[Congressional Record Volume 145, Number 150 (Friday, October 29, 1999)]
[Senate]
[Pages S13507-S13520]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                    TAX RELIEF EXTENSION ACT OF 1999

  Mr. LOTT. Mr. President, we have some very important extenders in the 
Tax Code that need to be acted on before the end of this year or they 
will

[[Page S13508]]

expire. The Finance Committee, in a broad bipartisan way, reported out 
the bill. We have now cleared it on both sides. So this is very 
important to get it into conference with the House quickly so we can 
get this legislation completed before the year's legislative end.
  Mr. President, I ask unanimous consent that the Senate now turn to 
the consideration of Calendar No. 346, S. 1792, the so-called Finance 
Committee extenders bill, and there be 10 minutes for debate, with no 
amendments or motions in order.
  The PRESIDING OFFICER. The clerk will report the bill by title.
  The legislative clerk read as follows:

       A bill (S. 1792) to amend the Internal Revenue Code of 1986 
     to extend expiring provisions, to fully allow the 
     nonrefundable personal credits against regular tax liability, 
     and for other purposes.

  There being no objection, the Senate proceeded to consider the bill.
  Mr. BAUCUS. Mr. President, I express my support for this bill.
  This bill is not perfect. There are many of us in the Senate who have 
hoped we could have done more. I have argued that the Research and 
Development tax credit should be made permanent for many years. 
Companies plan their research many years in advance, and we don't get 
the full benefit of the R&D credit by allowing it to expire so 
frequently.
  I also support making the AMT exclusion in the bill permanent. 
Taxpayers should be assured they will receive the full benefits of the 
personal credits that we enacted with such fanfare just last session.
  There are other credits in this bill that should be made permanent, 
such as the Work Opportunities and Welfare to Work tax credits. These 
credits help compensate companies for hiring those employees that are 
the hardest to employ and train--those coming off the welfare rolls.
  But we cannot allow the perfect to be the enemy of the good. We stand 
here in the waning days of this session, and it appears as though 
enacting legislation that would make these credits permanent is simply 
not in the cards. They are expensive, and it is not possible to enact 
major tax legislation that uses a substantial portion of the surplus 
unless it is in the context of a comprehensive bill.
  Above all, we must be fiscally responsible, and protect the surplus 
for our children and grandchildren.
  This bill has been reviewed by all Senators and has received 
unanimous consent to proceed. I hope the Conferees on the bill will 
work out the differences between the House and Senate quickly, and send 
us back a bill the President can sign into law. Doing otherwise risks 
getting nothing at all, and allowing the gap since these important 
credits lapsed to grow. This would further undermine their 
effectiveness, and leave thousands of businesses and individuals with 
tremendous uncertainty about their tax liabilities for this year.
  We cannot and should not leave this important work undone. We should 
restore these credits as soon as possible, even if that means leaving 
the debate about permanence for these credits for another day.
  Mr. LOTT. Mr. President, I ask consent that following the conclusion 
or yielding back of time, the bill be advanced to third reading and 
passed and the motion to reconsider be laid upon the table. I further 
ask consent that the bill remain at the desk, and once the Senate 
receives the House companion bill, the Senate proceed to its immediate 
consideration and all after the enacting clause be stricken, the text 
of the Senate bill be inserted, the bill be advanced to third reading 
and passed. I further ask consent that the Senate insist on its 
amendment, request a conference with the House, and the Chair be 
authorized to appoint conferees on the part of the Senate, and passage 
of the Senate bill be vitiated and it be placed back on the calendar.
  The PRESIDING OFFICER. Is there objection?
  Without objection, it is so ordered.
  The bill (S. 1792) was read the third time and passed, as follows:

                                S. 1792

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

     SECTION 1. SHORT TITLE; ETC.

       (a) Short Title.--This Act may be cited as the ``Tax Relief 
     Extension Act of 1999''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Table of Contents.--The table of contents for this Act 
     is as follows:

Sec. 1. Short title; etc.

         TITLE I--EXTENSION OF EXPIRED AND EXPIRING PROVISIONS

Sec. 101. Extension of minimum tax relief for individuals.
Sec. 102. Extension of exclusion for employer-provided educational 
              assistance.
Sec. 103. Extension of research and experimentation credit and increase 
              in rates for alternative incremental research credit.
Sec. 104. Extension of exceptions under subpart F for active financing 
              income.
Sec. 105. Extension of suspension of net income limitation on 
              percentage depletion from marginal oil and gas wells.
Sec. 106. Extension of work opportunity tax credit and welfare-to-work 
              tax credit.
Sec. 107. Extension and modification of tax credit for electricity 
              produced from certain renewable resources.
Sec. 108. Expansion of brownfields environmental remediation.
Sec. 109. Temporary increase in amount of rum excise tax covered over 
              to Puerto Rico and Virgin Islands.
Sec. 110. Delay requirement that registered motor fuels terminals offer 
              dyed fuel as a condition of registration.
Sec. 111. Extension of production credit for fuel produced by certain 
              gasification facilities.

                  TITLE II--REVENUE OFFSET PROVISIONS

                     Subtitle A--General Provisions

Sec. 201. Modification of individual estimated tax safe harbor.
Sec. 202. Modification of foreign tax credit carryover rules.
Sec. 203. Clarification of tax treatment of income and losses on 
              derivatives.
Sec. 204. Inclusion of certain vaccines against streptococcus 
              pneumoniae to list of taxable vaccines.
Sec. 205. Expansion of reporting of cancellation of indebtedness 
              income.
Sec. 206. Imposition of limitation on prefunding of certain employee 
              benefits.
Sec. 207. Increase in elective withholding rate for nonperiodic 
              distributions from deferred compensation plans.
Sec. 208. Limitation on conversion of character of income from 
              constructive ownership transactions.
Sec. 209. Treatment of excess pension assets used for retiree health 
              benefits.
Sec. 210. Modification of installment method and repeal of installment 
              method for accrual method taxpayers.
Sec. 211. Limitation on use of nonaccrual experience method of 
              accounting.
Sec. 212. Denial of charitable contribution deduction for transfers 
              associated with split-dollar insurance arrangements.
Sec. 213. Prevention of duplication of loss through assumption of 
              liabilities giving rise to a deduction.
Sec. 214. Consistent treatment and basis allocation rules for transfers 
              of intangibles in certain nonrecognition transactions.
Sec. 215. Distributions by a partnership to a corporate partner of 
              stock in another corporation.
Sec. 216. Prohibited allocations of stock in S corporation ESOP.

    Subtitle B--Provisions Relating to Real Estate Investment Trusts

   Part I--Treatment of Income and Services Provided by Taxable REIT 
                              Subsidiaries

Sec. 221. Modifications to asset diversification test.
Sec. 222. Treatment of income and services provided by taxable REIT 
              subsidiaries.
Sec. 223. Taxable REIT subsidiary.
Sec. 224. Limitation on earnings stripping.
Sec. 225. 100 percent tax on improperly allocated amounts.
Sec. 226. Effective date.

                       Part II--Health Care REITs

Sec. 231. Health care REITs.

      Part III--Conformity With Regulated Investment Company Rules

Sec. 241. Conformity with regulated investment company rules.

 Part IV--Clarification of Exception From Impermissible Tenant Service 
                                 Income

Sec. 251. Clarification of exception for independent operators.

           Part V--Modification of Earnings and Profits Rules

Sec. 261. Modification of earnings and profits rules.

              Part VI--Modification of Estimated Tax Rules

Sec. 271. Modification of estimated tax rules for closely held real 
              estate investment trusts.

[[Page S13509]]

       Part VIII--Modification of Treatment of Closely-Held REITs

Sec. 281. Controlled entities ineligible for REIT status.

                      TITLE III--BUDGET PROVISION

Sec. 301. Exclusion from paygo scorecard.

         TITLE I--EXTENSION OF EXPIRED AND EXPIRING PROVISIONS

     SEC. 101. EXTENSION OF MINIMUM TAX RELIEF FOR INDIVIDUALS.

       (a) In General.--The second sentence of section 26(a) 
     (relating to limitations based on amount of tax) is amended 
     by striking ``1998'' and inserting ``calendar year 1998, 
     1999, or 2000''.
       (b) Child Credit.--Section 24(d)(2) (relating to reduction 
     of credit to taxpayer subject to alternative minimum tax) is 
     amended by striking ``December 31, 1998'' and inserting 
     ``December 31, 2000''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 102. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED 
                   EDUCATIONAL ASSISTANCE.

       (a) In General.--Section 127(d) (relating to termination) 
     is amended by striking ``May 31, 2000'' and inserting 
     ``December 31, 2000''.
       (b) Repeal of Limitation on Graduate Education.--
       (1) In general.--The last sentence of section 127(c)(1) 
     (defining educational assistance) is amended by striking ``, 
     and such term also does not include any payment for, or 
     the provision of any benefits with respect to, 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''.
       (2) Effective date.--The amendment made by paragraph (1) 
     shall apply with respect to expenses relating to courses 
     beginning after December 31, 1999.

     SEC. 103. EXTENSION OF RESEARCH AND EXPERIMENTATION CREDIT 
                   AND INCREASE IN RATES FOR ALTERNATIVE 
                   INCREMENTAL RESEARCH CREDIT.

       (a) Extension.--
       (1) In general.--Section 41(h) (relating to termination) is 
     amended--
       (A) by striking ``June 30, 1999'' and inserting ``December 
     31, 2000'',
       (B) by striking ``36-month'' and inserting ``54-month'', 
     and
       (C) by striking ``36 months'' and inserting ``54 months''.
       (2) Conforming amendment.--Section 45C(b)(1)(D) is amended 
     by striking ``June 30, 1999'' and inserting ``December 31, 
     2000''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to amounts paid or incurred after June 30, 1999.
       (b) Increase in Percentages Under Alternative Incremental 
     Credit.--
       (1) In general.--Subparagraph (A) of section 41(c)(4) is 
     amended--
       (A) by striking ``1.65 percent'' and inserting ``2.65 
     percent'',
       (B) by striking ``2.2 percent'' and inserting ``3.2 
     percent'', and
       (C) by striking ``2.75 percent'' and inserting ``3.75 
     percent''.
       (2) Effective date.--The amendments made by this subsection 
     shall apply to taxable years beginning after June 30, 1999.
       (c) Extension of Research Credit to Research in Puerto Rico 
     and the Possessions of the United States.--
       (1) In general.--Section 41(d)(4)(F) (relating to foreign 
     research) is amended by inserting ``, the Commonwealth of 
     Puerto Rico, or any possession of the United States'' after 
     ``United States''.
       (2) Denial of double benefit.--Section 280C(c)(1) is 
     amended by inserting ``or credit'' after ``deduction'' each 
     place it appears.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to amounts paid or incurred after June 30, 1999.

     SEC. 104. EXTENSION OF EXCEPTIONS UNDER SUBPART F FOR ACTIVE 
                   FINANCING INCOME.

       (a) In General.--Sections 953(e)(10) and 954(h)(9) 
     (relating to application) are each amended--
       (1) by striking ``the first taxable year'' and inserting 
     ``taxable years'',
       (2) by striking ``January 1, 2000'' and inserting ``January 
     1, 2001'', and
       (3) by striking ``within which such'' and inserting 
     ``within which any such''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 105. EXTENSION OF SUSPENSION OF NET INCOME LIMITATION ON 
                   PERCENTAGE DEPLETION FROM MARGINAL OIL AND GAS 
                   WELLS.

       (a) In General.--Subparagraph (H) of section 613A(c)(6) 
     (relating to temporary suspension of taxable limit with 
     respect to marginal production) is amended by striking 
     ``January 1, 2000'' and inserting ``January 1, 2001''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 106. EXTENSION OF WORK OPPORTUNITY TAX CREDIT AND 
                   WELFARE-TO-WORK TAX CREDIT.

       (a) Temporary Extension.--Sections 51(c)(4)(B) and 51A(f ) 
     (relating to termination) are each amended by striking ``June 
     30, 1999'' and inserting ``December 31, 2000''.
       (b) Clarification of First Year of Employment.--Paragraph 
     (2) of section 51(i) is amended by striking ``during which he 
     was not a member of a targeted group''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to individuals who begin work for the employer 
     after June 30, 1999.

     SEC. 107. EXTENSION AND MODIFICATION OF TAX CREDIT FOR 
                   ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE 
                   RESOURCES.

       (a) Extension and Modification of Placed-in-Service 
     Rules.--Paragraph (3) of section 45(c) is amended to read as 
     follows:
       ``(3) Qualified facility.--
       ``(A) Wind facility.--In the case of a facility using wind 
     to produce electricity, the term `qualified facility' means 
     any facility owned by the taxpayer which is originally placed 
     in service after December 31, 1993, and before January 1, 
     2001.
       ``(B) Closed-loop biomass facility.--In the case of a 
     facility using closed-loop biomass to produce electricity, 
     the term `qualified facility' means any facility owned by the 
     taxpayer which is--
       ``(i) originally placed in service after December 31, 1992, 
     and before January 1, 2001, or
       ``(ii) originally placed in service before December 31, 
     1992, and modified to use closed-loop biomass to co-fire with 
     coal after such date and before January 1, 2001.
       ``(C) Biomass facility.--In the case of a facility using 
     biomass (other than closed-loop biomass) to produce 
     electricity, the term `qualified facility' means any facility 
     owned by the taxpayer which is originally placed in service 
     before January 1, 2001.
       ``(D) Landfill gas or poultry waste facility.--
       ``(i) In general.--In the case of a facility using landfill 
     gas or poultry waste to produce electricity, the term 
     `qualified facility' means any facility of the taxpayer which 
     is originally placed in service after December 31, 1999, and 
     before January 1, 2001.
       ``(ii) Landfill gas.--In the case of a facility using 
     landfill gas, such term shall include equipment and housing 
     (not including wells and related systems required to collect 
     and transmit gas to the production facility) required to 
     generate electricity which are owned by the taxpayer and so 
     placed in service.
       ``(E) Special rule.--In the case of a qualified facility 
     described in subparagraph (B) or (C) using coal to co-fire 
     with biomass, the 10-year period referred to in subsection 
     (a) shall be treated as beginning no earlier than January 1, 
     2000.''
       (b) Expansion of Qualified Energy Resources.--
       (1) In general.--Section 45(c)(1) (defining qualified 
     energy resources) is amended by striking ``and'' at the end 
     of subparagraph (A), by striking the period at the end of 
     subparagraph (B) and inserting a comma, and by adding at the 
     end the following new subparagraphs:
       ``(C) biomass (other than closed-loop biomass),
       ``(D) landfill gas, and
       ``(E) poultry waste.''
       (2) Definitions.--Section 45(c), as amended by subsection 
     (a), is amended by redesignating paragraph (3) as paragraph 
     (6) and inserting after paragraph (2) the following new 
     paragraphs:
       ``(3) Biomass.--The term `biomass' means any solid, 
     nonhazardous, cellulosic waste material which is segregated 
     from other waste materials and which is derived from--
       ``(A) any of the following forest-related resources: mill 
     residues, precommercial thinnings, slash, and brush, but not 
     including old-growth timber,
       ``(B) urban sources, including waste pallets, crates, and 
     dunnage, manufacturing and construction wood wastes, and 
     landscape or right-of-way tree trimmings, but not including 
     unsegregated municipal solid waste (garbage) or paper that is 
     commonly recycled, or
       ``(C) agriculture sources, including orchard tree crops, 
     vineyard, grain, legumes, sugar, and other crop by-products 
     or residues.
       ``(4) Landfill gas.--The term `landfill gas' means gas from 
     the decomposition of any household solid waste, commercial 
     solid waste, and industrial solid waste disposed of in a 
     municipal solid waste landfill unit (as such terms are 
     defined in regulations promulgated under subtitle D of the 
     Solid Waste Disposal Act (42 U.S.C. 6941 et seq.)).
       ``(5) Poultry waste.--The term `poultry waste' means 
     poultry manure and litter, including wood shavings, straw, 
     rice hulls, and other bedding material for the disposition of 
     manure.''
       (c) Special Rules.--Section 45(d) (relating to definitions 
     and special rules) is amended by adding at the end the 
     following new paragraphs:
       ``(6) Credit eligibility in the case of government-owned 
     facilities using poultry waste.--In the case of a facility 
     using poultry waste to produce electricity and owned by a 
     governmental unit, the person eligible for the credit under 
     subsection (a) is the lessor or the operator of such 
     facility.
       ``(7) Proportional credit for facility using coal to co-
     fire with biomass.--In the case of a qualified facility 
     described in subparagraph (B) or (C) of subsection (c)(6) 
     using coal to co-fire with biomass, the amount of the credit 
     determined under subsection (a) for the taxable year shall be 
     reduced by the percentage coal comprises (on a Btu basis) of 
     the average fuel input of the facility for the taxable year.
       ``(8) Denial of double benefit.--No credit shall be allowed 
     under this section with respect to a facility for any taxable 
     year if the credit under section 29 is allowed in such year 
     or has been allowed in any preceding taxable year with 
     respect to any fuel produced from such facility.''

[[Page S13510]]

       (d) Conforming Amendment.--Section 29(d) (relating to other 
     definitions and special rules) is amended by adding at the 
     end the following new paragraph:
       ``(9) Denial of double benefit.--No credit shall be allowed 
     under this section with respect to any fuel produced from a 
     facility for any taxable year if the credit under section 45 
     is allowed in such year or has been allowed in any preceding 
     taxable year with respect to such facility.''
       (e) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 108. EXPANSION OF BROWNFIELDS ENVIRONMENTAL REMEDIATION.

       (a) In General.--Section 198(c) is amended to read as 
     follows:
       ``(c) Qualified Contaminated Site.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified contaminated site' 
     means any area--
       ``(A) 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, and
       ``(B) at or on which there has been a release (or threat of 
     release) or disposal of any hazardous substance.
       ``(2) 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).
       ``(3) 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 environmental 
     agency of the State in which such area is located that such 
     area meets the requirement of paragraph (1)(B).
       ``(4) Appropriate state agency.--For purposes of paragraph 
     (3), 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.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to expenditures paid or incurred after December 
     31, 1999.

     SEC. 109. TEMPORARY INCREASE IN AMOUNT OF RUM EXCISE TAX 
                   COVERED OVER TO PUERTO RICO AND VIRGIN ISLANDS.

       (a) In General.--Section 7652(f)(1) (relating to limitation 
     on cover over of tax on distilled spirits) is amended to read 
     as follows:
       ``(1) $10.50 ($13.50 in the case of distilled spirits 
     brought into the United States after June 30, 1999, and 
     before January 1, 2001), or''.
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     take effect on July 1, 1999.
       (2) Special rule.--
       (A) In general.--For the period beginning after June 30, 
     1999, and before January 1, 2001, the treasury of Puerto Rico 
     shall make a Conservation Trust Fund transfer within 30 days 
     from the date of each cover over payment made during such 
     period to such treasury under section 7652(e) of the Internal 
     Revenue Code of 1986.
       (B) Conservation trust fund transfer.--
       (i) In general.--For purposes of this paragraph, the term 
     ``Conservation Trust Fund transfer'' means a transfer to the 
     Puerto Rico Conservation Trust Fund of an amount equal to 50 
     cents per proof gallon of the taxes imposed under section 
     5001 or section 7652 of such Code on distilled spirits that 
     are covered over to the treasury of Puerto Rico under section 
     7652(e) of such Code.
       (ii) Treatment of transfer.--Each Conservation Trust Fund 
     transfer shall be treated as principal for an endowment, the 
     income from which to be available for use by the Puerto Rico 
     Conservation Trust Fund for the purposes for which the Trust 
     Fund was established.
       (iii) Result of nontransfer.--

       (I) In general.--Upon notification by the Secretary of the 
     Interior that a Conservation Trust Fund transfer has not been 
     made by the treasury of Puerto Rico during the period 
     described in subparagraph (A), the Secretary of the Treasury 
     shall, except as provided in subclause (II), deduct and 
     withhold from the next cover over payment to be made to the 
     treasury of Puerto Rico under section 7652(e) of such Code an 
     amount equal to the appropriate Conservation Trust Fund 
     transfer and interest thereon at the underpayment rate 
     established under section 6621 of such Code as of the due 
     date of such transfer. The Secretary of the Treasury shall 
     transfer such amount deducted and withheld, and the interest 
     thereon, directly to the Puerto Rico Conservation Trust Fund.
       (II) Good cause exception.--If the Secretary of the 
     Interior finds, after consultation with the Governor of 
     Puerto Rico, that the failure by the treasury of Puerto 
     Rico to make a required transfer was for good cause, and 
     notifies the Secretary of the Treasury of the finding of 
     such good cause before the due date of the next cover over 
     payment following the notification of nontransfer, then 
     the Secretary of the Treasury shall not deduct the amount 
     of such nontransfer from any cover over payment.
       (C) Puerto rico conservation trust fund.--For purposes of 
     this paragraph, the term ``Puerto Rico Conservation Trust 
     Fund'' means the fund established pursuant to a Memorandum of 
     Understanding between the United States Department of the 
     Interior and the Commonwealth of Puerto Rico, dated December 
     24, 1968.

     SEC. 110. DELAY REQUIREMENT THAT REGISTERED MOTOR FUELS 
                   TERMINALS OFFER DYED FUEL AS A CONDITION OF 
                   REGISTRATION.

       Subsection (f)(2) of section 1032 of the Taxpayer Relief 
     Act of 1997, as amended by section 9008 of the Transportation 
     Equity Act for the 21st Century, is amended by striking 
     ``July 1, 2000'' and inserting ``January 1, 2001''.

     SEC. 111. EXTENSION OF PRODUCTION CREDIT FOR FUEL PRODUCED BY 
                   CERTAIN GASIFICATION FACILITIES.

       (a) In General.--Section 29(g)(1)(A) (relating to extension 
     for certain facilities) is amended by striking ``July 1, 
     1998'' and inserting ``July 1, 2000''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to fuels produced on and after July 1, 1998.
       (c) Special Rule.--
       (1) In general.--For purposes of the Internal Revenue Code 
     of 1986, the credit determined under section 29 of such Code 
     which is otherwise allowable under such Code by reason of the 
     amendment made by subsection (a) and which is attributable to 
     the suspension period shall not be taken into account prior 
     to October 1, 2004. On or after such date, such credit may be 
     taken into account through the filing of an amended return, 
     an application for expedited refund, an adjustment of 
     estimated taxes, or other means allowed by such Code. 
     Interest shall not be allowed under section 6511(a) of such 
     Code on any overpayment attributable to such credit for any 
     period before the 45th day after the credit is taken into 
     account under the preceding sentence.
       (2) Suspension period.--For purposes of this subsection, 
     the suspension period is the period beginning on July 1, 
     1998, and ending on September 30, 2004.
       (3) Expedited refunds.--
       (A) In general.--If there is an overpayment of tax with 
     respect to a taxable year by reason of paragraph (1), the 
     taxpayer may file an application for a tentative refund of 
     such overpayment. Such application shall be in such manner 
     and form, and contain such information, as the Secretary may 
     prescribe.
       (B) Deadline for applications.--Subparagraph (A) shall 
     apply only to applications filed before October 1, 2005.
       (C) Allowance of adjustments.--Not later than 90 days after 
     the date on which an application is filed under this 
     paragraph, the Secretary shall--
       (i) review the application,
       (ii) determine the amount of the overpayment, and
       (iii) apply, credit, or refund such overpayment,
     in a manner similar to the manner provided in section 6411(b) 
     of such Code.
       (D) Consolidated returns.--The provisions of section 
     6411(c) of such Code shall apply to an adjustment under this 
     paragraph in such manner as the Secretary may provide.
       (4) Credit attributable to suspension period.--For purposes 
     of this subsection, in the case of a taxable year which 
     includes a portion of the suspension period, the amount of 
     credit determined under section 29 of such Code for such 
     taxable year which is attributable to such period is the 
     amount which bears the same ratio to the amount of credit 
     determined under such section 29 for such taxable year as the 
     number of months in the suspension period which are during 
     such taxable year bears to the number of months in such 
     taxable year.
       (5) Waiver of statute of limitations.--If, on October 1, 
     2004 (or at any time within the 1-year period beginning on 
     such date) credit or refund of any overpayment of tax 
     resulting from the provisions of this subsection is barred by 
     any law or rule of law, credit or refund of such overpayment 
     shall, nevertheless, be allowed or made if claim therefore is 
     filed before the date 1 year after October 1, 2004.
       (6) Secretary.--For purposes of this subsection, the term 
     ``Secretary'' means the Secretary of the Treasury (or such 
     Secretary's delegate).

                  TITLE II--REVENUE OFFSET PROVISIONS

                     Subtitle A--General Provisions

     SEC. 201. MODIFICATION OF INDIVIDUAL ESTIMATED TAX SAFE 
                   HARBOR.

       (a) In General.--The table contained in clause (i) of 
     section 6654(d)(1)(C) (relating to limitation on use of 
     preceding year's tax) is amended by striking all matter 
     beginning with the item relating to 1999 or 2000 and 
     inserting the following new items:

  ``1999.....................................................110.5 ....

  2000.........................................................106 ....

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

  2002.........................................................110 ....

  2003.........................................................112 ....

  2004 or thereafter.........................................110''.....

       (b) Effective Date.--The amendment made by this section 
     shall apply with respect to any installment payment for 
     taxable years beginning after December 31, 1999.

[[Page S13511]]

     SEC. 202. MODIFICATION OF FOREIGN TAX CREDIT CARRYOVER RULES.

       (a) In General.--Section 904(c) (relating to limitation on 
     credit) is amended--
       (1) by striking ``in the second preceding taxable year,'', 
     and
       (2) by striking ``or fifth'' and inserting ``fifth, sixth, 
     or seventh''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to credits arising in taxable years beginning 
     after December 31, 1999.

     SEC. 203. CLARIFICATION OF TAX TREATMENT OF INCOME AND LOSS 
                   ON DERIVATIVES.

       (a) In General.--Section 1221 (defining capital assets) is 
     amended--
       (1) by striking ``For purposes'' and inserting the 
     following:
       ``(a) In General.--For purposes'',
       (2) by striking the period at the end of paragraph (5) and 
     inserting a semicolon, and
       (3) by adding at the end the following:
       ``(6) any commodities derivative financial instrument held 
     by a commodities derivatives dealer, unless--
       ``(A) it is established to the satisfaction of the 
     Secretary that such instrument has no connection to the 
     activities of such dealer as a dealer, and
       ``(B) such instrument is clearly identified in such 
     dealer's records as being described in subparagraph (A) 
     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);
       ``(7) any hedging transaction which is clearly identified 
     as such 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); or
       ``(8) supplies of a type regularly used or consumed by the 
     taxpayer in the ordinary course of a trade or business of the 
     taxpayer.
       ``(b) Definitions and Special Rules.--
       ``(1) Commodities derivative financial instruments.--For 
     purposes of subsection (a)(6)--
       ``(A) Commodities derivatives dealer.--The term 
     `commodities derivatives dealer' means a person which 
     regularly offers to enter into, assume, offset, assign, or 
     terminate positions in commodities derivative financial 
     instruments with customers in the ordinary course of a trade 
     or business.
       ``(B) Commodities derivative financial instrument.--
       ``(i) In general.--The term `commodities derivative 
     financial instrument' means any contract or financial 
     instrument with respect to commodities (other than a share of 
     stock in a corporation, a beneficial interest in a 
     partnership or trust, a note, bond, debenture, or other 
     evidence of indebtedness, or a section 1256 contract (as 
     defined in section 1256(b)), the value or settlement price of 
     which is calculated by or determined by reference to a 
     specified index.
       ``(ii) Specified index.--The term `specified index' means 
     any one or more or any combination of--

       ``(I) a fixed rate, price, or amount, or
       ``(II) a variable rate, price, or amount,

     which is based on any current, objectively determinable 
     financial or economic information with respect to commodities 
     which is not within the control of any of the parties to the 
     contract or instrument and is not unique to any of the 
     parties' circumstances.
       ``(2) Hedging transaction.--
       ``(A) In general.--For purposes of this section, the term 
     `hedging transaction' means any transaction entered into by 
     the taxpayer in the normal course of the taxpayer's trade or 
     business primarily--
       ``(i) to manage risk of price changes or currency 
     fluctuations with respect to ordinary property which is held 
     or to be held by the taxpayer,
       ``(ii) to manage risk of interest rate or price changes or 
     currency fluctuations with respect to borrowings made or to 
     be made, or ordinary obligations incurred or to be incurred, 
     by the taxpayer, or
       ``(iii) to manage such other risks as the Secretary may 
     prescribe in regulations.
       ``(B) Treatment of nonidentification or improper 
     identification of hedging transactions.--Notwithstanding 
     subsection (a)(7), the Secretary shall prescribe regulations 
     to properly characterize any income, gain, expense, or loss 
     arising from a transaction--
       ``(i) which is a hedging transaction but which was not 
     identified as such in accordance with subsection (a)(7), or
       ``(ii) which was so identified but is not a hedging 
     transaction.
       ``(3) Regulations.--The Secretary shall prescribe such 
     regulations as are appropriate to carry out the purposes of 
     paragraph (6) and (7) of subsection (a) in the case of 
     transactions involving related parties.''.
       (b) Management of Risk.--
       (1) Section 475(c)(3) is amended by striking ``reduces'' 
     and inserting ``manages''.
       (2) Section 871(h)(4)(C)(iv) is amended by striking ``to 
     reduce'' and inserting ``to manage''.
       (3) Clauses (i) and (ii) of section 988(d)(2)(A) are each 
     amended by striking ``to reduce'' and inserting ``to 
     manage''.
       (4) Paragraph (2) of section 1256(e) is amended to read as 
     follows:
       ``(2) Definition of hedging transaction.--For purposes of 
     this subsection, the term `hedging transaction' means any 
     hedging transaction (as defined in section 1221(b)(2)(A)) 
     if, before the close of the day on which such transaction 
     was entered into (or such earlier time as the Secretary 
     may prescribe by regulations), the taxpayer clearly 
     identifies such transaction as being a hedging 
     transaction.''.
       (c) Conforming Amendments.--
       (1) Each of the following sections are amended by striking 
     ``section 1221'' and inserting ``section 1221(a)'':
       (A) Section 170(e)(3)(A).
       (B) Section 170(e)(4)(B).
       (C) Section 367(a)(3)(B)(i).
       (D) Section 818(c)(3).
       (E) Section 865(i)(1).
       (F) Section 1092(a)(3)(B)(ii)(II).
       (G) Subparagraphs (C) and (D) of section 1231(b)(1).
       (H) Section 1234(a)(3)(A).
       (2) Each of the following sections are amended by striking 
     ``section 1221(1)'' and inserting ``section 1221(a)(1)'':
       (A) Section 198(c)(1)(A)(i).
       (B) Section 263A(b)(2)(A).
       (C) Clauses (i) and (iii) of section 267(f )(3)(B).
       (D) Section 341(d)(3).
       (E) Section 543(a)(1)(D)(i).
       (F) Section 751(d)(1).
       (G) Section 775(c).
       (H) Section 856(c)(2)(D).
       (I) Section 856(c)(3)(C).
       (J) Section 856(e)(1).
       (K) Section 856( j)(2)(B).
       (L) Section 857(b)(4)(B)(i).
       (M) Section 857(b)(6)(B)(iii).
       (N) Section 864(c)(4)(B)(iii).
       (O) Section 864(d)(3)(A).
       (P) Section 864(d)(6)(A).
       (Q) Section 954(c)(1)(B)(iii).
       (R) Section 995(b)(1)(C).
       (S) Section 1017(b)(3)(E)(i).
       (T) Section 1362(d)(3)(C)(ii).
       (U) Section 4662(c)(2)(C).
       (V) Section 7704(c)(3).
       (W) Section 7704(d)(1)(D).
       (X) Section 7704(d)(1)(G).
       (Y) Section 7704(d)(5).
       (3) Section 818(b)(2) is amended by striking ``section 
     1221(2)'' and inserting ``section 1221(a)(2)''.
       (4) Section 1397B(e)(2) is amended by striking ``section 
     1221(4)'' and inserting ``section 1221(a)(4)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to any instrument held, acquired, or entered 
     into, any transaction entered into, and supplies held or 
     acquired on or after the date of the enactment of this Act.

     SEC. 204. INCLUSION OF CERTAIN VACCINES AGAINST STREPTOCOCCUS 
                   PNEUMONIAE TO LIST OF TAXABLE VACCINES.

       (a) Inclusion of Vaccines.--
       (1) In general.--Section 4132(a)(1) (defining taxable 
     vaccine) is amended by adding at the end the following new 
     subparagraph:
       ``(L) Any conjugate vaccine against streptococcus 
     pneumoniae.''
       (2) Effective date.--
       (A) Sales.--The amendment made by this subsection shall 
     apply to vaccine sales beginning on the day after the date on 
     which the Centers for Disease Control makes a final 
     recommendation for routine administration to children of any 
     conjugate vaccine against streptococcus pneumoniae, but shall 
     not take effect if subsection (b) does not take effect.
       (B) Deliveries.--For purposes of subparagraph (A), in the 
     case of sales on or before the date described in such 
     subparagraph for which delivery is made after such date, the 
     delivery date shall be considered the sale date.
       (b) Vaccine Tax and Trust Fund Amendments.--
       (1) Sections 1503 and 1504 of the Vaccine Injury 
     Compensation Program Modification Act (and the amendments 
     made by such sections) are hereby repealed.
       (2) Subparagraph (A) of section 9510(c)(1) is amended by 
     striking ``August 5, 1997'' and inserting ``October 21, 
     1998''.
       (3) The amendments made by this subsection shall take 
     effect as if included in the provisions of the Omnibus 
     Consolidated and Emergency Supplemental Appropriations Act, 
     1999 to which they relate.
       (c) Report.--Not later than January 31, 2000, the 
     Comptroller General of the United States shall prepare and 
     submit a report to the Committee on Ways and Means of the 
     House of Representatives and the Committee on Finance of the 
     Senate on the operation of the Vaccine Injury Compensation 
     Trust Fund and on the adequacy of such Fund to meet future 
     claims made under the Vaccine Injury Compensation Program.

     SEC. 205. EXPANSION OF REPORTING OF CANCELLATION OF 
                   INDEBTEDNESS INCOME.

       (a) In General.--Paragraph (2) of section 6050P(c) 
     (relating to definitions and special rules) 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 inserting after subparagraph (C) the following 
     new subparagraph:
       ``(D) any organization a significant trade or business of 
     which is the lending of money.''
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to discharges of indebtedness after December 31, 
     1999.

     SEC. 206. IMPOSITION OF LIMITATION ON PREFUNDING OF CERTAIN 
                   EMPLOYEE BENEFITS.

       (a) Benefits to Which Exception Applies.--Section 
     419A(f)(6)(A) (relating to exception for 10 or more employer 
     plans) is amended to read as follows:
       ``(A) In general.--This subpart shall not apply to a 
     welfare benefit fund which is part

[[Page S13512]]

     of a 10 or more employer plan if the only benefits provided 
     through the fund are 1 or more of the following:
       ``(i) Medical benefits.
       ``(ii) Disability benefits.
       ``(iii) Group term life insurance benefits which do not 
     provide directly or indirectly for any cash surrender value 
     or other money that can be paid, assigned, borrowed, or 
     pledged for collateral for a loan.
     The preceding sentence shall not apply to any plan which 
     maintains experience-rating arrangements with respect to 
     individual employers.''
       (b) Limitation on Use of Amounts for Other Purposes.--
     Section 4976(b) (defining disqualified benefit) is amended by 
     adding at the end the following new paragraph:
       ``(5) Special rule for 10 or more employer plans exempted 
     from prefunding limits.--For purposes of paragraph (1)(C), 
     if--
       ``(A) subpart D of part I of subchapter D of chapter 1 does 
     not apply by reason of section 419A(f)(6) to contributions to 
     provide 1 or more welfare benefits through a welfare benefit 
     fund under a 10 or more employer plan, and
       ``(B) any portion of the welfare benefit fund attributable 
     to such contributions is used for a purpose other than that 
     for which the contributions were made,
     then such portion shall be treated as reverting to the 
     benefit of the employers maintaining the fund.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to contributions paid or accrued after June 9, 
     1999, in taxable years ending after such date.

     SEC. 207. INCREASE IN ELECTIVE WITHHOLDING RATE FOR 
                   NONPERIODIC DISTRIBUTIONS FROM DEFERRED 
                   COMPENSATION PLANS.

       (a) In General.--Section 3405(b)(1) (relating to 
     withholding) is amended by striking ``10 percent'' and 
     inserting ``15 percent''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to distributions after December 31, 2000.

     SEC. 208. LIMITATION ON CONVERSION OF CHARACTER OF INCOME 
                   FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.

       (a) In General.--Part IV of subchapter P of chapter 1 
     (relating to special rules for determining capital gains and 
     losses) is amended by inserting after section 1259 the 
     following new section:

     ``SEC. 1260. GAINS FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.

       ``(a) In General.--If the taxpayer has gain from a 
     constructive ownership transaction with respect to any 
     financial asset and such gain would (without regard to this 
     section) be treated as a long-term capital gain--
       ``(1) such gain shall be treated as ordinary income to the 
     extent that such gain exceeds the net underlying long-term 
     capital gain, and
       ``(2) to the extent such gain is treated as a long-term 
     capital gain after the application of paragraph (1), the 
     determination of the capital gain rate (or rates) applicable 
     to such gain under section 1(h) shall be determined on the 
     basis of the respective rate (or rates) that would have been 
     applicable to the net underlying long-term capital gain.
       ``(b) Interest Charge on Deferral of Gain Recognition.--
       ``(1) In general.--If any gain is treated as ordinary 
     income for any taxable year by reason of subsection (a)(1), 
     the tax imposed by this chapter for such taxable year shall 
     be increased by the amount of interest determined under 
     paragraph (2) with respect to each prior taxable year during 
     any portion of which the constructive ownership transaction 
     was open. Any amount payable under this paragraph shall be 
     taken into account in computing the amount of any deduction 
     allowable to the taxpayer for interest paid or accrued during 
     such taxable year.
       ``(2) Amount of interest.--The amount of interest 
     determined under this paragraph with respect to a prior 
     taxable year is the amount of interest which would have been 
     imposed under section 6601 on the underpayment of tax for 
     such year which would have resulted if the gain (which is 
     treated as ordinary income by reason of subsection (a)(1)) 
     had been included in gross income in the taxable years in 
     which it accrued (determined by treating the income as 
     accruing at a constant rate equal to the applicable Federal 
     rate as in effect on the day the transaction closed). The 
     period during which such interest shall accrue shall end on 
     the due date (without extensions) for the return of tax 
     imposed by this chapter for the taxable year in which such 
     transaction closed.
       ``(3) Applicable federal rate.--For purposes of paragraph 
     (2), the applicable Federal rate is the applicable Federal 
     rate determined under 1274(d) (compounded semiannually) which 
     would apply to a debt instrument with a term equal to the 
     period the transaction was open.
       ``(4) No credits against increase in tax.--Any increase in 
     tax under paragraph (1) shall not be treated as tax imposed 
     by this chapter for purposes of determining--
       ``(A) the amount of any credit allowable under this 
     chapter, or
       ``(B) the amount of the tax imposed by section 55.
       ``(c) Financial Asset.--For purposes of this section--
       ``(1) In general.--The term `financial asset' means--
       ``(A) any equity interest in any pass-thru entity, and
       ``(B) to the extent provided in regulations--
       ``(i) any debt instrument, and
       ``(ii) any stock in a corporation which is not a pass-thru 
     entity.
       ``(2) Pass-thru entity.--For purposes of paragraph (1), the 
     term `pass-thru entity' means--
       ``(A) a regulated investment company,
       ``(B) a real estate investment trust,
       ``(C) an S corporation,
       ``(D) a partnership,
       ``(E) a trust,
       ``(F) a common trust fund,
       ``(G) a passive foreign investment company (as defined in 
     section 1297 without regard to subsection (e) thereof),
       ``(H) a foreign personal holding company,
       ``(I) a foreign investment company (as defined in section 
     1246(b)), and
       ``(J) a REMIC.
       ``(d) Constructive Ownership Transaction.--For purposes of 
     this section--
       ``(1) In general.--The taxpayer shall be treated as having 
     entered into a constructive ownership transaction with 
     respect to any financial asset if the taxpayer--
       ``(A) holds a long position under a notional principal 
     contract with respect to the financial asset,
       ``(B) enters into a forward or futures contract to acquire 
     the financial asset,
       ``(C) is the holder of a call option, and is the grantor of 
     a put option, with respect to the financial asset and such 
     options have substantially equal strike prices and 
     substantially contemporaneous maturity dates, or
       ``(D) to the extent provided in regulations prescribed by 
     the Secretary, enters into one or more other transactions (or 
     acquires one or more positions) that have substantially the 
     same effect as a transaction described in any of the 
     preceding subparagraphs.
       ``(2) Exception for positions which are marked to market.--
     This section shall not apply to any constructive ownership 
     transaction if all of the positions which are part of such 
     transaction are marked to market under any provision of this 
     title or the regulations thereunder.
       ``(3) Long position under notional principal contract.--A 
     person shall be treated as holding a long position under a 
     notional principal contract with respect to any financial 
     asset if such person--
       ``(A) has the right to be paid (or receive credit for) all 
     or substantially all of the investment yield (including 
     appreciation) on such financial asset for a specified period, 
     and
       ``(B) is obligated to reimburse (or provide credit for) all 
     or substantially all of any decline in the value of such 
     financial asset.
       ``(4) Forward contract.--The term `forward contract' means 
     any contract to acquire in the future (or provide or receive 
     credit for the future value of) any financial asset.
       ``(e) Net Underlying Long-Term Capital Gain.--For purposes 
     of this section, in the case of any constructive ownership 
     transaction with respect to any financial asset, the term 
     `net underlying long-term capital gain' means the aggregate 
     net capital gain that the taxpayer would have had if--
       ``(1) the financial asset had been acquired for fair market 
     value on the date such transaction was opened and sold for 
     fair market value on the date such transaction was closed, 
     and
       ``(2) only gains and losses that would have resulted from 
     the deemed ownership under paragraph (1) were taken into 
     account.
     The amount of the net underlying long-term capital gain with 
     respect to any financial asset shall be treated as zero 
     unless the amount thereof is established by clear and 
     convincing evidence.
       ``(f ) Special Rule Where Taxpayer Takes Delivery.--Except 
     as provided in regulations prescribed by the Secretary, if a 
     constructive ownership transaction is closed by reason of 
     taking delivery, this section shall be applied as if the 
     taxpayer had sold all the contracts, options, or other 
     positions which are part of such transaction for fair market 
     value on the closing date. The amount of gain recognized 
     under the preceding sentence shall not exceed the amount of 
     gain treated as ordinary income under subsection (a). Proper 
     adjustments shall be made in the amount of any gain or loss 
     subsequently realized for gain recognized and treated as 
     ordinary income under this subsection.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section, including regulations--
       ``(1) to permit taxpayers to mark to market constructive 
     ownership transactions in lieu of applying this section, and
       ``(2) to exclude certain forward contracts which do not 
     convey substantially all of the economic return with respect 
     to a financial asset.''
       (b) 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. 1260. Gains from constructive ownership transactions.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into after July 11, 1999.

     SEC. 209. TREATMENT OF EXCESS PENSION ASSETS USED FOR RETIREE 
                   HEALTH BENEFITS.

       (a) Extension.--
       (1) In general.--Paragraph (5) of section 420(b) (relating 
     to expiration) is amended by

[[Page S13513]]

     striking ``in any taxable year beginning after December 31, 
     2000'' and inserting ``made after September 30, 2009''.
       (2) Conforming amendments.--
       (A) Section 101(e)(3) of the Employee Retirement Income 
     Security Act of 1974 (29 U.S.C. 1021(e)(3)) is amended by 
     striking ``January 1, 1995'' and inserting ``the date of the 
     enactment of the Tax Relief Extension Act of 1999''.
       (B) Section 403(c)(1) of such Act (29 U.S.C. 1103(c)(1)) is 
     amended by striking ``January 1, 1995'' and inserting ``the 
     date of the enactment of the Tax Relief Extension Act of 
     1999''.
       (C) Paragraph (13) of section 408(b) of such Act (29 U.S.C. 
     1108(b)(13)) is amended--
       (i) by striking ``in a taxable year beginning before 
     January 1, 2001'' and inserting ``made before October 1, 
     2009'', and
       (ii) by striking ``January 1, 1995'' and inserting ``the 
     date of the enactment of the Tax Relief Extension Act of 
     1999''.
       (b) Application of Minimum Cost Requirements.--
       (1) In general.--Paragraph (3) of section 420(c) is amended 
     to read as follows:
       ``(3) Minimum cost requirements.--
       ``(A) In general.--The requirements of this paragraph are 
     met if each group health plan or arrangement under which 
     applicable health benefits are provided provides that the 
     applicable employer cost for each taxable year during the 
     cost maintenance period shall not be less than the higher of 
     the applicable employer costs for each of the 2 taxable years 
     immediately preceding the taxable year of the qualified 
     transfer.
       ``(B) Applicable employer cost.--For purposes of this 
     paragraph, the term `applicable employer cost' means, with 
     respect to any taxable year, the amount determined by 
     dividing--
       ``(i) the qualified current retiree health liabilities of 
     the employer for such taxable year determined--

       ``(I) without regard to any reduction under subsection 
     (e)(1)(B), and
       ``(II) in the case of a taxable year in which there was no 
     qualified transfer, in the same manner as if there had been 
     such a transfer at the end of the taxable year, by

       ``(ii) the number of individuals to whom coverage for 
     applicable health benefits was provided during such taxable 
     year.
       ``(C) Election to compute cost separately.--An employer may 
     elect to have this paragraph applied separately with respect 
     to individuals eligible for benefits under title XVIII of the 
     Social Security Act at any time during the taxable year and 
     with respect to individuals not so eligible.
       ``(D) Cost maintenance period.--For purposes of this 
     paragraph, the term `cost maintenance period' means the 
     period of 5 taxable years beginning with the taxable year in 
     which the qualified transfer occurs. If a taxable year is in 
     two or more overlapping cost maintenance periods, this 
     paragraph shall be applied by taking into account the highest 
     applicable employer cost required to be provided under 
     subparagraph (A) for such taxable year.''.
       (2) Conforming amendments.--
       (A) Clause (iii) of section 420(b)(1)(C) is amended by 
     striking ``benefits'' and inserting ``cost''.
       (B) Subparagraph (D) of section 420(e)(1) is amended by 
     striking ``and shall not be subject to the minimum benefit 
     requirements of subsection (c)(3)'' and inserting ``or in 
     calculating applicable employer cost under subsection 
     (c)(3)(B)''.
       (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to qualified transfers occurring after the date of the 
     enactment of this Act.
       (2) Transition rule.--If the cost maintenance period for 
     any qualified transfer after the date of the enactment of 
     this Act includes any portion of a benefit maintenance period 
     for any qualified transfer on or before such date, the 
     amendments made by subsection (b) shall not apply to such 
     portion of the cost maintenance period (and such portion 
     shall be treated as a benefit maintenance period).

     SEC. 210. MODIFICATION OF INSTALLMENT METHOD AND REPEAL OF 
                   INSTALLMENT METHOD FOR ACCRUAL METHOD 
                   TAXPAYERS.

       (a) Repeal of Installment Method for Accrual Basis 
     Taxpayers.--
       (1) In general.--Subsection (a) of section 453 (relating to 
     installment method) is amended to read as follows:
       ``(a) Use of Installment Method.--
       ``(1) In general.--Except as otherwise provided in this 
     section, income from an installment sale shall be taken into 
     account for purposes of this title under the installment 
     method.
       ``(2) Accrual method taxpayer.--The installment method 
     shall not apply to income from an installment sale if such 
     income would be reported under an accrual method of 
     accounting without regard to this section. The preceding 
     sentence shall not apply to a disposition described in 
     subparagraph (A) or (B) of subsection (l)(2).''
       (2) Conforming amendments.--Sections 453(d)(1), 453(i)(1), 
     and 453(k) are each amended by striking ``(a)'' each place it 
     appears and inserting ``(a)(1)''.
       (b) Modification of Pledge Rules.--Paragraph (4) of section 
     453A(d) (relating to pledges, etc., of installment 
     obligations) is amended by adding at the end the following: 
     ``A payment shall be treated as directly secured by an 
     interest in an installment obligation to the extent an 
     arrangement allows the taxpayer to satisfy all or a portion 
     of the indebtedness with the installment obligation.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to sales or other dispositions occurring on or 
     after the date of the enactment of this Act.

     SEC. 211. LIMITATION ON USE OF NONACCRUAL EXPERIENCE METHOD 
                   OF ACCOUNTING.

       (a) In General.--Section 448(d)(5) (relating to special 
     rule for services) is amended--
       (1) by inserting ``in fields described in paragraph 
     (2)(A)'' after ``services by such person'', and
       (2) by inserting ``certain personal'' before ``services'' 
     in the heading.
       (b) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years ending after the date of the enactment 
     of this Act.
       (2) Change in method of accounting.--In the case of any 
     taxpayer required by the amendments made by this section to 
     change its method of accounting for its first taxable year 
     ending 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 
     over a period (not greater than 4 taxable years) beginning 
     with such first taxable year.

     SEC. 212. DENIAL OF CHARITABLE CONTRIBUTION DEDUCTION FOR 
                   TRANSFERS ASSOCIATED WITH SPLIT-DOLLAR 
                   INSURANCE ARRANGEMENTS.

       (a) In General.--Subsection (f ) of section 170 (relating 
     to disallowance of deduction in certain cases and special 
     rules) is amended by adding at the end the following new 
     paragraph:
       ``(10) Split-dollar life insurance, annuity, and endowment 
     contracts.--
       ``(A) In general.--Nothing in this section or in section 
     545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 shall 
     be construed to allow a deduction, and no deduction shall be 
     allowed, for any transfer to or for the use of an 
     organization described in subsection (c) if in connection 
     with such transfer--
       ``(i) the organization directly or indirectly pays, or has 
     previously paid, any premium on any personal benefit contract 
     with respect to the transferor, or
       ``(ii) there is an understanding or expectation that any 
     person will directly or indirectly pay any premium on any 
     personal benefit contract with respect to the transferor.
       ``(B) Personal benefit contract.--For purposes of 
     subparagraph (A), the term `personal benefit contract' means, 
     with respect to the transferor, any life insurance, annuity, 
     or endowment contract if any direct or indirect beneficiary 
     under such contract is the transferor, any member of the 
     transferor's family, or any other person (other than an 
     organization described in subsection (c)) designated by the 
     transferor.
       ``(C) Application to charitable remainder trusts.--In the 
     case of a transfer to a trust referred to in subparagraph 
     (E), references in subparagraphs (A) and (F) to an 
     organization described in subsection (c) shall be treated as 
     a reference to such trust.
       ``(D) Exception for certain annuity contracts.--If, in 
     connection with a transfer to or for the use of an 
     organization described in subsection (c), such organization 
     incurs an obligation to pay a charitable gift annuity (as 
     defined in section 501(m)) and such organization purchases 
     any annuity contract to fund such obligation, persons 
     receiving payments under the charitable gift annuity shall 
     not be treated for purposes of subparagraph (B) as indirect 
     beneficiaries under such contract if--
       ``(i) such organization possesses all of the incidents of 
     ownership under such contract,
       ``(ii) such organization is entitled to all the payments 
     under such contract, and
       ``(iii) the timing and amount of payments under such 
     contract are substantially the same as the timing and amount 
     of payments to each such person under such obligation (as 
     such obligation is in effect at the time of such transfer).
       ``(E) Exception for certain contracts held by charitable 
     remainder trusts.--A person shall not be treated for purposes 
     of subparagraph (B) as an indirect beneficiary under any life 
     insurance, annuity, or endowment contract held by a 
     charitable remainder annuity trust or a charitable remainder 
     unitrust (as defined in section 664(d)) solely by reason of 
     being entitled to any payment referred to in paragraph (1)(A) 
     or (2)(A) of section 664(d) if--
       ``(i) such trust possesses all of the incidents of 
     ownership under such contract, and
       ``(ii) such trust is entitled to all the payments under 
     such contract.
       ``(F) Excise tax on premiums paid.--
       ``(i) In general.--There is hereby imposed on any 
     organization described in subsection (c) an excise tax equal 
     to the premiums paid by such organization on any life 
     insurance, annuity, or endowment contract if the payment of 
     premiums on such contract is in

[[Page S13514]]

     connection with a transfer for which a deduction is not 
     allowable under subparagraph (A), determined without regard 
     to when such transfer is made.
       ``(ii) Payments by other persons.--For purposes of clause 
     (i), payments made by any other person pursuant to an 
     understanding or expectation referred to in subparagraph (A) 
     shall be treated as made by the organization.
       ``(iii) Reporting.--Any organization on which tax is 
     imposed by clause (i) with respect to any premium shall file 
     an annual return which includes--

       ``(I) the amount of such premiums paid during the year and 
     the name and TIN of each beneficiary under the contract to 
     which the premium relates, and
       ``(II) such other information as the Secretary may require.

     The penalties applicable to returns required under section 
     6033 shall apply to returns required under this clause. 
     Returns required under this clause shall be furnished at such 
     time and in such manner as the Secretary shall by forms or 
     regulations require.
       ``(iv) Certain rules to apply.--The tax imposed by this 
     subparagraph shall be treated as imposed by chapter 42 for 
     purposes of this title other than subchapter B of chapter 42.
       ``(G) Special rule where state requires specification of 
     charitable gift annuitant in contract.--In the case of an 
     obligation to pay a charitable gift annuity referred to in 
     subparagraph (D) which is entered into under the laws of a 
     State which requires, in order for the charitable gift 
     annuity to be exempt from insurance regulation by such State, 
     that each beneficiary under the charitable gift annuity be 
     named as a beneficiary under an annuity contract issued by an 
     insurance company authorized to transact business in such 
     State, the requirements of clauses (i) and (ii) of 
     subparagraph (D) shall be treated as met if--
       ``(i) such State law requirement was in effect on February 
     8, 1999,
       ``(ii) each such beneficiary under the charitable gift 
     annuity is a bona fide resident of such State at the time the 
     obligation to pay a charitable gift annuity is entered into, 
     and
       ``(iii) the only persons entitled to payments under such 
     contract are persons entitled to payments as beneficiaries 
     under such obligation on the date such obligation is entered 
     into.
       ``(H) Member of family.--For purposes of this paragraph, an 
     individual's family consists of the individual's 
     grandparents, the grandparents of such individual's spouse, 
     the lineal descendants of such grandparents, and any spouse 
     of such a lineal descendant.
       ``(I) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this paragraph, including regulations to 
     prevent the avoidance of such purposes.''
       (b) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     section, the amendment made by this section shall apply to 
     transfers made after February 8, 1999.
       (2) Excise tax.--Except as provided in paragraph (3) of 
     this subsection, section 170(f )(10)(F) of the Internal 
     Revenue Code of 1986 (as added by this section) shall apply 
     to premiums paid after the date of the enactment of this Act.
       (3) Reporting.--Clause (iii) of such section 170(f )(10)(F) 
     shall apply to premiums paid after February 8, 1999 
     (determined as if the tax imposed by such section applies to 
     premiums paid after such date).

     SEC. 213. PREVENTION OF DUPLICATION OF LOSS THROUGH 
                   ASSUMPTION OF LIABILITIES GIVING RISE TO A 
                   DEDUCTION.

       (a) In General.--Section 358 (relating to basis to 
     distributees) is amended by adding at the end the following 
     new subsection:
       ``(h) Special Rules for Assumption of Liabilities To Which 
     Subsection (d) Does Not Apply.--
       ``(1) In general.--If, after application of the other 
     provisions of this section to an exchange or series of 
     exchanges, the basis of property to which subsection (a)(1) 
     applies exceeds the fair market value of such property, then 
     such basis shall be reduced (but not below such fair market 
     value) by the amount (determined as of the date of the 
     exchange) of any liability--
       ``(A) which is assumed in exchange for such property, and
       ``(B) with respect to which subsection (d)(1) does not 
     apply to the assumption.
       ``(2) Exception.--Paragraph (1) shall not apply to any 
     liability if the trade or business giving rise to the 
     liability is transferred to the person assuming the liability 
     as part of the exchange.
       ``(3) Liability.--For purposes of this subsection, the term 
     `liability' shall include any obligation to make payment, 
     without regard to whether the obligation is fixed or 
     contingent or otherwise taken into account for purposes of 
     this title.
       ``(4) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the provisions 
     of this subsection.''
       (b) Application of Comparable Rules to Partnerships.--The 
     Secretary of the Treasury or his delegate shall prescribe 
     rules which provide appropriate adjustments under subchapter 
     K of chapter 1 of the Internal Revenue Code of 1986 to 
     prevent the acceleration or duplication of losses through the 
     assumption of (or transfer of assets subject to) liabilities 
     described in section 358(h)(3) of such Code (as added by 
     subsection (a)) in transactions involving partnerships.
       (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to assumptions of liability after October 18, 1999.
       (2) Rules.--The rules prescribed under subsection (b) shall 
     apply to assumptions of liability after October 18, 1999, or 
     such later date as may be prescribed in such rules.

     SEC. 214. CONSISTENT TREATMENT AND BASIS ALLOCATION RULES FOR 
                   TRANSFERS OF INTANGIBLES IN CERTAIN 
                   NONRECOGNITION TRANSACTIONS.

       (a) Transfers to Corporations.--Section 351 (relating to 
     transfer to corporation controlled by transferor) is amended 
     by redesignating subsection (h) as subsection (i) and by 
     inserting after subsection (g) the following new subsection:
       ``(h) Treatment of Transfers of Intangible Property.--
       ``(1) Transfers of less than all substantial rights.
       ``(A) In general.--A transfer of an interest in intangible 
     property (as defined in section 936(h)(3)(B)) shall be 
     treated under this section as a transfer of property even if 
     the transfer is of less than all of the substantial rights of 
     the transferor in the property.
       ``(B) Allocation of basis.--In the case of a transfer of 
     less than all of the substantial rights of the transferor in 
     the intangible property, the transferor's basis immediately 
     before the transfer shall be allocated among the rights 
     retained by the transferor and the rights transferred on the 
     basis of their respective fair market values.
       ``(2) Nonrecognition not to apply to intangible property 
     developed for transferee.--This section shall not apply to a 
     transfer of intangible property developed by the transferor 
     or any related person if such development was pursuant to an 
     arrangement with the transferee.''
       (b) Transfers to Partnerships.--Subsection (d) of section 
     721 is amended to read as follows:
       ``(d) Transfers of Intangible Property.--
       ``(1) In general.--Rules similar to the rules of section 
     351(h) shall apply for purposes of this section.
       ``(2) Transfers to foreign partnerships.--For regulatory 
     authority to treat intangibles transferred to a partnership 
     as sold, see section 367(d)(3).''
       (c) Effective Date.--The amendments made by this section 
     shall apply to transfers on or after the date of the 
     enactment of this Act.

     SEC. 215. DISTRIBUTIONS BY A PARTNERSHIP TO A CORPORATE 
                   PARTNER OF STOCK IN ANOTHER CORPORATION.

       (a) In General.--Section 732 (relating to basis of 
     distributed property other than money) is amended by adding 
     at the end the following new subsection:
       ``(f) Corresponding Adjustment to Basis of Assets of a 
     Distributed Corporation Controlled by a Corporate Partner.--
       ``(1) In general.--If--
       ``(A) a corporation (hereafter in this subsection referred 
     to as the `corporate partner') receives a distribution from a 
     partnership of stock in another corporation (hereafter in 
     this subsection referred to as the `distributed 
     corporation'),
       ``(B) the corporate partner has control of the distributed 
     corporation immediately after the distribution or at any time 
     thereafter, and
       ``(C) the partnership's adjusted basis in such stock 
     immediately before the distribution exceeded the corporate 
     partner's adjusted basis in such stock immediately after the 
     distribution,
     then an amount equal to such excess shall be applied to 
     reduce (in accordance with subsection (c)) the basis of 
     property held by the distributed corporation at such time 
     (or, if the corporate partner does not control the 
     distributed corporation at such time, at the time the 
     corporate partner first has such control).
       ``(2) Exception for certain distributions before control 
     acquired.--Paragraph (1) shall not apply to any distribution 
     of stock in the distributed corporation if--
       ``(A) the corporate partner does not have control of such 
     corporation immediately after such distribution, and
       ``(B) the corporate partner establishes to the satisfaction 
     of the Secretary that such distribution was not part of a 
     plan or arrangement to acquire control of the distributed 
     corporation.
       ``(3) Limitations on basis reduction.--
       ``(A) In general.--The amount of the reduction under 
     paragraph (1) shall not exceed the amount by which the sum of 
     the aggregate adjusted bases of the property and the amount 
     of money of the distributed corporation exceeds the corporate 
     partner's adjusted basis in the stock of the distributed 
     corporation.
       ``(B) Reduction not to exceed adjusted basis of property.--
     No reduction under paragraph (1) in the basis of any property 
     shall exceed the adjusted basis of such property (determined 
     without regard to such reduction).
       ``(4) Gain recognition where reduction limited.--If the 
     amount of any reduction under paragraph (1) (determined after 
     the application of paragraph (3)(A)) exceeds the aggregate 
     adjusted bases of the property of the distributed 
     corporation--
       ``(A) such excess shall be recognized by the corporate 
     partner as long-term capital gain, and

[[Page S13515]]

       ``(B) the corporate partner's adjusted basis in the stock 
     of the distributed corporation shall be increased by such 
     excess.
       ``(5) Control.--For purposes of this subsection, the term 
     `control' means ownership of stock meeting the requirements 
     of section 1504(a)(2).
       ``(6) Indirect distributions.--For purposes of paragraph 
     (1), if a corporation acquires (other than in a distribution 
     from a partnership) stock the basis of which is determined in 
     whole or in part by reference to subsection (a)(2) or (b), 
     the corporation shall be treated as receiving a distribution 
     of such stock from a partnership.
       ``(7) Special rule for stock in controlled corporation.--If 
     the property held by a distributed corporation is stock in a 
     corporation which the distributed corporation controls, this 
     subsection shall be applied to reduce the basis of the 
     property of such controlled corporation. This subsection 
     shall be reapplied to any property of any controlled 
     corporation which is stock in a corporation which it 
     controls.
       ``(8) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection, including regulations to avoid double 
     counting and to prevent the abuse of such purposes.''
       (b) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendment made by this section shall apply to distributions 
     made after July 14, 1999.
       (2) Partnerships in existence on July 14, 1999.--In the 
     case of a corporation which is a partner in a partnership as 
     of July 14, 1999, the amendment made by this section shall 
     apply to distributions made to such partner from such 
     partnership after the date of the enactment of this Act.

     SEC. 216. PROHIBITED ALLOCATIONS OF STOCK IN S CORPORATION 
                   ESOP.

       (a) In General.--Section 409 (relating to qualifications 
     for tax credit employee stock ownership plans) is amended by 
     redesignating subsection (p) as subsection (q) and by 
     inserting after subsection (o) the following new subsection:
       ``(p) Prohibited Allocations of Securities in an S 
     Corporation.--
       ``(1) In general.--An employee stock ownership plan holding 
     employer securities consisting of stock in an S corporation 
     shall provide that no portion of the assets of the plan 
     attributable to (or allocable in lieu of) such employer 
     securities may, during a nonallocation year, accrue (or be 
     allocated directly or indirectly under any plan of the 
     employer meeting the requirements of section 401(a)) for the 
     benefit of any disqualified person.
       ``(2) Failure to meet requirements.--
       ``(A) In general.--If a plan fails to meet the requirements 
     of paragraph (1), the plan shall be treated as having 
     distributed to any disqualified person the amount allocated 
     to the account of such person in violation of paragraph (1) 
     at the time of such allocation.
       ``(B) Cross reference.--

  ``For excise tax relating to violations of paragraph (1) and 
ownership of synthetic equity, see section 4979A.
       ``(3) Nonallocation year.--For purposes of this 
     subsection--
       ``(A) In general.--The term `nonallocation year' means any 
     plan year of an employee stock ownership plan if, at any time 
     during such plan year--
       ``(i) such plan holds employer securities consisting of 
     stock in an S corporation, and
       ``(ii) disqualified persons own at least 50 percent of the 
     number of shares of stock in the S corporation.
       ``(B) Attribution rules.--For purposes of subparagraph 
     (A)--
       ``(i) In general.--The rules of section 318(a) shall apply 
     for purposes of determining ownership, except that--

       ``(I) in applying paragraph (1) thereof, the members of an 
     individual's family shall include members of the family 
     described in paragraph (4)(D), and
       ``(II) paragraph (4) thereof shall not apply.

       ``(ii) Deemed-owned shares.--Notwithstanding the employee 
     trust exception in section 318(a)(2)(B)(i), individual shall 
     be treated as owning deemed-owned shares of the individual.
     Solely for purposes of applying paragraph (5), this 
     subparagraph shall be applied after the attribution rules of 
     paragraph (5) have been applied.
       ``(4) Disqualified person.--For purposes of this 
     subsection--
       ``(A) In general.--The term `disqualified person' means any 
     person if--
       ``(i) the aggregate number of deemed-owned shares of such 
     person and the members of such person's family is at least 20 
     percent of the number of deemed-owned shares of stock in the 
     S corporation, or
       ``(ii) in the case of a person not described in clause (i), 
     the number of deemed-owned shares of such person is at least 
     10 percent of the number of deemed-owned shares of stock in 
     such corporation.
       ``(B) Treatment of family members.--In the case of a 
     disqualified person described in subparagraph (A)(i), any 
     member of such person's family with deemed-owned shares shall 
     be treated as a disqualified person if not otherwise treated 
     as a disqualified person under subparagraph (A).
       ``(C) Deemed-owned shares.--
       ``(i) In general.--The term `deemed-owned shares' means, 
     with respect to any person--

       ``(I) the stock in the S corporation constituting employer 
     securities of an employee stock ownership plan which is 
     allocated to such person under the plan, and
       ``(II) such person's share of the stock in such corporation 
     which is held by such plan but which is not allocated under 
     the plan to participants.

       ``(ii) Person's share of unallocated stock.--For purposes 
     of clause (i)(II), a person's share of unallocated S 
     corporation stock held by such plan is the amount of the 
     unallocated stock which would be allocated to such person 
     if the unallocated stock were allocated to all 
     participants in the same proportions as the most recent 
     stock allocation under the plan.
       ``(D) Member of family.--For purposes of this paragraph, 
     the term `member of the family' means, with respect to any 
     individual--
       ``(i) the spouse of the individual,
       ``(ii) an ancestor or lineal descendant of the individual 
     or the individual's spouse,
       ``(iii) a brother or sister of the individual or the 
     individual's spouse and any lineal descendant of the brother 
     or sister, and
       ``(iv) the spouse of any individual described in clause 
     (ii) or (iii).
     A spouse of an individual who is legally separated from such 
     individual under a decree of divorce or separate maintenance 
     shall not be treated as such individual's spouse for purposes 
     of this subparagraph.
       ``(5) Treatment of synthetic equity.--For purposes of 
     paragraphs (3) and (4), in the case of a person who owns 
     synthetic equity in the S corporation, except to the extent 
     provided in regulations, the shares of stock in such 
     corporation on which such synthetic equity is based shall be 
     treated as outstanding stock in such corporation and deemed-
     owned shares of such person if such treatment of synthetic 
     equity of 1 or more such persons results in--
       ``(A) the treatment of any person as a disqualified person, 
     or
       ``(B) the treatment of any year as a nonallocation year.
     For purposes of this paragraph, synthetic equity shall be 
     treated as owned by a person in the same manner as stock is 
     treated as owned by a person under the rules of paragraphs 
     (2) and (3) of section 318(a). If, without regard to this 
     paragraph, a person is treated as a disqualified person or a 
     year is treated as a nonallocation year, this paragraph shall 
     not be construed to result in the person or year not being so 
     treated.
       ``(6) Definitions.--For purposes of this subsection--
       ``(A) Employee stock ownership plan.--The term `employee 
     stock ownership plan' has the meaning given such term by 
     section 4975(e)(7).
       ``(B) Employer securities.--The term `employer security' 
     has the meaning given such term by section 409(l).
       ``(C) Synthetic equity.--The term `synthetic equity' means 
     any stock option, warrant, restricted stock, deferred 
     issuance stock right, or similar interest or right that gives 
     the holder the right to acquire or receive stock of the S 
     corporation in the future. Except to the extent provided in 
     regulations, synthetic equity also includes a stock 
     appreciation right, phantom stock unit, or similar right to a 
     future cash payment based on the value of such stock or 
     appreciation in such value.
       ``(7) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection.''
       (b) Coordination With Section 4975(e)(7).--The last 
     sentence of section 4975(e)(7) (defining employee stock 
     ownership plan) is amended by inserting ``, section 409(p),'' 
     after ``409(n)''.
       (c) Excise Tax.--
       (1) Application of tax.--Subsection (a) of section 4979A 
     (relating to tax on certain prohibited allocations of 
     employer securities) is amended--
       (A) by striking ``or'' at the end of paragraph (1),
       (B) by striking the period at the end of paragraph (2) and 
     inserting a comma, and
       (C) by striking all that follows paragraph (2) and 
     inserting the following:
       ``(3) there is any allocation of employer securities which 
     violates the provisions of section 409(p), or a nonallocation 
     year described in subsection (c)(2)(C) with respect to an 
     employee stock ownership plan, or
       ``(4) any synthetic equity is owned by a disqualified 
     person in any nonallocation year,
     there is hereby imposed a tax on such allocation or ownership 
     equal to 50 percent of the amount involved.''
       (2) Liability.--Section 4979A(c) (defining liability for 
     tax) is amended to read as follows:
       ``(c) Liability for Tax.--The tax imposed by this section 
     shall be paid--
       ``(1) in the case of an allocation referred to in paragraph 
     (1) or (2) of subsection (a), by--
       ``(A) the employer sponsoring such plan, or
       ``(B) 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), and
       ``(2) in the case of an allocation or ownership referred to 
     in paragraph (3) or (4) of subsection (a), by the S 
     corporation the stock in which was so allocated or owned.''
       (3) Definitions.--Section 4979A(e) (relating to 
     definitions) is amended to read as follows:
       ``(e) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Definitions.--Except as provided in paragraph (2), 
     terms used in this section have the same respective meanings 
     as when used in sections 409 and 4978.

[[Page S13516]]

       ``(2) Special rules relating to tax imposed by reason of 
     paragraph (3) or (4) of subsection (a).--
       ``(A) Prohibited allocations.--The amount involved with 
     respect to any tax imposed by reason of subsection (a)(3) is 
     the amount allocated to the account of any person in 
     violation of section 409(p)(1).
       ``(B) Synthetic equity.--The amount involved with respect 
     to any tax imposed by reason of subsection (a)(4) is the 
     value of the shares on which the synthetic equity is based.
       ``(C) Special rule during first nonallocation year.--For 
     purposes of subparagraph (A), the amount involved for the 
     first nonallocation year of any employee stock ownership plan 
     shall be determined by taking into account the total value of 
     all the deemed-owned shares of all disqualified persons with 
     respect to such plan.
       ``(D) Statute of limitations.--The statutory period for the 
     assessment of any tax imposed by this section by reason of 
     paragraph (3) or (4) of subsection (a) shall not expire 
     before the date which is 3 years from the later of--
       ``(i) the allocation or ownership referred to in such 
     paragraph giving rise to such tax, or
       ``(ii) the date on which the Secretary is notified of such 
     allocation or ownership.''
       (d) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to plan years beginning after December 31, 2000.
       (2) Exception for certain plans.--In the case of any--
       (A) employee stock ownership plan established after July 
     14, 1999, or
       (B) employee stock ownership plan established on or before 
     such date if employer securities held by the plan consist of 
     stock in a corporation with respect to which an election 
     under section 1362(a) of the Internal Revenue Code of 1986 is 
     not in effect on such date,
     the amendments made by this section shall apply to plan years 
     ending after July 14, 1999.

    Subtitle B--Provisions Relating to Real Estate Investment Trusts

   PART I--TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE REIT 
                              SUBSIDIARIES

     SEC. 221. MODIFICATIONS TO ASSET DIVERSIFICATION TEST.

       (a) In General.--Subparagraph (B) of section 856(c)(4) is 
     amended to read as follows:
       ``(B)(i) not more than 25 percent of the value of its total 
     assets is represented by securities (other than those 
     includible under subparagraph (A)),
       ``(ii) not more than 20 percent of the value of its total 
     assets is represented by securities of 1 or more taxable REIT 
     subsidiaries, and
       ``(iii) except with respect to a taxable REIT subsidiary 
     and securities includible under subparagraph (A)--
       ``(I) not more than 5 percent of the value of its total 
     assets is represented by securities of any one issuer,
       ``(II) the trust does not hold securities possessing more 
     than 10 percent of the total voting power of the outstanding 
     securities of any one issuer, and
       ``(III) the trust does not hold securities having a value 
     of more than 10 percent of the total value of the outstanding 
     securities of any one issuer.''.
       (b) Exception for Straight Debt Securities.--Subsection (c) 
     of section 856 is amended by adding at the end the following 
     new paragraph:
       ``(7) Straight debt safe harbor in applying paragraph 
     (4).--Securities of an issuer which are straight debt (as 
     defined in section 1361(c)(5) without regard to subparagraph 
     (B)(iii) thereof) shall not be taken into account in applying 
     paragraph (4)(B)(ii)(III) if--
       ``(A) the issuer is an individual, or
       ``(B) the only securities of such issuer which are held by 
     the trust or a taxable REIT subsidiary of the trust are 
     straight debt (as so defined), or
       ``(C) the issuer is a partnership and the trust holds at 
     least a 20 percent profits interest in the partnership.''.

     SEC. 222. TREATMENT OF INCOME AND SERVICES PROVIDED BY 
                   TAXABLE REIT SUBSIDIARIES.

       (a) Income From Taxable REIT Subsidiaries Not Treated as 
     Impermissible Tenant Service Income.--Clause (i) of section 
     856(d)(7)(C) (relating to exceptions to impermissible tenant 
     service income) is amended by inserting ``or through a 
     taxable REIT subsidiary of such trust'' after ``income''.
       (b) Certain Income From Taxable REIT Subsidiaries Not 
     Excluded From Rents From Real Property.--
       (1) In general.--Subsection (d) of section 856 (relating to 
     rents from real property defined) is amended by adding at the 
     end the following new paragraphs:
       ``(8) Special rule for taxable reit subsidiaries.--For 
     purposes of this subsection, amounts paid to a real estate 
     investment trust by a taxable REIT subsidiary of such trust 
     shall not be excluded from rents from real property by reason 
     of paragraph (2)(B) if the requirements of either of the 
     following subparagraphs are met:
       ``(A) Limited rental exception.--The requirements of this 
     subparagraph are met with respect to any property if at least 
     90 percent of the leased space of the property is rented to 
     persons other than taxable REIT subsidiaries of such trust 
     and other than persons described in section 856(d)(2)(B). The 
     preceding sentence shall apply only to the extent that the 
     amounts paid to the trust as rents from real property (as 
     defined in paragraph (1) without regard to paragraph (2)(B)) 
     from such property are substantially comparable to such rents 
     made by the other tenants of the trust's property for 
     comparable space.
       ``(B) Exception for certain lodging facilities.--The 
     requirements of this subparagraph are met with respect to an 
     interest in real property which is a qualified lodging 
     facility leased by the trust to a taxable REIT subsidiary of 
     the trust if the property is operated on behalf of such 
     subsidiary by a person who is an eligible independent 
     contractor.
       ``(9) Eligible independent contractor.--For purposes of 
     paragraph (8)(B)--
       ``(A) In general.--The term `eligible independent 
     contractor' means, with respect to any qualified lodging 
     facility, any independent contractor if, at the time such 
     contractor enters into a management agreement or other 
     similar service contract with the taxable REIT subsidiary to 
     operate the facility, such contractor (or any related person) 
     is actively engaged in the trade or business of operating 
     qualified lodging facilities for any person who is not a 
     related person with respect to the real estate investment 
     trust or the taxable REIT subsidiary.
       ``(B) Special rules.--Solely for purposes of this paragraph 
     and paragraph (8)(B), a person shall not fail to be treated 
     as an independent contractor with respect to any qualified 
     lodging facility by reason of any of the following:
       ``(i) The taxable REIT subsidiary bears the expenses for 
     the operation of the facility pursuant to the management 
     agreement or other similar service contract.
       ``(ii) The taxable REIT subsidiary receives the revenues 
     from the operation of such facility, net of expenses for such 
     operation and fees payable to the operator pursuant to such 
     agreement or contract.
       ``(iii) The real estate investment trust receives income 
     from such person with respect to another property that is 
     attributable to a lease of such other property to such person 
     that was in effect as of the later of--

       ``(I) January 1, 1999, or
       ``(II) the earliest date that any taxable REIT subsidiary 
     of such trust entered into a management agreement or other 
     similar service contract with such person with respect to 
     such qualified lodging facility.

       ``(C) Renewals, etc., of existing leases.--For purposes of 
     subparagraph (B)(iii)--
       ``(i) a lease shall be treated as in effect on January 1, 
     1999, without regard to its renewal after such date, so long 
     as such renewal is pursuant to the terms of such lease as in 
     effect on whichever of the dates under subparagraph (B)(iii) 
     is the latest, and
       ``(ii) a lease of a property entered into after whichever 
     of the dates under subparagraph (B)(iii) is the latest shall 
     be treated as in effect on such date if--

       ``(I) on such date, a lease of such property from the trust 
     was in effect, and
       ``(II) under the terms of the new lease, such trust 
     receives a substantially similar or lesser benefit in 
     comparison to the lease referred to in subclause (I).

       ``(D) Qualified lodging facility.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `qualified lodging facility' 
     means any lodging facility unless wagering activities are 
     conducted at or in connection with such facility by any 
     person who is engaged in the business of accepting wagers and 
     who is legally authorized to engage in such business at or in 
     connection with such facility.
       ``(ii) Lodging facility.--The term `lodging facility' means 
     a hotel, motel, or other establishment more than one-half of 
     the dwelling units in which are used on a transient basis.
       ``(iii) Customary amenities and facilities.--The term 
     `lodging facility' includes customary amenities and 
     facilities operated as part of, or associated with, the 
     lodging facility so long as such amenities and facilities are 
     customary for other properties of a comparable size and class 
     owned by other owners unrelated to such real estate 
     investment trust.
       ``(E) Operate includes manage.--References in this 
     paragraph to operating a property shall be treated as 
     including a reference to managing the property.
       ``(F) Related person.--Persons shall be treated as related 
     to each other if such persons are treated as a single 
     employer under subsection (a) or (b) of section 52.''.
       (2) Conforming amendment.--Subparagraph (B) of section 
     856(d)(2) is amended by inserting ``except as provided in 
     paragraph (8),'' after ``(B)''.
       (3) Determining rents from real property.--
       (A)(i) Paragraph (1) of section 856(d) is amended by 
     striking ``adjusted bases'' each place it occurs and 
     inserting ``fair market values''.
       (ii) The amendment made by this subparagraph shall apply to 
     taxable years beginning after December 31, 2000.
       (B)(i) Clause (i) of section 856(d)(2)(B) is amended by 
     striking ``number'' and inserting ``value''.
       (ii) The amendment made by this subparagraph shall apply to 
     amounts received or accrued in taxable years beginning after 
     December 31, 2000, except for amounts paid pursuant to leases 
     in effect on July 12, 1999, or pursuant to a binding contract 
     in effect on such date and at all times thereafter.

[[Page S13517]]

     SEC. 223. TAXABLE REIT SUBSIDIARY.

       (a) In General.--Section 856 is amended by adding at the 
     end the following new subsection:
       ``(l) Taxable REIT Subsidiary.--For purposes of this part--
       ``(1) In general.--The term `taxable REIT subsidiary' 
     means, with respect to a real estate investment trust, a 
     corporation (other than a real estate investment trust) if--
       ``(A) such trust directly or indirectly owns stock in such 
     corporation, and
       ``(B) such trust and such corporation jointly elect that 
     such corporation shall be treated as a taxable REIT 
     subsidiary of such trust for purposes of this part.
     Such an election, once made, shall be irrevocable unless both 
     such trust and corporation consent to its revocation. Such 
     election, and any revocation thereof, may be made without the 
     consent of the Secretary.
       ``(2) 35 percent ownership in another taxable reit 
     subsidiary.--The term `taxable REIT subsidiary' includes, 
     with respect to any real estate investment trust, any 
     corporation (other than a real estate investment trust) with 
     respect to which a taxable REIT subsidiary of such trust owns 
     directly or indirectly--
       ``(A) securities possessing more than 35 percent of the 
     total voting power of the outstanding securities of such 
     corporation, or
       ``(B) securities having a value of more than 35 percent of 
     the total value of the outstanding securities of such 
     corporation.
     The preceding sentence shall not apply to a qualified REIT 
     subsidiary (as defined in subsection (i)(2)). The rule of 
     section 856(c)(7) shall apply for purposes of subparagraph 
     (B).
       ``(3) Exceptions.--The term `taxable REIT subsidiary' shall 
     not include--
       ``(A) any corporation which directly or indirectly operates 
     or manages a lodging facility or a health care facility, and
       ``(B) any corporation which directly or indirectly provides 
     to any other person (under a franchise, license, or 
     otherwise) rights to any brand name under which any lodging 
     facility or health care facility is operated.
     Subparagraph (B) shall not apply to rights provided to an 
     eligible independent contractor to operate or manage a 
     lodging facility if such rights are held by such corporation 
     as a franchisee, licensee, or in a similar capacity and such 
     lodging facility is either owned by such corporation or is 
     leased to such corporation from the real estate investment 
     trust.
       ``(4) Definitions.--For purposes of paragraph (3)--
       ``(A) Lodging facility.--The term `lodging facility' has 
     the meaning given to such term by paragraph (9)(D)(ii).
       ``(B) Health care facility.--The term `health care 
     facility' has the meaning given to such term by subsection 
     (e)(6)(D)(ii).''.
       (b) Conforming Amendment.--Paragraph (2) of section 856(i) 
     is amended by adding at the end the following new sentence: 
     ``Such term shall not include a taxable REIT subsidiary.''.

     SEC. 224. LIMITATION ON EARNINGS STRIPPING.

       Paragraph (3) of section 163( j) (relating to limitation on 
     deduction for interest on certain indebtedness) 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) any interest paid or accrued (directly or indirectly) 
     by a taxable REIT subsidiary (as defined in section 856(l)) 
     of a real estate investment trust to such trust.''.

     SEC. 225. 100 PERCENT TAX ON IMPROPERLY ALLOCATED AMOUNTS.

       (a) In General.--Subsection (b) of section 857 (relating to 
     method of taxation of real estate investment trusts and 
     holders of shares or certificates of beneficial interest) is 
     amended by redesignating paragraphs (7) and (8) as paragraphs 
     (8) and (9), respectively, and by inserting after paragraph 
     (6) the following new paragraph:
       ``(7) Income from redetermined rents, redetermined 
     deductions, and excess interest.--
       ``(A) Imposition of tax.--There is hereby imposed for each 
     taxable year of the real estate investment trust a tax equal 
     to 100 percent of redetermined rents, redetermined 
     deductions, and excess interest.
       ``(B) Redetermined rents.--
       ``(i) In general.--The term `redetermined rents' means 
     rents from real property (as defined in subsection 856(d)) 
     the amount of which would (but for subparagraph (E)) be 
     reduced on distribution, apportionment, or allocation under 
     section 482 to clearly reflect income as a result of services 
     furnished or rendered by a taxable REIT subsidiary of the 
     real estate investment trust to a tenant of such trust.
       ``(ii) Exception for certain services.--Clause (i) shall 
     not apply to amounts received directly or indirectly by a 
     real estate investment trust for services described in 
     paragraph (1)(B) or (7)(C)(i) of section 856(d).
       ``(iii) Exception for de minimis amounts.--Clause (i) shall 
     not apply to amounts described in section 856(d)(7)(A) with 
     respect to a property to the extent such amounts do not 
     exceed the one percent threshold described in section 
     856(d)(7)(B) with respect to such property.
       ``(iv) Exception for comparably priced services.--Clause 
     (i) shall not apply to any service rendered by a taxable REIT 
     subsidiary of a real estate investment trust to a tenant of 
     such trust if--

       ``(I) such subsidiary renders a significant amount of 
     similar services to persons other than such trust and tenants 
     of such trust who are unrelated (within the meaning of 
     section 856(d)(8)(F)) to such subsidiary, trust, and tenants, 
     but
       ``(II) only to the extent the charge for such service so 
     rendered is substantially comparable to the charge for the 
     similar services rendered to persons referred to in subclause 
     (I).

       ``(v) Exception for certain separately charged services.--
     Clause (i) shall not apply to any service rendered by a 
     taxable REIT subsidiary of a real estate investment trust to 
     a tenant of such trust if--

       ``(I) the rents paid to the trust by tenants (leasing at 
     least 25 percent of the net leasable space in the trust's 
     property) who are not receiving such service from such 
     subsidiary are substantially comparable to the rents paid by 
     tenants leasing comparable space who are receiving such 
     service from such subsidiary, and
       ``(II) the charge for such service from such subsidiary is 
     separately stated.

       ``(vi) Exception for certain services based on subsidiary's 
     income from the services.--Clause (i) shall not apply to any 
     service rendered by a taxable REIT subsidiary of a real 
     estate investment trust to a tenant of such trust if the 
     gross income of such subsidiary from such service is not less 
     than 150 percent of such subsidiary's direct cost in 
     furnishing or rendering the service.
       ``(vii) Exceptions granted by secretary.--The Secretary may 
     waive the tax otherwise imposed by subparagraph (A) if the 
     trust establishes to the satisfaction of the Secretary that 
     rents charged to tenants were established on an arms' length 
     basis even though a taxable REIT subsidiary of the trust 
     provided services to such tenants.
       ``(C) Redetermined deductions.--The term `redetermined 
     deductions' means deductions (other than redetermined rents) 
     of a taxable REIT subsidiary of a real estate investment 
     trust if the amount of such deductions would (but for 
     subparagraph (E)) be decreased on distribution, 
     apportionment, or allocation under section 482 to clearly 
     reflect income as between such subsidiary and such trust.
       ``(D) Excess interest.--The term `excess interest' means 
     any deductions for interest payments by a taxable REIT 
     subsidiary of a real estate investment trust to such trust to 
     the extent that the interest payments are in excess of a rate 
     that is commercially reasonable.
       ``(E) Coordination with section 482.--The imposition of tax 
     under subparagraph (A) shall be in lieu of any distribution, 
     apportionment, or allocation under section 482.
       ``(F) Regulatory authority.--The Secretary shall prescribe 
     such regulations as may be necessary or appropriate to carry 
     out the purposes of this paragraph. Until the 
     Secretary prescribes such regulations, real estate 
     investment trusts and their taxable REIT subsidiaries may 
     base their allocations on any reasonable method.''.
       (b) Amount Subject to Tax Not Required To Be Distributed.--
     Subparagraph (E) of section 857(b)(2) (relating to real 
     estate investment trust taxable income) is amended by 
     striking ``paragraph (5)'' and inserting ``paragraphs (5) and 
     (7)''.

     SEC. 226. EFFECTIVE DATE.

       (a) In General.--The amendments made by this part shall 
     apply to taxable years beginning after December 31, 2000.
       (b) Transitional Rules Related to Section 221.--
       (1) Existing arrangements.--
       (A) In general.--Except as otherwise provided in this 
     paragraph, the amendment made by section 221 shall not apply 
     to a real estate investment trust with respect to--
       (i) securities of a corporation held directly or indirectly 
     by such trust on July 12, 1999,
       (ii) securities of a corporation held by an entity on July 
     12, 1999, if such trust acquires control of such entity 
     pursuant to a written binding contract in effect on such date 
     and at all times thereafter before such acquisition,
       (iii) securities received by such trust (or a successor) in 
     exchange for, or with respect to, securities described in 
     clause (i) or (ii) in a transaction in which gain or loss is 
     not recognized, and
       (iv) securities acquired directly or indirectly by such 
     trust as part of a reorganization (as defined in section 
     368(a)(1) of the Internal Revenue Code of 1986) with respect 
     to such trust if such securities are described in clause (i), 
     (ii), or (iii) with respect to any other real estate 
     investment trust.
       (B) New trade or business or substantial new assets.--
     Subparagraph (A) shall cease to apply to securities of a 
     corporation as of the first day after July 12, 1999, on which 
     such corporation engages in a substantial new line of 
     business, or acquires any substantial asset, other than--
       (i) pursuant to a binding contract in effect on such date 
     and at all times thereafter before the acquisition of such 
     asset,
       (ii) in a transaction in which gain or loss is not 
     recognized by reason of section 1031 or 1033 of the Internal 
     Revenue Code of 1986, or
       (iii) in a reorganization (as so defined) with another 
     corporation the securities of which are described in 
     paragraph (1)(A) of this subsection.
       (C) Limitation on transition rules.--Subparagraph (A) shall 
     cease to apply to securities of a corporation held, acquired, 
     or received, directly or indirectly, by a real estate 
     investment trust as of the first day after July 12, 1999, on 
     which such trust acquires any additional securities of such 
     corporation other than--

[[Page S13518]]

       (i) pursuant to a binding contract in effect on July 12, 
     1999, and at all times thereafter, or
       (ii) in a reorganization (as so defined) with another 
     corporation the securities of which are described in 
     paragraph (1)(A) of this subsection.
       (2) Tax-free conversion.--If--
       (A) at the time of an election for a corporation to become 
     a taxable REIT subsidiary, the amendment made by section 221 
     does not apply to such corporation by reason of paragraph 
     (1), and
       (B) such election first takes effect before January 1, 
     2004,
     such election shall be treated as a reorganization qualifying 
     under section 368(a)(1)(A) of such Code.

                       PART II--HEALTH CARE REITS

     SEC. 231. HEALTH CARE REITS.

       (a) Special Foreclosure Rule for Health Care Properties.--
     Subsection (e) of section 856 (relating to special rules for 
     foreclosure property) is amended by adding at the end the 
     following new paragraph:
       ``(6) Special rule for qualified health care properties.--
     For purposes of this subsection--
       ``(A) Acquisition at expiration of lease.--The term 
     `foreclosure property' shall include any qualified health 
     care property acquired by a real estate investment trust as 
     the result of the termination of a lease of such property 
     (other than a termination by reason of a default, or the 
     imminence of a default, on the lease).
       ``(B) Grace period.--In the case of a qualified health care 
     property which is foreclosure property solely by reason of 
     subparagraph (A), in lieu of applying paragraphs (2) and 
     (3)--
       ``(i) the qualified health care property shall cease to be 
     foreclosure property as of the close of the second taxable 
     year after the taxable year in which such trust acquired such 
     property, and
       ``(ii) if the real estate investment trust establishes to 
     the satisfaction of the Secretary that an extension of the 
     grace period in clause (i) is necessary to the orderly 
     leasing or liquidation of the trust's interest in such 
     qualified health care property, the Secretary may grant one 
     or more extensions of the grace period for such qualified 
     health care property.
     Any such extension shall not extend the grace period beyond 
     the close of the 6th year after the taxable year in which 
     such trust acquired such qualified health care property.
       ``(C) Income from independent contractors.--For purposes of 
     applying paragraph (4)(C) with respect to qualified health 
     care property which is foreclosure property by reason of 
     subparagraph (A) or paragraph (1), income derived or received 
     by the trust from an independent contractor shall be 
     disregarded to the extent such income is attributable to--
       ``(i) any lease of property in effect on the date the real 
     estate investment trust acquired the qualified health care 
     property (without regard to its renewal after such date so 
     long as such renewal is pursuant to the terms of such lease 
     as in effect on such date), or
       ``(ii) any lease of property entered into after such date 
     if--

       ``(I) on such date, a lease of such property from the trust 
     was in effect, and
       ``(II) under the terms of the new lease, such trust 
     receives a substantially similar or lesser benefit in 
     comparison to the lease referred to in subclause (I).

       ``(D) Qualified health care property.--
       ``(i) In general.--The term `qualified health care 
     property' means any real property (including interests 
     therein), and any personal property incident to such real 
     property, which--

       ``(I) is a health care facility, or
       ``(II) is necessary or incidental to the use of a health 
     care facility.

       ``(ii) Health care facility.--For purposes of clause (i), 
     the term `health care facility' means a hospital, nursing 
     facility, assisted living facility, congregate care facility, 
     qualified continuing care facility (as defined in section 
     7872(g)(4)), or other licensed facility which extends medical 
     or nursing or ancillary services to patients and which, 
     immediately before the termination, expiration, default, or 
     breach of the lease of or mortgage secured by such facility, 
     was operated by a provider of such services which was 
     eligible for participation in the medicare program under 
     title XVIII of the Social Security Act with respect to such 
     facility.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

      PART III--CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES

     SEC. 241. CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES.

       (a) Distribution Requirement.--Clauses (i) and (ii) of 
     section 857(a)(1)(A) (relating to requirements applicable to 
     real estate investment trusts) are each amended by striking 
     ``95 percent (90 percent for taxable years beginning before 
     January 1, 1980)'' and inserting ``90 percent''.
       (b) Imposition of Tax.--Clause (i) of section 857(b)(5)(A) 
     (relating to imposition of tax in case of failure to meet 
     certain requirements) is amended by striking ``95 percent (90 
     percent in the case of taxable years beginning before January 
     1, 1980)'' and inserting ``90 percent''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

 PART IV--CLARIFICATION OF EXCEPTION FROM IMPERMISSIBLE TENANT SERVICE 
                                 INCOME

     SEC. 251. CLARIFICATION OF EXCEPTION FOR INDEPENDENT 
                   OPERATORS.

       (a) In General.--Paragraph (3) of section 856(d) (relating 
     to independent contractor defined) is amended by adding at 
     the end the following flush sentence:
     ``In the event that any class of stock of either the real 
     estate investment trust or such person is regularly traded on 
     an established securities market, only persons who own, 
     directly or indirectly, more than 5 percent of such class of 
     stock shall be taken into account as owning any of the stock 
     of such class for purposes of applying the 35 percent 
     limitation set forth in subparagraph (B) (but all of the 
     outstanding stock of such class shall be considered 
     outstanding in order to compute the denominator for purpose 
     of determining the applicable percentage of ownership).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

           PART V--MODIFICATION OF EARNINGS AND PROFITS RULES

     SEC. 261. MODIFICATION OF EARNINGS AND PROFITS RULES.

       (a) Rules for Determining Whether Regulated Investment 
     Company Has Earnings and Profits From Non-RIC Year.--
     Subsection (c) of section 852 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 earnings and 
     profits accumulated in any taxable year to which the 
     provisions of this part did not apply 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)(D) and 
     section 855.''.
       (b) Clarification of Application of REIT Spillover Dividend 
     Rules to Distributions To Meet Qualification Requirement.--
     Subparagraph (B) of section 857(d)(3) is amended by inserting 
     before the period ``and section 858''.
       (c) Application of Deficiency Dividend Procedures.--
     Paragraph (1) of section 852(e) is amended by adding at the 
     end the following new sentence: ``If the determination under 
     subparagraph (A) is solely as a result of the failure to meet 
     the requirements of subsection (a)(2), the preceding sentence 
     shall also apply for purposes of applying subsection (a)(2) 
     to the non-RIC year.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to distributions after December 31, 2000.

              PART VI--MODIFICATION OF ESTIMATED TAX RULES

     SEC. 271. MODIFICATION OF ESTIMATED TAX RULES FOR CLOSELY 
                   HELD REAL ESTATE INVESTMENT TRUSTS.

       (a) In General.--Subsection (e) of section 6655 (relating 
     to estimated tax by corporations) is amended by adding at the 
     end the following new paragraph:
       ``(5) Treatment of certain reit dividends.--
       ``(A) In general.--Any dividend received from a closely 
     held real estate investment trust by any person which owns 
     (after application of subsections (d)(5) and (l)(3)(B) of 
     section 856) 10 percent or more (by vote or value) of the 
     stock or beneficial interests in the trust shall be taken 
     into account in computing annualized income installments 
     under paragraph (2) in a manner similar to the manner under 
     which partnership income inclusions are taken into account.
       ``(B) Closely held reit.--For purposes of subparagraph (A), 
     the term `closely held real estate investment trust' means a 
     real estate investment trust with respect to which 5 or fewer 
     persons own (after application of subsections (d)(5) and 
     (l)(3)(B) of section 856) 50 percent or more (by vote or 
     value) of the stock or beneficial interests in the trust.''
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to estimated tax payments due on or after 
     November 15, 1999.

       PART VII--MODIFICATION OF TREATMENT OF CLOSELY-HELD REITS

     SEC. 281. CONTROLLED ENTITIES INELIGIBLE FOR REIT STATUS.

       (a) In General.--Subsection (a) of section 856 (relating to 
     definition of real estate investment trust) is amended by 
     striking ``and'' at the end of paragraph (6), by 
     redesignating paragraph (7) as paragraph (8), and by 
     inserting after paragraph (6) the following new paragraph:
       ``(7) which is not a controlled entity (as defined in 
     subsection (l)); and''.
       (b) Controlled Entity.--Section 856 is amended by adding at 
     the end the following new subsection:
       ``(l) Controlled Entity.--
       ``(1) In general.--For purposes of subsection (a)(7), an 
     entity is a controlled entity if, at any time during the 
     taxable year, one person (other than a qualified entity)--
       ``(A) in the case of a corporation, owns stock--
       ``(i) possessing at least 50 percent of the total voting 
     power of the stock of such corporation, or

[[Page S13519]]

       ``(ii) having a value equal to at least 50 percent of the 
     total value of the stock of such corporation, or
       ``(B) in the case of a trust, owns beneficial interests in 
     the trust which would meet the requirements of subparagraph 
     (A) if such interests were stock.
       ``(2) Qualified entity.--For purposes of paragraph (1), the 
     term `qualified entity' means--
       ``(A) any real estate investment trust, and
       ``(B) any partnership in which one real estate investment 
     trust owns at least 50 percent of the capital and profits 
     interests in the partnership.
       ``(3) Attribution rules.--For purposes of this paragraphs 
     (1) and (2)--
       ``(A) In general.--Rules similar to the rules of 
     subsections (d)(5) and (h)(3) shall apply; except that 
     section 318(a)(3)(C) shall not be applied under such rules to 
     treat stock owned by a qualified entity as being owned by a 
     person which is not a qualified entity.
       ``(B) Stapled entities.--A group of entities which are 
     stapled entities (as defined in section 269B(c)(2)) shall be 
     treated as one person.
       ``(4) Exception for certain new reits.--
       ``(A) In general.--The term `controlled entity' shall not 
     include an incubator REIT.
       ``(B) Incubator reit.--A corporation shall be treated as an 
     incubator REIT for any taxable year during the eligibility 
     period if it meets all the following requirements for such 
     year:
       ``(i) The corporation elects to be treated as an incubator 
     REIT.
       ``(ii) The corporation has only voting common stock 
     outstanding.
       ``(iii) Not more than 50 percent of the corporation's real 
     estate assets consist of mortgages.
       ``(iv) From not later than the beginning of the last half 
     of the second taxable year, at least 10 percent of the 
     corporation's capital is provided by lenders or equity 
     investors who are unrelated to the corporation's largest 
     shareholder.
       ``(v) The corporation annually increases the value of its 
     real estate assets by at least 10 percent.
       ``(vi) The directors of the corporation adopt a resolution 
     setting forth an intent to engage in a going public 
     transaction.
     No election may be made with respect to any REIT if an 
     election under this subsection was in effect for any 
     predecessor of such REIT. The requirement of clause (ii) 
     shall not fail to be met merely because a going public 
     transaction is accomplished through a transaction described 
     in section 368(a)(1) with another corporation which had 
     another class of stock outstanding prior to the transaction.
       ``(C) Eligibility period.--
       ``(i) In general.--The eligibility period (for which an 
     incubator REIT election can be made) begins with the REIT's 
     second taxable year and ends at the close of the REIT's third 
     taxable year, except that the REIT may, subject to clauses 
     (ii), (iii), and (iv), elect to extend such period for an 
     additional 2 taxable years.
       ``(ii) Going public transaction.--A REIT may not elect to 
     extend the eligibility period under clause (i) unless it 
     enters into an agreement with the Secretary that if it does 
     not engage in a going public transaction by the end of the 
     extended eligibility period, it shall pay Federal income 
     taxes for the 2 years of the extended eligibility period as 
     if it had not made an incubator REIT election and had ceased 
     to qualify as a REIT for those 2 taxable years.
       ``(iii) Returns, interest, and notice.--

       ``(I) Returns.--In the event the corporation ceases to be 
     treated as a REIT by operation of clause (ii), the 
     corporation shall file any appropriate amended returns 
     reflecting the change in status within 3 months of the close 
     of the extended eligibility period.
       ``(II) Interest.--Interest shall be payable on any tax 
     imposed by reason of clause (ii) for any taxable year but, 
     unless there was a finding under subparagraph (D), no 
     substantial underpayment penalties shall be imposed.
       ``(III) Notice.--The corporation shall, at the same time it 
     files its returns under subclause (I), notify its 
     shareholders and any other persons whose tax position is, or 
     may reasonably be expected to be, affected by the change in 
     status so they also may file any appropriate amended returns 
     to conform their tax treatment consistent with the 
     corporation's loss of REIT status.
       ``(IV) Regulations.--The Secretary shall provide 
     appropriate regulations setting forth transferee liability 
     and other provisions to ensure collection of tax and the 
     proper administration of this provision.

       ``(iv) Clauses (ii) and (iii) shall not apply if the 
     corporation allows its incubator REIT status to lapse at the 
     end of the initial 2-year eligibility period without engaging 
     in a going public transaction if the corporation is not a 
     controlled entity as of the beginning of its fourth taxable 
     year. In such a case, the corporation's directors may still 
     be liable for the penalties described in subparagraph (D) 
     during the eligibility period.
       ``(D) Special penalties.--If the Secretary determines that 
     an incubator REIT election was filed for a principal purpose 
     other than as part of a reasonable plan to undertake a going 
     public transaction, an excise tax of $20,000 shall be imposed 
     on each of the corporation's directors for each taxable year 
     for which an election was in effect.
       ``(E) Going public transaction.--For purposes of this 
     paragraph, a going public transaction means--
       ``(i) a public offering of shares of the stock of the 
     incubator REIT;
       ``(ii) a transaction, or series of transactions, that 
     results in the stock of the incubator REIT being regularly 
     traded on an established securities market and that results 
     in at least 50 percent of such stock being held by 
     shareholders who are unrelated to persons who held such stock 
     before it began to be so regularly traded; or
       ``(iii) any transaction resulting in ownership of the REIT 
     by 200 or more persons (excluding the largest single 
     shareholder) who in the aggregate own at least 50 percent of 
     the stock of the REIT.
     For the purposes of this subparagraph, the rules of paragraph 
     (3) shall apply in determining the ownership of stock.
       ``(F) Definitions.--The term `established securities 
     market' shall have the meaning set forth in the regulations 
     under section 897.''
       (c) Conforming Amendment.--Paragraph (2) of section 856(h) 
     is amended by striking ``and (6)'' each place it appears and 
     inserting ``, (6), and (7)''.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years ending after July 14, 1999.
       (2) Exception for existing controlled entities.--The 
     amendments made by this section shall not apply to any entity 
     which is a controlled entity (as defined in section 856(l) of 
     the Internal Revenue Code of 1986, as added by this section) 
     as of July 14, 1999, which is a real estate investment trust 
     for the taxable year which includes such date, and which has 
     significant business assets or activities as of such date. 
     For purposes of the preceding sentence, an entity shall be 
     treated as such a controlled entity on July 14, 1999, if it 
     becomes such an entity after such date in a transaction--
       (A) made pursuant to a written agreement which was binding 
     on such date and at all times thereafter, or
       (B) described on or before such date in a filing with the 
     Securities and Exchange Commission required solely by reason 
     of the transaction.

                      TITLE III--BUDGET PROVISION

     SEC. 301. EXCLUSION FROM PAYGO SCORECARD.

       Any net deficit increase or net surplus increase resulting 
     from the enactment of this Act shall not be counted for 
     purposes of section 252 of the Balanced Budget and Emergency 
     Deficit Control Act of 1985 (2 U.S.C. 902).

  Mr. ROTH. Mr. President, today I am pleased to join the distinguished 
ranking member of the Finance Committee, Senator Moynihan, in 
discussing Senate passage of the Tax Relief Extension Act of 1999.
  The bill the Senate passed today is a consensus package of extensions 
of expiring tax provisions, known as ``extenders.'' Working together, 
Senator Moynihan and I produced a package that was reported out of the 
Finance Committee unanimously.
  In order to get a package that could be approved by unanimous 
consent, we had to achieve a fair compromise. Every Member would 
probably differ in the way he or she would write an extenders bill.
  Fortunately, Members of the Senate realize the importance of 
addressing these expiring provisions. The evidence of that importance 
is demonstrated by the unanimous consent agreement for passage that we 
entered into today.
  The most important of the expiring provisions, as Senator Moynihan 
noted, is the exclusion of nonrefundable tax credits from the 
alternative minimum taxes (``AMT''). The Finance Committee bill insures 
that middle income families will receive the benefits of the $500 per 
child tax credit, HOPE Scholarship credit, Lifetime Learning credit, 
adoption credit, and dependent care tax credit. This relief is extended 
through December 31, 2000.
  There are other important expiring tax provisions the Finance 
Committee bill addresses. Included is the research and development 
(``R&D'') tax credit, the tax-free treatment of employer-provided 
educational assistance, the work opportunity tax credit, the welfare-
to-work tax credit, the active finance exception to Subpart F, and the 
extension and modification of the tax credit for production of 
electricity from wind and biomass, including poultry waste. There are 
several other important extenders in this legislation.
  Mr. President, I urge the House to pass its extenders bill. We will 
then proceed to a conference and work out the differences between the 
two bills. It is important that we work quickly and produce a 
conference agreement that addresses these important matters.
  Mr. MOYNIHAN. Mr. President, I have just a couple of points to make 
about this extender bill. First, my congratulations to our revered 
chairman

[[Page S13520]]

of the Finance Committee, who brought all sides together in a consensus 
bill that accomplishes our objective--extend expiring provisions that 
command support from all Senators. This was not a simple task.
  Tax extenders were part of the large tax bill that began working its 
way through the Congress in July--a bill that in my view needed to be 
and was vetoed. This fall, Senator Roth returned to the task and 
presented a chairman's mark focused on extenders. He built bipartisan 
support for the bill, and that is why we are here on the Senate floor 
so soon, ready to pass the legislation by unanimous consent.
  This bill is a paid-for extenders package. As such, it meets the 
standards of Members on both sides of the aisle. It is a bill that can 
pass this Congress and can be signed by the President.
  And it is important that we pass legislation that can be signed. If 
we do not, approximately 1.1 million Americans will find out that they 
will lose part or all of the $500 child credit or the HOPE scholarship 
credit when they sit down to complete their 1999 tax return. That is 
because these credits have not yet been permanently exempted from what 
we call the alternative minimum tax. This legislation will exempt these 
credits from the alternative minimum tax for 1999 and 2000.
  The American people ask us to be responsible in managing our tax 
laws. To not pass this bill would be irresponsible and contribute to a 
perception that Members of Congress who agree on what should be done 
cannot sit down and figure out a way to do them.
  Again, my congratulations to the chairman, and let's move 
expeditiously to a conference with the House of Representatives as soon 
as they pass similar legislation.
  The PRESIDING OFFICER. The Democratic leader is recognized.
  Mr. DASCHLE. Mr. President, I appreciate the cooperation we have had 
on both sides of the aisle to get to this point. A number of Senators 
have expressed a desire to offer amendments and to change, in some way, 
the package as it has been presented and passed this morning. We will 
work with our colleagues to find ways in which to address many of these 
issues, whether it is in conference or on other vehicles.
  There are a number of issues I care about as well, and I share the 
concerns expressed to me by some of our colleagues. It is very 
important that before the end of the session we pass this legislation 
out and get to conference within a time where we might be able to move 
it further along.
  I strongly support the action the Senate has just taken. My only 
regret is that these matters aren't permanent law and that they require 
extension at all. There should come a time when we pass them 
permanently so we aren't required to come back year after year. Having 
said that, again, I appreciate the work of the majority leader.
  I yield the floor.
  Mr. LOTT. Mr. President, I agree with that. I might say that there 
are some permanent provisions in the House Ways and Means version of 
this bill. They would make permanent the extender with regard to the 
alternative minimum tax and how it affects the low- and middle-income 
people and others. Also, I have a bill at the desk to express my strong 
feeling on this subject that would make the R&D tax credit permanent. I 
think to come back every year, 2 years, or even every 5 years, causes 
concern and insecurity with regard to those tax credits. I hope we will 
make it either permanent, or as long as possible, in the conference.
  I know there is at least one Senator who has provisions he hopes will 
be considered in the conference, and I think they should be. On our 
side, I have one Senator who feels very strongly that there are three 
parts of this bill that affect permanent law, which is not extenders. I 
agree. I think those permanent law issues should be dealt with by the 
regular committees. One has to do with brownfields, one with a rum 
provision, maybe in the Virgin Islands--not that you might want to be 
for them; I am just questioning whether or not they should be in a bill 
that is supposed to be tax credit extenders. We have other good 
provisions in here, a welfare-to-work tax credit, and others. So I am 
glad we are going to get this done before we leave. I thank Senators 
for the cooperation on both sides.

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