced to 
     commodities, foreign currency, interest rates, or indices 
     thereon is treated as foreign personal holding company 
     income; income from equity swaps or other types of notional 
     principal contracts is not treated as foreign personal 
     holding company income. Income derived from transfers of debt 
     securities (but not equity securities) pursuant to the rules 
     governing securities lending transactions (sec. 1058) is 
     treated as foreign personal holding company income.
       Income earned by a CFC that is a regular dealer in the 
     property sold or exchanged generally is excluded from the 
     definition of foreign personal holding company income. 
     However, no exception is available for a CFC that is a 
     regular dealer in financial instruments referenced to 
     commodities.
       A U.S. shareholder of a passive foreign investment company 
     (``PFIC'') is subject to U.S. tax and an interest charge with 
     respect to certain distributions from the PFIC and gains on 
     dispositions of the stock of the PFIC, unless the shareholder 
     elects to include in income currently for U.S. tax purposes 
     its share of the earnings of the PFIC. A foreign corporation 
     is a PFIC if it satisfies either a passive income test or a 
     passive assets test. For this purpose, passive income is 
     defined by reference to foreign personal holding company 
     income.

                               House Bill

       The House bill treats net income from all types of notional 
     principal contracts as a new category of foreign personal 
     holding company income. However, income, gain, deduction or 
     loss from a notional principal contract entered into to hedge 
     an item of income in another category of foreign personal 
     holding company income is included in that other category.
       The House bill treats payments in lieu of dividends derived 
     from equity securities lending transactions pursuant to 
     section 1058 as another new category of foreign personal 
     holding company income.
       The House bill provides an exception from foreign personal 
     holding company income for certain income, gain, deduction, 
     or loss from transactions (including hedging transactions) 
     entered into in the ordinary course of a CFC's business as a 
     regular dealer in property, forward contracts, options, 
     notional principal contracts, or similar financial 
     instruments (including instruments referenced to 
     commodities).
       These modifications to the definition of foreign personal 
     holding company income apply for purposes of determining a 
     foreign corporation's status as a PFIC.
       Effective date.--The provision applies to taxable years 
     beginning after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. The conferees wish to clarify the treatment 
     of notional principal contracts under the provision. Although 
     net income from notional principal contracts is added as a 
     new category of foreign personal holding company income, 
     amounts with respect to a notional principal contract entered 
     into to hedge an item described in another category of 
     foreign personal holding company income are taken into 
     account under the rules of such other category. In this 
     regard, gains and losses from transactions in inventory 
     property are covered by an exclusion from the category of 
     personal holding company income for net gains from property 
     transactions; income from a notional principal contract 
     entered into to hedge inventory property is taken into 
     account under such category and thus similarly is excluded 
     from foreign personal holding company income.
     2. Restrict like-kind exchange rules for certain personal 
         property (sec. 1172 of the House bill and sec. 862 of the 
         Senate amendment)

                              Present Law

       An exchange of property, like a sale, generally is a 
     taxable event. However, no gain or loss is recognized if 
     property held for productive use in a trade or business or 
     for investment is exchanged for property of a ``like-kind'' 
     which is to be held for productive use in a trade or business 
     or for investment (sec. 1031). In general, any kind of real 
     estate is treated as of a like-kind with other real property 
     as long as the properties are both located either within or 
     both outside the United States. In addition, certain types of 
     property, such as inventory, stocks and bonds, and 
     partnership interests, are not eligible for nonrecognition 
     treatment under section 1031.
       If section 1031 applies to an exchange of properties, the 
     basis of the property received in the exchange is equal to 
     the basis of the property transferred, decreased by any money 
     received by the taxpayer, and further adjusted for any gain 
     or loss recognized on the exchange.

                               House Bill

       The House bill provides that personal property 
     predominantly used within the United

[[Page H6556]]

     States and personal property predominantly used outside the 
     United States are not ``like-kind'' properties. For this 
     purpose, the use of the property surrendered in the exchange 
     will be determined based upon the use during the 24 months 
     immediately prior to the exchange. Similarly, for section 
     1031 to apply, property received in the exchange must 
     continue in the same use (i.e., foreign or domestic) for the 
     24 months immediately after the exchange.
       The 24-month period is reduced to such lesser time as the 
     taxpayer held the property, unless such shorter holding 
     period is a result of a transaction (or series of 
     transactions) structured to avoid the purposes of the 
     provision. Property described in section 168(g)(4) 
     (generally, property used both within and without the United 
     States that is eligible for accelerated depreciation as if 
     used in the United States) will be treated as property 
     predominantly used in the United States.
       Effective date.--The provision is effective for exchanges 
     after June 8, 1997, unless the exchange is pursuant to a 
     binding contract in effect on such date and all times 
     thereafter. A contract will not fail to be considered to be 
     binding solely because (1) it provides for a sale in lieu of 
     an exchange or (2) either the property to be disposed of as 
     relinquished property or the property to be acquired as 
     replacement property (whichever is applicable) was not 
     identified under the contract before June 9, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Impose holding period requirement for claiming foreign tax 
         credits with respect to dividends (sec. 1173 of the House 
         bill and sec. 863 of the Senate amendment)

                              Present Law

       A U.S. person that receives a dividend from a foreign 
     corporation generally is entitled to a credit for foreign 
     income taxes paid on the dividend, regardless of the 
     shareholder's holding period for the stock. If a regulated 
     investment company (``RIC'') elects, U.S. persons that 
     receive dividends from the RIC generally are entitled to an 
     indirect credit for foreign taxes paid by the RIC, regardless 
     of the shareholder's holding period for the RIC stock. A U.S. 
     corporation that receives a dividend from a foreign 
     corporation in which it has a 10-percent or greater voting 
     interest generally is entitled to an indirect credit for 
     foreign taxes paid by the foreign corporation, also 
     regardless of the shareholder's holding period.

                               House Bill

       The House bill disallows the foreign tax credits normally 
     available with respect to a dividend from a corporation or 
     RIC if the shareholder has not held the stock for 16 days in 
     the case of common stock and 46 days in the case of preferred 
     stock. The disallowance applies both to foreign tax credits 
     for foreign withholding taxes that are paid on the dividend 
     where the dividend-paying stock is held for less than these 
     holding periods and to indirect foreign tax credits for taxes 
     paid by a lower-tier foreign corporation or a RIC where any 
     of the required stock in the chain of ownership is held for 
     less than these holding periods. Periods during which a 
     taxpayer is protected from risk of loss generally are not 
     counted toward the holding period requirement. In the case of 
     a bona fide contract to sell stock, a special rule applies 
     for purposes of indirect foreign tax credits. The House bill 
     also provides an exception for foreign active securities 
     dealers.
       Effective date.--The provision is effective for dividends 
     paid or accrued more than 30 days after the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill with one 
     modification. Under the Senate amendment, the special rule 
     for contracts to sell stock does not apply to indirect 
     foreign tax credits of a RIC shareholder.

                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment with one modification. The conference agreement 
     grants regulatory authority to the Secretary of the Treasury 
     to treat certain foreign taxes as not subject to the 
     provision. The conferees anticipate that this authority may 
     be used to address internal withholding taxes imposed by a 
     foreign country on persons that do business in the foreign 
     country.
     4. Penalties for failure to file disclosure of exemption for 
         income from the international operation of ships or 
         aircraft by foreign persons (sec. 1174 of the House bill)

                              Present Law

       The United States generally imposes a 4-percent tax on the 
     U.S.-source gross transportation income of foreign persons 
     that is not effectively connected with the foreign person's 
     conduct of a U.S. trade or business (sec. 887). Foreign 
     persons generally are subject to U.S. tax at regular 
     graduated rates on net income, including transportation 
     income, that is effectively connected with a U.S. trade or 
     business (secs. 871(b) and 882).
       Transportation income is any income derived from, or in 
     connection with, the use (or hiring or leasing for use) of a 
     vessel or aircraft (or a container used in connection 
     therewith) or the performance of services directly related to 
     such use (sec. 863(c)(3)). Income attributable to 
     transportation that begins and ends in the United States is 
     treated as derived from sources in the United States (sec. 
     863(c)(1)). In the case of transportation that either begins 
     or ends in the United States, generally 50 percent of such 
     income is treated as U.S. source and 50 percent is treated as 
     foreign source (sec. 863(c)(2)). U.S.-source transportation 
     income is treated as effectively connected with a foreign 
     person's conduct of U.S. trade or business only if the 
     foreign person has a fixed place of business in the United 
     States that is involved in the earning of such income and 
     substantially all of such income of the foreign person is 
     attributable to regularly scheduled transportation (sec. 
     887(b)(4)).
       An exemption from U.S. tax is provided for income derived 
     by a nonresident alien individual or foreign corporation from 
     the international operation of a ship or aircraft, provided 
     that the foreign country in which such individual is resident 
     or such corporation is organized grants an equivalent 
     exemption to individual residents of the United States or 
     corporations organized in the United States (secs. 872(b) (1) 
     and (2) and 883(a) (1) and (2)).
       Pursuant to guidance published by the Internal Revenue 
     Service, a nonresident alien individual or foreign 
     corporation that is entitled to an exemption from U.S. tax 
     for its income from the international operation of ships or 
     aircraft must file a U.S. income tax return and must attach 
     to such return a statement claiming the exemption (Rev. Proc. 
     91-12, 1991-1 C.B. 473). If the foreign person is claiming an 
     exemption based on an applicable income tax treaty, the 
     foreign person must disclose that fact as required by the 
     Secretary of the Treasury (sec. 6114). The penalty for 
     failure to make disclosure of a treaty-based position as 
     required under section 6114 is $1,000 for an individual and 
     $10,000 for a corporation (sec. 6712).

                               House Bill

       Under the House bill, a foreign person that claims 
     exemption from U.S. tax for income from the international 
     operation of ships or aircraft, but does not satisfy the 
     filing requirements for claiming such exemption, is subject 
     to the penalty of the denial of such exemption and any 
     deductions or credits otherwise allowable in determining the 
     U.S. tax liability with respect to such income. If a foreign 
     person that has a fixed placed of business in the United 
     States fails to satisfy the filing requirements for claiming 
     an exemption from U.S. tax for its income from the 
     international operation of ships or aircraft, such person is 
     subject to the additional penalty that foreign source income 
     from the international operation of ships or aircraft would 
     be treated as effectively connected with the conduct of a 
     U.S. trade or business, but only to the extent that such 
     income is attributable to such fixed place of business in the 
     United States. Income so treated as effectively connected 
     with a U.S. business is subject to U.S. tax at graduated 
     rates (and is subject to the disallowance of deductions and 
     credits described above). These penalties do not apply in the 
     case of a failure to disclose that is due to reasonable 
     cause. The provision would not apply to the extent the 
     application would be contrary to any treaty obligation of the 
     United States.
       The House bill also provides for the provision of 
     information by the U.S. Customs Service to the Secretary of 
     the Treasury regarding foreign-flag ships engaged in shipping 
     to or from the United States.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the provision in 
     the House bill.
     5. Limitation on treaty benefits for payments to hybrid 
         entities (sec. 1175 of the House bill and sec. 742 of the 
         Senate amendment)

                              Present Law

       Nonresident alien individuals and foreign corporations 
     (collectively, foreign persons) that are engaged in business 
     in the United States are subject to U.S. tax on the income 
     from such business in the same manner as a U.S. person. In 
     addition, the United States imposes tax on certain types of 
     U.S.-source income, including interest, dividends and 
     royalties, of foreign persons not engaged in business in the 
     United States. Such tax is imposed on a gross basis and is 
     collected through withholding. The statutory rate of this 
     withholding tax is 30 percent. However, most U.S. income tax 
     treaties provide for a reduction in rate, or elimination, of 
     this withholding tax. Treaties generally provide for 
     different applicable withholding tax rates for different 
     types of income. Moreover, the applicable withholding tax 
     rates differ among treaties. The specific withholding tax 
     rates pursuant to a treaty are the result of negotiations 
     between the United States and the treaty partner.
       The application of the withholding tax is more complicated 
     in the case of income derived through an entity, such as a 
     limited liability company, that is treated as a partnership 
     for U.S. tax purposes but may be treated as a corporation for 
     purposes of the tax laws of a treaty partner. The Treasury 
     regulations include specific rules that apply in the case of 
     income derived through an entity that is treated as a 
     partnership for U.S.

[[Page H6557]]

     tax purposes. In the case of a payment of an item of U.S. 
     source income to a U.S. partnership, the partnership is 
     required to impose the withholding tax to the extent the 
     item of income is includible in the distributive share of 
     a partner who is a foreign person. Tax-avoidance 
     opportunities may arise in applying the reduced rates of 
     withholding tax provided under a treaty to cases involving 
     income derived through a limited liability company or 
     other hybrid entity (e.g., an entity that is treated as a 
     partnership for U.S. tax purposes but as a corporation for 
     purposes of the treaty partner's tax laws).
       Following the passage of the House bill and the Senate 
     amendment, proposed and temporary regulations were issued 
     addressing the application of the reduced rates of 
     withholding tax provided under a treaty in cases involving a 
     hybrid entity. Temp. Treas. reg. sec. 1.894-1T.

                               House Bill

       The House bill limits the availability of a reduced rate of 
     withholding tax pursuant to an income tax treaty in order to 
     prevent tax avoidance. Under the House bill, a foreign person 
     is entitled to a reduced rate of withholding tax under a 
     treaty with a foreign country on an item of income derived 
     through an entity that is a partnership (or is otherwise 
     treated as transparent) for U.S. tax purposes only if such 
     item is treated for purposes of the taxation laws of such 
     foreign country as an item of income of such person. This 
     rule does not apply if the treaty itself contains a provision 
     addressing the applicability of the treaty in the case of 
     income derived through a partnership. Moreover, the rule does 
     not apply if the foreign country imposes tax on an actual 
     distribution of such item of income from such partnership to 
     such person. In this regard, the foreign country will be 
     considered to impose tax on a distribution even though such 
     tax may be reduced or eliminated by reason of deductions or 
     credits otherwise available to the taxpayer.
       The House bill addresses a potential tax-avoidance 
     opportunity for Canadian corporations with U.S. subsidiaries 
     that arises because of the interaction between the U.S. tax 
     law, the Canadian tax law, and the income tax treaty between 
     the United States and Canada. Through the use of a U.S. 
     limited liability company, which is treated as a partnership 
     for U.S. tax purposes but as a corporation for Canadian tax 
     purposes, a payment of interest (which is deductible for U.S. 
     tax purposes) may be converted into a dividend (which is 
     excludable for Canadian tax purposes). Accordingly, interest 
     paid by a U.S. subsidiary through a U.S. limited liability 
     company to a Canadian parent corporation would be deducted by 
     the U.S. subsidiary for U.S. tax purposes and would be 
     excluded by the Canadian parent corporation for Canadian tax 
     purposes; the only tax on such interest would be a U.S. 
     withholding tax, which may be imposed at a reduced rate of 10 
     percent (rather than the full statutory rate of 30 percent) 
     pursuant to the income tax treaty between the United States 
     and Canada. Under the House bill, withholding tax is imposed 
     at the full statutory rate of 30 percent in such case. The 
     provision would not apply if the U.S.-Canadian income tax 
     treaty is amended to include a provision reaching a similar 
     result. In this regard, the United States and Canada recently 
     negotiated a proposed protocol that would amend the provision 
     in the treaty governing cross-border social security payments 
     and this issue could be addressed in the context of that 
     protocol or an additional protocol. Moreover, the provision 
     would not apply if Canada were to impose tax on the Canadian 
     parent on dividends received from the U.S. limited liability 
     company.
       It is believed that the provision generally is consistent 
     with U.S. treaty obligations, including the U.S.-Canada 
     treaty. The United States has recognized authority to 
     implement its tax treaties so as to avoid abuses.
       Effective date.--The provision is effective upon date of 
     enactment.

                            Senate Amendment

       The Senate amendment provides that the Secretary of the 
     Treasury shall prescribe regulations to determine the extent 
     to which a taxpayer shall be denied benefits under an income 
     tax treaty of the United States with respect to any payment 
     received by, or income attributable to activities of, an 
     entity that is treated as a partnership for U.S. federal 
     income tax purposes (or is otherwise treated as fiscally 
     transparent for such purposes) but is treated as fiscally 
     non-transparent for purposes of the tax laws of the 
     jurisdiction of residence of the taxpayer.
       The Senate amendment addresses the potential tax-avoidance 
     opportunity that may arise in applying the reduced rates of 
     withholding tax provided under a treaty to cases involving 
     income derived through a limited liability company or other 
     hybrid entity (e.g., an entity that is treated as a 
     partnership for U.S. tax purposes but as a corporation for 
     purposes of the treaty partner's tax laws). Such a tax-
     avoidance opportunity may arise, for example, for Canadian 
     corporations with U.S. subsidiaries because of the 
     interaction between the U.S. tax law, the Canadian tax law, 
     and the income tax treaty between the United States and 
     Canada. Through the use of a U.S. limited liability company, 
     which is treated as a partnership for U.S. tax purposes but 
     as a corporation for Canadian tax purposes, a payment of 
     interest (which is deductible for U.S. tax purposes) may be 
     converted into a dividend (which is excludable for Canadian 
     tax purposes). Accordingly, interest paid by a U.S. 
     subsidiary through a U.S. limited liability company to a 
     Canadian parent corporation would be deducted by the U.S. 
     subsidiary for U.S. tax purposes and would be excluded by the 
     Canadian parent corporation for Canadian tax purposes; the 
     only tax on such interest would be a U.S. withholding tax, 
     which may be imposed at a reduced rate of 10 percent (rather 
     than the full statutory rate of 30 percent) pursuant to the 
     income tax treaty between the United States and Canada. It is 
     expected that the regulations will impose withholding tax at 
     the full statutory rate of 30 percent in such case.
       Effective date.--The provision is effective upon date of 
     enactment.

                          Conference Agreement

       The conference agreement generally follows the House bill 
     with a modification to provide regulatory authority to 
     address the availability of treaty benefits in situations 
     that involve hybrid entities but that are not covered by the 
     denial of benefits specifically provided by the provision.
       Under the conference agreement, a foreign person is not 
     entitled to a reduced rate of withholding tax under a treaty 
     with a foreign country on an item of income derived through 
     an entity that is treated as a partnership (or is otherwise 
     treated as fiscally transparent) for U.S. tax purposes if (i) 
     such item is not treated for purposes of the taxation laws of 
     such foreign country as an item of income of such person, 
     (ii) the foreign country does not impose tax on an actual 
     distribution of such item of income from such entity to such 
     person, and (iii) the treaty itself does not contain a 
     provision addressing the applicability of the treaty in the 
     case of income derived through a partnership or other 
     fiscally transparent entity. In addition, the conference 
     agreement grants the Secretary of the Treasury authority to 
     prescribe regulations to determine, in situations other than 
     the situation specifically described in the statutory 
     provision, the extent to which a taxpayer shall not be 
     entitled to benefits under an income tax treaty of the United 
     States with respect to any payment received by, or income 
     attributable to activities of, an entity that is treated as a 
     partnership for U.S. federal income tax purposes (or is 
     otherwise treated as fiscally transparent for such purposes) 
     but is treated as fiscally non-transparent for purposes of 
     the tax laws of the jurisdiction of residence of the 
     taxpayer.
       The conferees note that on June 30, 1997 the Secretary 
     issued proposed and temporary regulations addressing the 
     availability of treaty benefits in cases involving hybrid 
     entities. The conferees believe that these regulations are 
     consistent with the provision in the conference agreement. 
     The conferees also believe that the provision in the 
     conference agreement and the temporary and proposed 
     regulations are consistent with U.S. treaty obligations. Such 
     provision and such regulations represent interpretations of 
     U.S. treaties clarifying those situations involving hybrid 
     entities in which taxpayers are entitled to treaty benefits 
     and those situations in which they are not.
     6. Interest on underpayments that are reduced by foreign tax 
         credit carrybacks (sec. 1176 of the House bill and sec. 
         865 of the Senate amendment)

                              Present Law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign source income. The amount of foreign tax credits that 
     can be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S. source income. Separate limitations are 
     applied to specific categories of income. The amount of 
     creditable taxes paid or accrued in any taxable year which 
     exceeds the foreign tax credit limitation is permitted to be 
     carried back two years and carried forward five years.
       For purposes of the computation of interest on overpayments 
     of tax, if an overpayment for a taxable year results from a 
     foreign tax credit carryback from a subsequent taxable year, 
     the overpayment is deemed not to arise prior to the filing 
     date for the subsequent taxable year in which the foreign 
     taxes were paid or accrued (sec. 6611(g)). Accordingly, 
     interest does not accrue on the overpayment prior to the 
     filing date for the year of the carryback that effectively 
     created such overpayment. In Fluor Corp. v. United States, 35 
     Fed. Cl. 520 (1996), the court held that in the case of an 
     underpayment of tax (rather than an overpayment) for a 
     taxable year that is eliminated by a foreign tax credit 
     carryback from a subsequent taxable year, interest does not 
     accrue on the underpayment that is eliminated by the foreign 
     tax credit carryback. The Government has filed an appeal in 
     the Fluor case.

                               House Bill

       Under the House bill, if an underpayment for a taxable year 
     is reduced or eliminated by a foreign tax credit carryback 
     from a subsequent taxable year, such carryback does not 
     affect the computation of interest on the underpayment for 
     the period ending with the filing date for such subsequent 
     taxable year in which the foreign taxes were paid or accrued. 
     The House bill also clarifies the application of the interest 
     rules of both section 6601 and section 6611 in the case of a 
     foreign tax credit carryback that is triggered by a net 
     operating loss or net capital loss carryback; in such a case, 
     a deficiency is not considered to have been reduced, and an 
     overpayment is not considered to have been

[[Page H6558]]

     created, until the filing date for the subsequent year in 
     which the loss carryback arose. No inference is intended 
     regarding the computation of interest under present law in 
     the case of a foreign tax credit carryback (including a 
     foreign tax credit carryback that is triggered by a net 
     operating loss or net capital loss carryback).
       Effective date.--The provision is effective for foreign 
     taxes actually paid or accrued in taxable years beginning 
     after date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     7. Determination of period of limitations relating to foreign 
         tax credits (sec. 1177 of the House bill and sec. 866 of 
         the Senate amendment)

                              Present Law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign source income. The amount of foreign tax credits that 
     can be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S. source income. Separate limitations are 
     applied to specific categories of income. The amount of 
     creditable taxes paid or accrued in any taxable year which 
     exceeds the foreign tax credit limitation is permitted to be 
     carried back two years and carried forward five years.
       For purposes of the period of limitations on filing claims 
     for credit or refund, in the case of a claim relating to an 
     overpayment attributable to foreign tax credits, the 
     limitations period is ten years from the filing date for the 
     taxable year with respect to which the claim is made. 
     The Internal Revenue Service has taken the position that, 
     in the case of a foreign tax credit carryforward, the 
     period of limitations is determined by reference to the 
     year in which the foreign taxes were paid or accrued (and 
     not the year to which the foreign tax credits are carried) 
     (Rev. Rul. 84-125, 1984-2 C.B. 125). However, the court in 
     Ampex Corp. v. United States, 620 F.2d 853 (1980), held 
     that, in the case of a foreign tax credit carryforward, 
     the period of limitations is determined by reference to 
     the year to which the foreign tax credits are carried (and 
     not the year in which the foreign taxes were paid or 
     accrued).

                               House Bill

       Under the House bill, in the case of a claim relating to an 
     overpayment attributable to foreign tax credits, the 
     limitations period is determined by reference to the year in 
     which the foreign taxes were paid or accrued (and not the 
     year to which the foreign tax credits are carried). No 
     inference is intended regarding the determination of such 
     limitations period under present law.
       Effective date.--The provision is effective for foreign 
     taxes paid or accrued in taxable years beginning after date 
     of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     8. Treatment of income from certain sales of inventory as 
         U.S. source (sec. 864 of the Senate amendment)

                              Present Law

       U.S. persons are subject to U.S. tax on their worldwide 
     income. A credit against U.S. tax on foreign source income is 
     allowed for foreign taxes. The amount of foreign tax credits 
     that can be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S. source income. Specific rules apply in 
     determining whether income is from U.S. or foreign sources. 
     Income from the sale or exchange of inventory property 
     generally is sourced where the sale occurs. In Liggett Group, 
     Inc. v. Commissioner, 58 T.C.M. 1167 (1990), the court 
     concluded that a sale of inventory property by a U.S. 
     corporation to U.S. customers gave rise to foreign source 
     income because the sale occurred outside the United States.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, income from a sale of inventory 
     property by a U.S. resident to another U.S. resident for use, 
     consumption, or disposition in the United States is treated 
     as U.S. source income, if the sale is not attributable to an 
     office or other fixed place of business maintained by the 
     seller outside the United States.
       Effective date.--The provision is effective for taxable 
     years beginning after date of enactment.

                          Conference Agreement

       The conference agreement does not include the provision in 
     the Senate amendment.
     9. Modify foreign tax credit carryover rules (sec. 867 of the 
         Senate amendment)

                              Present Law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign source income. The amount of foreign tax credits that 
     can be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S. source income. Separate foreign tax credit 
     limitations are applied to specific categories of income.
       The amount of creditable taxes paid or accrued (or deemed 
     paid) in any taxable year which exceeds the foreign tax 
     credit limitation is permitted to be carried back two years 
     and forward five years. The amount carried over may be used 
     as a credit in a carryover year to the extent the taxpayer 
     otherwise has excess foreign tax credit limitation for such 
     year. The separate foreign tax credit limitations apply for 
     purposes of the carryover rules.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment reduces the carryback period for 
     excess foreign tax credits from two years to one year. The 
     amendment also extends the excess foreign tax credit 
     carryforward period from five years to seven years.
       Effective date.--The provision applies to foreign tax 
     credits arising in taxable years beginning after December 31, 
     1997.

                          Conference Agreement

       The conference agreement does not include the provision in 
     the Senate amendment.
     10. Repeal special exception to foreign tax credit limitation 
         for alternative minimum tax purposes (sec. 868 of the 
         Senate amendment)

                              Present Law

       Present law imposes a minimum tax on a corporation to the 
     extent the taxpayer's minimum tax liability exceeds its 
     regular tax liability. The corporate minimum tax is imposed 
     at a rate of 20 percent on alternative minimum taxable income 
     in excess of a phased-out $40,000 exemption amount.
       The combination of the taxpayer's net operating loss 
     carryover and foreign tax credits cannot reduce the 
     taxpayer's alternative minimum tax liability by more than 90 
     percent of the amount determined without these items.
       The Omnibus Budget Reconciliation Act of 1989 (``1989 
     Act'') provided a special exception to the limitation on the 
     use of the foreign tax credit against the tentative minimum 
     tax. In order to qualify for this exception, a corporation 
     must meet four requirements. First, more than 50 percent of 
     both the voting power and value of the stock of the 
     corporation must be owned by U.S. persons who are not members 
     of an affiliated group which includes such corporation. 
     Second, all of the activities of the corporation must be 
     conducted in one foreign country with which the United States 
     has an income tax treaty in effect and such treaty must 
     provide for the exchange of information between such country 
     and the United States. Third, the corporation generally must 
     distribute to its shareholders all current earnings and 
     profits (except for certain amounts utilized for normal 
     maintenance or capital expenditures related to its existing 
     business). Fourth, all of such distributions which are 
     received by U.S. persons must be utilized by such persons in 
     a U.S. trade or business. This exception applies to taxable 
     years beginning after March 31, 1990 (with a proration rule 
     effective for certain taxable years which include March 31, 
     1990).

                               House Bill

       No provision.

                            Senate Amendment

       The special exception regarding the use of foreign tax 
     credits for purposes of the alternative minimum tax, as 
     provided by the 1989 Act, is repealed. Effective date.--The 
     provision is effective for taxable years beginning after the 
     date of enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

               H. Pension and Employee Benefit Provisions

     1. Cashout of certain accrued benefits (sec. 917 of the House 
         bill and sec. 879 of the Senate amendment)

                              Present Law

       Under present law, in the case of an employee whose plan 
     participation terminates, a qualified plan may involuntarily 
     ``cash out'' the benefit (i.e., pay out the balance to the 
     credit of a plan participant without the participant's 
     consent, and, if applicable, the consent of the participant's 
     spouse) if the present value of the benefit does not exceed 
     $3,500. If a benefit is cashed out under this rule and the 
     participant subsequently returns to employment covered by the 
     plan, then service taken into account in computing benefits 
     payable under the plan after the return need not include 
     service with respect to which benefits were cashed out unless 
     the employee ``buys back'' the benefit.
       Generally, a cash-out distribution from a qualified plan to 
     a plan participant can be rolled over, tax free, to an IRA or 
     to another qualified plan.

                               House Bill

       The House bill increases the limit on involuntary cash outs 
     from $3,500 to $5,000. The $5,000 amount is adjusted for 
     inflation beginning after 1998 in $50 increments.
       Effective date.--The provision is effective for plan years 
     beginning after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     the Senate amendment also makes a corresponding change to 
     title I of ERISA and provides that the $5,000 amount is 
     adjusted for inflation beginning after 1997 in $50 
     increments.

[[Page H6559]]

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, except that the conference agreement does 
     not increase the $5,000 limit for inflation.
     2. Election to receive taxable cash compensation in lieu of 
         nontaxable parking benefits (sec. 880 of the Senate 
         amendment)

                              Present Law

       Under present law, up to $165 per month of employer-
     provided parking is excludable from gross income. In order 
     for the exclusion to apply, the parking must be provided in 
     addition to and not in lieu of any compensation that is 
     otherwise payable to the employee. Employer-provided parking 
     cannot be provided as part of a cafeteria plan.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, no amount is includible in the 
     income of an employee merely because the employer offers the 
     employee a choice between cash and employer-provided parking. 
     The amount of cash offered is includible in income only if 
     the employee chooses the cash instead of parking.
       Effective date.--The provision is effective with respect to 
     taxable years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     3. Repeal of excess distribution and excess retirement 
         accumulation taxes (sec. 882 of the Senate amendment)

                              Present Law

       Under present law, a 15-percent excise tax is imposed on 
     excess distributions from qualified retirement plans, tax-
     sheltered annuities, and individual retirement arrangements 
     (``IRAs''). Excess distributions are generally the aggregate 
     amount of retirement distributions from such plans during any 
     calendar year in excess of $160,000 (for 1997) or 5 times 
     that amount in the case of a lump-sum distribution. The 15-
     percent excise tax does not apply to distributions received 
     in 1997, 1998, and 1999.
       An additional 15-percent estate tax is imposed on an 
     individual's excess retirement accumulations. Excess 
     retirement accumulations are generally the balance in 
     retirement plans in excess of the present value of a benefit 
     that would not be subject to the 15-percent tax on excess 
     distributions.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment repeals both the 15-percent excise tax 
     on excess distributions and the 15-percent estate tax on 
     excess retirement accumulations.
       Effective date.--The provision repealing the excess 
     distribution tax is effective with respect to excess 
     distributions received after December 31, 1996. The repeal of 
     the excess accumulation tax is effective with respect to 
     decedents dying after December 31, 1996.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     4. Tax on prohibited transactions (sec. 884 of the Senate 
         amendment)

                              Present Law

       Present law prohibits certain transactions (prohibited 
     transactions) between a qualified plan and a disqualified 
     person in order to prevent persons with a close relationship 
     to the qualified plan from using that relationship to the 
     detriment of plan participants and beneficiaries. A two-tier 
     excise tax is imposed on prohibited transactions. The initial 
     level tax is equal to 10- percent of the amount involved with 
     respect to the transaction. If the transaction is not 
     corrected within a certain period, a tax equal to 100 percent 
     of the amount involved may be imposed.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment increases the initial-level prohibited 
     transaction tax from 10 percent to 15 percent.
       Effective date.--The provision is effective with respect to 
     prohibited transactions occurring after the date of 
     enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     5. Basis recovery rules (sec. 885 of the Senate amendment)

                              Present Law

       Under present law, amounts received as an annuity under a 
     tax-qualified pension plan generally are includible in income 
     in the year received, except to the extent the amount 
     received represents return of the recipient's investment in 
     the contract (i.e., basis). The portion of each annuity 
     payment that represents a return of basis generally is 
     determined by a simplified method. Under this method, the 
     portion of each annuity payment that is a return to basis is 
     equal to the employee's total basis as of the annuity 
     starting date, divided by the number of anticipated payments 
     under a specified table. The number of anticipated payments 
     listed in the table is based on the age of the primary 
     annuitant on the annuity starting date.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, the present-law table applies 
     to benefits based on the life of one annuitant. A separate 
     table applies to benefits based on the life of more than one 
     annuitant.
       Effective date.--The provision is effective with respect to 
     annuity starting dates after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment. As 
     under the Senate amendment, a separate table applies to 
     benefits based on the life of more than one annuitant, as 
     follows:

        Combined age of annuitants                   Number of payments
Not more than 110...................................................410
More than 110 but not more than 120.................................360
More than 120 but not more than 130.................................310
More than 130 but not more than 140.................................260
More than 140.......................................................210

       The conference agreement clarifies that the new table 
     applies to benefits based on the life of more than one 
     annuitant, even if the amount of the annuity varies by 
     annuitant. Thus, for example, the new table applies to a 50-
     percent joint and survivor annuity. The new table does not 
     apply to an annuity paid on a single life merely because it 
     has additional features, e.g., a term certain.
       Effective date.--Same as the Senate amendment.

                  I. Other Revenue-Increase Provisions

     1. Phase out suspense accounts for certain large farm 
         corporations (sec. 1061 of the House bill and sec. 871 of 
         the Senate amendment)

                              Present Law

       A corporation (or a partnership with a corporate partner) 
     engaged in the trade or business of farming must use an 
     accrual method of accounting for such activities unless such 
     corporation (or partnership), for each prior taxable year 
     beginning after December 31, 1975, did not have gross 
     receipts exceeding $1 million. If a farm corporation is 
     required to change its method of accounting, the section 481 
     adjustment resulting from such change is included in gross 
     income ratably over a 10-year period, beginning with the year 
     of change. This rule does not apply to a family farm 
     corporation.
       A provision of the Revenue Act of 1987 (``1987 Act'') 
     requires a family corporation (or a partnership with a family 
     corporation as a partner) to use an accrual method of 
     accounting for its farming business unless, for each prior 
     taxable year beginning after December 31, 1985, such 
     corporation (and any predecessor corporation) did not have 
     gross receipts exceeding $25 million. A family corporation is 
     one where at least 50 percent of the stock of the corporation 
     is held by one, or in some limited cases, two or three, 
     families.
       A family farm corporation that must change to an accrual 
     method of accounting as a result of the 1987 Act provision is 
     required to establish a suspense account in lieu of including 
     the entire amount of the section 481 adjustment in gross 
     income. The initial balance of the suspense account equals 
     the lesser of (1) the section 481 adjustment otherwise 
     required for the year of change, or (2) the section 481 
     adjustment computed as if the change in method of accounting 
     had occurred as of the beginning of the taxable year 
     preceding the year of change.
       The amount of the suspense account is required to be 
     included in gross income if the corporation ceases to be a 
     family corporation. In addition, if the gross receipts of the 
     corporation attributable to farming for any taxable year 
     decline to an amount below the lesser of (1) the gross 
     receipts attributable to farming for the last taxable year 
     for which an accrual method of accounting was not required, 
     or (2) the gross receipts attributable to farming for the 
     most recent taxable year for which a portion of the suspense 
     account was required to be included in income, a portion of 
     the suspense account is required to be included in gross 
     income.

                               House Bill

       The House bill repeals the ability of a family farm 
     corporation to establish a suspense account when it is 
     required to change to an accrual method of accounting. Thus, 
     under the provision, any family farm corporation required to 
     change to an accrual method of accounting would restore the 
     section 481 adjustment applicable to the change in gross 
     income ratably over a 10-year period beginning with the year 
     of change.
       In addition, any taxpayer with an existing suspense account 
     is required to restore the account into income ratably over a 
     20-year period beginning in the first taxable year beginning 
     after June 8, 1997, subject to the present-law requirements 
     to restore such accounts more rapidly. The amount required to 
     be restored to income for a taxable year pursuant to the 20-
     year spread period shall not exceed the net operating loss of 
     the corporation for the year (in the case of a corporation 
     with a net operating loss) or 50 percent of the net income of 
     the taxpayer for the year (for corporations with taxable 
     income). For this purpose, a net operating loss or taxable 
     income is determined without regard to the amount restored to 
     income under the provision. Any reduction in the amount 
     required to be restored to income is taken into account 
     ratably over the remaining years in the 20-year period or, if 
     applicable, after the end of the 20-year period. Amounts that 
     extend beyond the 20-year period remain subject to the net 
     operating loss and 50-percent-

[[Page H6560]]

     of-taxable income rules. The net operating loss and 50-
     percent-of-taxable income rules do not apply to restorations 
     of suspense accounts pursuant to present law.
       Effective date.--The provision is effective for taxable 
     years ending after June 8, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.
       In addition, the Senate amendment repeals the present-law 
     requirement to accelerate the recovery of suspense accounts 
     when the gross receipts of the taxpayer decreases.

                          Conference Agreement

       The conference agreement follows the Senate amendment. In 
     addition, the conferees wish to clarify that in the case of a 
     family farm corporation that elects to be an S corporation 
     for a taxable year, the net operating loss and 50 percent of 
     taxable income limitations shall be determined by taking into 
     account all the items of income, gain, deduction and loss of 
     the corporation, whether or not such items are separately 
     stated under section 1366.
     2. Modify net operating loss carryback and carryforward rules 
         (sec. 1062 of the House bill, and sec. 872 of the Senate 
         amendment)

                              Present Law

       The net operating loss (``NOL'') of a taxpayer (generally, 
     the amount by which the business deductions of a taxpayer 
     exceeds its gross income) may be carried back three years and 
     carried forward 15 years to offset taxable income in such 
     years. A taxpayer may elect to forgo the carryback of an NOL. 
     Special rules apply to real estate investment trusts 
     (``REITs'') (no carrybacks), specified liability losses (10-
     year carryback), and excess interest losses (no carrybacks).

                               House Bill

       The House bill limits the NOL carryback period to two years 
     and extends the NOL carryforward period to 20 years. The 
     House bill does not apply to the carryback rules relating to 
     REITs, specified liability losses, excess interest losses, 
     and corporate capital losses. In addition, the House bill 
     does not apply to NOLs arising from casualty losses of 
     individual taxpayers.
       Effective date.--The provision is effective for NOLs 
     arising in taxable years beginning after the date of 
     enactment.

                            Senate Amendment

       The Senate amendment follows the House bill. In addition, 
     the Senate amendment preserves the 3-year carryback for NOLs 
     of farmers and small businesses attributable to losses 
     incurred in Presidentially declared disaster areas.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     3. Expand the limitations on deductibility of premiums and 
         interest with respect to life insurance, endowment and 
         annuity contracts (sec. 1063 of the House bill and sec. 
         873 of the Senate amendment)

                              Present Law

     Exclusion of inside buildup and amounts received by reason of 
         death
       No Federal income tax generally is imposed on a 
     policyholder with respect to the earnings under a life 
     insurance contract (``inside buildup''). 39 
     Further, an exclusion from Federal income tax is provided for 
     amounts received under a life insurance contract paid by 
     reason of the death of the insured (sec. 101(a)).
---------------------------------------------------------------------------
     \39\ This favorable tax treatment is available only if the 
     policyholder has an insurable interest in the insured when 
     the contract is issued and if the life insurance contract 
     meets certain requirements designed to limit the investment 
     character of the contract (sec. 7702). Distributions from a 
     life insurance contract (other than a modified endowment 
     contract) that are made prior to the death of the insured 
     generally are includible in income, to the extent that the 
     amounts distributed exceed the taxpayer's basis in the 
     contract; such distributions generally are treated first as a 
     tax-free recovery of basis, and then as income (sec. 72(e)). 
     In the case of a modified endowment contract, however, in 
     general, distributions are treated as income first, loans are 
     treated as distributions (i.e., income rather than basis 
     recovery first), and an additional 10 percent tax is imposed 
     on the income portion of distributions made before age 59-\1/
     2\ and in certain other circumstances (secs. 72(e) and (v)). 
     A modified endowment contract is a life insurance contract 
     that does not meet a statutory ``7-pay'' test, i.e., 
     generally is funded more rapidly than 7 annual level premiums 
     (sec. 7702A). Certain amounts received under a life insurance 
     contract on the life of a terminally or chronically ill 
     individual, and certain amounts paid by a viatical settlement 
     provider for the sale or assignment of a life insurance 
     contract on the life of a terminally ill or chronically ill 
     individual, are treated as excludable as if paid of the death 
     of the insured (sec. 101(g)).
---------------------------------------------------------------------------
     Premium deduction limitation
       No deduction is permitted for premiums paid on any life 
     insurance policy covering the life of any officer or 
     employee, or of any person financially interested in any 
     trade or business carried on by the taxpayer, when the 
     taxpayer is directly or indirectly a beneficiary under such 
     policy (sec. 264(a)(1)).
     Interest deduction disallowance with respect to life 
         insurance
       Present law provides generally that no deduction is allowed 
     for interest paid or accrued on any indebtedness with respect 
     to one or more life insurance contracts or annuity or 
     endowment contracts owned by the taxpayer covering any 
     individual who is or was (1) an officer or employee of, or 
     (2) financially interested in, any trade or business 
     currently or formerly carried on by the taxpayer (the 
     ``COLI'' rules).
       This interest deduction disallowance rule generally does 
     not apply to interest on debt with respect to contracts 
     purchased on or before June 20, 1986; rather, an interest 
     deduction limit based on Moody's Corporate Bond Yield 
     Average--Monthly Average Corporates applies in the case of 
     such contracts.40
---------------------------------------------------------------------------
     \40\ Phase-in rules apply generally with respect to otherwise 
     deductible interest paid or accrued after December 31, 1995, 
     and before January 1, 1999, in the case of debt incurred 
     before January 1, 1996. In addition, transition rules apply.
---------------------------------------------------------------------------
       An exception to this interest disallowance rule is provided 
     for interest on indebtedness with respect to life insurance 
     policies covering up to 20 key persons. A key person is an 
     individual who is either an officer or a 20-percent owner of 
     the taxpayer. The number of individuals that can be treated 
     as key persons may not exceed the greater of (1) 5 
     individuals, or (2) the lesser of 5 percent of the total 
     number of officers and employees of the taxpayer, or 20 
     individuals. For determining who is a 20-percent owner, all 
     members of a controlled group are treated as one taxpayer. 
     Interest paid or accrued on debt with respect to a contract 
     covering a key person is deductible only to the extent the 
     rate of interest does not exceed Moody's Corporate Bond Yield 
     Average--Monthly Average Corporates for each month beginning 
     after December 31, 1995, that interest is paid or accrued.
       The foregoing interest deduction limitation was added in 
     1996 to existing interest deduction limitations with respect 
     to life insurance and similar contracts.41
---------------------------------------------------------------------------
     \41\ Since 1942, a limitation has applied to the 
     deductibility of interest with respect to single premium 
     contracts (sec. 264(a)(2)). For this purpose, a contract is 
     treated as a single premium contract if (1) substantially all 
     the premiums on the contract are paid within a period of 4 
     years from the date on which the contract is purchased, or 
     (2) an amount is deposited with the insurer for payment of a 
     substantial number of future premiums on the contract. 
     Further, under a limitation added in 1964, no deduction is 
     allowed for any amount paid or accrued on debt incurred or 
     continued to purchase or carry a life insurance, endowment, 
     or annuity contract pursuant to a plan of purchase that 
     contemplates the systematic direct or indirect borrowing of 
     part or all of the increases in the cash value of the 
     contract (sec. 264(a)(3)). An exception to the latter rule is 
     provided, permitting deductibility of interest on bona fide 
     debt that is part of such a plan, if no part of 4 of the 
     annual premiums due during the first 7 years is paid by means 
     of debt (the ``4-out-of-7 rule'') (sec. 264(c)(1)). In 
     addition to the specific disallowance rules of section 264, 
     generally applicable principles of tax law apply.
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     Interest deduction limitation with respect to tax-exempt 
         interest income
       Present law provides that no deduction is allowed for 
     interest on debt incurred or continued to purchase or carry 
     obligations the interest on which is wholly exempt from 
     Federal income tax (sec. 265(a)(2)). In addition, in the case 
     a financial institution, a proration rule provides that no 
     deduction is allowed for that portion of the taxpayer's 
     interest that is allocable to tax-exempt interest (sec. 
     265(b)). The portion of the interest deduction that is 
     disallowed under this rule generally is the portion 
     determined by the ratio of the taxpayer's (1) average 
     adjusted bases of tax-exempt obligations acquired after 
     August 7, 1986, to (2) the average adjusted bases for all of 
     the taxpayer's assets (sec. 265(b)(2)).42
---------------------------------------------------------------------------
     \42\ Special rules apply for certain tax-exempt obligations 
     of small issuers (sec. 265(b)(3)).
---------------------------------------------------------------------------

                               House Bill

     Expansion of premium deduction limitation to individuals in 
         whom taxpayer has an insurable interest
       Under the House bill, the present-law premium deduction 
     limitation is modified to provide that no deduction is 
     permitted for premiums paid on any life insurance, annuity or 
     endowment contract, if the taxpayer is directly or indirectly 
     a beneficiary under the contract.
     Expansion of interest disallowance to individuals in whom 
         taxpayer has insurable interest
       Under the House bill, no deduction is allowed for interest 
     paid or accrued on any indebtedness with respect to life 
     insurance policy, or endowment or annuity contract, covering 
     the life of any individual. Thus, the provision limits 
     interest deductibility in the case of such a contract 
     covering any individual in whom the taxpayer has an insurable 
     interest when the contract is first issued under applicable 
     State law, except as otherwise provided under present law 
     with respect to key persons and pre-1986 contracts.
     Pro rata disallowance of interest on debt to fund life 
         insurance
       In the case of a taxpayer other than a natural person, no 
     deduction is allowed for the portion of the taxpayer's 
     interest expense that is allocable to unborrowed policy cash 
     surrender values with respect to any life insurance policy or 
     annuity or endowment contract issued after June 8, 1997. 
     Interest expense is so allocable based on the ratio of (1) 
     the taxpayer's average unborrowed policy cash values of life 
     insurance policies, and annuity and endowment contracts, 
     issued after June 8, 1997, to (2) the average adjusted bases 
     for all assets of the taxpayer. This rule does not apply to 
     any policy or contract owned by an entity engaged in a trade 
     or business, covering any individual who is an employee, 
     officer or director of the trade or business at the time 
     first covered by the policy or contract. Such a policy or 
     contract is not taken

[[Page H6561]]

     into account in determining unborrowed policy cash values.
       The unborrowed policy cash values means the cash surrender 
     value of the policy or contract determined without regard to 
     any surrender charge, reduced by the amount of any loan with 
     respect to the policy or contract. The cash surrender value 
     is to be determined without regard to any other contractual 
     or noncontractual arrangement that artificially depresses the 
     cash value of a contract.
       If a trade or business (other than a sole proprietorship or 
     a trade or business of performing services as an employee) is 
     directly or indirectly the beneficiary under any policy or 
     contract, then the policy or contract is treated as held by 
     the trade or business. For this purpose, the amount of the 
     unborrowed cash value is treated as not exceeding the amount 
     of the benefit payable to the trade or business. In the case 
     of a partnership or S corporation, the provision applies at 
     the partnership or corporate level. The amount of the benefit 
     is intended to take into account the amount payable to the 
     business under the contract (e.g., as a death benefit) or 
     pursuant to another agreement (e.g., under a split dollar 
     agreement). The amount of the benefit is intended also to 
     include any amount by which liabilities of the business would 
     be reduced by payments under the policy or contract (e.g., 
     when payments under the policy reduce the principal or 
     interest on a liability owed to or by the business).
       As provided in regulations, the issuer or policyholder of 
     the life insurance policy or endowment or annuity contract is 
     required to report the amount of the amount of the unborrowed 
     cash value in order to carry out this rule.
       If interest expense is disallowed under other provisions of 
     section 264 (limiting interest deductions with respect to 
     life insurance policies or endowment or annuity contracts) or 
     under section 265 (relating to tax-exempt interest), then the 
     disallowed interest expense is not taken into account under 
     this provision, and the average adjusted bases of assets is 
     reduced by the amount of debt, interest on which is so 
     disallowed. The provision is applied before present-law 
     rules relating to capitalization of certain expenses where 
     the taxpayer produces property (sec. 263A).
       An aggregation rule is provided, treating related persons 
     as one for purposes of the provision.
       The provision does not apply to any insurance company 
     subject to tax under subchapter L of the Code. Rather, the 
     rules reducing certain deductions for losses incurred, in the 
     case of property and casualty companies, and reducing reserve 
     deductions or dividends received deductions of life insurance 
     companies, are modified to take into account the increase in 
     cash values of life insurance policies or annuity or 
     endowment contracts held by insurance companies.
     Effective date
       The provisions apply with respect to contracts issued after 
     June 8, 1997. For this purpose, a material increase in the 
     death benefit or other material change in the contract causes 
     the contract to be treated as a new contract. To the extent 
     of additional covered lives under a contract after June 8, 
     1997, the contract is treated as a new contract. In the case 
     of an increase in the death benefit of a contract that is 
     converted to extended term insurance pursuant to 
     nonforfeiture provisions, in a transaction to which section 
     501(d)(2) of the Health Insurance Portability and 
     Accountability Act of 1996 applies, the contract is not 
     treated as a new contract.
     Senate Amendment
       The Senate amendment is the same as the House bill.
     Conference Agreement
       The conference agreement follows the House bill and the 
     Senate amendment, with modifications.
     Expansion of premium deduction limitation to individuals in 
         whom taxpayer has an insurable interest
       The conference agreement provides that the premium 
     deduction limitation does not apply to premiums with respect 
     to any annuity contract described in section 72(s)(5) 
     (relating to certain qualified pension plans, certain 
     retirement annuities, individual retirement annuities, and 
     qualified funding assets), nor to premiums with respect to 
     any annuity to which section 72(u) applies (relating to 
     current taxation of income on the contract in the case of an 
     annuity contract held by a person who is not a natural 
     person).
     Expansion of interest disallowance to individuals in whom 
         taxpayer has insurable interest
       The conference agreement specifies the treatment of certain 
     interest to which the provision of the bill providing for 
     expansion of interest disallowance to individuals in whom 
     taxpayer has insurable interest otherwise would apply. The 
     conference agreement provides that in the case of a transfer 
     for valuable consideration of a life insurance contract or 
     any interest therein described in section 101(a)(2), the 
     amount of the death benefit excluded from gross income under 
     section 101(a) may not exceed an amount equal to the sum of 
     the actual value of the consideration, premiums, interest 
     disallowed as a deduction under new section 264(a)(4), and 
     other amounts subsequently paid by the transferee. Thus, 
     under the provision, in the case of the transfer for value of 
     a life insurance contract, the interest with respect to the 
     contract that otherwise would be disallowed under new section 
     264(a)(4) is capitalized, reducing the amount included in 
     income by the transferee upon receipt by the transferee of 
     the amounts paid by reason of the death of the insured.
     Pro rata disallowance of interest on debt to fund life 
         insurance
       Under the pro rata interest disallowance provision of the 
     bill, the conference agreement provides that interest expense 
     is allocable to unborrowed policy cash values based on the 
     ratio of (1) the taxpayer's average unborrowed policy cash 
     values of life insurance policies, and annuity and endowment 
     contracts, issued after June 8, 1997, to (2) the sum of (a) 
     in the case of assets that are life insurance policies or 
     annuity or endowment contracts, the average unborrowed policy 
     cash values, and (b) in the case of other assets, the average 
     adjusted bases for all such other assets of the taxpayer.
       Under the pro rata interest disallowance rule, the 
     conference agreement expands the exception for any policy or 
     contract owned by an entity engaged in a trade or business, 
     covering an individual who is an employee, officer or 
     director of the trade or business at the time first covered. 
     Under the conference agreement, the exception applies to any 
     policy or contract owned by an entity engaged in a trade or 
     business, which covers one individual who (at the time first 
     insured under the policy or contract ) is (1) a 20-percent 
     owner of the entity, or (2) an individual (who is not a 20-
     percent owner) who is an officer, director or employee of the 
     trade or business. The exception also applies in the case of 
     a joint-life policy or contract under which the sole insureds 
     are a 20-percent owner and the spouse of the 20-percent 
     owner. A joint-life contract under which the sole insureds 
     are a 20-percent owner and his or her spouse is the only type 
     of policy or contract with more than one insured that comes 
     within the exception. Thus, for example, if the insureds 
     under a contract include an individual described in the 
     exception (e.g., an employee, officer, director, or 20-
     percent owner) and any individual who is not described in the 
     exception (e.g., a debtor of the entity), then the exception 
     does not apply to the policy or contract. For purposes of 
     this exception, a 20-percent owner has the same meaning as 
     under present-law section 264(d)(4). In addition, the 
     conference agreement provides that the pro rata interest 
     disallowance rule does not apply to any annuity contract to 
     which section 72(u) applies (relating to current taxation of 
     income on the contract in the case of an annuity contract 
     held by a person who is not a natural person). The conference 
     agreement provides that any policy or contract that is not 
     subject to the pro rata interest disallowance rule by reason 
     of this exception (for 20-percent owners, their spouses, 
     employees, officers and directors, and in the case of an 
     annuity contract to which section 72(u) applies) is not taken 
     into account in the applying the ratio to determine the 
     portion of the taxpayer's interest expense that is allocable 
     to unborrowed policy cash values.
       The conferees wish to clarify that the aggregation rule 
     (treating related persons as one for purposes of the 
     provision) is intended to prevent taxpayers from avoiding the 
     pro rata interest limitation by owning life insurance, 
     endowment or annuity contracts, while incurring interest 
     expense through a related person.
     Treatment of insurance companies
       The conference agreement modifies the rules of the 
     provision relating to the reduction of certain deductions of 
     insurance companies. For purposes of those rules, an increase 
     in the policy cash value for any policy or contract is (1) 
     the amount of the increase in the adjusted cash value, 
     reduced by (2) the gross premiums received with respect to 
     the policy or contract during the taxable year, and increased 
     by (3) distributions under the policy or contract to which 
     section 72(e) apply (other than amounts includable in the 
     policyholder's gross income). For this purpose, the adjusted 
     cash value means the cash surrender value of the policy or 
     contract, increased by (1) commissions payable with respect 
     to the policy or contract for the taxable year, and (2) asset 
     management fees, surrender and mortality charges, and any 
     other fees or charges, specified in regulations, which are 
     imposed (or would be imposed if the policy or contract were 
     surrendered or canceled) with respect to the policy or 
     contract for the taxable year.
     Effective date
       The conferees wish to clarify the rule under the effective 
     date providing that the addition of covered lives is treated 
     as a new contract only with respect to such additional 
     covered lives. It is intended that this rule apply with 
     respect to a master or group policy or contract, not with 
     respect to a joint-life policy or contract (i.e., a policy or 
     contract that insures more than one individual).
     4. Allocation of basis of properties distributed to a partner 
         by a partnership (sec. 1064 of the House bill and sec. 
         874 of the Senate amendment)

                              Present Law

     In general
       The partnership provisions of present law generally permit 
     partners to receive distributions of partnership property 
     without recognition of gain or loss (sec. 731).43 
     Rules

[[Page H6562]]

     are provided for determining the basis of the distributed 
     property in the hands of the distributee, and for allocating 
     basis among multiple properties distributed, as well as for 
     determining adjustments to the distributee partner's basis in 
     its partnership interest. Property distributions are tax-free 
     to a partnership. Adjustments to the basis of the 
     partnership's remaining undistributed assets are not required 
     unless the partnership has made an election that requires 
     basis adjustments both upon partnership distributions and 
     upon transfers of partnership interests (sec. 754).
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     \43\ Exceptions to this nonrecognition rule apply: (1) when 
     money (and the fair market value of marketable securities) 
     received exceeds a partner's adjusted basis in the 
     partnership (sec. 731(a)(1)); (2) when only money, inventory 
     and unrealized receivables are received in liquidation of a 
     partner's interest and loss is realized (sec. 731(a)(2)); (3) 
     to certain disproportionate distributions involving inventory 
     and unrealized receivables (sec. 751(b)); and (4) to certain 
     distributions relating to contributed property (secs. 704(c) 
     and 737). In addition, if a partner engages in a transaction 
     with a partnership other than in its capacity as a member of 
     the partnership, the transaction generally is considered as 
     occurring between the partnership and one who is not a 
     partner (sec. 707).
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     Partner's basis in distributed properties and partnership 
         interest
       Present law provides two different rules for determining a 
     partner's basis in distributed property, depending on whether 
     or not the distribution is in liquidation of the partner's 
     interest in the partnership. Generally, a substituted basis 
     rule applies to property distributed to a partner in 
     liquidation. Thus, the basis of property distributed in 
     liquidation of a partner's interest is equal to the partner's 
     adjusted basis in its partnership interest (reduced by any 
     money distributed in the same transaction) (sec. 732(b)).
       By contrast, generally, a carryover basis rule applies to 
     property distributed to a partner other than in liquidation 
     of its partnership interest, subject to a cap (sec. 732(a)). 
     Thus, in a non-liquidating distribution, the distributee 
     partner's basis in the property is equal to the partnership's 
     adjusted basis in the property immediately before the 
     distribution, but not to exceed the partner's adjusted basis 
     in its partnership interest (reduced by any money distributed 
     in the same transaction). In a non-liquidating distribution, 
     the partner's basis in its partnership interest is reduced by 
     the amount of the basis to the distributee partner of the 
     property distributed and is reduced by the amount of any 
     money distributed (sec. 733).
     Allocating basis among distributed properties
       In the event that multiple properties are distributed by a 
     partnership, present law provides allocation rules for 
     determining their bases in the distributee partner's hands. 
     An allocation rule is needed when the substituted basis rule 
     for liquidating distributions applies, in order to assign a 
     portion of the partner's basis in its partnership interest to 
     each distributed asset. An allocation rule is also needed in 
     a non-liquidating distribution of multiple assets when the 
     total carryover basis would exceed the partner's basis in its 
     partnership interest, so a portion of the partner's basis in 
     its partnership interest is assigned to each distributed 
     asset.
       Present law provides for allocation in proportion to the 
     partnership's adjusted basis. The rule allocates basis first 
     to unrealized receivables and inventory items in an amount 
     equal to the partnership's adjusted basis (or if the 
     allocated basis is less than partnership basis, then in 
     proportion to the partnership's basis), and then among other 
     properties in proportion to their adjusted bases to the 
     partnership (sec. 732(c)).44 Under this allocation 
     rule, in the case of a liquidating distribution, the 
     distributee partner can have a basis in the distributed 
     property that exceeds the partnership's basis in the 
     property.
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     \44\ A special rule allows a partner that acquired a 
     partnership interest by transfer within two years of a 
     distribution to elect to allocate the basis of property 
     received in the distribution as if the partnership had a 
     section 754 election in effect (sec. 732(d)). The special 
     rule also allows the Service to require such an allocation 
     where the value at the time of transfer of the property 
     received exceeds 110 percent of its adjusted basis to the 
     partnership (sec. 732(d)). Treas. Reg. sec. 1.732-1(d)(4) 
     generally requires the application of section 732(d) where 
     the allocation of basis under section 732(c) upon a 
     liquidation of the partner's interest would have resulted in 
     a shift of basis from non-depreciable property to depreciable 
     property.
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                               House Bill

       The House bill modifies the basis allocation rules for 
     distributee partners. It allocates a distributee partner's 
     basis adjustment among distributed assets first to unrealized 
     receivables and inventory items in an amount equal to the 
     partnership's basis in each such property (as under present 
     law).
       Under the provision, basis is allocated first to the extent 
     of each distributed property's adjusted basis to the 
     partnership. Any remaining basis adjustment, if an increase, 
     is allocated among properties with unrealized appreciation in 
     proportion to their respective amounts of unrealized 
     appreciation (to the extent of each property's appreciation), 
     and then in proportion to their respective fair market 
     values. For example, assume that a partnership with two 
     assets, A and B, distributes them both in liquidation to a 
     partner whose basis in its interest is 55. Neither asset 
     consists of inventory or unrealized receivables. Asset A has 
     a basis to the partnership of 5 and a fair market value of 
     40, and asset B has a basis to the partnership of 10 and a 
     fair market value of 10. Under the provision, basis is first 
     allocated to asset A in the amount of 5 and to asset B in the 
     amount of 10 (their adjusted bases to the partnership). The 
     remaining basis adjustment is an increase totaling 40 (the 
     partner's 55 basis minus the partnership's total basis in 
     distributed assets of 15). Basis is then allocated to asset A 
     in the amount of 35, its unrealized appreciation, with no 
     allocation to asset B attributable to unrealized appreciation 
     because its fair market value equals the partnership's 
     adjusted basis. The remaining basis adjustment of 5 is 
     allocated in the ratio of the assets' fair market values, 
     i.e., 4 to asset A (for a total basis of 44) and 1 to asset B 
     (for a total basis of 11).
       If the remaining basis adjustment is a decrease, it is 
     allocated among properties with unrealized depreciation in 
     proportion to their respective amounts of unrealized 
     depreciation (to the extent of each property's depreciation), 
     and then in proportion to their respective adjusted bases 
     (taking into account the adjustments already made). A 
     remaining basis adjustment that is a decrease arises under 
     the provision when the partnership's total adjusted basis in 
     the distributed properties exceeds the amount of the 
     partner's basis in its partnership interest, and the latter 
     amount is the basis to be allocated among the distributed 
     properties. For example, assume that a partnership with two 
     assets, C and D, distributes them both in liquidation to a 
     partner whose basis in its partnership interest is 20. 
     Neither asset consists of inventory or unrealized 
     receivables. Asset C has a basis to the partnership of 15 and 
     a fair market value of 15, and asset D has a basis to the 
     partnership of 15 and a fair market value of 5. Under the 
     provision, basis is first allocated to the extent of the 
     partnership's basis in each distributed property, or 15 to 
     each distributed property, for a total of 30. Because the 
     partner's basis in its interest is only 20, a downward 
     adjustment of 10 (30 minus 20) is required. The entire amount 
     of the 10 downward adjustment is allocated to the property D, 
     reducing its basis to 5. Thus, the basis of property C is 15 
     in the hands of the distributee partner, and the basis of 
     property D is 5 in the hands of the distributee partner.
       Effective date.--The provision applies to partnership 
     distributions after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Treatment of inventory items of a partnership (sec. 1065 
         of the House bill and sec. 875 of the Senate amendment)

                              Present Law

       Under present law, upon the sale or exchange of a 
     partnership interest, any amount received that is 
     attributable to unrealized receivables, or to inventory that 
     has substantially appreciated, is treated as an amount 
     realized from the sale or exchange of property that is not a 
     capital asset (sec. 751(a)).
       Present law provides a similar rule to the extent that a 
     distribution is treated as a sale or exchange of a 
     partnership interest. A distribution by a partnership in 
     which a partner receives substantially appreciated inventory 
     or unrealized receivables in exchange for its interest in 
     certain other partnership property (or receives certain other 
     property in exchange for its interest in substantially 
     appreciated inventory or unrealized receivables) is treated 
     as a taxable sale or exchange of property, rather than as a 
     nontaxable distribution (sec. 751(b)).
       For purposes of these rules, inventory of a partnership 
     generally is treated as substantially appreciated if the fair 
     market value of the inventory exceeds 120 percent of adjusted 
     basis of the inventory to the partnership (sec. 
     751(d)(1)(A)). In applying this rule, inventory property is 
     excluded from the calculation if a principal purpose for 
     acquiring the inventory property was to avoid the rules 
     relating to inventory (sec. 751(d)(1)(B)).

                               House Bill

       The House bill eliminates the requirement that inventory be 
     substantially appreciated in order to give rise to ordinary 
     income under the rules relating to sales and exchanges of 
     partnership interests and certain partnership distributions. 
     This conforms the treatment of inventory to the treatment of 
     unrealized receivables under these rules.
       Effective date.--The provision is effective for sales, 
     exchanges, and distributions after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with modifications. The conference 
     agreement repeals the requirement that inventory be 
     substantially appreciated only with respect to sales or 
     exchanges of partnership interests under section 751 (a) of 
     the Code, but not with respect to distributions under section 
     751(b) of the Code. Thus, present law is retained with 
     respect to distributions governed by section 751(b).
       Effective date.--The conference agreement follows the House 
     bill and the Senate amendment, with a modification. The 
     conference agreement provides that the provision is effective 
     for sales, exchanges, and distributions after the date of 
     enactment, except

[[Page H6563]]

     that the provision does not apply to any sale or exchange 
     pursuant to a written binding contract in effect on June 8, 
     1997, and at all times thereafter before such sale or 
     exchange.
       6. Treatment of appreciated property contributed to a 
     partnership (sec. 1066 of the House bill)

                              Present Law

       Under present law, if a partner contributes appreciated 
     property to a partnership, no gain is recognized to the 
     contributing partner at the time of the contribution. The 
     contributing partner's basis in its partnership interest is 
     increased by the basis of the contributed property at the 
     time of the contribution. The pre-contribution gain is 
     reflected in the difference between the partner's capital 
     account and its basis in its partnership interest (``book/tax 
     differential''). Income, gain, loss, and deduction with 
     respect to the contributed property must be shared among the 
     partners so as to take account of the variation between the 
     basis of the property to the partnership and its fair market 
     value at the time of contribution (sec. 704(c)(1)(A)).
       If the property is subsequently distributed to another 
     partner within 5 years of the contribution, the contributing 
     partner generally recognizes gain as if the property had been 
     sold for its fair market value at the time of the 
     distribution (sec. 704(c)(1)(B)). Similarly, the contributing 
     partner generally includes pre-contribution gain in income to 
     the extent that the value of other property distributed by 
     the partnership to that partner exceeds its adjusted basis in 
     its partnership interest, if the distribution by the 
     partnership is made within 5 years after the contribution of 
     the appreciated property (sec. 737).

                               House Bill

       The House bill extends to 10 years the period in which a 
     partner recognizes pre-contribution gain with respect to 
     property contributed to a partnership. Thus, under the 
     provision, a partner that contributes appreciated property to 
     a partnership generally recognizes pre-contribution gain in 
     the event that the partnership distributes the contributed 
     property to another partner, or distributes to the 
     contributing partner other property whose value exceeds that 
     partner's basis in its partnership interest, if the 
     distribution occurs within 10 years after the contribution to 
     the partnership.
       Effective date.--Effective for property contributed to a 
     partnership after June 8, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with a 
     modification. The conference agreement extends to 7 years the 
     period in which a partner recognizes pre-contribution gain 
     with respect to property contributed to a partnership. Thus, 
     under the conference agreement, a partner that contributes 
     appreciated property to a partnership generally recognizes 
     pre-contribution gain in the event that the partnership 
     distributes the contributed property to another partner, or 
     distributes to the contributing partner other property whose 
     value exceeds that partner's basis in its partnership 
     interest, if the distribution occurs within 7 years after the 
     contribution to the partnership.
       Effective date.--The effective date is the same as the 
     House bill, with a modification. The conference agreement is 
     effective for property contributed to a partnership after 
     June 8, 1997, except that the provision does not apply to any 
     property contributed to a partnership pursuant to a written 
     binding contract in effect on June 8, 1997, and at all times 
     thereafter before such contribution, if the contract provides 
     for the contribution of a fixed amount of property.
     7. Earned income credit compliance provisions (sec. 1067 of 
         the House bill and sec. 5851 of the Senate amendment to 
         H.R. 2015 (``the Balanced Budget Act of 1997''))

                                Overview

       Certain eligible low-income workers are entitled to claim a 
     refundable earned income credit on their income tax return. A 
     refundable credit is a credit that not only reduces an 
     individual's tax liability but allows refunds to the 
     individual in excess of income tax liability. The amount of 
     the credit an eligible individual may claim depends upon 
     whether the individual has one, more than one, or no 
     qualifying children, and is determined by multiplying the 
     credit rate by the individual's 45 earned income 
     up to an earned income amount. The maximum amount of the 
     credit is the product of the credit rate and the earned 
     income amount. The credit is reduced by the amount of the 
     alternative minimum tax (``AMT'') the taxpayer owes for the 
     year. The credit is phased out above certain income levels.
---------------------------------------------------------------------------
     \45\ In the case of a married individual who files a joint 
     return with his or her spouse, the income for purposes of 
     these tests is the combined income of the couple.
---------------------------------------------------------------------------
       For individuals with earned income (or AGI, if greater) in 
     excess of the beginning of the phaseout range, the maximum 
     credit amount is reduced by the phaseout rate multiplied by 
     the amount of earned income (or AGI, if greater) in excess of 
     the beginning of the phaseout range. For individuals with 
     earned income (or AGI, if greater) in excess of the end of 
     the phaseout range, no credit is allowed. The definition of 
     AGI used for phasing out the earned income credit disregards 
     certain losses. The losses disregarded are: (1) net capital 
     losses (if greater than zero); (2) net losses from trusts and 
     estates; (3) net losses from nonbusiness rents and royalties; 
     and (4) 50 percent of the net losses from business, computed 
     separately with respect to sole proprietorships (other than 
     in farming), sole proprietorships in farming, and other 
     businesses. Also, an individual is not eligible for the 
     earned income credit if the aggregate amount of 
     ``disqualified income'' of the taxpayer for the taxable year 
     exceeds $2,250. Disqualified income is the sum of: (1) 
     interest (taxable and tax-exempt); (2) dividends; (3) net 
     rent and royalty income (if greater than zero); (4) capital 
     gain net income; and (5) net passive income (if greater than 
     zero) that is not self-employment income. The earned income 
     amount, the phaseout amount and the disqualified income 
     amount are indexed for inflation.
       The parameters for the credit depend upon the number of 
     qualifying children the individual claims. For 1997, the 
     parameters are given in the following table:

               PRESENT-LAW EARNED INCOME CREDIT PARAMETERS              
------------------------------------------------------------------------
                                        Two or                          
                                         more         One         No    
                                      qualifying  qualifying  qualifying
                                       children      child     children 
------------------------------------------------------------------------
Credit rate (percent)...............       40.00       34.00        7.65
Earned income amount................      $9,140      $6,500      $4,340
Maximum credit......................      $3,656      $2,210        $332
Phaseout begins.....................     $11,930     $11,930      $5,430
Phaseout rate (percent).............       21.06       15.98        7.65
Phaseout ends.......................     $29,290     $25,760      $9,770
------------------------------------------------------------------------

       In order to claim the credit, an individual must either 
     have a qualifying child or meet other requirements. A 
     qualifying child must meet a relationship test, an age test, 
     an identification test, and a residence test. In order to 
     claim the credit without a qualifying child, an individual 
     must not be a dependent and must be over age 24 and under age 
     65.
       a. Deny EIC eligibility for prior acts of recklessness or 
           fraud (sec. 1067 of the House bill and sec. 5851 of the 
           Senate amendment to H.R. 2015)

                              Present Law

       The accuracy-related penalty, which is imposed at a rate of 
     20 percent, applies to the portion of any underpayment that 
     is attributable to (1) negligence, (2) any substantial 
     understatement of income tax, (3) any substantial valuation 
     overstatement, (4) any substantial overstatement of pension 
     liabilities, or (5) any substantial estate or gift tax 
     valuation understatement (sec. 6662). Negligence includes any 
     careless, reckless, or intentional disregard of rules or 
     regulations, as well as any failure to make a reasonable 
     attempt to comply with the provisions of the Code.
       The fraud penalty, which is imposed at a rate of 75 
     percent, applies to the portion of any underpayment that is 
     attributable to fraud (sec. 6663).
       Neither the accuracy-related penalty nor the fraud penalty 
     is imposed with respect to any portion of an underpayment if 
     it is shown that there was a reasonable cause for that 
     portion and that the taxpayer acted in good faith with 
     respect to that portion.

                               House Bill

       Under the House bill, a taxpayer who fraudulently claims 
     the earned income credit (EIC) is ineligible to claim the EIC 
     for a subsequent period of 10 years. In addition, a taxpayer 
     who erroneously claims the EIC due to reckless or intentional 
     disregard of rules or regulations is ineligible to claim the 
     EIC for a subsequent period of two years. These sanctions are 
     in addition to any other penalty imposed under present law. 
     The determination of fraud or of reckless or intentional 
     disregard of rules or regulations are made in a deficiency 
     proceeding (which provides for judicial review).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       b. Recertification required when taxpayer found to be 
           ineligible for EIC in past (sec. 1067 of the House bill 
           and sec. 5851 of the Senate amendment to H.R. 2015)

                              Present law

       If an individual fails to provide a correct TIN and claims 
     the EIC, such omission is treated as a mathematical or 
     clerical error. Also, if an individual who claims the EIC 
     with respect to net earnings from self employment fails to 
     pay the proper amount of self-employment tax on such net 
     earnings, the failure is treated as a mathematical or 
     clerical error for purposes of the amount of EIC claimed. 
     Generally, taxpayers have 60 days in which they can either 
     provide a correct TIN or request that the IRS follow the 
     current-law deficiency procedures. If a taxpayer fails to 
     respond within this period, he or she must file an amended 
     return with a correct TIN or clarify that any self-employment 
     tax has been paid in order to obtain the EIC originally 
     claimed.
       The IRS must follow deficiency procedures when 
     investigating other types of questionable EIC claims. Under 
     these procedures, contact letters are first sent to the 
     taxpayer. If the necessary information is not provided by the 
     taxpayer, a statutory notice of deficiency is sent by 
     certified mail, notifying the taxpayer that the adjustment 
     will be assessed unless the taxpayer files a petition in

[[Page H6564]]

     Tax Court within 90 days. If a petition is not filed within 
     that time and there is no other response to the statutory 
     notice, the assessment is made and the EIC is denied.

                               House Bill

       Under the House bill, a taxpayer who has been denied the 
     EIC as a result of deficiency procedures is ineligible to 
     claim the EIC in subsequent years unless evidence of 
     eligibility for the credit is provided by the taxpayer. To 
     demonstrate current eligibility, the taxpayer is required to 
     meet evidentiary requirements established by the Secretary of 
     the Treasury. Failure to provide this information when 
     claiming the EIC is treated as a mathematical or clerical 
     error. If a taxpayer is recertified as eligible for the 
     credit, the taxpayer is not required to provide this 
     information in the future unless the IRS again denies the EIC 
     as a result of a deficiency procedure. Ineligibility for the 
     EIC under the provision is subject to review by the courts.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       c. Due diligence requirements for paid preparers (sec. 1067 
           of the House bill and sec. 5851 of the Senate amendment 
           to H.R. 2015)

                              Present Law

       Several penalties apply in the case of an understatement of 
     tax that is caused by an income tax return preparer. First, 
     if any part of an understatement of tax on a return or claim 
     for refund is attributable to a position for which there was 
     not a realistic possibility of being sustained on its merits 
     and if any person who is an income tax return preparer with 
     respect to such return or claim for refund knew (or 
     reasonably should have known) of such position and such 
     position was not disclosed or was frivolous, then that return 
     preparer is subject to a penalty of $250 with respect to that 
     return or claim (sec. 6694(a)). The penalty is not imposed if 
     there is reasonable cause for the understatement and the 
     return preparer acted in good faith.
       In addition, if any part of an understatement of tax on a 
     return or claim for refund is attributable to a willful 
     attempt by an income tax return preparer to understate the 
     tax liability of another person or to any reckless or 
     intentional disregard of rules or regulations by an income 
     tax return preparer, then the income tax return preparer is 
     subject to a penalty of $1,000 with respect to that return or 
     claim (sec. 6694(b)).
       Also, a penalty for aiding and abetting the understatement 
     of tax liability is imposed in cases where any person aids, 
     assists in, procures, or advises with respect to the 
     preparation or presentation of any portion of a return or 
     other document if (1) the person knows or has reason to 
     believe that the return or other document will be used in 
     connection with any material matter arising under the tax 
     laws, and (2) the person knows that if the portion of the 
     return or other document were so used, an understatement 
     of the tax liability of another person would result (sec. 
     6701).
       Additional penalties are imposed on return preparers with 
     respect to each failure to (1) furnish a copy of a return or 
     claim for refund to the taxpayer, (2) sign the return or 
     claim for refund, (3) furnish his or her identifying number, 
     (4) retain a copy or list of the returns prepared, and (5) 
     file a correct information return (sec. 6695). The penalty is 
     $50 for each failure and the total penalties imposed for any 
     single type of failure for any calendar year are limited to 
     $25,000.

                               House Bill

       Under the House bill, return preparers are required to 
     fulfill certain due diligence requirements with respect to 
     returns they prepare claiming the EIC. The penalty for 
     failure to meet these requirements is $100. This penalty is 
     in addition to any other penalty imposed under present law.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       d. Modify the definition of AGI used to phaseout the EIC

                              Present Law

       The EIC is phased out above certain income levels. For 
     individuals with earned income (or AGI, if greater) in excess 
     of the beginning of the phaseout range, the maximum credit 
     amount is reduced by the phaseout rate multiplied by the 
     amount of earned income (or AGI, if greater) in excess of the 
     beginning of the phaseout range. For individuals with earned 
     income (or AGI, if greater) in excess of the end of the 
     phaseout range, no credit is allowed. The definition of AGI 
     used for the phase out of the earned income credit disregards 
     certain losses. The losses disregarded are: (1) net capital 
     losses (if greater than zero); (2) net losses from trusts and 
     estates; (3) net losses from nonbusiness rents and royalties; 
     and (4) 50 percent of the net losses from business, computed 
     separately with respect to sole proprietorships (other than 
     in farming), sole proprietorships in farming, and other 
     businesses.

                               House Bill

       No provision.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement modifies the definition of AGI 
     used for phasing out the credit by adding two items of 
     nontaxable income and changing the percentage of certain 
     losses disregarded. The two items added are: (1) tax-exempt 
     interest, and (2) nontaxable distributions from pensions, 
     annuities, and individual retirement arrangements (but only 
     if not rolled over into similar vehicles during the 
     applicable rollover period). The conference agreement also 
     increases the amount of net losses from businesses, computed 
     separately with respect to sole proprietorships (other than 
     farming), sole proprietorships in farming, and other 
     businesses disregarded from 50 percent to 75 percent.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.
     8. Eligibility for income forecast method (sec. 1068 of the 
         House bill and sec. 876 of the Senate amendment)

                              Present Law

       A taxpayer generally recovers the cost of property used in 
     a trade or business through depreciation or amortization 
     deductions over time. Tangible property generally is 
     depreciated under the modified Accelerated Cost Recovery 
     System (``MACRS'') of section 168, which applies specific 
     recovery periods and depreciation methods to the cost of 
     various types of depreciable property. MACRS does not apply 
     to certain property, including any motion picture film, video 
     tape, or sound recording or to other any property if the 
     taxpayer elects to exclude such property from MACRS and the 
     taxpayer applies a unit-of-production method or other method 
     of depreciation not expressed in a term of years. The cost of 
     such property may be depreciated under the ``income 
     forecast'' method.
       The income forecast method is considered to be a method of 
     depreciation not expressed in a term of years. Under the 
     income forecast method, the depreciation deduction for a 
     taxable year for a property is determined by multiplying the 
     cost of the property (less estimated salvage value) by a 
     fraction, the numerator of which is the income generated by 
     the property during the year and the denominator of which is 
     the total forecasted or estimated income to be derived from 
     the property during its useful life. The income forecast 
     method is available to any property if (1) the taxpayer 
     elects to exclude such property from MACRS and (2) for the 
     first taxable year for which depreciation is allowable, the 
     property is properly depreciated under such method. The 
     income forecast method has been held to be applicable for 
     computing depreciation deductions for motion picture films, 
     television films and taped shows, books, patents, master 
     sound recordings and video games. Most recently, the 
     income forecast method has been held applicable to 
     consumer durable property subject to short-term ``rent-to-
     own'' leases.

                               House Bill

       The House bill clarifies the types of property to which the 
     income forecast method may be applied. Under the House bill, 
     the income forecast method is available to motion picture 
     films, television films and taped shows, books, patents, 
     master sound recordings, copyrights, and other such property 
     as designated by the Secretary of the Treasury.
       In addition, consumer durables subject to rent-to-own 
     contracts are provided a three-year recovery period and a 
     four-year class life for MACRS purposes (and are not eligible 
     for the income forecast method). Such property generally is 
     described in Rev. Proc. 95-38, 1995-34 I.R.B. 25.
       Effective date.--The provision is effective for property 
     placed in service after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement generally follows the House bill 
     and the Senate amendment, with modifications to depreciation 
     applicable to qualified rent-to-own property. First, the 
     conference agreement provides that the special 3-year 
     recovery period may apply to any property generally used in 
     the home for personal, but not business, use. The conferees 
     understand that certain rent-to-own property, including 
     computer and peripheral equipment, may be used in the home 
     for either personal or business purposes, and the taxpayer 
     may not be aware of how its customers may use the property. 
     So as not to increase the administrative burdens of 
     taxpayers, the conferees intend that if such dual-use 
     property does not represent a significant portion of a 
     taxpayer's leasing property and if such other leasing 
     property predominantly is qualified rent-to-own property, 
     then such dual-use property generally also would be qualified 
     rent-to-own property. However, if such dual-use property 
     represents a significant portion of the taxpayer's leasing 
     property, the conferees intend that the burden of proof be 
     placed on the taxpayer to show that such property is 
     qualified rent-to-own property.

[[Page H6565]]

       In addition, the conference agreement modifies the 
     definition of ``rent-to-own contract'' to include leases that 
     provide for decreasing regular periodic payments.
       Finally, the conferees wish to clarify that the 3-year 
     recovery period provided under the provision only applies to 
     property subject to leases and no inference is intended as to 
     whether any arrangement constitutes a lease for tax purposes.
     9. Require taxpayers to include rental value of residence in 
         income without regard to period of rental (sec. 1069 of 
         the House bill)

                              Present Law

       Gross income for purposes of the Internal Revenue Code 
     generally includes all income from whatever source derived, 
     including rents. The Code (sec. 280A(g)) provides a de 
     minimis exception to this rule where a dwelling unit is used 
     during the taxable year by the taxpayer as a residence and 
     such dwelling unit is actually rented for less than 15 days 
     during the taxable year. In this case, the income from such 
     rental is not included in gross income and no deductions 
     arising from such rental use are allowed as a deduction.

                               House Bill

       The House bill repeals the 15-day rules of section 280A(g). 
     The House bill also provides that no reduction in basis is 
     required if the taxpayer (1) rented the dwelling unit for 
     less than 15 days during the taxable year and (2) did not 
     claim depreciation on the dwelling unit for the period of 
     rental.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     10. Modify the exception to the related party rule of section 
         1033 for individuals to only provide an exception for de 
         minimis amounts (sec. 1070 of the House bill and sec. 877 
         of the Senate amendment)

                              Present Law

       Under section 1033, gain realized by a taxpayer from 
     certain involuntary conversions of property is deferred to 
     the extent the taxpayer purchases property similar or related 
     in service or use to the converted property within a 
     specified replacement period of time. Pursuant to a provision 
     of Public Law 104-7, subchapter C corporations (and certain 
     partnerships with corporate partners) are not entitled to 
     defer gain under section 1033 if the replacement property or 
     stock is purchased from a related person. A person is treated 
     as related to another person if the person bears a 
     relationship to the other person described in section 267(b) 
     or 707(b)(1). An exception to this related party rule 
     provides that a taxpayer could purchase replacement property 
     or stock from a related person and defer gain under section 
     1033 to the extent the related person acquired the 
     replacement property or stock from an unrelated person within 
     the replacement period.

                               House Bill

       The House bill expands the present-law denial of the 
     application of section 1033 to any other taxpayer (including 
     an individual) that acquires replacement property from a 
     related party (as defined by secs. 267(b) and 707(b)(1)) 
     unless the taxpayer has aggregate realized gain of $100,000 
     or less for the taxable year with respect to converted 
     property with aggregate realized gains. In the case of a 
     partnership (or S corporation), the annual $100,000 
     limitation applies to both the partnership (or S corporation) 
     and each partner (or shareholder).
       Effective date.--The provision applies to involuntary 
     conversions occurring after June 8, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     11. Repeal of exception for certain sales by manufacturers to 
         dealers (sec. 1071 of the House bill and sec. 878 of the 
         Senate amendment)
     Present Law
       In general, the installment sales method of accounting may 
     not be used by dealers in personal property. Present law 
     provides an exception which permits the use of the 
     installment method for installment obligations arising from 
     the sale of tangible personal property by a manufacturer of 
     the property (or an affiliate of the manufacturer) to a 
     dealer,46 but only if the dealer is obligated to 
     make payments of principal only when the dealer resells (or 
     rents) the property, the manufacturer has the right to 
     repurchase the property at a fixed (or ascertainable) price 
     after no longer than a 9-month period following the sale to 
     the dealer, and certain other conditions are met. In order to 
     meet the other conditions, the aggregate face amount of the 
     installment obligations that otherwise qualify for the 
     exception must equal at least 50 percent of the total sales 
     to dealers that gave rise to such receivables (the ``50-
     percent test'') in both the taxable year and the preceding 
     taxable year, except that, if the taxpayer met all of the 
     requirements for the exception in the preceding taxable year, 
     the taxpayer would not be treated as failing to meet the 50-
     percent test before the second consecutive year in which the 
     taxpayer did not actually meet the test. In addition, these 
     requirements must be met by the taxpayer in its first taxable 
     year beginning after October 22, 1986, except that 
     obligations issued before that date are treated as meeting 
     the applicable requirements if such obligations were 
     conformed to the requirements of the provision within 60 days 
     of that date.
---------------------------------------------------------------------------
     \46\ I.e., the sale of the property must be intended to be 
     for resale or leasing by the dealer.
---------------------------------------------------------------------------

                               House Bill

       The House bill repeals the exception that permits the use 
     of the installment method of accounting for certain sales by 
     manufacturers to dealers.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment. Any resulting 
     adjustment from a required change in accounting will be 
     includible ratably over the 4 taxable years beginning after 
     that date.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     for the effective date.
       Effective date.--The provision is effective for taxable 
     years beginning one year after the date of enactment. Any 
     resulting adjustment from a required change in accounting 
     will be includible ratably over the 4 taxable years beginning 
     after that date.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     12. Extension of Federal unemployment surtax (sec. 881 of the 
         Senate amendment)

                              Present Law

       The Federal Unemployment Tax Act (FUTA) imposes a 6.2-
     percent gross tax rate on the first $7,000 paid annually by 
     covered employers to each employee. Employers in States with 
     programs approved by the Federal Government and with no 
     delinquent Federal loans may credit 5.4-percentage points 
     against the 6.2-percent tax rate, making the minimum, net 
     Federal unemployment tax rate 0.8 percent. Since all States 
     have approved programs, 0.8 percent is the Federal tax rate 
     that generally applies. This Federal revenue finances 
     administration of the system, half of the Federal-State 
     extended benefits program, and a Federal account for State 
     loans. The States use the revenue turned back to them by the 
     5.4-percent credit to finance their regular State programs 
     and half of the Federal-State extended benefits program.
       In 1976, Congress passed a temporary surtax of 0.2 percent 
     of taxable wages to be added to the permanent FUTA tax rate. 
     Thus, the current 0.8-percent FUTA tax rate has two 
     components: a permanent tax rate of 0.6 percent, and a 
     temporary surtax rate of 0.2 percent. The temporary surtax 
     subsequently has been extended through 1998.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment extends the temporary surtax rate 
     through December 31, 2007. It also increases the limit from 
     0.25 percent to 0.50 percent of covered wages on the Federal 
     Unemployment Account (FUA) in the Unemployment Trust Fund.
       Effective date.--The provision is effective for labor 
     performed on or after January 1, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     13. Treatment of charitable remainder trusts (sec. 883 of the 
         Senate amendment)

                              Present Law

     In general
       Sections 170(f), 2055(e)(2) and 2522(c)(2) disallow a 
     charitable deduction for income, estate or gift tax purposes, 
     respectively, where the donor transfers an interest in 
     property to a charity (e.g., a remainder) while also either 
     retaining an interest in that property (e.g., an income 
     interest) or transferring an interest in that property to a 
     noncharity for less than full and adequate consideration. 
     Exceptions to this general rule are provided for: (1) 
     remainder interests in charitable remainder annuity trusts, 
     charitable remainder unitrusts, pooled income funds, farms, 
     and personal residences; (2) present interests in the form of 
     a guaranteed annuity or a fixed percentage of the annual 
     value of the property; (3) an undivided portion of the 
     donor's entire interest in the property; and (4) a qualified 
     conservation easement.
     Charitable remainder annuity trusts and charitable remainder 
         unitrusts
       A charitable remainder annuity trust is a trust which is 
     required to pay a fixed dollar amount, not less often than 
     annually, of at least 5 percent of the initial value of the 
     trust to a non-charity for the life of an individual or a 
     period of years not to exceed 20 years, with the remainder 
     passing to charity. A charitable remainder unitrust is a 
     trust which generally is required to pay, at least annually, 
     a fixed percentage of the fair market value of the trust's 
     assets determined at least annually to a noncharity for 
     the life of an individual or a period of years not to 
     exceed 20 years, with the remainder passing to charity 
     (sec. 664(d)).
       Distributions from a charitable remainder annuity trust or 
     charitable remainder unitrust are treated first as ordinary 
     income to the extent of the trust's current and previously 
     undistributed ordinary income for

[[Page H6566]]

     the trust's year in which the distribution occurred; second, 
     as capital gains to the extent of the trust's current capital 
     gain and previously undistributed capital gain for the 
     trust's year in which the distribution occurred; third, as 
     other income (e.g., tax-exempt income) to the extent of the 
     trust's current and previously undistributed other income for 
     the trust's year in which the distribution occurred; and, 
     fourth, as corpus (sec. 664(b)).
       Distributions are includible in the income of the 
     beneficiary for the year that the annuity or unitrust amount 
     is required to be distributed even though the annuity or 
     unitrust amount is not distributed until after the close of 
     the trust's taxable year. Treas. reg. sec. 1.664-1(d)(4).
       On April 18, 1997, the Treasury Department proposed 
     regulations providing additional rules under sections 664 and 
     2702 to address perceived abuses involving distributions from 
     charitable remainder trusts. One of those proposed rules 
     would require that payment of any required annuity or 
     unitrust amount by a charitable remainder trust (other than 
     an ``income only'' unitrust) be made by the close of the 
     trust's taxable year in which such payments are due. See 
     Prop. Treas. reg. secs. 1.664-2(a)(1)(i) and 1.664-
     3(a)(1)(i).

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, a trust cannot be a charitable 
     remainder annuity trust if the annuity for any year is 
     greater than 50 percent of the initial fair market value of 
     the trust's assets or be a charitable remainder unitrust if 
     the percentage of assets that are required to be distributed 
     at least annually is greater than 50 percent. Any trust that 
     fails this 50-percent rule will not be a charitable remainder 
     trust whose taxation is governed under section 664, but will 
     be treated as a complex trust and, accordingly, all its 
     income will be taxed to its beneficiaries or to the trust.
       Effective date.--The provision applies to transfers to a 
     trust made after June 18, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     a modification that requires that the value of the charitable 
     remainder with respect to any transfer to a qualified 
     charitable remainder annuity trust or charitable remainder 
     unitrust be at least 10 percent of the net fair market value 
     of such property transferred in trust on the date of the 
     contribution to the trust. The 10-percent test is measured on 
     each transfer to the charitable remainder trust and, 
     consequently, a charitable remainder trust which meets the 
     10-percent test on the date of transfer will not subsequently 
     fail to meet that test if interest rates have declined 
     between the trust's creation and the death of a measuring 
     life. Similarly, where a charitable remainder trust is 
     created for the joint lives of two individuals with a 
     remainder to charity, the trust will not cease to qualify as 
     a charitable remainder trust because the value of the 
     charitable remainder was less than 10 percent of the trust's 
     assets at the first death of those two individuals. The 
     conference agreement provides several additional rules in 
     order to provide relief for trusts that do not meet the 10-
     percent rule.
       First, where a transfer is made after July 28, 1997, to a 
     charitable remainder trust that fails the 10-percent test, 
     the trust is treated as meeting the 10-percent requirement if 
     the governing instrument of the trust is changed by 
     reformation, amendment, construction, or otherwise to meet 
     such requirement by reducing the payout rate or duration (or 
     both) of any noncharitable beneficiary's interest to the 
     extent necessary to satisfy such requirement so long as the 
     reformation is commenced within the period permitted for 
     reformations of charitable remainder trusts under section 
     2055(e)(3). The statute of limitations applicable to a 
     deficiency of any tax resulting from reformation of the trust 
     shall not expire before the date one year after the Treasury 
     Department is notified that the trust has been reformed. In 
     substance, this rule relaxes the requirements of section 
     2055(e)(3)(B) to the extent necessary for the reformation for 
     the trust to meet the 10-percent requirement.
       Second, a transfer to a trust will be treated as if the 
     transfer never had been made where a court having 
     jurisdiction over the trust subsequently declares the trust 
     void (because, e.g., the application of the 10 percent rule 
     frustrates the purposes for which the trust was created) and 
     judicial proceedings to revoke the trust are commenced within 
     the period permitted for reformations of charitable remainder 
     trusts under section 2055(e)(3). Under this provision, the 
     effect of ``unwinding'' the trust is that any transactions 
     made by the trust with respect to the property transferred 
     (e.g., income earned on the assets transferred to the trust 
     and capital gains generated by the sales of the property 
     transferred) would be income and capital gain of the donor 
     (or the donor's estate if the trust was testamentary), and 
     the donor (or the donor's estate if the trust was 
     testamentary) would not be permitted a charitable deduction 
     with respect to the transfer. The statute of limitations 
     applicable to a deficiency of any tax resulting from 
     ``unwinding'' the trust shall not expire before the date one 
     year after the Treasury Department is notified that the trust 
     has been revoked.
       Third, where an additional contribution is made after July 
     28, 1997, to a charitable remainder unitrust created before 
     July 29, 1997, and that unitrust would not meet the 10-
     percent requirement with respect to the additional 
     contribution, the conference agreement provides that such 
     additional contribution will be treated, under regulations to 
     be issued by the Secretary of the Treasury, as if it had been 
     made to a new trust that does not meet the 10-percent 
     requirement, but which does not affect the status of the 
     original unitrust as a charitable remainder trust.
       The conferees intend that this provision of the conference 
     agreement not limit or alter the validity of regulations 
     proposed by the Treasury Department on April 18, 1997, or the 
     Treasury Department's authority to address abuses of the 
     rules governing the taxation of charitable remainder trusts 
     or their beneficiaries.
       Effective date.--The requirement that the payout rate not 
     exceed 50 percent applies to transfers to a trust made after 
     June 18, 1997.
       The requirement that the value of the charitable remainder 
     with respect to any transfer to a qualified remainder trust 
     be at least 10 percent of the fair market value of the assets 
     transferred in trust applies to transfers to a trust made 
     after July 28, 1997. However, the 10-percent requirement does 
     not apply to a charitable remainder trust created by a 
     testamentary instrument (e.g., a will or revocable trust) 
     executed before July 29, 1997, if the instrument is not 
     modified after that date and the settlor dies before January 
     1, 1999, or could not be modified after July 28, 1997, 
     because the settlor was under a mental disability on that 
     date (i.e., July 28, 1997) and all times thereafter.
     14. Modify general business credit carryback and carryforward 
         rules (sec. 788(b) of the Senate amendment)

                              Present Law

       A qualified taxpayer is allowed to claim the rehabilitation 
     credit, the energy credit, the reforestation credit, the work 
     opportunity credit, the alcohol fuels credit, the research 
     credit, the low-income housing credit, the enhanced oil 
     recovery credit, the disabled access credit, the renewable 
     electricity production credit, the empowerment zone 
     employment credit, the Indian employment credit, the employer 
     social security credit, and the orphan drug credit 
     (collectively, known as the general business credit), subject 
     to certain limitations based on tax liability for the year. 
     Unused general business credits generally may be carried back 
     three years and carried forward 15 years to offset tax 
     liability of such years, subject to the same limitations.

                               House Bill

       No provision.

         

                               

       The Senate amendment limits the carryback period for the 
     general business credit to one year and extends the 
     carryforward period to 20 years.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement includes the Senate amendment with 
     a clarification that the provision is effective for credits 
     arising in taxable years beginning after December 31, 1997.
     15. Using Federal case registry of child support orders for 
         tax enforcement purposes

                              Present Law

       The Personal Responsibility and Work Opportunity 
     Reconciliation Act of 1996 mandated the creation of a Federal 
     Case Registry of Child Support Orders (the FCR) by October 1, 
     1998. Although HHS has not yet issued final regulations, the 
     FCR is required to include the names, and the State case 
     identification numbers of individuals who are owed or who owe 
     child support or for whom paternity is being established. It 
     may also include the social security numbers (SSNs) of these 
     individuals.

                               House Bill

       No provision.

                            Senate Amendment

       No provision.

                          Conference Agreement

       Not later than October 1, 1999, the Secretary of the 
     Treasury will have access to the Federal Case Registry of 
     Child Support Orders. Also, by October 1, 1999, the data 
     elements on the State Case Registry will include the SSNs of 
     children covered by cases in the Registry, and the States 
     will provide the SSNs of these children to the FCR.
       Effective date.-- The provision is effective on October 1, 
     1999.
     16. Expanded SSA records for tax enforcement

                              Present Law

       Under the Family Support Act of 1988, States must require 
     each parent to furnish their social security number (SSN) for 
     birth records. Parents can apply directly to the Social 
     Security Administration (SSA) for an SSN for their child; or, 
     in most states, they may apply for the child's SSN when 
     obtaining a birth certificate. On an individual's SSN 
     application, the SSA currently requires the mother's maiden 
     name but not her SSN.

                               House Bill

       No provision.

                            Senate Amendment

       No provision.

                          Conference Agreement

       SSA is required to obtain social security numbers (SSNs) of 
     both parents on minor

[[Page H6567]]

     children's applications for SSNs. The SSA will provide this 
     information to the IRS as part of the Data Master File (``DM-
     1 file'). The conferees anticipate that the IRS will use the 
     information to identify questionable claims for the earned 
     income credit, the dependent exemption, and other tax 
     benefits, before tax refunds are paid out.
       Effective date.--The provision is effective on the date of 
     enactment.
     17. Treatment of amounts received under the work requirements 
         of the Personal Responsibility and Work Opportunity Act 
         of 1996

                              Present Law

     Workfare payments
       Generally under the Personal Responsibility and Work 
     Opportunity Act of 1996, the receipt of certain government 
     assistance payments is denied unless the recipient meets 
     certain work requirements. The tax treatment of payments 
     received with respect to these work requirements (``workfare 
     payments'') was not specified in that legislation.

                          Earned income credit

       Certain eligible low-income workers are entitled to claim a 
     refundable earned income credit on their income tax return. 
     The amount of the credit an eligible individual may claim 
     depends upon whether the individual has one, more than one, 
     or no qualifying children, and is generally determined by 
     multiplying the credit rate by the individual's earned income 
     up to an earned income amount. The maximum amount of the 
     credit is the product of the credit rate and the earned 
     income amount. The credit is reduced by the amount of the 
     alternative minimum tax (``AMT'') the taxpayer owes for the 
     year. The credit is phased out above certain income levels. 
     For individuals with earned income (or AGI, if greater) in 
     excess of the beginning of the phaseout range, the maximum 
     credit amount is reduced by the phaseout rate multiplied by 
     the amount of earned income (or AGI, if greater) in excess of 
     the beginning of the phaseout range. For individuals with 
     earned income (or AGI, if greater) in excess of the end of 
     the phaseout range, no credit is allowed. For these purposes, 
     both earned income and AGI are defined to include wages. 
     There is no explicit provision whether workfare payments are 
     wages for purposes of the earned income credit.

                               House Bill

       No provision.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement provides that workfare payments 
     are not wages for purposes of the earned income credit. There 
     is no inference intended with respect to whether workfare 
     payments otherwise qualify as wages for purposes of income 
     and employment taxes or as wages for purposes of an 
     employer's eligibility for the work opportunity tax credit 
     and the welfare-to-work tax credit. Also, there is no 
     inference intended with respect to whether workfare payments 
     are wages for purposes of the earned income credit before 
     enactment of this provision.
       Effective date.--The provision is effective on the date of 
     enactment.

                       XI. FOREIGN TAX PROVISIONS

                         A. General Provisions

     1. Simplify foreign tax credit limitation for individuals 
         (sec. 1103 of the House bill and sec. 901 of the Senate 
         amendment)

                              Present Law

       In order to compute the foreign tax credit, a taxpayer 
     computes foreign source taxable income and foreign taxes paid 
     in each of the applicable separate foreign tax credit 
     limitation categories. In the case of an individual, this 
     requires the filing of IRS Form 1116.
       In many cases, individual taxpayers who are eligible to 
     credit foreign taxes may have only a modest amount of foreign 
     source gross income, all of which is income from investments. 
     Taxable income of this type ordinarily is includible in the 
     single foreign tax credit limitation category for passive 
     income. However, under certain circumstances, the Code treats 
     investment-type income (e.g., dividends and interest) as 
     income in one of several other separate limitation categories 
     (e.g., high withholding tax interest income or general 
     limitation income). For this reason, any taxpayer with 
     foreign source gross income is required to provide sufficient 
     detail on Form 1116 to ensure that foreign source taxable 
     income from investments, as well as all other foreign source 
     taxable income, is allocated to the correct limitation 
     category.

                               House Bill

       The House bill allows individuals with no more than $300 
     ($600 in the case of married persons filing jointly) of 
     creditable foreign taxes, and no foreign source income other 
     than passive income, an exemption from the foreign tax credit 
     limitation rules. (It is intended that an individual electing 
     this exemption will not be required to file Form 1116 in 
     order to obtain the benefit of the foreign tax credit.) An 
     individual making this election is not entitled to any 
     carryover of excess foreign taxes to or from a taxable year 
     to which the election applies.
       For purposes of this election, passive income generally is 
     defined to include all types of income that is foreign 
     personal holding company income under the subpart F rules, 
     plus income inclusions from foreign personal holding 
     companies and passive foreign investment companies, provided 
     that the income is shown on a payee statement furnished to 
     the individual. For purposes of this election, creditable 
     foreign taxes include only foreign taxes that are shown on a 
     payee statement furnished to the individual.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Simplify translation of foreign taxes (sec. 1104 of the 
         House bill and sec. 902 of the Senate amendment)

                              Present Law

     Translation of foreign taxes
       Foreign income taxes paid in foreign currencies are 
     required to be translated into U.S. dollar amounts using the 
     exchange rate as of the time such taxes are paid to the 
     foreign country or U.S. possession. This rule applies to 
     foreign taxes paid directly by U.S. taxpayers, which taxes 
     are creditable in the year paid or accrued, and to foreign 
     taxes paid by foreign corporations that are deemed paid by a 
     U.S. corporation that is a shareholder of the foreign 
     corporation, and hence creditable, in the year that the U.S. 
     corporation receives a dividend or has an income inclusion 
     from the foreign corporation.
     Redetermination of foreign taxes
       For taxpayers that utilize the accrual basis of accounting 
     for determining creditable foreign taxes, accrued and unpaid 
     foreign tax liabilities denominated in foreign currencies are 
     translated at the exchange rate as of the last day of the 
     taxable year of accrual. If a difference exists between the 
     dollar value of accrued foreign taxes and the dollar value of 
     those taxes when paid, a redetermination of foreign taxes 
     arises. A foreign tax redetermination may occur in the case 
     of a refund of foreign taxes. A foreign tax redetermination 
     also may arise because the amount of foreign currency units 
     actually paid differs from the amount of foreign currency 
     units accrued. In addition, a redetermination may arise due 
     to fluctuations in the value of the foreign currency relative 
     to the dollar between the date of accrual and the date of 
     payment.
       As a general matter, a redetermination of foreign tax paid 
     or accrued directly by a U.S. person requires notification of 
     the Internal Revenue Service and a redetermination of U.S. 
     tax liability for the taxable year for which the foreign tax 
     was claimed as a credit. The Treasury regulations provide 
     exceptions to this rule for de minimis cases. In the case of 
     a redetermination of foreign taxes that qualify for the 
     indirect (or ``deemed-paid'') foreign tax credit under 
     sections 902 and 960, the Treasury regulations generally 
     require taxpayers to make appropriate adjustments to the 
     payor foreign corporation's pools of earnings and profits and 
     foreign taxes.

                               House Bill

     Translation of foreign taxes
       Translation of certain accrued foreign taxes
       With respect to taxpayers that take foreign income taxes 
     into account when accrued, the House bill generally provides 
     for foreign taxes to be translated at the average exchange 
     rate for the taxable year to which such taxes relate. This 
     rule does not apply (1) to any foreign income tax paid after 
     the date two years after the close of the taxable year to 
     which such taxes relate, (2) with respect to taxes of an 
     accrual-basis taxpayer that are actually paid in a taxable 
     year prior to the year to which they relate, or (3) to tax 
     payments that are denominated in an inflationary currency (as 
     defined by regulations).
       Translation of all other foreign taxes
       Under the House bill, foreign taxes not eligible for 
     application of the preceding rule generally are translated 
     into U.S. dollars using the exchange rates as of the time 
     such taxes are paid. The House bill provides the Secretary of 
     the Treasury with authority to issue regulations that would 
     allow foreign tax payments to be translated into U.S. dollar 
     amounts using an average exchange rate for a specified 
     period.
     Redetermination of foreign taxes
       Under the House bill, a redetermination is required if (1) 
     accrued taxes when paid differ from the amounts claimed as 
     credits by the taxpayer; (2) accrued taxes are not paid 
     before the date two years after the close of the taxable year 
     to which such taxes relate; or (3) any tax paid is refunded 
     in whole or in part. Thus, for example, the House bill 
     provides that if at the close of the second taxable year 
     after the taxable year to which an accrued tax relates, any 
     portion of the tax so accrued has not yet been paid, a 
     foreign tax redetermination under section 905(c) is required 
     for the amount representing the unpaid portion of that 
     accrued tax. In other words, the previous accrual of any tax 
     that is unpaid as of that date is denied. In cases where a 
     redetermination is required, as under present law, the bill 
     specifies that the taxpayer must notify the Secretary, who 
     will redetermine the amount of the tax for the year or years 
     affected. In the case of indirect foreign tax credits, 
     regulatory authority is granted to prescribe appropriate 
     adjustments to the foreign tax credit pools in lieu of such a 
     redetermination.
       The House bill provides that in the case of accrued taxes 
     not paid within the date two

[[Page H6568]]

     years after the close of the taxable year to which such taxes 
     relate, any such taxes if subsequently paid are taken into 
     account for the taxable year to which such taxes relate. 
     These taxes are translated into U.S. dollar amounts using the 
     exchange rates in effect as of the time such taxes are paid.
       For example, assume that in year 1 a taxpayer accrues 1,000 
     units of foreign tax that relate to year 1 and that the 
     currency involved is not inflationary . Further assume that 
     as of the end of year 1 the tax is unpaid. In this case, the 
     House bill provides that the taxpayer translates 1,000 units 
     of accrued foreign tax into U.S. dollars at the average 
     exchange rate for year 1. If the 1,000 units of tax are paid 
     by the taxpayer in either year 2 or year 3, no 
     redetermination of foreign tax is required. If any portion of 
     the tax so accrued remains unpaid as of the end of year 3, 
     however, the taxpayer is required to redetermine its foreign 
     tax accrued in year 1 to eliminate the accrued but unpaid 
     tax, thereby reducing its foreign tax credit for such year. 
     If the taxpayer pays the disallowed taxes in year 4, the 
     taxpayer again redetermines its foreign taxes (and foreign 
     tax credit) for year 1, but the taxes paid in year 4 are 
     translated into U.S. dollars at the exchange rate for year 4.
     Effective date
       The provision generally is effective for foreign taxes paid 
     (in the case of taxpayers using the cash basis for 
     determining the foreign tax credit) or accrued (in the case 
     of taxpayers using the accrual basis for determining the 
     foreign tax credit) in taxable years beginning after December 
     31, 1997. The provision's changes to the foreign tax 
     redetermination rules apply to foreign taxes which relate to 
     taxable years beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill with one 
     modification with respect to the treatment of accrued taxes 
     that are paid more than two years after the close of the 
     taxable year to which such taxes relate. In the case of the 
     indirect foreign tax credit, any such taxes are taken into 
     account for the taxable year in which paid, and are 
     translated into U.S. dollar amounts using the exchange rates 
     as of the time such taxes are paid. In the case of the direct 
     foreign tax credit, as under the House bill, any such taxes 
     are taken into account for the taxable year to which such 
     taxes relate, but are translated into U.S. dollar amounts 
     using the exchange rates in effect as of the time such taxes 
     are paid.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     one modification. The conference agreement clarifies that the 
     regulatory authority applicable in the case of indirect 
     foreign tax credits allows, in lieu of a redetermination of 
     taxes, appropriate adjustments to the pools of post-1986 
     foreign income taxes and the pools of post-1986 undistributed 
     earnings.
     3. Election to use simplified foreign tax credit limitation 
         for alternative minimum tax purposes (sec. 1105 of the 
         House bill and sec. 903 of the Senate amendment)

                              Present Law

       Computing foreign tax credit limitations requires the 
     allocation and apportionment of deductions between items of 
     foreign source income and items of U.S. source income. 
     Foreign tax credit limitations must be computed both for 
     regular tax purposes and for purposes of the alternative 
     minimum tax (AMT). Consequently, the allocation and 
     apportionment of deductions must be done separately for 
     regular tax foreign tax credit limitation purposes and AMT 
     foreign tax credit limitation purposes.

                               House Bill

       The House bill permits taxpayers to elect to use as their 
     AMT foreign tax credit limitation fraction the ratio of 
     foreign source regular taxable income to entire alternative 
     minimum taxable income, rather than the ratio of foreign 
     source alternative minimum taxable income to entire 
     alternative minimum taxable income. Under this election, 
     foreign source regular taxable income is used, however, only 
     to the extent it does not exceed entire alternative minimum 
     taxable income. In the event that foreign source regular 
     taxable income does exceed entire alternative minimum taxable 
     income, and the taxpayer has income in more than one foreign 
     tax credit limitation category, it is intended that the 
     foreign source taxable income in each such category generally 
     would be reduced by a pro rata portion of that excess.
       The election is available only in the first taxable year 
     beginning after December 31, 1997 for which the taxpayer 
     claims an AMT foreign tax credit. It is intended that a 
     taxpayer will be treated, for this purpose, as claiming an 
     AMT foreign tax credit for any taxable year for which the 
     taxpayer chooses to have the benefits of the foreign tax 
     credit and in which the taxpayer is subject to the 
     alternative minimum tax or would be subject to the 
     alternative minimum tax but for the availability of the AMT 
     foreign tax credit. The election, once made, will apply to 
     all subsequent taxable years, and may be revoked only with 
     the consent of the Secretary of the Treasury.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Simplify treatment of personal transactions in foreign 
         currency (sec. 1106 of the House bill and sec. 904 of the 
         Senate amendment)

                              Present Law

       When a U.S. taxpayer makes a payment in a foreign currency, 
     gain or loss (referred to as ``exchange gain or loss'') 
     generally arises from any change in the value of the foreign 
     currency relative to the U.S. dollar between the time the 
     currency was acquired (or the obligation to pay was incurred) 
     and the time that the payment is made. Gain or loss results 
     because foreign currency, unlike the U.S. dollar, is treated 
     as property for Federal income tax purposes.
       Exchange gain or loss can arise in the course of a trade or 
     business or in connection with an investment transaction. 
     Exchange gain or loss also can arise where foreign currency 
     was acquired for personal use.

                               House Bill

       If an individual acquires foreign currency and disposes of 
     it in a personal transaction and the exchange rate changes 
     between the acquisition and disposition of such currency, the 
     House bill applies nonrecognition treatment to any resulting 
     exchange gain, provided that such gain does not exceed $200. 
     The provision does not change the treatment of resulting 
     exchange losses.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with one modification. The conference 
     agreement clarifies that transactions entered into in 
     connection with a business trip constitute personal 
     transactions for purposes of this provision. Exchange gain 
     resulting from such transactions is eligible for 
     nonrecognition treatment under this provision.
     5. Simplify foreign tax credit limitation for dividends from 
         10/50 companies (sec. 1107 of the House bill)

                              Present Law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign source income. The amount of foreign tax credits that 
     can be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S. source income. Separate limitations are 
     applied to specific categories of income.
       Special foreign tax credit limitation rules apply in the 
     case of dividends received from a foreign corporation in 
     which the taxpayer owns at least 10 percent of the stock by 
     vote and which is not a controlled foreign corporation (a so-
     called ``10/50 company''). Dividends received by the taxpayer 
     from each 10/50 company are subject to a separate foreign tax 
     credit limitation.

                               House Bill

       Under the House bill, a single foreign tax credit 
     limitation generally applies to dividends received by the 
     taxpayer from all 10/50 companies. However, separate foreign 
     tax credit limitations continue to apply to dividends 
     received by the taxpayer from each 10/50 company that 
     qualifies as a passive foreign investment company. 
     Regulatory authority is granted to provide rules regarding 
     the treatment of distributions out of earnings and profits 
     for periods prior to the taxpayer's acquisition of such 
     stock. To the extent the regulations treat distributions 
     from a foreign corporation out of earnings and profits for 
     pre-acquisition periods as subject to a separate foreign 
     tax credit limitation, it is expected that the regulations 
     would allow the taxpayer to elect to apply that separate 
     foreign tax credit limitation (rather than the limitation 
     applicable to dividends from all 10/50 companies) also to 
     distributions out of post-acquisition earnings and profits 
     of such corporation.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement generally provides for look-
     through treatment to apply in characterizing dividends from 
     10/50 companies for foreign tax credit limitation purposes. 
     Under the conference agreement, any dividend from a 10/50 
     company paid out of earnings and profits accumulated in a 
     taxable year beginning after December 31, 2002 is treated as 
     income in a foreign tax credit limitation category in 
     proportion to the ratio of the earnings and profits 
     attributable to income in such foreign tax credit limitation 
     category to the total earnings and profits. Regulatory 
     authority is granted to provide rules regarding the treatment 
     of distributions out of earning and profits for periods prior 
     to the taxpayer's acquisition of such stock.
       In the case of dividends from a 10/50 company paid out of 
     earnings and profits accumulated in a taxable year beginning 
     before January 1, 2003, the conference agreement provides 
     that a single foreign tax credit limitation generally applies 
     to all such dividends

[[Page H6569]]

     from all 10/50 companies. However, separate foreign tax 
     credit limitations continue to apply to any such dividends 
     received by the taxpayer from each 10/50 company that 
     qualifies as a passive foreign investment company. Regulatory 
     authority is granted to provide rules regarding the treatment 
     of distributions out of earning and profits for periods prior 
     to the taxpayer's acquisition of such stock.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2002.

    B. General Provisions Affecting Treatment of Controlled Foreign 
 Corporations (secs. 1111-1113 of the House bill and secs. 911-913 of 
                         the Senate amendment)

                              Present Law

       If an upper-tier controlled foreign corporation (``CFC'') 
     sells stock of a lower-tier CFC, the gain generally is 
     included in the income of U.S. 10-percent shareholders as 
     subpart F income and such U.S. shareholder's basis in the 
     stock of the first-tier CFC is increased to account for the 
     inclusion. The inclusion is not characterized for foreign tax 
     credit limitation purposes by reference to the nature of the 
     income of the lower-tier CFC; instead it generally is 
     characterized as passive income.
       For purposes of the foreign tax credit limitations 
     applicable to so-called 10/50 companies, a CFC is not treated 
     as a 10/50 company with respect to any distribution out of 
     its earnings and profits for periods during which it was a 
     CFC and, except as provided in regulations, the recipient of 
     the distribution was a U.S. 10-percent shareholder in such 
     corporation.
       If subpart F income of a lower-tier CFC is included in the 
     gross income of a U.S. 10- percent shareholder, no provision 
     of present law allows adjustment of the basis of the upper-
     tier CFC's stock in the lower-tier CFC.
       The subpart F income earned by a foreign corporation during 
     its taxable year is taxed to the persons who are U.S. 10-
     percent shareholders of the corporation on the last day, in 
     that year, on which the corporation is a CFC. In the case of 
     a U.S. 10-percent shareholder who acquired stock in a CFC 
     during the year, such inclusions are reduced by all or a 
     portion of the amount of dividends paid in that year by the 
     foreign corporation to any person other than the acquiror 
     with respect to that stock.
       As a general rule, subpart F income does not include income 
     earned from sources within the United States if the income is 
     effectively connected with the conduct of a U.S. trade or 
     business by the CFC. This general rule does not apply, 
     however, if the income is exempt from, or subject to a 
     reduced rate of, U.S. tax pursuant to a provision of a U.S. 
     treaty.
       A U.S. corporation that owns at least 10 percent of the 
     voting stock of a foreign corporation is treated as if it had 
     paid a share of the foreign income taxes paid by the foreign 
     corporation in the year in which the foreign corporation's 
     earnings and profits become subject to U.S. tax as dividend 
     income of the U.S. shareholder. A U.S. corporation also may 
     be deemed to have paid taxes paid by a second- or third-tier 
     foreign corporation if certain conditions are satisfied.

                               House Bill

     Lower-tier CFCs
       Characterization of gain on stock disposition
       Under the House bill, if a CFC is treated as having gain 
     from the sale or exchange of stock in a foreign corporation, 
     the gain is treated as a dividend to the same extent that it 
     would have been so treated under section 1248 if the CFC were 
     a U.S. person. This provision, however, does not affect the 
     determination of whether the corporation whose stock is sold 
     or exchanged is a CFC.
       Thus, for example, if a U.S. corporation owns 100 percent 
     of the stock of a foreign corporation, which owns 100 percent 
     of the stock of a second foreign corporation, then under the 
     House bill, any gain of the first corporation upon a sale or 
     exchange of stock of the second corporation is treated as a 
     dividend for purposes of subpart F income inclusions to the 
     U.S. shareholder, to the extent of earnings and profits of 
     the second corporation attributable to periods in which the 
     first foreign corporation owned the stock of the second 
     foreign corporation while the latter was a CFC with respect 
     to the U.S. shareholder.
       Gain on disposition of stock in a related corporation 
     created or organized under the laws of, and having a 
     substantial part of its assets in a trade or business in, the 
     same foreign country as the gain recipient, even if 
     recharacterized as a dividend under the House bill provision, 
     is not excluded from foreign personal holding company income 
     under the same-country exception that applies to actual 
     dividends.
       Under the House bill, for purposes of this rule, a CFC is 
     treated as having sold or exchanged stock if, under any 
     provision of subtitle A of the Code, the CFC is treated as 
     having gain from the sale or exchange of such stock. Thus, 
     for example, if a CFC distributes to its shareholder stock in 
     a foreign corporation, and the distribution results in gain 
     being recognized by the CFC under section 311(b) as if the 
     stock were sold to the shareholder for fair market value, the 
     House bill makes clear that, for purposes of this rule, the 
     CFC is treated as having sold or exchanged the stock.
       The House bill also repeals a provision added to the Code 
     by the Technical and Miscellaneous Revenue Act of 1988 that, 
     except as provided by regulations, requires a recipient of a 
     distribution from a CFC to have been a U.S. 10-percent 
     shareholder of that CFC for the period during which the 
     earnings and profits which gave rise to the distribution were 
     generated in order to avoid treating the distribution as one 
     coming from a 10/50 company. Thus, under the House bill, a 
     CFC is not treated as a 10/50 company with respect to any 
     distribution out of its earnings and profits for periods 
     during which it was a CFC, whether or not the recipient of 
     the distribution was a U.S. 10-percent shareholder of the 
     corporation when the earnings and profits giving rise to the 
     distribution were generated.
       Adjustments to basis of stock
       Under the House bill, when a lower-tier CFC earns subpart F 
     income, and stock in that corporation is later disposed of by 
     an upper-tier CFC, the resulting income inclusion of the U.S. 
     10-percent shareholders, under regulations, is to be adjusted 
     to account for previous inclusions, in a manner similar to 
     the adjustments provided to the basis of stock in a first-
     tier CFC. Thus, just as the basis of a U.S. 10-percent 
     shareholder in a first-tier CFC rises when subpart F income 
     is earned and falls when previously taxed income is 
     distributed, so as to avoid double taxation of the income on 
     a later disposition of the stock of that company, the subpart 
     F income from gain on the disposition of a lower-tier CFC 
     generally is reduced by income inclusions of earnings that 
     were not subsequently distributed by the lower-tier CFC.
       For example, assume that a U.S. person is the owner of all 
     of the stock of a first-tier CFC which, in turn, is the sole 
     shareholder of a second-tier CFC. In year 1, the second-tier 
     CFC earns $100 of subpart F income which is included in the 
     U.S. person's gross income for that year. In year 2, the 
     first-tier CFC disposes of the second-tier CFC's stock and 
     recognizes $300 of income with respect to the disposition. 
     All of that income constitutes subpart F foreign personal 
     holding company income. Under the House bill, the Secretary 
     is granted regulatory authority to reduce the U.S. person's 
     year 2 subpart F inclusion by $100--the amount of year 1 
     subpart F income of the second-tier CFC that was included, in 
     that year, in the U.S. person's gross income. Such an 
     adjustment, in effect, allows for a step-up in the basis of 
     the stock of the second-tier CFC to the extent of its subpart 
     F income previously included in the U.S. person's gross 
     income.
     Subpart F inclusions in year of acquisition
       If a U.S. 10-percent shareholder acquires the stock of a 
     CFC from another U.S. 10-percent shareholder during a taxable 
     year of the CFC in which it earns subpart F income, the House 
     bill provision reduces the acquiror's subpart F income 
     inclusion for that year by a portion of the amount of the 
     dividend deemed (under sec. 1248) to be received by the 
     transferor. The portion by which the inclusion is reduced (as 
     is the case if a dividend was paid to the previous owner of 
     the stock) does not exceed the lesser of the amount of 
     dividends with respect to such stock deemed received (under 
     sec. 1248) by other persons during the year or the amount 
     determined by multiplying the subpart F income for the year 
     by the proportion of the year during which the acquiring 
     shareholder did not own the stock.
     Treatment of U.S. income earned by a CFC
       Under the House bill, an exemption or reduction by treaty 
     of the branch profits tax that would be imposed under section 
     884 on a CFC does not affect the general statutory exemption 
     from subpart F income that is granted for U.S. source 
     effectively connected income. For example, assume a CFC earns 
     income of a type that generally would be subpart F income, 
     and that income is earned from sources within the United 
     States in connection with business operations therein. 
     Further assume that repatriation of that income is exempted 
     from the U.S. branch profits tax under a provision of an 
     applicable U.S. income tax treaty. The House bill provides 
     that, notwithstanding the treaty's effect on the branch tax, 
     the income is not treated as subpart F income as long as it 
     is not exempt from U.S. taxation (or subject to a reduced 
     rate of tax) under any other treaty provision.
     Extension of indirect foreign tax credit
       The House bill extends the application of the indirect 
     foreign tax credit (secs. 902 and 960) to taxes paid or 
     accrued by certain fourth-, fifth-, and sixth-tier foreign 
     corporations. In general, three requirements are required to 
     be satisfied by a foreign company at any of these tiers to 
     qualify for the credit. First, the company must be a CFC. 
     Second, the U.S. corporation claiming the credit under 
     section 902(a) must be a U.S. shareholder (as defined in sec. 
     951(b)) with respect to the foreign company. Third, the 
     product of the percentage ownership of voting stock at each 
     level from the U.S. corporation down must equal at least 5 
     percent. The House bill limits the application of the 
     indirect foreign tax credit below the third tier to taxes 
     paid or incurred in taxable years during which the payor is a 
     CFC. Foreign taxes paid below the sixth tier of foreign 
     corporations remain ineligible for the indirect foreign tax 
     credit.
     Effective dates
       Lower-tier CFCs.--The provision that treats gains on 
     dispositions of stock in lower-tier CFCs as dividends under 
     section 1248 principles applies to gains recognized on 
     transactions occurring after the date of enactment.
       The provision that expands look-through treatment, for 
     foreign tax credit limitation

[[Page H6570]]

     purposes, of dividends from CFCs is effective for 
     distributions after the date of enactment.
       The provision that provides for regulatory adjustments to 
     U.S. shareholder inclusions, with respect to gains of CFCs 
     from dispositions of stock in lower-tier CFCs is effective 
     for determining inclusions for taxable years of U.S. 
     shareholders beginning after December 31, 1997. Thus, the 
     House bill permits regulatory adjustments to an inclusion 
     occurring after the effective date to account for income that 
     was previously taxed under the subpart F provisions either 
     prior to or subsequent to the effective date.
       Subpart F inclusions in year of acquisition.--The provision 
     that permits dispositions of stock to be taken into 
     consideration in determining a U.S. shareholder's subpart F 
     inclusion for a taxable year is effective with respect to 
     dispositions occurring after the date of enactment.
       Treatment of U.S. source income earned by a CFC.--The 
     provision concerning the effect of treaty exemptions from, or 
     reductions of, the branch profits tax on the determination of 
     subpart F income is effective for taxable years beginning 
     after December 31, 1986.
       Extension of indirect foreign tax credit.--The provision 
     that extends application of the indirect foreign tax credit 
     to certain CFCs below the third tier is effective for foreign 
     taxes paid or incurred by CFCs for taxable years of such 
     corporations beginning after the date of enactment.
       In the case of any chain of foreign corporations, the taxes 
     of which would be eligible for the indirect foreign tax 
     credit, under present law or under the House bill, but for 
     the denial of indirect credits below the third or sixth tier, 
     as the case may be, no liquidation, reorganization, or 
     similar transaction in a taxable year beginning after the 
     date of enactment will have the effect of permitting taxes to 
     be taken into account under the indirect foreign tax credit 
     provisions of the Code which could not have been taken into 
     account under those provisions but for such transaction.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

  C. Modification of Passive Foreign Investment Company Provisions to 
Eliminate Overlap with Subpart F, to Allow Mark-to-Market Election, and 
 to Require Measurement Based on Value for PFIC Asset Test (secs. 1121-
   1123 of the House bill and secs. 751-753 of the Senate amendment)

                              Present Law

     Overview
       U.S. citizens and residents and U.S. corporations 
     (collectively, ``U.S. persons'') are taxed currently by the 
     United States on their worldwide income, subject to a credit 
     against U.S. tax on foreign income based on foreign income 
     taxes paid with respect to such income. A foreign corporation 
     generally is not subject to U.S. tax on its income from 
     operations outside the United States.
       Income of a foreign corporation generally is taxed by the 
     United States when it is repatriated to the United States 
     through payment to the corporation's U.S. shareholders, 
     subject to a foreign tax credit. However, a variety of 
     regimes imposing current U.S. tax on income earned through a 
     foreign corporation have been reflected in the Code. Today 
     the principal anti-deferral regimes set forth in the Code are 
     the controlled foreign corporation rules of subpart F (secs. 
     951-964) and the passive foreign investment company rules 
     (secs. 1291-1297). Additional anti-deferral regimes set forth 
     in the Code are the foreign personal holding company rules 
     (secs. 551-558); the personal holding company rules (secs. 
     541-547); the accumulated earnings tax (secs. 531-537); and 
     the foreign investment company and electing foreign 
     investment company rules (secs. 1246-1247). The anti-deferral 
     regimes included in the Code overlap such that a given 
     taxpayer may be subject to multiple sets of anti-deferral 
     rules.
     Controlled foreign corporations
       A controlled foreign corporation (CFC) is defined generally 
     as any foreign corporation if U.S. persons own more than 50 
     percent of the corporation's stock (measured by vote or 
     value), taking into account only those U.S. persons that own 
     at least 10 percent of the stock (measured by vote only) 
     (sec. 957). Stock ownership includes not only stock owned 
     directly, but also stock owned indirectly or constructively 
     (sec. 958).
       Certain income of a CFC (referred to as ``subpart F 
     income'') is subject to current U.S. tax. The United States 
     generally taxes the U.S. 10-percent shareholders of a CFC 
     currently on their pro rata shares of the subpart F income of 
     the CFC. In effect, the Code treats those U.S. shareholders 
     as having received a current distribution out of the CFC's 
     subpart F income. Such shareholders also are subject to 
     current U.S. tax on their pro rata shares of the CFC's 
     earnings invested in U.S. property. The foreign tax credit 
     may reduce the U.S. tax on these amounts.
     Passive foreign investment companies
       The Tax Reform Act of 1986 established an anti-deferral 
     regime for passive foreign investment companies (PFICs). A 
     PFIC is any foreign corporation if (1) 75 percent or more of 
     its gross income for the taxable year consists of passive 
     income, or (2) 50 percent or more of the average fair market 
     value of its assets consists of assets that produce, or are 
     held for the production of, passive income. For purposes of 
     applying the PFIC asset test, the assets of a CFC are 
     required to be measured using adjusted basis; the assets of a 
     foreign corporation that is not a CFC are measured using fair 
     market value unless the corporation elects to use adjusted 
     basis.
       Two alternative sets of income inclusion rules apply to 
     U.S. persons that are shareholders in a PFIC. One set of 
     rules applies to PFICs that are ``qualified electing funds,'' 
     under which electing U.S. shareholders include currently in 
     gross income their respective shares of the PFIC's total 
     earnings, with a separate election to defer payment of tax, 
     subject to an interest charge, on income not currently 
     received. The second set of rules applies to PFICs that are 
     not qualified electing funds (``nonqualified funds''), under 
     which the U.S. shareholders pay tax on income realized from 
     the PFIC and an interest charge that is attributable to the 
     value of deferral.
     Overlap between subpart F and the PFIC provisions
       A foreign corporation that is a CFC is also a PFIC if it 
     meets the passive income test or the passive asset test 
     described above. In such a case, the 10-percent U.S. 
     shareholders are subject both to the subpart F provisions 
     (which require current inclusion of certain earnings of the 
     corporation) and to the PFIC provisions (which impose an 
     interest charge on amounts distributed from the corporation 
     and gains recognized upon the disposition of the 
     corporation's stock, unless an election is made to include 
     currently all of the corporation's earnings).

                               House Bill

     Elimination of overlap between subpart F and the PFIC 
         provisions
       In the case of a PFIC that is also a CFC, the House bill 
     generally treats the corporation as not a PFIC with respect 
     to certain 10-percent shareholders. This rule applies if the 
     corporation is a CFC (within the meaning of section 957(a)) 
     and the shareholder is a U.S. shareholder (within the meaning 
     of section 951(b)) of such corporation (i.e., if the 
     shareholder is subject to the current inclusion rules of 
     subpart F with respect to such corporation). Moreover, the 
     rule applies for that portion of the shareholder's holding 
     period with respect to the corporation's stock which is after 
     December 31, 1997 and during which the corporation is a CFC 
     and the shareholder is a U.S. shareholder. Accordingly, a 
     shareholder that is subject to current inclusion under the 
     subpart F rules with respect to stock of a PFIC that is also 
     a CFC generally is not subject also to the PFIC provisions 
     with respect to the same stock. The PFIC provisions continue 
     to apply in the case of a PFIC that is also a CFC to 
     shareholders that are not subject to subpart F (i.e., to 
     shareholders that are U.S. persons and that own (directly, 
     indirectly, or constructively) less than 10 percent of the 
     corporation's stock by vote).
       If a shareholder of a PFIC is subject to the rules 
     applicable to nonqualified funds before becoming eligible for 
     the special rules provided under the proposal for 
     shareholders that are subject to subpart F, the stock held 
     by such shareholder continues to be treated as PFIC stock 
     unless the shareholder makes an election to pay tax and an 
     interest charge with respect to the unrealized 
     appreciation in the stock or the accumulated earnings of 
     the corporation.
       If, under the House bill, a shareholder is not subject to 
     the PFIC provisions because the shareholder is subject to 
     subpart F and the shareholder subsequently ceases to be 
     subject to subpart F with respect to the corporation, for 
     purposes of the PFIC provisions, the shareholder's holding 
     period for such stock is treated as beginning immediately 
     after such cessation. Accordingly, in applying the rules 
     applicable to PFICs that are not qualified electing funds, 
     the earnings of the corporation are not attributed to the 
     period during which the shareholder was subject to subpart F 
     with respect to the corporation and was not subject to the 
     PFIC provisions.
     Mark-to-market election
       The House bill allows a shareholder of a PFIC to make a 
     mark-to-market election with respect to the stock of the 
     PFIC, provided that such stock is marketable (as defined 
     below). Under such an election, the shareholder includes in 
     income each year an amount equal to the excess, if any, of 
     the fair market value of the PFIC stock as of the close of 
     the taxable year over the shareholder's adjusted basis in 
     such stock. The shareholder is allowed a deduction for the 
     excess, if any, of the adjusted basis of the PFIC stock over 
     its fair market value as of the close of the taxable year. 
     However, deductions are allowable under this rule only to the 
     extent of any net mark-to-market gains with respect to the 
     stock included by the shareholder for prior taxable years.
       Under the House bill, this mark-to-market election is 
     available only for PFIC stock that is ``marketable.'' For 
     this purpose, PFIC stock is considered marketable if it is 
     regularly traded on a national securities exchange that is 
     registered with the Securities and Exchange Commission or on 
     the national market system established pursuant to section 
     11A of the Securities and Exchange Act of 1934. In addition, 
     PFIC stock is considered marketable if it is regularly traded 
     on any exchange or market that the Secretary of the Treasury 
     determines has rules sufficient to ensure that the market 
     price represents a legitimate and sound fair market value. 
     Any

[[Page H6571]]

     option on stock that is considered marketable under the 
     foregoing rules is treated as marketable, to the extent 
     provided in regulations. PFIC stock also is treated as 
     marketable, to the extent provided in regulations, if the 
     PFIC offers for sale (or has outstanding) stock of which it 
     is the issuer and which is redeemable at its net asset value 
     in a manner comparable to a U.S. regulated investment company 
     (RIC).
        In addition, the House bill treats as marketable any PFIC 
     stock owned by a RIC that offers for sale (or has 
     outstanding) any stock of which it is the issuer and which is 
     redeemable at its net asset value. The House bill treats as 
     marketable any PFIC stock held by any other RIC that 
     otherwise publishes net asset valuations at least annually, 
     except to the extent provided in regulations. It is believed 
     that even for RICs that do not make a market in their own 
     stock, but that do regularly report their net asset values in 
     compliance with the securities laws, inaccurate valuation may 
     bring exposure to legal liabilities, and this exposure may 
     ensure the reliability of the values such RICs assign to the 
     PFIC stock they hold.
        The shareholder's adjusted basis in the PFIC stock is 
     adjusted to reflect the amounts included or deducted under 
     this election. In the case of stock owned indirectly by a 
     U.S. person through a foreign entity (as discussed below), 
     the basis adjustments for mark-to-market gains and losses 
     apply to the basis of the PFIC in the hands of the 
     intermediary owner, but only for purposes of the subsequent 
     application of the PFIC rules to the tax treatment of the 
     indirect U.S. owner. In addition, similar basis adjustments 
     are made to the adjusted basis of the property actually held 
     by the U.S. person by reason of which the U.S. person is 
     treated as owning PFIC stock.
        Amounts included in income pursuant to a mark-to-market 
     election, as well as gain on the actual sale or other 
     disposition of the PFIC stock, is treated as ordinary income. 
     Ordinary loss treatment also applies to the deductible 
     portion of any mark-to-market loss on PFIC stock, as well as 
     to any loss realized on the actual sale or other disposition 
     of PFIC stock to the extent that the amount of such loss does 
     not exceed the net mark-to-market gains previously included 
     with respect to such stock. The source of amounts with 
     respect to a mark-to-market election generally is determined 
     in the same manner as if such amounts were gain or loss from 
     the sale of stock in the PFIC.
        An election to mark to market applies to the taxable year 
     for which made and all subsequent taxable years, unless the 
     PFIC stock ceases to be marketable or the Secretary of the 
     Treasury consents to the revocation of such election.
        Under constructive ownership rules, U.S. persons that own 
     PFIC stock through certain foreign entities may make this 
     election with respect to the PFIC. These constructive 
     ownership rules apply to treat PFIC stock owned directly or 
     indirectly by or for a foreign partnership, trust, or estate 
     as owned proportionately by the partners or beneficiaries, 
     except as provided in regulations. Stock in a PFIC that is 
     thus treated as owned by a person is treated as actually 
     owned by that person for purposes of again applying the 
     constructive ownership rules. In the case of a U.S. person 
     that is treated as owning PFIC stock by application of this 
     constructive ownership rule, any disposition by the U.S. 
     person or by any other person that results in the U.S. person 
     being treated as no longer owning the PFIC stock, as well as 
     any disposition by the person actually owning the PFIC stock, 
     is treated as a disposition by the U.S. person of the PFIC 
     stock.
        In addition, a CFC that owns stock in a PFIC is treated as 
     a U.S. person that may make the election with respect to such 
     PFIC stock. Any amount includible (or deductible) in the 
     CFC's gross income pursuant to this mark-to-market election 
     is treated as foreign personal holding company income (or a 
     deduction allocable to foreign personal holding company 
     income). The source of such amounts, however, is determined 
     by reference to the actual residence of the CFC.
        In the case of a taxpayer that makes the mark-to-market 
     election with respect to stock in a PFIC that is a 
     nonqualified fund after the beginning of the taxpayer's 
     holding period with respect to such stock, a coordination 
     rule applies to ensure that the taxpayer does not avoid 
     the interest charge with respect to amounts attributable 
     to periods before such election. A similar rule applies to 
     RICs that make the mark-to-market election under the House 
     bill after the beginning of their holding period with 
     respect to PFIC stock (to the extent that the RIC had not 
     previously marked to market the stock of the PFIC).
       Except as provided in the coordination rules described 
     above, the rules of section 1291 (with respect to 
     nonqualified funds) do not apply to a shareholder of a PFIC 
     if a mark-to-market election is in effect for the 
     shareholder's taxable year. Moreover, in applying section 
     1291 in a case where a mark-to-market election was in effect 
     for any prior taxable year, the shareholder's holding period 
     for the PFIC stock is treated as beginning immediately after 
     the last taxable year for which such election applied.
       A special rule applicable in the case of a PFIC shareholder 
     that becomes a U.S. person treats the adjusted basis of any 
     PFIC stock held by such person on the first day of the year 
     in which such shareholder becomes a U.S. person as equal to 
     the greater of its fair market value on such date or its 
     adjusted basis on such date. Such rule applies only for 
     purposes of the mark-to-market election.
     Effective date
       The provision is effective for taxable years of U.S. 
     persons beginning after December 31, 1997, and taxable years 
     of foreign corporations ending with or within such taxable 
     years of U.S. persons.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with one modification to the rules regarding 
     the measurement of assets for purposes of applying the PFIC 
     asset test. Under the conference agreement, if the stock of a 
     foreign corporation is publicly traded for the taxable year, 
     the PFIC asset test is applied using fair market value for 
     purposes of measuring the PFIC's assets. For this purpose, 
     the stock of a foreign corporation is treated as publicly 
     traded if such stock is readily tradeable on a national 
     securities exchange that is registered with the Securities 
     and Exchange Commission, the national market system 
     established pursuant to section 11A of the Securities and 
     Exchange Act of 1934, or any other exchange or market that 
     the Secretary of the Treasury determines has rules sufficient 
     to ensure that the market price represents a sound fair 
     market value. Because the PFIC asset test is applied based on 
     quarterly measurements of the corporation's assets, it is 
     intended that a corporation the stock of which is publicly 
     traded on each such quarterly measurement date during the 
     taxable year will be eligible for this asset measurement rule 
     for such taxable year. In applying the PFIC asset test, it is 
     intended that the total value of a publicly-traded foreign 
     corporation's assets generally will be treated as equal to 
     the sum of the aggregate value of its outstanding stock plus 
     its liabilities.
       The conference agreement does not change the rules 
     applicable to non-publicly-traded foreign corporations for 
     purposes of the measurement of assets in applying the PFIC 
     asset test. Accordingly, CFCs that are not publicly traded 
     continue to be required to measure their assets using 
     adjusted basis, and any other foreign corporations that are 
     not publicly traded continue to measure their assets using 
     fair market value unless they elect to use adjusted basis.

  D. Simplify Formation and Operation of International Joint Ventures 
 (secs. 1131, 1141-1145, and 1151 of the House bill and secs. 921, 931-
                 935, and 941 of the Senate amendment)

                              Present Law

       Under section 1491, an excise tax generally is imposed on 
     transfers of property by a U.S. person to a foreign 
     corporation as paid-in surplus or as a contribution to 
     capital or to a foreign partnership, estate or trust. The tax 
     is 35 percent of the amount of gain inherent in the property 
     transferred but not recognized for income tax purposes at the 
     time of the transfer. However, several exceptions to the 
     section 1491 excise tax are available. Under section 1494(c), 
     a substantial penalty applies in the case of a failure to 
     report a transfer described in section 1491.
       Section 367 applies to require gain recognition upon 
     certain transfers by U.S. persons to foreign corporations. 
     Under section 367(d), a U.S. person that contributes 
     intangible property to a foreign corporation is treated as 
     having sold the property to the corporation and is treated as 
     receiving deemed royalty payments from the corporation. These 
     deemed royalty payments are treated as U.S. source income. A 
     U.S. person may elect to apply similar rules to a transfer of 
     intangible property to a foreign partnership that otherwise 
     would be subject to the section 1491 excise tax.
       A foreign partnership may be required to file a partnership 
     return. If a foreign partnership fails to file a required 
     return, losses and credits with respect to the partnership 
     may be disallowed to the partnership. A U.S. person that 
     acquires or disposes of an interest in a foreign partnership, 
     or whose proportional interest in the partnership changes 
     substantially, may be required to file an information return 
     with respect to such event.
       A partnership generally is considered to be a domestic 
     partnership if it is created or organized in the United 
     States or under the laws of the United States or any State. A 
     foreign partnership generally is any partnership that is not 
     a domestic partnership.

                               House Bill

     Transfers of foreign entities
       The House bill repeals the sections 1491-1494 excise tax 
     and information reporting rules that apply to certain 
     transfers of appreciated property by a U.S. person to a 
     foreign entity. Instead of the excise tax that applies under 
     present law to transfers to a foreign estate or trust, gain 
     recognition is required upon a transfer of appreciated 
     property by a U.S. person to a foreign estate or trust. 
     Instead of the excise tax that applies under present law to 
     certain transfers to foreign corporations, regulatory 
     authority is granted under section 367 to deny nonrecognition 
     treatment to such a transfer in a transaction that is not 
     otherwise described in section 367. Instead of the excise tax 
     that applies under present law to transfers to foreign 
     partnerships, regulatory authority is granted to provide for 
     gain recognition on a transfer of appreciated property to a 
     partnership in cases where such gain otherwise

[[Page H6572]]

     would be transferred to a foreign partner. In addition, 
     regulatory authority is granted to deny the nonrecognition 
     treatment that is provided under section 1035 to certain 
     exchanges of insurance policies, where the transfer is to a 
     foreign person.
       The House bill repeals the rule that treats as U.S. source 
     income any deemed royalty arising under section 367(d). Under 
     the House bill, in the case of a transfer of intangible 
     property to a foreign corporation, the deemed royalty 
     payments under section 367(d) are treated as foreign source 
     income to the same extent that an actual royalty payment 
     would be considered to be foreign source income. Regulatory 
     authority is granted to provide similar treatment in the case 
     of a transfer of intangible property to a foreign 
     partnership.
     Information reporting
       The House bill provides detailed information reporting 
     rules in the case of foreign partnerships. A foreign 
     partnership generally is required to file a partnership 
     return for a taxable year if the partnership has U.S. source 
     income or is engaged in a U.S. trade or business, except to 
     the extent provided in regulations.
       Under the House bill, reporting rules similar to those 
     applicable under present law in the case of controlled 
     foreign corporations apply in the case of foreign 
     partnerships. A U.S. partner that controls a foreign 
     partnership is required to file an annual information return 
     with respect to such partnership. For this purpose, a U.S. 
     partner is considered to control a foreign partnership if the 
     partner holds a more than 50 percent interest in the capital, 
     profits, or, to the extent provided in regulations, losses, 
     of the partnership. Similar information reporting also will 
     be required from a U.S. 10-percent partner of a foreign 
     partnership that is controlled by U.S. 10-percent partners. A 
     $10,000 penalty applies to a failure to comply with these 
     reporting requirements; additional penalties of up to $50,000 
     apply in the case of continued noncompliance after 
     notification by the Secretary of the Treasury. The penalties 
     for failure to report information with respect to a 
     controlled foreign corporation are conformed with these 
     penalties.
       Under the House bill, reporting by a U.S. person of an 
     acquisition or disposition of an interest in a foreign 
     partnership, or a change in the person's proportional 
     interest in the partnership, is required only in the case of 
     acquisitions, dispositions, or changes involving at least a 
     10-percent interest. A $10,000 penalty applies to a failure 
     to comply with these reporting requirements; additional 
     penalties of up to $50,000 apply in the case of continued 
     noncompliance after notification by the Secretary. The 
     penalties for failure to report information with respect to a 
     foreign corporation are conformed with these penalties.
       Under the House bill, reporting rules similar to those 
     applicable under present law in the case of transfers by U.S. 
     persons to foreign corporations apply in the case of 
     transfers to foreign partnerships. These reporting rules 
     apply in the case of a transfer to a foreign partnership only 
     if the U.S. person holds at least a 10-percent interest in 
     the partnership or the value of the property transferred by 
     such person to the partnership during a 12-month period 
     exceeded $100,000. A penalty equal to 10 percent of the value 
     of the property transferred applies to a failure to comply 
     with these reporting requirements. The penalty under 
     present law for failure to report transfers to a foreign 
     corporation is conformed with this penalty. In the case of 
     a transfer to a foreign partnership, failure to comply 
     also results in gain recognition with respect to the 
     property transferred.
       Under the House bill, in the case of a failure to report 
     required information with respect to a foreign corporation, 
     partnership, or trust, the statute of limitations with 
     respect to any event or period to which such information 
     relates does not expire before the date that is three years 
     after the date on which such information is provided.
     Foreign or domestic partnership determination
       Under the House bill, regulatory authority is granted to 
     provide rules treating a partnership as a foreign partnership 
     where such treatment is more appropriate. It is expected that 
     a recharacterization of a partnership as foreign rather than 
     domestic under such regulations will be based only on 
     material factors such as the residence of the partners and 
     the extent to which the partnership is engaged in business in 
     the United States or earns U.S. source income. It also is 
     expected that such regulations will provide guidance 
     regarding the determination of whether an entity that is a 
     partnership for Federal income tax purposes is to be 
     considered to be created or organized in the United States or 
     under the law of the United States or any State.
     Effective date
       The provisions with respect to the repeal of sections 1491-
     1494 are effective upon date of enactment. The provisions 
     with respect to the source of a deemed royalty under section 
     367(d) also are effective for transfers made and royalties 
     deemed received after date of enactment.
       The provisions regarding information reporting with respect 
     to foreign partnerships generally are effective for 
     partnership taxable years beginning after date of enactment. 
     The provisions regarding information reporting with respect 
     to interests in, and transfers to, foreign partnerships are 
     effective for transfers to, and changes in interest in, 
     foreign partnerships after date of enactment. Taxpayers may 
     elect to apply these rules to transfers made after August 20, 
     1996 (and thereby avoid a penalty under section 1494(c)) and 
     the Secretary may prescribe simplified reporting requirements 
     for these cases. The provision with respect to the statute of 
     limitations in the case of noncompliance with reporting 
     requirements is effective for information returns due after 
     date of enactment.
       The provision granting regulatory authority with respect to 
     the treatment of partnerships as foreign or domestic is 
     effective for partnership taxable years beginning after date 
     of enactment.

                            Senate Amendment

       The Senate amendment generally follows the House bill with 
     several modifications.
       Under the Senate amendment, gain recognition is required 
     upon a transfer of appreciated property by a U.S. person to a 
     foreign estate or trust, except as provided in regulations. 
     This rule does not apply to a transfer to a trust to the 
     extent that any person is treated as the owner of the trust 
     under section 679.
       Under the Senate amendment, the penalty equal to 10 percent 
     of the value of the transferred property that applies to a 
     failure to comply with the information reporting requirements 
     with respect to a transfer of property to a foreign 
     corporation or partnership may not exceed $100,000 except in 
     cases of intentional disregard for such reporting 
     requirements.
       Under the Senate amendment, regulatory authority is granted 
     to provide rules treating a partnership as a domestic or 
     foreign partnership, where such treatment is more 
     appropriate, without regard to where the partnership is 
     created or organized. It is expected that a 
     recharacterization of a partnership under such regulations 
     will be based only on material factors such as the residence 
     of the partners and the extent to which the partnership is 
     engaged in business in the United States or earns U.S. source 
     income. It also is expected that such regulations will 
     provide guidance regarding the determination of whether an 
     entity that is a partnership for Federal income tax purposes 
     is to be considered to be created or organized in the United 
     States or under the law of the United States or any State.

                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment with modifications.
       The conference agreement clarifies that, for purposes of 
     the requirement of gain recognition upon a transfer of 
     appreciated property by a U.S. person to a foreign estate or 
     trust, a U.S. trust that becomes a foreign trust is treated 
     as having transferred all of its assets to a foreign trust.
       The conference agreement further clarifies that, in the 
     case of a transfer by a U.S. person to a foreign corporation 
     as paid-in surplus or as a contribution to capital in a 
     transaction not otherwise described in section 367 (e.g., a 
     capital contribution by a non-shareholder), regulatory 
     authority is granted under section 367 to treat such transfer 
     as a fair market value sale and to require gain recognition 
     thereon.
       For purposes of the information reporting rules applicable 
     to a U.S. partner that controls a foreign partnership, the 
     conference agreement clarifies that a partner's interest in a 
     partnership is determined with application of constructive 
     ownership rules similar to those provided in section 267(c) 
     (other than paragraph (3)).
       Finally, the conference agreement provides that regulations 
     issued under the grant of regulatory authority to provide 
     rules treating a partnership as a domestic or foreign 
     partnership will apply only to partnerships created or 
     organized after the date such regulations are filed with the 
     Federal Register (or, if earlier, the date of a public notice 
     substantially describing the expected contents of the 
     regulations). Accordingly, regulations issued under this 
     grant of regulatory authority will not be applied to 
     reclassify pre-existing partnerships. In connection with this 
     regulatory authority, the conferees wish to make clear that 
     it is intended that the general rule for classifying a 
     partnership as domestic or foreign will continue to be the 
     place where the partnership is created or organized (or the 
     laws under which it is created or organized), and that the 
     regulations are expected to provide a different 
     classification result only in unusual cases. The conferees 
     also expect that any regulations will avoid period-by-period 
     reclassifications of partnerships.

E. Modification of Reporting Threshold for Stock Ownership of a Foreign 
  Corporation (sec. 1146 of the House bill and sec. 936 of the Senate 
                               amendment)

                              Present Law

       Several provisions of the Code require U.S. persons to 
     report information with respect to a foreign corporation in 
     which they are shareholders or officers or directors. 
     Sections 6038 and 6035 generally require every U.S. citizen 
     or resident who is an officer, or director, or who owns at 
     least 10 percent of the stock, of a foreign corporation that 
     is a controlled foreign corporation or a foreign personal 
     holding company to file Form 5471 annually.
       Section 6046 mandates the filing of information returns by 
     certain U.S. persons with respect to a foreign corporation 
     upon the occurrence of certain events. U.S. persons required 
     to file these information returns are

[[Page H6573]]

     those who acquire 5 percent or more of the value of the stock 
     of a foreign corporation, others who become U.S. persons 
     while owning that percentage of the stock of a foreign 
     corporation, and U.S. citizens and residents who are officers 
     or directors of foreign corporations with such U.S. 
     ownership.
       A failure to file the required information return under 
     section 6038 may result in monetary penalties or reduction of 
     foreign tax credit benefits. A failure to file the required 
     information returns under sections 6035 or 6046 may result in 
     monetary penalties.

                               House Bill

       The House bill increases the threshold for stock ownership 
     of a foreign corporation that results in information 
     reporting obligations under section 6046 from 5 percent 
     (based on value) to 10 percent (based on vote or value).
       Effective date.--The provision is effective for reportable 
     transactions occurring after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

               F. Other Foreign Simplification Provisions

     1. Transition rule for certain trusts (sec. 1161 of the House 
         bill and sec. 951 of the Senate amendment)

                              Present Law

       Under rules enacted with the Small Business Job Protection 
     Act of 1996, a trust is considered to be a U.S. trust if two 
     criteria are met. First, a court within the United States 
     must be able to exercise primary supervision over the 
     administration of the trust. Second, U.S. fiduciaries of the 
     trust must have the authority to control all substantial 
     decisions of the trust. A trust that does not satisfy both of 
     these criteria is considered to be a foreign trust. These 
     rules for defining a U.S. trust generally are effective for 
     taxable years of a trust that begin after December 31, 1996. 
     A trust that qualified as a U.S. trust under prior law could 
     fail to qualify as a U.S. trust under these new criteria.

                               House Bill

       Under the House bill, the Secretary of the Treasury is 
     granted authority to allow nongrantor trusts that had been 
     treated as U.S. trusts under prior law to elect to continue 
     to be treated as U.S. trusts, notwithstanding the new 
     criteria for qualification as a U.S. trust.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1996.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Simplify stock and securities trading safe harbor (sec. 
         1162 of the House bill and sec. 952 of the Senate 
         amendment)

                              Present Law

       A nonresident alien individual or foreign corporation that 
     is engaged in a trade or business within the United States is 
     subject to U.S. taxation on its net income that is 
     effectively connected with the trade or business, at 
     graduated rates of tax. Under a ``safe harbor'' rule, foreign 
     persons that trade in stocks or securities for their own 
     accounts are not treated as engaged in a U.S. trade or 
     business for this purpose.
       For a foreign corporation to qualify for the safe harbor, 
     it must not be a dealer in stock or securities. In addition, 
     if the principal business of the foreign corporation is 
     trading in stock or securities for its own account, the safe 
     harbor generally does not apply if the principal office of 
     the corporation is in the United States.
       For foreign persons who invest in securities trading 
     partnerships, the safe harbor applies only if the partnership 
     is not a dealer in stock and securities. In addition, if the 
     principal business of the partnership is trading stock or 
     securities for its own account, the safe harbor generally 
     does not apply if the principal office of the partnership is 
     in the United States.
       Under Treasury regulations that apply to both corporations 
     and partnerships, the determination of the location of the 
     entity's principal office turns on the location of various 
     functions relating to operation of the entity, including 
     communication with investors and the general public, 
     solicitation and acceptance of sales of interests, and 
     maintenance and audits of its books of account (Treas. reg. 
     sec. 1.864-2(c)(2)(ii) and (iii)). Under the regulations, the 
     location of the entity's principal office does not depend on 
     the location of the entity's management or where investment 
     decisions are made.

                               House Bill

       The House bill modifies the stock and securities trading 
     safe harbor by eliminating the requirement for both 
     partnerships and foreign corporations that trade stock or 
     securities for their own accounts that the entity's principal 
     office not be within the United States.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Clarification of determination of foreign taxes deemed 
         paid (sec. 1178(a) of the House bill and sec. 953(a) of 
         the Senate amendment)

                              Present Law

       Under section 902, a domestic corporation that receives a 
     dividend from a foreign corporation in which it owns 10 
     percent or more of the voting stock is deemed to have paid a 
     portion of the foreign taxes paid by such foreign 
     corporation. The domestic corporation that receives a 
     dividend is deemed to have paid a portion of the foreign 
     corporation's post-1986 foreign income taxes based on the 
     ratio of the amount of such dividend to the foreign 
     corporation's post-1986 undistributed earnings. The foreign 
     corporation's post-1986 foreign income taxes is the sum of 
     the foreign income taxes with respect to the taxable year in 
     which the dividend is distributed plus certain foreign income 
     taxes with respect to prior taxable years (beginning after 
     December 31, 1986).

                               House Bill

       The House bill clarifies that, for purposes of the deemed 
     paid credit under section 902 for a taxable year, a foreign 
     corporation's post-1986 foreign income taxes includes foreign 
     income taxes with respect to prior taxable years (beginning 
     after December 31, 1986) only to the extent such taxes are 
     not attributable to dividends distributed by the foreign 
     corporation in prior taxable years. No inference is intended 
     regarding the determination of foreign taxes deemed paid 
     under present law.
       Effective date.--The provision is effective on date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Clarification of foreign tax credit limitation for 
         financial services income (sec. 1178(b) of the House bill 
         and sec. 953(b) of the Senate amendment)

                              Present Law

       Under section 904, separate foreign tax credit limitations 
     apply to various categories of income. Two of these separate 
     limitation categories are passive income and financial 
     services income. For purposes of the separate foreign tax 
     credit limitation applicable to passive income, certain 
     income that is treated as high-taxed income is excluded from 
     the definition of passive income. For purposes of the 
     separate foreign tax credit limitation applicable to 
     financial services income, the definition of financial 
     services income generally incorporates passive income as 
     defined for purposes of the separate limitation applicable to 
     passive income.

                               House Bill

       The House bill clarifies that the exclusion of income that 
     is treated as high-taxed income does not apply for purposes 
     of the separate foreign tax credit limitation applicable to 
     financial services income. No inference is intended regarding 
     the treatment of high-taxed income for purposes of the 
     separate foreign tax credit limitation applicable to 
     financial services income under present law.
       Effective date.--The provision is effective on date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

                      G. Other Foreign Provisions

     1. Eligibility of licenses of computer software for foreign 
         sales corporation benefits (sec. 1101 of the House bill 
         and sec. 741 of the Senate amendment)

                              Present law

       Under special tax provisions that provide an export 
     benefit, a portion of the foreign trade income of an eligible 
     foreign sales corporation (``FSC'') is exempt from Federal 
     income tax. Foreign trade income is defined as the gross 
     income of a FSC that is attributable to foreign trading gross 
     receipts. The term ``foreign trading gross receipts'' 
     includes the gross receipts of a FSC from the sale, lease, or 
     rental of export property and from services related and 
     subsidiary to such sales, leases, or rentals.
       For purposes of the FSC rules, export property is defined 
     as property (1) which is manufactured, produced, grown, or 
     extracted in the United States by a person other than a FSC; 
     (2) which is held primarily for sale, lease, or rental in the 
     ordinary conduct of a trade or business by or to a FSC for 
     direct use, consumption, or disposition outside the United 
     States; and (3) not more than 50 percent of the fair market 
     value of which is attributable to articles imported into the 
     United States. Intangible property generally is excluded from 
     the definition of export property for purposes of the FSC 
     rules; this exclusion applies to copyrights other than films, 
     tapes, records, or similar reproductions for commercial or 
     home use. The temporary Treasury regulations provide that a 
     license of a master recording tape for reproduction outside 
     the United States is not excluded from the definition of 
     export property (Treas. Reg. sec. 1.927(a)-1T(f)(3)). The 
     statutory exclusion for intangible property does not contain 
     any specific reference to computer software. However, the 
     temporary

[[Page H6574]]

     Treasury regulations provide that a copyright on computer 
     software does not constitute export property, and that 
     standardized, mass marketed computer software constitutes 
     export property if such software is not accompanied by a 
     right to reproduce for external use (Treas. Reg. sec. 
     1.927(a)-1T(f)(3)).

                               House Bill

       The House bill provides that computer software licensed for 
     reproduction abroad is not excluded from the definition of 
     export property for purposes of the FSC provisions. 
     Accordingly, computer software that is exported with a right 
     to reproduce is eligible for the benefits of the FSC 
     provisions. In light of the rapid innovations in the computer 
     and software industries, the Committee intends that the term 
     ``computer software'' be construed broadly to accommodate 
     technological changes in the products produced by both 
     industries. No inference is intended regarding the 
     qualification as export property of computer software 
     licensed for reproduction abroad under present law.
       Effective date.--The provision generally applies to gross 
     receipts from computer software licenses attributable to 
     periods after December 31, 1997. Accordingly, in the case of 
     a multi-year license, the provision applies to gross receipts 
     attributable to the period of such license that is after 
     December 31, 1997. In the case of gross receipts attributable 
     to 1998, the provision applies to only one-third of such 
     gross receipts. In the case of gross receipts attributable to 
     1999, the provision applies to only two-thirds of such gross 
     receipts.

                            Senate Amendment

       The Senate amendment is the same as the House bill, with a 
     modification to the effective date.
       Effective date.--The provision applies to gross receipts 
     from computer software licenses attributable to periods after 
     December 31, 1997. Accordingly, in the case of a multi-year 
     license, the provision applies to gross receipts attributable 
     to the period of such license that is after December 31, 
     1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     2. Increase dollar limitation on section 911 exclusion (sec. 
         1102 of the House bill)

                              Present Law

       U.S. citizens generally are subject to U.S. income tax on 
     all their income, whether derived in the United States or 
     elsewhere. A U.S. citizen who earns income in a foreign 
     country also may be taxed on such income by that foreign 
     country. A credit against the U.S. income tax imposed on 
     foreign source income is allowed for foreign taxes paid on 
     such income.
       U.S. citizens living abroad may be eligible to exclude from 
     their income for U.S. tax purposes certain foreign earned 
     income and foreign housing costs. In order to qualify for 
     these exclusions, a U.S. citizen must be either (1) a bona 
     fide resident of a foreign country for an uninterrupted 
     period that includes an entire taxable year or (2) present 
     overseas for 330 days out of any 12 consecutive month period. 
     In addition, the taxpayer must have his or her tax home in a 
     foreign country.
       The exclusion for foreign earned income generally applies 
     to income earned from sources outside the United States as 
     compensation for personal services actually rendered by the 
     taxpayer. The maximum exclusion for foreign earned income for 
     a taxable year is $70,000.
       The exclusion for housing costs applies to reasonable 
     expenses, other than deductible interest and taxes, paid or 
     incurred by or on behalf of the taxpayer for housing for the 
     taxpayer and his or her spouse and dependents in a foreign 
     country. The exclusion amount for housing costs for a taxable 
     year is equal to the excess of such housing costs for the 
     taxable year over an amount computed pursuant to a specified 
     formula.
       The combined earned income exclusion and housing cost 
     exclusion may not exceed the taxpayer's total foreign earned 
     income. The taxpayer's foreign tax credit is reduced by the 
     amount the credit that is attributable to excluded income.

                               House Bill

       Under the House bill, the $70,000 limitation on the 
     exclusion for foreign earned income is increased to $80,000, 
     in increments of $2,000 each year beginning in 1998. The 
     $80,000 limitation on the exclusion for foreign earned income 
     is indexed for inflation beginning in 2008 (for inflation 
     after 2006).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     3. Treatment of certain securities positions under the 
         subpart F investment in U.S. property rules (sec. 743 of 
         the Senate amendment)

                              Present Law

       Under the rules of subpart F (secs. 951-964), the U.S. 10-
     percent shareholders of a controlled foreign corporation 
     (CFC) are required to include in income currently for U.S. 
     tax purposes certain earnings of the CFC, whether or not such 
     earnings are distributed currently to the shareholders. The 
     U.S. 10-percent shareholders of a CFC are subject to current 
     U.S. tax on their shares of certain income earned by the CFC 
     (referred to as ``subpart F income'). The U.S. 10-percent 
     shareholders also are subject to current U.S. tax on their 
     shares of the CFC's earnings to the extent invested by the 
     CFC in certain U.S. property.
       A shareholder's current income inclusion with respect to a 
     CFC's investment in U.S. property for a taxable year is based 
     on the CFC's average investment in U.S. property for such 
     year. For this purpose, the U.S. property held by the CFC 
     must be measured as of the close of each quarter in the 
     taxable year. U.S. property generally is defined to include 
     tangible property located in the United States, stock of a 
     U.S. corporation, obligations of a U.S. person, and the right 
     to use certain intellectual property in the United States. 
     Exceptions are provided for, among other things, obligations 
     of the United States, U.S. bank deposits, certain trade or 
     business obligations, and stock or debts of certain unrelated 
     U.S. corporations.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides two additional exceptions 
     from the definition of U.S. property for purposes of the 
     subpart F rules. Both exceptions relate to transactions 
     entered into by a securities or commodities dealer in the 
     ordinary course of its business as a securities or 
     commodities dealer.
       The first exception covers the deposit of collateral or 
     margin by a securities or commodities dealer, or the receipt 
     of such a deposit by a securities or commodities dealer, if 
     such deposit is made or received on commercial terms in the 
     ordinary course of the dealer's business as a securities or 
     commodities dealer. This exception applies to deposits of 
     margin or collateral for securities loans, notional principal 
     contracts, options contracts, forward contracts, futures 
     contracts, and any other financial transaction with respect 
     to which the Secretary of the Treasury determines that the 
     posting of collateral or margin is customary.
       The second exception covers repurchase agreement 
     transactions and reverse repurchase agreement transactions 
     entered into by or with a securities or commodities dealer in 
     the ordinary course of its business as a securities or 
     commodities dealer. The exception applies only to the extent 
     that the obligation under the transaction does not exceed the 
     fair market value of readily marketable securities 
     transferred or otherwise posted as collateral.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     1997, and taxable years of U.S. shareholders with or within 
     which such taxable years of foreign corporations end.

                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment. Under the conference agreement, for purposes of 
     these two additional exceptions under section 956, the term 
     ``dealer in commodities'' means futures commission merchants 
     and dealers in commodities within the meaning of the new 
     definition that is added to section 475 by the conference 
     agreement. In addition, the conferees wish to clarify that 
     the addition of these two exceptions under section 956 is not 
     intended to create any inference regarding the treatment of 
     an obligation of a U.S. person to return stock that is 
     borrowed pursuant to a securities loan.
     4. Exception from foreign personal holding company income 
         under subpart F for active financing income (sec. 744 of 
         the Senate amendment)

                              Present Law

       Under the subpart F rules, certain U.S. shareholders of a 
     controlled foreign corporation (``CFC'') are subject to U.S. 
     tax currently on certain income earned by the CFC, whether or 
     not such income is distributed to the shareholders. The 
     income subject to current inclusion under the subpart F 
     rules includes, among other things, ``foreign personal 
     holding company income'' and insurance income. The U.S. 
     10-percent shareholders of a CFC also are subject to 
     current inclusion with respect to their shares of the 
     CFC's foreign base company services income (i.e., income 
     derived from services performed for a related person 
     outside the country in which the CFC is organized).
       Foreign personal holding company income generally consists 
     of the following: dividends, interest, royalties, rents and 
     annuities; net gains from sales or exchanges of (1) property 
     that gives rise to the preceding types of income, (2) 
     property that does not give rise to income, and (3) interests 
     in trusts, partnerships, and REMICs; net gains from 
     commodities transactions; net gains from foreign currency 
     transactions; and income that is equivalent to interest.
       Insurance income subject to current inclusion under the 
     subpart F rules includes any income of a CFC attributable to 
     the issuing or reinsuring of any insurance or annuity 
     contract in connection with risks located in a country other 
     than the CFC's country of organization and related person 
     insurance income. Subpart F insurance income also includes 
     income attributable to an insurance contract in connection 
     with risks located within the CFC's country of organization, 
     as the result of an arrangement under which another 
     corporation receives a substantially

[[Page H6575]]

     equal amount of consideration for insurance of other-country 
     risks. Investment income of a CFC that is allocable to any 
     insurance or annuity contract related to risks located 
     outside the CFC's country of organization is taxable as 
     subpart F insurance income (Prop. Treas. reg. sec. 1.953-
     1(a)). Investment income allocable to risks located within 
     the CFC's country of organization generally is taxable as 
     foreign personal holding company income.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides a temporary exception from 
     foreign personal holding company income for subpart F 
     purposes for certain income that is derived in the active 
     conduct of an insurance, banking, financing or similar 
     business. Such exception is applicable only for taxable years 
     beginning in 1998.
       Under the Senate amendment, foreign personal holding 
     company income does not include income that is derived in or 
     incident to the active conduct of a banking, financing or 
     similar business by a CFC that is predominantly engaged in 
     the active conduct of such business. For this purpose, income 
     derived in the active conduct of a banking, financing, or 
     similar business generally is determined under the principles 
     applicable in determining financial services income for 
     foreign tax credit limitation purposes. Moreover, the 
     Secretary of the Treasury shall prescribe regulations 
     applying look-through treatment in characterizing for this 
     purpose dividends, interest, income equivalent to interest, 
     rents, and royalties from related persons. A CFC is 
     considered to be predominantly engaged in the active conduct 
     of a banking, financing, or similar business if (1) more than 
     70 percent of its gross income is derived from transactions 
     with unrelated persons and more than 20 percent of its gross 
     income from that business is derived from transactions with 
     unrelated persons located within the country in which the CFC 
     is organized or incorporated, or (2) the CFC is predominantly 
     engaged in the active conduct of a banking or securities 
     business, or is a qualified bank or securities affiliate, as 
     defined for purposes of the passive foreign investment 
     company provisions.
       Under the Senate amendment, foreign personal holding 
     company income also does not include certain investment 
     income of a qualifying insurance company with respect to 
     risks located within the CFC's country of organization. These 
     exceptions apply to income derived from investments of assets 
     equal to the total of (1) unearned premiums and reserves 
     ordinary and necessary for the proper conduct of the CFC's 
     insurance business, (2) one-third of premiums earned during 
     the taxable year on insurance contracts regulated in the 
     country in which sold as property, casualty, or health 
     insurance contracts, and (3) the greater of $10 million or 10 
     percent of reserves for insurance contracts regulated in the 
     country in which sold as life insurance or annuity contracts. 
     For this purpose, a qualifying insurance company is an entity 
     that is subject to regulation as an insurance company under 
     the laws of its country of incorporation and that realizes at 
     least 50 percent of its gross income (other than income from 
     investments) from premiums related to risks located within 
     such country. These exceptions for insurance investment 
     income do not apply to investment income which is received by 
     the CFC from a related person. Similarly, the exceptions do 
     not apply to investment income that is attributable directly 
     or indirectly to the insurance or reinsurance of risks of 
     related persons. The Senate amendment does not change the 
     rule of present law that investment income of a CFC that is 
     attributable to the issuing or reinsuring of any insurance or 
     annuity contract related to risks outside of its country of 
     organization is taxable as Subpart F insurance income.
       The Senate amendment also provides an exception from 
     foreign base company services income for income derived from 
     services performed in connection with the active conduct of a 
     banking, financing, insurance or similar business by a CFC 
     that is predominantly engaged in the active conduct of such 
     business.
       Effective date.--The provision applies only to taxable 
     years of foreign corporations beginning in 1998, and to 
     taxable years of United States shareholders with or within 
     which such taxable years of foreign corporations end.

                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment with modifications.
       Under the conference agreement, the temporary exception 
     from foreign personal holding company income applies to 
     income that is derived in the active conduct of a banking, 
     financing or similar business by a CFC that is predominantly 
     engaged in the active conduct of such business. For this 
     purpose, income derived in the active conduct of a banking, 
     financing, or similar business generally is determined under 
     the principles applicable in determining financial 
     services income for foreign tax credit limitation 
     purposes. However, in the case of a corporation that is 
     engaged in the active conduct of a banking or securities 
     business, the income that is eligible for this exception 
     is determined under the principles applicable in 
     determining the income which is treated as nonpassive 
     income for purposes of the passive foreign investment 
     company provisions. The conferees generally intend that 
     the income of a corporation engaged in the active conduct 
     of a banking or securities business that is eligible for 
     this exception is the income that is treated as nonpassive 
     under the regulations proposed under section 1296(b). See 
     Prop. Treas. Reg. secs. 1.1296-4 and 1.1296-6. In this 
     regard, the conferees intend that eligible income will 
     include income or gains with respect to foreclosed 
     property which is incident to the active conduct of a 
     banking business.
       For purposes of the temporary exception, a corporation is 
     considered to be predominantly engaged in the active conduct 
     of a banking, financing, or similar business if it is engaged 
     in the active conduct of a banking or securities business or 
     is a qualified bank affiliate or qualified securities 
     affiliate. In this regard, the conferees intend that a 
     corporation will be considered to be engaged in the active 
     conduct of a banking or securities business if the 
     corporation would be treated as so engaged under the 
     regulations proposed under section 1296(b); the conferees 
     further intend that qualified bank affiliates and qualified 
     securities affiliates will be as determined under such 
     proposed regulations. See Prop. Treas. Reg. secs. 1.1296-4 
     and 1.1296-6.
       Alternatively, a corporation is considered to be engaged in 
     the active conduct of a banking, financing or similar 
     business if more than 70 percent of its gross income is 
     derived from such business from transactions with unrelated 
     persons located within the country under the laws of which 
     the corporation is created or organized. For this purpose, 
     income derived by a qualified business unit of a corporation 
     from transactions with unrelated persons located in the 
     country in which the qualified business unit maintains its 
     principal office and conducts substantial business activity 
     is treated as derived by the corporation from transactions 
     with unrelated persons located within the country in which 
     the corporation is created or organized. A person other than 
     a natural person is considered to be located within the 
     country in which it maintains an office through which it 
     engages in a trade or business and by which the transaction 
     is effected. A natural person is treated as located within 
     the country in which such person is physically located when 
     such person enters into the transaction.
       The conference agreement provides a temporary exception 
     from foreign personal holding company income for certain 
     investment income of a qualifying insurance company with 
     respect to risks located within the CFC's country of creation 
     or organization. The rules of this provision of the 
     conference agreement differ from the rules of present-law 
     section 953 of the Code, which determines the subpart F 
     inclusions of a U.S. shareholder relating to insurance income 
     of a CFC. Such insurance income under section 953 generally 
     is computed in accordance with the rules of subchapter L of 
     the Code. The conferees believe that review of the rules of 
     this provision would be appropriate when final guidance under 
     section 953 is published by the Treasury Department.
       The conference agreement provides a temporary exception for 
     income (received from a person other than a related person) 
     from investments made by a qualifying insurance company of 
     its reserves or 80 percent of its unearned premiums (as 
     defined for purposes of the provision). For this purpose, in 
     the case of contracts regulated in the country in which sold 
     as property, casualty, or health insurance contracts, 
     unearned premiums and reserves mean unearned premiums and 
     reserves for losses incurred determined using the methods and 
     interest rates that would be used if the qualifying insurance 
     company were subject to tax under subchapter L of the Code. 
     Thus, for this purpose, unearned premiums are determined in 
     accordance with section 832(b)(4), and reserves for losses 
     incurred are determined in accordance with section 832(b)(5) 
     and 846 of the Code (as well as any other rules applicable to 
     a U.S. property and casualty insurance company with respect 
     to such amounts).
       In the case of a contract regulated in the country in which 
     sold as a life insurance or annuity contract, the following 
     three alternative rules for determining reserves are provided 
     under the conference agreement. It is intended that any one 
     of the three rules may be elected with respect to a 
     particular line of business.
       First, reserves for such contracts may be determined 
     generally under the rules applicable to domestic life 
     insurance companies under subchapter L of the Code, using the 
     methods there specified, but substituting for the interest 
     rates in Code section 807(d)(2)(B) an interest rate 
     determined for the country in which the qualifying insurance 
     company was created or organized, calculated in the same 
     manner as the mid-term applicable Federal interest rate 
     (``AFR'') (within the meaning of section 1274(d)).
       Second, the reserves for such contracts may be determined 
     generally using a preliminary term foreign reserve method, 
     except that the interest rate to be used is the interest rate 
     determined for the country in which the qualifying insurance 
     company was created or organized, calculated in the same 
     manner as the mid-term AFR. If a qualifying insurance company 
     uses such a preliminary term method with respect to contracts 
     insuring risks located in the country in which the company is 
     created or organized, then such method is the method that 
     applies for purposes of this election.
       Third, reserves for such contracts may be determined to be 
     equal to the net surrender

[[Page H6576]]

     value of the contract (as defined in section 807(e)(1)(A)).
       In no event may the reserve for any contract at any time 
     exceed the foreign statement reserve for the contract, 
     reduced by any catastrophe or deficiency reserve. This rule 
     applies whether the contract is regulated as a property, 
     casualty, health, life insurance, annuity, or any other type 
     of contract.
       The conference agreement also provides a temporary 
     exception for income from investment of assets equal to (1) 
     one-third of premiums earned during the taxable year on 
     insurance contracts regulated in the country in which sold as 
     property, casualty, or health insurance contracts, and (2) 
     the greater of 10 percent of reserves, or, in the case of a 
     qualifying insurance company that is a startup company, $10 
     million. For this purpose, a startup company is a company 
     (including any predecessor) that has not been engaged in 
     the active conduct of an insurance business for more than 
     5 years. It is intended that the 5-year period commences 
     when the foreign company first is engaged in the active 
     conduct of an insurance business. If the foreign company 
     was formed before being acquired by the U.S. shareholder, 
     the 5-year period commences when the acquired company 
     first was engaged in the active conduct of an insurance 
     business. The conferees intend that in the event of the 
     acquisition of a book of business from another company 
     through an assumption or indemnity reinsurance 
     transaction, the period commences when the acquiring 
     company first engaged in the active conduct of an 
     insurance business, except that if more than a substantial 
     part (e.g., 80 percent) of the business of the ceding 
     company is acquired, then the 5-year period commences when 
     the ceding company first engaged in the active conduct of 
     an insurance business. In addition, it is not intended 
     that reinsurance transactions among related persons be 
     used to multiply the number of 5-year periods.
       To prevent the shifting of relatively high-yielding assets 
     to generate investment income that qualifies under this 
     temporary exception, the conference agreement provides that, 
     under rules prescribed by the Secretary, income is allocated 
     to contracts as follows. In the case of contracts that are 
     separate-account-type contracts (including variable contracts 
     not meeting the requirements of section 817), only the income 
     specifically allocable to such contracts is taken into 
     account. In the case of other contracts, income not 
     specifically allocable is allocated ratably among such 
     contracts.
       The conference agreement modifies the definition of a 
     qualifying insurance company. Under the conference agreement, 
     a qualifying insurance company means any entity which: (1) is 
     regulated as an insurance company under the laws of the 
     country in which it is incorporated; (2) derives at least 50 
     percent of its net written premiums from the insurance or 
     reinsurance of risks situated within its country of 
     incorporation; and (3) is engaged in the active conduct of an 
     insurance business and would be subject to tax under 
     subchapter L if it were a domestic corporation.
       The conference agreement clarifies that this provision does 
     not apply to investment income (includable in the income of a 
     U.S. shareholder of a CFC pursuant to section 953) allocable 
     to contracts that insure related party risks or risks located 
     in a country other than the country in which the qualifying 
     insurance company is created or organized.
       Finally, the conference agreement provides an anti-abuse 
     rule applicable for purposes of these temporary exceptions 
     from foreign personal holding company income. For purposes of 
     applying these exceptions, items with respect to a 
     transaction or series of transactions shall be disregarded if 
     one of the principal purposes of the transaction or 
     transactions is to qualify income or gain for these 
     exceptions, including any change in the method of computing 
     reserves or any other transaction or transactions one of the 
     principal purposes of which is the acceleration or deferral 
     of any item in order to claim the benefits of these 
     exceptions.
       The conferees recognize that insurance, banking, financing, 
     and similar businesses are businesses the active conduct of 
     which involves the generation of income, such as interest 
     and dividends, of a type that generally is treated as 
     passive for purposes of subpart F. For purposes of this 
     temporary provision, the conferees intend to delineate the 
     income derived in the active conduct of such businesses, 
     while retaining the present-law anti-deferral rules of 
     subpart F with respect to income not derived in the active 
     conduct of these financial services businesses. However, 
     the conferees recognize that the line between income 
     derived in the active conduct of such businesses and 
     income otherwise derived by entities so engaged can be 
     difficult to draw. The conferees believe that the issues 
     of the determination of income derived in the active 
     conduct of such businesses and the potential mobility of 
     the business activity and income recognition of insurance, 
     banking, financing, and similar businesses require further 
     study. In the event that it becomes necessary to consider 
     a possible extension of the provision in the future, the 
     conferees would invite the comments of taxpayers and the 
     Treasury Department regarding these issues.

  5. Treat service income of nonresident alien individuals earned on 
foreign ships as foreign source income and disregard the U.S. presence 
         of such individuals (sec. 745 of the Senate amendment)

                              Present Law

       Nonresident alien individuals generally are subject to U.S. 
     taxation and withholding on their U.S. source income. 
     Compensation for labor and personal services performed within 
     the United States is considered U.S. source unless such 
     income qualifies for a de minimis exception. To qualify for 
     the exception, the compensation paid to a nonresident alien 
     individual must not exceed $3,000, the compensation must 
     reflect services performed on behalf of a foreign employer, 
     and the individual must be present in the United Sates for 
     not more than 90 days during the taxable year. Special rules 
     apply to exclude certain items from the gross income of a 
     nonresident alien. An exclusion applies to gross income 
     derived by a nonresident alien individual from the 
     international operation of a ship if the country in which 
     such individual is resident provides a reciprocal exemption 
     for U.S. residents. However, this exclusion does not apply to 
     income from personal services performed by an individual crew 
     member on board a ship. Consequently, wages exceeding $3,000 
     in a taxable year that are earned by nonresident alien 
     individual crew members of a foreign ship while the vessel is 
     within U.S. territory are subject to income taxation by the 
     United States.
       U.S. residents are subject to U.S. tax on their worldwide 
     income. In general, a non-U.S. citizen is considered to be a 
     resident of the United States if the individual (1) has 
     entered the United States as a lawful permanent U.S. resident 
     or (2) is present in the United States for 31 or more days 
     during the current calendar year and has been present in the 
     United States for a substantial period of time--183 or more 
     days--during a three-year period computed by weighting toward 
     the present year (the ``substantial presence test''). An 
     individual generally is treated as present in the United 
     States on any day if such individual is physically present in 
     the United States at any time during the day. Certain 
     categories of individuals (e.g., foreign government employees 
     and certain students) are not treated as U.S. residents even 
     if they are present in the United States for the requisite 
     period of time. Crew members of a foreign vessel who are on 
     board the vessel while it is stationed within U.S. 
     territorial waters are treated as present in the United 
     States.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment treats gross income of a nonresident 
     alien individual, who is present in the United States as a 
     member of the regular crew of a foreign vessel, from the 
     performance of personal services in connection with the 
     international operation of a ship as income from foreign 
     sources. Thus, such income is exempt from U.S. income and 
     withholding tax. However, such persons are not excluded for 
     purposes of applying the minimum participation standards of 
     section 410 to a plan of the employer. In addition, for 
     purposes of determining whether an individual is a U.S. 
     resident under the substantial presence test, the Senate 
     amendment provides that the days that such individual is 
     present as a member of the regular crew of a foreign vessel 
     are disregarded.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment with modifications. The conference agreement 
     provides that the treatment of income of a nonresident alien 
     crew member of a foreign vessel as foreign source income will 
     not apply for purposes of the pension rules and certain 
     employee benefit provisions. The conference agreement further 
     provides that, for purposes of determining whether an 
     individual is a U.S. resident under the substantial presence 
     test, any day that such individual is present as a member of 
     the regular crew of a foreign vessel is disregarded only if 
     the individual does not otherwise engage in trade or business 
     within the United States on such day.

 XII. SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND BUSINESSES

                 A. Provisions Relating to Individuals

1. Modifications to standard deduction of dependents; AMT treatment of 
 certain minor children (sec. 1201 of the House bill and sec. 1001 of 
                         the Senate amendment)

                              Present Law

       Standard deduction of dependents.--The standard deduction 
     of a taxpayer for whom a dependency exemption is allowed on 
     another taxpayer's return can not exceed the lesser of (1) 
     the standard deduction for an individual taxpayer (projected 
     to be $4,250 for 1998) or (2) the greater of $500 (indexed) 
     1 or the dependent's earned income (sec. 
     63(c)(5)).
---------------------------------------------------------------------------
     \1\  The indexed amount is projected to be $700 for 1998.
---------------------------------------------------------------------------
       Taxation of unearned income of children under age 14.--The 
     tax on a portion of the unearned income (e.g., interest and 
     dividends) of a child under age 14 is the additional tax that 
     the child's custodial parent would pay if the child's 
     unearned income were included in that parent's income. The 
     portion of the child's unearned income which is taxed at the 
     parent's top marginal rate is the amount by which the child's 
     unearned income is

[[Page H6577]]

     more than the sum of (1) $500 2 (indexed) plus (2) 
     the greater of (a) $500 3 (indexed) or (b) the 
     child's itemized deductions directly connected with the 
     production of the unearned income (sec. 1(g)).
---------------------------------------------------------------------------
     \2\  Projected to be $700 for 1998.
     \3\  Projected to be $700 for 1998.
---------------------------------------------------------------------------
       Alternative minimum tax (``AMT'') exemption for children 
     under age 14.--Single taxpayers are entitled to an exemption 
     from the alternative minimum tax (``AMT'') of $33,750. 
     However, in the case of a child under age 14, his exemption 
     from the AMT, in substance, is the unused alternative minimum 
     tax exemption of the child's custodial parent, limited to sum 
     of earned income and $1,400 (sec. 59(j)).

                               House Bill

       Standard deduction of dependents.--The House bill increases 
     the standard deduction for a taxpayer with respect to whom a 
     dependency exemption is allowed on another taxpayer's return 
     to the lesser of (1) the standard deduction for individual 
     taxpayers or (2) the greater of: (a) $500 4 
     (indexed for inflation as under present law), or (b) the 
     individual's earned income plus $250. The $250 amount is 
     indexed for inflation after 1998.
---------------------------------------------------------------------------
     \4\  Projected to be $700 for 1998.
---------------------------------------------------------------------------
       Alternative minimum tax exemption for children under age 
     14.--The House bill increases the AMT exemption amount for a 
     child under age 14 to the lesser of (1) $33,750 or (2) the 
     sum of the child's earned income plus $5,000. The $5,000 
     amount is indexed for inflation after 1998.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Increase de minimis threshold for estimated tax to $1,000 
         for individuals (sec. 1202 of the House bill and sec. 
         1002 of the Senate amendment)

                              Present Law

       An individual taxpayer generally is subject to an addition 
     to tax for any underpayment of estimated tax (sec. 6654). An 
     individual generally does not have an underpayment of 
     estimated tax if he or she makes timely estimated tax 
     payments at least equal to: (1) 100 percent of the tax shown 
     on the return of the individual for the preceding year (the 
     ``100 percent of last year's liability safe harbor'') or (2) 
     90 percent of the tax shown on the return for the current 
     year. The 100 percent of last year's liability safe harbor is 
     modified to be a 110 percent of last year's liability safe 
     harbor for any individual with an AGI of more than $150,000 
     as shown on the return for the preceding taxable year. Income 
     tax withholding from wages is considered to be a payment of 
     estimated taxes. In general, payment of estimated taxes must 
     be made quarterly. The addition to tax is not imposed where 
     the total tax liability for the year, reduced by any withheld 
     tax and estimated tax payments, is less than $500.

                               House Bill

       The House bill increases the $500 individual estimated tax 
     de minimis threshold to $1,000.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Optional methods for computing SECA tax combined (sec. 
         1203 of the House bill)

                              Present Law

       The Self-Employment Contributions Act (``SECA'') imposes 
     taxes on net earnings from self-employment to provide social 
     security coverage to self-employed workers. The maximum 
     amount of earnings subject to the SECA tax is coordinated 
     with, and is set at the same level as, the maximum level of 
     wages and salaries subject to FICA taxes ($65,000 for OASDI 
     taxes in 1997 and indexed annually, and without limit for the 
     Hospital Insurance tax). Special rules allow certain self-
     employed individuals to continue to maintain social security 
     coverage during a period of low income. The method applicable 
     to farmers is slightly more favorable than the method 
     applicable to other self-employed persons.
       A farmer may increase his or her self-employment income, 
     for purposes of obtaining social security coverage, by 
     reporting two-thirds of the first $2,400 of gross income as 
     net earnings from self-employment, i.e., the optional amount 
     of net earnings from self-employment would not exceed $1,600. 
     There is no limit on the number of times a farmer may use 
     this method. The optional method for non farm income is 
     similar, also permitting two-thirds of the first $2,400 of 
     gross income to be treated as self-employment income. 
     However, the optional non farm method may not be used more 
     than five times by any individual, and may only be used if 
     the taxpayer had net earnings from self-employment of $400 or 
     more in at least two of the three years immediately preceding 
     the year in which the optional method is elected.
       In general, to receive benefits, including Disability 
     Insurance Benefits, under the Social Security Act, a worker 
     must have a minimum number of quarters of coverage. A minimum 
     amount of wages or self-employment income must be reported to 
     obtain a quarter of coverage. A maximum of four quarters of 
     coverage may be obtained each year. In 1978, the amount of 
     earnings required to obtain a quarter of coverage began 
     increasing each year. Starting in 1994, a farmer could obtain 
     only two quarters of coverage under the optional method 
     applicable to farmers.

                               House Bill

       The House bill combines the farm and non farm optional 
     methods into a single combined optional method applicable to 
     all self-employed workers. A self-employed worker may elect 
     to use the optional method an unlimited number of times. If 
     it is used, it must be applied to all self- employment 
     earnings for the year, both farm and non farm.
       The $2,400 amount is increased to an amount which would 
     provide four quarters of coverage in 1998 (the ``lower 
     limit'). Such amount increases each year based on the 
     earnings requirements under the Social Security Act.
       The optional method in this provision is elected on a year-
     by-year basis. An election for a taxable year must be filed 
     with the original Federal income tax return for the year, and 
     may not be made retroactively by filing an amended return.
       Effective date: The provision is effective for taxable 
     years beginning after January 1, 1998.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     4. Treatment of certain reimbursed expenses of rural letter 
         carriers' vehicles (sec. 1204 of the House bill and sec. 
         1003 of the Senate amendment)

                              Present Law

       A taxpayer who uses his or her automobile for business 
     purposes may deduct the business portion of the actual 
     operation and maintenance expenses of the vehicle, plus 
     depreciation (subject to the limitations of sec. 280F). 
     Alternatively, the taxpayer may elect to utilize a standard 
     mileage rate in computing the deduction allowable for 
     business use of an automobile that has not been fully 
     depreciated. Under this election, the taxpayer's deduction 
     equals the applicable rate multiplied by the number of miles 
     driven for business purposes and is taken in lieu of 
     deductions for depreciation and actual operation and 
     maintenance expenses.
       An employee of the U.S. Postal Service may compute his 
     deduction for business use of an automobile in performing 
     services involving the collection and delivery of mail on a 
     rural route by using, for all business use mileage, 150 
     percent of the standard mileage rate.
       Rural letter carriers are paid an equipment maintenance 
     allowance (EMA) to compensate them for the use of their 
     personal automobiles in delivering the mail. The tax 
     consequences of the EMA are determined by comparing it with 
     the automobile expense deductions that each carrier is 
     allowed to claim (using either the actual expenses method or 
     the 150 percent of the standard mileage rate). If the EMA 
     exceeds the allowable automobile expense deductions, the 
     excess generally is subject to tax. If the EMA falls short of 
     the allowable automobile expense deductions, a deduction is 
     allowed only to the extent that the sum of this shortfall and 
     all other miscellaneous itemized deductions exceeds two 
     percent of the taxpayer's adjusted gross income.

                               House Bill

       The House bill repeals the special rate for Postal Service 
     employees of 150 percent of the standard mileage rate. In its 
     place, the House bill requires that the rate of reimbursement 
     provided by the Postal Service to rural letter carriers be 
     considered to be equivalent to their expenses. The rate of 
     reimbursement that is considered to be equivalent to their 
     expenses is the rate of reimbursement contained in the 1991 
     collective bargaining agreement, which may be increased by no 
     more than the rate of inflation.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Travel expenses of Federal employees participating in a 
         Federal criminal investigation (sec. 1205 of the House 
         bill and sec. 1004 of the Senate amendment)

                              Present Law

       Unreimbursed ordinary and necessary travel expenses paid or 
     incurred by an individual in connection with temporary 
     employment away from home (e.g., transportation costs and the 
     cost of meals and lodging) are generally deductible, subject 
     to the two-percent floor on miscellaneous itemized 
     deductions. Travel expenses paid or incurred in connection 
     with indefinite employment away from home, however, are not 
     deductible. A taxpayer's employment away from home in a 
     single location is indefinite rather than temporary if it 
     lasts for one year or more; thus,

[[Page H6578]]

     no deduction is permitted for travel expenses paid or 
     incurred in connection with such employment (sec. 162(a)). If 
     a taxpayer's employment away from home in a single location 
     lasts for less than one year, whether such employment is 
     temporary or indefinite is determined on the basis of the 
     facts and circumstances.

                               House Bill

       The one-year limitation with respect to deductibility of 
     expenses while temporarily away from home does not include 
     any period during which a Federal employee is certified by 
     the Attorney General (or the Attorney General's designee) as 
     traveling on behalf of the Federal Government in a temporary 
     duty status to investigate or provide support services to the 
     investigation of a Federal crime. Thus, expenses for these 
     individuals during these periods are fully deductible, 
     regardless of the length of the period for which 
     certification is given (provided that the other requirements 
     for deductibility are satisfied).
       Effective date.--The provision is effective for amounts 
     paid or incurred with respect to taxable years ending after 
     the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     6. Payment of taxes by commercially acceptable means (sec. 
         1206 of the House bill)

                              Present Law

       Payment of taxes may be made by checks or money orders, to 
     the extent and under the conditions provided by Treasury 
     regulations (sec. 6311).

                               House Bill

     In general
       The Internal Revenue Service (IRS) is engaged in a long-
     term modernization of its information systems, the Tax 
     Systems Modernization (TSM) Program. This modernization is 
     intended to address deficiencies in the current IRS 
     information systems and to plan effectively for future 
     information system needs and requirements. The systems 
     changes are designed to reduce the burden on taxpayers, 
     generate additional revenue through improved voluntary 
     compliance, and achieve productivity gains throughout the 
     IRS. One key element of this program is electronic filing of 
     tax returns.
       At the present time, increasing reliance is being placed 
     upon electronic funds transfers for payment of obligations. 
     In light of this, the IRS seeks to integrate these payment 
     methods in its TSM program, including electronic filing of 
     returns, as well as into its traditional collection 
     functions. The House bill allows the IRS to accept payment by 
     any commercially acceptable means that the Secretary deems 
     appropriate, to the extent and under the conditions provided 
     in Treasury regulations. This will include, for example, 
     electronic funds transfers, including those arising from 
     credit cards, debit cards, and charge cards.
       The IRS contemplates that it will proceed to negotiate 
     contracts to implement this provision with one or more 
     private sector credit and debit card systems. The House bill 
     provides that the Federal Government may pay fees with 
     respect to any such contracts only out of amounts 
     specifically appropriated for that purpose.
     Billing error resolution
       In the course of processing these transactions, it will be 
     necessary to resolve billing errors and other disputes. The 
     Internal Revenue Code contains mechanisms for the 
     determination of tax liability, defenses and other taxpayer 
     protections, and the resolution of disputes with respect to 
     those liabilities. The Truth-in-Lending Act contains 
     provisions for determination of credit card liabilities, 
     defenses and other consumer protections, and the resolution 
     of disputes with respect to these liabilities.
       The House bill excludes credit card, debit card, and charge 
     card issuers and processing mechanisms from the resolution 
     (such as through the ``billing error'' resolution process) of 
     tax liability, but makes IRS subject to the Truth-in-Lending 
     provisions insofar as those provisions impose obligations and 
     responsibilities with regard to the ``billing error'' 
     resolution process. It is not intended that consumers obtain 
     additional ways to dispute their tax liabilities under the 
     Truth-in-Lending provisions.
       The House bill also specifically includes the use of debit 
     cards in this provision and provides that the corresponding 
     defenses and ``billing error'' provisions of the Electronic 
     Fund Transfer Act will apply in a similar manner.
       The House bill adds new section 6311(d)(3) to the Code. 
     This section describes the circumstances under which section 
     161 of the Truth-in-Lending Act (``TILA'') and section 908 of 
     the Electronic Fund Transfer Act (``EFTA'') apply to disputes 
     that may arise in connection with payments of taxes made by 
     credit card or debit card. Subsections (A) through (C) 
     recognize that ``billing errors'' relating to the credit card 
     account, such as an error arising from a credit card 
     transaction posted to a cardholder's account without the 
     cardholder's authorization, an amount posted to the wrong 
     cardholder's account, or an incorrect amount posted to a 
     cardholder's account as a result of a computational error or 
     numerical transposition, are governed by the billing error 
     provisions of section 161 of TILA. Similarly, subsections 
     6311(d)(3)(A)-(C) provide that errors such as those described 
     above which arise in connection with payments of internal 
     revenue taxes made by debit card, are governed by section 908 
     of EFTA.
       The Internal Revenue Code provides that refunds are only 
     authorized to be paid to the person who made the overpayment 
     (generally the taxpayer). Subsection 6311(d)(3)(E), however, 
     provides that where a taxpayer is entitled to receive funds 
     as a result of the correction of a billing error made under 
     section 161 of TILA in connection with a credit card 
     transaction, or under section 908 of EFTA in connection with 
     a debit card transaction, the IRS is authorized to utilize 
     the appropriate credit card or debit card system to initiate 
     a credit to the taxpayer's credit card or debit card account. 
     The IRS may, therefore, provide such funds through the 
     taxpayer's credit card or debit card account rather than 
     directly to the taxpayer.
       On the other hand, subsections 6311(d)(3)(A)-(C) provide 
     that any alleged error or dispute asserted by a taxpayer 
     concerning the merits of the taxpayer's underlying tax 
     liability or tax return is governed solely by existing tax 
     laws, and is not subject to section 161 or section 170 of 
     TILA, section 908 of EFTA, or any similar provisions of State 
     law. Absent the exclusion from section 170 of TILA, in a 
     collection action brought against the cardholder by the card 
     issuer the cardholder might otherwise assert as a defense 
     that the IRS had incorrectly computed his tax liability. A 
     collection action initiated by a credit card issuer against 
     the taxpayer/cardholder will be an inappropriate vehicle for 
     the determination of a taxpayer's tax liability, especially 
     since the United States will not be a party to such an 
     action.
       Similarly, without the exclusion from section 161 of TILA 
     and section 908 of EFTA, a taxpayer could contest the merits 
     of his tax liability by putting the charge which appears on 
     the credit card bill in dispute. Pursuant to TILA or EFTA, 
     the taxpayer's card issuer will have to investigate the 
     dispute, thereby finding itself in the middle of a dispute 
     between the IRS and the taxpayer. It is believed that it is 
     improper to attempt to resolve tax disputes through the 
     billing process. It is also noted that the taxpayer retains 
     the traditional, existing remedies for resolving tax 
     disputes, such as resolving the dispute administratively with 
     the IRS, filing a petition with the Tax Court after receiving 
     a statutory notice of deficiency, or paying the disputed tax 
     and filing a claim for refund (and subsequently filing a 
     refund suit if the claim is denied or not acted upon).
     Creditor status
       The TILA imposes various responsibilities and obligations 
     on creditors. Although the definition of the term 
     ``creditor'' set forth in 15 U.S.C. sec. 1602 is limited, and 
     will generally not include the IRS, in the case of an open-
     end credit plan involving a credit card, the card issuer and 
     any person who honors the credit card are, pursuant to 15 
     U.S.C. sec. 1602(f), creditors.
       In addition, 12 CFR sec. 226.12(e) provides that the 
     creditor must transmit a credit statement to the card issuer 
     within 7 business days from accepting the return or forgiving 
     the debt. There is a concern that the response deadlines 
     otherwise imposed by 12 CFR sec. 226.12(e), if applicable, 
     will be difficult for the IRS to comply with (given the 
     volume of payments the IRS is likely to receive in peak 
     periods). This could subject the IRS to unwarranted damage 
     actions. Consequently, the House bill generally provides an 
     exception to creditor status for the IRS.
     Privacy protections
       The House bill also addresses privacy questions that arise 
     from the IRS' participation in credit card processing 
     systems. It is believed that taxpayers expect that the 
     maximum possible protection of privacy will be accorded any 
     transactions they have with the IRS. Accordingly, the House 
     bill provides the greatest possible protection of taxpayers' 
     privacy that is consistent with developing and operating an 
     efficient tax administration system. It is expected that the 
     principle will be fully observed in the implementation of 
     this provision.
       A key privacy issue is the use and redisclosure of tax 
     information by financial institutions for purposes unrelated 
     to the processing of credit card charges, i.e., marketing and 
     related uses. To accept credit card charges by taxpayers, the 
     IRS will have to disclose tax information to financial 
     institutions to obtain payment and to resolve billing 
     disputes. To obtain payment, the IRS will have to disclose, 
     at a minimum, information on the ``credit slip,'' i.e., 
     the dollar amount of the payment and the taxpayer's credit 
     card number.
       The resolution of billing disputes may require the 
     disclosure of additional tax information to financial 
     institutions. In most cases, providing a copy of the credit 
     slip and verifying the transaction amount will be sufficient. 
     Conceivably, financial institutions could require some 
     information regarding the underlying liability even where the 
     dispute concerns a ``billing dispute'' matter. This 
     additional information will not necessarily be shared as 
     widely as the initial payment data. In lieu of disclosing 
     further information, the IRS may elect to allow disputed 
     amounts to be charged back to the IRS and to reinstate the 
     corresponding tax liability.
       Despite the language in most cardholder agreements that 
     permits redisclosure of credit card transaction information, 
     the public may be largely unaware of how widely

[[Page H6579]]

     that information is shared. For example, some financial 
     institutions may share credit, payment, and purchase 
     information with private credit bureaus, who, in turn, may 
     sell this information to direct mail marketers, and others. 
     Without use and redisclosure restrictions, taxpayers may 
     discover that some traditionally confidential tax information 
     might be widely disseminated to direct mail marketers and 
     others.
       It is intended that credit or debit card transaction 
     information will generally be restricted to those uses 
     necessary to process payments and resolve billing errors, as 
     well as other purposes that are specified in the statute. The 
     House bill directs the Secretary to issue published 
     procedures on what constitutes authorized uses and 
     disclosures. It is anticipated that the Secretary's published 
     procedures will prohibit the use of transaction information 
     for marketing tax-related services by the issuer or any 
     marketing that targets only those who use their credit card 
     to pay their taxes. It is also anticipated that the published 
     procedures will prohibit the sale of transaction information 
     to a third party.
       Effective date.--The provision is effective nine months 
     after the date of enactment. The IRS may, in this interim 
     period, conduct internal tests and negotiate with card 
     issuers, but may not accept credit or debit cards for payment 
     of tax liability.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, except 
     that the requirement that a separate appropriation be made 
     for payment by the IRS of credit card fees is deleted, and a 
     prohibition on the payment by the IRS of any fee or the 
     provision of any other consideration is added.

             B. Provisions Relating to Businesses Generally

     1. Modifications to look-back method for long-term contracts 
         (sec. 1211 of the House bill, and sec. 1011 of the Senate 
         amendment)

                              Present Law

       Taxpayers engaged in the production of property under a 
     long-term contract generally must compute income from the 
     contract under the percentage of completion method. Under the 
     percentage of completion method, a taxpayer must include in 
     gross income for any taxable year an amount that is based on 
     the product of (1) the gross contract price and (2) the 
     percentage of the contract completed as of the end of the 
     year. The percentage of the contract completed as of the end 
     of the year is determined by comparing costs incurred with 
     respect to the contract as of the end of the year with 
     estimated total contract costs.
       Because the percentage of completion method relies upon 
     estimated, rather than actual, contract price and costs to 
     determine gross income for any taxable year, a ``look-back 
     method'' is applied in the year a contract is completed in 
     order to compensate the taxpayer (or the Internal Revenue 
     Service) for the acceleration (or deferral) of taxes paid 
     over the contract term. The first step of the look-back 
     method is to reapply the percentage of completion method 
     using actual contract price and costs rather than estimated 
     contract price and costs. The second step generally requires 
     the taxpayer to recompute its tax liability for each year of 
     the contract using gross income as reallocated under the 
     look-back method. If there is any difference between the 
     recomputed tax liability and the tax liability as previously 
     determined for a year, such difference is treated as a 
     hypothetical underpayment or overpayment of tax to which the 
     taxpayer applies a rate of interest equal to the overpayment 
     rate, compounded daily. 5 The taxpayer receives 
     (or pays) interest if the net amount of interest applicable 
     to hypothetical overpayments exceeds (or is less than) the 
     amount of interest applicable to hypothetical underpayments.
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     \5\ The overpayment rate equals the applicable Federal short-
     term rate plus two percentage points. This rate is adjusted 
     quarterly by the IRS. Thus, in applying the look-back method 
     for a contract year, a taxpayer may be required to use five 
     different interest rates.
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                               House Bill

     Election not to apply the look-back method for de minimis 
         amounts
       The House bill provides that a taxpayer may elect not to 
     apply the look-back method with respect to a long-term 
     contract if for each prior contract year, the cumulative 
     taxable income (or loss) under the contract as determined 
     using estimated contract price and costs is within 10 percent 
     of the cumulative taxable income (or loss) as determined 
     using actual contract price and costs.
       The House bill also provides that a taxpayer may elect not 
     to reapply the look-back method with respect to a contract 
     if, as of the close of any taxable year after the year the 
     contract is completed, the cumulative taxable income (or 
     loss) under the contract is within 10 percent of the 
     cumulative look-back income (or loss) as of the close of the 
     most recent year in which the look-back method was applied 
     (or would have applied but for the other de minimis exception 
     described above).
       Further, the House bill provides that for purposes of the 
     look-back method, only one rate of interest is to apply for 
     each accrual period. An accrual period with respect to a 
     taxable year begins on the day after the return due date 
     (determined without regard to extensions) for the taxable 
     year and ends on such return due date for the following 
     taxable year. The applicable rate of interest is the 
     overpayment rate in effect for the calendar quarter in which 
     the accrual period begins.
     Effective date
       The provision applies to contracts completed in taxable 
     years ending after the date of enactment. The change in the 
     interest rate calculation also applies for purposes of the 
     look-back method applicable to the income forecast method of 
     depreciation for property placed in service after September 
     13, 1995.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Minimum tax treatment of certain property and casualty 
         insurance companies (sec. 1212 of the House bill and sec. 
         1012 of the Senate amendment)

                              Present Law

       Present law provides that certain property and casualty 
     insurance companies may elect to be taxed only on taxable 
     investment income for regular tax purposes (sec. 831(b)). 
     Eligible property and casualty insurance companies are those 
     whose net written premiums (or if greater, direct written 
     premiums) for the taxable year exceed $350,000 but do not 
     exceed $1,200,000.
       Under present law, all corporations including insurance 
     companies are subject to an alternative minimum tax. 
     Alternative minimum taxable income is increased by 75 percent 
     of the excess of adjusted current earnings over alternative 
     minimum taxable income (determined without regard to this 
     adjustment and without regard to net operating losses).

                               House Bill

       The House bill provides that a property and casualty 
     insurance company that elects for regular tax purposes to be 
     taxed only on taxable investment income determines its 
     adjusted current earnings under the alternative minimum tax 
     without regard to any amount not taken into account in 
     determining its gross investment income under section 834(b). 
     Thus, adjusted current earnings of an electing company is 
     determined without regard to underwriting income (or 
     underwriting expense, as provided in sec. 
     56(g)(4)(B)(i)(II)).
       Effective date.--Taxable years beginning after December 31, 
     1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Treatment of construction allowances provided to lessees 
         (sec. 961 of the House bill and sec. 1014 of the Senate 
         amendment)

                              Present Law

       Issues have arisen as to the proper treatment of amounts 
     provided to a lessee by a lessor for property to be 
     constructed and used by the lessee pursuant to the lease 
     (``construction allowances''). In general, incentive payments 
     are includible in income as accessions to wealth. 
     6 A coordinated issue paper issued by the Internal 
     Revenue Service (``IRS'') on October 7, 1996, states the IRS 
     position that construction allowances should generally be 
     included in income in the year received. However, the paper 
     does recognize that amounts received by a lessee from a 
     lessor and expended by the lessee on assets owned by the 
     lessor were not includible in the lessee's income. The issue 
     paper provides that tax ownership is determined by applying a 
     ``benefits and burdens of ownership'' test that includes an 
     examination of several factors.
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     \6\ John B. White, Inc. v. Comm., 55 T.C. 729 (1971), aff'd 
     per curiam 458 F. 2d 989 (3d Cir.), cert. denied, 409 U.S. 
     876 (1972). However, see, e.g., Federated Department Stores 
     v. Comm., 51 T.C. 500 (1968) aff'd 426 F. 2d 417 (6th Cir. 
     1970) and The May Department Stores Co. v. Comm., 33 TCM 1128 
     (1974), aff'd 519 F. 2d 1154 (8th Cir. 1975) with respect to 
     the application of section 118 to certain payments.
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                               House Bill

       The House bill provides that the gross income of a lessee 
     does not include amounts received in cash (or treated as a 
     rent reduction) from a lessor under a short-term lease of 
     retail space for the purpose of the lessee's construction 
     or improvement of qualified long-term real property for 
     use in the lessee's trade or business at such retail 
     space. The exclusion only applies to the extent the 
     allowance does not exceed the amount expended by the 
     lessee on the construction or improvement of qualified 
     long-term real property.
       The House bill provides that the lessor must treat the 
     amounts expended on the construction allowance as 
     nonresidential real property owned by the lessor.
       The House bill contains reporting requirements to ensure 
     that both the lessor and lessee treat such amounts in 
     accordance with the provision. Under regulations, the lessor 
     and the lessee shall, at such times and in such manner as 
     provided by the regulations, furnish to the Secretary of the 
     Treasury information concerning the amounts received (or 
     treated as a rent reduction), the amounts

[[Page H6580]]

     expended on qualified long-term real property, and such other 
     information as the Secretary deems necessary to carry out the 
     provision.
       Effective date.--The provision applies to leases entered 
     into after the date of enactment. No inference is intended as 
     to the treatment of amounts that are not subject to the 
     provision.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement generally follows the House bill 
     and the Senate amendment, with a clarification of the 
     coordination of the provision and present-law rule that 
     allows lessors to take losses with respect to certain 
     leasehold improvements abandoned at the end of the term of 
     the lease (sec. 168(i)(8)). In addition, the conferees wish 
     to emphasize that no inference is intended as to the 
     treatment of amounts that are not subject to the provision, 
     and that the provisions of the IRS issue paper and present 
     law (including case law) will continue to apply where 
     applicable.

                C. Partnership Simplification Provisions

     1. General provisions
       a. Simplified flow-through for electing large partnerships 
           (sec. 1221 of the House bill and sec. 1021 of the 
           Senate amendment)

                              Present Law

     Treatment of partnerships in general
       A partnership generally is treated as a conduit for Federal 
     income tax purposes. Each partner takes into account 
     separately his distributive share of the partnership's items 
     of income, gain, loss, deduction or credit. The character of 
     an item is the same as if it had been directly realized or 
     incurred by the partner. Limitations affecting the 
     computation of taxable income generally apply at the partner 
     level.
       The taxable income of a partnership is computed in the same 
     manner as that of an individual, except that no deduction is 
     permitted for personal exemptions, foreign taxes, charitable 
     contributions, net operating losses, certain itemized 
     deductions, or depletion. Elections affecting the computation 
     of taxable income derived from a partnership are made by the 
     partnership, except for certain elections such as those 
     relating to discharge of indebtedness income and the foreign 
     tax credit.
     Capital gains
       The net capital gain of an individual is taxed generally at 
     the same rates applicable to ordinary income, subject to a 
     maximum marginal rate of 28 percent. Net capital gain is the 
     excess of net long-term capital gain over net short-term 
     capital loss. Individuals with a net capital loss generally 
     may deduct up to $3,000 of the loss each year against 
     ordinary income. Net capital losses in excess of the $3,000 
     limit may be carried forward indefinitely.
       A special rule applies to gains and losses on the sale, 
     exchange or involuntary conversion of certain trade or 
     business assets (sec. 1231). In general, net gains from such 
     assets are treated as long-term capital gains but net losses 
     are treated as ordinary losses.
       A partner's share of a partnership's net short-term capital 
     gain or loss and net long-term capital gain or loss from 
     portfolio investments is separately reported to the partner. 
     A partner's share of a partnership's net gain or loss under 
     section 1231 generally is also separately reported.
     Deductions and credits
       Miscellaneous itemized deductions (e.g., certain investment 
     expenses) are deductible only to the extent that, in the 
     aggregate, they exceed two percent of the individual's 
     adjusted gross income.
       In general, taxpayers are allowed a deduction for 
     charitable contributions, subject to certain limitations. The 
     deduction allowed an individual generally cannot exceed 50 
     percent of the individual's adjusted gross income for the 
     taxable year. The deduction allowed a corporation generally 
     cannot exceed 10 percent of the corporation's taxable income. 
     Excess contributions are carried forward for five years.
       A partner's distributive share of a partnership's 
     miscellaneous itemized deductions and charitable 
     contributions is separately reported to the partner.
       Each partner is allowed his distributive share of credits 
     against his taxable income.
     Foreign taxes
       The foreign tax credit generally allows U.S. taxpayers to 
     reduce U.S. income tax on foreign income by the amount of 
     foreign income taxes paid or accrued with respect to that 
     income. In lieu of electing the foreign tax credit, a 
     taxpayer may deduct foreign taxes. The total amount of the 
     credit may not exceed the same proportion of the taxpayer's 
     U.S. tax which the taxpayer's foreign source taxable income 
     bears to the taxpayer's worldwide taxable income for the 
     taxable year.
     Unrelated business taxable income
       Tax-exempt organizations are subject to tax on income from 
     unrelated businesses. Certain types of income (such as 
     dividends, interest and certain rental income) are not 
     treated as unrelated business taxable income. Thus, for a 
     partner that is an exempt organization, whether partnership 
     income is unrelated business taxable income depends on the 
     character of the underlying income. Income from a publicly 
     traded partnership, however, is treated as unrelated business 
     taxable income regardless of the character of the underlying 
     income.
     Special rules related to oil and gas activities
       Taxpayers involved in the search for and extraction of 
     crude oil and natural gas are subject to certain special tax 
     rules. As a result, in the case of partnerships engaged in 
     such activities, certain specific information is separately 
     reported to partners.
       A taxpayer who owns an economic interest in a producing 
     deposit of natural resources (including crude oil and natural 
     gas) is permitted to claim a deduction for depletion of the 
     deposit as the minerals are extracted. In the case of oil and 
     gas produced in the United States, a taxpayer generally is 
     permitted to claim the greater of a deduction for cost 
     depletion or percentage depletion. Cost depletion is computed 
     by multiplying a taxpayer's adjusted basis in the depletable 
     property by a fraction, the numerator of which is the amount 
     of current year production from the property and the 
     denominator of which is the property's estimated reserves as 
     of the beginning of that year. Percentage depletion is equal 
     to a specified percentage (generally, 15 percent in the case 
     of oil and gas) of gross income from production. Cost 
     depletion is limited to the taxpayer's basis in the 
     depletable property; percentage depletion is not so limited. 
     Once a taxpayer has exhausted its basis in the depletable 
     property, it may continue to claim percentage depletion 
     deductions (generally referred to as ``excess percentage 
     depletion'').
       Certain limitations apply to the deduction for oil and gas 
     percentage depletion. First, percentage depletion is not 
     available to oil and gas producers who also engage (directly 
     or indirectly) in significant levels of oil and gas retailing 
     or refining activities (so-called ``integrated producers'' of 
     oil and gas). Second, the deduction for percentage depletion 
     may be claimed by a taxpayer only with respect to up to 1,000 
     barrels-per-day of production. Third, the percentage 
     depletion deduction may not exceed 100 percent of the 
     taxpayer's net income for the taxable year from the 
     depletable oil and gas property. Fourth, a percentage 
     depletion deduction may not be claimed to the extent that it 
     exceeds 65 percent of the taxpayer's pre-percentage depletion 
     taxable income.
       In the case of a partnership that owns depletable oil and 
     gas properties, the depletion allowance is computed 
     separately by the partners and not by the partnership. In 
     computing a partner's basis in his partnership interest, 
     basis is increased by the partner's share of any partnership-
     related excess percentage depletion deductions and is 
     decreased (but not below zero) by the partner's total amount 
     of depletion deductions attributable to partnership property.
       Intangible drilling and development costs (``IDCs'') 
     incurred with respect to domestic oil and gas wells generally 
     may be deducted at the election of the taxpayer. In the case 
     of integrated producers, no more than 70 percent of IDCs 
     incurred during a taxable year may be deducted. IDCs not 
     deducted are capitalized and generally are either added to 
     the property's basis and recovered through depletion 
     deductions or amortized on a straight-line basis over a 60-
     month period.
       The special treatment granted to IDCs incurred in the 
     pursuit of oil and gas may give rise to an item of tax 
     preference or (in the case of corporate taxpayers) an 
     adjusted current earnings (``ACE'') adjustment for the 
     alternative minimum tax. The tax preference item is based on 
     a concept of ``excess IDCs.'' In general, excess IDCs are the 
     excess of IDCs deducted for the taxable year over the amount 
     of those IDCs that would have been deducted had they been 
     capitalized and amortized on a straight-line basis over 120 
     months commencing with the month production begins from the 
     related well. The amount of tax preference is then computed 
     as the difference between the excess IDC amount and 65 
     percent of the taxpayer's net income from oil and gas 
     (computed without a deduction for excess IDCs). For IDCs 
     incurred in taxable years beginning after 1992, the ACE 
     adjustment related to IDCs is repealed for taxpayers other 
     than integrated producers. Moreover, beginning in 1993, the 
     IDC tax preference generally is repealed for taxpayers other 
     than integrated producers. In this case, however, the repeal 
     of the excess IDC preference may not result in more than a 40 
     percent reduction (30 percent for taxable years beginning in 
     1993) in the amount of the taxpayer's alternative minimum 
     taxable income computed as if that preference had not been 
     repealed.
     Passive losses
       The passive loss rules generally disallow deductions and 
     credits from passive activities to the extent they exceed 
     income from passive activities. Losses not allowed in a 
     taxable year are suspended and treated as current deductions 
     from passive activities in the next taxable year. These 
     losses are allowed in full when a taxpayer disposes of the 
     entire interest in the passive activity to an unrelated 
     person in a taxable transaction. Passive activities include 
     trade or business activities in which the taxpayer does not 
     materially participate. (Limited partners generally do not 
     materially participate in the activities of a partnership.) 
     Passive activities also include rental activities (regardless 
     of the taxpayer's material participation) 7. 
     Portfolio income (such as interest

[[Page H6581]]

     and dividends), and expenses allocable to such income, are 
     not treated as income or loss from a passive activity.
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     \7\ An individual who actively participates in a rental real 
     estate activity and holds at least a 10-percent interest may 
     deduct up to $25,000 of passive losses. The $25,000 amount 
     phases out as the individual's income increases from $100,000 
     to $150,000.
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       The $25,000 allowance also applies to low-income housing 
     and rehabilitation credits (on a deduction equivalent basis), 
     regardless of whether the taxpayer claiming the credit 
     actively participates in the rental real estate activity 
     generating the credit. In addition, the income phaseout range 
     for the $25,000 allowance for rehabilitation credits is 
     $200,000 to $250,000 (rather than $100,000 to $150,000). For 
     interests acquired after December 31, 1989 in partnerships 
     holding property placed in service after that date, the 
     $25,000 deduction-equivalent allowance is permitted for the 
     low-income housing credit without regard to the taxpayer's 
     income.
       A partnership's operations may be treated as multiple 
     activities for purposes of the passive loss rules. In such 
     case, the partnership must separately report items of income 
     and deductions from each of its activities.
       Income, loss and other items from a publicly traded 
     partnership are treated as separate from income and loss from 
     any other publicly traded partnership, and also as separate 
     from any income or loss from passive activities.
       The Omnibus Budget Reconciliation Act of 1993 added a rule, 
     effective for taxable years beginning after December 31, 
     1993, treating a taxpayer's rental real estate activities in 
     which he materially participates as not subject to limitation 
     under the passive loss rules if the taxpayer meets 
     eligibility requirements relating to real property trades or 
     businesses in which he performs services (sec. 469(c)(7)). 
     Real property trade or business means any real property 
     development, redevelopment, construction, reconstruction, 
     acquisition, conversion, rental, operation, management, 
     leasing, or brokerage trade or business. An individual 
     taxpayer generally meets the eligibility requirements if (1) 
     more than half of the personal services the taxpayer performs 
     in trades or business during the taxable year are performed 
     in real property trades or businesses in which the taxpayer 
     materially participates, and (2) such taxpayer performs 
     more than 750 hours of services during the taxable year in 
     real property trades or businesses in which the taxpayer 
     materially participates.
     REMICs
       A tax is imposed on partnerships holding a residual 
     interest in a real estate mortgage investment conduit 
     (``REMIC''). The amount of the tax is the amount of excess 
     inclusions allocable to partnership interests owned by 
     certain tax-exempt organizations (``disqualified 
     organizations'') multiplied by the highest corporate tax 
     rate.
     Contribution of property to a partnership
       In general, a partner recognizes no gain or loss upon the 
     contribution of property to a partnership. However, income, 
     gain, loss and deduction with respect to property contributed 
     to a partnership by a partner must be allocated among the 
     partners so as to take into account the difference between 
     the basis of the property to the partnership and its fair 
     market value at the time of contribution. In addition, the 
     contributing partner must recognize gain or loss equal to 
     such difference if the property is distributed to another 
     partner within five years of its contribution (sec. 704(c)), 
     or if other property is distributed to the contributor within 
     the five year period (sec. 737).
     Election of optional basis adjustments
       In general, the transfer of a partnership interest or a 
     distribution of partnership property does not affect the 
     basis of partnership assets. A partnership, however, may 
     elect to make certain adjustments in the basis of partnership 
     property (sec. 754). Under a section 754 election, the 
     transfer of a partnership interest generally results in an 
     adjustment in the partnership's basis in its property for the 
     benefit of the transferee partner only, to reflect the 
     difference between that partner's basis for his interest and 
     his proportionate share of the adjusted basis of partnership 
     property (sec. 743(b)). Also under the election, a 
     distribution of property to a partner in certain cases 
     results in an adjustment in the basis of other partnership 
     property (sec. 734(b)).
     Terminations
       A partnership terminates if either (1) all partners cease 
     carrying on the business, financial operation or venture of 
     the partnership, or (2) within a 12-month period 50 percent 
     or more of the total partnership interests are sold or 
     exchanged (sec. 708).
     House Bill
     In general
       The House bill modifies the tax treatment of an electing 
     large partnership (generally, any partnership that elects 
     under the provision, if the number of partners in the 
     preceding taxable year is 100 or more) and its partners. The 
     provision provides that each partner takes into account 
     separately the partner's distributive share of the following 
     items, which are determined at the partnership level: (1) 
     taxable income or loss from passive loss limitation 
     activities; (2) taxable income or loss from other activities 
     (e.g., portfolio income or loss); (3) net capital gain or 
     loss to the extent allocable to passive loss limitation 
     activities and other activities; (4) tax-exempt interest; (5) 
     net alternative minimum tax adjustment separately computed 
     for passive loss limitation activities and other activities; 
     (6) general credits; (7) low-income housing credit; (8) 
     rehabilitation credit; (9) credit for producing fuel from a 
     nonconventional source; (10) creditable foreign taxes and 
     foreign source items; and (11) any other items to the extent 
     that the Secretary determines that separate treatment of such 
     items is appropriate. 8 Separate treatment may be 
     appropriate, for example, should changes in the law 
     necessitate such treatment for any items.
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     \8\ In determining the amounts required to be separately 
     taken into account by a partner, those provisions of the 
     large partnership rules governing computations of taxable 
     income are applied separately with respect to that partner by 
     taking into account that partner's distributive share of the 
     partnership's items of income, gain, loss, deduction or 
     credit. This rule permits partnerships to make otherwise 
     valid special allocations of partnership items to partners.
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       Under the House bill, the taxable income of an electing 
     large partnership is computed in the same manner as that of 
     an individual, except that the items described above are 
     separately stated and certain modifications are made. These 
     modifications include disallowing the deduction for personal 
     exemptions, the net operating loss deduction and certain 
     itemized deductions. 9 All limitations and other 
     provisions affecting the computation of taxable income or any 
     credit (except for the at risk, passive loss and itemized 
     deduction limitations, and any other provision specified in 
     regulations) are applied at the partnership (and not the 
     partner) level.
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     \9\ An electing large partnership is allowed a deduction 
     under section 212 for expenses incurred for the production of 
     income, subject to 70-percent disallowance. No income from an 
     electing large partnership is treated as fishing or farming 
     income.
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       All elections affecting the computation of taxable income 
     or any credit generally are made by the partnership.
     Capital gains
       Under the House bill, netting of capital gains and losses 
     occurs at the partnership level. A partner in a large 
     partnership takes into account separately his distributive 
     share of the partnership's net capital gain or net capital 
     loss. 10 Such net capital gain or loss is treated 
     as long-term capital gain or loss.
---------------------------------------------------------------------------
     \10\ The term ``net capital gain'' has the same meaning as in 
     section 1222(11). The term ``net capital loss'' means the 
     excess of the losses from sales or exchanges of capital 
     assets over the gains from sales or exchanges of capital 
     assets. Thus, the partnership cannot offset any portion of 
     capital losses against ordinary income.
---------------------------------------------------------------------------
       Any excess of net short-term capital gain over net long-
     term capital loss is consolidated with the partnership's 
     other taxable income and is not separately reported.
       A partner's distributive share of the partnership's net 
     capital gain is allocated between passive loss limitation 
     activities and other activities. The net capital gain is 
     allocated to passive loss limitation activities to the extent 
     of net capital gain from sales and exchanges of property used 
     in connection with such activities, and any excess is 
     allocated to other activities. A similar rule applies for 
     purposes of allocating any net capital loss.
       Any gains and losses of the partnership under section 1231 
     are netted at the partnership level. Net gain is treated as 
     long-term capital gain and is subject to the rules described 
     above. Net loss is treated as ordinary loss and consolidated 
     with the partnership's other taxable income.
     Deductions
       The House bill contains two special rules for deductions. 
     First, miscellaneous itemized deductions are not separately 
     reported to partners. Instead, 70 percent of the amount of 
     such deductions is disallowed at the partnership level; 
     11 the remaining 30 percent is allowed at the 
     partnership level in determining taxable income, and is not 
     subject to the two-percent floor at the partner level.
---------------------------------------------------------------------------
     \11\ The 70-percent figure is intended to approximate the 
     amount of such deductions that would be denied at the partner 
     level as a result of the 2-percent floor.
---------------------------------------------------------------------------
       Second, charitable contributions are not separately 
     reported to partners under the bill. Instead, the charitable 
     contribution deduction is allowed at the partnership level in 
     determining taxable income, subject to the limitations that 
     apply to corporate donors.
     Credits in general
       Under the House bill, general credits are separately 
     reported to partners as a single item. General credits are 
     any credits other than the low-income housing credit, the 
     rehabilitation credit and the credit for producing fuel from 
     a nonconventional source. A partner's distributive share of 
     general credits is taken into account as a current year 
     general business credit. Thus, for example, the credit for 
     clinical testing expenses is subject to the present law 
     limitations on the general business credit. The refundable 
     credit for gasoline used for exempt purposes and the refund 
     or credit for undistributed capital gains of a regulated 
     investment company are allowed to the partnership, and thus 
     are not separately reported to partners.
       In recognition of their special treatment under the passive 
     loss rules, the low-income housing and rehabilitation credits 
     are separately reported. 12 In addition, the 
     credit for

[[Page H6582]]

     producing fuel from a nonconventional source is separately 
     reported.
---------------------------------------------------------------------------
     \12\ It is understood that the rehabilitation and low-income 
     housing credits which are subject to the same passive loss 
     rules (i.e., in the case of the low-income housing credit, 
     where the partnership interest was acquired or the property 
     was placed in service before 1990) could be reported together 
     on the same line.
---------------------------------------------------------------------------
       The House bill imposes credit recapture at the partnership 
     level and determines the amount of recapture by assuming that 
     the credit fully reduced taxes. Such recapture is applied 
     first to reduce the partnership's current year credit, if 
     any; the partnership is liable for any excess over that 
     amount. Under the House bill, the transfer of an interest in 
     an electing large partnership does not trigger recapture.
     Foreign taxes
       The House bill retains present-law treatment of foreign 
     taxes. The partnership reports to the partner creditable 
     foreign taxes and the source of any income, gain, loss or 
     deduction taken into account by the partnership. Elections, 
     computations and limitations are made by the partner.
     Tax-exempt interest
       The House bill retains present-law treatment of tax-exempt 
     interest. Interest on a State or local bond is separately 
     reported to each partner.
     Unrelated business taxable income
       The House bill retains present-law treatment of unrelated 
     business taxable income. Thus, a tax-exempt partner's 
     distributive share of partnership items is taken into account 
     separately to the extent necessary to comply with the rules 
     governing such income.
     Passive losses
       Under the House bill, a partner in an electing large 
     partnership takes in an electing to account separately his 
     distributive share of the partnership's taxable income or 
     loss from passive loss limitation activities. The term 
     ``passive loss limitation activity'' means any activity 
     involving the conduct of a trade or business (including any 
     activity treated as a trade or business under sec. 469(c)(5) 
     or (6)) and any rental activity. A partner's share of an 
     electing large partnership's taxable income or loss from 
     passive loss limitation activities is treated as an item of 
     income or loss from the conduct of a trade or business which 
     is a single passive activity, as defined in the passive loss 
     rules. Thus, an electing large partnership generally is not 
     required to separately report items from multiple activities.
       A partner in an electing large partnership also takes into 
     account separately his distributive share of the 
     partnership's taxable income or loss from activities other 
     than passive loss limitation activities. Such distributive 
     share is treated as an item of income or expense with respect 
     to property held for investment. Thus, portfolio income 
     (e.g., interest and dividends) is reported separately and is 
     reduced by portfolio deductions and allocable investment 
     interest expense.
       In the case of a partner holding an interest in an electing 
     large partnership which is not a limited partnership 
     interest, such partner's distributive share of any items are 
     taken into account separately to the extent necessary to 
     comply with the passive loss rules. Thus, for example, income 
     of an electing large partnership is not treated as passive 
     income with respect to the general partnership interest of a 
     partner who materially participates in the partnership's 
     trade or business.
       Under the House bill, the requirement that the passive loss 
     rule be separately applied to each publicly traded 
     partnership (sec. 469(k) of the Code) continues to apply.
     Alternative minimum tax
       Under the House bill, alternative minimum tax (``AMT'') 
     adjustments and preferences are combined at the partnership 
     level. An electing large partnership would report to partners 
     a net AMT adjustment separately computed for passive loss 
     limitation activities and other activities. In determining a 
     partner's alternative minimum taxable income, a partner's 
     distributive share of any net AMT adjustment is taken into 
     account instead of making separate AMT adjustments with 
     respect to partnership items. The net AMT adjustment is 
     determined by using the adjustments applicable to individuals 
     (in the case of partners other than corporations), and by 
     using the adjustments applicable to corporations (in the case 
     of corporate partners). Except as provided in regulations, 
     the net AMT adjustment is treated as a deferral preference 
     for purposes of the section 53 minimum tax credit.
     Discharge of indebtedness income
       If an electing large partnership has income from the 
     discharge of any indebtedness, such income is separately 
     reported to each partner. In addition, the rules governing 
     such income (sec. 108) are applied without regard to the 
     large partnership rules. Partner-level elections under 
     section 108 are made by each partner separately. Thus, for 
     example, the large partnership provisions do not affect 
     section 108(d)(6), which provides that certain section 108 
     rules apply at the partner level, or section 108(b)(5), which 
     provides for an election to reduce the basis of depreciable 
     property. The large partnership provisions also do not affect 
     the election under 108(c) (added by the Omnibus Budget 
     Reconciliation Act of 1993) to exclude discharge of 
     indebtedness income with respect to qualified real property 
     business indebtedness.
     REMICs
       For purposes of the tax on partnerships holding residual 
     interests in REMICs, all interests in an electing large 
     partnership are treated as held by disqualified 
     organizations. Thus, an electing large partnership holding a 
     residual interest in a REMIC is subject to a tax equal to the 
     excess inclusions multiplied by the highest corporate rate. 
     The amount subject to tax is excluded from partnership 
     income.
     Election of optional basis adjustments
       Under the House bill, an electing large partnership may 
     still elect to adjust the basis of partnership assets with 
     respect to transferee partners. The computation of an 
     electing large partnership's taxable income is made without 
     regard to the section 743(b) adjustment. As under present 
     law, the section 743(b) adjustment is made only with respect 
     to the transferee partner. In addition, an electing large 
     partnership is permitted to adjust the basis of partnership 
     property under section 734(b) if property is distributed to a 
     partner, as under present law.
     Terminations
       The House bill provides that an electing large partnership 
     does not terminate for tax purposes solely because 50 percent 
     of its interests are sold or exchanged within a 12-month 
     period.
     Partnerships and partners subject to large partnership rules
       Definition of electing large partnership
       An ``electing large partnership'' is any partnership that 
     elects under the provision, if the number of partners in the 
     preceding taxable year is 100 or more. The number of partners 
     is determined by counting only persons directly holding 
     partnership interests in the taxable year, including persons 
     holding through nominees; persons holding indirectly (e.g., 
     through another partnership) are not counted. Regulations may 
     provide, however, that if the number of partners in any 
     taxable year falls below 100, the partnership may not be 
     treated as an electing large partnership. The election 
     applies to the year for which made and all subsequent years 
     and cannot be revoked without the Secretary's consent.
       Special rules for certain service partnerships
       An election under this provision is not effective for any 
     partnership if substantially all the partners are: (1) 
     individuals performing substantial services in connection 
     with the partnership's activities, or personal service 
     corporations the owner-employees of which perform such 
     services; (2) retired partners who had performed such 
     services; or (3) spouses of partners who had performed such 
     services. In addition, the term ``partner'' does not include 
     any individual performing substantial services in connection 
     with the partnership's activities and holding a partnership 
     interest, or an individual who formerly performed such 
     services and who held a partnership interest at the time the 
     individual performed such services.
     Exclusion for commodity partnerships
       An election under this provision is not effective for any 
     partnership the principal activity of which is the buying and 
     selling of commodities (not described in sec. 1221(1)), or 
     options, futures or forwards with respect to commodities.
     Special rules for partnerships holding oil and gas properties
       Simplified reporting treatment of electing large 
           partnerships with oil and gas activities
       The House bill provides special rules for electing large 
     partnerships with oil and gas activities that operate under 
     the simplified reporting regime. These partnerships are 
     collectively referred to herein as ``oil and gas large 
     partnerships.'' Generally, the House bill provides that an 
     oil and gas large partnership reports information to its 
     partners under the general simplified large partnership 
     reporting regime described above. To prevent the extension of 
     percentage depletion deductions to persons excluded therefrom 
     under present law, however, certain partners are treated as 
     disqualified persons under the House bill.
       The treatment of a disqualified person's distributive share 
     of any item of income, gain, loss, deduction, or credit 
     attributable to any partnership oil or gas property is 
     determined under the bill without regard to the special rules 
     applicable to large partnerships. Thus, an oil and gas large 
     partnership reports information related to oil and gas 
     activities to a partner who is a disqualified person in the 
     same manner and to the same extent that it reports such 
     information to that partner under present law. The simplified 
     reporting rules of the bill, however, apply with respect to 
     reporting such a partner's share of items not related to oil 
     and gas activities.
       The House bill defines two categories of taxpayers as 
     disqualified persons. The first category encompasses 
     taxpayers who do not qualify for the deduction for percentage 
     depletion under section 613A (i.e., integrated producers of 
     oil and gas). The second category includes any person whose 
     average daily production of oil and gas (for purposes of 
     determining the depletable oil and natural gas quantity under 
     section 613A(c)(2)) is at least 500 barrels for its taxable 
     year in which (or with which) the partnership's taxable year 
     ends. In making this computation, all production of domestic 
     crude oil and natural gas attributable to the partner is 
     taken into account, including such partner's proportionate 
     share of any production of the large partnership.
       A taxpayer that falls within a category of disqualified 
     person has the responsibility of notifying any large 
     partnership in which it

[[Page H6583]]

     holds a direct or indirect interest (e.g., through a pass-
     through entity) of its status as such. Thus, for example, if 
     an integrated producer owns an interest in a partnership 
     which in turn owns an interest in an oil and gas large 
     partnership, it is responsible for providing the management 
     of the electing large partnership information regarding its 
     status as a disqualified person and details regarding its 
     indirect interest in the electing large partnership.
       Under the House bill, an oil and gas large partnership 
     computes its deduction for oil and gas depletion under the 
     general statutory rules (subject to certain exceptions 
     described below) under the assumptions that the partnership 
     is the taxpayer and that it qualifies for the percentage 
     depletion deduction. The amount of the depletion deduction, 
     as well as other oil and gas related items, generally are 
     reported to each partner (other than to partners who are 
     disqualified persons) as components of that partner's 
     distributive share of taxable income or loss from passive 
     loss limitation activities. The House bill provides that in 
     computing the partnership's oil and gas percentage depletion 
     deduction, the 1,000-barrel-per-day limitation does not 
     apply. In addition, an oil and gas large partnership is 
     allowed to compute percentage depletion under the bill 
     without applying the 65-percent-of-taxable-income limitation 
     under section 613A(d)(1).
       As under present law, an election to deduct IDCs under 
     section 263(c) is made at the partnership level. Since the 
     House bill treats those taxpayers required by the Code (sec. 
     291) to capitalize 30 percent of IDCs as disqualified 
     persons, an oil and gas large partnership may pass through a 
     full deduction of IDCs to its partners who are not 
     disqualified persons. In contrast to present law, an oil and 
     gas large partnership also has the responsibility with 
     respect to its partners who are not disqualified persons for 
     making an election under section 59(e) to capitalize and 
     amortize certain specified IDCs. Partners who are 
     disqualified persons are permitted to make their own separate 
     section 59(e) elections under the House bill.
       Consistent with the general reporting regime for electing 
     large partnerships, the House bill provides that a single AMT 
     adjustment (under either corporate or non-corporate 
     principles, as the case may be) is made and reported to the 
     partners (other than disqualified persons) of an oil and gas 
     large partnership as a separate item. This separately-
     reported item is affected by the limitation on the repeal of 
     the tax preference for excess IDCs. For purposes of computing 
     this limitation, the bill treats an oil and gas large 
     partnership as the taxpayer. Thus, the limitation on repeal 
     of the IDC preference is applied at the partnership level and 
     is based on the cumulative reduction in the partnership's 
     alternative minimum taxable income resulting from repeal of 
     that preference.
       The House bill provides that in making partnership-level 
     computations, any item of income, gain, loss, deduction, or 
     credit attributable to a partner who is a disqualified person 
     is disregarded. For example, in computing the partnership's 
     net income from oil and gas for purposes of determining the 
     IDC preference (if any) to be reported to partners who are 
     not disqualified persons as part of the AMT adjustment, 
     disqualified persons' distributive shares of the 
     partnership's net income from oil and gas are not to be taken 
     into account.
     Regulatory authority
       The Secretary of the Treasury is granted authority to 
     prescribe such regulations as may be appropriate to carry out 
     the purposes of the provisions.
     Effective date
       The provisions generally apply to partnership taxable years 
     beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       b. Simplified audit procedures for electing large 
           partnerships (sec. 1222 of the House bill and sec. 1022 
           of the Senate amendment)

                              Present Law

     In general
       Prior to 1982, regardless of the size of a partnership, 
     adjustments to a partnership's items of income, gain, loss, 
     deduction, or credit had to be made in separate proceedings 
     with respect to each partner individually. Because a large 
     partnership sometimes had many partners located in different 
     audit districts, adjustments to items of income, gains, 
     losses, deductions, or credits of the partnership had to be 
     made in numerous actions in several jurisdictions, sometimes 
     with conflicting outcomes.
       The Tax Equity and Fiscal Responsibility Act of 1982 
     (``TEFRA'') established unified audit rules applicable to all 
     but certain small (10 or fewer partners) partnerships. These 
     rules require the tax treatment of all ``partnership items'' 
     to be determined at the partnership, rather than the partner, 
     level. Partnership items are those items that are more 
     appropriately determined at the partnership level than at the 
     partner level, as provided by regulations.
       Under the TEFRA rules, a partner must report all 
     partnership items consistently with the partnership return or 
     must notify the IRS of any inconsistency. If a partner fails 
     to report any partnership item consistently with the 
     partnership return, the IRS may make a computational 
     adjustment and immediately assess any additional tax that 
     results.
     Administrative proceedings
       Under the TEFRA rules, a partner must report all 
     partnership items consistently with the partnership return or 
     must notify the IRS of any inconsistency. If a partner fails 
     to report any partnership item consistently with the 
     partnership return, the IRS may make a computational 
     adjustment and immediately assess any additional tax that 
     results.
       The IRS may challenge the reporting position of a 
     partnership by conducting a single administrative proceeding 
     to resolve the issue with respect to all partners. But the 
     IRS must still assess any resulting deficiency against each 
     of the taxpayers who were partners in the year in which the 
     understatement of tax liability arose.
       Any partner of a partnership can request an administrative 
     adjustment or a refund for his own separate tax liability. 
     Any partner also has the right to participate in partnership-
     level administrative proceedings. A settlement agreement with 
     respect to partnership items binds all parties to the 
     settlement.
     Tax Matters Partner
       The TEFRA rules establish the ``Tax Matters Partner'' as 
     the primary representative of a partnership in dealings with 
     the IRS. The Tax Matters Partner is a general partner 
     designated by the partnership or, in the absence of 
     designation, the general partner with the largest profits 
     interest at the close of the taxable year. If no Tax Matters 
     Partner is designated, and it is impractical to apply the 
     largest profits interest rule, the IRS may select any partner 
     as the Tax Matters Partner.
     Notice requirements
       The IRS generally is required to give notice of the 
     beginning of partnership-level administrative proceedings and 
     any resulting administrative adjustment to all partners whose 
     names and addresses are furnished to the IRS. For 
     partnerships with more than 100 partners, however, the IRS 
     generally is not required to give notice to any partner whose 
     profits interest is less than one percent.
     Adjudication of disputes concerning partnership items
       After the IRS makes an administrative adjustment, the Tax 
     Matters Partner (and, in limited circumstances, certain other 
     partners) may file a petition for readjustment of partnership 
     items in the Tax Court, the district court in which the 
     partnership's principal place of business is located, or the 
     Claims Court.
     Statute of limitations
       The IRS generally cannot adjust a partnership item for a 
     partnership taxable year if more than 3 years have elapsed 
     since the later of the filing of the partnership return or 
     the last day for the filing of the partnership return.

                               House Bill

       The House bill creates a new audit system for electing 
     large partnerships. The provision defines ``electing large 
     partnership'' the same way for audit and reporting purposes 
     (generally, any partnership that elects under the reporting 
     provisions, if the number of partners in the preceding 
     taxable year is 100 or more).
       As under present law, electing large partnerships and their 
     partners are subject to unified audit rules. Thus, the tax 
     treatment of ``partnership items'' are determined at the 
     partnership, rather than the partner, level. The term 
     ``partnership items'' is defined as under present law.
       Unlike present law, however, partnership adjustments 
     generally will flow through to the partners for the year in 
     which the adjustment takes effect. Thus, the current-year 
     partners' share of current-year partnership items of income, 
     gains, losses, deductions, or credits will be adjusted to 
     reflect partnership adjustments that take effect in that 
     year. The adjustments generally will not affect prior-year 
     returns of any partners (except in the case of changes to any 
     partner's distributive shares).
       In lieu of flowing an adjustment through to its partners, 
     the partnership may elect to pay an imputed underpayment. The 
     imputed underpayment generally is calculated by netting the 
     adjustments to the income and loss items of the partnership 
     and multiplying that amount by the highest tax rate (whether 
     individual or corporate; currently, the top individual rate 
     of 39.6 percent). A partner may not file a claim for credit 
     or refund of his allocable share of the payment. A 
     partnership may make this election only if it meets 
     requirements set forth in Treasury regulations designed to 
     ensure payment (for example, in the case of a foreign 
     partnership).
       Regardless of whether a partnership adjustment flows 
     through to the partners, an adjustment must be offset if it 
     requires another adjustment in a year after the adjusted year 
     and before the year the offsetted adjustment takes effect. 
     For example, if a partnership expensed a $1,000 item in year 
     1, and it was determined in year 4 that the item should have 
     been capitalized and amortized ratably over 10 years, the 
     adjustment in year 4 would be $700, apart from any interest 
     or penalty. (The $900 adjustment for the improper deduction 
     would be offset by $200 of

[[Page H6584]]

     adjustments for amortization deductions.) The year 4 partners 
     would be required to include an additional $700 in income for 
     that year. The partnership may ratably amortize the remaining 
     $700 of expenses in years 4-10.
       In addition, the partnership, rather than the partners 
     individually, generally is liable for any interest and 
     penalties that result from a partnership adjustment. Interest 
     is computed for the period beginning on the return due date 
     for the adjusted year and ending on the earlier of the return 
     due date for the partnership taxable year in which the 
     adjustment takes effect or the date the partnership pays the 
     imputed underpayment. Thus, in the above example, the 
     partnership would be liable for 4 years' worth of interest 
     (on a declining principal amount).
       Penalties (such as the accuracy and fraud penalties) are 
     determined on a year-by-year basis (without offsets) based on 
     an imputed underpayment. All accuracy penalty criteria and 
     waiver criteria (such as reasonable cause, substantial 
     authority, etc.) are determined as if the partnership were a 
     taxable individual. Accuracy and fraud penalties are assessed 
     and accrue interest in the same manner as if asserted against 
     a taxable individual.
       Any payment (for Federal income taxes, interest, or 
     penalties) that an electing large partnership is required to 
     make is non-deductible.
       If a partnership ceases to exist before a partnership 
     adjustment takes effect, the former partners are required to 
     take the adjustment into account, as provided by regulations. 
     Regulations are also authorized to prevent abuse and to 
     enforce efficiently the audit rules in circumstances that 
     present special enforcement considerations (such as 
     partnership bankruptcy).
     Administrative proceedings
       Under the electing large partnership audit rules, a partner 
     is not permitted to report any partnership items 
     inconsistently with the partnership return, even if the 
     partner notifies the IRS of the inconsistency. The IRS may 
     treat a partnership item that was reported inconsistently by 
     a partner as a mathematical or clerical error and immediately 
     assess any additional tax against that partner.
       As under present law, the IRS may challenge the reporting 
     position of a partnership by conducting a single 
     administrative proceeding to resolve the issue with respect 
     to all partners. Unlike under present law, however, partners 
     will have no right individually to participate in settlement 
     conferences or to request a refund.
     Partnership representative
       The House bill requires each electing large partnership to 
     designate a partner or other person to act on its behalf. If 
     an electing large partnership fails to designate such a 
     person, the IRS is permitted to designate any one of the 
     partners as the person authorized to act on the partnership's 
     behalf. After the IRS's designation, an electing large 
     partnership could still designate a replacement for the IRS-
     designated partner.
     Notice requirements
       Unlike under present law, the IRS is not required to give 
     notice to individual partners of the commencement of an 
     administrative proceeding or of a final adjustment. Instead, 
     the IRS is authorized to send notice of a partnership 
     adjustment to the partnership itself by certified or 
     registered mail. The IRS could give proper notice by mailing 
     the notice to the last known address of the partnership, even 
     if the partnership had terminated its existence.
     Adjudication of disputes concerning partnership items
       As under present law, an administrative adjustment could be 
     challenged in the Tax Court, the district court in which the 
     partnership's principal place of business is located, or the 
     Claims Court. However, only the partnership, and not partners 
     individually, can petition for a readjustment of partnership 
     items.
       If a petition for readjustment of partnership items is 
     filed by the partnership, the court with which the petition 
     is filed will have jurisdiction to determine the tax 
     treatment of all partnership items of the partnership for 
     the partnership taxable year to which the notice of 
     partnership adjustment relates, and the proper allocation 
     of such items among the partners. Thus, the court's 
     jurisdiction is not limited to the items adjusted in the 
     notice.
     Statute of limitations
       Absent an agreement to extend the statute of limitations, 
     the IRS generally could not adjust a partnership item of an 
     electing large partnership more than 3 years after the later 
     of the filing of the partnership return or the last day for 
     the filing of the partnership return. Special rules apply to 
     false or fraudulent returns, a substantial omission of 
     income, or the failure to file a return. The IRS would assess 
     and collect any deficiency of a partner that arises from any 
     adjustment to a partnership item subject to the limitations 
     period on assessments and collection applicable to the year 
     the adjustment takes effect (secs. 6248, 6501 and 6502).
     Regulatory authority
       The Secretary of the Treasury is granted authority to 
     prescribe regulations as may be necessary to carry out the 
     simplified audit procedure provisions, including regulations 
     to prevent abuse of the provisions through manipulation. The 
     regulations may include rules that address transfers of 
     partnership interests, in anticipation of a partnership 
     adjustment, to persons who are tax-favored (e.g., 
     corporations with net operating losses, tax-exempt 
     organizations, and foreign partners) or persons who are 
     expected to be unable to pay tax (e.g., shell corporations). 
     For example, if prior to the time a partnership adjustment 
     takes effect, a taxable partner transfers a partnership 
     interest to a nonresident alien to avoid the tax effect of 
     the partnership adjustment, the rules may provide, among 
     other things, that income related to the partnership 
     adjustment is treated as effectively connected taxable 
     income, that the partnership adjustment is treated as taking 
     effect before the partnership interest was transferred, or 
     that the former partner is treated as a current partner to 
     whom the partnership adjustment is allocated.
     Effective date
       The provision applies to partnership taxable years 
     beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with technical modifications.
       c. Due date for furnishing information to partners of 
           electing large partnerships (sec. 1223 of the House 
           bill and sec. 1023 of the Senate amendment)

                              Present Law

       A partnership required to file an income tax return with 
     the Internal Revenue Service must also furnish an information 
     return to each of its partners on or before the day on which 
     the income tax return for the year is required to be filed, 
     including extensions. Under regulations, a partnership must 
     file its income tax return on or before the fifteenth day of 
     the fourth month following the end of the partnership's 
     taxable year (on or before April 15, for calendar year 
     partnerships). This is the same deadline by which most 
     individual partners must file their tax returns.

                               House Bill

       The House bill provides that an electing large partnership 
     must furnish information returns to partners by the first 
     March 15 following the close of the partnership's taxable 
     year. Electing large partnerships are those partnerships 
     subject to the simplified reporting and audit rules 
     (generally, any partnership that elects under the reporting 
     provision, if the number of partners in the preceding taxable 
     year is 100 or more).
       The House bill also provides that, if the partnership is 
     required to provide copies of the information returns to the 
     Internal Revenue Service on magnetic media, each schedule 
     (such as each Schedule K-1) with respect to each partner is 
     treated as a separate information return with respect to the 
     corrective periods and penalties that are generally 
     applicable to all information returns.
       Effective date.--The provision is effective for partnership 
     taxable years beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       d. Partnership returns required on magnetic media (sec. 
           1224 of the House bill and sec. 1024 of the Senate 
           amendment)

                              Present Law

       Partnerships are permitted, but not required, to provide 
     the tax return of the partnership (Form 1065), as well as 
     copies of the schedules sent to each partner (Form K-1), to 
     the Internal Revenue Service on magnetic media.

                               House Bill

       The House bill provides generally that any partnership is 
     required to provide the tax return of the partnership (Form 
     1065), as well as copies of the schedule sent to each partner 
     (Form K-1), to the Internal Revenue Service on magnetic 
     media. An exception is provided for partnerships with 100 or 
     fewer partners.
       Effective date.--The provision is effective for partnership 
     taxable years beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       e. Treatment of partnership items of individual retirement 
           arrangements (sec. 1225 of the House bill and sec. 1025 
           of the Senate amendment)

                              Present Law

     Return filing requirements
       An individual retirement account (``IRA'') is a trust which 
     generally is exempt from taxation except for the taxes 
     imposed on income from an unrelated trade or business. A 
     fiduciary of a trust that is exempt from taxation (but 
     subject to the taxes imposed on income from an unrelated 
     trade or business) generally is required to file a return on 
     behalf of the trust for a taxable year if the trust has gross 
     income of $1,000 or more included in computing unrelated 
     business taxable income for that year (Treas. Reg. sec. 
     1.6012-3(a)(5)).
       Unrelated business taxable income is the gross income 
     (including gross income from a partnership) derived by an 
     exempt organization from an unrelated trade or business, less

[[Page H6585]]

     certain deductions which are directly connected with the 
     carrying on of such trade or business (sec. 512(a)(1). In 
     calculating unrelated business taxable income, exempt 
     organizations (including IRAs) generally also are permitted a 
     specific deduction of $1,000 (sec. 512(b)(12)).
     Unified audits of partnerships
       All but certain small partnerships are subject to unified 
     audit rules established by the Tax Equity and Fiscal 
     Responsibility Act of 1982. These rules require the tax 
     treatment of all ``partnership items'' to be determined at 
     the partnership, rather than the partner, level. Partnership 
     items are those items that are more appropriately determined 
     at the partnership level than at the partner level, including 
     such items as gross income and deductions of the partnership.

                               House Bill

       The House bill modifies the filing threshold for an IRA 
     with an interest in a partnership that is subject to the 
     partnership-level audit rules. A fiduciary of such an IRA 
     could treat the trust's share of partnership taxable income 
     as gross income, for purposes of determining whether the 
     trust meets the $1,000 gross income filing threshold. A 
     fiduciary of an IRA that receives taxable income from a 
     partnership that is subject to partnership-level audit rules 
     of less than $1,000 (before the $1,000 specific deduction) is 
     not required to file an income tax return if the IRA does not 
     have any other income from an unrelated trade or business.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Other partnership audit rules
       a. Treatment of partnership items in deficiency proceedings 
           (sec. 1231 of the House bill and sec. 1031 of the 
           Senate amendment)

                              Present Law

       Partnership proceedings under rules enacted in TEFRA 
     13 must be kept separate from deficiency 
     proceedings involving the partners in their individual 
     capacities. Prior to the Tax Court's opinion in Munro v. 
     Commissioner, 92 T.C. 71 (1989), the IRS computed 
     deficiencies by assuming that all items that were subject to 
     the TEFRA partnership procedures were correctly reported on 
     the taxpayer's return. However, where the losses claimed from 
     TEFRA partnerships were so large that they offset any 
     proposed adjustments to nonpartnership items, no deficiency 
     could arise from a non-TEFRA proceeding, and if the 
     partnership losses were subsequently disallowed in a 
     partnership proceeding, the non-TEFRA adjustments might be 
     uncollectible because of the expiration of the statute of 
     limitations with respect to nonpartnership items.
---------------------------------------------------------------------------
     \13\ Tax Equity and Fiscal Responsibility Act of 1982.
---------------------------------------------------------------------------
       Faced with this situation in Munro, the IRS issued a notice 
     of deficiency to the taxpayer that presumptively disallowed 
     the taxpayer's TEFRA partnership losses for computational 
     purposes only. Although the Tax Court ruled that a deficiency 
     existed and that the court had jurisdiction to hear the case, 
     the court disapproved of the methodology used by the IRS to 
     compute the deficiency. Specifically, the court held that 
     partnership items (whether income, loss, deduction, or 
     credit) included on a taxpayer's return must be completely 
     ignored in determining whether a deficiency exists that is 
     attributable to nonpartnership items.

                               House Bill

       The House bill overrules Munro and allow the IRS to return 
     to its prior practice of computing deficiencies by assuming 
     that all TEFRA items whose treatment has not been finally 
     determined had been correctly reported on the taxpayer's 
     return. This eliminates the need to do special computations 
     that involve the removal of TEFRA items from a taxpayer's 
     return, and will restore to taxpayers a prepayment forum with 
     respect to the TEFRA items. In addition, the provision 
     provides a special rule to address the factual situation 
     presented in Munro.
       Specifically, the House bill provides a declaratory 
     judgment procedure in the Tax Court for adjustments to an 
     oversheltered return. An oversheltered return is a return 
     that shows no taxable income and a net loss from TEFRA 
     partnerships. In such a case, the IRS is authorized to issue 
     a notice of adjustment with respect to non-TEFRA items, 
     notwithstanding that no deficiency would result from the 
     adjustment. However, the IRS could only issue such a notice 
     if a deficiency would have arisen in the absence of the net 
     loss from TEFRA partnerships.
       The Tax Court is granted jurisdiction to determine the 
     correctness of such an adjustment as well as to make a 
     declaration with respect to any other item for the taxable 
     year to which the notice of adjustment relates, except for 
     partnership items and affected items which require partner-
     level determinations. No tax is due upon such a 
     determination, but a decision of the Tax Court is treated as 
     a final decision, permitting an appeal of the decision by 
     either the taxpayer or the IRS. An adjustment determined to 
     be correct would thus have the effect of increasing the 
     taxable income that is deemed to have been reported on the 
     taxpayer's return. If the taxpayer's partnership items were 
     then adjusted in a subsequent proceeding, the IRS has 
     preserved its ability to collect tax on any increased 
     deficiency attributable to the nonpartnership items.
       Alternatively, if the taxpayer chooses not to contest the 
     notice of adjustment within the 90-day period, the bill 
     provides that when the taxpayer's partnership items are 
     finally determined, the taxpayer has the right to file a 
     refund claim for tax attributable to the items adjusted by 
     the earlier notice of adjustment for the taxable year. 
     Although a refund claim is not generally permitted with 
     respect to a deficiency arising from a TEFRA proceeding, such 
     a rule is appropriate with respect to a defaulted notice of 
     adjustment because taxpayers may not challenge such a notice 
     when issued since it does not require the payment of 
     additional tax.
       In addition, the House bill incorporates a number of 
     provisions intended to clarify the coordination between TEFRA 
     audit proceedings and individual deficiency proceedings. 
     Under these provisions, any adjustment with respect to a non-
     partnership item that caused an increase in tax liability 
     with respect to a partnership item would be treated as a 
     computational adjustment and assessed after the conclusion of 
     the TEFRA proceeding. Accordingly, deficiency procedures do 
     not apply with respect to this increase in tax liability, and 
     the statute of limitations applicable to TEFRA proceedings 
     are controlling.
       Effective date.--The provision is effective for partnership 
     taxable years ending after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       b. Partnership return to be determinative of audit 
           procedures to be followed (sec. 1232 of the House bill 
           and sec. 1032 of the Senate amendment)

                              Present Law

       TEFRA established unified audit rules applicable to all 
     partnerships, except for partnerships with 10 or fewer 
     partners, each of whom is a natural person (other than a 
     nonresident alien) or an estate, and for which each partner's 
     share of each partnership item is the same as that partner's 
     share of every other partnership item. Partners in the 
     exempted partnerships are subject to regular deficiency 
     procedures.

                               House Bill

       The House bill permits the IRS to apply the TEFRA audit 
     procedures if, based on the partnership's return for the 
     year, the IRS reasonably determines that those procedures 
     should apply. Similarly, the provision permits the IRS to 
     apply the normal deficiency procedures if, based on the 
     partnership's return for the year, the IRS reasonably 
     determines that those procedures should apply.
       Effective date.--The provision is effective for partnership 
     taxable years ending after the date of enactment.

                            Senate Amendment

          The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       c. Provisions relating to statute of limitations
       i. Suspend statute when an untimely petition is filed (sec. 
           1233(a) of the House bill and sec. 1033(a) of the 
           Senate amendment)

                              Present Law

       In a deficiency case, section 6503(a) provides that if a 
     proceeding in respect of the deficiency is placed on the 
     docket of the Tax Court, the period of limitations on 
     assessment and collection is suspended until the decision of 
     the Tax Court becomes final, and for 60 days thereafter. The 
     counterpart to this provision with respect to TEFRA cases is 
     contained in section 6229(d). That section provides that the 
     period of limitations is suspended for the period during 
     which an action may be brought under section 6226 and, if an 
     action is brought during such period, until the decision of 
     the court becomes final, and for 1 year thereafter. As a 
     result of this difference in language, the running of the 
     statute of limitations in a TEFRA case will only be tolled by 
     the filing of a timely petition whereas in a deficiency case, 
     the statute of limitations is tolled by the filing of any 
     petition, regardless of whether the petition is timely.

                               House Bill

       The House bill conforms the suspension rule for the filing 
     of petitions in TEFRA cases with the rule under section 
     6503(a) pertaining to deficiency cases. Under the provision, 
     the statute of limitations in TEFRA cases is suspended by the 
     filing of any petition under section 6226, regardless of 
     whether the petition is timely or valid, and the suspension 
     will remain in effect until the decision of the court becomes 
     final, and for one year thereafter. Hence, if the statute of 
     limitations is open at the time that an untimely petition is 
     filed, the limitations period would no longer continue to run 
     and possibly expire while the action is pending before the 
     court.
       Effective date.--The provision is effective with respect to 
     all cases in which the period

[[Page H6586]]

     of limitations has not expired under present law as of the 
     date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       ii. Suspend statute of limitations during bankruptcy 
           proceedings (sec. 1233(b) of the House bill and sec. 
           1033(b) of the Senate amendment)

                              Present Law

       The period for assessing tax with respect to partnership 
     items generally is the longer of the periods provided by 
     section 6229 or section 6501. For partnership items that 
     convert to nonpartnership items, section 6229(f) provides 
     that the period for assessing tax shall not expire before the 
     date which is 1 year after the date that the items become 
     nonpartnership items. Section 6503(h) provides for the 
     suspension of the limitations period during the pendency of a 
     bankruptcy proceeding. However, this provision only applies 
     to the limitations periods provided in sections 6501 and 
     6502.
       Under present law, because the suspension provision in 
     section 6503(h) applies only to the limitations periods 
     provided in section 6501 and 6502, some uncertainty exists as 
     to whether section 6503(h) applies to suspend the limitations 
     period pertaining to converted items provided in section 
     6229(f) when a petition naming a partner as a debtor in a 
     bankruptcy proceeding is filed. As a result, the limitations 
     period provided in section 6229(f) may continue to run during 
     the pendency of the bankruptcy proceeding, notwithstanding 
     that the IRS is prohibited from making an assessment against 
     the debtor because of the automatic stay provisions of the 
     Bankruptcy Code.

                               House Bill

       The House bill clarifies that the statute of limitations is 
     suspended for a partner who is named in a bankruptcy 
     petition. The suspension period is for the entire period 
     during which the IRS is prohibited by reason of the 
     bankruptcy proceeding from making an assessment, and for 60 
     days thereafter. The provision does not purport to create any 
     inference as to the proper interpretation of present law.
       Effective date.--The provision is effective with respect to 
     all cases in which the period of limitations has not expired 
     under present law as of the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       iii. Extend statute of limitations for bankrupt TMPs (sec. 
           1233(c) of the House bill and sec. 1033(c) of the 
           Senate amendment)

                              Present Law

       Section 6229(b)(1)(B) provides that the statute of 
     limitations is extended with respect to all partners in the 
     partnership by an agreement entered into between the tax 
     matters partner (TMP) and the IRS. However, Temp. Treas. Reg. 
     secs. 301.6231(a)(7)-1T(1)(4) and 301.6231(c)-7T(a) provide 
     that upon the filing of a petition naming a partner as a 
     debtor in a bankruptcy proceeding, that partner's partnership 
     items convert to nonpartnership items, and if the debtor was 
     the tax matters partner, such status terminates. These rules 
     are necessary because of the automatic stay provision 
     contained in 11 U.S.C. sec. 362(a)(8). As a result, if a 
     consent to extend the statute of limitations is signed by a 
     person who would be the TMP but for the fact that at the time 
     that the agreement is executed the person was a debtor in a 
     bankruptcy proceeding, the consent would not be binding on 
     the other partners because the person signing the agreement 
     was no longer the TMP at the time that the agreement was 
     executed.

                               House Bill

       The House bill provides that unless the IRS is notified of 
     a bankruptcy proceeding in accordance with regulations, the 
     IRS can rely on a statute extension signed by a person who is 
     the tax matters partner but for the fact that said person was 
     in bankruptcy at the time that the person signed the 
     agreement. Statute extensions granted by a bankrupt TMP in 
     these cases are binding on all of the partners in the 
     partnership. The provision is not intended to create any 
     inference as to the proper interpretation of present law.
       Effective date.--The provision is effective for extension 
     agreements entered into after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       d. Expansion of small partnership exception (sec. 1234 of 
           the House bill and sec. 1034 of the Senate amendment)

                              Present Law

       TEFRA established unified audit rules applicable to all 
     partnerships, except for partnerships with 10 or fewer 
     partners, each of whom is a natural person (other than a 
     nonresident alien) or an estate, and for which each partner's 
     share of each partnership item is the same as that partner's 
     share of every other partnership item. Partners in the 
     exempted partnerships are subject to regular deficiency 
     procedures.

                               House Bill

       The House bill permits a small partnership to have a C 
     corporation as a partner or to specially allocate items 
     without jeopardizing its exception from the TEFRA rules. 
     However, the provision retains the prohibition of present law 
     against having a flow-through entity (other than an estate of 
     a deceased partner) as a partner for purposes of qualifying 
     for the small partnership exception.
       Effective date.--The provision is effective for partnership 
     taxable years ending after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       e. Exclusion of partial settlements from 1-year limitation 
           on assessment (sec. 1235 of the House bill and sec. 
           1035 of the Senate amendment)

                              Present Law

       The period for assessing tax with respect to partnership 
     items generally is the longer of the periods provided by 
     section 6229 or section 6501. For partnership items that 
     convert to nonpartnership items, section 6229(f) provides 
     that the period for assessing tax shall not expire before the 
     date which is 1 year after the date that the items become 
     nonpartnership items. Section 6231(b)(1)(C) provides that the 
     partnership items of a partner for a partnership taxable year 
     become nonpartnership items as of the date the partner enters 
     into a settlement agreement with the IRS with respect to such 
     items.

                               House Bill

       The House bill provides that if a partner and the IRS enter 
     into a settlement agreement with respect to some but not all 
     of the partnership items in dispute for a partnership taxable 
     year and other partnership items remain in dispute, the 
     period for assessing any tax attributable to the settled 
     items is determined as if such agreement had not been entered 
     into. Consequently, the limitations period that is applicable 
     to the last item to be resolved for the partnership taxable 
     year is controlling with respect to all disputed partnership 
     items for the partnership taxable year. The provision does 
     not purport to create any inference as to the proper 
     interpretation of present law.
       Effective date.--The provision is effective for settlements 
     entered into after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

F. Extension of time for filing a request for administrative adjustment 
  (sec. 1236 of the House bill and sec. 1036 of the Senate amendment)

                              Present Law

       If an agreement extending the statute is entered into with 
     respect to a non-TEFRA statute of limitations, that agreement 
     also extends the statute of limitations for filing refund 
     claims (sec. 6511(c)). There is no comparable provision for 
     extending the time for filing refund claims with respect to 
     partnership items subject to the TEFRA partnership rules.

                               House Bill

       The House bill provides that if a TEFRA statute extension 
     agreement is entered into, that agreement also extends the 
     statute of limitations for filing refund claims attributable 
     to partnership items or affected items until 6 months after 
     the expiration of the limitations period for assessments.
       Effective date.--The provision is effective as if included 
     in the amendments made by section 402 of the Tax Equity and 
     Fiscal Responsibility Act of 1982.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

  G. Availability of innocent spouse relief in context of partnership 
 proceedings (sec. 1237 of the House bill and sec. 1037 of the Senate 
                               amendment)

                              Present Law

       In general, an innocent spouse may be relieved of liability 
     for tax, penalties and interest if certain conditions are met 
     (sec. 6013(e)). However, existing law does not provide the 
     spouse of a partner in a TEFRA partnership with a judicial 
     forum to raise the innocent spouse defense with respect to 
     any tax or interest that relates to an investment in a TEFRA 
     partnership.

                               House Bill

       The House bill provides both a prepayment forum and a 
     refund forum for raising the innocent spouse defense in TEFRA 
     cases.
       With respect to a prepayment forum, the provision provides 
     that within 60 days of the date that a notice of 
     computational adjustment relating to partnership items is 
     mailed to the spouse of a partner, the spouse could request 
     that the assessment be abated. Upon receipt of such a 
     request, the assessment is

[[Page H6587]]

     abated and any reassessment will be subject to the deficiency 
     procedures. If an abatement is requested, the statute of 
     limitations does not expire before the date which is 60 days 
     after the date of the abatement. If the spouse files a 
     petition with the Tax Court, the Tax Court only has 
     jurisdiction to determine whether the requirements of section 
     6013(e) have been satisfied. In making this determination, 
     the treatment of the partnership items that gave rise to the 
     liability in question is conclusive.
       Alternatively, the House bill provides that the spouse of a 
     partner could file a claim for refund to raise the innocent 
     spouse defense. The claim has to be filed within 6 months 
     from the date that the notice of computational adjustment is 
     mailed to the spouse. If the claim is not allowed, the spouse 
     could file a refund action. For purposes of any claim or suit 
     under this provision, the treatment of the partnership items 
     that gave rise to the liability in question is conclusive.
       Effective date.--The provision is effective as if included 
     in the amendments made by section 402 of the Tax Equity and 
     Fiscal Responsibility Act of 1982.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 H. Determination of penalties at partnership level (sec. 1238 of the 
           House bill and sec. 1038 of the Senate amendment)

                              Present Law

       Partnership items include only items that are required to 
     be taken into account under the income tax subtitle. 
     Penalties are not partnership items since they are contained 
     in the procedure and administration subtitle. As a result, 
     penalties may only be asserted against a partner through the 
     application of the deficiency procedures following the 
     completion of the partnership-level proceeding.

                               House Bill

       The House bill provides that the partnership-level 
     proceeding is to include a determination of the applicability 
     of penalties at the partnership level. However, the provision 
     allows partners to raise any partner-level defenses in a 
     refund forum.
       Effective date.--The provision is effective for partnership 
     taxable years ending after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with technical modifications.

  I. Provisions relating to Tax Court jurisdiction (sec. 1239 of the 
           House bill and sec. 1039 of the Senate amendment)

                              Present Law

       Improper assessment and collection activities by the IRS 
     during the 150-day period for filing a petition or during the 
     pendency of any Tax Court proceeding, ``may be enjoined in 
     the proper court.'' Present law may be unclear as to whether 
     this includes the Tax Court.
       For a partner other than the Tax Matters Partner to be 
     eligible to file a petition for redetermination of 
     partnership items in any court or to participate in an 
     existing case, the period for assessing any tax attributable 
     to the partnership items of that partner must not have 
     expired. Since such a partner would only be treated as a 
     party to the action if the statute of limitations with 
     respect to them was still open, the law is unclear whether 
     the partner would have standing to assert that the statute of 
     limitations had expired with respect to them.

                               House Bill

       The House bill clarifies that an action to enjoin premature 
     assessments of deficiencies attributable to partnership items 
     may be brought in the Tax Court. The provision also permits a 
     partner to participate in an action or file a petition for 
     the sole purpose of asserting that the period of limitations 
     for assessing any tax attributable to partnership items has 
     expired for that person. Additionally, the provision 
     clarifies that the Tax Court has overpayment jurisdiction 
     with respect to affected items.
       Effective date.--The provision is effective for partnership 
     taxable years ending after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with technical modifications.

   J. Treatment of premature petitions filed by notice partners or 5-
percent groups (sec. 1240 of the House bill and sec. 1040 of the Senate 
                               amendment)

                              Present Law

       The Tax Matters Partner is given the exclusive right to 
     file a petition for a readjustment of partnership items 
     within the 90-day period after the issuance of the notice of 
     a final partnership administrative adjustment (FPAA). If the 
     Tax Matters Partner does not file a petition within the 90-
     day period, certain other partners are permitted to file a 
     petition within the 60-day period after the close of the 90-
     day period. There are ordering rules for determining which 
     action goes forward and for dismissing other actions.

                               House Bill

       The House bill treats premature petitions filed by certain 
     partners within the 90-day period as being filed on the last 
     day of the following 60-day period under specified 
     circumstances, thus affording the partnership with an 
     opportunity for judicial review that is not available under 
     present law.
       Effective date.--The provision is effective with respect to 
     petitions filed after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

K. Bonds in case of appeals from certain proceedings (sec. 1241 of the 
           House bill and sec. 1041 of the Senate amendment)

                              Present Law

       A bond must be filed to stay the collection of deficiencies 
     pending the appeal of the Tax Court's decision in a TEFRA 
     proceeding. The amount of the bond must be based on the 
     court's estimate of the aggregate deficiencies of the 
     partners.

                               House Bill

       The House bill clarifies that the amount of the bond should 
     be based on the Tax Court's estimate of the aggregate 
     liability of the parties to the action (and not all of the 
     partners in the partnership). For purposes of this provision, 
     the amount of the bond could be estimated by applying the 
     highest individual rate to the total adjustments determined 
     by the Tax Court and doubling that amount to take into 
     account interest and penalties.
       Effective date.--The provision is effective as if included 
     in the amendments made by section 402 of the Tax Equity and 
     Fiscal Responsibility Act of 1982.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

   L. Suspension of interest where delay in computational adjustment 
  resulting from certain settlements (sec. 1242 of the House bill and 
                   sec. 1042 of the Senate amendment)

                              Present Law

       Interest on a deficiency generally is suspended when a 
     taxpayer executes a settlement agreement with the IRS and 
     waives the restrictions on assessments and collections, and 
     the IRS does not issue a notice and demand for payment of 
     such deficiency within 30 days. Interest on a deficiency that 
     results from an adjustment of partnership items in TEFRA 
     proceedings, however, is not suspended.

                               House Bill

       The House bill suspends interest where there is a delay in 
     making a computational adjustment relating to a TEFRA 
     settlement.
       Effective date.--The provision is effective with respect to 
     adjustments relating to taxable years beginning after the 
     date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

M. Special rules for administrative adjustment requests with respect to 
bad debts or worthless securities (sec. 1243 of the House bill and sec. 
                     1043 of the Senate amendment)

                              Present Law

       The non-TEFRA statute of limitations for filing a claim for 
     credit or refund generally is the later of (1) three years 
     from the date the return in question was filed or (2) two 
     years from the date the claimed tax was paid, whichever is 
     later (sec. 6511(b)). However, an extended period of time, 
     seven years from the date the return was due, is provided for 
     filing a claim for refund of an overpayment resulting from a 
     deduction for a worthless security or bad debt (sec. 
     6511(d)).
       Under the TEFRA partnership rules, a request for 
     administrative adjustment (``RAA'') must be filed within 
     three years after the later of (1) the date the partnership 
     return was filed or (2) the due date of the partnership 
     return (determined without regard to extensions) (sec. 
     6227(a)(1)). In addition, the request must be filed before a 
     final partnership administrative adjustment (``FPAA'') is 
     mailed for the taxable year (sec. 6227(a)(2)). There is no 
     special provision for extending the time for filing an RAA 
     that relates to a deduction for a worthless security or an 
     entirely worthless bad debt.

                               House Bill

       The House bill extends the time for the filing of an RAA 
     relating to the deduction by a partnership for a worthless 
     security or bad debt. In these circumstances, in lieu of the 
     three-year period provided in sec. 6227(a)(1), the period for 
     filing an RAA is seven years from the date the partnership 
     return was due with respect to which the request is made 
     (determined without regard to extensions). The RAA is still 
     required to be filed before the FPAA is mailed for the 
     taxable year.

[[Page H6588]]

       Effective date.--The provision is effective as if included 
     in the amendments made by section 402 of the Tax Equity and 
     Fiscal Responsibility Act of 1982.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Closing of partnership taxable year with respect to 
         deceased partner (sec. 1246 of the House bill and sec. 
         1046 of the Senate amendment)

                              Present Law

       The partnership taxable year closes with respect to a 
     partner whose entire interest is sold, exchanged, or 
     liquidated. Such year, however, generally does not close upon 
     the death of a partner. Thus, a decedent's entire share of 
     items of income, gain, loss, deduction and credit for the 
     partnership year in which death occurs is taxed to the estate 
     or successor in interest rather than to the decedent on his 
     or her final income tax return. See Estate of Hesse v. 
     Commissioner, 74 T.C. 1307, 1311 (1980).

                               House Bill

       The House bill provides that the taxable year of a 
     partnership closes with respect to a partner whose entire 
     interest in the partnership terminates, whether by death, 
     liquidation or otherwise. The provision does not change 
     present law with respect to the effect upon the partnership 
     taxable year of a transfer of a partnership interest by a 
     debtor to the debtor's estate (under Chapters 7 or 11 of 
     Title 11, relating to bankruptcy).
       Effective date.--Partnership taxable years beginning after 
     December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

  D. Modifications of Rules for Real Estate Investment Trusts (secs. 
     1251-1263 of the House bill and secs. 1051-1063 of the Senate 
                               amendment)

                              Present Law

     Overview
       In general, a real estate investment trust (``REIT'') is an 
     entity that receives most of its income from passive real 
     estate related investments and that receives conduit 
     treatment for income that is distributed to shareholders. If 
     an entity meets the qualifications for REIT status, the 
     portion of its income that is distributed to the investors 
     each year generally is taxed to the investors without being 
     subjected to a tax at the REIT level; the REIT generally is 
     subject to a corporate tax only on the income that it retains 
     and on certain income from property that qualifies as 
     foreclosure property.
     Election to be treated as a REIT
       In order to qualify as a REIT, and thereby receive conduit 
     treatment, an entity must elect REIT status. A newly-electing 
     entity generally cannot have earnings and profits accumulated 
     from any year in which the entity was in existence and not 
     treated as a REIT (sec. 857(a)(3)). To satisfy this 
     requirement, the entity must distribute, during its first 
     REIT taxable year, any earnings and profits that were 
     accumulated in non-REIT years. For this purpose, 
     distributions by the entity generally are treated as being 
     made from the most recently accumulated earnings and profits.
     Taxation of REITs
       Overview
       In general, if an entity qualifies as a REIT by satisfying 
     the various requirements described below, the entity is 
     taxable as a corporation on its ``real estate investment 
     trust taxable income'' (``REITTI''), and also is taxable on 
     certain other amounts (sec. 857). REITTI is the taxable 
     income of the REIT with certain adjustments (sec. 857(b)(2)). 
     The most significant adjustment is a deduction for dividends 
     paid. The allowance of this deduction is the mechanism by 
     which the REIT becomes a conduit for income tax purposes.
       Capital gains
       A REIT that has a net capital gain for a taxable year 
     generally is subject to tax on such capital gain under the 
     capital gains tax regime generally applicable to corporations 
     (sec. 857(b)(3)). However, a REIT may diminish or eliminate 
     its tax liability attributable to such capital gain by paying 
     a ``capital gain dividend'' to its shareholders (sec. 
     857(b)(3)(C)). A capital gain dividend is any dividend or 
     part of a dividend that is designated by the payor REIT as a 
     capital gain dividend in a written notice mailed to 
     shareholders. Shareholders who receive capital gain dividends 
     treat the amount of such dividends as long-term capital 
     gain regardless of the holding period of their stock (sec. 
     857(b)(3)(C)).
       A regulated investment company (``RIC''), but not a REIT, 
     may elect to retain and pay income tax on net long-term 
     capital gains it received during the tax year. If a RIC makes 
     this election, the RIC shareholders must include in their 
     income as long-term capital gains their proportionate share 
     of these undistributed long-term capital gains as designated 
     by the RIC. The shareholder is deemed to have paid the 
     shareholder's share of the tax, which can be credited or 
     refunded to the shareholder. Also, the basis of the 
     shareholder's shares is increased by the amount of the 
     undistributed long-term capital gains (less the amount of 
     capital gains tax paid by the RIC) included in the 
     shareholder's long-term capital gains.
       Income from foreclosure property
       In addition to tax on its REITTI, a REIT is subject to tax 
     at the highest rate of tax paid by corporations on its net 
     income from foreclosure property (sec. 857(b)(4)). Net income 
     from foreclosure property is the excess of the sum of gains 
     from foreclosure property that is held for sale to customers 
     in the ordinary course of a trade or business and gross 
     income from foreclosure property (other than income that 
     otherwise would qualify under the 75-percent income test 
     described below) over all allowable deductions directly 
     connected with the production of such income.
       Foreclosure property is any real property or personal 
     property incident to such real property that is acquired by a 
     REIT as a result of default or imminent default on a lease of 
     such property or indebtedness secured by such property, 
     provided that (unless acquired as foreclosure property), such 
     property was not held by the REIT for sale to customers (sec. 
     856(e)). A property generally may be treated as foreclosure 
     property for a period of two years after the date the 
     property is acquired by the REIT. The IRS may grant 
     extensions of the period for treating the property as 
     foreclosure property if the REIT establishes that an 
     extension of the grace period is necessary for the orderly 
     liquidation of the REIT's interest in the property. The grace 
     period cannot be extended beyond six years from the date the 
     property is acquired by the REIT.
       Property will cease to be treated as foreclosure property 
     if, after 90 days after the date of acquisition, the REIT 
     operates the foreclosure property in a trade or business 
     other than through an independent contractor from whom the 
     REIT does not derive or receive any income (sec. 
     856(e)(4)(C)).
       Income or loss from prohibited transactions
       In general, a REIT must derive its income from passive 
     sources and not engage in any active trade or business. 
     Accordingly, in addition to the tax on its REITTI and on its 
     net income from foreclosure property, a 100 percent tax is 
     imposed on the net income of a REIT from ``prohibited 
     transactions'' (sec. 857(b)(6)). A prohibited transaction is 
     the sale or other disposition of property described in 
     section 1221(1) of the Code (property held for sale in the 
     ordinary course of a trade or business) other than 
     foreclosure property. Thus, the 100 percent tax on prohibited 
     transactions helps to ensure that the REIT is a passive 
     entity and may not engage in ordinary retailing activities 
     such as sales to customers of condominium units or subdivided 
     lots in a development project. A safe harbor is provided for 
     certain sales that otherwise might be considered prohibited 
     transactions (sec. 857(b)(6)(C)). The safe harbor is limited 
     to seven or fewer sales a year or, alternatively, any number 
     of sales provided that the aggregate adjusted basis of the 
     property sold does not exceed 10 percent of the aggregate 
     basis of all the REIT's assets at the beginning of the REIT's 
     taxable year.
     Requirements for REIT status
       A REIT must satisfy four tests on a year-by-year basis: 
     organizational structure, source of income, nature of assets, 
     and distribution of income. These tests are intended to allow 
     conduit treatment in circumstances in which a corporate tax 
     otherwise would be imposed, only if there really is a pooling 
     of investment arrangement that is evidenced by its 
     organizational structure, if its investments are basically in 
     real estate assets, and if its income is passive income from 
     real estate investment, as contrasted with income from the 
     operation of business involving real estate. In addition, 
     substantially all of the entity's income must be passed 
     through to its shareholders on a current basis.
     Organizational structure requirements
       To qualify as a REIT, an entity must be for its entire 
     taxable year a corporation or an unincorporated trust or 
     association that would be taxable as a domestic corporation 
     but for the REIT provisions, and must be managed by one or 
     more trustees (sec. 856(a)). The beneficial ownership of the 
     entity must be evidenced by transferable shares or 
     certificates of ownership. Except for the first taxable year 
     for which an entity elects to be a REIT, the beneficial 
     ownership of the entity must be held by 100 or more persons, 
     and the entity may not be so closely held by individuals that 
     it would be treated as a personal holding company if all its 
     adjusted gross income constituted personal holding company 
     income. A REIT is disqualified for any year in which it does 
     not comply with regulations to ascertain the actual ownership 
     of the REIT's outstanding shares. Treasury regulations 
     require that the entity request information from certain 
     shareholders regarding shares directly or indirectly owned by 
     them.
     Income requirements
       Overview
       In order for an entity to qualify as a REIT, at least 95 
     percent of its gross income generally must be derived from 
     certain passive sources (the ``95-percent test''). In 
     addition, at least 75 percent of its income generally must be 
     from certain real estate sources (the ``75-percent test''), 
     including rents from real property.
       In addition, less than 30 percent of the entity's gross 
     income may be derived from gain from the sale or other 
     disposition of stock or securities held for less than one 
     year, real property held less than four years (other than 
     foreclosure property, or property subject to an 
     involuntary conversion within the

[[Page H6589]]

     meaning of sec. 1033), and property that is sold or 
     disposed of in a prohibited transaction (sec. 856(c)(4)).
       Definition of rents from real property
       For purposes of the income requirements, rents from real 
     property generally include: (1) rents from interests in real 
     property; (2) charges for services customarily rendered or 
     furnished in connection with the rental of real property, 
     whether or not such charges are separately stated; and (3) 
     rent attributable to personal property that is leased under 
     or in connection with a lease of real property, but only if 
     the rent attributable to such personal property does not 
     exceed 15 percent of the total rent for the year under the 
     lease (sec. 856(d)(1)).
       Services provided to tenants are regarded as customary if, 
     in the geographic market within which the building is 
     located, tenants in buildings that are of a similar class 
     (for example, luxury apartment buildings) are customarily 
     provided with the service. The furnishing of water, heat, 
     light, and air conditioning, the cleaning of windows, public 
     entrances, exits, and lobbies, the performance of general 
     maintenance, and of janitorial and cleaning services, the 
     collection of trash, the furnishing of elevator services, 
     telephone answering services, incidental storage space, 
     laundry equipment, watchman or guard service, parking 
     facilities and swimming pool facilities are examples of 
     services that are customarily furnished to tenants of a 
     particular class of buildings in many geographical marketing 
     areas (Treas. Reg. sec. 1.856-4(b)).
       Exclusion of rents from related tenants
       Amounts are not treated as qualified rent if they are 
     received from corporate or noncorporate tenants in which the 
     REIT, directly or indirectly, has an ownership interest of 10 
     percent or more (sec. 856(d)(2)(B)).
       Exclusion of rents where services to tenants are performed 
           by related contractors
       Where a REIT furnishes or renders services to the tenants, 
     amounts received or accrued with respect to such property 
     generally are not treated as qualifying rents unless the 
     services are furnished through an independent contractor 
     (sec. 856(d)(2)(C)). A REIT may furnish or render a service 
     directly, however, if the service would not generate 
     unrelated business taxable income under section 512(b)(3) if 
     provided by an organization described in section 511(a)(2). 
     In general, an independent contractor is a person who does 
     not own more than a 35 percent interest in the REIT (sec. 
     856(d)(3)(A)), and in which no more than a 35 percent 
     interest is held by persons with a 35 percent or greater 
     interest in the REIT (sec. 856(d)(3)(B)).
       Constructive ownership rules involving corporations
       For purposes of determining the REIT's ownership interest 
     in a tenant and whether a contractor is independent, the 
     attribution rules of section 318 apply, except that 10 
     percent is substituted for 50 percent where it appears in 
     subparagraph (C) of section 318(a)(2) and 318(a)(3) (sec. 
     856(d)(5)). Thus, under section 318(a)(2)(C) (as so 
     modified), if 10 or more percent of a REIT or other 
     corporation is owned, directly or indirectly, by or for a 
     person, that person is treated as owning that person's 
     proportionate share of any stock owned directly or indirectly 
     by that corporation.
       Constructive ownership rules involving partnerships
       Under section 318, stock owned, directly or indirectly, by 
     or for a partnership is considered owned proportionately by 
     its partners (sec. 318(a)(2)(A)). In addition, stock owned, 
     directly or indirectly, by or for a partner is considered 
     owned by the partnership (sec. 318(a)(3)(A)). However, stock 
     constructively owned by a partnership is not considered as 
     owned for purposes of being constructively owned by partners 
     (sec. 318(a)(5)(C)). The following examples illustrate the 
     application of these provisions for purposes of the related 
     tenant and independent contractor rules.
       Constructive ownership of tenant
       If a REIT owns a 10 percent or greater interest in a person 
     that is a tenant of the REIT, rents paid by that person to 
     the REIT are not qualifying rents to the REIT (sec. 
     856(d)(2)(B)). Example #1.--If 10 percent or more of a REIT's 
     shares are owned by a partnership and a partner owning a one-
     percent interest in that partnership also owns a 10-percent 
     or greater interest in a person that is a tenant of the REIT, 
     rents paid by the tenant to the REIT are not qualifying rents 
     to the REIT; the 10-percent or greater interest in the tenant 
     is considered owned by the partnership (sec. 318(a)(3)(A)) 
     and in turn by the REIT (secs. 318(a)(3)(C) and 856(d)(5)). 
     Example #2.--If a REIT owns a 30-percent interest in a 
     partnership that in turn owns a 40-percent interest in a 
     person that is a tenant of the REIT, rents paid by that 
     person to the REIT are not qualifying rents to the REIT 
     because the REIT is considered to own more than 10 percent of 
     the tenant (sec. 318(a)(2)(A)). Example #3.--If 10 percent or 
     more of a REIT's shares are owned by persons who are 50-
     percent partners in a partnership whose other partners own 
     the entirety of the interests in a tenant of the REIT, none 
     of the interests in the tenant are considered owned by the 
     partners who own interests in the REIT (sec. 318(a)(5)(C)).
       Constructive ownership of contractor
       If a person providing services to tenants of the REIT owns 
     a greater-than-35-percent interest in the REIT, or if another 
     person owns a greater-than-35-percent interest in both the 
     REIT and a person providing services, amounts received or 
     accrued by the REIT with respect to the property are not 
     qualifying rents because the service provider does not 
     qualify as an independent contractor (sec. 856(d)(3)). 
     Example #4.--If more than 35 percent of a REIT's shares are 
     owned by a partnership and a partner owning a one-percent 
     interest in that partnership also owns a greater-than-35-
     percent interest in a contractor, that person will not be 
     considered an independent contractor because the partnership 
     owns more than 35 percent of the REIT's shares and will also 
     be considered to own a greater-than-35-percent interest in 
     the contractor (sec. 318(a)(3)A)). Example #5.--If more 
     than 35 percent of a REIT's shares are owned by a person 
     who owns a one-percent interest in a partnership and 
     another one-percent partner in that partnership owns more 
     than 35 percent of the interests in a contractor, the 
     independent contractor definition will not be met because 
     the partnership will be considered to own more than 35 
     percent interests in both the REIT and the contractor 
     (sec. 318 (a)(3)(A)).
       Hedging instruments
       Interest rate swaps or cap agreements that protect a REIT 
     from interest rate fluctuations on variable rate debt 
     incurred to acquire or carry real property are treated as 
     securities under the 30-percent test and payments under these 
     agreements are treated as qualifying under the 95-percent 
     test (sec. 856(c)(6)(G)).
       Treatment of shared appreciation mortgages
       For purposes of the income requirements for qualification 
     as a REIT, and for purposes of the prohibited transaction 
     provisions, any income derived from a ``shared appreciation 
     provision'' is treated as gain recognized on the sale of the 
     ``secured property.'' For these purposes, a shared 
     appreciation provision is any provision that is in connection 
     with an obligation that is held by the REIT and secured by an 
     interest in real property, which provision entitles the REIT 
     to receive a specified portion of any gain realized on the 
     sale or exchange of such real property (or of any gain that 
     would be realized if the property were sold on a specified 
     date). Secured property for these purposes means the real 
     property that secures the obligation that has the shared 
     appreciation provision.
       In addition, for purposes of the income requirements for 
     qualification as a REIT, and for purposes of the prohibited 
     transactions provisions, the REIT is treated as holding the 
     secured property for the period during which it held the 
     shared appreciation provision (or, if shorter, the period 
     during which the secured property was held by the person 
     holding such property), and the secured property is treated 
     as property described in section 1221(1) if it is such 
     property in the hands of the obligor on the obligation to 
     which the shared appreciation provision relates (or if it 
     would be such property if held by the REIT). For purposes of 
     the prohibited transaction safe harbor, the REIT is treated 
     as having sold the secured property at the time that it 
     recognizes income on account of the shared appreciation 
     provision, and any expenditures made by the holder of the 
     secured property are treated as made by the REIT.
     Asset requirements
       To satisfy the asset requirements to qualify for treatment 
     as a REIT, at the close of each quarter of its taxable year, 
     an entity must have at least 75 percent of the value of its 
     assets invested in real estate assets, cash and cash items, 
     and government securities (sec. 856(c)(5)(A)). Moreover, not 
     more than 25 percent of the value of the entity's assets can 
     be invested in securities of any one issuer (other than 
     government securities and other securities described in the 
     preceding sentence). Further, these securities may not 
     comprise more than five percent of the entity's assets or 
     more than 10 percent of the outstanding voting securities of 
     such issuer (sec. 856(c)(5)(B)). The term real estate assets 
     is defined to mean real property (including interests in real 
     property and mortgages on real property) and interests in 
     REITs (sec. 856(c)(6)(B)).
     REIT subsidiaries
       Under present law, all the assets, liabilities, and items 
     of income, deduction, and credit of a ``qualified REIT 
     subsidiary'' are treated as the assets, liabilities, and 
     respective items of the REIT that owns the stock of the 
     qualified REIT subsidiary. A subsidiary of a REIT is a 
     qualified REIT subsidiary if and only if 100 percent of the 
     subsidiary's stock is owned by the REIT at all times that the 
     subsidiary is in existence. If at any time the REIT ceases to 
     own 100 percent of the stock of the subsidiary, or if the 
     REIT ceases to qualify for (or revokes an election of) REIT 
     status, such subsidiary is treated as a new corporation that 
     acquired all of its assets in exchange for its stock (and 
     assumption of liabilities) immediately before the time that 
     the REIT ceased to own 100 percent of the subsidiary's stock, 
     or ceased to be a REIT as the case may be.
     Distribution requirements
       To satisfy the distribution requirement, a REIT must 
     distribute as dividends to its shareholders during the 
     taxable year an amount equal to or exceeding (i) the sum of 
     95 percent of its REITTI other than net capital gain income 
     and 95 percent of the excess of its net income from 
     foreclosure property over the tax imposed on that income 
     minus (ii) certain excess noncash income. Excess noncash 
     items include (1) the excess of the

[[Page H6590]]

     amounts that the REIT is required to include in income under 
     section 467 with respect to certain rental agreements 
     involving deferred rents, over the amounts that the REIT 
     otherwise would recognize under its regular method of 
     accounting, (2) in the case of a REIT using the cash method 
     of accounting, the excess of the amount of original issue 
     discount and coupon interest that the REIT is required to 
     take into account with respect to a loan to which section 
     1274 applies, over the amount of money and fair market value 
     of other property received with respect to the loan, and (3) 
     income arising from the disposition of a real estate asset in 
     certain transactions that failed to qualify as like-kind 
     exchanges under section 1031.

                               House Bill

     Overview
       The House bill modifies many of the provisions relating to 
     the requirements for qualification as, and the taxation of, a 
     REIT. In particular, the modifications relate to the general 
     requirements for qualification as a REIT, the taxation of a 
     REIT, the income requirements for qualification as a REIT, 
     and certain other provisions.
     Alterative penalty for failure to make requests of 
         shareholders (sec. 1251 of the House bill)
       The House bill replaces the rule that disqualifies a REIT 
     for any year in which the REIT failed to comply with Treasury 
     regulations to ascertain its ownership, with an intermediate 
     penalty for failing to do so. The penalty is $25,000 ($50,000 
     for intentional violations) for any year in which the REIT 
     did not comply with the ownership regulations. The REIT also 
     is required, when requested by the IRS, to send curative 
     demand letters.
       In addition, a REIT that complied with the Treasury 
     regulations for ascertaining its ownership, and which did not 
     know, or have reason to know, that it was so closely held as 
     to be classified as a personal holding company, is treated as 
     meeting the requirement that it not be a personal holding 
     company.
     De minimis rule for tenant service income (sec. 1252 of the 
         House bill)
       The House bill permits a REIT to render a de minimis amount 
     of impermissible services to tenants, or in connection with 
     the management of property, and still treat amounts received 
     with respect to that property as rent. The value of the 
     impermissible services may not exceed one percent of the 
     gross income from the property. For these purposes, the 
     services may not be valued at less than 150 percent of the 
     REIT's direct cost of the services.
     Attribution rules applicable to tenant ownership (sec. 1253 
         of the House bill)
       The House bill modifies the application the rule 
     attributing ownership from partners to partnerships (sec. 
     318(a)(3)(A)) for purposes of defining non-qualifying rent 
     from related persons (sec. 856(d)(2)), so that attribution 
     occurs only when a partner owns directly or indirectly a 25-
     percent or greater interest in the partnership. Thus, a REIT 
     and a tenant will not be treated as related (and, therefore, 
     rents paid by the tenant to the REIT will not be treated as 
     non-qualifying rents) if the REIT's shares are owned by a 
     partnership and a partner owning a directly and indirectly 
     less-than-25-percent interest in that partnership also owns 
     an interest in the tenant. The related tenant rule (sec. 
     856(d)(2)(B)) also will not be violated where owners of the 
     REIT and owners of the tenant are partners in a partnership 
     and either the owners of the REIT or the owners of the tenant 
     are directly and indirectly less-than-25-percent partners in 
     the partnership.
     Credit for tax paid by REIT on retained capital gains (sec. 
         1254 of the House bill)
       The House bill permits a REIT to elect to retain and pay 
     income tax on net long-term capital gains it received during 
     the tax year, just as a RIC is permitted under present law. 
     Thus, if a REIT made this election, the REIT shareholders 
     would include in their income as long-term capital gains 
     their proportionate share of the undistributed long-term 
     capital gains as designated by the REIT. The shareholder 
     would be deemed to have paid the shareholder's share of the 
     tax, which would be credited or refunded to the shareholder. 
     Also, the basis of the shareholder's shares would be 
     increased by the amount of the undistributed long-term 
     capital gains (less the amount of capital gains tax paid by 
     the REIT) included in the shareholder's long-term capital 
     gains.
     Repeal of 30-percent gross income requirement (sec. 1255 of 
         the House bill)
       The House bill repeals the rule that requires less than 30 
     percent of a REIT's gross income be derived from gain from 
     the sale or other disposition of stock or securities held for 
     less than one year, certain real property held less than four 
     years, and property that is sold or disposed of in a 
     prohibited transaction.
     Modification of earnings and profits for determining whether 
         REIT has earnings and profits from non-REIT year (sec. 
         1256 of the House bill)
       The House bill changes the ordering rule for purposes of 
     the requirement that newly-electing REITs distribute earnings 
     and profits that were accumulated in non-REIT years. 
     Distributions of accumulated earnings and profits generally 
     are treated as made from the entity's earliest accumulated 
     earnings and profits, rather than the most recently 
     accumulated earnings and profits. These distributions are not 
     treated as distributions for purposes of calculating the 
     dividends paid deduction.
     Treatment of foreclosure property (sec. 1257 of the House 
         bill)
       The House bill lengthens the original grace period for 
     foreclosure property until the last day of the third full 
     taxable year following the election. The grace period also 
     could be extended for an additional three years by filing a 
     request to the IRS. A REIT could revoke an election to treat 
     property as foreclosure property for any taxable year by 
     filing a revocation on or before its due date for filing its 
     tax return.
       In addition, the House bill conforms the definition of 
     independent contractor for purposes of the foreclosure 
     property rule (sec. 856(e)(4)(C)) to the definition of 
     independent contractor for purposes of the general rules 
     (sec. 856(d)(2)(C)).
     Payments under hedging instruments (sec. 1258 of the House 
         bill)
       The House bill treats income from all hedges that reduce 
     the interest rate risk of REIT liabilities, not just from 
     interest rate swaps and caps, as qualifying income under the 
     95-percent test. Thus, payments to a REIT under an interest 
     rate swap, cap agreement, option, futures contract, forward 
     rate agreement or any similar financial instrument entered 
     into by the REIT to hedge its indebtedness incurred or to be 
     incurred (and any gain from the sale or other disposition of 
     these instruments) are treated as qualifying income for 
     purposes of the 95-percent test.
     Excess noncash income (sec. 1259 of the House bill)
       The House bill (1) expands the class of excess noncash 
     items that are not subject to the distribution requirement to 
     include income from the cancellation of indebtedness and (2) 
     extends the treatment of original issue discount and coupon 
     interest as excess noncash items to REITs that use an accrual 
     method of taxation.
     Prohibited transaction safe harbor (sec. 1260 of the House 
         bill)
       The House bill excludes from the prohibited sales rules 
     property that was involuntarily converted.
     Shared appreciation mortgages (sec. 1261 of the House bill)
       The House bill provides that interest received on a shared 
     appreciation mortgage is not subject to the tax on prohibited 
     transactions where the property subject to the mortgage is 
     sold within four years of the REIT's acquisition of the 
     mortgage pursuant to a bankruptcy plan of the mortgagor 
     unless the REIT acquired the mortgage knew or had reason to 
     know that the property subject to the mortgage would be sold 
     in a bankruptcy proceeding.
     Wholly-owned REIT subsidiaries (sec. 1262 of the House bill)
       The House bill permits any corporation wholly-owned by a 
     REIT to be treated as a qualified subsidiary, regardless of 
     whether the corporation had always been owned by the REIT. 
     Where the REIT acquired an existing corporation, any such 
     corporation is treated as being liquidated as of the time of 
     acquisition by the REIT and then reincorporated (thus, any of 
     the subsidiary's pre-REIT built-in gain would be subject to 
     tax under the normal rules of sec. 337). In addition, any 
     pre-REIT earnings and profits of the subsidiary must be 
     distributed before the end of the REIT's taxable year.
     Effective date
       The House bill is effective for taxable years beginning 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is identical to the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. In addition, the conference agreement 
     extends, to the definition of an independent contractor under 
     section 856(d)(3), the modification to the attribution to 
     partnerships of section 318(a)(3)(A) so that attribution 
     occurs only when a partner owns a 25-percent or greater 
     interest in the partnership. Thus, a person providing 
     services will not fail to be an independent contractor (and, 
     therefore, amounts received or accrued by the REIT with 
     respect to the property will not be treated as non-qualifying 
     rents) where the REIT's shares are owned by a partnership and 
     a partner owning a directly and indirectly a less-than-25-
     percent interest in the partnership also owns an interest in 
     a contractor. Similarly, a contractor will not fail to be an 
     independent contractor where owners of the REIT and owners of 
     the contractor are partners in a partnership and either the 
     owners of the REIT or owners of the tenant are directly and 
     indirectly less-than-25-percent partners in the partnership.
       Effective date.--The conference agreement is effective for 
     taxable years beginning after the date of enactment.

 E. Repeal the ``Short-Short'' Test for Regulated Investment Companies 
  (sec. 1271 of the House bill and sec. 1071 of the Senate amendment)

                              Present Law

       To qualify as a regulated investment company (``RIC''), a 
     company must derive less than 30 percent of its gross income 
     from the sale or other disposition of stock or securities 
     held for less than 3 months (the ``30-percent test'' or 
     ``short-short rule'').

[[Page H6591]]

                               House Bill

       The 30-percent test (or short-short rule) is repealed 
     effective for taxable years ending after the date of 
     enactment.

                            Senate Amendment

       The 30-percent test (or short-short rule) is repealed 
     effective for taxable years beginning after the December 31, 
     1997.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment effective for taxable years beginning after 
     the date of enactment.

                        F. Taxpayer Protections

     1. Provide reasonable cause exception for additional 
         penalties (sec. 1281 of the House bill and sec. 1081 of 
         the Senate amendment)

                              Present Law

       Many penalties in the Code may be waived if the taxpayer 
     establishes reasonable cause. For example, the accuracy-
     related penalty (sec. 6662) may be waived with respect to any 
     item if the taxpayer establishes reasonable cause for his 
     treatment of the item and that he acted in good faith (sec. 
     6664(c)).

                               House Bill

       The House bill provides that the following penalties may be 
     waived if the failure is shown to be due to reasonable cause 
     and not willful neglect:
       (1) the penalty for failure to make a report in connection 
     with deductible employee contributions to a retirement 
     savings plan (sec. 6652(g));
       (2) the penalty for failure to make a report as to certain 
     small business stock (sec. 6652(k));
       (3) the penalty for failure of a foreign corporation to 
     file a return of personal holding company tax (sec. 6683); 
     and
       (4) the penalty for failure to make required payments for 
     entities electing not to have the required taxable year (sec. 
     7519).
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Clarification of period for filing claims for refunds 
         (sec. 1282 of the House bill and sec. 1082 of the Senate 
         amendment)

                              Present Law

       The Code contains a series of limitations on tax refunds. 
     Section 6511 of the Code provides both a limitation on the 
     time period in which a claim for refund can be made (section 
     6511(a)) and a limitation on the amount that can be allowed 
     as a refund (section 6511(b)). Section 6511(a) provides the 
     general rule that a claim for refund must be filed within 3 
     years of the date of the return or 2 years of the date of 
     payment of the taxes at issue, whichever is later. Section 
     6511(b) limits the refund amount that can be covered: if a 
     return was filed, a taxpayer can recover amounts paid within 
     2 years before the claim. Section 6512(b)(3) incorporates 
     these rules where taxpayers who challenge deficiency notices 
     in Tax Court are found to be entitled to refunds.
       In Commissioner v. Lundy, 116 S. Ct. 647 (1996), the 
     taxpayer had not filed a return, but received a notice of 
     deficiency within 3 years after the date the return was due 
     and challenged the proposed deficiency in Tax Court. The 
     Supreme Court held that the taxpayer could not recover 
     overpayments attributable to withholding during the tax year, 
     because no return was filed and the 2-year ``look back'' rule 
     applied. Since overwithheld amounts are deemed paid as of the 
     date the taxpayer's return was first due (i.e., more than 2 
     years before the notice of deficiency was issued), such 
     overpayments could not be recovered. By contrast, if the same 
     taxpayer had filed a return on the date the notice of 
     deficiency was issued, and then claimed a refund, the 3-year 
     ``look back'' rule would apply, and the taxpayer could have 
     obtained a refund of the overwithheld amounts.

                               House Bill

       The House bill permits taxpayers who initially fail to file 
     a return, but who receive a notice of deficiency and file 
     suit to contest it in Tax Court during the third year after 
     the return due date, to obtain a refund of excessive amounts 
     paid within the 3-year period prior to the date of the 
     deficiency notice.
       Effective date.--The provision applies to claims for refund 
     with respect to tax years ending after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Repeal of authority to disclose whether a prospective 
         juror has been audited (sec. 1283 of the House bill and 
         sec. 1083 of the Senate amendment)

                              Present Law

       In connection with a civil or criminal tax proceeding to 
     which the United States is a party, the Secretary must 
     disclose, upon the written request of either party to the 
     lawsuit, whether an individual who is a prospective juror has 
     or has not been the subject of an audit or other tax 
     investigation by the Internal Revenue Service (sec. 
     6103(h)(5)).
       This disclosure requirement, as it has been interpreted by 
     several recent court decisions, has created significant 
     difficulties in the civil and criminal tax litigation 
     process. First, the litigation process can be substantially 
     slowed. It can take the Secretary a considerable period of 
     time to compile the information necessary for a response 
     (some courts have required searches going back as far as 25 
     years). Second, providing early release of the list of 
     potential jurors to defendants (which several recent court 
     decisions have required, to permit defendants to obtain 
     disclosure of the information from the Secretary) can provide 
     an opportunity for harassment and intimidation of potential 
     jurors in organized crime, drug, and some tax protester 
     cases. Third, significant judicial resources have been 
     expended in interpreting this procedural requirement that 
     might better be spent resolving substantive disputes. Fourth, 
     differing judicial interpretations of this provision have 
     caused confusion. In some instances, defendants convicted of 
     criminal tax offenses have obtained reversals of those 
     convictions because of failures to comply fully with this 
     provision.

                               House Bill

       The House bill repeals the requirement that the Secretary 
     disclose, upon the written request of either party to the 
     lawsuit, whether an individual who is a prospective juror has 
     or has not been the subject of an audit or other tax 
     investigation by the Internal Revenue Service.
       Effective date.--The provision is effective for judicial 
     proceedings commenced after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Clarify statute of limitations for items from pass-through 
         entities (sec. 1284 of the House bill and sec. 1084 of 
         the Senate amendment)

                              Present Law

       Pass-through entities (such as S corporations, 
     partnerships, and certain trusts) generally are not subject 
     to income tax on their taxable income. Instead, these 
     entities file information returns and the entities' 
     shareholders (or beneficial owners) report their pro rata 
     share of the gross income and are liable for any taxes due.
       Some believe that, prior to 1993, it may have been unclear 
     as to whether the statute of limitations for adjustments that 
     arise from distributions from pass-through entities should be 
     applied at the entity or individual level (i.e., whether the 
     3-year statute of limitations for assessments runs from the 
     time that the entity files its information return or from the 
     time that a shareholder timely files his or her income tax 
     return). In 1993, the Supreme Court held that the limitations 
     period for assessing the income tax liability of an S 
     corporation shareholder runs from the date the shareholder's 
     return is filed (Bufferd v. Comm., 113 S. Ct. 927 (1993)).

                               House Bill

       The House bill clarifies that the return that starts the 
     running of the statute of limitations for a taxpayer is the 
     return of the taxpayer and not the return of another person 
     from whom the taxpayer has received an item of income, gain, 
     loss, deduction, or credit.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Awarding of administrative costs and attorneys fees (sec. 
         1285 of the House bill)

                              Present Law

       Any person who substantially prevails in any action brought 
     by or against the United States in connection with the 
     determination, collection, or refund of any tax, interest, or 
     penalty may be awarded reasonable administrative costs 
     incurred before the IRS and reasonable litigation costs 
     incurred in connection with any court proceeding.
       No time limit is specified for the taxpayer to apply to the 
     IRS for an award of administrative costs. In addition, no 
     time limit is specified for a taxpayer to appeal to the Tax 
     Court an IRS decision denying an award of administrative 
     costs. Finally, the procedural rules for adjudicating a 
     denial of administrative costs are unclear.

                               House Bill

       The House bill provides that a taxpayer who seeks an award 
     of administrative costs must apply for such costs within 90 
     days of the date on which the taxpayer was determined to be 
     a prevailing party. The House bill also provides that a 
     taxpayer who seeks to appeal an IRS denial of an 
     administrative cost award must petition the Tax Court 
     within 90 days after the date that the IRS mails the 
     denial notice.
       The House bill clarifies that dispositions by the Tax Court 
     of petitions relating only to administrative costs are to be 
     reviewed in the same manner as other decisions of the Tax 
     Court.
       Effective date.--The provision is effective with respect to 
     costs incurred in civil actions or proceedings commenced 
     after the date of enactment.

[[Page H6592]]

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

 6. Prohibition on browsing (secs. 1286 and 1287 of the House bill and 
              secs. 1085 and 1086 of the Senate amendment)

                              Present Law

       The Internal Revenue Code prohibits disclosure of tax 
     returns and return information, except to the extent 
     specifically authorized by the Internal Revenue Code (sec. 
     6103). Unauthorized willful disclosure is a felony punishable 
     by a fine not exceeding $5,000 or imprisonment of not more 
     than five years, or both (sec. 7213). An action for civil 
     damages also may be brought for unauthorized disclosure (sec. 
     7431).
       There is no explicit criminal penalty in the Internal 
     Revenue Code for unauthorized inspection (absent subsequent 
     disclosure) of tax returns and return information. Such 
     inspection is, however, explicitly prohibited by the Internal 
     Revenue Service (``IRS'').14 In a recent case, an 
     individual was convicted of violating the Federal wire fraud 
     statute (18 U.S.C. 1343 and 1346) and a Federal computer 
     fraud statute (18 U.S.C. 1030) for unauthorized inspection. 
     However, the U.S. First Circuit Court of Appeals overturned 
     this conviction.15 Unauthorized inspection of 
     information of any department or agency of the United States 
     (including the IRS) via computer was made a crime under 18 
     U.S.C. 1030 by the Economic Espionage Act of 
     1996.16 This provision does not apply to 
     unauthorized inspection of paper documents.
---------------------------------------------------------------------------
     \14\ IRS Declaration of Privacy Principles, May 9, 1994.
     \15\ U.S. v. Czubinski, DTR 2/25/97, p. K-2.
     \16\ P.L. 104-294, sec. 201 (October 11, 1996).
---------------------------------------------------------------------------

                               House Bill

                           Criminal penalties

       The House bill creates a new criminal penalty in the 
     Internal Revenue Code. The penalty is imposed for willful 
     inspection (except as authorized by the Code) of any tax 
     return or return information by any Federal employee or IRS 
     contractor. The penalty also applies to willful inspection 
     (except as authorized) by any State employee or other person 
     who acquired the tax return or return information under 
     specific provisions of section 6103. Upon conviction, the 
     penalty is a fine in any amount not exceeding 
     $1,000,17 or imprisonment of not more than 1 year, 
     or both, together with the costs of prosecution. In addition, 
     upon conviction, an officer or employee of the United States 
     would be dismissed from office or discharged from employment.
---------------------------------------------------------------------------
     \17\ Pursuant to 18 U.S.C. sec. 3571 (added by the Sentencing 
     Reform Act of 1984), the amount of the fine is not more than 
     the greater of the amount specified in this new Code section 
     or $100,000.
---------------------------------------------------------------------------
       The Congress views any unauthorized inspection of tax 
     returns or return information as a very serious offense; this 
     new criminal penalty reflects that view. The Congress also 
     believes that unauthorized inspection warrants very serious 
     personnel sanctions against IRS employees who engage in 
     unauthorized inspection, and that it is appropriate to fire 
     employees who do this.

                             Civil damages

       The House bill amends the provision providing for civil 
     damages for unauthorized disclosure by also providing for 
     civil damages for unauthorized inspection. Damages are 
     available for unauthorized inspection that occurs either 
     knowingly or by reason of negligence. Accidental or 
     inadvertent inspection that may occur (such as, for example, 
     by making an error in typing in a TIN) would not be subject 
     to damages because it would not meet this standard. The House 
     bill also provides that no damages are available to a 
     taxpayer if that taxpayer requested the inspection or 
     disclosure.
       The House bill also requires that, if any person is 
     criminally charged by indictment or information with 
     inspection or disclosure of a taxpayer's return or return 
     information in violation of section 7213(a) or (b), section 
     7213A (as added by the bill), or 18 USC section 
     1030(a)(2)(B), the Secretary notify that taxpayer as soon as 
     practicable of the inspection or disclosure.
       Effective date.--The provision is effective for violations 
     occurring on or after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement does not include these provisions, 
     because they are identical to the provisions of H.R. 1226, 
     which passed the House on April 15, 1997, and which passed 
     the Senate on July 23, 1997, clearing the measure for the 
     President's signature.

        XIII. ESTATE, GIFT, AND TRUST SIMPLIFICATION PROVISIONS

     1. Eliminate gift tax filing requirements for gifts to 
         charities (sec. 1301 of the House bill and sec. 1101 of 
         the Senate amendment)

                              Present Law

       A gift tax generally is imposed on lifetime transfers of 
     property by gift (sec. 2501). In computing the amount of 
     taxable gifts made during a calendar year, a taxpayer 
     generally may deduct the amount of any gifts made to a 
     charity (sec. 2522). Generally, this charitable gift 
     deduction is available for outright gifts to charity, as well 
     as gifts of certain partial interests in property (such as a 
     remainder interest). A gift of a partial interest in property 
     must be in a prescribed form in order to qualify for the 
     deduction.
       Individuals who make gifts in excess of $10,000 to any one 
     donee during the calendar year generally are required to file 
     a gift tax return (sec. 6019). This filing requirement 
     applies to all gifts, whether charitable or noncharitable, 
     and whether or not the gift qualifies for a gift tax 
     charitable deduction. Thus, under current law, a gift tax 
     return is required to be filed for gifts to charity in excess 
     of $10,000, even though no gift tax is payable on the 
     transfer.

                               House Bill

       The House bill provides that gifts to charity are not 
     subject to the gift tax filing requirements of section 6019, 
     as long as the entire value of the transferred property 
     qualifies for the gift tax charitable deduction under section 
     2522. The filing requirements for gifts of partial interests 
     in property remain unchanged.
       Effective date.--The provision is effective for gifts made 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with a technical clarification that the 
     property given to charity must be the donor's entire interest 
     in the property.
     2. Clarification of waiver of certain rights of recovery 
         (sec. 1302 of the House bill and sec. 1102 of the Senate 
         amendment)

                              Present Law

       For estate and gift tax purposes, a marital deduction is 
     allowed for qualified terminable interest property (QTIP). 
     Such property generally is included in the surviving spouse's 
     gross estate upon his or her death. The surviving spouse's 
     estate is entitled to recover the portion of the estate tax 
     attributable to inclusion of QTIP from the person receiving 
     the property, unless the spouse directs otherwise by will 
     (sec. 2207A). For this purpose, a will provision specifying 
     that all taxes shall be paid by the estate is sufficient to 
     waive the right of recovery.
       A decedent's gross estate includes the value of previously 
     transferred property in which the decedent retains enjoyment 
     or the right to income (sec. 2036). The estate is entitled to 
     recover from the person receiving the property a portion of 
     the estate tax attributable to the inclusion (sec. 2207B). 
     This right may be waived only by a provision in the will (or 
     revocable trust) specifically referring to section 2207B.

                               House Bill

       The House bill provides that the right of recovery with 
     respect to QTIP is waived only to the extent that language in 
     the decedent's will or revocable trust specifically so 
     indicates (e.g., by a specific reference to QTIP, the QTIP 
     trust, section 2044, or section 2207A). Thus, a general 
     provision specifying that all taxes be paid by the estate is 
     no longer sufficient to waive the right of recovery.
       The House bill also provides that the right of contribution 
     for property over which the decedent retained enjoyment or 
     the right to income is waived by a specific indication in the 
     decedent's will or revocable trust, but specific reference to 
     section 2207B is no longer required.
       Effective date.--The provision applies to decedents dying 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Transitional rule under section 2056A (sec. 1303 of the 
         House bill and sec. 1103 of the Senate amendment)

                              Present Law

        A ``marital deduction'' generally is allowed for estate 
     and gift tax purposes for the value of property passing to a 
     spouse. The Technical and Miscellaneous Revenue Act of 1988 
     (``TAMRA'') denied the marital deduction for property passing 
     to an alien spouse outside a qualified domestic trust 
     (``QDT''). An estate tax generally is imposed on corpus 
     distributions from a QDT.
       TAMRA defined a QDT as a trust that, among other things, 
     required all trustees be U.S. citizens or domestic 
     corporations. This provision was modified in the Omnibus 
     Budget Reconciliation Acts of 1989 and 1990 to require that 
     at least one trustee be a U.S. citizen or domestic 
     corporation and that no corpus distribution be made unless 
     such trustee has the right to withhold any estate tax imposed 
     on the distribution (the ``withholding requirement'').

                               House Bill

       The House bill provides that certain trusts created before 
     the enactment of the Omnibus Budget Reconciliation Act of 
     1990 are treated as satisfying the withholding requirement if 
     the governing instruments require that all trustees be U.S. 
     citizens or domestic corporations.
       Effective date.--The provision applies as if included in 
     the Omnibus Budget Reconciliation Act of 1990.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

[[Page H6593]]

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Clarifications relating to disclaimers (sec. 1304 of the 
         House bill)

                              Present Law

       Historically, there must be acceptance of a gift in order 
     for the gift to be completed under State law and there is no 
     taxable gift for Federal gift tax purposes unless there is a 
     completed gift. Most States have rules that provide that, 
     where there is a disclaimer of a gift, the property passes to 
     the person who is entitled to the property had the 
     disclaiming party died before the purported transfer.
       In the Tax Reform Act of 1976, Congress provided a uniform 
     disclaimer rule (sec. 2518) that specified how and when a 
     disclaimer under State law must be made in order to be 
     effective for Federal transfer tax purposes. Under section 
     2518, a State law type disclaimer is effective for Federal 
     transfer tax purposes if it is an irrevocable and unqualified 
     refusal to accept an interest in property and certain other 
     requirements are satisfied. One of these other requirements 
     is that the disclaimer generally must be made in writing not 
     later than nine months after the transfer creating the 
     interest occurs. Section 2518 is not currently effective for 
     Federal tax purposes other than transfer taxes.
       In 1981, Congress added a rule to section 2518 that allowed 
     certain transfers of property to be treated as a qualified 
     disclaimer. In order to qualify, these transfer-type 
     disclaimers must be a written transfer of the disclaimant's 
     ``entire interest in the property'' to persons who would have 
     received the property had there been a valid disclaimer under 
     State law (sec. 2518(c)(3)). Like other disclaimers, the 
     transfer-type disclaimer generally must be made within nine 
     months of the transfer creating the interest.

                               House Bill

       The House bill allows a transfer-type disclaimer of an 
     ``undivided portion'' of the disclaimant transferor's 
     interest in property to qualify under section 2518. Also, the 
     House bill allows a spouse to make a qualified transfer-type 
     disclaimer where the disclaimed property is transferred to a 
     trust in which the disclaimant spouse has an interest (e.g., 
     a credit shelter trust). Further, the House bill provides 
     that a qualified disclaimer for transfer tax purposes under 
     section 2518 also is effective for Federal income tax 
     purposes (e.g., disclaimers of interests in annuities and 
     income in respect of a decedent).
       None of the foregoing provisions are intended to create an 
     inference regarding the Federal tax treatment of disclaimers 
     under present law.
       Effective date.--The provision applies to disclaimers made 
     after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

        5. Amend ``5 or 5 power'' (sec. 1305 of the House bill)

                              Present Law

       The exercise or release of a general power of appointment 
     generally is considered a gift by the person holding the 
     power (sec. 2514(b)). A special rule, however, provides that 
     the lapse of a power of appointment during the life of the 
     person holding the power is considered a release (and thus a 
     taxable gift) only to the extent that the value of the 
     property over which the power lapsed exceeds the greater of 
     $5,000 or five percent (``5 or 5 power'') of the value of the 
     assets of the trust (sec. 2514(e)). A similar provision 
     applies for purposes of estate taxation (sec. 2041(b)(2)).

                               House Bill

       The House bill increases the limitations in sections 
     2514(e) and 2041(b)(2) to the greater of $10,000 or 5 
     percent.
       Effective date.--The provision applies to lapses occurring 
     in taxable years beginning after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     6. Treatment for estate tax purposes of short-term 
         obligations held by nonresident aliens (sec. 1306 of the 
         House bill and sec. 1104 of the Senate amendment)

                              Present Law

       The United States imposes estate tax on assets of 
     noncitizen nondomiciliaries that were situated in the United 
     States at the time of the individual's death. Debt 
     obligations of a U.S. person, the United States, a political 
     subdivision of a State, or the District of Columbia are 
     considered property located within the United States if held 
     by a nonresident not a citizen of the United States (sec. 
     2014(c)).
       Special rules apply to treat certain bank deposits and debt 
     instruments the income from which qualifies for the bank 
     deposit interest exemption and the portfolio interest 
     exemption as property from without the United States despite 
     the fact that such items are obligations of a U.S. person, 
     the United States, a political subdivision of a State, or the 
     District of Columbia (sec. 2105(b)). Income from such items 
     is exempt from U.S. income tax in the hands of the 
     nonresident recipient (secs. 871(h) and 871(i)(2)(A)). The 
     effect of these special rules is to exclude these items from 
     the U.S. gross estate of a nonresident not a citizen of the 
     United States. However, because of an amendment to section 
     871(h) made by the Tax Reform Act of 1986, these special 
     rules no longer cover obligations that generate short-term 
     OID income despite the fact that such income is exempt from 
     U.S. income tax in the hands of the nonresident recipient 
     (sec. 871(g)(1)(B)(i)).

                               House Bill

       The House bill provides that any debt obligation, the 
     income from which would be eligible for the exemption for 
     short-term OID under section 871(g)(1)(B)(i) if such income 
     were received by the decedent on the date of his death, is 
     treated as property located outside of the United States in 
     determining the U.S. estate tax liability of a nonresident 
     not a U.S. citizen. No inference is intended with respect to 
     the estate tax treatment of such obligations under present 
     law.
       Effective date.--The provision is effective for estates of 
     decedents dying after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     7. Certain revocable trusts treated as part of estate (sec. 
         1307 of the House bill)

                              Present Law

       Both estates and revocable inter vivos trusts can function 
     to settle the affairs of a decedent and distribute assets to 
     heirs. In the case of revocable inter vivos trusts, the 
     grantor transfers property into a trust which is revocable 
     during his or her lifetime. Upon the grantor's death, the 
     power to revoke ceases and the trustee then performs the 
     settlement functions typically performed by the executor of 
     an estate. While both estates and revocable trusts perform 
     essentially the same function after the testator or grantor's 
     death, there are a number of ways in which an estate and a 
     revocable trust operate differently. First, there can be only 
     one estate per decedent while there can be more than one 
     revocable trust. Second, estates are in existence only for a 
     reasonable period of administration; revocable trusts can 
     perform the same settlement functions as an estate, but may 
     continue in existence thereafter as testamentary trusts.
       Numerous differences presently exist between the income tax 
     treatment of estates and revocable trusts, including: (1) 
     estates are allowed a charitable deduction for amounts 
     permanently set aside for charitable purposes while post 
     death revocable trusts are allowed a charitable deduction 
     only for amounts paid to charities; (2) the active 
     participation requirement the passive loss rules under 
     section 469 is waived in the case of estates (but not 
     revocable trusts) for two years after the owner's death; and 
     (3) estates (but not revocable trusts) can qualify for 
     section 194 amortization of reforestation expenditures.

                               House Bill

       The House bill provides an irrevocable election to treat a 
     qualified revocable trust as part of the decedent's estate 
     for Federal income tax purposes. This elective treatment is 
     effective from the date of the decedent's death until two 
     years after his or her death (if no estate tax return is 
     required) or, if later, six months after the final 
     determination of estate tax liability (if an estate tax 
     return is required). The election must be made by both the 
     executor of the decedent's estate (if any) and the trustee of 
     the revocable trust no later than the time required for 
     filing the income tax return of the estate for its first 
     taxable year, taking into account any extensions. A 
     conforming change is made to section 2652(b) for generation-
     skipping transfer tax purposes.
       For this purpose, a qualified revocable trust is any trust 
     (or portion thereof) which was treated under section 676 as 
     owned by the decedent with respect to whom the election is 
     being made, by reason of a power in the grantor (i.e., trusts 
     that are treated as owned by the decedent solely by reason of 
     a power in a nonadverse party would not qualify).
       The separate share rule (described below) generally will 
     apply when a qualified revocable trust is treated as part of 
     the decedent's estate.
       Effective date.--The provision applies to decedents dying 
     after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     8. Distributions during first 65 days of taxable year of 
         estate (sec. 1308 of the House bill and sec. 1105 of the 
         Senate amendment)

                              Present Law

       In general, trusts and estates are treated as conduits for 
     Federal income tax purposes; income received by a trust or 
     estate that is distributed to a beneficiary in the trust or 
     estate's taxable year ``ending with or within'' the taxable 
     year of the beneficiary is taxable to the beneficiary in that 
     year; income that is retained by the trust or estate is 
     initially taxable to the trust or estate. In

[[Page H6594]]

     the case of distributions of previously accumulated income by 
     trusts (but not estates), there may be additional tax under 
     the so-called ``throwback'' rules if the beneficiary to whom 
     the distributions were made has marginal rates higher than 
     those of the trust. Under the ``65-day rule,'' a trust may 
     elect to treat distributions paid within 65 days after the 
     close of its taxable year as paid on the last day of its 
     taxable year. The 65-day rule is not applicable to estates.

                               House Bill

       The House bill extends application of the 65-day rule to 
     distributions by estates. Thus, an executor can elect to 
     treat distributions paid by the estate within 65 days after 
     the close of the estate's taxable year as having been paid on 
     the last day of such taxable year.
       Effective date.--The provision applies to taxable years 
     beginning after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     9. Separate share rules available to estates (sec. 1309 of 
         the House bill and sec. 1106 of the Senate amendment)

                              Present Law

       Trusts with more than one beneficiary must use the 
     ``separate share'' rule in order to provide different tax 
     treatment of distributions to different beneficiaries to 
     reflect the income earned by different shares of the trust's 
     corpus. 18 Treasury regulations provide that 
     ``[t]he application of the separate share rule * * * will 
     generally depend upon whether distributions of the trust are 
     to be made in substantially the same manner as if separate 
     trusts had been created. * * * Separate share treatment will 
     not be applied to a trust or portion of a trust subject to a 
     power to distribute, apportion, or accumulate income or 
     distribute corpus to or for the use of one or more 
     beneficiaries within a group or class of beneficiaries, 
     unless the payment of income, accumulated income, or corpus 
     of a share of one beneficiary cannot affect the proportionate 
     share of income, accumulated income, or corpus of any shares 
     of the other beneficiaries, or unless substantially proper 
     adjustment must thereafter be made under the governing 
     instrument so that substantially separate and independent 
     shares exist.'' (Treas. Reg. sec. 1.663(c)-3). The separate 
     share rule presently does not apply to estates.
---------------------------------------------------------------------------
     \18\ Application of the separate share rule is not elective; 
     it is mandatory if there are separate shares in the trust.
---------------------------------------------------------------------------

                               House Bill

       The House bill extends the application of the separate 
     share rule to estates. There are separate shares in an estate 
     when the governing instrument of the estate (e.g., the will 
     and applicable local law) creates separate economic interests 
     in one beneficiary or class of beneficiaries such that the 
     economic interests of those beneficiaries (e.g., rights to 
     income or gains from specified items of property) are not 
     affected by economic interests accruing to another separate 
     beneficiary or class of beneficiaries. For example, a 
     separate share in an estate would exist where the decedent's 
     will provides that all of the shares of a closely-held 
     corporation are devised to one beneficiary and that any 
     dividends paid to the estate by that corporation should be 
     paid only to that beneficiary and any such dividends would 
     not affect any other amounts which that beneficiary would 
     receive under the will. As in the case of trusts, the 
     application of the separate share rule is mandatory where 
     separate shares exist.
       Effective date.--The provision applies to decedents dying 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     10. Executor of estate and beneficiaries treated as related 
         persons for disallowance of losses (sec. 1310 of the 
         House bill and sec. 1107 of the Senate amendment)

                              Present Law

       Section 267 disallows a deduction for any loss on the sale 
     of an asset to a person related to the taxpayer. For the 
     purposes of section 267, the following parties are related 
     persons: (1) a trust and the trust's grantor, (2) two trusts 
     with the same grantor, (3) a trust and a beneficiary of the 
     trust, (4) a trust and a beneficiary of another trust, if 
     both trusts have the same grantor, and (5) a trust and a 
     corporation the stock of which is more than 50 percent owned 
     by the trust or the trust's grantor.
       Section 1239 disallows capital gain treatment on the sale 
     of depreciable property to a related person. For purposes of 
     section 1239, a trust and any beneficiary of the trust are 
     treated as related persons, unless the beneficiary's interest 
     is a remote contingent interest.
       Neither section 267 or section 1239 presently treat an 
     estate and a beneficiary of the estate as related persons.

                               House Bill

       Under the House bill, an estate and a beneficiary of that 
     estate are treated as related persons for purposes of 
     sections 267 and 1239, except in the case of a sale or 
     exchange in satisfaction of a pecuniary bequest.
       Effective date.--The provision applies to taxable years 
     beginning after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     11. Limitation on taxable year of estates (sec. 1311 of the 
         House bill)

                              Present Law

       The taxability of distributions from a trust or estate is 
     based on the amount of income received by the trust or estate 
     in the trust or estate's taxable year ``ending with or 
     within'' the taxable year of the beneficiary (typically a 
     calendar year). Trusts are required to use a calendar year 
     and, consequently, income of a trust that is distributed to a 
     calendar-year beneficiary in the year earned is taxed to the 
     beneficiary in the year earned. Estates, on the other hand, 
     are allowed to use any fiscal year. Consequently, in the case 
     of estates, the taxation of distributions to a calendar-year 
     beneficiary in up to the last 11 months of the calendar year 
     can be deferred until the next taxable year depending upon 
     the fiscal year selected.

                               House Bill

       The House bill limits the taxable year of an estate to a 
     year ending on October 31, November 30, or December 31. 
     19 Thus, the maximum deferral allowable to a 
     calendar-year beneficiary is with respect to distributions 
     made in the last two months of the calendar year.
---------------------------------------------------------------------------
     \19\  If an election is made to treat a revocable trust as 
     part of the estate under section 14601 of the bill, such 
     trust would switch to the taxable year of the estate during 
     the period that the election was effective.
---------------------------------------------------------------------------
       Effective date.--The provision applies to decedents dying 
     after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     12. Simplified taxation of earnings of pre-need funeral 
         trusts (sec. 1312 of the House bill and sec. 1108 of the 
         Senate amendment)

                              Present Law

       A pre-need funeral trust is an arrangement where an 
     individual purchases funeral services or merchandise from a 
     funeral home for the benefit of a specified person in advance 
     of that person's death. (The beneficiary may be either the 
     purchaser or another person.) The purchaser enters into a 
     contract with the provider of such services or merchandise 
     whereby the purchaser selects the services or merchandise to 
     be provided upon the death of the beneficiary, and agrees to 
     pay for them in advance of the beneficiary's death. Such 
     amounts (or a portion thereof) are held in trust during the 
     beneficiary's lifetime and are paid to the seller upon the 
     beneficiary's death.
       Under present law, pre-need funeral trusts generally are 
     treated as grantor trusts, and the annual income earned by 
     such trusts is taxed to the purchaser/grantor of the trust. 
     Rev. Rul. 87-127. Any amount received from the trust by the 
     seller (as payment for services or merchandise) is includible 
     in the gross income of the seller.

                               House Bill

       The House bill allows the trustee of a pre-need funeral 
     trust to elect special tax treatment for such a trust, to the 
     extent the trust would otherwise be treated as a grantor 
     trust. A qualified funeral trust is defined as one which 
     meets the following requirements: (1) the trust arises as the 
     result of a contract between a person engaged in the trade or 
     business of providing funeral or burial services or 
     merchandise and one or more individuals to have such services 
     or property provided upon such individuals' death; (2) the 
     only beneficiaries of the trust are individuals who have 
     entered into contracts to have such services or merchandise 
     provided upon their death; (3) the only contributions to the 
     trust are contributions by or for the benefit of the trust 
     beneficiaries; (4) the trust's only purpose is to hold and 
     invest funds that will be used to make payments for funeral 
     or burial services or merchandise for the trust 
     beneficiaries; and (5) the trust has not accepted 
     contributions totaling more than $7,000 by or for the benefit 
     of any individual. For this purpose, ``contributions'' 
     include all amounts transferred to the trust, regardless of 
     how denominated in the contract. Contributions do not, 
     however, include income or gain earned with respect to 
     property in the trust. For purposes of applying the $7,000 
     limit, if a purchaser has more than one contract with a 
     single trustee (or related trustees), all such trusts are 
     treated as one trust. Similarly, if the Secretary of Treasury 
     determines that a purchaser has entered into separate 
     contracts with unrelated trustees to avoid the $7,000 limit 
     described above, the Secretary may require that such trusts 
     be treated as one trust. For contracts entered into after 
     1998, the $7,000 limit is indexed annually for inflation.
       The trustee's election to have this provision apply to a 
     qualified funeral trust is to be made separately with respect 
     to each purchaser's trust. It is anticipated that the 
     Department of Treasury will issue prompt guidance with 
     respect to the simplified reporting

[[Page H6595]]

     requirements so that if the election is made, a single annual 
     trust return may be filed by the trustee, separately listing 
     the amount of income earned with respect to each purchaser. 
     If the election is made, the trust is not treated as a 
     grantor trust and the amount of tax paid with respect to each 
     purchaser's trust is determined in accordance with the income 
     tax rate schedule generally applicable to estates and trusts 
     (Code sec. 1(e)), but no deduction is allowed under section 
     642(b). The tax on the annual earnings of the trust is 
     payable by the trustee.
       As under present law, amounts received from the trust by 
     the seller are treated as payments for services and 
     merchandise and are includible in the gross income of the 
     seller. No gain or loss is recognized to the beneficiary of 
     the trust for payments from the trust to the beneficiary upon 
     cancellation of the contract, and the beneficiary takes a 
     carryover basis in any assets received from the trust upon 
     cancellation.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.

                            Senate Agreement

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with modifications that would (1) allow the 
     provision to be applied to contracts purchased by one 
     individual to have funeral or burial services or merchandise 
     provided for another individual upon that individual's death 
     (to the extent that such arrangements would otherwise be 
     treated as grantor trusts), and (2) allow the election to be 
     made for taxable years ending after the date of enactment.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment.
     13. Adjustments for gifts within 3 years of decedent's death 
         (sec. 1313 of the House bill and sec. 1109 of the Senate 
         amendment)

                              Present Law

       The first $10,000 of gifts of present interests to each 
     donee during any one calendar year are excluded from Federal 
     gift tax.
       The value of the gross estate includes the value of any 
     previously transferred property if the decedent retained the 
     power to revoke the transfer (sec. 2038). The gross estate 
     also includes the value of any property with respect to which 
     such power is relinquished during the three years before 
     death (sec. 2035). There has been significant litigation as 
     to whether these rules require that certain transfers made 
     from a revocable trust within three years of death be 
     includible in the gross estate. See, e.g., Jalkut Estate v. 
     Commissioner, 96 T.C. 675 (1991) (transfers from revocable 
     trust includible in gross estate); McNeely v. Commissioner, 
     16 F.3d 303 (8th Cir. 1994) (transfers from revocable trust 
     not includible in gross estate); Kisling v. Commissioner, 32 
     F.3d 1222 (8th Cir. 1994) (acq.) (transfers from revocable 
     trust not includible in gross estate).

                               House Bill

       The House bill codifies the rule set forth in the McNeely 
     and Kisling cases to provide that a transfer from a revocable 
     trust (i.e., a trust described under section 676) is treated 
     as if made directly by the grantor. Thus, an annual exclusion 
     gift from such a trust is not included in the gross estate.
       The House bill also revises section 2035 to improve its 
     clarity.
       Effective date.--The provision applies to decedents dying 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. The provision is not intended to modify the 
     result reached in the Kisling case.
     14. Clarify relationship between community property rights 
         and retirement benefits (sec. 1314 of the House bill and 
         sec. 1110 of the Senate amendment)

                              Present Law

     Community property
       Under State community property laws, each spouse owns an 
     undivided one-half interest in each community property asset. 
     In community property jurisdictions, a nonparticipant spouse 
     may be treated as having a vested community property interest 
     in either his or her spouse's qualified plan, individual 
     retirement arrangement (``IRA''), or simplified employee 
     pension (``SEP'') plan.
     Transfer tax treatment of qualified plans
       In the Retirement Equity Act of 1984 (``REA''), qualified 
     retirement plans were required to provide automatic survivor 
     benefits (1) in the case of a participant who retires under 
     the plan, in the form of a qualified joint and survivor 
     annuity, and (2) in the case of a vested participant who dies 
     before the annuity starting date and who has a surviving 
     spouse, in the form of a preretirement survivor annuity. A 
     participant generally is permitted to waive such annuities, 
     provided he or she obtains the written consent of his or her 
     spouse.
       The Tax Reform Act of 1986 repealed the estate tax 
     exclusion, formerly contained in sections 2039(c) and 
     2039(d), for certain interests in qualified plans owned by a 
     nonparticipant spouse attributable to community property laws 
     and made certain other changes to conform the transfer tax 
     treatment of qualified and nonqualified plans.
       As a result of these changes made by REA and the Tax Reform 
     Act of 1986, the transfer tax treatment of married couples 
     residing in a community property State is unclear where 
     either spouse is covered by a qualified plan.

                               House Bill

       The House bill clarifies that the marital deduction is 
     available with respect to a nonparticipant spouse's interest 
     in an annuity attributable to community property laws where 
     he or she predeceases the participant spouse. Under the House 
     bill, the nonparticipant spouse's interest in an annuity 
     arising under the community property laws of a State that 
     passes to the surviving participant spouse may qualify for 
     treatment as QTIP under section 2056(b)(7).
       The provision is not intended to create an inference 
     regarding the treatment under present law of a transfer to a 
     surviving spouse of the decedent spouse's interest in an 
     annuity arising under community property laws.
       Effective date.--The provision applies to decedents dying, 
     or waivers, transfers and disclaimers made, after the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. The provision is not intended to modify the 
     result of the Supreme Court's decision in Boggs v. Boggs, 117 
     S.Ct. 1754 (1997).
     15. Treatment under qualified domestic trust rules of forms 
         of ownership which are not trusts (sec. 1315 of the House 
         bill and sec. 1111 of the Senate amendment)

                              Present Law

       A marital deduction generally is allowed for estate and 
     gift tax purposes for the value of property passing to a 
     spouse. The marital deduction is not available for property 
     passing to an alien spouse outside a qualified domestic trust 
     (``QDT'). An estate tax generally is imposed on corpus 
     distributions from a QDT.
       Trusts are not permitted in some countries (e.g., many 
     civil law countries). 20 As a result, it is not 
     possible to create a QDT in those countries.
---------------------------------------------------------------------------
     \20\ Note that in some civil law States (e.g., Louisiana), an 
     entity similar to a trust, called a usufruct, exists.
---------------------------------------------------------------------------

                               House Bill

       The House bill provides the Treasury Department with 
     regulatory authority to treat as trusts legal arrangements 
     that have substantially the same effect as a trust. It is 
     anticipated that such regulations, if any, would only permit 
     a marital deduction with respect to non-trust arrangements 
     under which the U.S. would retain jurisdiction and adequate 
     security to impose U.S. transfer tax on transfers by the 
     surviving spouse of the property transferred by the decedent. 
     Possible arrangements could include the adoption of a 
     bilateral treaty that provides for the collection of U.S. 
     transfer tax from the noncitizen surviving spouse or a 
     closing agreement process under which the surviving spouse 
     waives treaty benefits, allows the U.S. to retain taxing 
     jurisdiction and provides adequate security with respect to 
     such transfer taxes.
       Effective date.--The provision applies to decedents dying 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     16. Opportunity to correct certain failures under section 
         2032A (sec. 1316 of the House bill and sec. 1112 of the 
         Senate amendment)

                              Present Law

       For estate tax purposes, an executor may elect to value 
     certain real property used in farming or other closely held 
     business operations at its current use value rather than its 
     highest and best use (sec. 2032A). A written agreement signed 
     by each person with an interest in the property must be filed 
     with the election.
       In 1984, section 2032A was amended to provide that if an 
     executor makes a timely election that substantially complies 
     with Treasury regulations, but fails to provide all required 
     information or the signatures of all persons required to 
     enter into the agreement, the executor may supply the missing 
     information within a reasonable period of time (not exceeding 
     90 days) after notification by the Treasury Department.
       Treasury regulations require that a notice of election and 
     certain information be filed with the Federal estate tax 
     return (Treas. Reg. sec. 20.2032A-8). The administrative 
     policy of the Treasury Department is to disallow current use 
     valuation elections unless the required information is 
     supplied.

                               House Bill

       The House bill extends the procedures allowing subsequent 
     submission of information to any executor who makes the 
     election and submits the recapture agreement, without regard 
     to compliance with the Treasury regulations. Thus, the House 
     bill allows the current use valuation election if the 
     executor supplies the required information within a 
     reasonable period of time (not exceeding 90 days) after 
     notification by the IRS. During that time period, the House 
     bill also allows

[[Page H6596]]

     the addition of signatures to a previously filed agreement.
       The Committee report on the House bill indicates that the 
     Treasury Department has taken an unnecessarily restrictive 
     view of the 1984 amendment to section 2032A and intends no 
     inference that the Treasury Department lacks the power, under 
     the law in effect prior to the date of enactment, to correct 
     the situation addressed by this provision. The House bill 
     intends that, with respect to technically defective 2032A 
     elections made prior to the date of enactment, prior law 
     should be applied in a manner consistent with the provision.
       Effective date.--The provision applies to decedents dying 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     17. Authority to waive requirement of U.S. trustee for 
         qualified domestic trusts (sec. 1317 of the House bill 
         and sec. 1113 of the Senate amendment)

                              Present Law

       In order for a trust to be a QDT, a U.S. trustee must have 
     the power to approve all corpus distributions from the trust. 
     In some countries, trusts cannot have any U.S. trustees. As a 
     result, trusts established in those countries cannot qualify 
     as a QDT.

                               House Bill

       In order to permit the establishment of a QDT in those 
     situations where a country prohibits a trust from having a 
     U.S. trustee, the House bill provides the Treasury Department 
     with regulatory authority to waive the requirement that a QDT 
     have a U.S. trustee. It is anticipated that such regulations, 
     if any, provide an alternative mechanism under which the U.S. 
     would retain jurisdiction and adequate security to impose 
     U.S. transfer tax on transfers by the surviving spouse of the 
     property transferred by the decedent.
       Effective date.--The provision applies to decedents dying 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

          XIV. EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS

                A. Excise Tax Simplification Provisions

     1. Increase de minimis limit for after-market alterations 
         subject to heavy truck and luxury automobile excise taxes 
         (sec. 1401 of the House bill and sec. 1201 of the Senate 
         amendment)

                              Present Law

       An excise tax is imposed on retail sales of truck chassis 
     and truck bodies suitable for use in a vehicle with a gross 
     vehicle weight of over 33,000 pounds. The tax is equal to 12 
     percent of the retail sales price. An excise tax also is 
     imposed on retail sales of luxury automobiles. The tax 
     currently is equal to 8 percent of the amount by which the 
     retail sales price exceeds an inflation-adjusted base. (The 
     rate is reduced by 1 percentage point per year through 2002, 
     and the tax is not imposed after 2002.) Anti-abuse rules 
     prevent the avoidance of these taxes through separate 
     purchases of major component parts. With certain exceptions, 
     tax at the rate applicable to the vehicle is imposed on the 
     subsequent installation of parts and accessories within six 
     months after purchase of a taxable vehicle. The exceptions 
     include a de minimis exception for parts and accessories with 
     an aggregate price that does not exceed $200 (or such other 
     amount as Treasury may by regulation prescribe).

                               House Bill

       The tax on subsequent installation of parts and accessories 
     does not apply to parts and accessories with an aggregate 
     price that does not exceed $1,000. Parts and accessories 
     installed on a vehicle on or before that date are taken into 
     account in determining whether the $1,000 threshold is 
     exceeded. If the aggregate price of the pre-effective date 
     parts and accessories does not exceed $200, they are not to 
     be subject to tax unless the aggregate price of all additions 
     exceeds $1,000.
       Effective date.--The increase in the threshold for taxing 
     after-market additions under the heavy truck and luxury car 
     excise taxes is effective on January 1, 1998.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Simplification of excise taxes on distilled spirits, wine, 
         and beer (secs. 1411-1422 of the House bill and secs. 
         1211-1222 of the Senate amendment)

                              Present Law

       Imported distilled spirits returned to plant.-- Excise tax 
     that has been paid on domestic distilled spirits is credited 
     or refunded if the spirits are later returned to bonded 
     premises. Tax is imposed on imported bottled spirits when 
     they are withdrawn from customs custody, but the tax is not 
     refunded or credited if the spirits are later returned to 
     bonded premises.
       Cancellation of export bonds.--An exporter that withdraws 
     distilled spirits from bonded warehouses for export or 
     transportation to a customs bonded warehouse without the 
     payment of tax must furnish a bond to cover the withdrawal. 
     The required bonds are canceled ``on the submission of such 
     evidence, records, and certification indicating exportation 
     as the Secretary may by regulations prescribe.''
       Location of records of distilled spirits plant.-- 
     Proprietors of distilled spirits plants are required to 
     maintain records and reports relating to their production, 
     storage, denaturation, and processing activities on the 
     premises where the operations covered by the record are 
     carried on.
       Transfers from brewery to distilled spirits plant.--A 
     distilled spirits plant may receive on its bonded premises 
     beer to be used in the production of distilled spirits only 
     if the beer is produced on contiguous brewery premises.
       Sign not required for wholesale dealers.--Wholesale liquor 
     dealers are required to post a sign identifying the firm as 
     such. Failure to do so may subject the wholesaler dealer to a 
     penalty.
       Refund on returns of merchantable wine.--Excise tax paid on 
     domestic wine that is returned to bond as unmerchantable is 
     refunded or credited, and the wine is once again treated as 
     wine in bond on the premises of a bonded wine cellar.
       Increased sugar limits for certain wine.--Natural wines may 
     be sweetened to correct high acid content. For most wines, 
     however, sugar cannot constitute more than 35 percent (by 
     volume) of the combined sugar and juice used to produce the 
     wine. Up to 60 percent sugar may be used in wine made from 
     loganberries, currants, and gooseberries. If the amount of 
     sugar used exceeds the applicable limitation, the wine must 
     be labeled ``substandard.''
       Beer withdrawn for embassy use.--Imported beer to be used 
     for the family and official use of representatives of foreign 
     governments or public international organizations may be 
     withdrawn from customs bonded warehouses without payment of 
     excise tax. No similar exemption applies to domestic beer 
     withdrawn from a brewery or entered into a bonded customs 
     warehouse for the same authorized use.
       Beer withdrawn for destruction.--Removals of beer from a 
     brewery are exempt from tax if the removal is for export, 
     because the beer is unfit for beverage use, for laboratory 
     analysis, research, development and testing, for the brewer's 
     personal or family use, or as supplies for certain vessels 
     and aircraft.
       Drawback on exported beer.--A domestic producer that 
     exports beer may recover the tax (receive a ``drawback'') 
     found to have been paid on the exported beer upon the 
     ``submission of such evidence, records and certificates 
     indicating exportation'' required by regulations.
       Imported beer transferred in bulk to brewery and imported 
     wine transferred in bulk to wineries.--Imported beer and wine 
     are subject to tax when removed from customs custody.

                               House Bill

       Imported distilled spirits returned to plant.--Refunds or 
     credits of the tax are available for imported bottled spirits 
     that are returned to distilled spirits plants.
       Cancellation of export bonds.--The certification 
     requirement are relaxed to allow the bonds to be canceled if 
     there is such proof of exportation as the Secretary may 
     require.
       Location of records of distilled spirits plant.--Records 
     and reports are permitted to be maintained elsewhere other 
     than on the plant premises
       Transfers from brewery to distilled spirits plant.--Beer 
     may be brought from any brewery for use in the production of 
     spirits. Such beer is exempt from excise tax, subject to 
     Treasury regulations.
       Sign not required for wholesale dealers.--The requirement 
     that a sign be posted is repealed.
       Refund on returns of merchantable wine.--A refund or credit 
     is available in the case of all domestic wine returned to 
     bond, whether or not unmerchantable.
       Increased sugar limits for certain wine.--Up to 60 percent 
     sugar is permitted in any wine made from juice, such as 
     cranberry or plum juice, with an acid content of 20 or more 
     parts per thousand.
       Beer withdrawn for embassy use.--Subject to Treasury's 
     regulatory authority, an exemption similar to that currently 
     available for imported beer is provided for domestic beer.
       Beer withdrawn for destruction.--An exemption from tax is 
     added for removals for destruction, subject to Treasury 
     regulations.
       Drawback on exported beer.--The certification requirement 
     is relaxed to allow a drawback of tax paid if there is such 
     proof of exportation as the Secretary may be regulations 
     require.
       Imported beer transferred in bulk to brewery and imported 
     wine transferred in bulk to wineries.--Subject to Treasury 
     regulations, beer and wine imported in bulk may be withdrawn 
     from customs custody and transferred in bulk to a brewery 
     (beer) or a winery (wine) without payment of tax. The 
     proprietor of the brewery to which the beer is transferred or 
     of the winery to which the wine is transferred is liable for 
     the tax imposed on the withdrawal from customs custody and 
     the importer is relieved of liability.
       Effective date.--The provision to repeal the requirement 
     that wholesale liquor dealers post a sign outside their place 
     of business takes effect on the date of enactment. The other 
     provisions take effect on the first day of the calendar 
     quarter that begins at least 90 days after the date of 
     enactment.

[[Page H6597]]

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with a modification delaying the effective 
     date of certain provisions from the first day of the calendar 
     quarter that begins at least 90 days after the date of 
     enactment to the first day of the quarter beginning at least 
     180 days after such date.
     3. Authority for Internal Revenue Service to grant exemptions 
         from excise tax registration requirements (sec. 1431 of 
         the House bill and sec. 1231 of the Senate amendment)

                              Present Law

       The Code exempts certain types of sales (e.g., sales for 
     use in further manufacture, sales for export, and sales for 
     use by a State or local government or a nonprofit educational 
     organization) from excise taxes imposed on manufacturers and 
     retailers. These exemptions generally apply only if the 
     seller, the purchaser, and any person to whom the article is 
     resold by the purchaser (the second purchaser) are registered 
     with the Internal Revenue Service. The IRS can waive the 
     registration requirement for the purchaser and second 
     purchaser in some but not all cases.

                               House Bill

       The IRS is authorized to waive the registration requirement 
     for purchasers and second purchasers in all cases.
       Effective date.--The provision applies to sales made 
     pursuant to waivers issued after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Repeal of expired excise tax provisions (sec. 1432 of the 
         House bill and sec. 1232 of the Senate amendment)

                              Present Law

       The Code includes a provision relating to a temporary 
     reduction in the tax on piggyback trailers sold before July 
     18, 1985, and provisions relating to the tax on the removal 
     of hard minerals from the deep seabed before June 28, 1990.
       An excise tax is imposed on the sale or use by the 
     manufacturer or importer of certain ozone-depleting chemicals 
     (sec. 4681). The amount of the tax generally is determined by 
     multiplying the base tax amount applicable for the calendar 
     year by an ozone-depleting factor assigned to each taxable 
     chemical. The base tax amount was $5.80 per pound in 1996 and 
     will increase by 45 cents per pound per year thereafter. The 
     Code contains provisions for special rates of tax applicable 
     to years before 1996 (e.g., sec. 4282(g)(1), (2), (3), and 
     (5)).

                               House Bill

       These provisions are repealed, as ``deadwood''.
       Effective date.--The provisions are effective on the date 
     of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Modifications to excise tax on certain arrows (sec. 1233 
         of the Senate amendment)

                              Present Law

       An 11-percent manufacturer's excise tax is imposed on bows 
     having a draw weight of more than 10 pounds and on arrows 
     that either are greater than 18 inches in length or are 
     suitable for use with a taxable bow. The tax is imposed on 
     the manufacturer's sales price of the completed arrow.

                               House Bill

       No provision.

                            Senate Amendment

       The current excise tax on arrows tax is replaced with a 
     manufacturer's excise tax on the four component parts of the 
     arrow: shafts, points, nocks, and vanes. The tax rate is 
     increased to 12.4 percent of the value of each of these four 
     components to offset the reduction in aggregate value 
     subjected to tax compared to present-law valuation of the 
     completed arrow.
       Effective date.--The provision is to be effective for arrow 
     components sold after September 30, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     6. Modifications to heavy highway vehicle retail excise tax 
         (sec. 1234 of the Senate amendment)

                              Present Law

       A 12-percent retail excise tax is imposed on certain heavy 
     highway trucks and trailers, and on highway tractors. Small 
     trucks (those with a gross vehicle weight not over 33,000 
     pounds) and lighter trailers (those with a gross vehicle 
     weight not over 26,000 pounds) are exempt from the tax. The 
     tax applies to the first retail sale of a new or 
     remanufactured vehicle. The determination under present law 
     of whether a particular modification to an existing vehicle 
     constitutes remanufacture (taxable) or a repair (nontaxable) 
     is factual and generally is based on whether the function of 
     the vehicle is changed or, in the case of worn vehicles, 
     whether the cost of the modification exceeds 75 percent of 
     the value of the modified vehicle.
       No tax is imposed on trucks, tractors, and trailers when 
     they are sold for resale or long- term lease, if the 
     purchaser is registered with the Treasury Department. In such 
     cases, purchasers are liable for the tax when the vehicle is 
     sold or leased. The tax is based on the sales price in the 
     transaction to which it applies.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment makes two changes to the heavy vehicle 
     excise tax:
       (1) Clarification is provided that the 75-percent-of-value 
     threshold applies in determining whether repairs to a wrecked 
     vehicle constitute remanufacture; and
       (2) The registration requirement currently applicable to 
     certain sales of trucks, tractors, and trailers for resale is 
     replaced with a certification requirement.
       Effective date.--The provision is effective after December 
     31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     7. Treatment of skydiving flights as noncommercial aviation 
         (sec. 1235 of the Senate amendment)

                              Present Law

       Commercial passenger aviation, or air transportation for 
     which a fare is charged, is subject to a 10-percent ad 
     valorem excise tax for the Airport and Airway Trust Fund. 
     Noncommercial aviation, or air transportation which is not 
     ``for hire,'' is subject to a fuels tax for the Trust Fund. 
     In the case of skydiving flights, questions have arisen as to 
     when the flight is commercial aviation subject to the ticket 
     tax and when it is noncommercial aviation subject to the 
     fuels tax. In general, if instruction is offered, the flight 
     is noncommercial aviation. Otherwise, the flight is treated 
     as commercial aviation. Many skydiving flights carry both 
     persons receiving instruction and others not receiving 
     instruction.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment specifies that flights which are 
     exclusively dedicated to skydiving are taxed as noncommercial 
     aviation flights, regardless of whether instruction is 
     offered to any of the passengers.
       Effective date.--The provision is effective for flights 
     beginning after September 30, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     8. Eliminate double taxation of certain aviation fuels sold 
         to producers by ``fixed base operators'' (sec. 1236 of 
         the Senate amendment)

                              Present Law

       Section 4091 imposes a tax on the sale of aviation fuel by 
     any producer (defined to include a wholesale distributor). 
     Fuel sold at many rural airports is sold by retail dealers 
     who do not qualify as wholesale distributors. This fuel is 
     purchased by the retailers tax-paid. In certain instances, 
     fuel which has been purchased tax-paid by a retailer will be 
     re-sold to a producer, e.g., to enable the producer to serve 
     one of its customers at the airport. When this fuel is resold 
     at retail by the producer, a second tax is imposed. The Code 
     contains no provision allowing a refund of the first tax in 
     such cases.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment permits a refund of the tax previously 
     paid on aviation fuel when a registered producer acquires the 
     fuel.
       Effective date.--The provision is effective for fuel sold 
     after September 30, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     a clarification that the provision applies to tax-paid fuel 
     purchased by registered producers after September 30, 1997.

                     B. Tax-Exempt Bond Provisions

     Overview
       Interest on State and local government bonds generally is 
     excluded from gross income for purposes of the regular 
     individual and corporate income taxes if the proceeds of the 
     bonds are used to finance direct activities of these 
     governmental units (Code sec. 103).
       Unlike the interest on governmental bonds, described above, 
     interest on private activity bonds generally is taxable. A 
     private activity bond is a bond issued by a State or local 
     governmental unit acting as a conduit to provide financing 
     for private parties in a manner violating either (1) a 
     private business use and payment test or (2) a private loan 
     restriction. However, interest on private activity bonds is 
     not taxable if (1) the financed activity is specified in the 
     Code and (2) at least 95 percent of the net proceeds of the 
     bond issue is used to finance the specified activity.
       Issuers of State and local government bonds must satisfy 
     numerous other requirements, including arbitrage restrictions 
     (for all such bonds) and annual State volume limitations (for 
     most private activity bonds) for

[[Page H6598]]

     the interest on these bonds to be excluded from gross income.
     1. Repeal of $100,000 limitation on unspent proceeds under 1-
         year exception from rebate (sec. 1441 of the House bill 
         and sec. 1241 of the Senate amendment)

                              Present Law

       Subject to limited exceptions, arbitrage profits from 
     investing bond proceeds in investments unrelated to the 
     governmental purpose of the borrowing must be rebated to the 
     Federal Government. No rebate is required if the gross 
     proceeds of an issue are spent for the governmental purpose 
     of the borrowing within six months after issuance.
       This six-month exception is deemed to be satisfied by 
     issuers of governmental bonds (other than tax and revenue 
     anticipation notes) and qualified 501(c)(3) bonds if (1) all 
     proceeds other than an amount not exceeding the lesser of 5 
     percent or $100,000 are so spent within six months and (2) 
     the remaining proceeds are spent within one year after the 
     bonds are issued.

                               House Bill

       Under the House bill, the $100,000 limit on proceeds that 
     may remain unspent after six months for certain governmental 
     and qualified 501(c)(3) bonds otherwise exempt from the 
     rebate requirement is deleted. Thus, if at least 95 percent 
     of the proceeds of these bonds is spent within six months 
     after their issuance, and the remainder is spent within one 
     year, the six-month exception is deemed to be satisfied.
       Effective date.--The provision applies to bonds issued 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Exception from rebate for earnings on bona fide debt 
         service fund under construction bond rules (sec. 1442 of 
         the House bill and sec. 1242 of the Senate amendment)

                              Present Law

       In general, arbitrage profits from investing bond proceeds 
     in investments unrelated to the governmental purpose of the 
     borrowing must be rebated to the Federal Government. An 
     exception is provided for certain construction bond issues if 
     the bonds are governmental bonds, qualified 501(c)(3) bonds, 
     or exempt-facility private activity bonds for governmentally-
     owned property.
       This exception is satisfied only if the available 
     construction proceeds of the issue are spent at minimum 
     specified rates during the 24-month period after the bonds 
     are issued. The exception does not apply to bond proceeds 
     invested after the 24-month expenditure period as part of a 
     reasonably required reserve or replacement fund, a bona fide 
     debt service fund, or to certain other investments (e.g., 
     sinking funds). Issuers of these construction bonds also may 
     elect to comply with a penalty regime in lieu of rebating 
     arbitrage profits if they fail to satisfy the exception's 
     spending requirements.

                               House Bill

       The House bill exempts earnings on bond proceeds invested 
     in bona fide debt service funds from the arbitrage rebate 
     requirement and the penalty requirement of the 24-month 
     exception if the spending requirements of that exception are 
     otherwise satisfied.
       Effective date.--The provision applies to bonds issued 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Repeal of debt service-based limitation on investment in 
         certain nonpurpose investments (sec. 1443 of the House 
         bill and sec. 1243 of the Senate amendment)

                              Present Law

       Issuers of all tax-exempt bonds generally are subject to 
     two sets of restrictions on investment of their bond proceeds 
     to limit arbitrage profits. The first set requires that tax-
     exempt bond proceeds be invested at a yield that is not 
     materially higher (generally defined as 0.125 percentage 
     points) than the bond yield (``yield restrictions''). 
     Exceptions are provided to this restriction for investments 
     during any of several ``temporary periods'' pending use of 
     the proceeds and, throughout the term of the issue, for 
     proceeds invested as part of a reasonably required reserve or 
     replacement fund or a ``minor'' portion of the issue 
     proceeds.
       Except for temporary periods and amounts held pending use 
     to pay current debt service, present law also limits the 
     amount of the proceeds of private activity bonds (other than 
     qualified 501(c)(3) bonds) that may be invested at materially 
     higher yields at any time during a bond year to 150 percent 
     of the debt service for that bond year. This restriction 
     affects primarily investments in reasonably required reserve 
     or replacement funds. Present law further restricts the 
     amount of proceeds from the sale of bonds that may be 
     invested in these reserve funds to ten percent of such 
     proceeds.
       The second set of restrictions requires generally that all 
     arbitrage profits earned on investments unrelated to the 
     governmental purpose of the borrowing be rebated to the 
     Federal Government (``arbitrage rebate''). Arbitrage profits 
     include all earnings (in excess of bond yield) derived from 
     the investment of bond proceeds (and subsequent earnings on 
     any such earnings).

                               House Bill

       The House bill repeals the 150-percent of debt service 
     yield restriction.
       Effective date.-- The provision applies to bonds issued 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Repeal of expired provisions relating to student loan 
         bonds (sec. 1444 of the House bill and sec. 1244 of the 
         Senate amendment)

                              Present Law

       Present law includes two special exceptions to the 
     arbitrage rebate and pooled financing temporary period rules 
     for certain qualified student loan bonds. These exceptions 
     applied only to bonds issued before January 1, 1989.

                               House Bill

       These special exceptions are deleted as ``deadwood.''
       Effective date.--The provision applies to bonds issued 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

                        C. Tax Court Procedures

1. Overpayment determinations of Tax Court (sec. 1451 of the House bill 
                 and sec. 1251 of the Senate amendment)

                              Present Law

       The Tax Court may order the refund of an overpayment 
     determined by the Court, plus interest, if the IRS fails to 
     refund such overpayment and interest within 120 days after 
     the Court's decision becomes final. Whether such an order is 
     appealable is uncertain.
       In addition, it is unclear whether the Tax Court has 
     jurisdiction over the validity or merits of certain credits 
     or offsets (e.g., providing for collection of student loans, 
     child support, etc.) made by the IRS that reduce or eliminate 
     the refund to which the taxpayer was otherwise entitled.

                               House Bill

       The House bill clarifies that an order to refund an 
     overpayment is appealable in the same manner as a decision of 
     the Tax Court. The House bill also clarifies that the Tax 
     Court does not have jurisdiction over the validity or merits 
     of the credits or offsets that reduce or eliminate the refund 
     to which the taxpayer was otherwise entitled.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Redetermination of interest pursuant to motion (sec. 1452 
         of the House bill and sec. 1252 of the Senate amendment)

                              Present Law

       A taxpayer may seek a redetermination of interest after 
     certain decisions of the Tax Court have become final by 
     filing a petition with the Tax Court. It would be beneficial 
     to taxpayers if a proceeding for a redetermination of 
     interest supplemented the original deficiency action brought 
     by the taxpayer to redetermine the deficiency determination 
     of the IRS. A motion, rather than a petition, is a more 
     appropriate pleading for relief in these cases.

                               House Bill

       The House bill provides that a taxpayer must file a 
     ``motion'' (rather than a ``petition'') to seek a 
     redetermination of interest in the Tax Court. The House bill 
     also clarifies that the Tax Court's jurisdiction to 
     redetermine the amount of interest under section 7481(c) does 
     not depend on whether the interest is underpayment interest 
     or overpayment interest.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. In clarifying the Tax Court's jurisdiction 
     over interest determinations, the conferees do not intend to 
     limit any other remedies that taxpayers may currently have 
     with respect to such determinations, including in particular 
     refund proceedings relating solely to the amount of interest 
     due.
     3. Application of net worth requirement for awards of 
         litigation costs (sec. 1453 of the House bill and sec. 
         1253 of the Senate amendment)

                              Present Law

       Any person who substantially prevails in any action brought 
     by or against the United

[[Page H6599]]

     States in connection with the determination, collection, or 
     refund of any tax, interest, or penalty may be awarded 
     reasonable administrative costs incurred before the IRS and 
     reasonable litigation costs incurred in connection with any 
     court proceeding. A person who substantially prevails must 
     meet certain net worth requirements to be eligible for an 
     award of administrative or litigation costs. In general, only 
     an individual whose net worth does not exceed $2,000,000 is 
     eligible for an award, and only a corporation or partnership 
     whose net worth does not exceed $7,000,000 is eligible for an 
     award. (The net worth determination with respect to a 
     partnership or S corporation applies to all actions that are 
     in substance partnership actions or S corporation actions, 
     including unified entity-level proceedings under sections 
     6226 or 6228, that are nominally brought in the name of a 
     partner or a shareholder.)

                               House Bill

       The House bill provides that the net worth limitations 
     currently applicable to individuals also apply to estates and 
     trusts. The House bill also provides that individuals who 
     file a joint tax return shall be treated as one individual 
     for purposes of computing the net worth limitations. 
     Consequently, the net worth of both spouses is aggregated for 
     purposes of this computation. An exception to this rule is 
     provided in the case of a spouse otherwise qualifying for 
     innocent spouse relief.
       Effective date.--The provision applies to proceedings 
     commenced after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill with 
     respect to estates and trusts. The Senate amendment provides 
     that individuals who file a joint return are treated as 
     separate individuals (resulting in a net worth limitation of 
     $4,000,000 for individuals who file a joint return).

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with respect to estates and trusts. The 
     conference agreement follows the Senate amendment with 
     respect to individuals.
     4. Tax Court jurisdiction for determination of employment 
         status (sec. 1454 of the House bill and sec. 1254 of the 
         Senate amendment)

                              Present Law

       The Tax Court is a court of limited jurisdiction, 
     established under Article I of the Constitution. The Tax 
     Court only has the jurisdiction that is expressly conferred 
     on it by statute (sec. 7442).

                               House Bill

       The House bill provides that, in connection with the audit 
     of any person, if there is an actual controversy involving a 
     determination by the IRS as part of an examination that (1) 
     one or more individuals performing services for that person 
     are employees of that person or (2) that person is not 
     entitled to relief under section 530 of the Revenue Act of 
     1978, the Tax Court would have jurisdiction to determine 
     whether the IRS is correct. For example, one way the IRS 
     could make the required determination is through a mechanism 
     similar to the employment tax early referral procedures. 
     21
---------------------------------------------------------------------------
     \21\ See Announcement 96-13 and Announcement 97-52.
---------------------------------------------------------------------------
       The House bill provides for de novo review (rather than 
     review of the administrative record). Assessment and 
     collection of the tax would be suspended while the matter is 
     pending in the Tax Court. Any determination by the Tax Court 
     would have the force and effect of a decision of the Tax 
     Court and would be reviewable as such; accordingly, it would 
     be binding on the parties. Awards of costs and certain fees 
     (pursuant to sec. 7430) would be available to eligible 
     taxpayers with respect to Tax Court determinations pursuant 
     to this proposal. The House bill also provides a number of 
     procedural rules to incorporate this new jurisdiction within 
     the existing procedures applicable in the Tax Court.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill, with 
     technical modifications.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with additional technical modifications.

                          D. Other Provisions

     1. Due date for first quarter estimated tax payments by 
         private foundations (sec. 1461 of the House bill and sec. 
         1261 of the Senate amendment)

                              Present Law

       Under section 4940, tax-exempt private foundations 
     generally are required to pay an excise tax equal to two 
     percent of their net investment income for the taxable year. 
     Under section 6655(g)(3), private foundations are required to 
     pay estimated tax with respect to their excise tax liability 
     under section 4940 (as well as any unrelated business income 
     tax (UBIT) liability under section 511).22 Section 
     6655(c) provides that this estimated tax is payable in 
     quarterly installments and that, for calendar-year 
     foundations, the first quarterly installment is due on April 
     15th. Under section 6655(I), foundations with taxable years 
     other than the calendar year must make their quarterly 
     estimated tax payments no later than the dates in their 
     fiscal years that correspond to the dates applicable to 
     calendar-year foundations.
---------------------------------------------------------------------------
     \22\ Generally, the amount of the first quarter payment must 
     be at least 25 percent of the lesser of (1) the preceding 
     year's tax liability, as shown on the foundation's Form 990-
     PF, or (2) 95 percent of the foundation's current-year tax 
     liability.
---------------------------------------------------------------------------

                               House Bill

       The House bill amends section 6655(g)(3) to provide that a 
     calendar-year foundation's first-quarter estimated tax 
     payment is due on May 15th (which is the same day that its 
     annual return, Form 990-PF, for the preceding year is due). 
     As a result of the operation of present-law section 6655(I), 
     fiscal-year foundations will be required to make their first-
     quarter estimated tax payment no later than the 15th day of 
     the fifth month of their taxable year.
       Effective date.--The provision applies to taxable years 
     beginning after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Withholding of Commonwealth income taxes from the wages of 
         Federal employees (sec. 1462 of the House bill and sec. 
         1262 of the Senate amendment)

                              Present Law

       If State law provides generally for the withholding of 
     State income taxes from the wages of employees in a State, 
     the Secretary of the Treasury shall (upon the request of the 
     State) enter into an agreement with the State providing for 
     the withholding of State income taxes from the wages of 
     Federal employees in the State. For this purpose, a State is 
     a State, territory, or possession of the United States. The 
     Court of Appeals for the Federal Circuit recently held in 
     Romero v. United States (38 F.3d 1204 (1994)) that Puerto 
     Rico was not encompassed within this definition; 
     consequently, the court invalidated an agreement between the 
     Secretary of the Treasury and Puerto Rico that provided for 
     the withholding of Puerto Rico income taxes from the wages of 
     Federal employees.

                               House Bill

       The House bill makes any Commonwealth eligible to enter 
     into an agreement with the Secretary of the Treasury that 
     would provide for income tax withholding from the wages of 
     Federal employees.
       Effective date.--The provision is effective January 1, 
     1998.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Certain notices disregarded under provision increasing 
         interest rate on large corporate underpayments (sec. 1463 
         of the House bill and sec. 1263 of the Senate amendment)

                              Present Law

       The interest rate on a large corporate underpayment of tax 
     is the Federal short-term rate plus five percentage points. A 
     large corporate underpayment is any underpayment by a 
     subchapter C corporation of any tax imposed for any taxable 
     period, if the amount of such underpayment for such period 
     exceeds $100,000. The large corporate underpayment rate 
     generally applies to periods beginning 30 days after the 
     earlier of the date on which the first letter of proposed 
     deficiency, a statutory notice of deficiency, or a 
     nondeficiency letter or notice of assessment or proposed 
     assessment is sent. For this purpose, a letter or notice is 
     disregarded if the taxpayer makes a payment equal to the 
     amount shown on the letter or notice within that 30 day 
     period.

                               House Bill

       The House bill provides that, for purposes of determining 
     the period to which the large corporate underpayment rate 
     applies, any letter or notice is disregarded if the amount of 
     the deficiency, proposed deficiency, assessment, or proposed 
     assessment set forth in the letter or notice is not greater 
     than $100,000 (determined by not taking into account any 
     interest, penalties, or additions to tax).
       Effective date.--The provision is effective for purposes of 
     determining interest for periods after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

              XV. PENSION AND EMPLOYEE BENEFIT PROVISIONS

  A. Miscellaneous Provisions Relating to Pensions and Other Benefits

     1. Cash or deferred arrangements for irrigation and drainage 
         entities (sec. 911 of the House bill)

                              Present Law

       Under present law, taxable and tax-exempt employers may 
     maintain qualified cash or deferred arrangements. State and 
     local government organizations generally are prohibited from 
     establishing qualified cash or deferred arrangements 
     (``section 401(k) plans'').

[[Page H6600]]

     This prohibition does not apply to qualified cash or deferred 
     arrangements adopted by a State or local government before 
     May 6, 1986.
       Mutual irrigation or ditch companies are exempt from tax if 
     at least 85 percent of the income of the company consists of 
     amounts collected from members for the sole purpose of 
     meeting losses and expenses.

                               House Bill

       Under the House bill, mutual irrigation or ditch companies 
     and districts organized under the laws of a State as a 
     municipal corporation for the purpose of irrigation, water 
     conservation or drainage (or a national association of such 
     organizations) are permitted to maintain qualified cash or 
     deferred arrangements, even if the company or district is a 
     State or local government organization.
       Effective date.--The provision is effective with respect to 
     years beginning after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     2. Permanent moratorium on application of nondiscrimination 
         rules to State and local governmental plans (sec. 912 of 
         the House bill and sec. 1308 of the Senate amendment)

                              Present Law

       Under present law, the rules applicable to governmental 
     plans require that such plans satisfy certain 
     nondiscrimination and minimum participation rules. In 
     general, the rules require that a plan not discriminate in 
     favor of highly compensated employees with regard to the 
     contribution and benefits provided under the plan, 
     participation in the plan, coverage under the plan, and 
     compensation taken into account under the plan. 
     Nondiscrimination rules apply to all governmental plans, 
     qualified retirement plans (including cash or deferred 
     arrangements (sec. 401(k) plans) in effect before May 6, 
     1986), and annuity plans (sec. 403(b) plans). Elective 
     deferrals under section 401(k) plans are required to satisfy 
     a special nondiscrimination test called the average deferral 
     percentage (``ADP'') test. Employer matching and after-tax 
     employee contributions are subject to a similar test called 
     the average contribution percentage (``ACP'') test.
       For purposes of satisfying the nondiscrimination rules, the 
     Internal Revenue Service has issued several Notices which 
     extended the effective date for compliance for governmental 
     plans. Governmental plans will be required to comply with the 
     nondiscrimination rules beginning with plan years beginning 
     on or after the later of January 1, 1999, or 90 days after 
     the opening of the first legislative session beginning on or 
     after January 1, 1999, of the governing body with authority 
     to amend the plan, if that body does not meet continuously. 
     For plan years beginning before the extended effective date, 
     governmental plans are deemed to satisfy the 
     nondiscrimination requirements.

                               House Bill

       The House bill provides that State and local governmental 
     plans are exempt from the nondiscrimination and minimum 
     participation rules.
       Effective date.--Taxable years beginning on or after the 
     date of enactment. A governmental plan is treated as 
     satisfying the coverage and nondiscrimination tests for 
     taxable years beginning before the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment and clarifies that the exemption from the 
     nondiscrimination and participation rules includes exemption 
     from the ACP and ADP tests. The conference agreement provides 
     that a cash or deferred arrangement under a governmental plan 
     is treated as a qualified cash or deferred arrangement even 
     though the ADP test is not in fact satisfied. Thus, for 
     example, elective contributions made by a government employer 
     on behalf of an employee are not treated as distributed or 
     made available to the employee (in accordance with section 
     402(e)(3) of the Code).
       Effective date.--Same as the House bill and Senate 
     amendment.
     3. Treatment of certain disability payments to public safety 
         employees (sec. 913 of the House bill and sec. 785 of the 
         Senate amendment)

                              Present Law

       Under present law, amounts received under a workmen's 
     compensation act as compensation for personal injuries or 
     sickness incurred in the course of employment are excluded 
     from gross income. Compensation received under a workmen's 
     compensation act by the survivors of a deceased employee also 
     are excluded from gross income. Nonoccupational death and 
     disability benefits are not excludable from income as 
     workmen's compensation benefits.

                               House Bill

       Under the House bill, certain payments made on behalf of 
     full-time employees of any police or fire department 
     organized and operated by a State (or any political 
     subdivision, agency, or instrumentality thereof) are 
     excludable from income. The House bill applies to payments 
     made on account of heart disease or hypertension of the 
     employee and that were received in 1989, 1990, 1991 pursuant 
     to a State law as amended on May 19, 1992, which irrebuttably 
     presumed that heart disease and hypertension are work-related 
     illnesses, but only for employees separating from service 
     before July 1, 1992. Claims for refund or credit for 
     overpayment of tax resulting from the provision may be filed 
     up to 1 year after the date of enactment, without regard to 
     the otherwise applicable statute of limitations.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that the provision applies to amounts payable under a State 
     law (as in existence on July 1, 1992) which irrebuttably 
     presumed that heart disease and hypertension are work-related 
     illnesses, but only for employees separating from service 
     before such date.
       Effective date.--Same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill.
     4. Portability of permissive service credit under 
         governmental pension plans (sec. 914 of the House bill)

                              Present Law

       Under present law, limits are imposed on the contributions 
     and benefits under qualified pension plans (Code sec. 415). 
     Certain special rules apply in the case of State and local 
     governmental plans.
       In the case of a defined contribution plan, the limit on 
     annual additions is the lesser of $30,000 or 25 percent of 
     compensation. Annual additions include employer 
     contributions, as well as after-tax employee contributions. 
     In the case of a defined benefit pension plan, the limit on 
     the annual retirement benefit is the lesser of (1) 100 
     percent of compensation or (2) $125,000 (indexed for 
     inflation). The 100 percent of compensation limitation does 
     not apply in the case of State and local governmental pension 
     plans.
       Amounts contributed by employees to a State or local 
     governmental plan are treated as made by the employer if the 
     employer ``picks up'' the contribution.

                               House Bill

       Under the House bill, in applying the defined benefit 
     pension plan limit, the annual benefit under a State or local 
     governmental plan includes the accrued benefit derived from 
     contributions to purchase permissive service credit. Such 
     contributions are not taken into account in determining 
     annual additions.
       Permissive service credit means credit for a period of 
     service recognized by the governmental plan if the employee 
     contributes to the plan an amount (as determined by the plan) 
     which does not exceed the amount necessary to fund the 
     accrued benefit attributable to such period of service.
       The House bill does not affect the treatment of ``pick up'' 
     contributions.
       Effective date.--The provision is effective with respect to 
     years beginning after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with 
     modifications. Under the conference agreement, contributions 
     by a participant in a State or local governmental plan to 
     purchase permissive service credits are subject to one of two 
     limits. Either (1) the accrued benefit derived from all 
     contributions to purchase permissive service credit must be 
     taken into account in determining whether the defined benefit 
     pension plan limit is satisfied, or (2) all such 
     contributions must be taken into account in determining 
     whether the $30,000 limit on annual additions is met for the 
     year (taking into account any other annual additions of the 
     participant). Under the first alternative, a plan will not 
     fail to satisfy the reduced defined benefit pension plan 
     limit that applies in the case of early retirement due to 
     the accrued benefit derived from the purchase of 
     permissive service credits. These limits may be applied on 
     a participant-by-participant basis. That is, contributions 
     to purchase permissive service credits by all participants 
     in the same plan do not have to satisfy the same limit.
       Under the conference agreement, permissive service credit 
     is defined as under the House bill. Thus, it is credit for a 
     period of service that is recognized by the governmental plan 
     only if the employee voluntarily contributes to the plan an 
     amount (as determined by the plan) which does not exceed the 
     amount necessary to fund the benefit attributable to the 
     period of service and which is in addition to the regular 
     employee contributions, if any, under the plan. Section 415 
     is violated if more than 5 years of permissive service credit 
     is purchased for ``nonqualified service''. In addition, 
     section 415 is violated if nonqualified service is taken into 
     account for an employee who has less than 5 years of 
     participation under the plan. Nonqualified service is service 
     other than service (1) as a Federal, State, or local 
     government employee, (2) as an employee of an association 
     representing Federal, State or local government employees, 
     (3) as an employee of an educational institution which 
     provides elementary or secondary education, or (4) for 
     military service. Service under (1), (2) or (3) is not 
     qualified if it enables a participant to

[[Page H6601]]

     receive a retirement benefit for the same service under more 
     than one plan.
       The conference agreement provides that in the case of any 
     repayment of contributions and earnings to a governmental 
     plan with respect to an amount previously refunded upon a 
     forfeiture of service credit under the plan (or another plan 
     maintained by a State or local government employer within the 
     same State) any such repayment shall not be taken into 
     account for purposes of section 415 and service credit 
     obtained as a result of the repayment shall not be considered 
     permissive service credit.
       The provision is not intended to affect the application of 
     ``pick up'' contributions to purchase permissive service 
     credit or the treatment of pick up contributions under 
     section 415. The provision does not apply to purchases of 
     service credit for qualified military service under the rules 
     relating to veterans'' reemployment rights (sec. 414(u)).
       Effective date.--In general, the conference agreement is 
     effective with respect to contributions to purchase 
     permissive service credits made in years beginning after 
     December 31, 1997.
       The conference agreement provides a transition rule for 
     plans that provided for the purchase of permissive service 
     credit prior to enactment of this Act. Under this rule, the 
     defined contribution limits will not reduce the amount of 
     permissive service credit of an eligible participant allowed 
     under the terms of the plan as in effect on the date of 
     enactment. For this purpose an eligible participant is an 
     individual who first became a participant in the plan before 
     the first plan year beginning after the last day of the 
     calendar year in which the next regular session (following 
     the date of the enactment of this Act) of the governing body 
     with authority to amend the plan ends.
     5. Gratuitous transfers for the benefit of employees (sec. 
         915 of the House bill)

                              Present Law

       An employee stock ownership plan (``ESOP'') is a qualified 
     stock bonus plan or a combination stock bonus and money 
     purchase pension plan under which employer securities are 
     held for the benefit of employees.
       A deduction is allowed for Federal estate tax purposes for 
     transfers by a decedent to charitable, religious, scientific, 
     etc. organizations. In the case of a transfer of a remainder 
     interest to a charity, the remainder interest must be in a 
     charitable remainder trust. A charitable remainder trust 
     generally is a trust that is required to pay, no less often 
     than annually, a fixed dollar amount (charitable remainder 
     annuity trust) or a fixed percentage of the fair market value 
     of the trust's assets determined at least annually 
     (charitable remainder unitrust) to noncharitable 
     beneficiaries, and the remainder of the trust (i.e., after 
     termination of the annuity or unitrust amounts) to a 
     charitable, religious, scientific, etc. organization.

                               House Bill

       The House bill permits certain limited transfers of 
     qualified employer securities by charitable remainder trusts 
     to ESOPs without adversely affecting the status of the 
     charitable remainder trusts. As a result, the bill provides 
     that a qualified gratuitous transfer of employer securities 
     to an ESOP is deductible from the gross estate of a decedent 
     under Code section 2055 to the extent of the present value of 
     the remainder interest. In addition, an ESOP will not fail to 
     be a qualified plan because it complies with the requirements 
     with respect to a qualified gratuitous transfer.
       In order for a transfer of securities to be a qualified 
     gratuitous transfer, a number of requirements must be 
     satisfied, including the following: (1) the securities 
     transferred to the ESOP must previously have passed from the 
     decedent to a charitable remainder trust; (2) at the time of 
     the transfer to the ESOP, family members of the decedent own 
     (directly or indirectly) no more than 10 percent of the value 
     of the outstanding stock of the company; (3) immediately 
     after the transfer to the ESOP, the ESOP owns at least 60 
     percent of the value of outstanding stock of the company; and 
     (4) the plan meets certain requirements. The provision 
     applies in cases in which the ESOPs was in existence on 
     August 1, 1996 and the decedent dies on or before December 
     31, 1998.
       Effective date.--The provision is effective with respect to 
     transfers to an ESOP after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     6. Treatment of certain transportation on noncommercially 
         operated aircraft as a fringe benefit (sec. 916 of the 
         House bill)

                              Present Law

       Under present law, the value of an employer-provided flight 
     taken for personal purposes is generally includible in 
     income. However, under a special rule in regulations, the 
     value of a personal flight is deemed to be zero (and, 
     therefore, there is no income inclusion) if at least 50 
     percent of the regular passenger seating capacity of the 
     aircraft is occupied by individuals whose flights are 
     primarily for the employer's business (and therefore, 
     excludable from income).

                               House Bill

       Under the House bill, the value of air transportation for 
     personal purposes is excludable from income if the flight is 
     made in the ordinary course of the trade or business of an 
     employer and the flight would have been made whether or not 
     the employee was transported on the flight, and the employer 
     incurs no substantial additional cost (including foregone 
     revenue) in providing the flight to the employee.
       Effective date.--The provision is effective for 
     transportation services provided after December 31, 1997.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     7. Clarification of certain rules relating to ESOPs of S 
         corporations (sec. 918 of the House bill and sec. 1309 of 
         the Senate amendment)

                              Present Law

       Under present law, an S corporation can have no more than 
     75 shareholders. For taxable years beginning after December 
     31, 1997, certain tax-exempt organizations, including 
     employee stock ownership plans (``ESOPs'') can be a 
     shareholder of an S corporation.
       ESOPs are generally required to make distributions in the 
     form of employer securities. If the employer securities are 
     not readily tradable, the employee has a right to require the 
     employer to buy the securities. In the case of an employer 
     whose bylaws or charter restricts ownership of substantially 
     all employer securities to employees or a pension plan, the 
     plan may provide that benefits are distributed in the form of 
     cash. Such a plan may distribute employer securities, if the 
     employee has a right to require the employer to purchase the 
     securities.
       ESOPs are subject to certain prohibited transaction rules 
     under the Internal Revenue Code and title I of the Employee 
     Retirement Income Security Act (``ERISA'') which are designed 
     to prohibit certain transactions between the plan and certain 
     persons close to the plan. A number of statutory exceptions 
     are provided to the prohibited transaction rules. These 
     statutory exceptions do not apply to any transaction in which 
     a plan (directly or indirectly) (1) lends any part of the 
     assets of the plan to, (2) pays any compensation for personal 
     services rendered to the plan to, or (3) acquires for the 
     plan any property from or sells any property to a shareholder 
     employee of an S corporation, a member of the family of such 
     a shareholder employee, or a corporation controlled by the 
     shareholder employee. An administrative exception from the 
     prohibited transactions rules may be obtained from the 
     Secretary of Labor, even if a statutory exception does not 
     apply.

                               House Bill

       The House bill provides that ESOPs of S corporations may 
     distribute cash to plan participants as long as the employee 
     has a right to require the employer to purchase employer 
     securities (as under the present-law rules). In addition, the 
     House bill extends the Code's statutory exceptions to certain 
     prohibited transactions rules to shareholder employees of S 
     corporations.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1997.

                            Senate Amendment

       The Senate amendment is the same as the House bill with 
     respect to the provision that permits ESOPs of S corporations 
     to distribute stock in certain cases.
       The Senate amendment provides that the sale of stock by a 
     shareholder employee of an S corporation is not a prohibited 
     transaction under the Code or ERISA.
       Effective date.--Same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with respect to the provision permitting 
     ESOPs maintained by S corporations to distribute employer 
     securities in certain circum- stances.
       The conference agreement follows the Senate amendment with 
     respect to the provision relating to prohibited transaction 
     rules, as modified. Under the conference agreement, the 
     statutory exceptions do not fail to apply merely because a 
     transaction involves the sale of employer securities to an 
     ESOP maintained by an S corporation by a shareholder 
     employee, a family member of the shareholder employee, or a 
     corporation controlled by the shareholder employee. Thus, the 
     statutory exemptions for such a transaction (including the 
     exemption for a loan to the ESOP to acquire employer 
     securities in connection with such a sale or a guarantee of 
     such a loan) apply.
       Effective date.--Same as the House bill and the Senate 
     amendment.
     8. Repeal application of UBIT to ESOPs of S corporations 
         (sec. 716 of the Senate amendment)

                              Present Law

       Under present law, for taxable years beginning after 
     December 31, 1997, certain tax-exempt organizations, 
     including employee stock ownership plans (``ESOPs'') can be a 
     shareholder of an S corporation. Items of income or loss of 
     the S corporation will flow through to qualified tax-exempt 
     shareholders as unrelated business taxable income (``UBTI''), 
     regardless of the source of the income.

                               House Bill

       No provision.

[[Page H6602]]

                            Senate Amendment

       The Senate amendment repeals the provision treating items 
     of income or loss of an S corporation as unrelated business 
     taxable income in the case of an employee stock ownership 
     plan that is an S corporation shareholder.
       Effective date.--Taxable years beginning after December 31, 
     1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment, and 
     clarifies that the repeal of the provision treating items of 
     income or loss of an S corporation as unrelated business 
     taxable income applies only with respect to employer 
     securities held by an employee stock ownership plan (as 
     defined in section 4975(e)(7) of the Code) maintained by an S 
     corporation.
     9. Treatment of multiemployer plans under section 415 (sec. 
         711 of the Senate amendment)

                              Present Law

       Present law imposes limits on contributions and benefits 
     under qualified plans based on the type of plan. In the case 
     of defined benefit pension plans, the limit on the annual 
     retirement benefit is the lesser of (1) 100 percent of 
     compensation or (2) $125,000 (indexed for inflation).

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment eliminates the application of the 100 
     percent of compensation limitation for multiemployer defined 
     benefit pension plans. Such plans would only be subject to 
     the dollar limitation.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     10. Modification of partial termination rules (sec. 712 of 
         the Senate amendment)

                              Present Law

       Under the Internal Revenue Code, pension plan benefits are 
     required to become fully vested upon termination or partial 
     termination of the plan. The plan document is required to 
     contain a provision reflecting this rule. Under section 552 
     of the Deficit Reduction Act of 1984 (``DEFRA''), for 
     purposes of this rule, a partial termination is treated as 
     not occurring if (1) the partial termination is a result of a 
     decline in plan participation which occurs by reason of the 
     completion of the Trans-Alaska Oil Pipeline construction 
     project and occurred after December 31, 1975, and before 
     January 1, 1980, with respect to participants employed in 
     Alaska; (2) no discrimination occurred with respect to the 
     partial termination; and (3) it is established to the 
     satisfaction of the Secretary of the Treasury that the 
     benefits of the provision will not accrue to the employers 
     under the plan.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment clarifies that section 552 of DEFRA 
     applies for the Code, any other provision of law, and any 
     plan or trust provision.
       Effective date.--The provision is effective as if included 
     in section 552 of DEFRA.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     11. Increase in full funding limit (sec. 713 of the Senate 
         amendment)

                              Present Law

       Under present law, defined benefit pension plans are 
     subject to minimum funding requirements. In addition, there 
     is a maximum limit on contributions that can be made to a 
     plan, called the full funding limit. The full funding limit 
     is the lesser of a plan's accrued liability and 150 percent 
     of current liability. In general, current liability is all 
     liabilities to plan participants and beneficiaries. Current 
     liability represents benefits accrued to date, whereas the 
     accrued liability full funding limit is based on projected 
     benefits. Under IRS rules, amounts that cannot be contributed 
     because of the current liability full funding limit are 
     amortized over 10 years.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment increases the 150-percent of full 
     funding limit as follows: 155 percent for plan years 
     beginning in 1999 or 2000, 160 percent for plan years 
     beginning in 2001 or 2002, 165 percent for plan years 
     beginning in 2003 and 2004, and 170 percent for plan years 
     beginning in 2005 and thereafter.
       In addition, under the provision, amounts that cannot be 
     contributed due to the current liability full funding limit 
     are amortized over 20 years. Amounts that could not be 
     contributed because of such full funding limit and that have 
     not been amortized as of the last day of the plan year 
     beginning in 1998 are amortized over this 20-year period.
       Effective date.--Plan years beginning after December 31, 
     1998.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     the modification that, with respect to amortization bases 
     remaining at the end of the 1998 plan year, the 20-year 
     amortization period is reduced by the number of years since 
     the amortization base had been established. The conference 
     agreement also clarifies that no amortization is required 
     with respect to funding methods that do not provide for 
     amortization bases.
     12. Spousal consent required for distributions from section 
         401(k) plans (sec. 714 of the Senate amendment)

                              Present Law

       Under present law, pension plans that provide automatic 
     survivor benefits (i.e., joint and survivor annuities and 
     preretirement survivor annuities) require spousal consent to 
     the payment of a participant's benefit in a form other than a 
     survivor annuity. A qualified cash or deferred arrangement (a 
     ``section 401(k) plan'') is not subject to the automatic 
     survivor benefit rules if the plan provides that the spouse 
     of a participant is the beneficiary of the participant's 
     entire account under the plan, the participant's benefit is 
     not paid in the form of an annuity, and the participant's 
     account does not include amounts transferred from another 
     plan that was subject to the automatic survivor benefit 
     rules. In general, spousal consent is not required for an 
     involuntary cash-out of a participant's benefit or 
     distributions made to satisfy the minimum distribution rules.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that written spousal consent 
     is required for all distributions, including plan loans, from 
     plans containing a qualified cash or deferred arrangement. As 
     under present law, spousal consent is not required for an 
     involuntary cash-out or a participant's benefit or for the 
     payment of distributions required under the minimum 
     distribution rules. If spousal consent is not obtained, the 
     benefit must be distributed in equal periodic payments over 
     the life (or life expectancy) of the participant, the lives 
     (or life expectancies) of the participant and beneficiary, or 
     over a period of 10 years or more. A plan which complies with 
     the spousal consent requirement will not be treated as 
     failing to satisfy the anti-cutback rules related to optional 
     forms of benefit.
       Effective date.--The provision is effective for plan years 
     beginning after December 31, 1998.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     13. Contributions on behalf of a minister to a church plan 
         (sec. 715 of the Senate amendment)

                              Present Law

       Under present law, contributions made to retirement plans 
     by ministers who are self-employed are deductible to the 
     extent such contributions do no exceed certain limitations 
     applicable to retirement plans. These limitations include the 
     limit on elective deferrals, the exclusion allowance, and the 
     limit on annual additions to a retirement plan.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that in the case of a 
     contribution made on behalf of a minister who is self-
     employed to a church plan, the contribution is excludable 
     from the income of the minister to the extent that the 
     contribution would be excludable if the minister were an 
     employee of a church and the contribution were made to the 
     plan.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment. The 
     provision does not alter present law under which amounts 
     contributed for a minister in connection with section 403(b), 
     either by the minister's actual employer or by any church or 
     convention or association of churches that is treated as the 
     minister's employer under section 414(e), are excluded from 
     the minister's income, and amounts contributed in accordance 
     with section 403(b) by the minister (whether the minister is 
     an employee or is self employed) are deductible by the 
     minister as provided in section 404 taking into account the 
     other special rules of section 414(e).
     14. Exclusion of ministers from discrimination testing of 
         certain non-church retirement plans (sec. 715 of the 
         Senate amendment)

                              Present Law

       Under present law, ministers who are employed by an 
     organization other than a church are treated as if employed 
     by the church and may participate in the retirement plan 
     sponsored by the church. If the organization also sponsors a 
     retirement plan, such plan does not have to include the 
     ministers as employees for purposes of satisfying the 
     nondiscrimination rules applicable to qualified plans 
     provided the organization is not eligible to participate in 
     the church plan.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that if a minister is 
     employed by an organization other than a church and the 
     organization is not otherwise participating in the church 
     plan, then the minister does not have to be included as an 
     employee under the retirement plan of the organization for 
     purposes of the nondiscrimination rules.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1997.

[[Page H6603]]

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     15. Diversification in section 401(k) plan investments (sec. 
         717 of the Senate amendment)

                              Present Law

       The Employee Retirement Income Security Act of 1974, as 
     amended (``ERISA'') prohibits certain employee benefit plans 
     from investing more than 10 percent of the plan's assets in 
     the securities and real property of the employer who sponsors 
     the plan. The 10 percent limitation does not apply to 
     ``eligible individual account plans'' that specifically 
     authorize such investments. Generally, eligible individual 
     account plans are defined contribution plans, including plans 
     containing a cash or deferred arrangement (``401(k) plans''). 
     The assets of such plans may be invested in employer 
     securities and real property without regard to the 10-percent 
     limitation.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that the term ``eligible 
     individual account plan'' does not include the portion of a 
     plan that consists of elective deferrals (and earnings on the 
     elective deferrals) made under section 401(k) if elective 
     deferrals equal to more than 1 percent of a participant's 
     compensation are required to be invested in employer 
     securities at the direction of a person other than the 
     participant. Such portion of the plan is treated as a 
     separate plan subject to the 10-percent limitation on 
     investment in employer securities and real property.
       The Senate amendment does not apply to an individual 
     account plan if the value of the assets of all individual 
     account plans maintained by the employer does not exceed 10 
     percent of the value of the assets of all pension plans 
     maintained by the employer. The Senate amendment does not 
     apply to an employee stock ownership plan as defined in 
     sections 409(a) and 4975(e)(7) of the Internal Revenue Code.
       Effective date.--The provision is effective with respect to 
     employer securities and employer real property acquired after 
     the beginning of the first plan year beginning after the 90th 
     day after the date of enactment. The provision does not apply 
     to employer securities and real property acquired pursuant to 
     a binding written contract to acquire such securities or real 
     property in effect on the date of enactment and at all times 
     thereafter.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications. The conference agreement clarifies that the 
     provision applies if elective deferrals equal to more than 1 
     percent of an employee's eligible compensation are required 
     to be invested in employer securities and employer real 
     property. Eligible compensation is compensation that is 
     eligible to be deferred. As under the Senate amendment, if 
     the 1 percent threshold is exceeded, then the portion of the 
     plan that consists of elective deferrals (and earnings 
     thereon) is still treated as an individual account plan as 
     long as elective deferrals (and earnings thereon) are not 
     required to be invested in employer securities and employer 
     real property.
       The conference agreement provides that multiemployer plans 
     are not taken into account in determining whether the value 
     of the assets of all individual account plans maintained by 
     the employer does not exceed 10 percent of the value of the 
     assets of all pension plans maintained by the employer. The 
     conference agreement provides that the provision does not 
     apply to an employee stock ownership plan as defined in 
     section 4975(e)(7) of the Internal Revenue Code.
       Effective date.--Under the conference agreement, the 
     provision is effective with respect to elective deferrals in 
     plan years beginning after December 31, 1998 (and earnings 
     thereon). The provision does not apply with respect to 
     earnings on elective deferrals for years beginning before 
     January 1, 1999.
     16. Removal of dollar limitation on benefit payments from a 
         defined benefit plan for police and fire employees (sec. 
         786 of the Senate amendment)

                              Present Law

       Under present law, limits are imposed on the contributions 
     and benefits under qualified pension plans. Certain special 
     rules apply in the case of State and local governmental 
     plans.
       In the case of a defined benefit pension plan, the limit on 
     the annual retirement benefit is the lesser of (1) 100 
     percent of compensation or (2) $125,000 (for 1997, indexed 
     for inflation). The 100 percent of compensation limitation 
     does not apply in the case of State and local governmental 
     pension plans. In general, the dollar limit is reduced if 
     benefits begin before social security retirement age and 
     increased if benefits begin after social security retirement 
     age. In the case of State and local government plans, the 
     dollar limit is not reduced unless benefits begin before age 
     62 and in any case is not less than $75,000, and the dollar 
     limit is increased if benefits begin after age 65. In the 
     case of certain police and fire department employees, the 
     dollar limit cannot be reduced below $50,000 (indexed), 
     regardless of the age at which benefits commence.1
---------------------------------------------------------------------------
     \1\ This special rule applies to participants (1) in a 
     defined benefit plan of a State or local government plan, and 
     (2) with respect to whom the period of service taken into 
     account in determining the amount of the benefit under such 
     plan includes at least 15 years of service of the participant 
     as (a) a full-time employee of a police or fire department 
     organized by a State or political subdivision to provide 
     police protection, firefighting services, or emergency 
     medical services or (b) as a member of the Armed Services of 
     the United States.
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       The dollar limit on defined benefit plans does not apply to 
     individuals who receive the special rule for certain police 
     and fire department employees under present law.
       Effective date.--Years beginning after December 31, 1996.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     the clarification that the exception from the dollar limit 
     for police and fire department employees only applies to the 
     reduction for early retirement benefits. Thus, the defined 
     benefit plan dollar limit continues to apply, but is not 
     reduced in the case of early retirement. As under present 
     law, the dollar limit is increased for such employees if 
     benefits begin after age 65.
       Effective date.--Same as the Senate amendment.
     17. Church plan exception to prohibition on discrimination 
         against individuals based on health status

                              Present Law

       Under the Health Insurance Portability and Accountability 
     Act (``HIPAA''), group health plans generally may not 
     establish rules for eligibility based on any of the following 
     factors relating to an individual or a dependent of the 
     individual: (1) health status, (2) medical condition, (3) 
     claims experience, (4) receipt of health care, (5) medical 
     history, (6) genetic information, (7) evidence of 
     insurability, or (8) disability. In addition, a group health 
     plan may not charge an individual a greater premium based on 
     any of such factors.
       A excise tax is imposed on the failure of a group plan to 
     satisfy the nondiscrimination rule. In general, the excise 
     tax is imposed on the employer sponsoring the plan and is 
     equal to $100 per day per individual as long as the plan 
     is not in compliance.

                               House Bill

       No provision.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement provides that certain church plans 
     are not treated as violating the nondiscrimination 
     requirement merely because the plan requires evidence of good 
     health in order for an individual to enroll in the plan for 
     (1) individuals who are employees of employers with 10 or 
     fewer and for self-employed individuals or (2) any individual 
     who enrolls after the first 90 days of eligibility under the 
     plan. The provision applies to a church plan for a year if 
     the plan included such provisions requiring evidence of good 
     health on July 15, 1997, and at all times thereafter before 
     the beginning of the year.
       Effective date.--The provision is effective as if included 
     in HIPAA.
     18. Newborns' and mothers' health protection; mental health 
         parity

                              Present Law

       The Newborns' and Mothers' Health Protection Act of 1996 
     amended the Employee Retirement Income Security Act 
     (``ERISA'') and the Public Health Service Act to impose 
     certain requirements on group health plans with respect to 
     coverage of newborns and mothers, including a requirement 
     that a group health plan cannot restrict benefits for a 
     hospital stay in connection with childbirth for the mother or 
     newborn to less than 48 hours following a normal vaginal 
     delivery or less than 96 hours following a cesarean section. 
     These provisions are effective with respect to plan years 
     beginning on or after January 1, 1998.
       The Mental Health Parity Act of 1996 amended ERISA and the 
     Public Health Service Act to provide that group health plans 
     that provide both medical and surgical benefits and mental 
     health benefits cannot impose limits on mental health 
     benefits that are not imposed on substantially all medical 
     and surgical benefits. The provisions of the Mental Health 
     Parity Act are effective with respect to plan years beginning 
     on or after January 1, 1998, but do not apply to benefits for 
     services furnished on or after September 30, 2001.
       The Internal Revenue Code requires that group health plans 
     meet certain requirements with respect to limitations on 
     exclusions of preexisting conditions and that group health 
     plans not discriminate against individuals based on health 
     status. An excise tax of $100 per day during the period of 
     noncompliance is imposed on the employer sponsoring the plan 
     if the plan fails to meet these requirements. The maximum tax 
     that can be imposed during a taxable year cannot exceed the 
     lesser of 10 percent of the employer's group health plan 
     expenses for the prior year or $500,000. No tax is imposed if 
     the Secretary determines that the employer did not know, and 
     exercising reasonable diligence would not have known, that 
     the failure existed.

                               House Bill

       No provision.

[[Page H6604]]

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement incorporates into the Internal 
     Revenue Code the provisions of the Newborns' and Mothers' 
     Health Protection Act of 1996 and the Mental Health Parity 
     Act of 1996 relating to group health plans. Failures to 
     comply with such provisions are subject to the present-law 
     excise tax applicable to failures to comply with present-law 
     group health plan requirements.
       Effective date.--The provisions are effective with respect 
     to plan years beginning on or after January 1, 1998.

                  B. Pension Simplification Provisions

     1. Matching contributions of self-employed individuals not 
         treated as elective deferrals (sec. 1301 of the Senate 
         amendment)

                              Present Law

       A qualified cash or deferred arrangement (a ``section 
     401(k) plan'') is a type of tax- qualified pension plan under 
     which employees can elect to make pre-tax contributions. An 
     employee's annual elective contributions are subject to a 
     dollar limit ($9,500 for 1997). Employers may make matching 
     contributions based on employees' elective contributions. In 
     the case of employees, such matching contributions are not 
     subject to the $9,500 limit on elective contributions. 
     Elective contributions are subject to a special 
     nondiscrimination test called the average deferral percentage 
     (``ADP'') test. Matching contributions are subject to a 
     similar nondiscrimination test called the average 
     contributions percentage (``ACP'') test. The employer may 
     elect to treat certain matching contributions as elective 
     contributions for purposes of the ACP test.
       Under present law, matching contributions made for a self-
     employed individual are generally treated as additional 
     elective contributions by the self-employed individual who 
     receives the matching contribution. Accordingly, matching 
     contributions for a self-employed individual are subject to 
     the dollar limit on elective contributions (along with the 
     individual's other elective deferrals) and are subject to the 
     ACP test.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that matching contributions 
     for self-employed individuals are treated the same as 
     matching contributions for employees, i.e., they are not 
     treated as elective contributions and are not subject to the 
     elective contribution limits.
       Effective date.--The provision is effective for years 
     beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment, and 
     clarifies that the provision does not apply to qualified 
     matching contributions that are treated as elective 
     contributions for purposes of satisfying the ADP test.
       Effective date.--Same as the Senate amendment, except that 
     the conference agreement provides that the provision is 
     effective for years beginning after December 31, 1996, in the 
     case of SIMPLE retirement plans.
     2. Contributions to IRAs through payroll deductions (sec. 
         1302 of the Senate amendment)

                              Present Law

       Under present law, employer involvement in the 
     establishment or maintenance of individual retirement 
     arrangements (``IRAs'') of its employees can result in the 
     employer being considered to maintain a retirement plan for 
     purposes of title I of the Employee Retirement Income 
     Security Act of 1974, as amended (``ERISA''), thus subjecting 
     the employer to ERISA's fiduciary rules.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that an employer that 
     facilitates IRA contributions by its employees by 
     establishing a system under which employees, through employer 
     payroll deductions, may make contributions to IRAs will not 
     be considered to sponsor a retirement plan subject to ERISA. 
     Under the system, employees would be required to provide 
     their employer with a contribution certificate which 
     establishes the IRA and specifies the contribution amount to 
     be deducted from the employee's wages and remitted to the 
     employee's IRA. As under present law, the amount contributed 
     through payroll deduction would be includible in the 
     employee's gross income and wages for employment tax 
     purposes, and deductible by the employee in accordance with 
     the rules relating to IRAs.
       The provision does not apply to an employee employed by an 
     employer who maintains a tax-qualified retirement plan.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment. The conference agreement provides that employers 
     that choose not to sponsor a retirement plan should be 
     encouraged to set up a payroll deduction system to help 
     employees save for retirement by making payroll deduction 
     contributions to their IRAs. The Secretary of Treasury is 
     encouraged to continue his efforts to publicize the 
     availability of these payroll deduction IRAs.
     3. Plans not disqualified merely by accepting rollover 
         contributions (sec. 1303 of the Senate amendment)

                              Present Law

       Under present law, a qualified retirement plan that accepts 
     rollover contributions from other plans will not be 
     disqualified because the plan making the distribution is, in 
     fact, not qualified at the time of the distribution, if, 
     prior to accepting the rollover, the receiving plan 
     reasonably concluded that the distributing plan was 
     qualified. The receiving plan can reasonably conclude that 
     the distributing plan was qualified if, for example, prior to 
     accepting the rollover, the distributing plan provided a 
     statement that the distributing plan had a favorable 
     determination letter issued by the Internal Revenue Service 
     (``IRS''). The receiving plan is not required to verify this 
     information.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment clarifies the circumstances under 
     which a qualified plan could accept rollover contributions 
     without jeopardizing its qualified status. Under the 
     provision, if the trustee of the plan making the distribution 
     verifies that the distributing plan is intended to be a 
     qualified plan, the plan receiving the rollover will not be 
     disqualified if the distributing plan was not in fact a 
     qualified plan.
       Effective date.--The Senate amendment is effective for 
     rollover contributions made after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment, as 
     modified. Under the conference agreement, the Secretary of 
     the Treasury is directed to clarify that, under its 
     regulations protecting plans from disqualification because 
     they receive invalid rollover contributions, it is not 
     necessary for a distributing plan to have a determination 
     letter in order for the administrator of the receiving plan 
     to reasonably conclude that a contribution is a valid 
     rollover.
     4. Modification of prohibition on assignment or alienation 
         (sec. 1304 of the Senate amendment)

                              Present Law

       Under present law, amounts held in a qualified retirement 
     plan for the benefit of a participant are not, except in very 
     limited circumstances, assignable or available to personal 
     creditors of the participant. A plan may permit a 
     participant, at such time as benefits under the plan are in 
     pay status, to make a voluntary revocable assignment of an 
     amount not in excess of 10-percent of any benefit payment, 
     provided the purpose is not to defray plan administration 
     costs. In addition, a plan may comply with a qualified 
     domestic relations order issued by a state court requiring 
     benefit payments to former spouses or other ``alternate 
     payees'' even if the participant is not in pay status.
       There is no specific exception from the Employee Retirement 
     Income Security Act of 1974, as amended (``ERISA'') or the 
     Internal Revenue Code which would permit the offset of a 
     participant's benefit against the amount owed to a plan by 
     the participant as a result of a breach of fiduciary duty to 
     the plan or criminality involving the plan. Courts have been 
     divided in their interpretation of the prohibition on 
     assignment or alienation in these cases. Some courts have 
     ruled that there is no exception in ERISA for the offset of a 
     participant's benefit to make a plan whole in the case of a 
     fiduciary breach. Other courts have reached a different 
     result and permitted an offset of a participant's benefit for 
     breach of fiduciary duties.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment permits a participant's benefit in a 
     qualified plan to be reduced to satisfy liabilities of the 
     participant to the plan due to (1) the participant is being 
     convicted of committing a crime involving the plan, (2) a 
     civil judgment (or consent order or decree) entered by a 
     court in an action brought in connection with a violation of 
     the fiduciary provisions of title I of ERISA, or (3) a 
     settlement agreement between the Secretary of Labor or the 
     Pension Benefit Guaranty Corporation and the participant in 
     connection with a violation of the fiduciary provisions of 
     ERISA. The court order establishing such liability must 
     require that the participant's benefit in the plan be applied 
     to satisfy the liability. If the participant is married at 
     the time his or her benefit under the plan is offset to 
     satisfy the liability, spousal consent to such offset would 
     be required unless the spouse is also required to pay an 
     amount to the plan in the judgment, order, decree or 
     settlement or the judgment, order, decree or settlement 
     provides a 50-percent survivor annuity for the spouse.
       Effective date.--The Senate amendment is effective for 
     judgments, orders, and decrees issued, and settlement 
     agreements entered into, on or after the date of enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment. The 
     conference agreement clarifies that an offset is includible 
     in income on the date of the offset.

[[Page H6605]]

     5. Elimination of paperwork burdens on plans (sec. 1305 of 
         the Senate amendment)

                              Present Law

       Under present law, employers are required to prepare 
     summary plan descriptions of employee benefit plans 
     (``SPDs'), and summaries of material modifications to such 
     plans (``SMMs'). The SPDs and SMMs generally provide 
     information concerning the benefits provided by the plan and 
     the participants' rights and obligations under the plan. The 
     SPDs and SMMs must be furnished to plan participants and 
     beneficiaries and filed with the Secretary of Labor.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment eliminates the requirement that SPDs 
     and SMMs be filed with the Secretary of Labor. Employers 
     would be required to furnish these documents to the Secretary 
     of Labor upon request. A civil penalty could be imposed by 
     the Secretary of Labor on the plan administrator for failure 
     to comply with such requests. The penalty would be up to $100 
     per day of failure, up to a maximum of $1,000 per request. No 
     penalty would be imposed if the failure was due to matters 
     reasonably outside the control of the plan administrator.
       Effective date.--The provision is effective on the date of 
     enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     6. Modification of section 403(b) exclusion allowance to 
         conform to section 415 modifications (sec. 1306 of the 
         Senate amendment)

                              Present Law

       Under present law, annual contributions to a section 403(b) 
     annuity cannot exceed the exclusion allowance. In general, 
     the exclusion allowance for a taxable year is the excess, if 
     any, of (1) 20 percent of the employee's includible 
     compensation multiplied by his or her years of service, over 
     (2) the aggregate employer contributions for an annuity 
     excludable for any prior taxable years.
       Alternatively, an employee may elect to have the exclusion 
     allowance determined under the rules relating to tax-
     qualified defined contribution plans (sec. 415). Tax-
     qualified defined contributions plans are subject to 
     limitations on annual additions. In addition, for years 
     beginning before January 1, 2000, an overall limit applies if 
     an employee is a participant in both a defined contribution 
     plan and defined benefit plan of the same employer (sec. 
     415(e)).

                               House Bill

       No provision.

                            Senate Amendment

       The provision conforms the section 403(b) exclusion 
     allowance to the section 415 limits by providing that 
     includible compensation includes elective deferrals (and 
     similar pre-tax contributions) of the employee.
       The Secretary of the Treasury is directed to revise the 
     regulations regarding the exclusion allowance to reflect the 
     fact that the overall limit on benefits and contributions is 
     repealed (sec. 415(e)). The revised regulations are to be 
     effective for limitation years beginning after December 31, 
     1999.
       Effective date.--The modification to the definition of 
     includible compensation is effective for years beginning 
     after December 31, 1997. The direction to the Secretary is 
     effective on the date of enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     the clarification that the revised Treasury regulations are 
     to be effective for years (rather than limitation years) 
     beginning after December 31, 1999. In addition, the 
     conference agreement clarifies that the revised regulations 
     are to relate to the election to have the exclusion allowance 
     determined under section 415.
     7. New technologies in retirement plans (sec. 1307 of the 
         Senate amendment)

                              Present Law

       Under present law, it is not clear if sponsors of employee 
     benefit plans may use new technologies (telephonic response 
     systems, computers, E-mail) to satisfy the various ERISA 
     requirements for notice, election, consent, recordkeeping, 
     and participant disclosure.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment directs the Secretaries of the 
     Treasury and Labor to issue guidance facilitating the use of 
     new technology for plan purposes. The guidance is to be 
     designed to (1) interpret the notice, election, consent, 
     disclosure, and time requirements (and related recordkeeping 
     requirements) under the Internal Revenue Code of 1986 
     (``IRC'') and the Employee Retirement Income Security Act of 
     1974, as amended (``ERISA'') relating to retirement plans as 
     applied to the use of new technologies by plan sponsors 
     and administrators while maintaining the protection of the 
     rights of participants and beneficiaries, and (2) clarify 
     the extent to which writing requirements under the IRC 
     shall be interpreted to permit paperless transactions.
       Effective date.--The provision is effective on the date of 
     enactment and requires that the guidance be issued not later 
     than December 31, 1998.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     8. Modification of 10-percent tax on nondeductible 
         contributions (sec. 1310 of the Senate amendment)

                              Present Law

       Under present law, if an employer sponsors both a defined 
     benefit plan and a defined contribution plan that covers some 
     of the same employees, the total deduction for all plans for 
     a plan year is generally limited to the greater of (1) 25 
     percent of compensation or (2) the contribution necessary to 
     meet the minimum funding requirements of the defined benefit 
     plan for the year.
       A 10-percent nondeductible excise tax is imposed on 
     contributions that are not deductible. This excise tax does 
     not apply to contributions to one or more defined 
     contribution plans that are nondeductible because they exceed 
     the combined plan deduction limit to the extent such 
     contributions do not exceed 6 percent of compensation in the 
     year for which the contribution is made.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment adds an additional exception to the 
     10-percent excise tax on nondeductible contributions. Under 
     the provision, the excise tax does not apply to contributions 
     to one or more defined contribution plans that are not 
     deductible because they exceed the combined plan deduction 
     limit to the extent such contributions do not exceed the 
     amount of the employer's matching contributions plus the 
     elective deferral contributions to a section 401(k) plan.
       Effective date.--The provision is effective with respect to 
     taxable years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     9. Modify funding requirements for certain plans (sec. 1311 
         of the Senate amendment)

                              Present Law

       Under present law, defined benefit pension plans are 
     required to meet certain minimum funding rules. Underfunded 
     plans are required to satisfy certain faster funding 
     requirements. In general, these additional requirements do 
     not apply in the case of plans with a funded current 
     liability percentage of at least 90 percent.
       The Pension Benefit Guaranty Corporation (``PBGC'') insures 
     benefits under most defined benefit pension plans in the 
     event the plan is terminated with insufficient assets to pay 
     for plan benefits. The PBGC is funded in part by a flat-rate 
     premium per plan participant, and a variable rate premium 
     based on plan underfunding.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment modifies the minimum funding 
     requirements in the case of certain plans. The provision 
     applies in the case of plans that (1) were not required to 
     pay a variable rate PBGC premium for the plan year beginning 
     in 1996, (2) do not, in plan years beginning after 1995 and 
     before 2009, merge with another plan (other than a plan 
     sponsored by an employer that was a member of the controlled 
     group of the employer in 1996), and (3) are sponsored by a 
     company that is engaged primarily in the interurban or 
     interstate passenger bus service.
       The provision treats a plan to which it applies as having a 
     funded current liability percentage of at least 90 percent 
     for plan years beginning after 1996 and before 2005. For plan 
     years beginning after 2004, the funded current liability 
     percentage will be deemed to be at least 90 percent if the 
     actual funded current liability percentage is at least at 
     certain specified levels.
       The relief from the minimum funding requirements applies 
     for the plan year beginning in 2005, 2006, 2007, and 2008 
     only if contributions to the plan equal at least the expected 
     increase in current liability due to benefits accruing during 
     the plan year.
       Effective date.--The provision is effective with respect to 
     contributions due after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The provision is effective with respect to 
     plan years beginning after December 31, 1996.
     10. Date for adoption of plan amendments

                              Present Law

       Plan amendments to reflect amendments to the law generally 
     must be made by the time prescribed by law for filing the 
     income tax return of the employer for the employer's taxable 
     year in which the change in law occurs.

                               House Bill

       No provision.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement provides that any amendments to a 
     plan or annuity contract required to be made by the Act are 
     not required to be made before the first day of the first 
     plan year beginning on or after January 1, 1999. In the case 
     of a governmental

[[Page H6606]]

     plan, the date for amendments is extended to the first plan 
     year beginning on or after January 1, 2001. The conference 
     agreement also provides that if an amendment is made pursuant 
     to the Act (whether or not the amendment is required) before 
     the date for required plan amendments, the plan or contract 
     is operated in a manner consistent with the amendment during 
     a period and the amendment is effective retroactively to such 
     period (1) the plan or contract will not fail to be treated 
     as operated in accordance with its terms for such period 
     merely because it is operated in a manner consistent with the 
     amendment, and (2) the plan will not fail to meet the anti-
     cutback provisions applicable to qualified retirement plans 
     by reason of such a plan amendment.

                  XVI. SENSE OF THE SENATE RESOLUTIONS

     A. Sense of the Senate Regarding Reform of the Internal 
         Revenue Code of 1986 (sec. 780 of the Senate amendment)

                              Present Law

       The Federal Government imposes an individual income tax, a 
     corporate income tax, a payroll tax collected from both 
     employees and employers, certain excise taxes, and transfer 
     taxes on certain transfers of wealth by gift or from an 
     estate.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides a Sense of the Senate 
     resolution that the Internal Revenue Code of 1986 needs 
     broad-based reform, and that the President should submit a 
     comprehensive proposal for reform.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

 B. Sense of the Senate Regarding Tax Treatment of Stock Options (sec. 
                      781 of the Senate amendment)

                              Present Law

       Under present law, an employer is generally entitled to a 
     deduction with respect to stock options when the options are 
     exercised by the employee. The deduction is generally the 
     difference between the option price and the fair market value 
     of the stock when the option is exercised.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment includes a Sense of the Senate 
     resolution that finds that businesses can deduct the value of 
     stock options as a business expense even though the options 
     are not treated as an expense on the books of the business. 
     It is the sense of the Senate that the Committee on Finance 
     should hold hearings on the tax treatment of stock options.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

 C. Sense of the Senate Resolution Regarding Estate Taxes (sec. 782 of 
                         the Senate amendment)

                              Present Law

       A gift tax is imposed on lifetime transfers by gift and an 
     estate tax is imposed on transfers at death under a single 
     unified graduated rate schedule that effectively begins at 37 
     percent and reaches 55 percent on cumulative taxable 
     transfers over $3 million. A unified credit effectively 
     exempts the first $600,000 in cumulative taxable transfers 
     from estate and gift tax (sec. 2010).
       An executor may elect 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 with 
     a portion bearing 4-percent interest.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides a Sense of the Senate 
     resolution that (1) estate tax relief provided by this bill 
     is an important step that will enable more family-owned farms 
     and small businesses to survive and continue to provide 
     economic security and job creation in American communities 
     and (2) Congress should eliminate the Federal estate tax 
     liability for family-owned businesses by the end of 2002 on a 
     deficit-neutral basis.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

D. Sense of the Senate Regarding Who Should Benefit from Tax Cuts (sec. 
                      791 of the Senate amendment)

                              Present Law

       No provision.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment includes a Sense of the Senate 
     resolution that only those who pay Federal income taxes 
     should benefit from the tax reduction provisions of the Act.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

   E. Sense of the Senate Regarding Self-Employment Taxes of Limited 
              Partners (sec. 734 of the Senate amendment)

                              Present Law

       Under the Self-Employment Contributions Act, taxes are 
     imposed on an individual's net earnings from self employment. 
     A limited partner's net earnings from self employment include 
     guaranteed payments made to the individual for services 
     actually rendered and do not include a limited partner's 
     distributive share of the income or loss of the partnership. 
     The Department of the Treasury has issued proposed 
     regulations defining a limited partner for this purpose. 
     These regulations provide, among other things, that an 
     individual is not a limited partner if the individual 
     participates in the partnership business for more than 500 
     hours during the taxable year. The regulations are proposed 
     to be effective beginning with the individual's first taxable 
     year beginning on or after the date the regulations are 
     published as final regulations in the Federal Register.

                               House Bill

       No provision.

                            Senate Amendment

       It is the Sense of the Senate that the Department of the 
     Treasury should withdraw the proposed regulations defining 
     limited partner, and that the Congress should determine the 
     tax law governing self-employment income.

                          Conference Agreement

       The conference agreement provides that any regulations 
     relating to the definition of a limited partner for self-
     employment tax purposes shall not be issued or effective 
     before July 1, 1998.

                 XVII. TECHNICAL CORRECTIONS PROVISIONS

                               House Bill

       The House bill contains technical, clerical, and conforming 
     amendments to the Small Business Job Protection Act of 1996, 
     the Health Insurance Portability and Accountability Act of 
     1996, the Taxpayer Bill of Rights 2, and other recently 
     enacted tax legislation.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that the Senate amendment (1) does not contain the provision 
     that defines the term ``former reservations in Oklahoma'' for 
     purposes of section 168(j)(6) (relating to certain tax 
     benefits provided with reference to activities occurring on 
     Indian reservations) and (2) makes certain clarifications to 
     the provisions relating to church plans included in the Small 
     Business Job Protection Act of 1996.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. Thus, the conference agreement contains 
     both the provision in the House bill relating to the 
     definition of the term ``former reservations in Oklahoma'' 
     and the provisions in the Senate amendment relating to church 
     plans.
       In addition, the conference agreement makes the following 
     additions, modifications, and clarifications relating to 
     technical correction provisions.
       (1) The conference agreement amends section 205(c) of the 
     Employee Retirement Income Security Act (as amended by the 
     Small Business Job Protection Act of 1996) to clarify that 
     the reference to ``the Secretary'' is to the Secretary of the 
     Treasury.
       (2) The conference agreement clarifies that, for purposes 
     of the section 833 deduction, liabilities incurred during the 
     taxable year under cost-plus contracts are added to claims 
     incurred under section 833(b)(1)(A)(i). Similarly, for 
     purposes of the section 833 deduction, expenses incurred 
     during the taxable year in connection with cost-plus 
     contracts are added to expenses incurred under section 
     833(b)(1)(A)(ii). The provision is effective as if included 
     in the Tax Reform Act of 1986.
       (3) The conference agreement provides that the technical 
     correction provisions clarifying the phased reduction in 
     luxury excise tax rates for automobiles will be effective for 
     sales after the date of enactment of this Act.
       (4) The conference agreement clarifies that, under the 
     transition relief provided under the company-owned life 
     insurance rule, the 4-out-of-7 rule and the single premium 
     rule of present law are not to apply solely by reason of a 
     lapse occurring after October 13, 1995, by reason of no 
     additional premiums being received under the contract.

                       XVIII. OTHER TAX PROVISION

A. Estimated Tax Requirements of Individuals (sec. 311(d) of the House 
                                 bill)

       Under present law, an individual taxpayer generally is 
     subject to an addition to tax for any underpayment of 
     estimated tax. An individual generally does not have an 
     underpayment of estimated tax if he or she makes timely 
     estimated tax payments at least equal to: (1) 100 percent of 
     the tax shown on the return of the individual for the 
     preceding year (the ``100 percent of last year's liability 
     safe harbor'') or (2) 90 percent of the tax shown on the 
     return for the current year. The 100 percent of last year's 
     liability safe harbor is modified to be a 110 percent of last 
     year's liability safe harbor for any individual with an AGI 
     of more than $150,000 as shown on the return for the 
     preceding taxable year.

                               House Bill

       The House bill changes the 110 percent of last year's 
     liability safe harbor to be a 109 percent of last year's 
     liability safe harbor for taxable years beginning in 1997 and 
     a 105 percent of last year's liability safe harbor for 
     taxable years beginning in 1998.

[[Page H6607]]

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement changes the 110 percent of last 
     year's liability safe harbor to be a 100 percent of last 
     year's liability safe harbor for taxable years beginning in 
     1998, a 105 percent of last year's liability safe harbor for 
     taxable years beginning in 1990, 2000, and 2001, and a 112 
     percent of last year's liability safe harbor for taxable 
     years beginning in 2002. In addition, no estimated tax 
     penalties will be imposed under section 6654 or 6655 for any 
     period before January 1, 1998, for any payment the due date 
     of which is before January 16, 1998, with respect to an 
     underpayment to the extent the underpayment is created or 
     increased by a provision of the Act.

                         XIX. TRADE PROVISIONS

  A. Extension of Duty-Free Treatment Under the Generalized System of 
                Preferences (sec. 971 of the House bill)

                              Present Law

       Title V of the Trade Act of 1974, as amended (Generalized 
     System of Preferences (``GSP'')), grants authority to the 
     President to provide duty-free treatment on imports of 
     eligible articles from designated beneficiary developing 
     countries, subject to specific conditions and limitations. To 
     qualify for GSP privileges, each beneficiary country is 
     subject to various mandatory and discretionary eligibility 
     criteria. Import sensitive products are ineligible for GSP. 
     The President's authority to grant GSP benefits expired on 
     May 31, 1997.

                               House Bill

       Under the House bill, the GSP program is reauthorized for 
     two years, to expire on May 31, 1999. Refunds of any duty 
     paid between May 31, 1997 and the date of enactment are 
     provided upon request of the importer.
       Effective date.--The provision is effective upon date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with a 
     modification to extend the GSP reauthorization through June 
     30, 1998.

 B. Temporary Suspension of Vessel Repair Duty (sec. 972 of the House 
                                 bill)

                              Present Law

       Section 466 of the Tariff Act of 1930 establishes a 50-
     percent duty on repairs made outside the United States to 
     U.S. flag vessels.

                               House Bill

       The current 50-percent duty on repairs to U.S. flag vessels 
     made in countries that are signatories to the OECD 
     Shipbuilding Agreement is suspended for a one-year period.
       Effective date.--The provision is effective with respect to 
     repair activities occurring for a one-year period beginning 
     on the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

 C. United States-Caribbean Basin Trade Partnership Act (secs. 981-988 
                           of the House bill)

                              Present Law

       The Caribbean Basin Initiative (``CBI'') program was 
     established by the Caribbean Basin Economic Recovery Act 
     (``CBERA''), which was enacted on August 5, 1983. This 
     legislation authorized the President to grant duty-free 
     treatment to the imports of eligible articles from designated 
     countries in the Caribbean Basin region. Certain products 
     (textiles, apparel, canned tuna, petroleum and petroleum 
     products, footwear, handbags, luggage, flatgoods, work 
     gloves, leather wearing apparel, watches and watch parts) 
     were excluded under the statute from eligibility for duty-
     free treatment.
       CBI trade benefits were made permanent in 1990.

                               House Bill

       The House bill amends the Caribbean Basin Economic Recovery 
     Act to provide additional temporary transitional trade 
     benefits to products that are excluded from eligibility for 
     duty-free treatment under CBI. These products are provided 
     tariff and quota treatment which is comparable to treatment 
     accorded to like articles imported from Mexico under the 
     North American Free Trade Agreement (``NAFTA'') subject to 
     certain rule-of-origin and customs requirements and other 
     limitations. The President must review periodically country 
     adherence to eligibility criteria, and consult with 
     beneficiary countries about free trade agreement 
     negotiations.
       Effective date.--The provision is effective for one year 
     beginning January 1, 1998.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

       XX. LIMITED TAX BENEFITS SUBJECT TO THE LINE ITEM VETO ACT

       The Line Item Veto Act amended the Congressional Budget and 
     Impoundment Act of 1974 to grant the President the limited 
     authority to cancel specific dollar amounts of discretionary 
     budget authority, certain new direct spending, and limited 
     tax benefits. The Line Item Veto Act provides that the Joint 
     Committee on Taxation is required to examine any revenue or 
     reconciliation bill or joint resolution that amends the 
     Internal Revenue Code of 1986 prior to its filing by a 
     conference committee in order to determine whether or not the 
     bill or joint resolution contains any limited tax benefits 
     and to provide a statement to the conference committee that 
     either (1) identifies each limited tax benefit contained in 
     the bill or resolution, or (2) states that the bill or 
     resolution contains no limited tax benefits. The conferees 
     determine whether or not to include the Joint Committee's 
     statement in the conference report. If the conference report 
     includes the information from the Joint Committee on Taxation 
     identifying provisions that are limited tax benefits, then 
     the President may cancel one or more of those, but only 
     those, provisions that have been identified. If such a 
     conference report contains a statement from the Joint 
     Committee on Taxation that none of the provisions in the 
     conference report are limited tax benefits, then the 
     President has no authority to cancel any of the specific tax 
     provisions, because there are no tax provisions that are 
     eligible for cancellation under the Line Item Veto Act.
       The conference report contains a list of provisions that 
     have been identified by the Joint Committee on Taxation as 
     limited tax benefits within the meaning of the Line Item Veto 
     Act. These provisions are listed below
       (1) Sec. 101(c) (relating to high risk pools permitted to 
     cover dependents of high risk individuals)
       (2) Sec. 222 (relating to limitation on qualified 501(c)(3) 
     bonds other than hospital bonds)
       (3) Sec. 224 (relating to contributions of computer 
     technology and equipment for elementary or secondary school 
     purposes)
       (4) Sec. 312(a) (relating to treatment of remainder 
     interests for purposes of provision relating to gain from 
     sale of principal residence)
       (5) Sec. 501(b) (relating to indexing of alternative 
     valuation of certain farm, etc., real property)
       (6) Sec. 504 (relating to extension of treatment of certain 
     rents under section 2032A to lineal descendants)
       (7) Sec. 505 (relating to clarification of judicial review 
     of eligibility for extension of time for payment of estate 
     tax)
       (8) Sec. 508 (relating to treatment of land subject to 
     qualified conservation easement)
       (9) Sec. 511 (relating to expansion of exception from 
     generation-skipping transfer tax for transfers to individuals 
     with deceased parents)
       (10) Sec. 601 (relating to the research tax credit)
       (11) Sec. 602 (relating to contributions of stock to 
     private foundations)
       (12) Sec. 603 (relating to the work opportunity tax credit)
       (13) Sec. 604 (relating to orphan drug tax credit)
       (14) Sec. 701 (relating to incentives for revitalization of 
     the District of Columbia) to the extent it amends the 
     Internal Revenue Code of 1986 to create sections 1400 and 
     1400A (relating to tax-exempt economic development bonds)
       (15) Sec. 701 (relating to incentives for revitalization of 
     the District of Columbia) to the extent it amends the 
     Internal Revenue Code of 1986 to create section 1400C 
     (relating to first-time homebuyer credit for District of 
     Columbia)
       (16) Sec. 801 (relating to incentives for employing long-
     term family assistance recipients)
       (17) Sec. 904(b) (relating to uniform rate of tax on 
     vaccines) as it relates to any vaccine containing pertussis 
     bacteria, extracted or partial cell bacteria, or specific 
     pertussis antigens
       (18) Sec. 904(b) (relating to uniform rate of tax on 
     vaccines) as it relates to any vaccine against measles
       (19) Sec. 904(b) (relating to uniform rate of tax on 
     vaccines) as it relates to any vaccine against mumps
       (20) Sec. 904(b) (relating to uniform rate of tax on 
     vaccines) as it relates to any vaccine against rubella
       (21) Sec. 905 (relating to operators of multiple retail 
     gasoline outlets treated as wholesale distributors for refund 
     purposes)
       (22) Sec. 906 (relating to exemption of electric and other 
     clean-fuel motor vehicles from luxury automobile 
     classification)
       (23) Sec. 907(a) (relating to rate of tax on liquified 
     natural gas determined on basis of BTU equivalency with 
     gasoline)
       (24) Sec. 907(b) (relating to rate of tax on methanol from 
     natural gas determined on basis of BTU equivalency with 
     gasoline)
       (25) Sec. 908 (relating to modification of tax treatment of 
     hard cider)
       (26) Sec. 914 (relating to mortgage financing for 
     residences located in disaster areas)
       (27) Sec. 962 (relating to assignment of workmen's 
     compensation liability eligible for exclusion relating to 
     personal injury liability assignments)
       (28) Sec. 963 (relating to tax-exempt status for certain 
     State worker's compensation act companies)
       (29) Sec. 967 (relating to additional advance refunding of 
     certain Virgin Island bonds)
       (30) Sec. 968 (relating to nonrecognition of gain on sale 
     of stock to certain farmers'' cooperatives)
       (31) Sec. 971 (relating to exemption of the incremental 
     cost of a clean fuel vehicle from the limits on depreciation 
     for vehicles)
       (32) Sec. 974 (relating to clarification of treatment of 
     certain receivables purchased by cooperative hospital service 
     organizations)
       (33) Sec. 975 (relating to deduction in computing adjusted 
     gross income for expenses in

[[Page H6608]]

     connection with service performed by certain officials) with 
     respect to taxable years beginning before 1991
       (34) Sec. 977 (relating to elective carryback of existing 
     carryovers of National Railroad Passenger Corporation)
       (35) Sec. 1005(b)(2)(B) (relating to transition rule for 
     instruments described in a ruling request submitted to the 
     Internal Revenue Service on or before June 8, 1997)
       (36) Sec. 1005(b)(2)(C) (relating to transition rule for 
     instruments described on or before June 8, 1997, in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission) as it relates to a public announcement
       (37) Sec. 1005(b)(2)(C) (relating to transition rule for 
     instruments described on or before June 8, 1997, in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission) as it relates to a filing with the Securities and 
     Exchange Commission
       (38) Sec. 1011(d)(2)(B) (relating to transition rule for 
     distributions made pursuant to the terms of a tender offer 
     outstanding on May 3, 1995)
       (39) Sec. 1011(d)(3) (relating to transition rule for 
     distributions made pursuant to the terms of a tender offer 
     outstanding on September 13, 1995)
       (40) Sec. 1012(d)(3)(B) (relating to transition rule for 
     distributions pursuant to an acquisition described in section 
     355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 
     described in a ruling request submitted to the Internal 
     Revenue Service on or before April 16, 1997)
       (41) Sec. 1012(d)(3)(C) (relating to transition rule for 
     distributions pursuant to an acquisition described in section 
     355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 
     described in a public announcement or filing with the 
     Securities and Exchange Commission) as it relates to a public 
     announcement
       (42) Sec. 1012(d)(3)(C) (relating to transition rule for 
     distributions pursuant to an acquisition described in section 
     355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 
     described in a public announcement or filing with the 
     Securities and Exchange Commission) as it relates to a filing 
     with the Securities and Exchange Commission
       (43) Sec. 1013(d)(2)(B) (relating to transition rule for 
     distributions or acquisitions after June 8, 1997, described 
     in a ruling request submitted to the Internal Revenue Service 
     submitted on or before June 8, 1997)
       (44) Sec. 1013(d)(2)(C) (relating to transition rule for 
     distributions or acquisitions after June 8, 1997, described 
     in a public announcement or filing with the Securities and 
     Exchange Commission on or before June 8, 1997) as it relates 
     to a public announcement
       (45) Sec. 1013(d)(2)(C) (relating to transition rule for 
     distributions or acquisitions after June 8, 1997, described 
     in a public announcement or filing with the Securities and 
     Exchange Commission on or before June 8, 1997) as it relates 
     to a filing with the Securities and Exchange Commission
       (46) Sec. 1014(f)(2)(B) (relating to transition rule for 
     any transaction after June 8, 1997, if such transaction is 
     described in a ruling request submitted to the Internal 
     Revenue Service on or before June 8, 1997)
       (47) Sec. 1014(f)(2)(C) (relating to transition rule for 
     any transaction after June 8, 1997, if such transaction is 
     described in a public announcement or filing with the 
     Securities and Exchange Commission on or before June 8, 1997) 
     as it relates to a public announcement
       (48) Sec. 1014(f)(2)(C) (relating to transition rule for 
     any transaction after June 8, 1997, if such transaction is 
     described in a public announcement or filing with the 
     Securities and Exchange Commission on or before June 8, 1997) 
     as it relates to a filing with the Securities and Exchange 
     Commission
       (49) Sec. 1042(b) (relating to special rules for provision 
     terminating certain exceptions from rules relating to exempt 
     organizations which provide commercial-type insurance)
       (50) Sec. 1081(a) (relating to termination of suspense 
     accounts for family corporations required to use accrual 
     accounting) as it relates to the repeal of Internal Revenue 
     Code section 447(i)(3)
       (51) Sec. 1089(b)(3) (relating to reformations)
       (52) Sec. 1089(b)(5)(B)(i) (relating to persons under a 
     mental disability)
       (53) Sec.1171 (relating to treatment of computer software 
     as FSC export property)
       (54) Sec. 1175 (relating to exemption for active financing 
     income)
       (55) Sec. 1204 (relating to travel expenses of Federal 
     employees doing criminal investigations)
       (56) Sec. 1236 (relating to extension of time for filing a 
     request for administrative adjustment)
       (57) Sec. 1243 (relating to special rules for 
     administrative adjustment request with respect to bad debts 
     or worthless securities)
       (58) Sec. 1251 (relating to clarification on limitation on 
     maximum number of shareholders)
       (59) Sec. 1253 (relating to attribution rules applicable to 
     tenant ownership)
       (60) Sec. 1256 relating to modification of earnings and 
     profits rules for determining whether REIT has earnings and 
     profits from non-REIT years)
       (61) Sec. 1257 (relating to treatment of foreclosure 
     property)
       (62) Sec. 1261 (relating to shared appreciation mortgages)
       (63) Sec. 1302 (relating to clarification of waiver of 
     certain rights of recovery)
       (64) Sec. 1303 (relating to transitional rule under section 
     2056A)
       (65) Sec. 1304 (relating to treatment for estate tax 
     purposes of short-term obligations held by nonresident alien)
       (66) Sec. 1311 (relating to clarification of treatment of 
     survivor annuities under qualified terminable interest rules)
       (67) Sec. 1312 (relating to treatment of qualified domestic 
     trust rules of forms of ownership which are not trusts)
       (68) Sec. 1313 (relating to opportunity to correct failures 
     under section 2032A)
       (69) Sec. 1414 (relating to fermented material from any 
     brewery may be received at a distilled spirits plant)
       (70) Sec. 1417 (relating to use of additional ameliorating 
     material in certain wines)
       (71) Sec. 1418 (relating to domestically produced beer may 
     be withdrawn free of tax for use of foreign embassies, 
     legations, etc.)
       (72) Sec. 1421 (relating to transfer to brewery of beer 
     imported in bulk without payment of tax)
       (73) Sec. 1422 (relating to transfer to bonded wine cellars 
     of wine imported in bulk without payment of tax)
       (74) Sec. 1506 (relating to clarification of certain rules 
     relating to employee stock ownership plans of S corporations)
       (75) Sec. 1507 (relating to modification of 10 percent tax 
     for nondeductible contributions)
       (76) Sec. 1523 (relating to repeal of application of 
     unrelated business income tax to ESOPs)
       (77) Sec. 1530 (relating to gratuitous transfers for the 
     benefit of employees)
       (78) Sec. 1532 (relating to special rules relating to 
     church plans)
       (79) Sec. 1604(c)(2) (relating to amendment related to 
     Omnibus Budget Reconciliation Act of 1993)

                                                    ESTIMATED BUDGET EFFECTS OF THE CONFERENCE AGREEMENT ON THE REVENUE PROVISIONS OF H.R. 2014, THE ``TAXPAYER RELIEF ACT OF 1997''                                                    
                                                                                            [Fiscal Years 1997-2007, in millions of dollars]                                                                                            
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                   Provision                                    Effective                   1997       1998       1999       2000       2001       2002       2003       2004       2005       2006       2007     1997-2002   1997-2007
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
I. Child and Dependent Care Tax Credits; Health                                                                                                                                                                                         
 Care for Children                                                                                                                                                                                                                      
    1. Tax credit for children under age 17      1/1/98................................  .........     -2,710    -18,119    -21,549    -21,401    -21,258    -20,901    -20,430    -19,702    -18,997    -18,317     -85,037    -183,384
     ($400 in 1998, and $500 thereafter;                                                                                                                                                                                                
     $75,000/$110,000 AGI phaseout for credit;                                                                                                                                                                                          
     nonrefundable for small families,                                                                                                                                                                                                  
     refundable and limited to tax plus                                                                                                                                                                                                 
     employee FICA minus EIC for large families                                                                                                                                                                                         
     \1\ \2\.                                                                                                                                                                                                                           
    2. Expand State high-risk pools to include   tyba 12/31/97.........................  .........         -1         -2         -2         -2         -2         -2         -2         -2         -2         -2          -8         -17
     spouses and children of high-risk                                                                                                                                                                                                  
     individuals.                                                                                                                                                                                                                       
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Child and Dependent Care Tax   ......................................  .........      2,711    -18,121    -21,551    -21,403    -21,260    -20,903    -20,432    -19,704    -18,999    -18,319     -85,045    -183,401
       Credits; Health Care for Children.                                                                                                                                                                                               
                                                                                        ================================================================================================================================================
II. Education Tax Incentives                                                                                                                                                                                                            
    A. Tax Benefits Relating to Education                                                                                                                                                                                               
     Expenses:                                                                                                                                                                                                                          
        1. Administration's HOPE credit for      pma & tyba 12/31/97...................  .........     -2,083     -6,469     -7,393     -7,907     -7,707     -8,620     -8,754     -8,893     -9,035     -9,180     -31,559     -76,041
         first 2 years; 100% credit for first                                                                                                                                                                                           
         $1,000 of eligible expenses; 50%                                                                                                                                                                                               
         credit for next $1,000; 20% credit for                                                                                                                                                                                         
         third and fourth year students for up                                                                                                                                                                                          
         to $5,000 of expenses; for years after                                                                                                                                                                                         
         2002, expenses are increased to                                                                                                                                                                                                
         $10,000 (effective date of the 20%                                                                                                                                                                                             
         credit is 7/1/98); eligible expenses                                                                                                                                                                                           
         for HOPE credit are indexed in 2001;                                                                                                                                                                                           
         income limits for both credits indexed                                                                                                                                                                                         
         in 2001.                                                                                                                                                                                                                       
        2. Expand State-sponsored prepaid        tyba 12/31/97.........................  .........        -36       -107       -118       -130       -143       -157       -173       -190       -209       -230        -533      -1,491
         tuition and State savings programs to                                                                                                                                                                                          
         include room and board\3\.                                                                                                                                                                                                     

[[Page H6609]]

                                                                                                                                                                                                                                        
        3. Student loan interest deduction:      poida 12/31/97........................  .........        -18        -69       -122       -204       -277       -308       -326       -346       -368       -391        -690      -2,429
         $1,000 above-the-line deduction in                                                                                                                                                                                             
         1998, $1,500 in 1999, $2,000 in 2000,                                                                                                                                                                                          
         $2,500 in 2001 and thereafter;                                                                                                                                                                                                 
         phaseout $40,000-$55,000 single filers                                                                                                                                                                                         
         ($60,000-$75,000 joint filers); income                                                                                                                                                                                         
         limits indexed beginning in 2003.                                                                                                                                                                                              
        4. Penalty-free withdrawals from all     tyba 12/31/97.........................  .........        -78       -201       -181       -175       -177       -179       -182       -184       -186       -189        -812      -1,732
         IRAs for undergraduate, post-secondary                                                                                                                                                                                         
         vocational, and graduate education                                                                                                                                                                                             
         expenses.                                                                                                                                                                                                                      
        5. Education IRA--permit contributions   tyba 12/31/97.........................  .........       -156       -644       -912     -1,060     -1,126     -1,448     -1,752     -2,054     -2,360     -2,680      -3,899     -14,193
         to Education IRA for a child under age                                                                                                                                                                                         
         18; annual contributions limited to                                                                                                                                                                                            
         $500 per child; impose phaseout range                                                                                                                                                                                          
         of $95,000-$110,000 for single filers                                                                                                                                                                                          
         and $150,000-$160,000 for joint filers                                                                                                                                                                                         
         \4\.                                                                                                                                                                                                                           
    B. Other Education-Related Tax Provisions:                                                                                                                                                                                          
        1. Extend employer-provided education    tyba 12/31/96.........................  .........       -534       -369       -250  .........  .........  .........  .........  .........  .........  .........      -1,153      -1,153
         assistance for undergraduates through                                                                                                                                                                                          
         5/31/00 [\1\].                                                                                                                                                                                                                 
        2. Repeal $150 million limit on tax-     1/1/98................................  .........         -6        -45        -75        -89        -99       -106       -115       -125       -138       -162        -315        -962
         exempt section 501(c)(3) bonds for new                                                                                                                                                                                         
         capital expenditures.                                                                                                                                                                                                          
        3. Enhanced deduction for corporate      tyba 12/31/97.........................  .........        -46        -48        -77        -49         -5         -1  .........  .........  .........  .........        -225        -227
         contributions of computer technology                                                                                                                                                                                           
         and equipment for grades K-12; sunset                                                                                                                                                                                          
         after 3 years.                                                                                                                                                                                                                 
        4. Raise small issuer arbitrage rebate   bia 12/31/97..........................  .........         -1         -4         -7        -11        -14        -27        -30        -33        -36        -38         -36        -199
         exception for governmental bonds used                                                                                                                                                                                          
         to finance education facilities from                                                                                                                                                                                           
         $5 million to $10 million.                                                                                                                                                                                                     
        5. Treatment of cancellation of certain  Da DOE................................  .........                                                                                                                                      
         student loans; with modification.                                                                                                                                                                                              
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        6. Tax credit for holders of qualified   oia 12/31/97..........................  .........         -8        -27        -43        -47        -47        -47        -47        -47        -47        -47        -172        -408
         education bonds (limited to $400                                                                                                                                                                                               
         million per year in loans; 2-year                                                                                                                                                                                              
         sunset..                                                                                                                                                                                                                       
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Education Tax Incentives.  ......................................  .........     -2,966     -7,983     -9,178     -9,672     -9,595    -10,893    -11,379    -11,872    -12,379    -12,917     -39,394     -98,835
                                                                                        ================================================================================================================================================
III. Savings and Investment Tax Incentives                                                                                                                                                                                              
    A. Individual Retirement Arrangements:                                                                                                                                                                                              
        1. IRA--Increase deductible IRA income   tyba 12/31/97.........................  .........       -367       -345         86       -346       -860     -1,830     -3,292     -3,842     -4,424     -5,004      -1,832     -20,225
         limits by $10,000 for joint filers in                                                                                                                                                                                          
         1998 ($5,000 for single filers in                                                                                                                                                                                              
         1998) and by $1,000 per year through                                                                                                                                                                                           
         2002; in 2003 increase to $40,000 for                                                                                                                                                                                          
         single filers and $60,000 for joint                                                                                                                                                                                            
         filers and by $5,000 per year                                                                                                                                                                                                  
         thereafter until limits are $50,000-                                                                                                                                                                                           
         $60,000 for single filers and $80,000-                                                                                                                                                                                         
         $100,000 for joint filers (phase out                                                                                                                                                                                           
         range increases to $20,000 when lower                                                                                                                                                                                          
         limit reaches $100,000); penalty-free                                                                                                                                                                                          
         withdrawals for educational purposes                                                                                                                                                                                           
         and first-time home purchase only;                                                                                                                                                                                             
         create IRA PLUS; impose phase-out                                                                                                                                                                                              
         range of $95,000-$110,000 for single                                                                                                                                                                                           
         filers and $150,000-$160,000 for joint                                                                                                                                                                                         
         filers; impose $150,000-$160,000                                                                                                                                                                                               
         income phase-out for spousal IRAs;                                                                                                                                                                                             
         provide that aggregate contributions                                                                                                                                                                                           
         to deductible and nondeductible                                                                                                                                                                                                
         retirement IRAs may not exceed $2,000.                                                                                                                                                                                         
    B. Capital Gains Provisions:                                                                                                                                                                                                        
        1. Capital gains: (a) 20%/10% rate       various...............................      1,254      6,371        171     -2,954     -2,934     -1,785     -3,742     -3,981     -4,179     -4,424     -4,958         123     -21,161
         structure; (b) retain maximum 28% for                                                                                                                                                                                          
         collectibles; (c) section 1250                                                                                                                                                                                                 
         recapture at maximum of 25%; (d)                                                                                                                                                                                               
         symmetric AMT treatment; (e) exclusion                                                                                                                                                                                         
         for gain on personal residence                                                                                                                                                                                                 
         (including remainder interests); (f)                                                                                                                                                                                           
         capital gains rate structure of 18%/8%                                                                                                                                                                                         
         for assets held more than 5 years                                                                                                                                                                                              
         after 2000, with mark-to-market in                                                                                                                                                                                             
         2001; assets qualify for 8% in 2001 if                                                                                                                                                                                         
         held for 5 years regardless of when                                                                                                                                                                                            
         asset was acquired; (g) permit                                                                                                                                                                                                 
         rollover of qualified small business                                                                                                                                                                                           
         stock if rolled over into another                                                                                                                                                                                              
         qualified small business stock within                                                                                                                                                                                          
         60 days; and (h) retain 28%/15% rate                                                                                                                                                                                           
         structure for capital assets held more                                                                                                                                                                                         
         than 12 months but less than 18 months.                                                                                                                                                                                        
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
        Subtotal of Savings and Investment Tax   ......................................      1,254      6,004       -174     -2,868     -3,280     -2,645     -5,572     -7,273     -8,021     -8,848     -9,962      -1,709     -41,386
         Incentives.                                                                                                                                                                                                                    
IV. Alternative Minimum Tax Provisions                                                                                                                                                                                                  
    1. Exemption from alternative minimum tax    tyba 12/31/97.........................  .........        -97       -171       -131       -100        -77        -59        -45        -34        -26        -20        -577        -762
     for small corporations.                                                                                                                                                                                                            
    2. Conform AMT depreciation lives to the     ppisa 12/31/98........................  .........  .........       -580     -1,653     -2,230     -2,358     -2,561     -2,622     -2,350     -2,044     -1,920      -6,821     -18,317
     regular tax.                                                                                                                                                                                                                       
    3. Reverse IRS position on AMT treatment of  di tyba 12/31/87......................         -8       -157       -158       -167       -164       -157       -148         22         22         21         21        -811        -872
     certain installment sales by farmers.                                                                                                                                                                                              
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Alternative Minimum Tax        ......................................         -8       -254       -909     -1,951     -2,494     -2,592     -2,768     -2,645     -2,362     -2,049     -1,919      -8,209     -19,951
       Provisions.                                                                                                                                                                                                                      
                                                                                        ================================================================================================================================================

[[Page H6610]]

                                                                                                                                                                                                                                        
V. Estate, Gift and Generation-Skipping Tax                                                                                                                                                                                             
 Provisions                                                                                                                                                                                                                             
    A. Estate and Gift Tax Provisions:                                                                                                                                                                                                  
        1. Increase unified estate and gift tax  dda 12/31/97..........................  .........  .........       -843     -1,259     -1,816     -2,013     -2,596     -2,997     -5,656     -7,279     -8,638      -5,931     -33,097
         credit to $625,000 in 1998; $650,000                                                                                                                                                                                           
         in 1999; $675,000 in 2000 and 2001;                                                                                                                                                                                            
         $700,000 in 2002 and 2003, $850,000 in                                                                                                                                                                                         
         2004, $950,000 in 2005; $1 million in                                                                                                                                                                                          
         2006 and thereafter; and index other                                                                                                                                                                                           
         provisions beginning in 1999; cap                                                                                                                                                                                              
         family owned business exclusion with                                                                                                                                                                                           
         unified credit at $1.3 million                                                                                                                                                                                                 
         annually (exclude $675,000 in 1998,                                                                                                                                                                                            
         $650,000 in 1999, $625,000 in 2000,                                                                                                                                                                                            
         $625,000 in 2001, $600,000 in 2002 and                                                                                                                                                                                         
         2003, $450,000 in 2004, $350,000 in                                                                                                                                                                                            
         2005; $300,000 in 2006 and thereafter).                                                                                                                                                                                        
        2. Reduce section 6601(j) interest rate  dda 12/31/97..........................  .........  .........         -9        -17        -25        -33        -41        -47        -53        -58        -65         -84        -349
         to 2% for first $1 million of taxable                                                                                                                                                                                          
         closely-held business interests,                                                                                                                                                                                               
         remainder subject to tax at 45% of                                                                                                                                                                                             
         present-law interest rates, and all                                                                                                                                                                                            
         interest under section 6166 made                                                                                                                                                                                               
         nondeductible.                                                                                                                                                                                                                 
        3. Provide up to $500,000 estate tax     dda 12/31/97..........................  .........  .........         -7        -15        -25        -35        -48        -51        -56        -60        -64         -82        -361
         exclusion (phasein by $100,000                                                                                                                                                                                                 
         annually beginning in 1998) for                                                                                                                                                                                                
         treatment of land subject to a                                                                                                                                                                                                 
         qualified conservation easement                                                                                                                                                                                                
         coordinated with exclusion of family                                                                                                                                                                                           
         farms (expanded treatment of land with                                                                                                                                                                                         
         severed mineral rights) and business                                                                                                                                                                                           
         relief used.                                                                                                                                                                                                                   
        4. Extension of treatment of certain     roa 12/31/76..........................  .........        -25         -2         -2         -2         -2         -2         -2         -2         -2         -2         -33         -43
         rents under section 2032A to lineal                                                                                                                                                                                            
         descendants.                                                                                                                                                                                                                   
        5. Clarification of judicial review of   dda DOE...............................  .........  .........        -15        -15        -15        -15        -15        -15        -14        -12        -11         -60        -127
         eligibility for extension of time for                                                                                                                                                                                          
         payment of estate tax.                                                                                                                                                                                                         
        6. Gifts may not be revalued for estate  gma DOE...............................  .........  .........        -16        -18        -21        -26        -32        -38        -45        -53        -61         -81        -310
         tax purposes after expiration of                                                                                                                                                                                               
         statute of limitations.                                                                                                                                                                                                        
        7. Repeal certain throwback rules        tyba 12/31/97.........................  .........  .........        -11        -11        -11        -11        -11        -11        -11        -11        -11         -44         -99
         applicable to domestic trusts; exclude                                                                                                                                                                                         
         pre-1984 multiple trusts from repeal.                                                                                                                                                                                          
        8. Estate tax relief for money going to  DOE...................................  .........         -8        -15  .........  .........  .........  .........  .........  .........  .........  .........         -23         -23
         ESOPs in existence on 8/1/96 and                                                                                                                                                                                               
         decedents dying before 1/1/99.                                                                                                                                                                                                 
    B. Generation-Skipping Tax Provision:                                                                                                                                                                                               
        1. Expand exception from generation-     gsta 12/31/97.........................  .........  .........         -4         -4         -4         -4         -4         -5         -5         -5         -6         -16         -41
         skipping transfer tax for transfers to                                                                                                                                                                                         
         individuals with deceased parents.                                                                                                                                                                                             
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Estate, Gift and           ......................................  .........        -33       -922      -1341      -1919      -2139      -2749      -3166      -5842      -7480      -8858       -6354      -34450
           Generation-Skipping Tax Provisions.                                                                                                                                                                                          
                                                                                        ================================================================================================================================================
VI. Expiring Tax Provisions                                                                                                                                                                                                             
    1. Research tax credit through 6/30/98.....  6/1/97................................       -161       -820       -639       -294       -204       -123        -33  .........  .........  .........  .........      -2,241      -2,274
    2. Contributions of appreciated stock to     6/1/97................................  .........        -99         -9         -4  .........  .........  .........  .........  .........  .........  .........        -112        -112
     private foundations through 6/30/98.                                                                                                                                                                                               
    3. Extend a modified work opportunity tax    wpoifhma 9/30/97......................  .........       -140       -131        -73        -28        -11         -2  .........  .........  .........  .........        -383        -385
     credit through 6/30/98 \5\; include SSI                                                                                                                                                                                            
     recipients.                                                                                                                                                                                                                        
    4. Orphan drug tax credit (permanent)......  6/1/97................................  .........        -29        -28        -30        -32        -34        -35        -37        -39        -40        -42        -152        -346
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Expiring Tax Provisions......  ......................................       -161     -1,088       -807       -401       -264       -168        -70        -37        -39        -40        -42      -2,888      -3,117
                                                                                        ================================================================================================================================================
VII. District of Columbia Tax Incentives                                                                                                                                                                                                
    1. Designate existing D.C. enterprise        1/1/98................................  .........        -71       -110       -113       -118       -127        -45          3          2      (\6\)         -2        -539        -582
     community and census tracts with greater                                                                                                                                                                                           
     than 20% poverty (with revised residency                                                                                                                                                                                           
     requirement) as the D.C. Enterprise Zone,                                                                                                                                                                                          
     eligible for modified present-law                                                                                                                                                                                                  
     empowerment zone incentives (20% wage                                                                                                                                                                                              
     credit, increased 179 expensing, and                                                                                                                                                                                               
     expanded tax-exempt financing); sunset 12/                                                                                                                                                                                         
     31/02.                                                                                                                                                                                                                             
    2. Provide 0% capital gains rate on          1/1/98................................  .........         -1         -5        -12        -21        -33        -48        -85        -90        -99       -107         -73        -502
     enterprise zone business property in D.C.                                                                                                                                                                                          
     census tracts with greater than 10%                                                                                                                                                                                                
     poverty held for at least 5 years; sunset                                                                                                                                                                                          
     12/31/02.                                                                                                                                                                                                                          
    3. $5,000 tax credit for first-time          po/a DOE..............................  .........        -10        -21        -27        -16      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)         -74         -74
     homebuyer in D.C., with phaseout of                                                                                                                                                                                                
     $110,000-$130,000 for joint filers                                                                                                                                                                                                 
     ($70,000-$90,000 for single filers), and                                                                                                                                                                                           
     sunset 12/31/00.                                                                                                                                                                                                                   
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of District of Columbia Tax       ......................................  .........        -82       -136       -152       -155       -160        -93        -82        -88        -99       -109        -686      -1,158
       Incentives.                                                                                                                                                                                                                      
                                                                                        ================================================================================================================================================
VIII. Welfare-to-Work Tax Credit                                                                                                                                                                                                        
    Administration's welfare-to-work tax         wpoifhma 12/31/97.....................  .........        -13        -31        -29        -15        -10         -4         -2         -1  .........  .........         -99        -106
     credit, as modified: (a) wage credit is                                                                                                                                                                                            
     35% on first $10,000 of wages in the first                                                                                                                                                                                         
     year of employment, and 50% on $10,000 of                                                                                                                                                                                          
     wages in the second year of employment;                                                                                                                                                                                            
     (b) effective for hires made through 4/30/                                                                                                                                                                                         
     99.                                                                                                                                                                                                                                
                                                                                        ================================================================================================================================================
IX. Miscellaneous Provisions                                                                                                                                                                                                            
    A. Excise Tax Provisions:                                                                                                                                                                                                           
        1. Repeal excise tax on recreational     1/1/98................................  .........         -4         -5         -5         -1         -1         -1         -1         -1         -1         -1         -16         -22
         motorboat diesel fuel.                                                                                                                                                                                                         
        2. Modify excise tax on imported halons  DOE...................................      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)           1           1
        3. Transfer the 4.3 cents/gallon         10/1/97...............................                                                                                                                                                 
         transportation motor fuels tax on                                                                                                                                                                                              
         highway motor fuels to the Highway                                                                                                                                                                                             
         Trust Fund.                                                                                                                                                                                                                    
(12)No Revenue Effect                                                                                                                                                                                                                   
        4. Modify excise tax deposit rules for   DOE...................................  .........     -6,359      6,359  .........  .........  .........  .........  .........  .........  .........  .........  ..........  ..........
         gasoline and special motor fuels,                                                                                                                                                                                              
         diesel fuel and kerosene, aviation                                                                                                                                                                                             
         fuels, and air cargo taxes to suspend                                                                                                                                                                                          
         deposits due 8/1/98 to 9/30/98 until                                                                                                                                                                                           
         10/5/98.                                                                                                                                                                                                                       
        5. Equalize the excise tax rates among   DOE...................................         -2        -15        -16        -16        -17        -18        -19        -20        -21        -22        -23         -82        -186
         alternative motor fuels except CNG.                                                                                                                                                                                            

[[Page H6611]]

                                                                                                                                                                                                                                        
        6. Treat certain gasoline retailers as   DOE...................................                                                                                                                                                 
         wholesale distributors under gasoline                                                                                                                                                                                          
         tax refund rules.                                                                                                                                                                                                              
(12)Negligible Revenue Effect                                                                                                                                                                                                           
        7. Reduce excise tax rate on draft       10/1/97...............................  .........         -1         -1         -1         -1         -1         -1         -1         -1         -1         -1          -3          -7
         cider to the small producer beer rate.                                                                                                                                                                                         
        8. Require study on simplified           ......................................                                                                                                                                                 
         collection of distilled spirits taxes.                                                                                                                                                                                         
(12) No Revenue Effect                                                                                                                                                                                                                  
                                                                                                                                                                                                                                        
        9. Codify Bureau of Alcohol, Tobacco,    DOE...................................  .........                                                                                                                                      
         and Firearms regulations on wine                                                                                                                                                                                               
         labeling; with modification.                                                                                                                                                                                                   
(11)No Revenue Effect                                                                                                                                                                                                                   
        10. Uniform excise tax on vaccines; add  10/1/97...............................  .........        -16        -15        -15        -15        -14        -14        -14        -14        -14        -14         -74        -146
         3 new vaccines ($0.75 per dose).                                                                                                                                                                                               
     B. Disaster Relief Provisions:                                                                                                                                                                                                     
        1. Disaster losses--postponement of IRS  aoty..................................  .........                                                                                                                                      
         deadlines and loss valuation; permit                                                                                                                                                                                           
         extension of statute of limitations.                                                                                                                                                                                           
(11)Negligible Revenue Effect                                                                                                                                                                                                           
        2. Modify tax treatment of livestock     sea 12/31/96..........................  .........        -12         -2         -2         -2         -1         -1         -1         -1         -1         -1         -18         -23
         sold on account of certain weather-                                                                                                                                                                                            
         related conditions.                                                                                                                                                                                                            
        3. Loosen mortgage revenue bond          (\8\).................................  .........         -3         -7         -8         -8         -7         -6         -6         -5         -4         -4         -33         -58
         requirements in Presidentially                                                                                                                                                                                                 
         declared disaster areas for 2 years;                                                                                                                                                                                           
         permit 2-year period to place                                                                                                                                                                                                  
         mortgages.                                                                                                                                                                                                                     
        4. Abatement of interest on              1/1/97................................         -5  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........          -5          -5
         underpayments by taxpayers in                                                                                                                                                                                                  
         Presidentially declared disaster areas                                                                                                                                                                                         
         (1997 disaster areas only).                                                                                                                                                                                                    
     C. Provisions Relating to Employment                                                                                                                                                                                               
     Taxes:                                                                                                                                                                                                                             
        1. Worker classification of securities   spa 12/31/97..........................                                                                                                                                                 
         brokers for income and employment tax                                                                                                                                                                                          
         purposes.                                                                                                                                                                                                                      
(12) Negligible Revenue Effect                                                                                                                                                                                                          
        2. Impose moratorium on issuance of      DOE...................................                                                                                                                                                 
         Treasury regulation relating to self-                                                                                                                                                                                          
         employment tax (SECA) thhrough 6/30/98.                                                                                                                                                                                        
(12) No Revenue Effect                                                                                                                                                                                                                  
        3. SECA for insurance agents...........  pa 12/31/97...........................                                                                                                                                                 
(12) Negligible Revenue Effect                                                                                                                                                                                                          
    D. Provisions Relating to Small Businesses:                                                                                                                                                                                         
        1. Delay penalties for failure to make   DOE...................................                                                                                                                                                 
         payments through EFTPS until after 6/                                                                                                                                                                                          
         30/98.                                                                                                                                                                                                                         
(12) No Revenue Effect                                                                                                                                                                                                                  
        2. Definition of principal place of      tyba 12/31/98.........................  .........  .........       -119       -244       -253       -263       -274       -285       -295       -306       -318        -880      -2,358
         business for home office deduction.                                                                                                                                                                                            
        3. Increase deduction for health         tyba 12/31/96.........................  .........  .........  .........        -39       -120       -224       -605       -882       -601       -404       -604        -383      -3,479
         insurance expenses of self-employed                                                                                                                                                                                            
         individuals: 50% in 2000 and 2001, 60%                                                                                                                                                                                         
         in 2002, 80% in 2003 through 2005; 90%                                                                                                                                                                                         
         in 2006, and 100% in 2007 and                                                                                                                                                                                                  
         thereafter.                                                                                                                                                                                                                    
     E. Other Provisions:                                                                                                                                                                                                               
        1. Shrinkage allowance for inventory     ......................................  .........         -7        -21        -23        -25        -27        -29        -31        -33        -35        -37        -103        -268
         account.                                                                                                                                                                                                                       
        2. Include liability to pay              cfa DOE...............................  .........         -1         -2         -5         -8        -12        -17        -23        -29        -32        -36         -27        -164
         compensation under workmen's                                                                                                                                                                                                   
         compensation acts within rules                                                                                                                                                                                                 
         relating to certain personal liability                                                                                                                                                                                         
         assignments.                                                                                                                                                                                                                   
        3. Clarify tax-exempt status of certain  tyba 12/31/97.........................  .........      (\6\)      (\6\)         -1         -1         -1         -1         -1         -1         -1         -1          -2          -6
         State workmen's compensation funds.                                                                                                                                                                                            
        4. Allow grandfathered publicly traded   tyba 12/31/97.........................                                                                                                                                                 
         partnerships to elect to pay a                                                                                                                                                                                                 
         publicly traded partnership tax; with                                                                                                                                                                                          
         technical modifications.                                                                                                                                                                                                       
(12) Revenue Neutral                                                                                                                                                                                                                    
        5. Exclusion from UBTI for certain       psora 12/31/97........................                                                                                                                                                 
         corporate sponsorship payments, with                                                                                                                                                                                           
         technical clarification.                                                                                                                                                                                                       
(12)Negligible Revenue Effect                                                                                                                                                                                                           
        6. Allow timeshare associations to       tyba 12/31/96.........................  .........         -1         -1         -1         -1         -2         -2         -2         -2         -2         -2          -7         -17
         elect to be taxed as homeowner                                                                                                                                                                                                 
         associations at 32% rate and modify                                                                                                                                                                                            
         definition of property for timeshares.                                                                                                                                                                                         
        7. Deferral of gain on sales of stock    sea 12/31/97..........................  .........         -2        -68         -5         -5         -4         -4         -4         -4         -4         -4         -84        -104
         in farm product refining firms to farm                                                                                                                                                                                         
         coops which supply the firm with raw                                                                                                                                                                                           
         farm products for refining.                                                                                                                                                                                                    
        8. No information reporting on sales of  DOE...................................  .........                                                                                                                                      
         principal residences less than                                                                                                                                                                                                 
         $250,000 or $500,000 (married filing                                                                                                                                                                                           
         joint return).                                                                                                                                                                                                                 
(11)Negligible Revenue Effect                                                                                                                                                                                                           
        9. Increase the business meals           tyba 12/31/97.........................  .........         -8        -17        -27        -37        -49        -62        -76        -91       -108       -125        -138        -600
         deduction to 80% in 5% increments                                                                                                                                                                                              
         every other year for persons subject                                                                                                                                                                                           
         to Federal hours of service                                                                                                                                                                                                    
         limitation, with clarification of                                                                                                                                                                                              
         section 119 meals.                                                                                                                                                                                                             
        10. Provide an above-the-line deduction  1/1/87................................  .........        -10         -4         -4         -4         -5         -5         -6         -6         -7         -7         -27         -58
         for certain State and local official's                                                                                                                                                                                         
         expenses.                                                                                                                                                                                                                      
        11. Raise the charitable mileage rate    tyba 12/31/97.........................  .........         -8        -56        -58        -61        -64        -68        -71        -75        -78        -82        -247        -621
         from 12 cents/mile to 14 cents/mile;                                                                                                                                                                                           
         no indexing.                                                                                                                                                                                                                   
        12. Expense ``Brownfields''              (\9\).................................  .........        -57       -132       -165        -63      (\7\)          2          9         17         19         18        -417        -352
         redevelopment costs in empowerment                                                                                                                                                                                             
         zones, enterprise communities and EPA                                                                                                                                                                                          
         demonstration sites; add census tracts                                                                                                                                                                                         
         with greater than 20% poverty, 3-year                                                                                                                                                                                          
         sunset.                                                                                                                                                                                                                        
        13. Administration's proposal to add 20  DOE...................................  .........        -82       -121       -121        -99        -79        -56        -44        -41        -38        -25        -502        -706
         urban empowerment zones with modified                                                                                                                                                                                          
         incentives (including interaction with                                                                                                                                                                                         
         Conference Brownfields proposal.                                                                                                                                                                                               
        14. Designate 2 supplemental             1/1/00................................  .........  .........  .........        -38        -86        -92        -98        -78        -53        -26        -13        -215        -483
         empowerment zones as regular                                                                                                                                                                                                   
         empowerment zones, with present-law                                                                                                                                                                                            
         incentives (phaseout of wage credit                                                                                                                                                                                            
         beginning in 2004).                                                                                                                                                                                                            
        15. Exemption for incremental cost of    DOE...................................      (\6\)         -1         -1      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -2          -2
         clean-fuel vehicle from luxury tax and                                                                                                                                                                                         
         limits on depreciation.                                                                                                                                                                                                        
        16. Exclude from gross income certain    (\10\)................................  .........      (\6\)         -1         -1         -1         -1         -1         -1         -1         -2         -2          -4         -12
         survivor benefits attributable to a                                                                                                                                                                                            
         public safety officer who is killed in                                                                                                                                                                                         
         the line of duty.                                                                                                                                                                                                              
        17. Suspend 100% net income limitation   tyba DOE..............................  .........        -21        -35        -14  .........  .........  .........  .........  .........  .........  .........         -70         -70
         with respect to percentage depletion                                                                                                                                                                                           
         on oil and gas property for marginal                                                                                                                                                                                           
         producers for 2 years.                                                                                                                                                                                                         

[[Page H6612]]

                                                                                                                                                                                                                                        
        18. Allow refunding of certain tax-      bia DOE...............................  .........         -2         -4         -5         -5         -5         -3         -1         -3         -4         -4         -21         -37
         exempt Virgin Islands bonds.                                                                                                                                                                                                   
        19. Purchasing of receivables by tax-    tyba 12/31/96.........................                                                                                                                                                 
         exempt hospital cooperative service                                                                                                                                                                                            
         organizations.                                                                                                                                                                                                                 
(12)Negligible Revenue Effect                                                                                                                                                                                                           
        20. Modification of empowerment zone     DOE...................................                                                                                                                                                 
         and enterprise community criteria in                                                                                                                                                                                           
         the event of future designations of                                                                                                                                                                                            
         additional zones and communities.                                                                                                                                                                                              
(12) No Revenue Effect                                                                                                                                                                                                                  
        21. 3-year income averaging for farmers  tyba DOE ab 1/1/01....................         -1        -10        -53        -54        -50  .........  .........  .........  .........  .........  .........        -168        -168
        22. Prior year estimated tax safe        ......................................  .........     -7,400      4,000  .........  .........      4,400     -1,000  .........  .........  .........  .........       1,000  ..........
         harbor (100% in 1998, 105% in 1999                                                                                                                                                                                             
         through 2001, and 112% in 2002).                                                                                                                                                                                               
        23. Montana simplified tax and wage                                                                                                                                                                                             
         reporting system (5-year                                                                                                                                                                                                       
         demonstration).                                                                                                                                                                                                                
(12) No Revenue Effect                                                                                                                                                                                                                  
          24. National Passenger Rail (Amtrak)   DOE...................................  .........     -1,162     -1,162  .........  .........  .........  .........  .........  .........  .........  .........      -2,323      -2,323
           NOL provision.                                                                                                                                                                                                               
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
          SUBTOTAL OF MISCELLANEOUS PROVISIONS.  ......................................         -8    -15,182      8,516       -852       -863      3,530     -2,265     -1,539     -1,261     -1,071     -1,286      -4,850     -12,274
                                                                                        ================================================================================================================================================
X. Revenue-Increase Provisions                                                                                                                                                                                                          
    A. Financial Products:                                                                                                                                                                                                              
        1. Require recognition of gain on        csa 6/8/97............................  .........        367        121         68         73         79         85         94        111        118        127         708       1,243
         certain appreciated positions in                                                                                                                                                                                               
         personal property, with technical                                                                                                                                                                                              
         modifications.                                                                                                                                                                                                                 
        2. Gains or losses from certain          30da DOE..............................  .........         15         27         25         25         25         25         25         25         25         25         117         242
         terminations with respect to property;                                                                                                                                                                                         
         with technical modification and                                                                                                                                                                                                
         effective date with modifications.                                                                                                                                                                                             
        3. Determination of original issue       tyba DOE..............................  .........         76        275        358        319        283        100        105        109        114        118       1,311       1,857
         discount where pooled debt obligations                                                                                                                                                                                         
         subject to acceleration..                                                                                                                                                                                                      
        4. Denial of interest deduction on       iia 6/8/97............................  .........          5         16         29         43         55         62         63         64         65         67         148         469
         certain debt instruments.                                                                                                                                                                                                      
    B. Corporate Organizations and                                                                                                                                                                                                      
     Reorganizations:                                                                                                                                                                                                                   
        1. Tax treatment of certain              da 9/13/95............................  .........         44        -93        -54        -10         45         77         81         89         95        101         -68         375
         extraordinary dividends.                                                                                                                                                                                                       
        2. Require gain recognition on certain   da 4/16/97............................  .........        301        243        216        187        158        130        101         73         46         10       1,105       1,465
         distributions of controlled                                                                                                                                                                                                    
         corporation stock (with modifications                                                                                                                                                                                          
         for intragroup distributions); with                                                                                                                                                                                            
         binding contract modification.                                                                                                                                                                                                 
        3. Tax treatment of redemptions          da/a 6/8/97...........................  .........         10         10          5          5          5          5          5          5          5          5          35          60
         involving related corporations.                                                                                                                                                                                                
        4. Modify holding period for dividends-  droaa 30da DOE........................  .........         11         13         15         16         16         16         17         17         17         18          71         156
         received deduction with 2-year                                                                                                                                                                                                 
         transition period.                                                                                                                                                                                                             
    C. Other Corporate Provisions:                                                                                                                                                                                                      
        1. Registration and other provisions     tsoaiTg...............................  .........         15         37         38         39         41         42         43         44         46         47         170         392
         relating to confidential corporate tax                                                                                                                                                                                         
         shelters.                                                                                                                                                                                                                      
        2. Certain preferred stock treated as    ta 6/8/97.............................  .........         35         37         39         41         43         10         10         11         11         12         194         248
         ``boot,'' with clarification.                                                                                                                                                                                                  
    D. Administrative Provisions:                                                                                                                                                                                                       
        1. Reporting of certain payments made    pma 12/31/97..........................  .........  .........          3          3          3          3          3          4          4          4          4          12          31
         to attorneys.                                                                                                                                                                                                                  
        2. Decrease of threshold for reporting   rd 90da DOE...........................  .........  .........          7          8          9         10         11         11         12         12         13          34          93
         payments to corporations performing                                                                                                                                                                                            
         services for Federal agencies.                                                                                                                                                                                                 
        3. Extend disclosure of tax return       dma 9/30/98...........................  .........  .........         22         27         31         36         36  .........  .........  .........  .........         116         152
         information for administration of                                                                                                                                                                                              
         certain Veterans' programs \12\.                                                                                                                                                                                               
        4. Modify levy exemption and provide     lia DOE...............................  .........        332        327        256        213        157        117        102         86         82         78       1,285       1,750
         continuous levy on certain payments.                                                                                                                                                                                           
        5. Consistency requirement for returns   rfa DOE...............................  .........          3          3          3          3          3          3          4          4          4          4          15          34
         of beneficiaries of estates and trusts.                                                                                                                                                                                        
    E. Excise Tax Provisions:                                                                                                                                                                                                           
        1. Extend and modify Airport Trust Fund                                                                                                                                                                                         
         excise taxes:.                                                                                                                                                                                                                 
            a. Extend domestic air passenger     10/1/97...............................  .........      4,633      4,859      5,031      5,433      5,870      6,275      6,684      7,117      7,580      8,059      25,826      61,542
             ticket tax: reduce tax rate from                                                                                                                                                                                           
             10% to 9% of ticket price and                                                                                                                                                                                              
             impose an additional tax of $1.00                                                                                                                                                                                          
             per flight segment for 10/1/97                                                                                                                                                                                             
             through 9/30/98; 8% and $2.00/                                                                                                                                                                                             
             segment for 10/1/98 through 9/30/                                                                                                                                                                                          
             99; and 7.5% after 9/30/99 with                                                                                                                                                                                            
             additional tax of $2.25/segment                                                                                                                                                                                            
             for 10/1/99 through 12/31/99,                                                                                                                                                                                              
             $2.50/segment in 2000, $2.75/                                                                                                                                                                                              
             segment in 2001, and $3.00/segment                                                                                                                                                                                         
             in 2002, and in years thereafter                                                                                                                                                                                           
             index the $3.00/segment tax to                                                                                                                                                                                             
             changes in the CPI (first indexing                                                                                                                                                                                         
             adjustment on 1/1/03).                                                                                                                                                                                                     
            b. Modify airline ticket tax         DOE...................................     -1,017       -199      1,216  .........  .........  .........  .........  .........  .........  .........  .........  ..........  ..........
             deposit rule to suspend deposits                                                                                                                                                                                           
             due 8/15/97 to 9/30/97 until 10/10/                                                                                                                                                                                        
             97, and suspend deposits due 8/15/                                                                                                                                                                                         
             98 to 9/30/98 until 10/5/98.                                                                                                                                                                                               
            c. Reduce air passenger ticket tax   10/1/97...............................  .........        -26        -27        -26        -27        -27        -28        -30        -31        -32        -33        -133        -289
             to 7.5% of ticket price (and omit                                                                                                                                                                                          
             segment tax) for flight segments                                                                                                                                                                                           
             to/ from certain rural airports                                                                                                                                                                                            
             \13\.                                                                                                                                                                                                                      
            d. Extend international departure    10/1/97...............................  .........        788        879        948      1,026      1,114      1,209      1,307      1,411      1,526      1,653       4,754      11,859
             tax: increase tax from $6.00 to                                                                                                                                                                                            
             $12/passenger, tax arrivals at the                                                                                                                                                                                         
             same rate, and index the $12 tax                                                                                                                                                                                           
             to changes in the CPI (first                                                                                                                                                                                               
             indexing adjustment on 1/1/99),                                                                                                                                                                                            
             but retain present-law $6.00/                                                                                                                                                                                              
             passenger departure tax for                                                                                                                                                                                                
             domestic flights to/from Alaska                                                                                                                                                                                            
             and Hawaii, and index the $6.00                                                                                                                                                                                            
             departure tax to changes in the                                                                                                                                                                                            
             CPI (first indexing adjustment on                                                                                                                                                                                          
             1/1/99).                                                                                                                                                                                                                   

[[Page H6613]]

                                                                                                                                                                                                                                        
            e. Impose 7.5% tax rate on cash      10/1/97...............................  .........         65         73         77         82         87         92         98        104        110        116         384         904
             payments to airlines for air                                                                                                                                                                                               
             travel under credit card and                                                                                                                                                                                               
             similar programs.                                                                                                                                                                                                          
            f. Extend current air cargo excise   10/1/97...............................  .........        304        347        377        409        443        481        522        567        615        667       1,880       4,732
             tax.                                                                                                                                                                                                                       
            g. Extend current taxes on           10/1/97...............................  .........         84         87         89         91         93         95         97         99        102        104         446         943
             noncommercial aviation gasoline                                                                                                                                                                                            
             and noncommercial jet fuel.                                                                                                                                                                                                
            h. Dedicate 4.3 cents/gallon of tax  10/1/97...............................  .........                                                                                                                                      
             on aviation fuel to the Airport                                                                                                                                                                                            
             and Airway Trust Fund.                                                                                                                                                                                                     
(11)No Revenue Effect                                                                                                                                                                                                                   
        2. Tax kerosene in the same manner as    7/1/98................................  .........         44         43         49         46         44         43         44         47         49         52         226         461
         diesel fuel; modify to address home                                                                                                                                                                                            
         heating in Alaska.                                                                                                                                                                                                             
        3. Reinstate LUST excise tax and extend  10/1/97...............................  .........        129        129        128        129        131        134        136         67  .........  .........         645         983
         through 3/31/05.                                                                                                                                                                                                               
        4. Apply 3% telephone excise tax to      DOE...................................  .........         19         28         38         49         60         71         83        101        113        124         193         684
         certain prepaid phone cards, with                                                                                                                                                                                              
         technical modification.                                                                                                                                                                                                        
        5. Replace truck excise tax deduction    Sa 12/31/97...........................  .........         66         94         96         97         99        101        102        105        108        110         452         979
         for tire value with tax credit for                                                                                                                                                                                             
         excise tax paid on tires.                                                                                                                                                                                                      
    F. Provisions Relating to Tax-Exempt                                                                                                                                                                                                
     Organizations:                                                                                                                                                                                                                     
        1. Modify control test and include       tyba 12/31/98 & tyba 2ya DOE..........  .........      (\7\)      (\7\)      (\7\)          3          5          5          4          4          4          4           8          29
         attribution rules to determine UBIT                                                                                                                                                                                            
         consequences of certain payments from                                                                                                                                                                                          
         subsidiaries of tax-exempt                                                                                                                                                                                                     
         organizations.                                                                                                                                                                                                                 
        2. Repeal 1986 Act grandfather rules     tyba 12/31/97.........................  .........      (\7\)         82        116        124        128        133        140        149        160        174         450       1,208
         for pension business of TIAA-CREF and                                                                                                                                                                                          
         Mutual of America.                                                                                                                                                                                                             
    G. Foreign Provisions:                                                                                                                                                                                                              
        1. Inclusion of income from notional     tyba DOE..............................  .........          9         20         21         21         21         21         22         22         22         23          92         202
         principal contracts and stock lending                                                                                                                                                                                          
         transactions under subpart F.                                                                                                                                                                                                  
        2. Further restrict like-kind exchanges  Ta dofca..............................  .........          4          8         11         13         15         17         19         21         23         25          51         156
         involving foreign personal property.                                                                                                                                                                                           
        3. Impose holding period requirement     dpoaa 30da DOE........................  .........         23         48         50         53         56         58         61         64         68         71         230         552
         for claiming foreign tax credits with                                                                                                                                                                                          
         respect to dividends.                                                                                                                                                                                                          
        4. Limitation on treaty benefits for     DOE...................................  .........          1          1          1          1          1          1          1          1          1          1           5          10
         payments to hybrid entities.                                                                                                                                                                                                   
        5. Interest on underpayment reduced by   ftpoa tyba DOE........................  .........          8         10          2          1          1          1          1          1          1          1          22          27
         foreign tax credit carryback.                                                                                                                                                                                                  
        6. Determination of period of            ftpoa tyba DOE........................  .........          1          2          1          1          1          1          1          1          1          1           6          11
         limitations relating to foreign tax                                                                                                                                                                                            
         credits.                                                                                                                                                                                                                       
        7. Repeal special rule which permits     tyba DOE..............................  .........          2          5          5          5          5          5          5          5          5          5          22          47
         certain companies to eliminate their                                                                                                                                                                                           
         AMT liability.                                                                                                                                                                                                                 
    H. Pension and Employee Benefit Provisions:                                                                                                                                                                                         
        1. Provide employers the option to       tyba 12/31/97.........................  .........          3          8         11         12         12         13         14         14         15         16          46         118
         offer tax-free employee parking or                                                                                                                                                                                             
         taxable cash compensation (\14\).                                                                                                                                                                                              
        2. Repeal of 15% excess distribution     tyba & dda 12/31/96...................  .........        -18        -19         -7         18         18         16         16         14         13         11          -8          62
         and excess accumulation taxes.                                                                                                                                                                                                 
        3. Increase in prohibited transactions   ptoa DOE..............................  .........          2          4          4          4          4          4          4          4          4          4          14          34
         excise tax.                                                                                                                                                                                                                    
        4. Basis recovery method...............  aba 12/31/97..........................  .........          1          3          6          9         11         15         18         21         24         27          30         133
    I. Other Revenue-Increase Provisions:                                                                                                                                                                                               
        1. Termination of suspense accounts for  (\16\)................................  .........         29         33         35         36         37         39         40         41         43         44         170         377
         family farm corporations required to                                                                                                                                                                                           
         use accrual method of accounting                                                                                                                                                                                               
         (\15\).                                                                                                                                                                                                                        
        2. 2-year carryback and 20-year          NOLgi tyba DOE........................  .........         42        303        361        256        179        136        112        100         93         90       1,141       1,672
         carryforward for net operating losses                                                                                                                                                                                          
         with an exception related to                                                                                                                                                                                                   
         Presidentially declared disaster areas.                                                                                                                                                                                        
        3. Modification of treatment of company- cia 6/8/97............................  .........         20         53         93        140        193        247        299        349        399        447         500       2,240
         owned life insurance--pro rata                                                                                                                                                                                                 
         disallowance of interest on debt to                                                                                                                                                                                            
         fund life insurance.                                                                                                                                                                                                           
        4. Modify the basis allocation rules     pda DOE...............................  .........         26         52         55         57         59         61         64         66         69         72         249         581
         for distributee partners, with                                                                                                                                                                                                 
         technical modifications.                                                                                                                                                                                                       
        5. Eliminate the substantial              sepda DOE & efbcieo 6/8/97...........  .........         30         66         69         73         77         80         84         89         93         98         316         760
         appreciation requirement for inventory                                                                                                                                                                                         
         of a partnership, with technical                                                                                                                                                                                               
         modification and binding contract                                                                                                                                                                                              
         exception.                                                                                                                                                                                                                     
        6. Earned income credit compliance       tyba 12/31/96.........................  .........      (\7\)         18         25         24         21         21         21         21         21         21          88         193
         provisions: deny eligibility for prior                                                                                                                                                                                         
         acts of recklessness; recertification                                                                                                                                                                                          
         required when EIC denied in past; and                                                                                                                                                                                          
         due diligence requirement for paid                                                                                                                                                                                             
         preparers.                                                                                                                                                                                                                     
        7. For the purpose of the Earned Income  tyba 12/31/97.........................  .........      (\7\)         72         75         79         85         89         92         94         99        102         312         788
         Credit (EIC) phaseout, include in AGI                                                                                                                                                                                          
         nontaxable distributions of IRA,                                                                                                                                                                                               
         pensions, and annuities, and tax-                                                                                                                                                                                              
         exempt interest; and addback 75% of                                                                                                                                                                                            
         business losses (\17\).                                                                                                                                                                                                        
        8. Provide that workfare payments do     DOE...................................                                                                                                                                                 
         not qualify as earned income for the                                                                                                                                                                                           
         purposes of the earned income credit.                                                                                                                                                                                          
(12) Negligible Revenue Effect                                                                                                                                                                                                          
        9. New EIC compliance proposals (\18\):                                                                                                                                                                                         
            a. Federal case register data......  10/1/99...............................  .........  .........  .........  .........         10         20         30         40         60         85        105          30         350
            b. SSA parent SSNs.................  180da DOE.............................  .........  .........         10         10         10         10         10         10         10         10         10          40          90
            c. Additional appropriation for EIC  DOE...................................                                                                                                                                                 
             enforcement.                                                                                                                                                                                                               
(12) No Revenue Effect                                                                                                                                                                                                                  
        10. Restrict income forecast method and  tyba DOE..............................  .........         29         41         62         78         38         27         25         17         17         18         248         352
         allow 3-year MACRS for rent-to-own                                                                                                                                                                                             
         property; with clarification for home                                                                                                                                                                                          
         computers and cellular phones.                                                                                                                                                                                                 
        11. Extend FUTA surtax and increase the  lpo/a 1/1/99..........................  .........  .........      1,063      1,763      1,797      1,733        661        -73        -71        -74        -73       6,356       6,726
         statutory limit on the FUA Trust Fund                                                                                                                                                                                          
         from .25% of covered wages to .50%                                                                                                                                                                                             
         (\12\).                                                                                                                                                                                                                        
        12. Limitation on charitable remainder   Ta 6/18/97............................  .........          6          6          6          6          6          6          6          6          6          6          30          60
         trust annual payouts; require                                                                                                                                                                                                  
         charitable remainders to have a                                                                                                                                                                                                
         minimum value of 10% of trust.                                                                                                                                                                                                 

[[Page H6614]]

                                                                                                                                                                                                                                        
        13. Limit carryback period for general   cai tyba 12/31........................  .........        182        300         81        -60        -32         -9          5         15         21         25         471         527
         business credits to 1 year; extend                                                                                                                                                                                             
         carryforward period to 20 years.                                                                                                                                                                                               
        14. Extend the 5-year time limit for     pcpa dofca............................  .........  .........  .........  .........  .........          2         10         11         11         12         12           2          58
         taxing pre-contribution gain to 7                                                                                                                                                                                              
         years and grandfather binding                                                                                                                                                                                                  
         contracts in effect on 6/8/97.                                                                                                                                                                                                 
        15. Expansion of requirement that        icoa dofca............................  .........          1          4          6          8         11         13         15         17         19         21          30         115
         involuntarily converted property be                                                                                                                                                                                            
         replaced with property acquired from                                                                                                                                                                                           
         an unrelated person.                                                                                                                                                                                                           
        16. Repeal installment sales             ......................................  .........  .........         44         97        106        106         64         21         22         23         24         353         507
         grandfather rule tyb1ya DOE.                                                                                                                                                                                                   
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Revenue-Increase           ......................................  .........      7,522     11,013     10,802     11,217     11,696     10,970      10,78    611,409     12,092     12,866      51,230     109,350
           Provisions.                                                                                                                                                                                                                  
                                                                                        ================================================================================================================================================
XI. Foreign Tax Provisions                                                                                                                                                                                                              
    A. General Provisions:                                                                                                                                                                                                              
        1. Simplify foreign tax credit           tyba 12/31/97.........................  .........     (\19\)         -1         -1         -1         -1         -1         -1         -1         -1         -1          -4          -9
         limitation for individuals.                                                                                                                                                                                                    
        2. Simplify translation of foreign       ......................................  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)      (\19\)      (\19\)
         taxes.                                                                                                                                                                                                                         
        3. Election to use simplified foreign    tyba 12/31/97.........................  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)          -1          -2
         tax credit limitation for alternative                                                                                                                                                                                          
         minimum tax purposes.                                                                                                                                                                                                          
        4. Simplify treatment of personal        tyba 12/31/97.........................  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)          -1          -2
         transactions in foreign currency.                                                                                                                                                                                              
        5. Simplify foreign tax credit           tyba 12/31/02.........................  .........  .........  .........  .........  .........  .........        -57       -241       -215       -227       -242  ..........        -982
         limitation for dividends from 10/50                                                                                                                                                                                            
         companies to provide look-through                                                                                                                                                                                              
         starting in 2003.                                                                                                                                                                                                              
    B. General Provisions Affecting Treatment    various...............................  .........         -2         -5         -7         -9        -10        -10        -11        -12        -13        -14         -33         -93
     of Controlled Foreign Corporations.                                                                                                                                                                                                
    C. Modification of Passive Foreign           tyba 12/31/97.........................  .........        -24        -23        -24        -26        -27        -28        -29        -31        -33        -35        -124        -280
     Investment Company Provisions to Eliminate                                                                                                                                                                                         
     Overlap With Subpart F and to Allow Mark-                                                                                                                                                                                          
     to-Market Election, and to Modify Asset                                                                                                                                                                                            
     Measurement Rule.                                                                                                                                                                                                                  
    D. Simplify Formation and Operation of       various...............................  .........      (\6\)      (\6\)         -1         -1         -1         -1         -1         -1         -1         -2          -3          -9
     International Joint Ventures, with                                                                                                                                                                                                 
     Technical Modifications.                                                                                                                                                                                                           
    E. Modification of Reporting Threshold for   1/1/98................................  .........     (\19\)         -1         -2         -2         -2         -2         -2         -3         -3         -3          -7         -20
     Stock Ownership of a Foreign Corporation.                                                                                                                                                                                          
    F. Other Foreign Simplification Provisions:                                                                                                                                                                                         
        1. Transition rule for certain trusts..  aiii SBJPA............................  .........         -1         -3         -5         -5         -5         -5         -5         -5         -5         -5         -19         -44
        2. Simplify application of the stock     tyba 12/31/97.........................  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)       (\6\)       (\6\)
         and securities trading safe harbor.                                                                                                                                                                                            
        3. Clarification of determination of     DOE...................................  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)       (\6\)       (\6\)
         foreign taxes deemed paid.                                                                                                                                                                                                     
        4. Clarification of foreign tax credit   DOE...................................  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)       (\6\)       (\6\)
         limitation for financial services                                                                                                                                                                                              
         income.                                                                                                                                                                                                                        
    G. Other Foreign Provisions:                                                                                                                                                                                                        
        1. Foreign sales corporation benefits    gra 12/31/97..........................  .........        -27        -42       -146       -173       -180       -191       -202       -227       -252       -277        -568      -1,717
         for computer software.                                                                                                                                                                                                         
        2. Increase dollar limitation on         1/1/98................................  .........        -15        -30        -50        -67        -82        -97       -103       -111       -119       -127        -244        -801
         section 911 exclusion and index after                                                                                                                                                                                          
         2007.                                                                                                                                                                                                                          
        3. Exception from U.S. property          tyba 12/31/97.........................  .........         -1         -2         -2         -2         -2         -2         -2         -2         -2         -2          -9         -19
         definition under subpart F for certain                                                                                                                                                                                         
         securities positions.                                                                                                                                                                                                          
        4. Exemption from subpart F for active   tybi 1998.............................  .........        -23        -68         -3  .........  .........  .........  .........  .........  .........  .........         -94         -94
         financing income.                                                                                                                                                                                                              
        5. Treat service income of nonresident   tyba 12/31/97.........................  .........         -2         -4         -3         -3         -3         -3         -3         -3         -3         -3         -15         -30
         alien individuals earned on foreign                                                                                                                                                                                            
         ships as foreign source income and                                                                                                                                                                                             
         disregard the U.S. presence of such                                                                                                                                                                                            
         individuals; with amendment to rule                                                                                                                                                                                            
         disregarding U.S. presence.                                                                                                                                                                                                    
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Foreign Tax Provisions...  ......................................  .........        -95       -179       -244       -289       -313       -397       -600       -611       -659       -711      -1,122      -4,102
                                                                                        ================================================================================================================================================
XII Simplification Provisions Relating to                                                                                                                                                                                               
 Individuals and Businesses                                                                                                                                                                                                             
    A. Provisions Relating to Individuals:                                                                                                                                                                                              
        1. Deduction attributable to unearned    1/1/98................................  .........         -2        -38        -35        -35        -35        -35        -35        -38        -37        -36        -146        -327
         income of dependent filers: greater of                                                                                                                                                                                         
         (a) present law; or (b) earned income                                                                                                                                                                                          
         plus $250; delink dependent AMT from                                                                                                                                                                                           
         parent's AMT position.                                                                                                                                                                                                         
        2. Increase de minimis threshold for     tyba 12/31/97.........................  .........       -134        -17        -18        -19        -20        -21        -22        -24        -25        -26        -208        -326
         estimated tax to $1,000.                                                                                                                                                                                                       
        3. Treatment of certain reimbursed       tyba 12/31/97.........................  .........      (\6\)         -1         -1         -1         -1         -1         -1         -1         -1         -1          -5         -11
         expenses of rural mail carriers.                                                                                                                                                                                               
        4. Treatment of travel expenses of       eii tyea DOE..........................  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -1          -2
         certain Federal employees engaged in                                                                                                                                                                                           
         criminal investigations.                                                                                                                                                                                                       
        5. Permit payment of taxes by any        DOE...................................                                                                                                                                                 
         commercially acceptable means; and                                                                                                                                                                                             
         prohibit payment of fees by Treasury.                                                                                                                                                                                          
(12) Negligible Revenue Effect                                                                                                                                                                                                          
    B. Provisions Relating to Businesses                                                                                                                                                                                                
     Generally:                                                                                                                                                                                                                         
        1. Modify look-back method for long-     cci tyea DOE..........................  .........         -1         -2         -3         -4         -4         -4         -4         -5         -5         -5         -14         -37
         term contracts.                                                                                                                                                                                                                
        2. Minimum tax treatment of certain      tyba 12/31/97.........................  .........         -1         -2         -3         -3         -3         -3         -3         -3         -3         -3         -12         -27
         property and casualty insurance                                                                                                                                                                                                
         companies.                                                                                                                                                                                                                     
        3. Provide for exclusion for             leia DOE..............................  .........                                                                                                                                      
         construction allowances provided to                                                                                                                                                                                            
         lessees, with technical modification.                                                                                                                                                                                          
(11) Negligible Revenue Effect                                                                                                                                                                                                          
    C. Partnership Simplification Provisions:                                                                                                                                                                                           
        1. Simplified reporting to partners....  tyba 12/31/97.........................  .........          6          8          8          8          8          9          9          9          9          9          38          83
        2. Simplified audit procedure for large  tyba 12/31/97.........................  .........      (\7\)      (\7\)      (\7\)          1          1          1          1          1          1          1           2           8
         part.                                                                                                                                                                                                                          
        3. Due date for furnishing information   tyba 12/31/97.........................  .........                                                                                                                                      
         to partners of large partnerships.                                                                                                                                                                                             
(11)No Revenue Effect                                                                                                                                                                                                                   
        4. Returns required on magnetic media    tyba 12/31/97.........................  .........                                                                                                                                      
         for partnerships with 100 partners or                                                                                                                                                                                          
         more.                                                                                                                                                                                                                          
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        5. Other partnership audit rules.......  tyba 12/31/97.........................  .........         -2      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -3          -5
        6. Closing partnership taxable year      tyba 12/31/97.........................  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -1          -1
         with respect to deceased partner.                                                                                                                                                                                              
    D. Provisions Relating to Real Estate                                                                                                                                                                                               
     Investment Trusts:                                                                                                                                                                                                                 
        1. Alternative penalty for failure to    tyba DOE..............................  .........                                                                                                                                      
         request information from shareholders.                                                                                                                                                                                         
(11) Negligible Revenue Effect                                                                                                                                                                                                          

[[Page H6615]]

                                                                                                                                                                                                                                        
        2. De minimis rule for tenant services   tyba DOE..............................  .........                                                                                                                                      
         income.                                                                                                                                                                                                                        
(11)Negligible Revenue Effect                                                                                                                                                                                                           
        3. Attribution rules applicable to       tyba DOE..............................  .........                                                                                                                                      
         tenant services.                                                                                                                                                                                                               
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        4. Credit for tax paid by REIT on        tyba DOE..............................  .........                                                                                                                                      
         retained capital gains.                                                                                                                                                                                                        
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        5. Repeal 30% gross income requirement.  tyba DOE..............................  .........         -4         -5         -5        -6n         -7         -7         -8         -9        -10        -11         -26         -72
        6. Modification of earnings and profits  tyba DOE..............................  .........                                                                                                                                      
         rules for determining whether REIT has                                                                                                                                                                                         
         earnings and profits from non-REIT                                                                                                                                                                                             
         year.                                                                                                                                                                                                                          
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        7. Treatment of foreclosure property...  tyba DOE..............................  .........                                                                                                                                      
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        8. Payments under hedging instruments..  tyba DOE..............................  .........                                                                                                                                      
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        9. Excess noncash income...............  tyba DOE..............................  .........                                                                                                                                      
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        10. Prohibited transaction safe harbor.  tyba DOE..............................  .........                                                                                                                                      
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        11. Shared appreciation mortgages......  tyba DOE..............................  .........                                                                                                                                      
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        12. Wholly owned subsidiaries..........  tyba DOE..............................  .........                                                                                                                                      
(11) Negligible Revenue Effect                                                                                                                                                                                                          
    E. Provision Relating to Regulated                                                                                                                                                                                                  
     Investment Companies:                                                                                                                                                                                                              
        1. Repeal 30% gross income limitation    tyba DOE..............................  .........        -17        -23        -27        -33        -38        -45        -53        -61        -71        -82        -138        -450
         for regulated investment companies.                                                                                                                                                                                            
    F. Taxpayer Protections:                                                                                                                                                                                                            
        1. Provide ``reasonable cause''          tyba DOE..............................  .........                                                                                                                                      
         exception for filing claims for                                                                                                                                                                                                
         refunds.                                                                                                                                                                                                                       
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        2. Clarification of period for filing    tyea DOE..............................  .........                                                                                                                                      
         claims for refunds.                                                                                                                                                                                                            
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        3. Repeal authority to disclose whether  pca DOE...............................  .........                                                                                                                                      
         a prospective juror has been audited.                                                                                                                                                                                          
(11) No Revenue Effect                                                                                                                                                                                                                  
        4. Clarify statute of limitations for    tyba DOE..............................  .........                                                                                                                                      
         pass-through entities.                                                                                                                                                                                                         
(11) No Revenue Effect                                                                                                                                                                                                                  
        5. Clarify procedure for administrative  aca DOE...............................  .........                                                                                                                                      
         cost awards.                                                                                                                                                                                                                   
(11) No Revenue Effect                                                                                                                                                                                                                  
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Simplification Provisions    ....................................                  -155        -80        -84        -92        -99       -106       -116       -131       -142       -154        -514      -1,167
           Relating to Individuals and                                                                                                                                                                                                  
           Businesses.                                                                                                                                                                                                                  
                                                                                        ================================================================================================================================================
    XIII. Estate, Gift and Trust Simplification                                                                                                                                                                                         
     Provisions                                                                                                                                                                                                                         
    1. Gifts to charities of over $10,000        gma DOE...............................                                                                                                                                                 
     exempt from gift tax filing requirements.                                                                                                                                                                                          
(12) Negligible Revenue Effect                                                                                                                                                                                                          
         2. Clarification of waiver of certain   dda DOE...............................                                                                                                                                                 
         rights of recovery of estate tax from                                                                                                                                                                                          
         QTIP trust.                                                                                                                                                                                                                    
(12) Negligible Revenue Effect                                                                                                                                                                                                          
         3. Transitional rules under section     aiii OBRA'90..........................  .........                                                                                                                                      
         2056A.                                                                                                                                                                                                                         
(11) Negligible Revenue Effect                                                                                                                                                                                                          
         4. Estate and gift tax treatment of     dda DOE...............................  .........                                                                                                                                      
         short-term OID instruments.                                                                                                                                                                                                    
(11) Negligible Revenue Effect                                                                                                                                                                                                          
         5. Certain revocable trusts treated as  dda DOE...............................  .........         -3         -3         -3         -3         -3         -3         -3         -3         -3         -3         -15         -30
         part of estate.                                                                                                                                                                                                                
         6. Distributions during first 65 days   tyba DOE..............................  .........                                                                                                                                      
         of taxable year of estate.                                                                                                                                                                                                     
(11) Negligible Revenue Effect                                                                                                                                                                                                          
         7. Separate share rules available to    dda DOE...............................  .........                                                                                                                                      
         estates.                                                                                                                                                                                                                       
(11) Negligible Revenue Effect                                                                                                                                                                                                          
         8. Executor of estate and               tyba DOE..............................  .........                                                                                                                                      
         beneficiaries treated as related                                                                                                                                                                                               
         persons for disallowance of losses.                                                                                                                                                                                            
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        9. Treatment of funeral trusts.........  tyea DOE..............................  .........          2          2          2          2          2          2          2          2          2          2          10          20
        10. Adjustments for certain gifts        dda DOE...............................  .........                                                                                                                                      
         within 3 years of decedent's death.                                                                                                                                                                                            
(11) No Revenue Effect                                                                                                                                                                                                                  
        11. Clarification of treatment of        dda DOE...............................  .........                                                                                                                                      
         survivor annuities under qualified                                                                                                                                                                                             
         terminable interest rules.                                                                                                                                                                                                     
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        12. Treatment under qualified domestic   dda DOE...............................  .........                                                                                                                                      
         trust rules of forms of ownership                                                                                                                                                                                              
         which are not trusts.                                                                                                                                                                                                          
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        13. Opportunity to correct certain       DOE...................................  .........                                                                                                                                      
         failures under section 2032A.                                                                                                                                                                                                  
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        14. Authority to waive requirement of    dda DOE...............................  .........                                                                                                                                      
         United States trustee for qualified                                                                                                                                                                                            
         domestic trusts.                                                                                                                                                                                                               
(11) No Revenue Effect                                                                                                                                                                                                                  
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Estate, Gift and Trust         ......................................  .........         -1         -1         -1         -1         -1         -1         -1         -1         -1         -1          -5         -10
       Simplification Provisions.                                                                                                                                                                                                       
                                                                                        ================================================================================================================================================
XIV. Excise Tax and Other Simplification                                                                                                                                                                                                
 Provisions                                                                                                                                                                                                                             
    A. Excise Tax Simplification:                                                                                                                                                                                                       
         1. Increase de minimis limit for        DOE...................................  .........                                                                                                                                      
         aftermarket alterations for heavy                                                                                                                                                                                              
         truck and luxury car excises.                                                                                                                                                                                                  
(11) Negligible Revenue Effect                                                                                                                                                                                                          
         2. Credit or refund for imported        fcq DOE+180 days......................  .........                                                                                                                                      
         bottled distilled spirits returned to                                                                                                                                                                                          
         distilled spirits plant.                                                                                                                                                                                                       
(11) Negligible Revenue Effect                                                                                                                                                                                                          
         3. Authority to cancel or credit        fcq DOE+180 days......................  .........                                                                                                                                      
         export bonds without submission of                                                                                                                                                                                             
         records.                                                                                                                                                                                                                       
(11) No Revenue Effect                                                                                                                                                                                                                  
         4. Repeal of required maintenance of    fcq DOE+180 days......................  .........                                                                                                                                      
         records on premises of distilled                                                                                                                                                                                               
         spirits plant.                                                                                                                                                                                                                 
(11) No Revenue Effect                                                                                                                                                                                                                  
         5. Fermented material from any brewery  fcq DOE+180 days......................  .........                                                                                                                                      
         may be received at a distilled spirits                                                                                                                                                                                         
         plant.                                                                                                                                                                                                                         
(11) Negligible Revenue Effect                                                                                                                                                                                                          
         6. Repeal of requirement for wholesale  DOE...................................  .........                                                                                                                                      
         dealers in liquors to post sign.                                                                                                                                                                                               
(11) No Revenue Effect                                                                                                                                                                                                                  
         7. Refund of tax to wine returned to    fcq DOE+180 days......................  .........                                                                                                                                      
         bond not limited to unmerchantable                                                                                                                                                                                             
         wine.                                                                                                                                                                                                                          
(11) Negligible Revenue Effect                                                                                                                                                                                                          
         8. Use of additional ameliorating       fcq DOE+180 days......................  .........                                                                                                                                      
         material in certain wines.                                                                                                                                                                                                     
(11) No Revenue Effect                                                                                                                                                                                                                  
         9. Domestically produced beer may be    fcq DOE+180 days......................  .........                                                                                                                                      
         withdrawn free of tax for use of                                                                                                                                                                                               
         foreign embassies, legations, etc.                                                                                                                                                                                             
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        10. Beer may be withdrawn free of tax    fcq DOE+180 days......................  .........                                                                                                                                      
         for destruction.                                                                                                                                                                                                               
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        11. Authority to allow drawback on       fcq DOE+180 days......................  .........                                                                                                                                      
         exported beer without submission of                                                                                                                                                                                            
         records.                                                                                                                                                                                                                       
(11) No Revenue Effect                                                                                                                                                                                                                  
        12. Imported beer or wine transferred    fcq DOE+180 days......................  .........                                                                                                                                      
         in bulk to brewery or winery without                                                                                                                                                                                           
         payment of tax.                                                                                                                                                                                                                
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        13. Authority for IRS to grant           DOE...................................  .........                                                                                                                                      
         exemption from excise tax registration                                                                                                                                                                                         
         requirements.                                                                                                                                                                                                                  
(11) No Revenue Effect                                                                                                                                                                                                                  
        14. Exemption from truck excise tax for  1/1/98................................  .........         -5         -8         -8         -8         -9         -9        -10        -10        -11        -11         -38         -89
         certain wrecked truck fixups and truck                                                                                                                                                                                         
         modifications.                                                                                                                                                                                                                 

[[Page H6616]]

                                                                                                                                                                                                                                        
        15. Repeal registration requirement for  1/1/98................................  .........                                                                                                                                      
         tax-free sales of trucks for resale.                                                                                                                                                                                           
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        16. Repeal of excise tax ``deadwood''    DOE...................................  .........                                                                                                                                      
         provision.                                                                                                                                                                                                                     
(11)No Revenue Effect                                                                                                                                                                                                                   
        17. Move taxation of arrows from tax on  1/1/98................................  .........                                                                                                                                      
         assembled arrows to tax on component                                                                                                                                                                                           
         parts of 12.4%.                                                                                                                                                                                                                
(11)Negligible Revenue Effect                                                                                                                                                                                                           
        18. Clarify tax treatment of skydiving   10/1/97...............................  .........                                                                                                                                      
         flights as noncommercial aviation;                                                                                                                                                                                             
         with technical modifications.                                                                                                                                                                                                  
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        19. Eliminate double taxation for        10/1/97...............................  .........                                                                                                                                      
         certain purchases of aviation fuel                                                                                                                                                                                             
         from fixed-based operators; with                                                                                                                                                                                               
         technical modifications.                                                                                                                                                                                                       
(11) Negligible Revenue Effect                                                                                                                                                                                                          
    B. Tax Exempt Bond Provisions:                                                                                                                                                                                                      
        1. Repeal $100,000 limitation on         bia DOE...............................  .........      (\6\)         -2         -3         -5         -6         -8         -9        -10        -11        -12         -17         -65
         unspent proceeds from tax-exempt bond                                                                                                                                                                                          
         issues under year exception from                                                                                                                                                                                               
         rebate.                                                                                                                                                                                                                        
        2. Exclusion from arbitrage rebate for   bia DOE...............................  .........      (\6\)         -1         -2         -3         -3         -4         -5         -6         -6         -7          -9         -37
         earnings on bona fide debt service                                                                                                                                                                                             
         fund under construction.                                                                                                                                                                                                       
        3. Repeal of debt service based          bia DOE...............................  .........                                                                                                                                      
         limitation on investment in certain                                                                                                                                                                                            
         nonpurpose investments.                                                                                                                                                                                                        
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        4. Repeal of expired student loan bond   DOE...................................  .........                                                                                                                                      
         arbitrage rebate provisions.                                                                                                                                                                                                   
(11)No Revenue Effect                                                                                                                                                                                                                   
    C. Tax Court Procedures:                                                                                                                                                                                                            
        1. Clarify jurisdiction of Tax Court     DOE...................................  .........         -3         -3         -3         -3         -3         -3         -3         -3         -3         -3         -15         -30
         with respect to overpayment                                                                                                                                                                                                    
         determinations.                                                                                                                                                                                                                
        2. Clarify Tax Court jurisdiction over   DOE...................................  .........                                                                                                                                      
         interest determinations.                                                                                                                                                                                                       
(11) No Revenue Effect                                                                                                                                                                                                                  
        3. Clarify net worth requirements for    DOE...................................  .........         -1         -2         -2         -2         -2         -2         -2         -2         -2         -2          -9         -19
         awards of administrative or litigation                                                                                                                                                                                         
         costs; $4 million for joint returns.                                                                                                                                                                                           
        4. Clarify Tax Court jurisdiction for    DOE...................................  .........                                                                                                                                      
         independent contractors with technical                                                                                                                                                                                         
         modification.                                                                                                                                                                                                                  
(11)Negligible Revenue Effect                                                                                                                                                                                                           
    D. Other Provisions:                                                                                                                                                                                                                
        1. Extend due date for first quarter     tyba DOE..............................  .........         -2      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -2          -3
         estimated tax by private foundations.                                                                                                                                                                                          
        2. Clarification of authority to         1/1/98................................  .........         -2         -3         -1         -1         -1         -1         -1         -1         -1         -1          -8         -13
         withhold Puerto Rico income taxes from                                                                                                                                                                                         
         salaries of Federal employees..                                                                                                                                                                                                
        3. Certain notices disregarded under     1/1/98................................  .........         -1         -1         -1         -1         -1         -1         -1         -1         -1         -1          -5         -10
         provision increasing interest rate on                                                                                                                                                                                          
         large corporate underpayments.                                                                                                                                                                                                 
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Excise Tax and Other       ......................................  .........        -14        -20        -20        -23        -25        -28        -31        -33        -35        -37        -103        -266
           Simplification Provisions.                                                                                                                                                                                                   
                                                                                        ================================================================================================================================================
XV. Pension Simplification Provisions                                                                                                                                                                                                   
    A. Miscellaneous Provisions Relating to                                                                                                                                                                                             
     Pensions and Other Provisions:                                                                                                                                                                                                     
        1. Water districts made eligible for     1/1/98................................  .........     (\19\)         -1         -1         -1         -2         -2         -2         -2         -2         -3          -6         -15
         401(k) plans even if State or local                                                                                                                                                                                            
         entity.                                                                                                                                                                                                                        
        2. Extend moratorium on                  DOE...................................  .........                                                                                                                                      
         nondiscrimination rules for public                                                                                                                                                                                             
         pension plans (permanent), with                                                                                                                                                                                                
         technical.                                                                                                                                                                                                                     
(12) Negligible Revenue Effect                                                                                                                                                                                                          
        3. Treatment of certain disability       DOE...................................  .........  .........        -10         -1  .........  .........  .........  .........  .........  .........  .........         -11         -11
         benefits received by former police                                                                                                                                                                                             
         officers or firefighters.                                                                                                                                                                                                      
        4. ESOP provision Modify prohibited      tyba 12/31/97.........................  .........                                                                                                                                      
         transaction rules relating to employee                                                                                                                                                                                         
         stock ownership plans of S                                                                                                                                                                                                     
         corporation; with modifications.                                                                                                                                                                                               
(11) Negligible Revenue Effect                                                                                                                                                                                                          
        5. Repeal UBIT on income from an S       tyba 12/31/97.........................  .........         -8        -23        -34        -41        -44        -46        -48        -50        -52        -54        -149        -400
         corporation to an ESOP; with technical                                                                                                                                                                                         
         modification.                                                                                                                                                                                                                  
        6. Pension provision--increase in full   pyba 12/31/98.........................  .........  .........         -4        -12        -14        -18        -19        -23        -23        -25        -25         -48        -164
         funding limit with 20-year                                                                                                                                                                                                     
         amortization; with technical                                                                                                                                                                                                   
         modification.                                                                                                                                                                                                                  
        7. Deduction for contributions made by   tyba 12/31/97.........................  .........  .........                                                                                                                           
         ministers to retirement plans.                                                                                                                                                                                                 
(11)Negligible Revenue Effect                                                                                                                                                                                                           
        8. Exclusion of ministers from           tyba 12/31/97.........................  .........  .........                                                                                                                           
         discrimination testing of                                                                                                                                                                                                      
         nondenominational retirement plans.                                                                                                                                                                                            
(10)Negligible Revenue Effect                                                                                                                                                                                                           
        9. Diversification of 401(k)             DOE...................................  .........  .........                                                                                                                           
         investments; with 1-year delay of                                                                                                                                                                                              
         effective date.                                                                                                                                                                                                                
(10)Negligible Revenue Effect                                                                                                                                                                                                           
        10. Exempt police and firefighters from  yba 12/31/96..........................  .........  .........                                                                                                                           
         section 415 dollar limitation; with                                                                                                                                                                                            
         clarification.                                                                                                                                                                                                                 
(10)Negligible Revenue Effect                                                                                                                                                                                                           
        11. Modify section 415 limits for State  tyba 12/31/97.........................  .........         -9        -25        -25        -26        -26        -26        -27        -27        -27        -28        -111        -246
         and local plans; with modifications.                                                                                                                                                                                           
        12. ESOP provision--permit cash          tyba 12/31/97.........................  .........                                                                                                                                      
         distributions in lieu of stock in the                                                                                                                                                                                          
         S corporation.                                                                                                                                                                                                                 
(11)Negligible Revenue Effect                                                                                                                                                                                                           
        13. Increase the amount from $3,500 to   dma DOE (\7\).........................          2          6          7          7          7          8          8          9          9         10         29          73            
         $5,000 on involuntary cash out from                                                                                                                                                                                            
         pension plans with no indexing of                                                                                                                                                                                              
         dollar amount.                                                                                                                                                                                                                 
        14. Treatment for partnership items of   tyba 12/31/97.........................  .........                                                                                                                                      
         individual retirement accounts.                                                                                                                                                                                                
(11)No Revenue Effect                                                                                                                                                                                                                   
        15. Church plan exception to             DOE...................................  .........                                                                                                                                      
         prohibition on discrimination against                                                                                                                                                                                          
         individuals based on health status.                                                                                                                                                                                            
(11)Negligible Revenue Effect                                                                                                                                                                                                           
        16. Excise tax penalties for failure of  pybo/a 1/1/98.........................  .........                                                                                                                                      
         group health plan to provide certain                                                                                                                                                                                           
         maternity and mental health benefits.                                                                                                                                                                                          
(11)Negligible Revenue Effect                                                                                                                                                                                                           
        17. Date for adoption of plan            DOE...................................  .........                                                                                                                                      
         amendments.                                                                                                                                                                                                                    
(11)No Revenue Effect                                                                                                                                                                                                                   
    B. Pension Simplification Provisions:                                                                                                                                                                                               
        1. Matching contributions for self-      tyba 12/31/97.........................  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)      (\20\)      (\21\)
         employed individuals not treated as                                                                                                                                                                                            
         elective deferrals.                                                                                                                                                                                                            
        2. Contributions to IRAs through         tyba 12/31/97.........................  .........                                                                                                                                      
         payroll deductions.                                                                                                                                                                                                            
(11)No Revenue Effect                                                                                                                                                                                                                   
        3. Plans not disqualified merely by      tyba 12/31/97.........................  .........                                                                                                                                      
         accepting rollover contributions; with                                                                                                                                                                                         
         modification.                                                                                                                                                                                                                  
(11)Negligible Revenue Effect                                                                                                                                                                                                           
        4. Modification of prohibition on        DOE...................................  .........                                                                                                                                      
         assignment or alienation.                                                                                                                                                                                                      
(11)Negligible Revenue Effect                                                                                                                                                                                                           

[[Page H6617]]

                                                                                                                                                                                                                                        
        5. Eliminate paperwork burdens on plans  tyba DOE..............................  .........  .........                                                                                                                           
(12)No Revenue Effect                                                                                                                                                                                                                   
        6. Modifications to section 403(b)       tyba 12/31/98.........................  .........  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)      (\20\)      (\21\)
         exclusion allowance to conform to                                                                                                                                                                                              
         section 415 modifications.                                                                                                                                                                                                     
        7. New technologies in retirement plans  DOE...................................  .........                                                                                                                                      
(11)No Revenue Effect                                                                                                                                                                                                                   
        8. Modification of 10% tax on            tyba 12/31/97.........................  .........         -2         -3         -3         -3         -3         -3         -3         -3         -3         -3         -14         -29
         nondeductible.                                                                                                                                                                                                                 
        9. Modify funding rules for certain      cda 12/31/97..........................  .........                                                                                                                                      
         plans.                                                                                                                                                                                                                         
(11)Negligible Revenue Effect                                                                                                                                                                                                           
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Pension Simplification     ......................................        -27        -51        -68        -78        -86        -88        -95        -96       -100       -103       -310        -792            
           Provisions.                                                                                                                                                                                                                  
                                                                                        ================================================================================================================================================
XVI. Technical Corrections Provisions                                                                                                                                                                                                   
    1. Oklahoma technical on Indian wage         dwcorfpt 3/18/97......................  .........        -10         -2          1          2          2          1          1          1          1          1          -8          -2
     credits and development incentives for                                                                                                                                                                                             
     property with 10-year lives or less, with                                                                                                                                                                                          
     modification.                                                                                                                                                                                                                      
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Technical Corrections          ......................................        -10         -2          1          2          2          1          1          1          1          1         -8          -2            
       Provisions.                                                                                                                                                                                                                      
                                                                                        ================================================================================================================================================
XVII. TRADE PROVISION--GSP extension through 6/  6/1/97................................  .........       -378  .........  .........  .........  .........  .........  .........  .........  .........  .........        -378        -378
 30/98 [\12\]................................                                                                                                                                                                                           
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
      Total Revenue Effect of H.R. 2014........  ......................................         60     -9,483     -9,887    -27,937    -29,329    -23,865    -34,966    -36,611    -38,652    -39,809    -41,551    -100,444    -292,045
                                                                                        ================================================================================================================================================
XVIII. REVENUE PROVISIONS IN H.R. 2015                                                                                                                                                                                                  
    1. Increase small cigarettes tax by $0.10    10/1/97...............................  .........  .........  .........      1,175      1,720      2,272      2,280      2,290      2,300      2,310      2,320       5,167      16,667
     per pack in 2000 and 2001, and $0.15 per                                                                                                                                                                                           
     pack in 2002 and thereafter with                                                                                                                                                                                                   
     proportionate increase in other tobacco                                                                                                                                                                                            
     products excise taxes.                                                                                                                                                                                                             
    2. Miscellaneous FUTA provisions [\12\]....  various...............................  .........          3      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)           1  ..........
    3. Medicare Plus MSAs......................  tyba 12/31/97.........................  .........                                                                                                                                      
(11)Negligible Revenue Effect                                                                                                                                                                                                           
                                                                                        ------------------------------------------------------------------------------------------------------------------------------------------------
      Total Revenue Effect of H.R. 2015........  ......................................  .........          3        [6]      1,175      1,720      2,272      2,280      2,290      2,300      2,310      2,320       5,168      16,667
                                                                                        ================================================================================================================================================
      Grand Total: Reconciliation Revenue        ......................................         60     -9,480     -9,887    -26,762    -27,609    -21,593    -32,686    -34,321    -36,352    -37,499    -39,231     -95,276   -275,378 
       Provisions.                                                                                                                                                                                                                      
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[\1\] Estimate considers interaction with HOPE tax credit proposal.                                                                                                                                                                     
[\2\] The refundable portion of the child credit is equal to $4,281 million for fiscal years 1998-2002 and $10,022 million for fiscal years 1998-2007.                                                                                  
[\3\] Estimate includes interaction with estate and gift taxes.                                                                                                                                                                         
[\4\] Considers interaction with IRA PLUS proposal.                                                                                                                                                                                     
[\5\] Estimate includes interaction with welfare-to-work tax credit.                                                                                                                                                                    
[\6\] Loss of less than $500,000.                                                                                                                                                                                                       
[\7\] Gain of less than $500,000.                                                                                                                                                                                                       
[\8\] Effective for bonds issued after 12/31/96 and bonds issued before 1/1/99.                                                                                                                                                         
[\9\] Effective for expenses in taxable years ending after date of enactment and before 1/1/01.                                                                                                                                         
[\10\] Effective for payments received in taxable years beginning after 12/31/96 with respect to individuals dying after such date.                                                                                                     
[\11\] Assumes prior or concurrent passage of legislation to allow Virgin Island financing on parity basis.                                                                                                                             
[\12\] Estimate provided by the Congressional Budget Office.                                                                                                                                                                            
[\13\] Rural airports would be defined as (1) airports receiving ``essential air service'' assistance on date of enactment and having fewer than 100,000 enplanements in the previous calendar year, and (2) other airports having fewer
  than 100,000 passenger enplanements in the previous calendar year, excluding those within 75 miles of airports having more than 100,000 passenger enplanements in the previous year.                                                  
[\14\] Estimate does not include increase in receipts to Social Security trust fund ($21 million for fiscal years 1997-2002; $51 million for fiscal years 1997-2007).                                                                   
[\15\] The provision would eliminate the present-law requirement that a portion of the suspense account be restored to income whenever the gross receipts of the corporation decline.                                                   
[\16\] Provision would be effective for taxable years ending after 6/8/97 for new suspense accounts, and taxable years beginning after that date for existing accounts. Balances in new accounts would be included in income over a 10- 
  year period, and balances in existing accounts over a 20-year period. For existing accounts, the amounts included in income in any year would not exceed 50% of the taxable income of the taxpayer before the inclusion.              
[\17\] Estimate includes outlay reductions of $254 million for 1997-2002 and $650 million for 1997-2007.                                                                                                                                
[\18\] Estimate does not include effect on outlays. Outlays will be provided by the Congressional Budget Office.                                                                                                                        
[\19\] Loss of less than $1 million.                                                                                                                                                                                                    
[\20\] Loss of less than $5 million.                                                                                                                                                                                                    
[\21\] Loss of less than $10 million.                                                                                                                                                                                                   
                                                                                                                                                                                                                                        
 Legend for ``Effective'' column: ab=and before; aba=annuities beginning after; aca=actions commenced after; aiii OBRA'90=as if included in the Omnibus Budget Reconciliation Act of 1990; aiii SBJPA=as if included in the Small       
  Business Job Protection Act of 1996; aoty=all open taxable years; bia=bonds issued after; cai=credits arising in; cci=contracts completed in; cda=contributions due after; cfa=claims filed after; cia=contracts issued after;        
  csa=constructive sales after; da=distributions after; Da=discharges after; da/a=distributions and acquisitions after; dda=decedents dying after; di=dispositions in; dma=disclosures made after; DOE=date of enactment; dofca=date of 
  first committee action; dpoaa=dividends paid or accrued after; droaa=dividends received or accrued after; dwcorfpt=depreciation and wages claimed on returns filed prior to; efbcieo=exception for binding contracts in effect on;    
  eia=expenses incurred after; eii=expenses incurred in; fcq DOE + 180 days=first day of the calendar quarter that begins at least 180 days after date of enactment; ftpoa=foreign taxes paid or accrued in; gma=gifts made after;      
  gra=gross receipts after; gsta=generation skipping transfers after; icoa=involuntary conversions occurring after; lia=instruments issued after; leia=leases entered into after; lia=levies issued after; Ipo/a=labor performed on or  
  after; NOLgi=net operating lossess generated in; oia=obligations issued after; pca=proceedings commenced after; pcpa=property contributed to partnership after; pda=partnership distributions after; pma=payments made after; po/     
  a=purchases on or after; poida=payments of interest due after; ppisa=property placed in service after; psora=payments solicited or received after; ptoa=prohibited transactions occurring after; pyba=plans years beginning after;    
  phybo/a=plans years beginning on or after; rd=returns due; rfa=returns filed after; roa=rentals occurring after (for returns open on date of first committee action); Sa=sales after; sea=sales or exchanges after; sepda=sales and   
  exchanges, and certain partnership distributions after; spa=services performed after; ta=transactions after; Ta=transfers after; tyba=taxable years beginning after; Tybo/a=Taxable years beginning on or after; tyb1ya=taxable years 
  beginning 1 year after; tybi=taxable years beginning in; tyea=tax years ending after; tsoaiTg=tax shelters offered after issuance of Treasury guidance; wpoifhma=wages paid or incurred for hires made after; yba=years beginning     
  after; 30da=30 days after; 90da=90 days after; 180da=180 days after; 2ya=2 years after.                                                                                                                                               
                                                                                                                                                                                                                                        
 Note.--Details may not add to totals due to rounding. Enactment date is assumed to be August 15, 1997.                                                                                                                                 
                                                                                                                                                                                                                                        
 Source: Joint Committee on Taxation.                                                                                                                                                                                                   

     For consideration of the House bill, and the Senate 
     amendment, and modifications committed to conference:
     John R. Kasich,
     Bill Archer,
     Phil Crane,
     William M. Thomas,
     Dick Armey,
     Tom DeLay,
     Charles B. Rangel,
     As additional conferees from the Committee on Transportation 
     and Infrastructure, for consideration of secs. 702 and 704 of 
     the Senate amendment, and modifications committed to 
     conference:
     Bud Shuster,
     Susan Molinari,
     James L. Oberstar,
     Bill Goodling,
     Harris W. Fawell,
     Donald M. Payne,
                                Managers on the Part of the House.

     From the Committee on Finance:
     Bill Roth,
     Trent Lott,
     Daniel P. Moynihan,
     From the Committee on the Budget:
     Pete Domenici,
     Don Nickles,
     Frank R. Lautenberg,
                               Managers on the Part of the Senate.
