[Congressional Record (Bound Edition), Volume 145 (1999), Part 14]
[House]
[Pages 19573-19744]
[From the U.S. Government Publishing Office, www.gpo.gov]



     CONFERENCE REPORT ON H.R. 2488, FINANCIAL FREEDOM ACT OF 1999

  Mr. ARCHER (during the Special Order of Mr. Etheridge) submitted the 
following conference report and statement on the bill (H.R. 2488) to 
provide for reconciliation pursuant to sections 105 and 211 of the 
concurrent resolution on the budget for fiscal year 2000:

                  Conference Report (H. Rept. 106-289)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the Senate to the bill (H.R. 
     2488), to provide for reconciliation pursuant to sections 105 
     and 211 of the concurrent resolution on the budget for fiscal 
     year 2000, having met, after full and free conference, have 
     agreed to recommend and do recommend to their respective 
     Houses as follows:
       That the House recede from its disagreement to the 
     amendment of the Senate and agree to the same with an 
     amendment as follows:
       In lieu of the matter proposed to be inserted by the Senate 
     amendment, insert the following:

     SECTION 1. SHORT TITLE; ETC.

       (a) Short Title.--This Act may be cited as the ``Taxpayer 
     Refund and Relief 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) Section 15 Not To Apply.--No amendment made by this Act 
     shall be treated as a change in a rate of tax for purposes of 
     section 15 of the Internal Revenue Code of 1986.
       (d) Table of Contents.--The table of contents for this Act 
     is as follows:

Sec. 1. Short title; etc.

               TITLE I--BROAD-BASED AND FAMILY TAX RELIEF

            Subtitle A--Reduction in Individual Income Taxes

Sec. 101. Reduction in individual income taxes.

                     Subtitle B--Family Tax Relief

Sec. 111. Elimination of marriage penalty in standard deduction.
Sec. 112. Exclusion for foster care payments to apply to payments by 
              qualified placement agencies.
Sec. 113. Expansion of adoption credit.
Sec. 114. Modification of dependent care credit.
Sec. 115. Marriage penalty relief for earned income credit.

      Subtitle C--Repeal of Alternative Minimum Tax on Individuals

Sec. 121. Repeal of alternative minimum tax on individuals.

       TITLE II--RELIEF FROM TAXATION ON SAVINGS AND INVESTMENTS

                  Subtitle A--Capital Gains Tax Relief

Sec. 201. Reduction in individual capital gain tax rates.
Sec. 202. Indexing of certain assets acquired after December 31, 1999, 
              for purposes of determining gain.
Sec. 203. Capital gains tax rates applied to capital gains of 
              designated settlement funds.
Sec. 204. Special rule for members of uniformed services and Foreign 
              Service, and other employees, in determining exclusion of 
              gain from sale of principal residence.
Sec. 205. Tax treatment of income and loss on derivatives.
Sec. 206. Worthless securities of financial institutions.

             Subtitle B--Individual Retirement Arrangements

Sec. 211. Modification of deduction limits for IRA contributions.
Sec. 212. Modification of income limits on contributions and rollovers 
              to Roth IRAs.
Sec. 213. Deemed IRAs under employer plans.
Sec. 214. Catchup contributions to IRAs by individuals age 50 or over.

               TITLE III--ALTERNATIVE MINIMUM TAX REFORM

Sec. 301. Modification of alternative minimum tax on corporations.
Sec. 302. Repeal of 90 percent limitation on foreign tax credit.

                 TITLE IV--EDUCATION SAVINGS INCENTIVES

Sec. 401. Modifications to education individual retirement accounts.
Sec. 402. Modifications to qualified tuition programs.
Sec. 403. Exclusion of certain amounts received under the National 
              Health Service Corps Scholarship Program, the F. Edward 
              Hebert Armed Forces Health Professions Scholarship and 
              Financial Assistance Program, and certain other programs.
Sec. 404. Extension of exclusion for employer-provided educational 
              assistance.
Sec. 405. Additional increase in arbitrage rebate exception for 
              governmental bonds used to finance educational 
              facilities.
Sec. 406. Modification of arbitrage rebate rules applicable to public 
              school construction bonds.
Sec. 407. Elimination of 60-month limit and increase in income 
              limitation on student loan interest deduction.
Sec. 408. 2-percent floor on miscellaneous itemized deductions not to 
              apply to qualified professional development expenses of 
              elementary and secondary school teachers.

                    TITLE V--HEALTH CARE PROVISIONS

Sec. 501. Deduction for health and long-term care insurance costs of 
              individuals not participating in employer-subsidized 
              health plans.
Sec. 502. Long-term care insurance permitted to be offered under 
              cafeteria plans and flexible spending arrangements.
Sec. 503. Additional personal exemption for taxpayer caring for elderly 
              family member in taxpayer's home.
Sec. 504. Expanded human clinical trials qualifying for orphan drug 
              credit.
Sec. 505. Inclusion of certain vaccines against streptococcus 
              pneumoniae to list of taxable vaccines; reduction in per 
              dose tax rate.
Sec. 506. Drug benefits for medicare beneficiaries.

                      TITLE VI--ESTATE TAX RELIEF

  Subtitle A--Repeal of Estate, Gift, and Generation-Skipping Taxes; 
                  Repeal of Step Up in Basis At Death

Sec. 601. Repeal of estate, gift, and generation-skipping taxes.

[[Page 19574]]

Sec. 602. Termination of step up in basis at death.
Sec. 603. Carryover basis at death.

  Subtitle B--Reductions of Estate and Gift Tax Rates Prior to Repeal

Sec. 611. Additional reductions of estate and gift tax rates.

   Subtitle C--Unified Credit Replaced With Unified Exemption Amount

Sec. 621. Unified credit against estate and gift taxes replaced with 
              unified exemption amount.

     Subtitle D--Modifications of Generation-Skipping Transfer Tax

Sec. 631. Deemed allocation of gst exemption to lifetime transfers to 
              trusts; retroactive allocations.
Sec. 632. Severing of trusts.
Sec. 633. Modification of certain valuation rules.
Sec. 634. Relief provisions.

                   Subtitle E--Conservation Easements

Sec. 641. Expansion of estate tax rule for conservation easements.

    TITLE VII--TAX RELIEF FOR DISTRESSED COMMUNITIES AND INDUSTRIES

           Subtitle A--American Community Renewal Act of 1999

Sec. 701. Short title.
Sec. 702. Designation of and tax incentives for renewal communities.
Sec. 703. Extension of expensing of environmental remediation costs to 
              renewal communities.
Sec. 704. Extension of work opportunity tax credit for renewal 
              communities.
Sec. 705. Conforming and clerical amendments.

                     Subtitle B--Farming Incentive

Sec. 711. Production flexibility contract payments.

                   Subtitle C--Oil and Gas Incentives

Sec. 721. 5-year net operating loss carryback for losses attributable 
              to operating mineral interests of independent oil and gas 
              producers.
Sec. 722. Deduction for delay rental payments.
Sec. 723. Election to expense geological and geophysical expenditures.
Sec. 724. Temporary suspension of limitation based on 65 percent of 
              taxable income.
Sec. 725. Determination of small refiner exception to oil depletion 
              deduction.

                     Subtitle D--Timber Incentives

Sec. 731. Temporary suspension of maximum amount of amortizable 
              reforestation expenditures.
Sec. 732. Capital gain treatment under section 631(b) to apply to 
              outright sales by land owner.

                TITLE VIII--RELIEF FOR SMALL BUSINESSES

Sec. 801. Deduction for 100 percent of health insurance costs of self-
              employed individuals.
Sec. 802. Increase in expense treatment for small businesses.
Sec. 803. Repeal of Federal unemployment surtax.
Sec. 804. Increased deduction for meal expenses; increased 
              deductibility of business meal expenses for individuals 
              subject to Federal limitations on hours of service.
Sec. 805. Income averaging for farmers and fishermen not to increase 
              alternative minimum tax liability.
Sec. 806. Farm, fishing, and ranch risk management accounts.
Sec. 807. Exclusion of investment securities income from passive income 
              test for bank S corporations.
Sec. 808. Treatment of qualifying director shares.

                   TITLE IX--INTERNATIONAL TAX RELIEF

Sec. 901. Interest allocation rules.
Sec. 902. Look-thru rules to apply to dividends from noncontrolled 
              section 902 corporations.
Sec. 903. Clarification of treatment of pipeline transportation income.
Sec. 904. Subpart F treatment of income from transmission of high 
              voltage electricity.
Sec. 905. Recharacterization of overall domestic loss.
Sec. 906. Treatment of military property of foreign sales corporations.
Sec. 907. Treatment of certain dividends of regulated investment 
              companies.
Sec. 908. Repeal of special rules for applying foreign tax credit in 
              case of foreign oil and gas income.
Sec. 909. Advance pricing agreements treated as confidential taxpayer 
              information.
Sec. 910. Increase in dollar limitation on section 911 exclusion.
Sec. 911. Airline mileage awards to certain foreign persons.

        TITLE X--PROVISIONS RELATING TO TAX-EXEMPT ORGANIZATIONS

Sec. 1001. Exemption from income tax for State-created organizations 
              providing property and casualty insurance for property 
              for which such coverage is otherwise unavailable.
Sec. 1002. Modification of special arbitrage rule for certain funds.
Sec. 1003. Exemption procedure from taxes on self-dealing.
Sec. 1004. Expansion of declaratory judgment remedy to tax-exempt 
              organizations.
Sec. 1005. Modifications to section 512(b)(13).
Sec. 1006. Mileage reimbursements to charitable volunteers excluded 
              from gross income.
Sec. 1007. Charitable contribution deduction for certain expenses 
              incurred in support of Native Alaskan subsistence 
              whaling.
Sec. 1008. Simplification of lobbying expenditure limitation.
Sec. 1009. Tax-free distributions from individual retirement accounts 
              for charitable purposes.

                    TITLE XI--REAL ESTATE PROVISIONS

         Subtitle A--Improvements in Low-Income Housing Credit

Sec. 1101. Modification of State ceiling on low-income housing credit.
Sec. 1102. Modification of criteria for allocating housing credits 
              among projects.
Sec. 1103. Additional responsibilities of housing credit agencies.
Sec. 1104. Modifications to rules relating to basis of building which 
              is eligible for credit.
Sec. 1105. Other modifications.
Sec. 1106. Carryforward rules.
Sec. 1107. Effective date.

    Subtitle B--Provisions Relating to Real Estate Investment Trusts

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

Sec. 1111. Modifications to asset diversification test.
Sec. 1112. Treatment of income and services provided by taxable REIT 
              subsidiaries.
Sec. 1113. Taxable REIT subsidiary.
Sec. 1114. Limitation on earnings stripping.
Sec. 1115. 100 percent tax on improperly allocated amounts.
Sec. 1116. Effective date.

                       Part II--Health Care REITs

Sec. 1121. Health care REITs.

      Part III--Conformity With Regulated Investment Company Rules

Sec. 1131. Conformity with regulated investment company rules.

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

Sec. 1141. Clarification of exception for independent operators.

           Part V--Modification of Earnings and Profits Rules

Sec. 1151. Modification of earnings and profits rules.

     Subtitle C--Modification of At-Risk Rules for Publicly Traded 
                            Nonrecourse Debt

Sec. 1161. Treatment under at-risk rules of publicly traded nonrecourse 
              debt.

 Subtitle D--Treatment of Certain Contributions to Capital of Retailers

Sec. 1171. Exclusion from gross income for certain contributions to the 
              capital of certain retailers.

              Subtitle E--Private Activity Bond Volume Cap

Sec. 1181. Acceleration of phase-in of increase in volume cap on 
              private activity bonds.

          Subtitle F--Deduction for Renovating Historic Homes

Sec. 1191. Deduction for renovating historic homes.

               TITLE XII--PROVISIONS RELATING TO PENSIONS

                     Subtitle A--Expanding Coverage

Sec. 1201. Increase in benefit and contribution limits.
Sec. 1202. Plan loans for subchapter S owners, partners, and sole 
              proprietors.
Sec. 1203. Modification of top-heavy rules.
Sec. 1204. Elective deferrals not taken into account for purposes of 
              deduction limits.
Sec. 1205. Repeal of coordination requirements for deferred 
              compensation plans of State and local governments and 
              tax-exempt organizations.
Sec. 1206. Elimination of user fee for requests to IRS regarding 
              pension plans.
Sec. 1207. Deduction limits.
Sec. 1208. Option to treat elective deferrals as after-tax 
              contributions.
Sec. 1209. Reduced PBGC premium for new plans of small employers.
Sec. 1210. Reduction of additional PBGC premium for new and small 
              plans.

                Subtitle B--Enhancing Fairness for Women

Sec. 1221. Catchup contributions for individuals age 50 or over.
Sec. 1222. Equitable treatment for contributions of employees to 
              defined contribution plans.
Sec. 1223. Faster vesting of certain employer matching contributions.
Sec. 1224. Simplify and update the minimum distribution rules.
Sec. 1225. Clarification of tax treatment of division of section 457 
              plan benefits upon divorce.

[[Page 19575]]

Sec. 1226. Modification of safe harbor relief for hardship withdrawals 
              from cash or deferred arrangements.

          Subtitle C--Increasing Portability for Participants

Sec. 1231. Rollovers allowed among various types of plans.
Sec. 1232. Rollovers of IRAs into workplace retirement plans.
Sec. 1233. Rollovers of after-tax contributions.
Sec. 1234. Hardship exception to 60-day rule.
Sec. 1235. Treatment of forms of distribution.
Sec. 1236. Rationalization of restrictions on distributions.
Sec. 1237. Purchase of service credit in governmental defined benefit 
              plans.
Sec. 1238. Employers may disregard rollovers for purposes of cash-out 
              amounts.
Sec. 1239. Minimum distribution and inclusion requirements for section 
              457 plans.

       Subtitle D--Strengthening Pension Security and Enforcement

Sec. 1241. Repeal of 150 percent of current liability funding limit.
Sec. 1242. Maximum contribution deduction rules modified and applied to 
              all defined benefit plans.
Sec. 1243. Missing participants.
Sec. 1244. Excise tax relief for sound pension funding.
Sec. 1245. Excise tax on failure to provide notice by defined benefit 
              plans significantly reducing future benefit accruals.
Sec. 1246. Protection of investment of employee contributions to 401(k) 
              plans.
Sec. 1247. Treatment of multiemployer plans under section 415.

                Subtitle E--Reducing Regulatory Burdens

Sec. 1251. Modification of timing of plan valuations.
Sec. 1252. ESOP dividends may be reinvested without loss of dividend 
              deduction.
Sec. 1253. Repeal of transition rule relating to certain highly 
              compensated employees.
Sec. 1254. Employees of tax-exempt entities.
Sec. 1255. Clarification of treatment of employer-provided retirement 
              advice.
Sec. 1256. Reporting simplification.
Sec. 1257. Improvement of employee plans compliance resolution system.
Sec. 1258. Substantial owner benefits in terminated plans.
Sec. 1259. Modification of exclusion for employer provided transit 
              passes.
Sec. 1260. Repeal of the multiple use test.
Sec. 1261. Flexibility in nondiscrimination, coverage, and line of 
              business rules.
Sec. 1262. Extension to international organizations of moratorium on 
              application of certain nondiscrimination rules applicable 
              to State and local plans.

                      Subtitle F--Plan Amendments

Sec. 1271. Provisions relating to plan amendments.

                  TITLE XIII--MISCELLANEOUS PROVISIONS

         Subtitle A--Provisions Primarily Affecting Individuals

Sec. 1301. Consistent treatment of survivor benefits for public safety 
              officers killed in the line of duty.
Sec. 1302. Expansion of dc homebuyer tax credit.
Sec. 1303. No Federal income tax on amounts and lands received by 
              Holocaust victims or their heirs.

         Subtitle B--Provisions Primarily Affecting Businesses

Sec. 1311. Distributions from publicly traded partnerships treated as 
              qualifying income of regulated investment companies.
Sec. 1312. Special passive activity rule for publicly traded 
              partnerships to apply to regulated investment companies.
Sec. 1313. Large electric trucks, vans, and buses eligible for 
              deduction for clean-fuel vehicles in lieu of credit.
Sec. 1314. Modifications to special rules for nuclear decommissioning 
              costs.
Sec. 1315. Consolidation of life insurance companies with other 
              corporations.
Sec. 1316. Modification of active business definition under section 
              355.
Sec. 1317. Expansion of exemption from personal holding company tax for 
              lending or finance companies.
Sec. 1318. Extension of expensing of environmental remediation costs.

            Subtitle C--Provisions Relating to Excise Taxes

Sec. 1321. Consolidation of Hazardous Substance Superfund and Leaking 
              Underground Storage Tank Trust Fund.
Sec. 1322. Repeal of certain motor fuel excise taxes on fuel used by 
              railroads and on inland waterway transportation.
Sec. 1323. Repeal of excise tax on fishing tackle boxes.
Sec. 1324. Clarification of excise tax imposed on arrow components.
Sec. 1325. Exemption from ticket taxes for certain transportation 
              provided by small seaplanes.
Sec. 1326. Modification of rural airport definition.

                      Subtitle D--Other Provisions

Sec. 1331. Tax-exempt financing of qualified highway infrastructure 
              construction.
Sec. 1332. Tax treatment of Alaska Native Settlement Trusts.
Sec. 1333. Increase in threshold for Joint Committee reports on refunds 
              and credits.
Sec. 1334. Credit for clinical testing research expenses attributable 
              to certain qualified academic institutions including 
              teaching hospitals.
Sec. 1335. Payment of dividends on stock of cooperatives without 
              reducing patronage dividends.

                    Subtitle E--Tax Court Provisions

Sec. 1341. Tax court filing fee in all cases commenced by filing 
              petition.
Sec. 1342. Expanded use of Tax Court practice fee.
Sec. 1343. Confirmation of authority of Tax Court to apply doctrine of 
              equitable recoupment.

              TITLE XIV--EXTENSIONS OF EXPIRING PROVISIONS

Sec. 1401. Research credit.
Sec. 1402. Subpart F exemption for active financing income.
Sec. 1403. Taxable income limit on percentage depletion for marginal 
              production.
Sec. 1404. Work opportunity credit and welfare-to-work credit.
Sec. 1405. Extension and modification of credit for producing 
              electricity from certain renewable resources.

                       TITLE XV--REVENUE OFFSETS

Sec. 1501. Returns relating to cancellations of indebtedness by 
              organizations lending money.
Sec. 1502. Extension of Internal Revenue Service user fees.
Sec. 1503. Limitations on welfare benefit funds of 10 or more employer 
              plans.
Sec. 1504. Increase in elective withholding rate for nonperiodic 
              distributions from deferred compensation plans.
Sec. 1505. Controlled entities ineligible for REIT status.
Sec. 1506. Treatment of gain from constructive ownership transactions.
Sec. 1507. Transfer of excess defined benefit plan assets for retiree 
              health benefits.
Sec. 1508. Modification of installment method and repeal of installment 
              method for accrual method taxpayers.
Sec. 1509. Limitation on use of nonaccrual experience method of 
              accounting.
Sec. 1510. Charitable split-dollar life insurance, annuity, and 
              endowment contracts.
Sec. 1511. Restriction on use of real estate investment trusts to avoid 
              estimated tax payment requirements.
Sec. 1512. Modification of anti-abuse rules related to assumption of 
              liability.
Sec. 1513. Allocation of basis on transfers of intangibles in certain 
              nonrecognition transactions.
Sec. 1514. Distributions to a corporate partner of stock in another 
              corporation.
Sec. 1515. Prohibited allocations of S corporation stock held by an 
              ESOP.

                 TITLE XVI--COMPLIANCE WITH BUDGET ACT

Sec. 1601. Compliance with Budget Act.

               TITLE I--BROAD-BASED AND FAMILY TAX RELIEF

            Subtitle A--Reduction in Individual Income Taxes

     SEC. 101. REDUCTION IN INDIVIDUAL INCOME TAXES.

       (a) Regular Income Tax Rates.--
       (1) In general.--Subsection (f) of section 1 is amended by 
     adding at the end the following new paragraph:
       ``(8) Rate reductions.--The following adjustments shall 
     apply in prescribing the tables under paragraph (1):
       ``(A) Reduction in lowest rate.--With respect to taxable 
     years beginning after December 31, 2000, the rate applicable 
     to the lowest income bracket shall be--
       ``(i) 14.5 percent in the case of taxable years beginning 
     during 2001 or 2002, and
       ``(ii) 14.0 percent in the case of taxable years beginning 
     after 2002.
       ``(B) Reduction in other rates.--With respect to taxable 
     years beginning after December 31, 2004, each rate (other 
     than the rate referred to in subparagraph (A)) shall be 
     reduced by 1 percentage point.
       ``(C) Phaseout of marriage penalty in lowest bracket.--

[[Page 19576]]

       ``(i) In general.--With respect to taxable years beginning 
     after December 31, 2004--

       ``(I) the maximum taxable income in the lowest rate bracket 
     in the table contained in subsection (a) (and the minimum 
     taxable income in the next higher taxable income bracket in 
     such table) shall be the applicable percentage of the maximum 
     taxable income in the lowest rate bracket in the table 
     contained in subsection (c) (after any other adjustment under 
     this subsection), and
       ``(II) the comparable taxable income amounts in the table 
     contained in subsection (d) shall be \1/2\ of the amounts 
     determined under subclause (I).

       ``(ii) Applicable percentage.--For purposes of clause (i), 
     the applicable percentage shall be determined in accordance 
     with the following table:

``For taxable years beginning                            The applicable
  in calendar year--                                    percentage is--
      2005.......................................................173.7 
      2006.......................................................176.1 
      2007.......................................................188.1 
      2008 and thereafter.......................................200.0. 
       ``(D) Increase in maximum taxable income in lowest bracket 
     for other individuals.--
       ``(i) In general.--With respect to taxable years beginning 
     after December 31, 2005, the maximum taxable income in the 
     lowest rate bracket in the tables contained in subsections 
     (b) and (c), after any other adjustment under this subsection 
     (and the minimum taxable income in the next higher taxable 
     income bracket in such tables, as so adjusted) shall be 
     increased by $3,000.
       ``(ii) Cost-of-living adjustment.--In the case of any 
     taxable year beginning in any calendar year after 2006, the 
     $3,000 amount in clause (i) shall be increased by an amount 
     equal to--

       ``(I) such dollar amount, multiplied by
       ``(II) the cost-of living adjustment determined under 
     paragraph (3) for the calendar year in which the taxable year 
     begins, determined by substituting `calendar year 2005' for 
     `calendar year 1992' in subparagraph (B) thereof.''.

       ``(iii) Any increase under clause (ii) shall be added to 
     the amount it is increasing before such amount is rounded 
     under paragraph (6).
       ``(9) Post-2001 rate reductions contingent on no increase 
     in interest on total united states debt.--
       ``(A) In general.--If the calendar year preceding any 
     adjustment year is not a debt reduction calendar year, then--
       ``(i) such adjustment shall not take effect until the 
     calendar year following the adjustment year, and
       ``(ii) this subparagraph shall apply to such following 
     calendar year as if it were an adjustment year.
     For purposes of this subparagraph, the term `adjustment year' 
     means, with respect to any adjustment under subparagraph (A), 
     (B), or (D) of paragraph (8), the first calendar year for 
     which such adjustment takes effect without regard to this 
     paragraph.
       ``(B) Debt reduction calendar year.--For purposes of this 
     paragraph, the term `debt reduction calendar year' means any 
     calendar year after 2000 if the Secretary of the Treasury 
     (after consultation with the chairman of the Federal Reserve 
     Board) determines by August 31 of such calendar year that the 
     United States interest expense for the 12-month period ending 
     on July 31 of such calendar year is not more than 
     $1,000,000,000 greater than the United States interest 
     expense for the 12-month period ending on July 31 of the 
     preceding calendar year.
       ``(C) United states interest expense.--For purposes of this 
     paragraph, the term `United States interest expense' means 
     interest on obligations which are subject to the public debt 
     limit in section 3101 of title 31, United States Code.''.
       (2) Technical amendments.--
       (A) Subparagraph (B) of section 1(f)(2) is amended by 
     inserting ``except as provided in paragraph (8),'' before 
     ``by not changing''.
       (B) Subparagraph (C) of section 1(f)(2) is amended by 
     inserting ``and the reductions under paragraph (8) in the 
     rates of tax'' before the period.
       (C) The heading for subsection (f) of section 1 is amended 
     by inserting ``Rate Reductions;'' before ``Adjustments''.
       (D) Section 1(g)(7)(B)(ii)(II) is amended by striking ``15 
     percent'' and inserting ``the percentage applicable to the 
     lowest income bracket in subsection (c)''.
       (E) Subparagraphs (A)(ii)(I) and (B)(i) of section 1(h)(1) 
     are each amended by striking ``28 percent'' and inserting 
     ``27 percent''.
       (F) Section 531 is amended by striking ``39.6 percent of 
     the accumulated taxable income'' and inserting ``the product 
     of the accumulated taxable income and the percentage 
     applicable to the highest income bracket in section 1(c)''.
       (G) Section 541 is amended by striking ``39.6 percent of 
     the undistributed personal holding company income'' and 
     inserting ``the product of the undistributed personal holding 
     company income and the percentage applicable to the highest 
     income bracket in section 1(c)''.
       (H) Section 3402(p)(1)(B) is amended by striking 
     ``specified is 7, 15, 28, or 31 percent'' and all that 
     follows and inserting ``specified is--
       ``(i) 7 percent,
       ``(ii) a percentage applicable to 1 of the 3 lowest income 
     brackets in section 1(c), or
       ``(iii) such other percentage as is permitted under 
     regulations prescribed by the Secretary.''.
       (I) Section 3402(p)(2) is amended by striking ``15 percent 
     of such payment'' and inserting ``the product of such payment 
     and the percentage applicable to the lowest income bracket in 
     section 1(c)''.
       (J) Section 3402(q)(1) is amended by striking ``28 percent 
     of such payment'' and inserting ``the product of such payment 
     and the percentage applicable to the next to the lowest 
     income bracket in section 1(c)''.
       (K) Section 3402(r)(3) is amended by striking ``31 
     percent'' and inserting ``the rate applicable to the third 
     income bracket in such section''.
       (L) Section 3406(a)(1) is amended by striking ``31 percent 
     of such payment'' and inserting ``the product of such payment 
     and the percentage applicable to the third income bracket in 
     section 1(c)''.
       (b) Minimum Tax Rates.--Subparagraph (A) of section 
     55(b)(1) is amended by adding at the end the following new 
     clause:
       ``(iv) Rate reduction.--In the case of taxable years 
     beginning after December 31, 2004, each rate in clause (i) 
     shall be reduced by 1 percentage point.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

                     Subtitle B--Family Tax Relief

     SEC. 111. ELIMINATION OF MARRIAGE PENALTY IN STANDARD 
                   DEDUCTION.

       (a) In General.--Paragraph (2) of section 63(c) (relating 
     to standard deduction) is amended--
       (1) by striking ``$5,000'' in subparagraph (A) and 
     inserting ``200 percent of the dollar amount in effect under 
     subparagraph (C) for the taxable year'',
       (2) by adding ``or'' at the end of subparagraph (B),
       (3) by striking ``in the case of'' and all that follows in 
     subparagraph (C) and inserting ``in any other case.'', and
       (4) by striking subparagraph (D).
       (b) Phase-in.--Subsection (c) of section 63 is amended by 
     adding at the end the following new paragraph:
       ``(7) Phase-in of increase in basic standard deduction.--In 
     the case of taxable years beginning before January 1, 2005--
       ``(A) paragraph (2)(A) shall be applied by substituting for 
     `200 percent'--
       ``(i) `172.8 percent' in the case of taxable years 
     beginning during 2001,
       ``(ii) `180.1 percent' in the case of taxable years 
     beginning during 2002,
       ``(iii) `187.0 percent' in the case of taxable years 
     beginning during 2003, and
       ``(iv) `193.5 percent' in the case of taxable years 
     beginning during 2004, and
       ``(B) the basic standard deduction for a married individual 
     filing a separate return shall be one-half of the amount 
     applicable under paragraph (2)(A).
     If any amount determined under subparagraph (A) is not a 
     multiple of $50, such amount shall be rounded to the next 
     lowest multiple of $50.''.
       (c) Technical Amendments.--
       (1) Subparagraph (B) of section 1(f)(6) is amended by 
     striking ``(other than with'' and all that follows through 
     ``shall be applied'' and inserting ``(other than with respect 
     to sections 63(c)(4) and 151(d)(4)(A)) shall be applied''.
       (2) Paragraph (4) of section 63(c) is amended by adding at 
     the end the following flush sentence:
     ``The preceding sentence shall not apply to the amount 
     referred to in paragraph (2)(A).''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 112. EXCLUSION FOR FOSTER CARE PAYMENTS TO APPLY TO 
                   PAYMENTS BY QUALIFIED PLACEMENT AGENCIES.

       (a) In General.--The matter preceding subparagraph (B) of 
     section 131(b)(1) (defining qualified foster care payment) is 
     amended to read as follows:
       ``(1) In general.--The term `qualified foster care payment' 
     means any payment made pursuant to a foster care program of a 
     State or political subdivision thereof--
       ``(A) which is paid by--
       ``(i) the State or political subdivision thereof, or
       ``(ii) a qualified foster care placement agency, and''.
       (b) Qualified Foster Individuals To Include Individuals 
     Placed by Qualified Placement Agencies.--Subparagraph (B) of 
     section 131(b)(2) (defining qualified foster individual) is 
     amended to read as follows:
       ``(B) a qualified foster care placement agency.''.
       (c) Qualified Foster Care Placement Agency Defined.--
     Subsection (b) of section 131 is amended by redesignating 
     paragraph (3) as paragraph (4) and by inserting after 
     paragraph (2) the following new paragraph:
       ``(3) Qualified foster care placement agency.--The term 
     `qualified foster care placement agency' means any placement 
     agency which is licensed or certified by--
       ``(A) a State or political subdivision thereof, or
       ``(B) an entity designated by a State or political 
     subdivision thereof,
     for the foster care program of such State or political 
     subdivision to make foster care payments to providers of 
     foster care.''.

[[Page 19577]]

       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 113. EXPANSION OF ADOPTION CREDIT.

       (a) In General.--Section 23(a)(1) (relating to allowance of 
     credit) is amended to read as follows:
       ``(1) In general.--In the case of an individual, there 
     shall be allowed as a credit against the tax imposed by this 
     chapter--
       ``(A) in the case of an adoption of a child other than a 
     child with special needs, the amount of the qualified 
     adoption expenses paid or incurred by the taxpayer, and
       ``(B) in the case of an adoption of a child with special 
     needs, $10,000.''.
       (b) Dollar Limitation.--Section 23(b)(1) is amended--
       (1) by striking ``($6,000, in the case of a child with 
     special needs)'', and
       (2) by striking ``subsection (a)'' and inserting 
     ``subsection (a)(1)''.
       (c) Year Credit Allowed.--Section 23(a)(2) is amended by 
     adding at the end the following new flush sentence:
     ``In the case of the adoption of a child with special needs, 
     the credit allowed under paragraph (1) shall be allowed for 
     the taxable year in which the adoption becomes final.''.
       (d) Definition of Eligible Child.--
       (1) In general.--Section 23(d)(2) is amended to read as 
     follows:
       ``(2) Eligible child.--The term `eligible child' means any 
     individual who--
       ``(A) has not attained age 18, or
       ``(B) is physically or mentally incapable of caring for 
     himself.''.
       (2) Clarification of termination.--Section 23 is amended by 
     adding at the end the following new subsection:
       ``(i) Termination for Children Without Special Needs.--
     Except in the case of a child with special needs, this 
     section shall not apply to expenses paid or incurred after 
     December 31, 2001.''
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 114. MODIFICATION OF DEPENDENT CARE CREDIT.

       (a) Increase in Percentage of Employment-Related Expenses 
     Taken Into Account.--Subsection (a)(2) of section 21 
     (relating to expenses for household and dependent care 
     services necessary for gainful employment) is amended--
       (1) by striking ``30 percent'' and inserting ``35 percent 
     (40 percent in the case of taxable years beginning after 
     December 31, 2005)'',
       (2) by striking ``$2,000'' and inserting ``$1,000'', and
       (3) by striking ``$10,000'' and inserting ``$30,000''.
       (b) Indexing of Limit on Employment-Related Expenses.--
     Section 21(c) (relating to dollar limit on amount creditable) 
     is amended to read as follows:
       ``(c) Dollar Limit on Amount Creditable.--
       ``(1) In general.--The amount of the employment-related 
     expenses incurred during any taxable year which may be taken 
     into account under subsection (a) shall not exceed--
       ``(A) an amount equal to 50 percent of the amount 
     determined under subparagraph (B) if there is 1 qualifying 
     individual with respect to the taxpayer for such taxable 
     year, or
       ``(B) $4,800 if there are 2 or more qualifying individuals 
     with respect to the taxpayer for such taxable year.
     The amount determined under subparagraph (A) or (B) 
     (whichever is applicable) shall be reduced by the aggregate 
     amount excludable from gross income under section 129 for the 
     taxable year.
       ``(2) Cost-of-living adjustment.--
       ``(A) In general.--In the case of a taxable year beginning 
     after 2001, the $4,800 amount under paragraph (1)(B) shall be 
     increased by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2000' 
     for `calendar year 1992' in subparagraph (B) thereof.
       ``(B) Rounding rules.--If any amount after adjustment under 
     subparagraph (A) is not a multiple of $50, such amount shall 
     be rounded to the next lower multiple of $50.''.
       (c) Minimum Dependent Care Credit Allowed for Stay-at-Home 
     Parents.--Section 21(e) (relating to special rules) is 
     amended by adding at the end the following:
       ``(11) Minimum credit allowed for stay-at-home parents.--
       ``(A) In general.--Notwithstanding subsection (d), in the 
     case of any taxpayer with 1 or more qualifying individuals 
     described in subsection (b)(1)(A) under the age of 1, such 
     taxpayer shall be deemed to have employment-related expenses 
     for the taxable year with respect to each such qualifying 
     individual in an amount equal to the sum of--
       ``(i) $200 for each month in such taxable year during which 
     such qualifying individual is under the age of 1, and
       ``(ii) the amount of employment-related expenses otherwise 
     incurred for such qualifying individual for the taxable year 
     (determined under this section without regard to this 
     paragraph).
       ``(B) Election to not apply this paragraph.--This paragraph 
     shall not apply with respect to any qualifying individual for 
     any taxable year if the taxpayer elects to not have this 
     paragraph apply to such qualifying individual for such 
     taxable year.''.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 2001.
       (2) Subsection (c).--The amendment made by subsection (c) 
     shall apply to taxable years beginning after December 31, 
     2005.

     SEC. 115. MARRIAGE PENALTY RELIEF FOR EARNED INCOME CREDIT.

       (a) In General.--Paragraph (2) of section 32(b) (relating 
     to percentages and amounts) is amended--
       (1) by striking ``Amounts.--The earned'' and inserting 
     ``Amounts.--
       ``(A) In general.--Subject to subparagraph (B), the 
     earned'', and
       (2) by adding at the end the following new subparagraph:
       ``(B) Joint returns.--In the case of a joint return, the 
     phaseout amount determined under subparagraph (A) shall be 
     increased by $2,000.''.
       (b) Inflation adjustment.--Paragraph (1)(B) of section 
     32(j) (relating to inflation adjustments) is amended to read 
     as follows:
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined--
       ``(i) in the case of amounts in subsections (b)(1)(A) and 
     (i)(1), by substituting `calendar year 1995' for `calendar 
     year 1992' in subparagraph (B) thereof, and
       ``(ii) in the case of the $2,000 amount in subsection 
     (b)(1)(B), by substituting `calendar year 2005' for `calendar 
     year 1992' in subparagraph (B) of such section 1.''.
       (c) Rounding.--Section 32(j)(2)(A) (relating to rounding) 
     is amended by striking ``subsection (b)(2)'' and inserting 
     ``subsection (b)(2)(A) (after being increased under 
     subparagraph (B) thereof)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.

      Subtitle C--Repeal of Alternative Minimum Tax on Individuals

     SEC. 121. REPEAL OF ALTERNATIVE MINIMUM TAX ON INDIVIDUALS.

       (a) In General.--Subsection (a) of section 55 is amended by 
     adding at the end the following new flush sentence:
     ``For purposes of this title, the tentative minimum tax on 
     any taxpayer other than a corporation for any taxable year 
     beginning after December 31, 2007, shall be zero.''.
       (b) Reduction of Tax on Individuals Prior to Repeal.--
     Section 55 is amended by adding at the end the following new 
     subsection:
       ``(f) Phaseout of Tax on Individuals.--
       ``(1) In general.--The tax imposed by this section on a 
     taxpayer other than a corporation for any taxable year 
     beginning after December 31, 2004, and before January 1, 
     2008, shall be the applicable percentage of the tax which 
     would be imposed but for this subsection.
       ``(2) Applicable percentage.--For purposes of paragraph 
     (1), the applicable percentage shall be determined in 
     accordance with the following table:

``For taxable years beginning                            The applicable
  in calendar year--                                    percentage is--
    2005..........................................................80   
    2006..........................................................70   
    2007.......................................................60.''.  
       (c) Nonrefundable Personal Credits Fully Allowed Against 
     Regular Tax Liability.--
       (1) In general.--Subsection (a) of section 26 (relating to 
     limitation based on amount of tax) is amended to read as 
     follows:
       ``(a) Limitation Based on Amount of Tax.--The aggregate 
     amount of credits allowed by this subpart for the taxable 
     year shall not exceed the taxpayer's regular tax liability 
     for the taxable year.''.
       (2) Child credit.--Subsection (d) of section 24 is amended 
     by striking paragraph (2) and by redesignating paragraph (3) 
     as paragraph (2).
       (d) Limitation on Use of Credit for Prior Year Minimum Tax 
     Liability.--Subsection (c) of section 53 is amended to read 
     as follows:
       ``(c) Limitation.--
       ``(1) In general.--Except as otherwise provided in this 
     subsection, the credit allowable under subsection (a) for any 
     taxable year shall not exceed the excess (if any) of--
       ``(A) the regular tax liability of the taxpayer for such 
     taxable year reduced by the sum of the credits allowable 
     under subparts A, B, D, E, and F of this part, over
       ``(B) the tentative minimum tax for the taxable year.
       ``(2) Taxable years beginning after 2007.--In the case of 
     any taxable year beginning after 2007, the credit allowable 
     under subsection (a) to a taxpayer other than a corporation 
     for any taxable year shall not exceed 90 percent of the 
     excess (if any) of--
       ``(A) regular tax liability of the taxpayer for such 
     taxable year, over
       ``(B) the sum of the credits allowable under subparts A, B, 
     D, E, and F of this part.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

[[Page 19578]]



       TITLE II--RELIEF FROM TAXATION ON SAVINGS AND INVESTMENTS

                  Subtitle A--Capital Gains Tax Relief

     SEC. 201. REDUCTION IN INDIVIDUAL CAPITAL GAIN TAX RATES.

       (a) In General.--
       (1) Sections 1(h)(1)(B) and 55(b)(3)(B) are each amended by 
     striking ``10 percent'' and inserting ``8 percent''.
       (2) The following sections are each amended by striking 
     ``20 percent'' and inserting ``18 percent'':
       (A) Section 1(h)(1)(C).
       (B) Section 55(b)(3)(C).
       (C) Section 1445(e)(1).
       (D) The second sentence of section 7518(g)(6)(A).
       (E) The second sentence of section 607(h)(6)(A) of the 
     Merchant Marine Act, 1936.
       (3) Sections 1(h)(1)(D) and 55(b)(3)(D) are each amended by 
     striking ``25 percent'' and inserting ``23 percent''.
       (b) Conforming Amendments.--
       (1) Section 311 of the Taxpayer Relief Act of 1997 is 
     amended by striking subsection (e).
       (2) Section 1(h) is amended--
       (A) by striking paragraphs (2), (9), and (13),
       (B) by redesignating paragraphs (3) through (8) as 
     paragraphs (2) through (7), respectively, and
       (C) by redesignating paragraphs (10), (11), and (12) as 
     paragraphs (8), (9), and (10), respectively.
       (3) Paragraph (3) of section 55(b) is amended by striking 
     ``In the case of taxable years beginning after December 31, 
     2000, rules similar to the rules of section 1(h)(2) shall 
     apply for purposes of subparagraphs (B) and (C).''.
       (4) Paragraph (7) of section 57(a) is amended--
       (A) by striking ``42 percent'' and inserting ``28 
     percent'', and
       (B) by striking the last sentence.
       (c) Effective Dates.--
       (1) In general.--Except as otherwise provided by this 
     subsection, the amendments made by this section shall apply 
     to taxable years beginning after December 31, 1998.
       (2) Withholding.--The amendment made by subsection 
     (a)(2)(C) shall apply to amounts paid after the date of the 
     enactment of this Act.

     SEC. 202. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 
                   31, 1999, FOR PURPOSES OF DETERMINING GAIN.

       (a) In General.--Part II of subchapter O of chapter 1 
     (relating to basis rules of general application) is amended 
     by inserting after section 1021 the following new section:

     ``SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER 
                   DECEMBER 31, 1999, FOR PURPOSES OF DETERMINING 
                   GAIN.

       ``(a) General Rule.--
       ``(1) Indexed basis substituted for adjusted basis.--Solely 
     for purposes of determining gain on the sale or other 
     disposition by a taxpayer (other than a corporation) of an 
     indexed asset which has been held for more than 1 year, the 
     indexed basis of the asset shall be substituted for its 
     adjusted basis.
       ``(2) Exception for depreciation, etc.--The deductions for 
     depreciation, depletion, and amortization shall be determined 
     without regard to the application of paragraph (1) to the 
     taxpayer or any other person.
       ``(3) Exception for principal residences.--Paragraph (1) 
     shall not apply to any disposition of the principal residence 
     (within the meaning of section 121) of the taxpayer .
       ``(b) Indexed Asset.--
       ``(1) In general.--For purposes of this section, the term 
     `indexed asset' means--
       ``(A) common stock in a C corporation (other than a foreign 
     corporation), and
       ``(B) tangible property,
     which is a capital asset or property used in the trade or 
     business (as defined in section 1231(b)).
       ``(2) Stock in certain foreign corporations included.--For 
     purposes of this section--
       ``(A) In general.--The term `indexed asset' includes common 
     stock in a foreign corporation which is regularly traded on 
     an established securities market.
       ``(B) Exception.--Subparagraph (A) shall not apply to--
       ``(i) stock of a foreign investment company (within the 
     meaning of section 1246(b)),
       ``(ii) stock in a passive foreign investment company (as 
     defined in section 1296),
       ``(iii) stock in a foreign corporation held by a United 
     States person who meets the requirements of section 
     1248(a)(2), and
       ``(iv) stock in a foreign personal holding company (as 
     defined in section 552).
       ``(C) Treatment of american depository receipts.--An 
     American depository receipt for common stock in a foreign 
     corporation shall be treated as common stock in such 
     corporation.
       ``(c) Indexed Basis.--For purposes of this section--
       ``(1) General rule.--The indexed basis for any asset is--
       ``(A) the adjusted basis of the asset, increased by
       ``(B) the applicable inflation adjustment.
       ``(2) Applicable inflation adjustment.--The applicable 
     inflation adjustment for any asset is an amount equal to--
       ``(A) the adjusted basis of the asset, multiplied by
       ``(B) the percentage (if any) by which--
       ``(i) the chain-type price index for GDP for the last 
     calendar quarter ending before the asset is disposed of, 
     exceeds
       ``(ii) the chain-type price index for GDP for the last 
     calendar quarter ending before the asset was acquired by the 
     taxpayer.
     The percentage under subparagraph (B) shall be rounded to the 
     nearest \1/10\ of 1 percentage point.
       ``(3) Chain-type price index for GDP.--The chain-type price 
     index for GDP for any calendar quarter is such index for such 
     quarter (as shown in the last revision thereof released by 
     the Secretary of Commerce before the close of the following 
     calendar quarter).
       ``(d) Suspension of Holding Period Where Diminished Risk of 
     Loss; Treatment of Short Sales.--
       ``(1) In general.--If the taxpayer (or a related person) 
     enters into any transaction which substantially reduces the 
     risk of loss from holding any asset, such asset shall not be 
     treated as an indexed asset for the period of such reduced 
     risk.
       ``(2) Short sales.--
       ``(A) In general.--In the case of a short sale of an 
     indexed asset with a short sale period in excess of 1 year, 
     for purposes of this title, the amount realized shall be an 
     amount equal to the amount realized (determined without 
     regard to this paragraph) increased by the applicable 
     inflation adjustment. In applying subsection (c)(2) for 
     purposes of the preceding sentence, the date on which the 
     property is sold short shall be treated as the date of 
     acquisition and the closing date for the sale shall be 
     treated as the date of disposition.
       ``(B) Short sale period.--For purposes of subparagraph (A), 
     the short sale period begins on the day that the property is 
     sold and ends on the closing date for the sale.
       ``(e) Treatment of Regulated Investment Companies and Real 
     Estate Investment Trusts.--
       ``(1) Adjustments at entity level.--
       ``(A) In general.--Except as otherwise provided in this 
     paragraph, the adjustment under subsection (a) shall be 
     allowed to any qualified investment entity (including for 
     purposes of determining the earnings and profits of such 
     entity).
       ``(B) Exception for corporate shareholders.--Under 
     regulations--
       ``(i) in the case of a distribution by a qualified 
     investment entity (directly or indirectly) to a corporation--

       ``(I) the determination of whether such distribution is a 
     dividend shall be made without regard to this section, and
       ``(II) the amount treated as gain by reason of the receipt 
     of any capital gain dividend shall be increased by the 
     percentage by which the entity's net capital gain for the 
     taxable year (determined without regard to this section) 
     exceeds the entity's net capital gain for such year 
     determined with regard to this section, and

       ``(ii) there shall be other appropriate adjustments 
     (including deemed distributions) so as to ensure that the 
     benefits of this section are not allowed (directly or 
     indirectly) to corporate shareholders of qualified investment 
     entities.
     For purposes of the preceding sentence, any amount includible 
     in gross income under section 852(b)(3)(D) shall be treated 
     as a capital gain dividend and an S corporation shall not be 
     treated as a corporation.
       ``(C) Exception for qualification purposes.--This section 
     shall not apply for purposes of sections 851(b) and 856(c).
       ``(D) Exception for certain taxes imposed at entity 
     level.--
       ``(i) Tax on failure to distribute entire gain.--If any 
     amount is subject to tax under section 852(b)(3)(A) for any 
     taxable year, the amount on which tax is imposed under such 
     section shall be increased by the percentage determined under 
     subparagraph (B)(i)(II). A similar rule shall apply in the 
     case of any amount subject to tax under paragraph (2) or (3) 
     of section 857(b) to the extent attributable to the excess of 
     the net capital gain over the deduction for dividends paid 
     determined with reference to capital gain dividends only. The 
     first sentence of this clause shall not apply to so much of 
     the amount subject to tax under section 852(b)(3)(A) as is 
     designated by the company under section 852(b)(3)(D).
       ``(ii) Other taxes.--This section shall not apply for 
     purposes of determining the amount of any tax imposed by 
     paragraph (4), (5), or (6) of section 857(b).
       ``(2) Adjustments to interests held in entity.--
       ``(A) Regulated investment companies.--Stock in a regulated 
     investment company (within the meaning of section 851) shall 
     be an indexed asset for any calendar quarter in the same 
     ratio as--
       ``(i) the average of the fair market values of the indexed 
     assets held by such company at the close of each month during 
     such quarter, bears to
       ``(ii) the average of the fair market values of all assets 
     held by such company at the close of each such month.
       ``(B) Real estate investment trusts.--Stock in a real 
     estate investment trust (within the meaning of section 856) 
     shall be an indexed asset for any calendar quarter in the 
     same ratio as--

[[Page 19579]]

       ``(i) the fair market value of the indexed assets held by 
     such trust at the close of such quarter, bears to
       ``(ii) the fair market value of all assets held by such 
     trust at the close of such quarter.
       ``(C) Ratio of 80 percent or more.--If the ratio for any 
     calendar quarter determined under subparagraph (A) or (B) 
     would (but for this subparagraph) be 80 percent or more, such 
     ratio for such quarter shall be 100 percent.
       ``(D) Ratio of 20 percent or less.--If the ratio for any 
     calendar quarter determined under subparagraph (A) or (B) 
     would (but for this subparagraph) be 20 percent or less, such 
     ratio for such quarter shall be zero.
       ``(E) Look-thru of partnerships.--For purposes of this 
     paragraph, a qualified investment entity which holds a 
     partnership interest shall be treated (in lieu of holding a 
     partnership interest) as holding its proportionate share of 
     the assets held by the partnership.
       ``(3) Treatment of return of capital distributions.--Except 
     as otherwise provided by the Secretary, a distribution with 
     respect to stock in a qualified investment entity which is 
     not a dividend and which results in a reduction in the 
     adjusted basis of such stock shall be treated as allocable to 
     stock acquired by the taxpayer in the order in which such 
     stock was acquired.
       ``(4) Qualified investment entity.--For purposes of this 
     subsection, the term `qualified investment entity' means--
       ``(A) a regulated investment company (within the meaning of 
     section 851), and
       ``(B) a real estate investment trust (within the meaning of 
     section 856).
       ``(f) Other Pass-Thru Entities.--
       ``(1) Partnerships.--
       ``(A) In general.--In the case of a partnership, the 
     adjustment made under subsection (a) at the partnership level 
     shall be passed through to the partners.
       ``(B) Special rule in the case of section 754 elections.--
     In the case of a transfer of an interest in a partnership 
     with respect to which the election provided in section 754 is 
     in effect--
       ``(i) the adjustment under section 743(b)(1) shall, with 
     respect to the transferor partner, be treated as a sale of 
     the partnership assets for purposes of applying this section, 
     and
       ``(ii) with respect to the transferee partner, the 
     partnership's holding period for purposes of this section in 
     such assets shall be treated as beginning on the date of such 
     adjustment.
       ``(2) S corporations.--In the case of an S corporation, the 
     adjustment made under subsection (a) at the corporate level 
     shall be passed through to the shareholders. This section 
     shall not apply for purposes of determining the amount of any 
     tax imposed by section 1374 or 1375.
       ``(3) Common trust funds.--In the case of a common trust 
     fund, the adjustment made under subsection (a) at the trust 
     level shall be passed through to the participants.
       ``(4) Indexing adjustment disregarded in determining loss 
     on sale of interest in entity.--Notwithstanding the preceding 
     provisions of this subsection, for purposes of determining 
     the amount of any loss on a sale or exchange of an interest 
     in a partnership, S corporation, or common trust fund, the 
     adjustment made under subsection (a) shall not be taken into 
     account in determining the adjusted basis of such interest.
       ``(g) Dispositions Between Related Persons.--
       ``(1) In general.--This section shall not apply to any sale 
     or other disposition of property between related persons 
     except to the extent that the basis of such property in the 
     hands of the transferee is a substituted basis.
       ``(2) Related persons defined.--For purposes of this 
     section, the term `related persons' means--
       ``(A) persons bearing a relationship set forth in section 
     267(b), and
       ``(B) persons treated as single employer under subsection 
     (b) or (c) of section 414.
       ``(h) Transfers To Increase Indexing Adjustment.--If any 
     person transfers cash, debt, or any other property to another 
     person and the principal purpose of such transfer is to 
     secure or increase an adjustment under subsection (a), the 
     Secretary may disallow part or all of such adjustment or 
     increase.
       ``(i) Special Rules.--For purposes of this section--
       ``(1) Treatment of improvements, etc.--If there is an 
     addition to the adjusted basis of any tangible property or of 
     any stock in a corporation during the taxable year by reason 
     of an improvement to such property or a contribution to 
     capital of such corporation--
       ``(A) such addition shall never be taken into account under 
     subsection (c)(1)(A) if the aggregate amount thereof during 
     the taxable year with respect to such property or stock is 
     less than $1,000, and
       ``(B) such addition shall be treated as a separate asset 
     acquired at the close of such taxable year if the aggregate 
     amount thereof during the taxable year with respect to such 
     property or stock is $1,000 or more.
     A rule similar to the rule of the preceding sentence shall 
     apply to any other portion of an asset to the extent that 
     separate treatment of such portion is appropriate to carry 
     out the purposes of this section.
       ``(2) Assets which are not indexed assets throughout 
     holding period.--The applicable inflation adjustment shall be 
     appropriately reduced for periods during which the asset was 
     not an indexed asset.
       ``(3) Treatment of certain distributions.--A distribution 
     with respect to stock in a corporation which is not a 
     dividend shall be treated as a disposition.
       ``(4) Acquisition date where there has been prior 
     application of subsection (a)(1) with respect to the 
     taxpayer.--If there has been a prior application of 
     subsection (a)(1) to an asset while such asset was held by 
     the taxpayer, the date of acquisition of such asset by the 
     taxpayer shall be treated as not earlier than the date of the 
     most recent such prior application.
       ``(5) Collapsible corporations.--The application of section 
     341(a) (relating to collapsible corporations) shall be 
     determined without regard to this section.
       ``(j) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (b) Clerical Amendment.--The table of sections for part II 
     of subchapter O of chapter 1 is amended by inserting after 
     the item relating to section 1021 the following new item:

``Sec. 1022. Indexing of certain assets acquired after December 31, 
              1999, for purposes of determining gain.''.
       (c) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to the disposition of any property the holding period 
     of which begins after December 31, 1999.
       (2) Certain transactions between related persons.--The 
     amendments made by this section shall not apply to the 
     disposition of any property acquired after December 31, 1999, 
     from a related person (as defined in section 1022(g)(2) of 
     the Internal Revenue Code of 1986, as added by this section) 
     if--
       (A) such property was so acquired for a price less than the 
     property's fair market value, and
       (B) the amendments made by this section did not apply to 
     such property in the hands of such related person.
       (d) Election To Recognize Gain on Assets Held on January 1, 
     2000.--For purposes of the Internal Revenue Code of 1986--
       (1) In general.--A taxpayer other than a corporation may 
     elect to treat--
       (A) any readily tradable stock (which is an indexed asset) 
     held by such taxpayer on January 1, 2000, and not sold before 
     the next business day after such date, as having been sold on 
     such next business day for an amount equal to its closing 
     market price on such next business day (and as having been 
     reacquired on such next business day for an amount equal to 
     such closing market price), and
       (B) any other indexed asset held by the taxpayer on January 
     1, 2000, as having been sold on such date for an amount equal 
     to its fair market value on such date (and as having been 
     reacquired on such date for an amount equal to such fair 
     market value).
       (2) Treatment of gain or loss.--
       (A) Any gain resulting from an election under paragraph (1) 
     shall be treated as received or accrued on the date the asset 
     is treated as sold under paragraph (1) and shall be 
     recognized notwithstanding any provision of the Internal 
     Revenue Code of 1986.
       (B) Any loss resulting from an election under paragraph (1) 
     shall not be allowed for any taxable year.
       (3) Election.--An election under paragraph (1) shall be 
     made in such manner as the Secretary of the Treasury or his 
     delegate may prescribe and shall specify the assets for which 
     such election is made. Such an election, once made with 
     respect to any asset, shall be irrevocable.
       (4) Readily tradable stock.--For purposes of this 
     subsection, the term ``readily tradable stock'' means any 
     stock which, as of January 1, 2000, is readily tradable on an 
     established securities market or otherwise.

     SEC. 203. CAPITAL GAINS TAX RATES APPLIED TO CAPITAL GAINS OF 
                   DESIGNATED SETTLEMENT FUNDS.

       (a) In General.--Paragraph (1) of section 468B(b) (relating 
     to taxation of designated settlement funds) is amended by 
     inserting ``(subject to section 1(h))'' after ``maximum 
     rate''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 204. SPECIAL RULE FOR MEMBERS OF UNIFORMED SERVICES AND 
                   FOREIGN SERVICE, AND OTHER EMPLOYEES, IN 
                   DETERMINING EXCLUSION OF GAIN FROM SALE OF 
                   PRINCIPAL RESIDENCE.

       (a) In General.--Subsection (d) of section 121 (relating to 
     exclusion of gain from sale of principal residence) is 
     amended by adding at the end the following new paragraphs:
       ``(9) Members of uniformed services and foreign service.--
       ``(A) In general.--The running of the 5-year period 
     described in subsection (a) shall be suspended with respect 
     to an individual during any time that such individual or such 
     individual's spouse is serving on qualified official extended 
     duty as a member of the uniformed services or of the Foreign 
     Service.
       ``(B) Qualified official extended duty.--For purposes of 
     this paragraph--

[[Page 19580]]

       ``(i) In general.--The term `qualified official extended 
     duty' means any period of extended duty as a member of the 
     uniformed services or a member of the Foreign Service during 
     which the member serves at a duty station which is at least 
     50 miles from such property or is under Government orders to 
     reside in Government quarters.
       ``(ii) Uniformed services.--The term `uniformed services' 
     has the meaning given such term by section 101(a)(5) of title 
     10, United States Code, as in effect on the date of the 
     enactment of the Taxpayer Refund and Relief Act of 1999.
       ``(iii) Foreign service of the united states.--The term 
     `member of the Foreign Service' has the meaning given the 
     term `member of the Service' by paragraph (1), (2), (3), (4), 
     or (5) of section 103 of the Foreign Service Act of 1980, as 
     in effect on the date of the enactment of the Taxpayer Refund 
     and Relief Act of 1999.
       ``(iv) Extended duty.--The term `extended duty' means any 
     period of active duty pursuant to a call or order to such 
     duty for a period in excess of 90 days or for an indefinite 
     period.
       ``(10) Other employees.--
       ``(A) In general.--The running of the 5-year period 
     described in subsection (a) shall be suspended with respect 
     to an individual during any time that such individual or such 
     individual's spouse is serving as an employee for a period in 
     excess of 90 days in an assignment by such employee's 
     employer outside the United States.
       ``(B) Limitations and special rules.--
       ``(i) Maximum period of suspension.--The suspension under 
     subparagraph (A) with respect to a principal residence shall 
     not exceed (in the aggregate) 5 years.
       ``(ii) Members of uniformed services and foreign service.--
     Subparagraph (A) shall not apply to an individual to whom 
     paragraph (9) applies.
       ``(iii) Self-employed individual not considered an 
     employee.--For purposes of this paragraph, the term 
     `employee' does not include an individual who is an employee 
     within the meaning of section 401(c)(1) (relating to self-
     employed individuals).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to sales and exchanges after the date of the 
     enactment of this Act.

     SEC. 205. 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 enactment of this Act.

     SEC. 206. WORTHLESS SECURITIES OF FINANCIAL INSTITUTIONS.

       (a) In General.--The first sentence following section 
     165(g)(3)(B) (relating to securities of affiliated 
     corporation) is amended to read as follows: ``In computing 
     gross receipts for purposes of the preceding sentence, (i) 
     gross receipts from sales or exchanges of stocks and 
     securities shall be taken into account only to the extent of 
     gains therefrom, and (ii) gross receipts from royalties, 
     rents, dividends, interest, annuities, and gains from sales 
     or exchanges of stocks and securities derived from (or 
     directly related to) the conduct of an active trade or 
     business of an insurance company subject to tax under 
     subchapter L or a qualified financial institution (as defined 
     in subsection (l)(3)) shall be treated as from such sources 
     other than royalties, rents, dividends, interest, annuities, 
     and gains.''.

[[Page 19581]]

       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to securities which become worthless in taxable 
     years beginning after December 31, 1999.

             Subtitle B--Individual Retirement Arrangements

     SEC. 211. MODIFICATION OF DEDUCTION LIMITS FOR IRA 
                   CONTRIBUTIONS.

       (a) Increase in Contribution Limit.--
       (1) In general.--Paragraph (1)(A) of section 219(b) 
     (relating to maximum amount of deduction) is amended by 
     striking ``$2,000'' and inserting ``the deductible amount''.
       (2) Deductible amount.--Section 219(b) is amended by adding 
     at the end the following new paragraph:
       ``(5) Deductible amount.--For purposes of paragraph 
     (1)(A)--
       ``(A) In general.--The deductible amount shall be 
     determined in accordance with the following table:

``For taxable years beginning in:             The deductible amount is:
    512001, 2002, and 2003......................................$3,000 
    2004 and 2005...............................................$4,000 
    2006 and thereafter.........................................$5,000.
       ``(B) Cost-of-living adjustment.--
       ``(i) In general.--In the case of any taxable year 
     beginning in a calendar year after 2006, the $5,000 amount 
     under subparagraph (A) shall be increased by an amount equal 
     to--

       ``(I) such dollar amount, multiplied by
       ``(II) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2005' 
     for `calendar year 1992' in subparagraph (B) thereof.

       ``(ii) Rounding rules.--If any amount after adjustment 
     under clause (i) is not a multiple of $100, such amount shall 
     be rounded to the next lower multiple of $100.''.
       (b) Conforming Amendments.--
       (1) Section 408(a)(1) is amended by striking ``in excess of 
     $2,000 on behalf of any individual'' and inserting ``on 
     behalf of any individual in excess of the amount in effect 
     for such taxable year under section 219(b)(1)(A)''.
       (2) Section 408(b)(2)(B) is amended by striking ``$2,000'' 
     and inserting ``the dollar amount in effect under section 
     219(b)(1)(A)''.
       (3) Section 408(b) is amended by striking ``$2,000'' in the 
     matter following paragraph (4) and inserting ``the dollar 
     amount in effect under section 219(b)(1)(A)''.
       (4) Section 408(j) is amended by striking ``$2,000''.
       (5) Section 408(p)(8) is amended by striking ``$2,000'' and 
     inserting ``the dollar amount in effect under section 
     219(b)(1)(A)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 212. MODIFICATION OF INCOME LIMITS ON CONTRIBUTIONS AND 
                   ROLLOVERS TO ROTH IRAS.

       (a) Repeal of AGI Limit on Contributions.--Section 
     408A(c)(3) (relating to limits based on modified adjusted 
     gross income) is amended--
       (1) by striking clause (ii) of subparagraph (A) and 
     inserting:
       ``(ii) $10,000.'', and
       (2) by striking clause (ii) of subparagraph (C) and 
     inserting:
       ``(ii) the applicable dollar amount is--

       ``(I) $200,000 in the case of a taxpayer filing a joint 
     return, and
       ``(II) $100,000 in the case of any other taxpayer.''

       (b) Increase in AGI Limit for Rollover Contributions.--
     Section 408A(c)(3)(B) (relating to rollover from IRA) is 
     amended to read as follows:
       ``(B) Rollover from ira.--A taxpayer shall not be allowed 
     to make a qualified rollover contribution from an individual 
     retirement plan other than a Roth IRA during any taxable year 
     if, for the taxable year of the distribution to which the 
     contribution relates, the taxpayer's adjusted gross income 
     exceeds $100,000 ($200,000 in the case of a taxpayer filing a 
     joint return).''
       (c) Effective Dates.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 213. DEEMED IRAS UNDER EMPLOYER PLANS.

       (a) In General.--Section 408 (relating to individual 
     retirement accounts) is amended by redesignating subsection 
     (q) as subsection (r) and by inserting after subsection (p) 
     the following new subsection:
       ``(q) Deemed IRAs Under Qualified Employer Plans.--
       ``(1) General rule.--If--
       ``(A) a qualified employer plan elects to allow employees 
     to make voluntary employee contributions to a separate 
     account or annuity established under the plan, and
       ``(B) under the terms of the qualified employer plan, such 
     account or annuity meets the applicable requirements of this 
     section or section 408A for an individual retirement account 
     or annuity,
     then such account or annuity shall be treated for purposes of 
     this title in the same manner as an individual retirement 
     plan (and contributions to such account or annuity as 
     contributions to an individual retirement plan). For purposes 
     of subparagraph (B), the requirements of subsection (a)(5) 
     shall not apply.
       ``(2) Special rules for qualified employer plans.--For 
     purposes of this title--
       ``(A) a qualified employer plan shall not fail to meet any 
     requirement of this title solely by reason of establishing 
     and maintaining a program described in paragraph (1), and
       ``(B) any account or annuity described in paragraph (1), 
     and any contribution to the account or annuity, shall not be 
     subject to any requirement of this title applicable to a 
     qualified employer plan or taken into account in applying any 
     such requirement to any other contributions under the plan.
       ``(3) Definitions.--For purposes of this subsection--
       ``(A) Qualified employer plan.--The term `qualified 
     employer plan' has the meaning given such term by section 
     72(p)(4).
       ``(B) Voluntary employee contribution.--The term `voluntary 
     employee contribution' means any contribution (other than a 
     mandatory contribution within the meaning of section 
     411(c)(2)(C))--
       ``(i) which is made by an individual as an employee under a 
     qualified employer plan which allows employees to elect to 
     make contributions described in paragraph (1), and
       ``(ii) with respect to which the individual has designated 
     the contribution as a contribution to which this subsection 
     applies.''.
       (b) Amendment of ERISA.--
       (1) In general.--Section 4 of the Employee Retirement 
     Income Security Act of 1974 (29 U.S.C. 1003) is amended by 
     adding at the end the following new subsection:
       ``(c) If a pension plan allows an employee to elect to make 
     voluntary employee contributions to accounts and annuities as 
     provided in section 408(q) of the Internal Revenue Code of 
     1986, such accounts and annuities (and contributions thereto) 
     shall not be treated as part of such plan (or as a separate 
     pension plan) for purposes of any provision of this title 
     other than section 403(c), 404, or 405 (relating to exclusive 
     benefit, and fiduciary and co-fiduciary responsibilities).''.
       (2) Conforming amendment.--Section 4(a) of such Act (29 
     U.S.C. 1003(a)) is amended by inserting ``or (c)'' after 
     ``subsection (b)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 1999.

     SEC. 214. CATCHUP CONTRIBUTIONS TO IRAS BY INDIVIDUALS AGE 50 
                   OR OVER.

       (a) In General.--Section 219(b), as amended by section 211, 
     is amended by adding at the end the following new paragraph:
       ``(6) Catchup contributions.--
       ``(A) In general.--In the case of an individual who has 
     attained the age of 50 before the close of the taxable year, 
     the dollar amount in effect under paragraph (1)(A) for such 
     taxable year shall be equal to the applicable percentage of 
     such amount determined without regard to this paragraph.
       ``(B) Applicable percentage.--For purposes of this 
     paragraph, the applicable percentage shall be determined in 
     accordance with the following table:

``For taxable years beginning in:         The applicable percentage is:
    2001...................................................110 percent 
    2002...................................................120 percent 
    2003...................................................130 percent 
    2004...................................................140 percent 
    2005 and thereafter..................................150percent.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to contributions in taxable years beginning after 
     December 31, 2000.

               TITLE III--ALTERNATIVE MINIMUM TAX REFORM

     SEC. 301. MODIFICATION OF ALTERNATIVE MINIMUM TAX ON 
                   CORPORATIONS.

       (a) Limitation on Use of Credit for Prior Year Minimum Tax 
     Liability.--Subsection (c) of section 53, as amended by 
     section 121, is amended by redesignating paragraph (2) as 
     paragraph (3) and by inserting after paragraph (1) the 
     following new paragraph:
       ``(2) Corporations for taxable years beginning after 
     2004.--In the case of a corporation for any taxable year 
     beginning after 2004, the limitation under paragraph (1) 
     shall be increased by the lesser of--
       ``(A) 50 percent of the tentative minimum tax for the 
     taxable year, or
       ``(B) the excess (if any) of the tentative minimum tax for 
     the taxable year over the regular tax for the taxable year.''
       (b) Repeal of 90 Percent Limitation on NOL Deduction.--
     Section 56(d)(1)(A) is amended by striking ``90 percent'' and 
     inserting ``90 percent (100 percent in the case of a 
     corporation)''.
       (c) Effective Dates.--
       (1) Subsection (a).--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2004.
       (2) Subsection (b).--The amendment made by subsection (b) 
     shall apply to taxable years beginning after December 31, 
     2001.

     SEC. 302. REPEAL OF 90 PERCENT LIMITATION ON FOREIGN TAX 
                   CREDIT.

       (a) In General.--Section 59(a) (relating to alternative 
     minimum tax foreign tax credit) is amended by striking 
     paragraph (2) and by redesignating paragraphs (3) and (4) as 
     paragraphs (2) and (3), respectively.
       (b) Conforming Amendment.--Section 53(d)(1)(B)(i)(II) is 
     amended by striking ``and if section 59(a)(2) did not 
     apply''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

[[Page 19582]]



                 TITLE IV--EDUCATION SAVINGS INCENTIVES

     SEC. 401. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT 
                   ACCOUNTS.

       (a) Maximum Annual Contributions.--
       (1) In general.--Section 530(b)(1)(A)(iii) (defining 
     education individual retirement account) is amended by 
     striking ``$500'' and inserting ``$2,000''.
       (2) Conforming amendment.--Section 4973(e)(1)(A) is amended 
     by striking ``$500'' and inserting ``$2,000''.
       (b) Tax-Free Expenditures for Elementary and Secondary 
     School Expenses.--
       (1) In general.--Section 530(b)(2) (defining qualified 
     higher education expenses) is amended to read as follows:
       ``(2) Qualified education expenses.--
       ``(A) In general.--The term `qualified education expenses' 
     means--
       ``(i) qualified higher education expenses (as defined in 
     section 529(e)(3)), and
       ``(ii) qualified elementary and secondary education 
     expenses (as defined in paragraph (4)).
       ``(B) Qualified state tuition programs.--Such term shall 
     include any contribution to a qualified State tuition program 
     (as defined in section 529(b)) on behalf of the designated 
     beneficiary (as defined in section 529(e)(1)); but there 
     shall be no increase in the investment in the contract for 
     purposes of applying section 72 by reason of any portion of 
     such contribution which is not includible in gross income by 
     reason of subsection (d)(2).''.
       (2) Qualified elementary and secondary education 
     expenses.--Section 530(b) (relating to definitions and 
     special rules) is amended by adding at the end the following 
     new paragraph:
       ``(4) Qualified elementary and secondary education 
     expenses.--
       ``(A) In general.--The term `qualified elementary and 
     secondary education expenses' means--
       ``(i) expenses for tuition, fees, academic tutoring, 
     special needs services, books, supplies, computer equipment 
     (including related software and services), and other 
     equipment which are incurred in connection with the 
     enrollment or attendance of the designated beneficiary of the 
     trust as an elementary or secondary school student at a 
     public, private, or religious school, and
       ``(ii) expenses for room and board, uniforms, 
     transportation, and supplementary items and services 
     (including extended day programs) which are required or 
     provided by a public, private, or religious school in 
     connection with such enrollment or attendance.
       ``(B) Special rule for homeschooling.--Such term shall 
     include expenses described in subparagraph (A)(i) in 
     connection with education provided by homeschooling if the 
     requirements of any applicable State or local law are met 
     with respect to such education.
       ``(C) School.--The term `school' means any school which 
     provides elementary education or secondary education 
     (kindergarten through grade 12), as determined under State 
     law.''.
       (3) Conforming amendments.--Section 530 is amended--
       (A) by striking ``higher'' each place it appears in 
     subsections (b)(1) and (d)(2), and
       (B) by striking ``higher'' in the heading for subsection 
     (d)(2).
       (c) Waiver of Age Limitations for Children With Special 
     Needs.--Section 530(b)(1) (defining education individual 
     retirement account) is amended by adding at the end the 
     following flush sentence:
     ``The age limitations in subparagraphs (A)(ii) and (E) and 
     paragraphs (5) and (6) of subsection (d) shall not apply to 
     any designated beneficiary with special needs (as determined 
     under regulations prescribed by the Secretary).''.
       (d) Entities Permitted To Contribute to Accounts.--Section 
     530(c)(1) (relating to reduction in permitted contributions 
     based on adjusted gross income) is amended by striking ``The 
     maximum amount which a contributor'' and inserting ``In the 
     case of a contributor who is an individual, the maximum 
     amount the contributor''.
       (e) Time When Contributions Deemed Made.--
       (1) In general.--Section 530(b) (relating to definitions 
     and special rules), as amended by subsection (b)(2), is 
     amended by adding at the end the following new paragraph:
       ``(5) Time when contributions deemed made.--An individual 
     shall be deemed to have made a contribution to an education 
     individual retirement account on the last day of the 
     preceding taxable year if the contribution is made on account 
     of such taxable year and is made not later than the time 
     prescribed by law for filing the return for such taxable year 
     (not including extensions thereof).''.
       (2) Extension of time to return excess contributions.--
     Subparagraph (C) of section 530(d)(4) (relating to additional 
     tax for distributions not used for educational expenses) is 
     amended--
       (A) by striking clause (i) and inserting the following new 
     clause:
       ``(i) such distribution is made before the 1st day of the 
     6th month of the taxable year following the taxable year, 
     and'', and
       (B) by striking ``due date of return'' in the heading and 
     inserting ``certain date''.
       (f) Coordination With Hope and Lifetime Learning Credits 
     and Qualified Tuition Programs.--
       (1) In general.--Section 530(d)(2)(C) is amended to read as 
     follows:
       ``(C) Coordination with hope and lifetime learning credits 
     and qualified tuition programs.--For purposes of subparagraph 
     (A)--
       ``(i) Credit coordination.--The total amount of qualified 
     higher education expenses with respect to an individual for 
     the taxable year shall be reduced--

       ``(I) as provided in section 25A(g)(2), and
       ``(II) by the amount of such expenses which were taken into 
     account in determining the credit allowed to the taxpayer or 
     any other person under section 25A.

       ``(ii) Coordination with qualified tuition programs.--If, 
     with respect to an individual for any taxable year--

       ``(I) the aggregate distributions during such year to which 
     subparagraph (A) and section 529(c)(3)(B) apply, exceed
       ``(II) the total amount of qualified education expenses 
     (after the application of clause (i)) for such year,

     the taxpayer shall allocate such expenses among such 
     distributions for purposes of determining the amount of the 
     exclusion under subparagraph (A) and section 529(c)(3)(B).''.
       (2) Conforming amendments.--
       (A) Subsection (e) of section 25A is amended to read as 
     follows:
       ``(e) Election Not To Have Section Apply.--A taxpayer may 
     elect not to have this section apply with respect to the 
     qualified tuition and related expenses of an individual for 
     any taxable year.''.
       (B) Section 135(d)(2)(A) is amended by striking 
     ``allowable'' and inserting ``allowed''.
       (C) Section 530(d)(2)(D) is amended--
       (i) by striking ``or credit'', and
       (ii) by striking ``credit or'' in the heading.
       (D) Section 4973(e)(1) is amended by adding ``and'' at the 
     end of subparagraph (A), by striking subparagraph (B), and by 
     redesignating subparagraph (C) as subparagraph (B).
       (g) Renaming Education Individual Retirement Accounts as 
     Education Savings Accounts.--
       (1) In general.--
       (A) Section 530 (as amended by the preceding provisions of 
     this section) is amended by striking ``education individual 
     retirement account'' each place it appears and inserting 
     ``education savings account''.
       (B) The heading for paragraph (1) of section 530(b) is 
     amended by striking ``Education individual retirement 
     account'' and inserting ``Education savings account''.
       (C) The heading for section 530 is amended to read as 
     follows:

     ``SEC. 530. EDUCATION SAVINGS ACCOUNTS.''.

       (D) The item in the table of contents for part VII of 
     subchapter F of chapter 1 relating to section 530 is amended 
     to read as follows:

``Sec. 530. Education savings accounts.''.
       (2) Conforming amendments.--
       (A) The following provisions are each amended by striking 
     ``education individual retirement'' each place it appears and 
     inserting ``education savings'':
       (i) Section 25A(e)(2).
       (ii) Section 26(b)(2)(E).
       (iii) Section 72(e)(9).
       (iv) Section 135(c)(2)(C).
       (v) Subsections (a) and (e) of section 4973.
       (vi) Subsections (c) and (e) of section 4975.
       (vii) Section 6693(a)(2)(D).
       (B) The headings for each of the following provisions are 
     amended by striking ``education individual retirement 
     accounts'' each place it appears and inserting ``education 
     savings accounts''.
       (i) Section 72(e)(9).
       (ii) Section 135(c)(2)(C).
       (iii) Section 4973(e).
       (iv) Section 4975(c)(5).
       (h) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2000.
       (2) Subsection (g).--The amendments made by subsection (g) 
     shall take effect on the date of the enactment of this Act.

     SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

       (a) Short Title.--This section may be cited as the 
     ``Collegiate Learning and Student Savings (CLASS) Act''.
       (b) Eligible Educational Institutions Permitted To Maintain 
     Qualified Tuition Programs.--
       (1) In general.--Section 529(b)(1) (defining qualified 
     State tuition program) is amended by inserting ``or by 1 or 
     more eligible educational institutions'' after ``maintained 
     by a State or agency or instrumentality thereof ''.
       (2) Private qualified tuition programs limited to benefit 
     plans.--Clause (ii) of section 529(b)(1)(A) is amended by 
     inserting ``in the case of a program established and 
     maintained by a State or agency or instrumentality thereof,'' 
     before ``may make''.
       (3) Conforming amendments.--
       (A) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D), 529, 
     530(b)(2)(B), 4973(e), and 6693(a)(2)(C) are each amended by 
     striking ``qualified State tuition'' each place it appears 
     and inserting ``qualified tuition''.
       (B) The headings for sections 72(e)(9) and 135(c)(2)(C) are 
     each amended by striking ``qualified state tuition'' and 
     inserting ``qualified tuition''.

[[Page 19583]]

       (C) The headings for sections 529(b) and 530(b)(2)(B) are 
     each amended by striking ``Qualified state tuition'' and 
     inserting ``Qualified tuition''.
       (D) The heading for section 529 is amended by striking 
     ``state''.
       (E) The item relating to section 529 in the table of 
     sections for part VIII of subchapter F of chapter 1 is 
     amended by striking ``State''.
       (c) Exclusion From Gross Income of Education Distributions 
     From Qualified Tuition Programs.--
       (1) In general.--Section 529(c)(3)(B) (relating to 
     distributions) is amended to read as follows:
       ``(B) Distributions for qualified higher education 
     expenses.--For purposes of this paragraph--
       ``(i) In-kind distributions.--No amount shall be includible 
     in gross income under subparagraph (A) by reason of a 
     distribution which consists of providing a benefit to the 
     distributee which, if paid for by the distributee, would 
     constitute payment of a qualified higher education expense.
       ``(ii) Cash distributions.--In the case of distributions 
     not described in clause (i), if--

       ``(I) such distributions do not exceed the qualified higher 
     education expenses (reduced by expenses described in clause 
     (i)), no amount shall be includible in gross income, and
       ``(II) in any other case, the amount otherwise includible 
     in gross income shall be reduced by an amount which bears the 
     same ratio to such amount as such expenses bear to such 
     distributions.

       ``(iii) Exception for institutional programs.--In the case 
     of any taxable year beginning before January 1, 2004, clauses 
     (i) and (ii) shall not apply with respect to any distribution 
     during such taxable year under a qualified tuition program 
     established and maintained by 1 or more eligible educational 
     institutions.
       ``(iv) Treatment as distributions.--Any benefit furnished 
     to a designated beneficiary under a qualified tuition program 
     shall be treated as a distribution to the beneficiary for 
     purposes of this paragraph.
       ``(v) Coordination with hope and lifetime learning 
     credits.--The total amount of qualified higher education 
     expenses with respect to an individual for the taxable year 
     shall be reduced--

       ``(I) as provided in section 25A(g)(2), and
       ``(II) by the amount of such expenses which were taken into 
     account in determining the credit allowed to the taxpayer or 
     any other person under section 25A.

       ``(vi) Coordination with education individual retirement 
     accounts.--If, with respect to an individual for any taxable 
     year--

       ``(I) the aggregate distributions to which clauses (i) and 
     (ii) and section 530(d)(2)(A) apply, exceed
       ``(II) the total amount of qualified higher education 
     expenses otherwise taken into account under clauses (i) and 
     (ii) (after the application of clause (v)) for such year,

     the taxpayer shall allocate such expenses among such 
     distributions for purposes of determining the amount of the 
     exclusion under clauses (i) and (ii) and section 
     530(d)(2)(A).''.
       (2) Conforming amendments.--
       (A) Section 135(d)(2)(B) is amended by striking ``the 
     exclusion under section 530(d)(2)'' and inserting ``the 
     exclusions under sections 529(c)(3)(B)(i) and 530(d)(2)''.
       (B) Section 221(e)(2)(A) is amended by inserting ``529,'' 
     after ``135,''.
       (d) Rollover to Different Program for Benefit of Same 
     Designated Beneficiary.--Section 529(c)(3)(C) (relating to 
     change in beneficiaries) is amended--
       (1) by striking ``transferred to the credit'' in clause (i) 
     and inserting ``transferred--

       ``(I) to another qualified tuition program for the benefit 
     of the designated beneficiary, or
       ``(II) to the credit'',

       (2) by adding at the end the following new clause:
       ``(iii) Limitation on certain rollovers.--Clause (i)(I) 
     shall not apply to any amount transferred with respect to a 
     designated beneficiary if, at any time during the 1-year 
     period ending on the day of such transfer, any other amount 
     was transferred with respect to such beneficiary which was 
     not includible in gross income by reason of clause (i)(I).'', 
     and
       (3) by inserting ``or programs'' after ``beneficiaries'' in 
     the heading.
       (e) Member of Family Includes First Cousin.--Section 
     529(e)(2) (defining member of family) is amended by striking 
     ``and'' at the end of subparagraph (B), by striking the 
     period at the end of subparagraph (C) and by inserting ``; 
     and'', and by adding at the end the following new 
     subparagraph:
       ``(D) any first cousin of such beneficiary.''.
       (f) Definition of Qualified Higher Education Expenses.--
       (1) In general.--Subparagraph (A) of section 529(e)(3) 
     (relating to definition of qualified higher education 
     expenses) is amended to read as follows:
       ``(A) In general.--The term `qualified higher education 
     expenses' means--
       ``(i) tuition and fees required for the enrollment or 
     attendance of a designated beneficiary at an eligible 
     educational institution for courses of instruction of such 
     beneficiary at such institution, and
       ``(ii) expenses for books, supplies, and equipment which 
     are incurred in connection with such enrollment or 
     attendance, but not to exceed the allowance for books and 
     supplies included in the cost of attendance (as defined in 
     section 472 of the Higher Education Act of 1965 (20 U.S.C. 
     1087ll), as in effect on the date of enactment of the 
     Taxpayer Refund and Relief Act of 1999) as determined by the 
     eligible educational institution.''.
       (2) Exception for education involving sports, etc.--
     Paragraph (3) of section 529(e) (relating to qualified higher 
     education expenses) is amended by adding at the end the 
     following new subparagraph:
       ``(C) Exception for education involving sports, etc.--The 
     term `qualified higher education expenses' shall not include 
     expenses with respect to any course or other education 
     involving sports, games, or hobbies unless such course or 
     other education is part of the beneficiary's degree program 
     or is taken to acquire or improve job skills of the 
     beneficiary.''.
       (g) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 1999.
       (2) Qualified higher education expenses.--The amendments 
     made by subsection (f) shall apply to amounts paid for 
     courses beginning after December 31, 1999.

     SEC. 403. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE 
                   NATIONAL HEALTH SERVICE CORPS SCHOLARSHIP 
                   PROGRAM, THE F. EDWARD HEBERT ARMED FORCES 
                   HEALTH PROFESSIONS SCHOLARSHIP AND FINANCIAL 
                   ASSISTANCE PROGRAM, AND CERTAIN OTHER PROGRAMS.

       (a) In General.--Section 117(c) (relating to the exclusion 
     from gross income amounts received as a qualified 
     scholarship) is amended--
       (1) by striking ``Subsections (a)'' and inserting the 
     following:
       ``(1) In general.--Except as provided in paragraph (2), 
     subsections (a)'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Exceptions.--Paragraph (1) shall not apply to any 
     amount received by an individual under--
       ``(A) the National Health Service Corps Scholarship program 
     under section 338A(g)(1)(A) of the Public Health Service Act,
       ``(B) the Armed Forces Health Professions Scholarship and 
     Financial Assistance program under subchapter I of chapter 
     105 of title 10, United States Code,
       ``(C) the National Institutes of Health Undergraduate 
     Scholarship program under section 487D of the Public Health 
     Service Act, or
       ``(D) any State program determined by the Secretary to have 
     substantially similar objectives as such programs.''.
       (b) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by subsection (a) shall apply to amounts 
     received in taxable years beginning after December 31, 1993.
       (2) State programs.--Section 117(c)(2)(D) of the Internal 
     Revenue Code of 1986 (as added by the amendments made by 
     subsection (a)) shall apply to amounts received in taxable 
     years beginning after December 31, 1999.

     SEC. 404. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED 
                   EDUCATIONAL ASSISTANCE.

       Section 127(d) (relating to termination of exclusion for 
     educational assistance programs) is amended by striking ``May 
     31, 2000'' and inserting ``December 31, 2003''.

     SEC. 405. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION 
                   FOR GOVERNMENTAL BONDS USED TO FINANCE 
                   EDUCATIONAL FACILITIES.

       (a) In General.--Section 148(f)(4)(D)(vii) (relating to 
     increase in exception for bonds financing public school 
     capital expenditures) is amended by striking ``$5,000,000'' 
     the second place it appears and inserting ``$10,000,000''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to obligations issued in calendar years beginning 
     after December 31, 1999.

     SEC. 406. MODIFICATION OF ARBITRAGE REBATE RULES APPLICABLE 
                   TO PUBLIC SCHOOL CONSTRUCTION BONDS.

       (a) In General.--Subparagraph (C) of section 148(f)(4) is 
     amended by adding at the end the following new clause:
       ``(xviii) 4-year spending requirement for public school 
     construction issue.--

       ``(I) In general.--In the case of a public school 
     construction issue, the spending requirements of clause (ii) 
     shall be treated as met if at least 10 percent of the 
     available construction proceeds of the construction issue are 
     spent for the governmental purposes of the issue within the 
     1-year period beginning on the date the bonds are issued, 30 
     percent of such proceeds are spent for such purposes within 
     the 2-year period beginning on such date, 60 percent of such 
     proceeds are spent for such purposes within the 3-year period 
     beginning on such date, and 100 percent of such proceeds are 
     spent for such purposes within the 4-year period beginning on 
     such date.
       ``(II) Public school construction issue.--For purposes of 
     this clause, the term `public

[[Page 19584]]

     school construction issue' means any construction issue if no 
     bond which is part of such issue is a private activity bond 
     and all of the available construction proceeds of such issue 
     are to be used for the construction (as defined in clause 
     (iv)) of public school facilities to provide education or 
     training below the postsecondary level or for the acquisition 
     of land that is functionally related and subordinate to such 
     facilities.
       ``(III) Other rules to apply.--Rules similar to the rules 
     of the preceding provisions of this subparagraph which apply 
     to clause (ii) also apply to this clause.''.

       (b) Effective Date.--The amendment made by this section 
     shall apply to obligations issued after December 31, 1999.

     SEC. 407. ELIMINATION OF 60-MONTH LIMIT AND INCREASE IN 
                   INCOME LIMITATION ON STUDENT LOAN INTEREST 
                   DEDUCTION.

       (a) Elimination of 60-Month Limit.--
       (1) In general.--Section 221 (relating to interest on 
     education loans) is amended by striking subsection (d) and by 
     redesignating subsections (e), (f), and (g) as subsections 
     (d), (e), and (f), respectively.
       (2) Conforming amendment.--Section 6050S(e) is amended by 
     striking ``section 221(e)(1)'' and inserting ``section 
     221(d)(1)''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply with respect to any loan interest paid after 
     December 31, 1999, in taxable years ending after such date.
       (b) Increase in Income Limitation.--
       (1) In general.--Section 221(b)(2)(B) (relating to amount 
     of reduction) is amended by striking clauses (i) and (ii) and 
     inserting the following:
       ``(i) the excess of--

       ``(I) the taxpayer's modified adjusted gross income for 
     such taxable year, over
       ``(II) $45,000 ($90,000 in the case of a joint return), 
     bears to

       ``(ii) $15,000.''.
       (2) Conforming amendment.--Section 221(g)(1) is amended by 
     striking ``$40,000 and $60,000 amounts'' and inserting 
     ``$45,000 and $90,000 amounts''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to taxable years ending after December 31, 1999.

     SEC. 408. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED 
                   DEDUCTIONS NOT TO APPLY TO QUALIFIED 
                   PROFESSIONAL DEVELOPMENT EXPENSES OF ELEMENTARY 
                   AND SECONDARY SCHOOL TEACHERS.

       (a) In General.--Section 67(b) (defining miscellaneous 
     itemized deductions) is amended by striking ``and'' at the 
     end of paragraph (11), by striking the period at the end of 
     paragraph (12) and inserting ``, and'', and by adding at the 
     end the following new paragraph:
       ``(13) any deduction allowable for the qualified 
     professional development expenses of an eligible teacher.''.
       (b) Definitions.--Section 67 (relating to 2-percent floor 
     on miscellaneous itemized deductions) is amended by adding at 
     the end the following new subsection:
       ``(g) Qualified Professional Development Expenses of 
     Eligible Teachers.--For purposes of subsection (b)(13)--
       ``(1) Qualified professional development expenses.--
       ``(A) In general.--The term `qualified professional 
     development expenses' means expenses in an amount not to 
     exceed $1,000 for any taxable year--
       ``(i) for tuition, fees, books, supplies, equipment, and 
     transportation required for the enrollment or attendance of 
     an individual in a qualified course of instruction, and
       ``(ii) with respect to which a deduction is allowable under 
     section 162 (determined without regard to this section).
       ``(B) Qualified course of instruction.--The term `qualified 
     course of instruction' means a course of instruction which--
       ``(i) is--

       ``(I) at an institution of higher education (as defined in 
     section 481 of the Higher Education Act of 1965 (20 U.S.C. 
     1088), as in effect on the date of the enactment of this 
     subsection), or
       ``(II) a professional conference, and

       ``(ii) is part of a program of professional development 
     which is approved and certified by the appropriate local 
     educational agency as furthering the individual's teaching 
     skills.
       ``(C) Local educational agency.--The term `local 
     educational agency' has the meaning given such term by 
     section 14101 of the Elementary and Secondary Education Act 
     of 1965, as so in effect.
       ``(2) Eligible teacher.--
       ``(A) In general.--The term `eligible teacher' means an 
     individual who is a kindergarten through grade 12 classroom 
     teacher, instructor, counselor, aide, or principal in an 
     elementary or secondary school.
       ``(B) Elementary or secondary school.--The terms 
     `elementary school' and `secondary school' have the meanings 
     given such terms by section 14101 of the Elementary and 
     Secondary Education Act of 1965 (20 U.S.C. 8801), as so in 
     effect.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000, and ending before January 1, 2005.

                    TITLE V--HEALTH CARE PROVISIONS

     SEC. 501. DEDUCTION FOR HEALTH AND LONG-TERM CARE INSURANCE 
                   COSTS OF INDIVIDUALS NOT PARTICIPATING IN 
                   EMPLOYER-SUBSIDIZED HEALTH PLANS.

       (a) In General.--Part VII of subchapter B of chapter 1 is 
     amended by redesignating section 222 as section 223 and by 
     inserting after section 221 the following new section:

     ``SEC. 222. HEALTH AND LONG-TERM CARE INSURANCE COSTS.

       ``(a) In General.--In the case of an individual, there 
     shall be allowed as a deduction an amount equal to the 
     applicable percentage of the amount paid during the taxable 
     year for insurance which constitutes medical care for the 
     taxpayer and the taxpayer's spouse and dependents.
       ``(b) Applicable Percentage.--For purposes of subsection 
     (a), the applicable percentage shall be determined in 
     accordance with the following table:

``For taxable years beginning                            The applicable
  in calendar year--                                    percentage is--
  2002, 2003, and 2004.............................................25  
  2005.............................................................35  
  2006.............................................................65  
  2007 and thereafter............................................100.  
       ``(c) Limitation Based on Other Coverage.--
       ``(1) Coverage under certain subsidized employer plans.--
       ``(A) In general.--Subsection (a) shall not apply to any 
     taxpayer for any calendar month for which the taxpayer 
     participates in any health plan maintained by any employer of 
     the taxpayer or of the spouse of the taxpayer if 50 percent 
     or more of the cost of coverage under such plan (determined 
     under section 4980B and without regard to payments made with 
     respect to any coverage described in subsection (e)) is paid 
     or incurred by the employer.
       ``(B) Employer contributions to cafeteria plans, flexible 
     spending arrangements, and medical savings accounts.--
     Employer contributions to a cafeteria plan, a flexible 
     spending or similar arrangement, or a medical savings account 
     which are excluded from gross income under section 106 shall 
     be treated for purposes of subparagraph (A) as paid by the 
     employer.
       ``(C) Aggregation of plans of employer.--A health plan 
     which is not otherwise described in subparagraph (A) shall be 
     treated as described in such subparagraph if such plan would 
     be so described if all health plans of persons treated as a 
     single employer under subsections (b), (c), (m), or (o) of 
     section 414 were treated as one health plan.
       ``(D) Separate application to health insurance and long-
     term care insurance.--Subparagraphs (A) and (C) shall be 
     applied separately with respect to--
       ``(i) plans which include primarily coverage for qualified 
     long-term care services or are qualified long-term care 
     insurance contracts, and
       ``(ii) plans which do not include such coverage and are not 
     such contracts.
       ``(2) Coverage under certain federal programs.--
       ``(A) In general.--Subsection (a) shall not apply to any 
     amount paid for any coverage for an individual for any 
     calendar month if, as of the first day of such month, the 
     individual is covered under any medical care program 
     described in--
       ``(i) title XVIII, XIX, or XXI of the Social Security Act,
       ``(ii) chapter 55 of title 10, United States Code,
       ``(iii) chapter 17 of title 38, United States Code,
       ``(iv) chapter 89 of title 5, United States Code, or
       ``(v) the Indian Health Care Improvement Act.
       ``(B) Exceptions.--
       ``(i) Qualified long-term care.--Subparagraph (A) shall not 
     apply to amounts paid for coverage under a qualified long-
     term care insurance contract.
       ``(ii) Continuation coverage of fehbp.--Subparagraph 
     (A)(iv) shall not apply to coverage which is comparable to 
     continuation coverage under section 4980B.
       ``(d) Long-Term Care Deduction Limited to Qualified Long-
     Term Care Insurance Contracts.--In the case of a qualified 
     long-term care insurance contract, only eligible long-term 
     care premiums (as defined in section 213(d)(10)) may be taken 
     into account under subsection (a).
       ``(e) Deduction Not Available for Payment of Ancillary 
     Coverage Premiums.--Any amount paid as a premium for 
     insurance which provides for--
       ``(1) coverage for accidents, disability, dental care, 
     vision care, or a specified illness, or
       ``(2) making payments of a fixed amount per day (or other 
     period) by reason of being hospitalized.
     shall not be taken into account under subsection (a).
       ``(f) Special Rules.--
       ``(1) Coordination with deduction for health insurance 
     costs of self-employed individuals.--The amount taken into 
     account by the taxpayer in computing the deduction under 
     section 162(l) shall not be taken into account under this 
     section.
       ``(2) Coordination with medical expense deduction.--The 
     amount taken into account by the taxpayer in computing the 
     deduction under this section shall not be taken into account 
     under section 213.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out this section, 
     including

[[Page 19585]]

     regulations requiring employers to report to their employees 
     and the Secretary such information as the Secretary 
     determines to be appropriate.''.
       (b) Deduction Allowed Whether or Not Taxpayer Itemizes 
     Other Deductions.--Subsection (a) of section 62 is amended by 
     inserting after paragraph (17) the following new item:
       ``(18) Health and long-term care insurance costs.--The 
     deduction allowed by section 222.''.
       (c) Clerical Amendment.--The table of sections for part VII 
     of subchapter B of chapter 1 is amended by striking the last 
     item and inserting the following new items:

``Sec. 222. Health and long-term care insurance costs.
``Sec. 223. Cross reference.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 502. LONG-TERM CARE INSURANCE PERMITTED TO BE OFFERED 
                   UNDER CAFETERIA PLANS AND FLEXIBLE SPENDING 
                   ARRANGEMENTS.

       (a) Cafeteria Plans.--
       (1) In general.--Subsection (f) of section 125 (defining 
     qualified benefits) is amended by inserting before the period 
     at the end ``; except that such term shall include the 
     payment of premiums for any qualified long-term care 
     insurance contract (as defined in section 7702B) to the 
     extent the amount of such payment does not exceed the 
     eligible long-term care premiums (as defined in section 
     213(d)(10)) for such contract''.
       (b) Flexible Spending Arrangements.--Section 106 (relating 
     to contributions by employer to accident and health plans) is 
     amended by striking subsection (c).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

     SEC. 503. ADDITIONAL PERSONAL EXEMPTION FOR TAXPAYER CARING 
                   FOR ELDERLY FAMILY MEMBER IN TAXPAYER'S HOME.

       (a) In General.--Section 151 (relating to allowance of 
     deductions for personal exemptions) is amended by 
     redesignating subsection (e) as subsection (f) and by 
     inserting after subsection (d) the following new subsection:
       ``(e) Additional Exemption for Certain Elderly Family 
     Members Residing With Taxpayer.--
       ``(1) In general.--An exemption of the exemption amount for 
     each qualified family member of the taxpayer.
       ``(2) Qualified family member.--For purposes of this 
     subsection, the term `qualified family member' means, with 
     respect to any taxable year, any individual--
       ``(A) who is an ancestor of the taxpayer or of the 
     taxpayer's spouse or who is the spouse of any such ancestor,
       ``(B) who is a member for the entire taxable year of a 
     household maintained by the taxpayer, and
       ``(C) who has been certified, before the due date for 
     filing the return of tax for the taxable year (without 
     extensions), by a physician (as defined in section 1861(r)(1) 
     of the Social Security Act) as being an individual with long-
     term care needs described in paragraph (3) for a period--
       ``(i) which is at least 180 consecutive days, and
       ``(ii) a portion of which occurs within the taxable year.
     Such term shall not include any individual otherwise meeting 
     the requirements of the preceding sentence unless within the 
     39\1/2\ month period ending on such due date (or such other 
     period as the Secretary prescribes) a physician (as so 
     defined) has certified that such individual meets such 
     requirements.
       ``(3) Individuals with long-term care needs.--An individual 
     is described in this paragraph if the individual--
       ``(A) is unable to perform (without substantial assistance 
     from another individual) at least 2 activities of daily 
     living (as defined in section 7702B(c)(2)(B)) due to a loss 
     of functional capacity, or
       ``(B) requires substantial supervision to protect such 
     individual from threats to health and safety due to severe 
     cognitive impairment and is unable to perform, without 
     reminding or cuing assistance, at least 1 activity of daily 
     living (as so defined) or to the extent provided in 
     regulations prescribed by the Secretary (in consultation with 
     the Secretary of Health and Human Services), is unable to 
     engage in age appropriate activities.
       ``(4) Special rules.--Rules similar to the rules of 
     paragraphs (1), (2), (3), (4), and (5) of section 21(e) shall 
     apply for purposes of this subsection.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 504. EXPANDED HUMAN CLINICAL TRIALS QUALIFYING FOR 
                   ORPHAN DRUG CREDIT.

       (a) In General.--Subclause (I) of section 45C(b)(2)(A)(ii) 
     is amended to read as follows:

       ``(I) after the date that the application is filed for 
     designation under such section 526, and''.

       (b) Conforming Amendment.--Clause (i) of section 
     45C(b)(2)(A) is amended by inserting ``which is'' before 
     ``being'' and by inserting before the comma at the end ``and 
     which is designated under section 526 of such Act''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after December 31, 
     1999.

     SEC. 505. INCLUSION OF CERTAIN VACCINES AGAINST STREPTOCOCCUS 
                   PNEUMONIAE TO LIST OF TAXABLE VACCINES; 
                   REDUCTION IN PER DOSE TAX RATE.

       (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 (c) 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) Reduction in Per Dose Tax Rate.--
       (1) In general.--Section 4131(b)(1) (relating to amount of 
     tax) is amended by striking ``75 cents'' and inserting ``50 
     cents''.
       (2) Effective date.--
       (A) Sales.--The amendment made by this subsection shall 
     apply to vaccine sales after December 31, 2004, but shall not 
     take effect if subsection (c) 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.
       (3) Limitation on certain credits or refunds.--For purposes 
     of applying section 4132(b) of the Internal Revenue Code of 
     1986 with respect to any claim for credit or refund filed 
     after August 31, 2004, the amount of tax taken into account 
     shall not exceed the tax computed under the rate in effect on 
     January 1, 2005.
       (c) 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 Tax and Trade 
     Relief Extension Act of 1998 to which they relate.

     SEC. 506. DRUG BENEFITS FOR MEDICARE BENEFICIARIES.

       (a) In General.--Section 213 (relating to medical, dental, 
     etc., expenses) is amended by redesignating subsection (e) as 
     subsection (f) and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Drug Benefits for Medicare Beneficiaries.--
       ``(1) Deduction for certain former prescription drugs.--
       ``(A) In general.--Subsection (b) shall not apply to 
     amounts paid for eligible former prescription drugs for a 
     medicare beneficiary who is the taxpayer or the taxpayer's 
     spouse or dependent (as defined in section 152).
       ``(B) Eligible former prescription drug.--For purposes of 
     subparagraph (A), the term `eligible former prescription 
     drug' means any drug or biological which is not a prescribed 
     drug at the time purchased by the taxpayer but was a 
     prescribed drug at any prior time during the calendar year in 
     which so purchased or during the 2 preceding calendar years.
       ``(2) Adjusted gross income threshold not to apply to 
     prescription drug insurance coverage for medicare 
     beneficiaries if certain conditions met.--The 7.5 percent 
     adjusted gross income threshold in subsection (a) shall not 
     apply to the expenses paid during the taxable year for 
     prescription drug insurance coverage for a medicare 
     beneficiary who is the taxpayer or the taxpayer's spouse or 
     dependent (as defined in section 152) if--
       ``(A) the Secretary certifies that, throughout such taxable 
     year, the conditions specified in paragraph (3) are met, and
       ``(B) the charge for such coverage is either separately 
     stated in the contract or furnished to the policyholder by 
     the insurance company in a separate statement.
       ``(3) Conditions.--For purposes of paragraph (2), the 
     conditions specified in this paragraph are met if all of the 
     following are in effect:
       ``(A) Assistance for prescription drugs for low-income 
     medicare beneficiaries.--
       ``(i) Low-income assistance is available to enable the 
     purchase of coverage of prescription drugs as described in 
     subparagraph (B) or (C) for medicare beneficiaries with 
     incomes under 135 percent of the applicable Federal poverty 
     level, with such assistance phasing out for beneficiaries 
     with incomes between 135 percent and 150 percent of such 
     level.
       ``(ii) The Federal Government provides funding for the 
     costs of such assistance.

[[Page 19586]]

       ``(B) Authorizing medigap coverage solely of prescription 
     drugs.--At least 1 of the benefit packages authorized to be 
     offered under a medicare supplemental policy under the Social 
     Security Act is a package which provides solely for the 
     coverage of costs of prescription drugs.
       ``(C) Structural medicare reform.--Coverage for outpatient 
     prescription drugs for medicare beneficiaries is provided 
     only through integrated comprehensive health plans which 
     offer current medicare covered services and maximum 
     limitations on out-of-pocket spending and such comprehensive 
     plans sponsored by the Health Care Financing Administration 
     compete on the same basis as private plans.
       ``(D) Deduction for eligible former prescription drugs.--
     The treatment under paragraph (1) of expenses paid for 
     eligible former prescription drugs applies for such taxable 
     year.
       ``(4) Definition and special rule.--
       ``(A) Medicare beneficiary.--For purposes of this 
     subsection, the term `medicare beneficiary' means an 
     individual who is entitled to benefits under part A, or 
     enrolled under part B or C, of title XVIII of the Social 
     Security Act.
       ``(B) Coordination with other expenses.--Expenses to which 
     the 7.5 percent adjusted gross income threshold in subsection 
     (a) does not apply by reason of paragraph (1) and (2) shall 
     not be taken into account in applying such threshold to other 
     expenses.''
       (b) Deduction for Prescription Drug Insurance Coverage 
     Allowed Whether or Not Taxpayer Itemizes Other Deductions.--
     Subsection (a) of section 62 (defining adjusted gross income) 
     is amended by inserting after paragraph (18) the following 
     new paragraph:
       ``(19) Prescription drug insurance coverage for medicare 
     beneficiaries.--The deduction allowed by section 213(a) to 
     the extent of the expenses to which the 7.5 percent adjusted 
     gross income threshold in subsection (a) does not apply by 
     reason of paragraph (2) of section 213(e).''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

                      TITLE VI--ESTATE TAX RELIEF

  Subtitle A--Repeal of Estate, Gift, and Generation-Skipping Taxes; 
                  Repeal of Step Up in Basis At Death

     SEC. 601. REPEAL OF ESTATE, GIFT, AND GENERATION-SKIPPING 
                   TAXES.

       (a) In General.--Subtitle B is hereby repealed.
       (b) Effective Date.--The repeal made by subsection (a) 
     shall apply to the estates of decedents dying, and gifts and 
     generation-skipping transfers made, after December 31, 2008.

     SEC. 602. TERMINATION OF STEP UP IN BASIS AT DEATH.

       (a) Termination of Application of Section 1014.--Section 
     1014 (relating to basis of property acquired from a decedent) 
     is amended by adding at the end the following:
       ``(f) Termination.--In the case of a decedent dying after 
     December 31, 2008, this section shall not apply to property 
     for which basis is provided by section 1023.''.
       (b) Conforming Amendment.--Subsection (a) of section 1016 
     (relating to adjustments to basis) is amended by striking 
     ``and'' at the end of paragraph (26), by striking the period 
     at the end of paragraph (27) and inserting ``; and'', and by 
     adding at the end the following:
       ``(28) to the extent provided in section 1023 (relating to 
     basis for certain property acquired from a decedent dying 
     after December 31, 2008).''.

     SEC. 603. CARRYOVER BASIS AT DEATH.

       (a) General Rule.--Part II of subchapter O of chapter 1 
     (relating to basis rules of general application) is amended 
     by inserting after section 1022, as added by section 202, the 
     following:

     ``SEC. 1023. CARRYOVER BASIS FOR CERTAIN PROPERTY ACQUIRED 
                   FROM A DECEDENT DYING AFTER DECEMBER 31, 2008.

       ``(a) Carryover Basis.--Except as otherwise provided in 
     this section, the basis of carryover basis property in the 
     hands of a person acquiring such property from a decedent 
     shall be determined under section 1015.
       ``(b) Carryover Basis Property Defined.--
       ``(1) In general.--For purposes of this section, the term 
     `carryover basis property' means any property--
       ``(A) which is acquired from or passed from a decedent who 
     died after December 31, 2008, and
       ``(B) which is not excluded pursuant to paragraph (2).
     The property taken into account under subparagraph (A) shall 
     be determined under section 1014(b) without regard to 
     subparagraph (A) of the last sentence of paragraph (9) 
     thereof.
       ``(2) Certain property not carryover basis property.--The 
     term `carryover basis property' does not include--
       ``(A) any item of gross income in respect of a decedent 
     described in section 691,
       ``(B) property which was acquired from the decedent by the 
     surviving spouse of the decedent but only if the value of 
     such property would have been deductible from the value of 
     the taxable estate of the decedent under section 2056, as in 
     effect on the day before the date of the enactment of the 
     Taxpayer Refund and Relief Act of 1999, and
       ``(C) any includible property of the decedent if the 
     aggregate adjusted fair market value of such property does 
     not exceed $2,000,000.
     For purposes of this subsection, the term `adjusted fair 
     market value' means, with respect to any property, fair 
     market value reduced by any indebtedness secured by such 
     property.
       ``(3) Limitation on exception for property acquired by 
     surviving spouse.--The adjusted fair market value of property 
     which is not carryover basis property by reason of paragraph 
     (2)(B) shall not exceed $3,000,000. The executor shall 
     allocate the limitation under the preceding sentence among 
     such property.
       ``(4) Phasein of carryover basis if property exceeds 
     $1,300,000.--
       ``(A) In general.--If the aggregate adjusted fair market 
     value of the includible property of the decedent exceeds 
     $1,300,000, but does not exceed $2,000,000, the amount of the 
     increase in the basis of includible property which would (but 
     for this paragraph) result under section 1014 shall be 
     reduced by the amount which bears the same ratio to such 
     increase as such excess bears to $700,000.
       ``(B) Allocation of reduction.--The reduction under 
     subparagraph (A) shall be allocated among only the excepted 
     includible property having net appreciation and shall be 
     allocated in proportion to the respective amounts of such net 
     appreciation. For purposes of the preceding sentence, the 
     term `net appreciation' means the excess of the adjusted fair 
     market value over the decedent's adjusted basis immediately 
     before such decedent's death.
       ``(5) Includible property.--
       ``(A) In general.--For purposes of this subsection, the 
     term `includible property' means property which would be 
     included in the gross estate of the decedent under any of the 
     following provisions as in effect on the day before the date 
     of the enactment of the Taxpayer Refund and Relief Act of 
     1999:
       ``(i) Section 2033.
       ``(ii) Section 2038.
       ``(iii) Section 2040.
       ``(iv) Section 2041.
       ``(v) Section 2042(1).
       ``(B) Exclusion of property acquired by spouse.--Such term 
     shall not include property which is not carryover basis 
     property by reason of paragraph (2)(B).
       ``(c) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this section.''.
       (b) Miscellaneous Amendments Related To Carryover Basis.--
       (1) Capital gain treatment for inherited art work or 
     similar property.--
       (A) In general.--Subparagraph (C) of section 1221(3) 
     (defining capital asset) is amended by inserting ``(other 
     than by reason of section 1023)'' after ``is determined''.
       (B) Coordination with section 170.--Paragraph (1) of 
     section 170(e) (relating to certain contributions of ordinary 
     income and capital gain property) is amended by adding at the 
     end the following: ``For purposes of this paragraph, the 
     determination of whether property is a capital asset shall be 
     made without regard to the exception contained in section 
     1221(3)(C) for basis determined under section 1023.''.
       (2) Definition of Executor.--Section 7701(a) (relating to 
     definitions) is amended by adding at the end the following:
       ``(47) Executor.--The term `executor' means the executor or 
     administrator of the decedent, or, if there is no executor or 
     administrator appointed, qualified, and acting within the 
     United States, then any person in actual or constructive 
     possession of any property of the decedent.''.
       (3) Clerical amendment.--The table of sections for part II 
     of subchapter O of chapter 1 is amended by adding at the end 
     the following new item:

``Sec. 1023. Carryover basis for certain property acquired from a 
              decedent dying after December 31, 2008.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying after December 31, 
     2008.

  Subtitle B--Reductions of Estate and Gift Tax Rates Prior to Repeal

     SEC. 611. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.

       (a) Maximum Rate of Tax Reduced to 50 Percent.--
       (1) In general.--The table contained in section 2001(c)(1) 
     is amended by striking the 2 highest brackets and inserting 
     the following:

$1,025,800, plus 50% of the excess over $2,500,000.''..................
       (2) Phase-in of reduced rate.--Subsection (c) of section 
     2001 is amended by adding at the end the following new 
     paragraph:
       ``(3) Phase-in of reduced rate.--In the case of decedents 
     dying, and gifts made, during 2001, the last item in the 
     table contained in paragraph (1) shall be applied by 
     substituting `53%' for `50%'.''.
       (b) Repeal of Phaseout of Graduated Rates.--Subsection (c) 
     of section 2001 is amended by striking paragraph (2) and 
     redesignating paragraph (3), as added by subsection (a), as 
     paragraph (2).
       (c) Additional Reductions of Rates of Tax.--Subsection (c) 
     of section 2001, as so

[[Page 19587]]

     amended, is amended by adding at the end the following new 
     paragraph:
       ``(3) Phasedown of tax.--In the case of estates of 
     decedents dying, and gifts made, during any calendar year 
     after 2004 and before 2009--
       ``(A) In general.--Except as provided in subparagraph (C), 
     the tentative tax under this subsection shall be determined 
     by using a table prescribed by the Secretary (in lieu of 
     using the table contained in paragraph (1)) which is the same 
     as such table; except that--
       ``(i) each of the rates of tax shall be reduced by the 
     number of percentage points determined under subparagraph 
     (B), and
       ``(ii) the amounts setting forth the tax shall be adjusted 
     to the extent necessary to reflect the adjustments under 
     clause (i).
       ``(B) Percentage points of reduction.--

                                                        The number of  
    ``For calendar year:                          percentage points is:
      2003.........................................................1.0 
      2004.........................................................2.0 
      2005.........................................................3.0 
      2006.........................................................4.0 
      2007.........................................................5.5 
      2008.........................................................7.5.
       ``(C) Coordination with income tax rates.--The reductions 
     under subparagraph (A)--
       ``(i) shall not reduce any rate under paragraph (1) below 
     the lowest rate in section 1(c), and
       ``(ii) shall not reduce the highest rate under paragraph 
     (1) below the highest rate in section 1(c).
       ``(D) Coordination with credit for state death taxes.--
     Rules similar to the rules of subparagraph (A) shall apply to 
     the table contained in section 2011(b) except that the 
     Secretary shall prescribe percentage point reductions which 
     maintain the proportionate relationship (as in effect before 
     any reduction under this paragraph) between the credit under 
     section 2011 and the tax rates under subsection (c).''.
       (d) Effective Dates.--
       (1) Subsections (a) and (b).--The amendments made by 
     subsections (a) and (b) shall apply to estates of decedents 
     dying, and gifts made, after December 31, 2000.
       (2) Subsection (c).--The amendment made by subsection (c) 
     shall apply to estates of decedents dying, and gifts made, 
     after December 31, 2004.

   Subtitle C--Unified Credit Replaced With Unified Exemption Amount

     SEC. 621. UNIFIED CREDIT AGAINST ESTATE AND GIFT TAXES 
                   REPLACED WITH UNIFIED EXEMPTION AMOUNT.

       (a) In General.--
       (1) Estate tax.--Part IV of subchapter A of chapter 11 is 
     amended by inserting after section 2051 the following new 
     section:

     ``SEC. 2052. EXEMPTION.

       ``(a) In general.--For purposes of the tax imposed by 
     section 2001, the value of the taxable estate shall be 
     determined by deducting from the value of the gross estate an 
     amount equal to the excess (if any) of--
       ``(1) the exemption amount for the calendar year in which 
     the decedent died, over
       ``(2) the sum of--
       ``(A) the aggregate amount allowed as an exemption under 
     section 2521 with respect to gifts made by the decedent after 
     December 31, 2000, and
       ``(B) the aggregate amount of gifts made by the decedent 
     for which credit was allowed by section 2505 (as in effect on 
     the day before the date of the enactment of the Taxpayer 
     Refund and Relief Act of 1999).
     Gifts which are includible in the gross estate of the 
     decedent shall not be taken into account in determining the 
     amounts under paragraph (2).
       ``(b) Exemption Amount.--For purposes of subsection (a), 
     the term `exemption amount' means the amount determined in 
     accordance with the following table:

``In the case of                                          The exemption
  calendar year:                                             amount is:
  2001........................................................$675,000 
  2002 and 2003...............................................$700,000 
  2004........................................................$850,000 
  2005........................................................$950,000 
  2006 or thereafter......................................$1,000,000.''
       (2) Gift tax.--Subchapter C of chapter 12 (relating to 
     deductions) is amended by inserting before section 2522 the 
     following new section:

     ``SEC. 2521. EXEMPTION.

       ``In computing taxable gifts for any calendar year, there 
     shall be allowed as a deduction in the case of a citizen or 
     resident of the United States an amount equal to the excess 
     of--
       ``(1) the exemption amount determined under section 2052 
     for such calendar year, over
       ``(2) the sum of--
       ``(A) the aggregate amount allowed as an exemption under 
     this section for all preceding calendar years after 2000, and
       ``(B) the aggregate amount of gifts for which credit was 
     allowed by section 2505 (as in effect on the day before the 
     date of the enactment of the Taxpayer Refund and Relief Act 
     of 1999).''
       (b) Repeal of Unified Credits.--
       (1) Section 2010 (relating to unified credit against estate 
     tax) is hereby repealed.
       (2) Section 2505 (relating to unified credit against gift 
     tax) is hereby repealed.
       (c) Conforming Amendments.--
       (1) Subparagraph (B) of section 2001(b)(1) is amended by 
     inserting before the comma ``reduced by the amount described 
     in section 2052(a)(2)(B)''.
       (2)(A) Subsection (b) of section 2011 is amended--
       (i) by striking ``adjusted'' in the table, and
       (ii) by striking the last sentence.
       (B) Subsection (f) of section 2011 is amended by striking 
     ``, reduced by the amount of the unified credit provided by 
     section 2010''.
       (3) Subsection (a) of section 2012 is amended by striking 
     ``and the unified credit provided by section 2010''.
       (4)(A) Subsection (b) of section 2013 is amended by 
     inserting before the period at the end of the first sentence 
     ``and increased by the exemption allowed under section 2052 
     or 2106(a)(4) (or the corresponding provisions of prior law) 
     in determining the taxable estate of the transferor for 
     purposes of the estate tax''.
       (B) Subparagraph (A) of section 2013(c)(1) is amended by 
     striking ``2010,''.
       (5) Paragraph (2) of section 2014(b) is amended by striking 
     ``2010,''.
       (6) Clause (ii) of section 2056A(b)(12)(C) is amended to 
     read as follows:
       ``(ii) to treat any reduction in the tax imposed by 
     paragraph (1)(A) by reason of the credit allowable under 
     section 2010 (as in effect on the day before the date of the 
     enactment of the Taxpayer Refund and Relief Act of 1999) or 
     the exemption allowable under section 2052 with respect to 
     the decedent as a credit under section 2505 (as so in effect) 
     or exemption under section 2521 (as the case may be) 
     allowable to such surviving spouse for purposes of 
     determining the amount of the exemption allowable under 
     section 2521 with respect to taxable gifts made by the 
     surviving spouse during the year in which the spouse becomes 
     a citizen or any subsequent year,''.
       (7) Paragraph (3) of section 2057(a) is amended to read as 
     follows:
       ``(3) Coordination with exemption amount.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     if this section applies to an estate, the exemption amount 
     under section 2052 shall be $625,000.
       ``(B) Increase in exemption amount if deduction is less 
     than $675,000.--If the deduction allowed by this section is 
     less than $675,000, the amount of the exemption amount under 
     section 2052 shall be increased (but not above the amount 
     which would apply to the estate without regard to this 
     section) by the excess of $675,000 over the amount of the 
     deduction allowed.''
       (8)(A) Subparagraph (B) of section 2101(b)(1) is amended by 
     inserting before the comma ``reduced by the aggregate amount 
     of gifts for which credit was allowed by section 2505 (as in 
     effect on the day before the date of the enactment of the 
     Taxpayer Refund and Relief Act of 1999)''
       (B) Subsection (b) of section 2101 is amended by striking 
     the last sentence.
       (9) Section 2102 is amended by striking subsection (c).
       (10) Subsection (a) of section 2106 is amended by adding at 
     the end the following new paragraph:
       ``(4) Exemption.--
       ``(A) In general.--An exemption of $60,000.
       ``(B) Residents of possessions of the united states.--In 
     the case of a decedent who is considered to be a nonresident 
     not a citizen of the United States under section 2209, the 
     exemption under this paragraph shall be the greater of--
       ``(i) $60,000, or
       ``(ii) that proportion of $175,000 which the value of that 
     part of the decedent's gross estate which at the time of his 
     death is situated in the United States bears to the value of 
     his entire gross estate wherever situated.
       ``(C) Special rules.--
       ``(i) Coordination with treaties.--To the extent required 
     under any treaty obligation of the United States, the 
     exemption allowed under this paragraph shall be equal to the 
     amount which bears the same ratio to the exemption amount 
     under section 2052 (for the calendar year in which the 
     decedent died) as the value of the part of the decedent's 
     gross estate which at the time of his death is situated in 
     the United States bears to the value of his entire gross 
     estate wherever situated. For purposes of the preceding 
     sentence, property shall not be treated as situated in the 
     United States if such property is exempt from the tax imposed 
     by this subchapter under any treaty obligation of the United 
     States.
       ``(ii) Coordination with gift tax exemption and unified 
     credit.--If an exemption has been allowed under section 2521 
     (or a credit has been allowed under section 2505 as in effect 
     on the day before the date of the enactment of the Taxpayer 
     Refund and Relief Act of 1999) with respect to any gift made 
     by the decedent, each dollar amount contained in subparagraph 
     (A) or (B) or the exemption amount applicable under clause 
     (i) of this subparagraph (whichever applies) shall be reduced 
     by the exemption so allowed under 2521 (or, in the case of 
     such a credit, by the amount of the gift for which the credit 
     was so allowed).''
       (11)(A) Subsection (a) of section 2107 is amended by adding 
     at the end the following new paragraph:
       ``(3) Limitation on exemption amount.--Subparagraphs (B) 
     and (C) of section 2106(a)(4) shall not apply in applying 
     section 2106 for purposes of this section.''

[[Page 19588]]

       (B) Subsection (c) of section 2107 is amended--
       (i) by striking paragraph (1) and by redesignating 
     paragraphs (2) and (3) as paragraphs (1) and (2), 
     respectively, and
       (ii) by striking the second sentence of paragraph (2) (as 
     so redesignated).
       (12) Section 2206 is amended by striking ``the taxable 
     estate'' in the first sentence and inserting ``the sum of the 
     taxable estate and the amount of the exemption allowed under 
     section 2052 or 2106(a)(4) in computing the taxable estate''.
       (13) Section 2207 is amended by striking ``the taxable 
     estate'' in the first sentence and inserting ``the sum of the 
     taxable estate and the amount of the exemption allowed under 
     section 2052 or 2106(a)(4) in computing the taxable estate''.
       (14) Subparagraph (B) of section 2207B(a)(1) is amended to 
     read as follows:
       ``(B) the sum of the taxable estate and the amount of the 
     exemption allowed under section 2052 or 2106(a)(4) in 
     computing the taxable estate.''
       (15) Subsection (a) of section 2503 is amended by striking 
     ``section 2522'' and inserting ``section 2521''.
       (16) Paragraph (1) of section 6018(a) is amended by 
     striking ``the applicable exclusion amount in effect under 
     section 2010(c)'' and inserting ``the exemption amount under 
     section 2052''.
       (17) Subparagraph (A) of section 6601(j)(2) is amended to 
     read as follows:
       ``(A) the amount of the tax which would be imposed by 
     chapter 11 on an amount of taxable estate equal to 
     $1,000,000, or''.
       (18) The table of sections for part II of subchapter A of 
     chapter 11 is amended by striking the item relating to 
     section 2010.
       (19) The table of sections for part IV of subchapter A of 
     chapter 11 is amended by inserting after the item relating to 
     section 2051 the following new item:

``Sec. 2052. Exemption.''
       (20) The table of sections for subchapter A of chapter 12 
     is amended by striking the item relating to section 2505.
       (21) The table of sections for subchapter C of chapter 12 
     is amended by inserting before the item relating to section 
     2522 the following new item:

``Sec. 2521. Exemption.''
       (d) Effective Date.--The amendments made by this section--
       (1) insofar as they relate to the tax imposed by chapter 11 
     of the Internal Revenue Code of 1986, shall apply to estates 
     of decedents dying after December 31, 2000, and
       (2) insofar as they relate to the tax imposed by chapter 12 
     of such Code, shall apply to gifts made after December 31, 
     2000.

     Subtitle D--Modifications of Generation-Skipping Transfer Tax

     SEC. 631. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME 
                   TRANSFERS TO TRUSTS; RETROACTIVE ALLOCATIONS.

       (a) In General.--Section 2632 (relating to special rules 
     for allocation of GST exemption) is amended by redesignating 
     subsection (c) as subsection (e) and by inserting after 
     subsection (b) the following new subsections:
       ``(c) Deemed Allocation to Certain Lifetime Transfers to 
     GST Trusts.--
       ``(1) In general.--If any individual makes an indirect skip 
     during such individual's lifetime, any unused portion of such 
     individual's GST exemption shall be allocated to the property 
     transferred to the extent necessary to make the inclusion 
     ratio for such property zero. If the amount of the indirect 
     skip exceeds such unused portion, the entire unused portion 
     shall be allocated to the property transferred.
       ``(2) Unused portion.--For purposes of paragraph (1), the 
     unused portion of an individual's GST exemption is that 
     portion of such exemption which has not previously been--
       ``(A) allocated by such individual,
       ``(B) treated as allocated under subsection (b) with 
     respect to a direct skip occurring during or before the 
     calendar year in which the indirect skip is made, or
       ``(C) treated as allocated under paragraph (1) with respect 
     to a prior indirect skip.
       ``(3) Definitions.--
       ``(A) Indirect skip.--For purposes of this subsection, the 
     term `indirect skip' means any transfer of property (other 
     than a direct skip) subject to the tax imposed by chapter 12 
     made to a GST trust.
       ``(B) GST trust.--The term `GST trust' means a trust that 
     could have a generation-skipping transfer with respect to the 
     transferor unless--
       ``(i) the trust instrument provides that more than 25 
     percent of the trust corpus must be distributed to or may be 
     withdrawn by 1 or more individuals who are non-skip persons--

       ``(I) before the date that the individual attains age 46,
       ``(II) on or before 1 or more dates specified in the trust 
     instrument that will occur before the date that such 
     individual attains age 46, or
       ``(III) upon the occurrence of an event that, in accordance 
     with regulations prescribed by the Secretary, may reasonably 
     be expected to occur before the date that such individual 
     attains age 46;

       ``(ii) the trust instrument provides that more than 25 
     percent of the trust corpus must be distributed to or may be 
     withdrawn by 1 or more individuals who are non-skip persons 
     and who are living on the date of death of another person 
     identified in the instrument (by name or by class) who is 
     more than 10 years older than such individuals;
       ``(iii) the trust instrument provides that, if 1 or more 
     individuals who are non-skip persons die on or before a date 
     or event described in clause (i) or (ii), more than 25 
     percent of the trust corpus either must be distributed to the 
     estate or estates of 1 or more of such individuals or is 
     subject to a general power of appointment exercisable by 1 or 
     more of such individuals;
       ``(iv) the trust is a trust any portion of which would be 
     included in the gross estate of a non-skip person (other than 
     the transferor) if such person died immediately after the 
     transfer;
       ``(v) the trust is a charitable lead annuity trust (within 
     the meaning of section 2642(e)(3)(A)) or a charitable 
     remainder annuity trust or a charitable remainder unitrust 
     (within the meaning of section 664(d)); or
       ``(vi) the trust is a trust with respect to which a 
     deduction was allowed under section 2522 for the amount of an 
     interest in the form of the right to receive annual payments 
     of a fixed percentage of the net fair market value of the 
     trust property (determined yearly) and which is required to 
     pay principal to a non-skip person if such person is alive 
     when the yearly payments for which the deduction was allowed 
     terminate.
     For purposes of this subparagraph, the value of transferred 
     property shall not be considered to be includible in the 
     gross estate of a non-skip person or subject to a right of 
     withdrawal by reason of such person holding a right to 
     withdraw so much of such property as does not exceed the 
     amount referred to in section 2503(b) with respect to any 
     transferor, and it shall be assumed that powers of 
     appointment held by non-skip persons will not be exercised.
       ``(4) Automatic allocations to certain gst trusts.--For 
     purposes of this subsection, an indirect skip to which 
     section 2642(f) applies shall be deemed to have been made 
     only at the close of the estate tax inclusion period. The 
     fair market value of such transfer shall be the fair market 
     value of the trust property at the close of the estate tax 
     inclusion period.
       ``(5) Applicability and effect.--
       ``(A) In general.--An individual--
       ``(i) may elect to have this subsection not apply to--

       ``(I) an indirect skip, or
       ``(II) any or all transfers made by such individual to a 
     particular trust, and

       ``(ii) may elect to treat any trust as a GST trust for 
     purposes of this subsection with respect to any or all 
     transfers made by such individual to such trust.
       ``(B) Elections.--
       ``(i) Elections with respect to indirect skips.--An 
     election under subparagraph (A)(i)(I) shall be deemed to be 
     timely if filed on a timely filed gift tax return for the 
     calendar year in which the transfer was made or deemed to 
     have been made pursuant to paragraph (4) or on such later 
     date or dates as may be prescribed by the Secretary.
       ``(ii) Other elections.--An election under clause (i)(II) 
     or (ii) of subparagraph (A) may be made on a timely filed 
     gift tax return for the calendar year for which the election 
     is to become effective.
       ``(d) Retroactive Allocations.--
       ``(1) In general.--If--
       ``(A) a non-skip person has an interest or a future 
     interest in a trust to which any transfer has been made,
       ``(B) such person--
       ``(i) is a lineal descendant of a grandparent of the 
     transferor or of a grandparent of the transferor's spouse or 
     former spouse, and
       ``(ii) is assigned to a generation below the generation 
     assignment of the transferor, and
       ``(C) such person predeceases the transferor,
     then the transferor may make an allocation of any of such 
     transferor's unused GST exemption to any previous transfer or 
     transfers to the trust on a chronological basis.
       ``(2) Special rules.--If the allocation under paragraph (1) 
     by the transferor is made on a gift tax return filed on or 
     before the date prescribed by section 6075(b) for gifts made 
     within the calendar year within which the non-skip person's 
     death occurred--
       ``(A) the value of such transfer or transfers for purposes 
     of section 2642(a) shall be determined as if such allocation 
     had been made on a timely filed gift tax return for each 
     calendar year within which each transfer was made,
       ``(B) such allocation shall be effective immediately before 
     such death, and
       ``(C) the amount of the transferor's unused GST exemption 
     available to be allocated shall be determined immediately 
     before such death.
       ``(3) Future interest.--For purposes of this subsection, a 
     person has a future interest in a trust if the trust may 
     permit income or corpus to be paid to such person on a date 
     or dates in the future.''.
       (b) Conforming Amendment.--Paragraph (2) of section 2632(b) 
     is amended by striking ``with respect to a direct skip'' and 
     inserting ``or subsection (c)(1)''.
       (c) Effective Dates.--

[[Page 19589]]

       (1) Deemed allocation.--Section 2632(c) of the Internal 
     Revenue Code of 1986 (as added by subsection (a)), and the 
     amendment made by subsection (b), shall apply to transfers 
     subject to chapter 11 or 12 made after December 31, 1999, and 
     to estate tax inclusion periods ending after December 31, 
     1999.
       (2) Retroactive allocations.--Section 2632(d) of the 
     Internal Revenue Code of 1986 (as added by subsection (a)) 
     shall apply to deaths of non-skip persons occurring after the 
     date of the enactment of this Act.

     SEC. 632. SEVERING OF TRUSTS.

       (a) In General.--Subsection (a) of section 2642 (relating 
     to inclusion ratio) is amended by adding at the end the 
     following new paragraph:
       ``(3) Severing of trusts.--
       ``(A) In general.--If a trust is severed in a qualified 
     severance, the trusts resulting from such severance shall be 
     treated as separate trusts thereafter for purposes of this 
     chapter.
       ``(B) Qualified severance.--For purposes of subparagraph 
     (A)--
       ``(i) In general.--The term `qualified severance' means the 
     division of a single trust and the creation (by any means 
     available under the governing instrument or under local law) 
     of 2 or more trusts if--

       ``(I) the single trust was divided on a fractional basis, 
     and
       ``(II) the terms of the new trusts, in the aggregate, 
     provide for the same succession of interests of beneficiaries 
     as are provided in the original trust.

       ``(ii) Trusts with inclusion ratio greater than zero.--If a 
     trust has an inclusion ratio of greater than zero and less 
     than 1, a severance is a qualified severance only if the 
     single trust is divided into 2 trusts, one of which receives 
     a fractional share of the total value of all trust assets 
     equal to the applicable fraction of the single trust 
     immediately before the severance. In such case, the trust 
     receiving such fractional share shall have an inclusion ratio 
     of zero and the other trust shall have an inclusion ratio of 
     1.
       ``(iii) Regulations.--The term `qualified severance' 
     includes any other severance permitted under regulations 
     prescribed by the Secretary.
       ``(C) Timing and manner of severances.--A severance 
     pursuant to this paragraph may be made at any time. The 
     Secretary shall prescribe by forms or regulations the manner 
     in which the qualified severance shall be reported to the 
     Secretary.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to severances after the date of the enactment of 
     this Act.

     SEC. 633. MODIFICATION OF CERTAIN VALUATION RULES.

       (a) Gifts for Which Gift Tax Return Filed or Deemed 
     Allocation Made.--Paragraph (1) of section 2642(b) (relating 
     to valuation rules, etc.) is amended to read as follows:
       ``(1) Gifts for which gift tax return filed or deemed 
     allocation made.--If the allocation of the GST exemption to 
     any transfers of property is made on a gift tax return filed 
     on or before the date prescribed by section 6075(b) for such 
     transfer or is deemed to be made under section 2632 (b)(1) or 
     (c)(1)--
       ``(A) the value of such property for purposes of subsection 
     (a) shall be its value as finally determined for purposes of 
     chapter 12 (within the meaning of section 2001(f)(2)), or, in 
     the case of an allocation deemed to have been made at the 
     close of an estate tax inclusion period, its value at the 
     time of the close of the estate tax inclusion period, and
       ``(B) such allocation shall be effective on and after the 
     date of such transfer, or, in the case of an allocation 
     deemed to have been made at the close of an estate tax 
     inclusion period, on and after the close of such estate tax 
     inclusion period.''.
       (b) Transfers at Death.--Subparagraph (A) of section 
     2642(b)(2) is amended to read as follows:
       ``(A) Transfers at death.--If property is transferred as a 
     result of the death of the transferor, the value of such 
     property for purposes of subsection (a) shall be its value as 
     finally determined for purposes of chapter 11; except that, 
     if the requirements prescribed by the Secretary respecting 
     allocation of post-death changes in value are not met, the 
     value of such property shall be determined as of the time of 
     the distribution concerned.''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect as if included in the amendments made by 
     section 1431 of the Tax Reform Act of 1986.

     SEC. 634. RELIEF PROVISIONS.

       (a) In General.--Section 2642 is amended by adding at the 
     end the following new subsection:
       ``(g) Relief Provisions.--
       ``(1) Relief for late elections.--
       ``(A) In general.--The Secretary shall by regulation 
     prescribe such circumstances and procedures under which 
     extensions of time will be granted to make--
       ``(i) an allocation of GST exemption described in paragraph 
     (1) or (2) of subsection (b), and
       ``(ii) an election under subsection (b)(3) or (c)(5) of 
     section 2632.
     Such regulations shall include procedures for requesting 
     comparable relief with respect to transfers made before the 
     date of the enactment of this paragraph.
       ``(B) Basis for determinations.--In determining whether to 
     grant relief under this paragraph, the Secretary shall take 
     into account all relevant circumstances, including evidence 
     of intent contained in the trust instrument or instrument of 
     transfer and such other factors as the Secretary deems 
     relevant. For purposes of determining whether to grant relief 
     under this paragraph, the time for making the allocation (or 
     election) shall be treated as if not expressly prescribed by 
     statute.
       ``(2) Substantial compliance.--An allocation of GST 
     exemption under section 2632 that demonstrates an intent to 
     have the lowest possible inclusion ratio with respect to a 
     transfer or a trust shall be deemed to be an allocation of so 
     much of the transferor's unused GST exemption as produces the 
     lowest possible inclusion ratio. In determining whether there 
     has been substantial compliance, all relevant circumstances 
     shall be taken into account, including evidence of intent 
     contained in the trust instrument or instrument of transfer 
     and such other factors as the Secretary deems relevant.''.
       (b) Effective Dates.--
       (1) Relief for late elections.--Section 2642(g)(1) of the 
     Internal Revenue Code of 1986 (as added by subsection (a)) 
     shall apply to requests pending on, or filed after, the date 
     of the enactment of this Act.
       (2) Substantial compliance.--Section 2642(g)(2) of such 
     Code (as so added) shall take effect on the date of the 
     enactment of this Act and shall apply to allocations made 
     prior to such date for purposes of determining the tax 
     consequences of generation-skipping transfers with respect to 
     which the period of time for filing claims for refund has not 
     expired. No implication is intended with respect to the 
     availability of relief for late elections or the application 
     of a rule of substantial compliance prior to the enactment of 
     this amendment.

                   Subtitle E--Conservation Easements

     SEC. 641. EXPANSION OF ESTATE TAX RULE FOR CONSERVATION 
                   EASEMENTS.

       (a) Where Land Is Located.--
       (1) In general.--Clause (i) of section 2031(c)(8)(A) 
     (defining land subject to a conservation easement) is 
     amended--
       (A) by striking ``25 miles'' both places it appears and 
     inserting ``50 miles'', and
       (B) striking ``10 miles'' and inserting ``25 miles''.
       (2) Effective date.--The amendments made by this subsection 
     shall apply to estates of decedents dying after December 31, 
     1999.
       (b) Clarification of Date for Determining Value of Land and 
     Easement.--
       (1) In general.--Section 2031(c)(2) (defining applicable 
     percentage) is amended by adding at the end the following new 
     sentence: ``The values taken into account under the preceding 
     sentence shall be such values as of the date of the 
     contribution referred to in paragraph (8)(B).''.
       (2) Effective date.--The amendment made by this subsection 
     shall apply to estates of decedents dying after December 31, 
     1997.

    TITLE VII--TAX RELIEF FOR DISTRESSED COMMUNITIES AND INDUSTRIES

           Subtitle A--American Community Renewal Act of 1999

     SEC. 701. SHORT TITLE.

       This subtitle may be cited as the ``American Community 
     Renewal Act of 1999''.

     SEC. 702. DESIGNATION OF AND TAX INCENTIVES FOR RENEWAL 
                   COMMUNITIES.

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

                  ``Subchapter X--Renewal Communities

``Part   I. Designation.
``Part  II. Renewal community capital gain; renewal community business.
``Part  III. Family development accounts.
``Part   IV. Additional incentives.

                         ``PART I--DESIGNATION

``Sec. 1400E. Designation of renewal communities.

     ``SEC. 1400E. DESIGNATION OF RENEWAL COMMUNITIES.

       ``(a) Designation.--
       ``(1) Definitions.--For purposes of this title, the term 
     `renewal community' means any area--
       ``(A) which is nominated by one or more local governments 
     and the State or States in which it is located for 
     designation as a renewal community (hereinafter in this 
     section referred to as a `nominated area'); and
       ``(B) which the Secretary of Housing and Urban Development 
     designates as a renewal community, after consultation with--
       ``(i) the Secretaries of Agriculture, Commerce, Labor, and 
     the Treasury; the Director of the Office of Management and 
     Budget; and the Administrator of the Small Business 
     Administration; and
       ``(ii) in the case of an area on an Indian reservation, the 
     Secretary of the Interior.
       ``(2) Number of designations.--
       ``(A) In general.--The Secretary of Housing and Urban 
     Development may designate not more than 20 nominated areas as 
     renewal communities.
       ``(B) Minimum designation in rural areas.--Of the areas 
     designated under paragraph (1), at least 4 must be areas--

[[Page 19590]]

       ``(i) which are within a local government jurisdiction or 
     jurisdictions with a population of less than 50,000,
       ``(ii) which are outside of a metropolitan statistical area 
     (within the meaning of section 143(k)(2)(B)), or
       ``(iii) which are determined by the Secretary of Housing 
     and Urban Development, after consultation with the Secretary 
     of Commerce, to be rural areas.
       ``(3) Areas designated based on degree of poverty, etc.--
       ``(A) In general.--Except as otherwise provided in this 
     section, the nominated areas designated as renewal 
     communities under this subsection shall be those nominated 
     areas with the highest average ranking with respect to the 
     criteria described in subparagraphs (B), (C), and (D) of 
     subsection (c)(3). For purposes of the preceding sentence, an 
     area shall be ranked within each such criterion on the basis 
     of the amount by which the area exceeds such criterion, with 
     the area which exceeds such criterion by the greatest amount 
     given the highest ranking.
       ``(B) Exception where inadequate course of action, etc.--An 
     area shall not be designated under subparagraph (A) if the 
     Secretary of Housing and Urban Development determines that 
     the course of action described in subsection (d)(2) with 
     respect to such area is inadequate.
       ``(C) Priority for empowerment zones and enterprise 
     communities with respect to first half of designations.--With 
     respect to the first 10 designations made under this 
     section--
       ``(i) all shall be chosen from nominated areas which are 
     empowerment zones or enterprise communities (and are 
     otherwise eligible for designation under this section); and
       ``(ii) 2 shall be areas described in paragraph (2)(B).
       ``(4) Limitation on designations.--
       ``(A) Publication of regulations.--The Secretary of Housing 
     and Urban Development shall prescribe by regulation no later 
     than 4 months after the date of the enactment of this 
     section, after consultation with the officials described in 
     paragraph (1)(B)--
       ``(i) the procedures for nominating an area under paragraph 
     (1)(A);
       ``(ii) the parameters relating to the size and population 
     characteristics of a renewal community; and
       ``(iii) the manner in which nominated areas will be 
     evaluated based on the criteria specified in subsection (d).
       ``(B) Time limitations.--The Secretary of Housing and Urban 
     Development may designate nominated areas as renewal 
     communities only during the 24-month period beginning on the 
     first day of the first month following the month in which the 
     regulations described in subparagraph (A) are prescribed.
       ``(C) Procedural rules.--The Secretary of Housing and Urban 
     Development shall not make any designation of a nominated 
     area as a renewal community under paragraph (2) unless--
       ``(i) the local governments and the States in which the 
     nominated area is located have the authority--

       ``(I) to nominate such area for designation as a renewal 
     community;
       ``(II) to make the State and local commitments described in 
     subsection (d); and
       ``(III) to provide assurances satisfactory to the Secretary 
     of Housing and Urban Development that such commitments will 
     be fulfilled,

       ``(ii) a nomination regarding such area is submitted in 
     such a manner and in such form, and contains such 
     information, as the Secretary of Housing and Urban 
     Development shall by regulation prescribe; and
       ``(iii) the Secretary of Housing and Urban Development 
     determines that any information furnished is reasonably 
     accurate.
       ``(5) Nomination process for indian reservations.--For 
     purposes of this subchapter, in the case of a nominated area 
     on an Indian reservation, the reservation governing body (as 
     determined by the Secretary of the Interior) shall be treated 
     as being both the State and local governments with respect to 
     such area.
       ``(b) Period for Which Designation Is in Effect.--
       ``(1) al.--Any designation of an area as a renewal 
     community shall remain in effect during the period beginning 
     on the date of the designation and ending on the earliest 
     of--
       ``(A) December 31, 2007,
       ``(B) the termination date designated by the State and 
     local governments in their nomination, or
       ``(C) the date the Secretary of Housing and Urban 
     Development revokes such designation.
       ``(2) Revocation of designation.--The Secretary of Housing 
     and Urban Development may revoke the designation under this 
     section of an area if such Secretary determines that the 
     local government or the State in which the area is located--
       ``(A) has modified the boundaries of the area, or
       ``(B) is not complying substantially with, or fails to make 
     progress in achieving, the State or local commitments, 
     respectively, described in subsection (d).
       ``(c) Area and Eligibility Requirements.--
       ``(1) In general.--The Secretary of Housing and Urban 
     Development may designate a nominated area as a renewal 
     community under subsection (a) only if the area meets the 
     requirements of paragraphs (2) and (3) of this subsection.
       ``(2) Area requirements.--A nominated area meets the 
     requirements of this paragraph if--
       ``(A) the area is within the jurisdiction of one or more 
     local governments;
       ``(B) the boundary of the area is continuous; and
       ``(C) the area--
       ``(i) has a population, of at least--

       ``(I) 4,000 if any portion of such area (other than a rural 
     area described in subsection (a)(2)(B)(i)) is located within 
     a metropolitan statistical area (within the meaning of 
     section 143(k)(2)(B)) which has a population of 50,000 or 
     greater; or
       ``(II) 1,000 in any other case; or

       ``(ii) is entirely within an Indian reservation (as 
     determined by the Secretary of the Interior).
       ``(3) Eligibility requirements.--A nominated area meets the 
     requirements of this paragraph if the State and the local 
     governments in which it is located certify (and the Secretary 
     of Housing and Urban Development, after such review of 
     supporting data as he deems appropriate, accepts such 
     certification) that--
       ``(A) the area is one of pervasive poverty, unemployment, 
     and general distress;
       ``(B) the unemployment rate in the area, as determined by 
     the most recent available data, was at least 1\1/2\ times the 
     national unemployment rate for the period to which such data 
     relate;
       ``(C) the poverty rate for each population census tract 
     within the nominated area is at least 20 percent; and
       ``(D) in the case of an urban area, at least 70 percent of 
     the households living in the area have incomes below 80 
     percent of the median income of households within the 
     jurisdiction of the local government (determined in the same 
     manner as under section 119(b)(2) of the Housing and 
     Community Development Act of 1974).
       ``(4) Consideration of high incidence of crime.--The 
     Secretary of Housing and Urban Development shall take into 
     account, in selecting nominated areas for designation as 
     renewal communities under this section, the extent to which 
     such areas have a high incidence of crime.
       ``(5) Consideration of communities identified in gao 
     study.--The Secretary of Housing and Urban Development shall 
     take into account, in selecting nominated areas for 
     designation as renewal communities under this section, if the 
     area has census tracts identified in the May 12, 1998, report 
     of the Government Accounting Office regarding the 
     identification of economically distressed areas.
       ``(d) Required State and Local Commitments.--
       ``(1) In general.--The Secretary of Housing and Urban 
     Development may designate any nominated area as a renewal 
     community under subsection (a) only if--
       ``(A) the local government and the State in which the area 
     is located agree in writing that, during any period during 
     which the area is a renewal community, such governments will 
     follow a specified course of action which meets the 
     requirements of paragraph (2) and is designed to reduce the 
     various burdens borne by employers or employees in such area; 
     and
       ``(B) the economic growth promotion requirements of 
     paragraph (3) are met.
       ``(2) Course of action.--
       ``(A) In general.--A course of action meets the 
     requirements of this paragraph if such course of action is a 
     written document, signed by a State (or local government) and 
     neighborhood organizations, which evidences a partnership 
     between such State or government and community-based 
     organizations and which commits each signatory to specific 
     and measurable goals, actions, and timetables. Such course of 
     action shall include at least five of the following:
       ``(i) A reduction of tax rates or fees applying within the 
     renewal community.
       ``(ii) An increase in the level of efficiency of local 
     services within the renewal community.
       ``(iii) Crime reduction strategies, such as crime 
     prevention (including the provision of such services by 
     nongovernmental entities).
       ``(iv) Actions to reduce, remove, simplify, or streamline 
     governmental requirements applying within the renewal 
     community.
       ``(v) Involvement in the program by private entities, 
     organizations, neighborhood organizations, and community 
     groups, particularly those in the renewal community, 
     including a commitment from such private entities to provide 
     jobs and job training for, and technical, financial, or other 
     assistance to, employers, employees, and residents from the 
     renewal community.
       ``(vi) State or local income tax benefits for fees paid for 
     services performed by a nongovernmental entity which were 
     formerly performed by a governmental entity.
       ``(vii) The gift (or sale at below fair market value) of 
     surplus real property (such as land, homes, and commercial or 
     industrial structures) in the renewal community to 
     neighborhood organizations, community development 
     corporations, or private companies.

[[Page 19591]]

       ``(B) Recognition of past efforts.--For purposes of this 
     section, in evaluating the course of action agreed to by any 
     State or local government, the Secretary of Housing and Urban 
     Development shall take into account the past efforts of such 
     State or local government in reducing the various burdens 
     borne by employers and employees in the area involved.
       ``(3) Economic growth promotion requirements.--The economic 
     growth promotion requirements of this paragraph are met with 
     respect to a nominated area if the local government and the 
     State in which such area is located certify in writing that 
     such government and State, respectively, have repealed or 
     otherwise will not enforce within the area, if such area is 
     designated as a renewal community--
       ``(A) licensing requirements for occupations that do not 
     ordinarily require a professional degree;
       ``(B) zoning restrictions on home-based businesses which do 
     not create a public nuisance;
       ``(C) permit requirements for street vendors who do not 
     create a public nuisance;
       ``(D) zoning or other restrictions that impede the 
     formation of schools or child care centers; and
       ``(E) franchises or other restrictions on competition for 
     businesses providing public services, including but not 
     limited to taxicabs, jitneys, cable television, or trash 
     hauling,
     except to the extent that such regulation of businesses and 
     occupations is necessary for and well-tailored to the 
     protection of health and safety.
       ``(e) Coordination With Treatment of Empowerment Zones and 
     Enterprise Communities.--For purposes of this title, if there 
     are in effect with respect to the same area both--
       ``(1) a designation as a renewal community; and
       ``(2) a designation as an empowerment zone or enterprise 
     community,
     both of such designations shall be given full effect with 
     respect to such area.
       ``(f) Definitions and Special Rules.--For purposes of this 
     subchapter--
       ``(1) Governments.--If more than one government seeks to 
     nominate an area as a renewal community, any reference to, or 
     requirement of, this section shall apply to all such 
     governments.
       ``(2) State.--The term `State' includes Puerto Rico, the 
     Virgin Islands of the United States, Guam, American Samoa, 
     the Northern Mariana Islands, and any other possession of the 
     United States.
       ``(3) Local government.--The term `local government' 
     means--
       ``(A) any county, city, town, township, parish, village, or 
     other general purpose political subdivision of a State;
       ``(B) any combination of political subdivisions described 
     in subparagraph (A) recognized by the Secretary of Housing 
     and Urban Development; and
       ``(C) the District of Columbia.
       ``(4) Application of rules relating to census tracts and 
     census data.--The rules of sections 1392(b)(4) and 1393(a)(9) 
     shall apply.

 ``PART II--RENEWAL COMMUNITY CAPITAL GAIN; RENEWAL COMMUNITY BUSINESS

``Sec. 1400F. Renewal community capital gain.
``Sec. 1400G. Renewal community business defined.

     ``SEC. 1400F. RENEWAL COMMUNITY CAPITAL GAIN.

       ``(a) General Rule.--Gross income does not include any 
     qualified capital gain recognized on the sale or exchange of 
     a qualified community asset held for more than 5 years.
       ``(b) Qualified Community Asset.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified community asset' 
     means--
       ``(A) any qualified community stock;
       ``(B) any qualified community partnership interest; and
       ``(C) any qualified community business property.
       ``(2) Qualified community stock.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the term `qualified community stock' means any stock in a 
     domestic corporation if--
       ``(i) such stock is acquired by the taxpayer after December 
     31, 2000, and before January 1, 2008, at its original issue 
     (directly or through an underwriter) from the corporation 
     solely in exchange for cash;
       ``(ii) as of the time such stock was issued, such 
     corporation was a renewal community business (or, in the case 
     of a new corporation, such corporation was being organized 
     for purposes of being a renewal community business); and
       ``(iii) during substantially all of the taxpayer's holding 
     period for such stock, such corporation qualified as a 
     renewal community business.
       ``(B) Redemptions.--A rule similar to the rule of section 
     1202(c)(3) shall apply for purposes of this paragraph.
       ``(3) Qualified community partnership interest.--The term 
     `qualified community partnership interest' means any capital 
     or profits interest in a domestic partnership if--
       ``(A) such interest is acquired by the taxpayer after 
     December 31, 2000, and before January 1, 2008;
       ``(B) as of the time such interest was acquired, such 
     partnership was a renewal community business (or, in the case 
     of a new partnership, such partnership was being organized 
     for purposes of being a renewal community business); and
       ``(C) during substantially all of the taxpayer's holding 
     period for such interest, such partnership qualified as a 
     renewal community business.
     A rule similar to the rule of paragraph (2)(B) shall apply 
     for purposes of this paragraph.
       ``(4) Qualified community business property.--
       ``(A) In general.--The term `qualified community business 
     property' means tangible property if--
       ``(i) such property was acquired by the taxpayer by 
     purchase (as defined in section 179(d)(2)) after December 31, 
     2000, and before January 1, 2008;
       ``(ii) the original use of such property in the renewal 
     community commences with the taxpayer; and
       ``(iii) during substantially all of the taxpayer's holding 
     period for such property, substantially all of the use of 
     such property was in a renewal community business of the 
     taxpayer.
       ``(B) Special rule for substantial improvements.--The 
     requirements of clauses (i) and (ii) of subparagraph (A) 
     shall be treated as satisfied with respect to--
       ``(i) property which is substantially improved (within the 
     meaning of section 1400B(b)(4)(B)(ii)) by the taxpayer before 
     January 1, 2008; and
       ``(ii) any land on which such property is located.
       ``(c) Certain Rules To Apply.--Rules similar to the rules 
     of paragraphs (5), (6), and (7) of subsection (b), and 
     subsections (e), (f), and (g), of section 1400B shall apply 
     for purposes of this section.

     ``SEC. 1400G. RENEWAL COMMUNITY BUSINESS DEFINED.

       ``For purposes of this part, the term `renewal community 
     business' means any entity or proprietorship which would be a 
     qualified business entity or qualified proprietorship under 
     section 1397B if--
       ``(1) references to renewal communities were substituted 
     for references to empowerment zones in such section; and
       ``(2) `80 percent' were substituted for `50 percent' in 
     subsections (b)(2) and (c)(1) of such section.

                ``PART III--FAMILY DEVELOPMENT ACCOUNTS

``Sec. 1400H. Family development accounts for renewal community EITC 
              recipients.
``Sec. 1400I. Designation of earned income tax credit payments for 
              deposit to family development account.

     ``SEC. 1400H. FAMILY DEVELOPMENT ACCOUNTS FOR RENEWAL 
                   COMMUNITY EITC RECIPIENTS.

       ``(a) Allowance of Deduction.--
       ``(1) In general.--There shall be allowed as a deduction--
       ``(A) in the case of a qualified individual, the amount 
     paid in cash for the taxable year by such individual to any 
     family development account for such individual's benefit; and
       ``(B) in the case of any person other than a qualified 
     individual, the amount paid in cash for the taxable year by 
     such person to any family development account for the benefit 
     of a qualified individual but only if the amount so paid is 
     designated for purposes of this section by such individual.
       ``(2) Limitation.--
       ``(A) In general.--The amount allowable as a deduction to 
     any individual for any taxable year by reason of paragraph 
     (1)(A) shall not exceed the lesser of--
       ``(i) $2,000, or
       ``(ii) an amount equal to the compensation includible in 
     the individual's gross income for such taxable year.
       ``(B) Persons donating to family development accounts of 
     others.--The amount which may be designated under paragraph 
     (1)(B) by any qualified individual for any taxable year of 
     such individual shall not exceed $1,000.
       ``(3) Special rules for certain married individuals.--Rules 
     similar to rules of section 219(c) shall apply to the 
     limitation in paragraph (2)(A).
       ``(4) Coordination with iras.--No deduction shall be 
     allowed under this section for any taxable year to any person 
     by reason of a payment to an account for the benefit of a 
     qualified individual if any amount is paid for such taxable 
     year into an individual retirement account (including a Roth 
     IRA) for the benefit of such individual.
       ``(5) Rollovers.--No deduction shall be allowed under this 
     section with respect to any rollover contribution.
       ``(b) Tax Treatment of Distributions.--
       ``(1) Inclusion of amounts in gross income.--Except as 
     otherwise provided in this subsection, any amount paid or 
     distributed out of a family development account shall be 
     included in gross income by the payee or distributee, as the 
     case may be.
       ``(2) Exclusion of qualified family development 
     distributions.--Paragraph (1) shall

[[Page 19592]]

     not apply to any qualified family development distribution.
       ``(c) Qualified Family Development Distribution.--For 
     purposes of this section--
       ``(1) In general.--The term `qualified family development 
     distribution' means any amount paid or distributed out of a 
     family development account which would otherwise be 
     includible in gross income, to the extent that such payment 
     or distribution is used exclusively to pay qualified family 
     development expenses for the holder of the account or the 
     spouse or dependent (as defined in section 152) of such 
     holder.
       ``(2) Qualified family development expenses.--The term 
     `qualified family development expenses' means any of the 
     following:
       ``(A) Qualified higher education expenses.
       ``(B) Qualified first-time homebuyer costs.
       ``(C) Qualified business capitalization costs.
       ``(D) Qualified medical expenses.
       ``(E) Qualified rollovers.
       ``(3) Qualified higher education expenses.--
       ``(A) In general.--The term `qualified higher education 
     expenses' has the meaning given such term by section 
     72(t)(7), determined by treating postsecondary vocational 
     educational schools as eligible educational institutions.
       ``(B) Postsecondary vocational education school.--The term 
     `postsecondary vocational educational school' means an area 
     vocational education school (as defined in subparagraph (C) 
     or (D) of section 521(4) of the Carl D. Perkins Vocational 
     and Applied Technology Education Act (20 U.S.C. 2471(4))) 
     which is in any State (as defined in section 521(33) of such 
     Act), as such sections are in effect on the date of the 
     enactment of this section.
       ``(C) Coordination with other benefits.--The amount of 
     qualified higher education expenses for any taxable year 
     shall be reduced as provided in section 25A(g)(2).
       ``(4) Qualified first-time homebuyer costs.--The term 
     `qualified first-time homebuyer costs' means qualified 
     acquisition costs (as defined in section 72(t)(8) without 
     regard to subparagraph (B) thereof) with respect to a 
     principal residence (within the meaning of section 121) for a 
     qualified first-time homebuyer (as defined in section 
     72(t)(8)).
       ``(5) Qualified business capitalization costs.--
       ``(A) In general.--The term `qualified business 
     capitalization costs' means qualified expenditures for the 
     capitalization of a qualified business pursuant to a 
     qualified plan.
       ``(B) Qualified expenditures.--The term `qualified 
     expenditures' means expenditures included in a qualified 
     plan, including capital, plant, equipment, working capital, 
     and inventory expenses.
       ``(C) Qualified business.--The term `qualified business' 
     means any trade or business other than any trade or 
     business--
       ``(i) which consists of the operation of any facility 
     described in section 144(c)(6)(B), or
       ``(ii) which contravenes any law.
       ``(D) Qualified plan.--The term `qualified plan' means a 
     business plan which meets such requirements as the Secretary 
     may specify.
       ``(6) Qualified medical expenses.--The term `qualified 
     medical expenses' means any amount paid during the taxable 
     year, not compensated for by insurance or otherwise, for 
     medical care (as defined in section 213(d)) of the taxpayer, 
     his spouse, or his dependent (as defined in section 152).
       ``(7) Qualified rollovers.--The term `qualified rollover' 
     means any amount paid from a family development account of a 
     taxpayer into another such account established for the 
     benefit of--
       ``(A) such taxpayer, or
       ``(B) any qualified individual who is--
       ``(i) the spouse of such taxpayer, or
       ``(ii) any dependent (as defined in section 152) of the 
     taxpayer.
     Rules similar to the rules of section 408(d)(3) shall apply 
     for purposes of this paragraph.
       ``(d) Tax Treatment of Accounts.--
       ``(1) In general.--Any family development account is exempt 
     from taxation under this subtitle unless such account has 
     ceased to be a family development account by reason of 
     paragraph (2). Notwithstanding the preceding sentence, any 
     such account is subject to the taxes imposed by section 511 
     (relating to imposition of tax on unrelated business income 
     of charitable, etc., organizations). Notwithstanding any 
     other provision of this title (including chapters 11 and 12), 
     the basis of any person in such an account is zero.
       ``(2) Loss of exemption in case of prohibited 
     transactions.--For purposes of this section, rules similar to 
     the rules of section 408(e) shall apply.
       ``(3) Other rules to apply.--Rules similar to the rules of 
     paragraphs (4), (5), and (6) of section 408(d) shall apply 
     for purposes of this section.
       ``(e) Family Development Account.--For purposes of this 
     title, the term `family development account' means a trust 
     created or organized in the United States for the exclusive 
     benefit of a qualified individual or his beneficiaries, but 
     only if the written governing instrument creating the trust 
     meets the following requirements:
       ``(1) Except in the case of a qualified rollover (as 
     defined in subsection (c)(7))--
       ``(A) no contribution will be accepted unless it is in 
     cash; and
       ``(B) contributions will not be accepted for the taxable 
     year in excess of $3,000.
       ``(2) The requirements of paragraphs (2) through (6) of 
     section 408(a) are met.
       ``(f) Qualified Individual.--For purposes of this section, 
     the term `qualified individual' means, for any taxable year, 
     an individual--
       ``(1) who is a bona fide resident of a renewal community 
     throughout the taxable year; and
       ``(2) to whom a credit was allowed under section 32 for the 
     preceding taxable year.
       ``(g) Other Definitions and Special Rules.--
       ``(1) Compensation.--The term `compensation' has the 
     meaning given such term by section 219(f)(1).
       ``(2) Married individuals.--The maximum deduction under 
     subsection (a) shall be computed separately for each 
     individual, and this section shall be applied without regard 
     to any community property laws.
       ``(3) Time when contributions deemed made.--For purposes of 
     this section, a taxpayer shall be deemed to have made a 
     contribution to a family development account on the last day 
     of the preceding taxable year if the contribution is made on 
     account of such taxable year and is made not later than the 
     time prescribed by law for filing the return for such taxable 
     year (not including extensions thereof).
       ``(4) Employer payments; custodial accounts.--Rules similar 
     to the rules of sections 219(f)(5) and 408(h) shall apply for 
     purposes of this section.
       ``(5) Reports.--The trustee of a family development account 
     shall make such reports regarding such account to the 
     Secretary and to the individual for whom the account is 
     maintained with respect to contributions (and the years to 
     which they relate), distributions, and such other matters as 
     the Secretary may require under regulations. The reports 
     required by this paragraph--
       ``(A) shall be filed at such time and in such manner as the 
     Secretary prescribes in such regulations; and
       ``(B) shall be furnished to individuals--
       ``(i) not later than January 31 of the calendar year 
     following the calendar year to which such reports relate; and
       ``(ii) in such manner as the Secretary prescribes in such 
     regulations.
       ``(6) Investment in collectibles treated as 
     distributions.--Rules similar to the rules of section 408(m) 
     shall apply for purposes of this section.
       ``(h) Penalty for Distributions Not Used for Qualified 
     Family Development Expenses.--
       ``(1) In general.--If any amount is distributed from a 
     family development account and is not used exclusively to pay 
     qualified family development expenses for the holder of the 
     account or the spouse or dependent (as defined in section 
     152) of such holder, the tax imposed by this chapter for the 
     taxable year of such distribution shall be increased by 10 
     percent of the portion of such amount which is includible in 
     gross income.
       ``(2) Exception for certain distributions.--Paragraph (1) 
     shall not apply to distributions which are--
       ``(A) made on or after the date on which the account holder 
     attains age 59\1/2\,
       ``(B) made to a beneficiary (or the estate of the account 
     holder) on or after the death of the account holder, or
       ``(C) attributable to the account holder's being disabled 
     within the meaning of section 72(m)(7).
       ``(i) Application of Section.--This section shall apply to 
     amounts paid to a family development account for any taxable 
     year beginning after December 31, 2000, and before January 1, 
     2008.

     ``SEC. 1400I. DESIGNATION OF EARNED INCOME TAX CREDIT 
                   PAYMENTS FOR DEPOSIT TO FAMILY DEVELOPMENT 
                   ACCOUNT.

       ``(a) In General.--With respect to the return of any 
     qualified individual (as defined in section 1400H(f)) for the 
     taxable year of the tax imposed by this chapter, such 
     individual may designate that a specified portion (not less 
     than $1) of any overpayment of tax for such taxable year 
     which is attributable to the earned income tax credit shall 
     be deposited by the Secretary into a family development 
     account of such individual. The Secretary shall so deposit 
     such portion designated under this subsection.
       ``(b) Manner and Time of Designation.--A designation under 
     subsection (a) may be made with respect to any taxable year--
       ``(1) at the time of filing the return of the tax imposed 
     by this chapter for such taxable year, or
       ``(2) at any other time (after the time of filing the 
     return of the tax imposed by this chapter for such taxable 
     year) specified in regulations prescribed by the Secretary.
     Such designation shall be made in such manner as the 
     Secretary prescribes by regulations.
       ``(c) Portion Attributable to Earned Income Tax Credit.--
     For purposes of subsection (a), an overpayment for any 
     taxable year shall be treated as attributable to the earned 
     income tax credit to the extent that such overpayment does 
     not exceed the credit allowed to the taxpayer under section 
     32 for such taxable year.

[[Page 19593]]

       ``(d) Overpayments Treated as Refunded.--For purposes of 
     this title, any portion of an overpayment of tax designated 
     under subsection (a) shall be treated as being refunded to 
     the taxpayer as of the last date prescribed for filing the 
     return of tax imposed by this chapter (determined without 
     regard to extensions) or, if later, the date the return is 
     filed.
       ``(e) Termination.--This section shall not apply to any 
     taxable year beginning after December 31, 2007.

                    ``PART IV--ADDITIONAL INCENTIVES

``Sec. 1400K. Commercial revitalization deduction.
``Sec. 1400L. Increase in expensing under section 179.

     ``SEC. 1400K. COMMERCIAL REVITALIZATION DEDUCTION.

       ``(a) General Rule.--At the election of the taxpayer, 
     either--
       ``(1) one-half of any qualified revitalization expenditures 
     chargeable to capital account with respect to any qualified 
     revitalization building shall be allowable as a deduction for 
     the taxable year in which the building is placed in service, 
     or
       ``(2) a deduction for all such expenditures shall be 
     allowable ratably over the 120-month period beginning with 
     the month in which the building is placed in service.
     The deduction provided by this section with respect to such 
     expenditure shall be in lieu of any depreciation deduction 
     otherwise allowable on account of such expenditure.
       ``(b) Qualified Revitalization Buildings and 
     Expenditures.--For purposes of this section--
       ``(1) Qualified revitalization building.--The term 
     `qualified revitalization building' means any building (and 
     its structural components) if--
       ``(A) such building is located in a renewal community and 
     is placed in service after December 31, 2000;
       ``(B) a commercial revitalization deduction amount is 
     allocated to the building under subsection (d); and
       ``(C) depreciation (or amortization in lieu of 
     depreciation) is allowable with respect to the building 
     (without regard to this section).
       ``(2) Qualified revitalization expenditure.--
       ``(A) In general.--The term `qualified revitalization 
     expenditure' means any amount properly chargeable to capital 
     account--
       ``(i) for property for which depreciation is allowable 
     under section 168 (without regard to this section) and which 
     is--

       ``(I) nonresidential real property; or
       ``(II) an addition or improvement to property described in 
     subclause (I);

       ``(ii) in connection with the construction of any qualified 
     revitalization building which was not previously placed in 
     service or in connection with the substantial rehabilitation 
     (within the meaning of section 47(c)(1)(C)) of a building 
     which was placed in service before the beginning of such 
     rehabilitation; and
       ``(iii) for land (including land which is functionally 
     related to such property and subordinate thereto).
       ``(B) Dollar limitation.--The aggregate amount which may be 
     treated as qualified revitalization expenditures with respect 
     to any qualified revitalization building for any taxable year 
     shall not exceed the excess of--
       ``(i) $10,000,000, reduced by
       ``(ii) any such expenditures with respect to the building 
     taken into account by the taxpayer or any predecessor in 
     determining the amount of the deduction under this section 
     for all preceding taxable years.
       ``(C) Certain expenditures not included.--The term 
     `qualified revitalization expenditure' does not include--
       ``(i) Acquisition costs.--The costs of acquiring any 
     building or interest therein and any land in connection with 
     such building to the extent that such costs exceed 30 percent 
     of the qualified revitalization expenditures determined 
     without regard to this clause.
       ``(ii) Credits.--Any expenditure which the taxpayer may 
     take into account in computing any credit allowable under 
     this title unless the taxpayer elects to take the expenditure 
     into account only for purposes of this section.
       ``(c) When Expenditures Taken Into Account.--Qualified 
     revitalization expenditures with respect to any qualified 
     revitalization building shall be taken into account for the 
     taxable year in which the qualified revitalization building 
     is placed in service. For purposes of the preceding sentence, 
     a substantial rehabilitation of a building shall be treated 
     as a separate building.
       ``(d) Limitation on Aggregate Deductions Allowable With 
     Respect to Buildings Located in a State.--
       ``(1) In general.--The amount of the deduction determined 
     under this section for any taxable year with respect to any 
     building shall not exceed the commercial revitalization 
     deduction amount (in the case of an amount determined under 
     subsection (a)(2), the present value of such amount as 
     determined under the rules of section 42(b)(2)(C) by 
     substituting `100 percent' for `72 percent' in clause (ii) 
     thereof) allocated to such building under this subsection by 
     the commercial revitalization agency. Such allocation shall 
     be made at the same time and in the same manner as under 
     paragraphs (1) and (7) of section 42(h).
       ``(2) Commercial revitalization deduction amount for 
     agencies.--
       ``(A) In general.--The aggregate commercial revitalization 
     deduction amount which a commercial revitalization agency may 
     allocate for any calendar year is the amount of the State 
     commercial revitalization deduction ceiling determined under 
     this paragraph for such calendar year for such agency.
       ``(B) State commercial revitalization deduction ceiling.--
     The State commercial revitalization deduction ceiling 
     applicable to any State--
       ``(i) for each calendar year after 2000 and before 2008 is 
     $6,000,000 for each renewal community in the State; and
       ``(ii) zero for each calendar year thereafter.
       ``(C) Commercial revitalization agency.--For purposes of 
     this section, the term `commercial revitalization agency' 
     means any agency authorized by a State to carry out this 
     section.
       ``(e) Responsibilities of Commercial Revitalization 
     Agencies.--
       ``(1) Plans for allocation.--Notwithstanding any other 
     provision of this section, the commercial revitalization 
     deduction amount with respect to any building shall be zero 
     unless--
       ``(A) such amount was allocated pursuant to a qualified 
     allocation plan of the commercial revitalization agency which 
     is approved (in accordance with rules similar to the rules of 
     section 147(f)(2) (other than subparagraph (B)(ii) thereof)) 
     by the governmental unit of which such agency is a part; and
       ``(B) such agency notifies the chief executive officer (or 
     its equivalent) of the local jurisdiction within which the 
     building is located of such allocation and provides such 
     individual a reasonable opportunity to comment on the 
     allocation.
       ``(2) Qualified allocation plan.--For purposes of this 
     subsection, the term `qualified allocation plan' means any 
     plan--
       ``(A) which sets forth selection criteria to be used to 
     determine priorities of the commercial revitalization agency 
     which are appropriate to local conditions;
       ``(B) which considers--
       ``(i) the degree to which a project contributes to the 
     implementation of a strategic plan that is devised for a 
     renewal community through a citizen participation process;
       ``(ii) the amount of any increase in permanent, full-time 
     employment by reason of any project; and
       ``(iii) the active involvement of residents and nonprofit 
     groups within the renewal community; and
       ``(C) which provides a procedure that the agency (or its 
     agent) will follow in monitoring compliance with this 
     section.
       ``(f) Regulations.--For purposes of this section, the 
     Secretary shall, by regulations, provide for the application 
     of rules similar to the rules of section 49 and subsections 
     (a) and (b) of section 50.
       ``(g) Termination.--This section shall not apply to any 
     building placed in service after December 31, 2007.

     ``SEC. 1400L. INCREASE IN EXPENSING UNDER SECTION 179.

       ``(a) General Rule.--In the case of a renewal community 
     business (as defined in section 1400G), for purposes of 
     section 179--
       ``(1) the limitation under section 179(b)(1) shall be 
     increased by the lesser of--
       ``(A) $35,000; or
       ``(B) the cost of section 179 property which is qualified 
     renewal property placed in service during the taxable year; 
     and
       ``(2) the amount taken into account under section 179(b)(2) 
     with respect to any section 179 property which is qualified 
     renewal property shall be 50 percent of the cost thereof.
       ``(b) Recapture.--Rules similar to the rules under section 
     179(d)(10) shall apply with respect to any qualified renewal 
     property which ceases to be used in a renewal community by a 
     renewal community business.
       ``(c) Qualified Renewal Property.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified renewal property' 
     means any property to which section 168 applies (or would 
     apply but for section 179) if--
       ``(A) such property was acquired by the taxpayer by 
     purchase (as defined in section 179(d)(2)) after December 31, 
     2000, and before January 1, 2008; and
       ``(B) such property would be qualified zone property (as 
     defined in section 1397C) if references to renewal 
     communities were substituted for references to empowerment 
     zones in section 1397C.
       ``(2) Certain rules to apply.--The rules of subsections 
     (a)(2) and (b) of section 1397C shall apply for purposes of 
     this section.''.

     SEC. 703. EXTENSION OF EXPENSING OF ENVIRONMENTAL REMEDIATION 
                   COSTS TO RENEWAL COMMUNITIES.

       (a) Extension.--Paragraph (2) of section 198(c) (defining 
     targeted area) is amended by redesignating subparagraph (C) 
     as subparagraph (D) and by inserting after subparagraph (B) 
     the following new subparagraph:
       ``(C) Renewal communities included.--Except as provided in 
     subparagraph (B), such term shall include a renewal community 
     (as defined in section 1400E) with respect to expenditures 
     paid or incurred after December 31, 2000.''.
       (b) Extension of Termination Date for Renewal 
     Communities.--Subsection (h) of section 198 is amended by 
     inserting before

[[Page 19594]]

     the period ``(December 31, 2007, in the case of a renewal 
     community, as defined in section 1400E).''.

     SEC. 704. EXTENSION OF WORK OPPORTUNITY TAX CREDIT FOR 
                   RENEWAL COMMUNITIES.

       (a) Extension.--Subsection (c) of section 51 (relating to 
     termination) is amended by adding at the end the following 
     new paragraph:
       ``(5) Extension of credit for renewal communities.--
       ``(A) In general.--In the case of an individual who begins 
     work for the employer after the date contained in paragraph 
     (4)(B), for purposes of section 38--
       ``(i) in lieu of applying subsection (a), the amount of the 
     work opportunity credit determined under this section for the 
     taxable year shall be equal to--

       ``(I) 15 percent of the qualified first-year wages for such 
     year; and
       ``(II) 30 percent of the qualified second-year wages for 
     such year;

       ``(ii) subsection (b)(3) shall be applied by substituting 
     `$10,000' for `$6,000';
       ``(iii) paragraph (4)(B) shall be applied by substituting 
     for the date contained therein the last day for which the 
     designation under section 1400E of the renewal community 
     referred to in subparagraph (B)(i) is in effect; and
       ``(iv) rules similar to the rules of section 51A(b)(5)(C) 
     shall apply.
       ``(B) Qualified first- and second-year wages.--For purposes 
     of subparagraph (A)--
       ``(i) In general.--The term `qualified wages' means, with 
     respect to each 1-year period referred to in clause (ii) or 
     (iii), as the case may be, the wages paid or incurred by the 
     employer during the taxable year to any individual but only 
     if--

       ``(I) the employer is engaged in a trade or business in a 
     renewal community throughout such 1-year period;
       ``(II) the principal place of abode of such individual is 
     in such renewal community throughout such 1-year period; and
       ``(III) substantially all of the services which such 
     individual performs for the employer during such 1-year 
     period are performed in such renewal community.

       ``(ii) Qualified first-year wages.--The term `qualified 
     first-year wages' means, with respect to any individual, 
     qualified wages attributable to service rendered during the 
     1-year period beginning with the day the individual begins 
     work for the employer.
       ``(iii) Qualified second-year wages.--The term `qualified 
     second-year wages' means, with respect to any individual, 
     qualified wages attributable to service rendered during the 
     1-year period beginning on the day after the last day of the 
     1-year period with respect to such individual determined 
     under clause (ii).''.
       (b) Congruent Treatment of Renewal Communities and 
     Enterprise Zones for Purposes of Youth Residence 
     Requirements.--
       (1) High-risk youth.--Subparagraphs (A)(ii) and (B) of 
     section 51(d)(5) are each amended by striking ``empowerment 
     zone or enterprise community'' and inserting ``empowerment 
     zone, enterprise community, or renewal community''.
       (2) Qualified summer youth employee.--Clause (iv) of 
     section 51(d)(7)(A) is amended by striking ``empowerment zone 
     or enterprise community'' and inserting ``empowerment zone, 
     enterprise community, or renewal community''.
       (3) Headings.--Paragraphs (5)(B) and (7)(C) of section 
     51(d) are each amended by inserting ``or community'' in the 
     heading after ``zone''.
       (4) Effective date.--The amendments made by this subsection 
     shall apply to individuals who begin work for the employer 
     after December 31, 2000.

     SEC. 705. CONFORMING AND CLERICAL AMENDMENTS.

       (a) Deduction for Contributions to Family Development 
     Accounts Allowable Whether or Not Taxpayer Itemizes.--
     Subsection (a) of section 62 (relating to adjusted gross 
     income defined) is amended by inserting after paragraph (19) 
     the following new paragraph:
       ``(20) Family development accounts.--The deduction allowed 
     by section 1400H(a)(1).''.
       (b) Tax on Excess Contributions.--
       (1) Tax imposed.--Subsection (a) of section 4973 is amended 
     by striking ``or'' at the end of paragraph (3), adding ``or'' 
     at the end of paragraph (4), and inserting after paragraph 
     (4) the following new paragraph:
       ``(5) a family development account (within the meaning of 
     section 1400H(e)),''.
       (2) Excess contributions.--Section 4973 is amended by 
     adding at the end the following new subsection:
       ``(g) Family Development Accounts.--For purposes of this 
     section, in the case of family development accounts, the term 
     `excess contributions' means the sum of--
       ``(1) the excess (if any) of--
       ``(A) the amount contributed for the taxable year to the 
     accounts (other than a qualified rollover, as defined in 
     section 1400H(c)(7)), over
       ``(B) the amount allowable as a deduction under section 
     1400H for such contributions; and
       ``(2) the amount determined under this subsection for the 
     preceding taxable year reduced by the sum of--
       ``(A) the distributions out of the accounts for the taxable 
     year which were included in the gross income of the payee 
     under section 1400H(b)(1);
       ``(B) the distributions out of the accounts for the taxable 
     year to which rules similar to the rules of section 408(d)(5) 
     apply by reason of section 1400H(d)(3); and
       ``(C) the excess (if any) of the maximum amount allowable 
     as a deduction under section 1400H for the taxable year over 
     the amount contributed to the account for the taxable year.
     For purposes of this subsection, any contribution which is 
     distributed from the family development account in a 
     distribution to which rules similar to the rules of section 
     408(d)(4) apply by reason of section 1400H(d)(3) shall be 
     treated as an amount not contributed.''.
       (c) Tax on Prohibited Transactions.--Section 4975 is 
     amended--
       (1) by adding at the end of subsection (c) the following 
     new paragraph:
       ``(6) Special rule for family development accounts.--An 
     individual for whose benefit a family development account is 
     established and any contributor to such account shall be 
     exempt from the tax imposed by this section with respect to 
     any transaction concerning such account (which would 
     otherwise be taxable under this section) if, with respect to 
     such transaction, the account ceases to be a family 
     development account by reason of the application of section 
     1400H(d)(2) to such account.''; and
       (2) in subsection (e)(1), by striking ``or'' at the end of 
     subparagraph (E), by redesignating subparagraph (F) as 
     subparagraph (G), and by inserting after subparagraph (E) the 
     following new subparagraph:
       ``(F) a family development account described in section 
     1400H(e), or''.
       (d) Information Relating to Certain Trusts and Annuity 
     Plans.--Subsection (c) of section 6047 is amended--
       (1) by inserting ``or section 1400H'' after ``section 
     219''; and
       (2) by inserting ``, of any family development account 
     described in section 1400H(e),'', after ``section 408(a)''.
       (e) Inspection of Applications for Tax Exemption.--Clause 
     (i) of section 6104(a)(1)(B) is amended by inserting ``a 
     family development account described in section 1400H(e),'' 
     after ``section 408(a),''.
       (f) Failure To Provide Reports on Family Development 
     Accounts.--Paragraph (2) of section 6693(a) is amended by 
     striking ``and'' at the end of subparagraph (C), by striking 
     the period and inserting ``, and'' at the end of subparagraph 
     (D), and by adding at the end the following new subparagraph:
       ``(E) section 1400H(g)(6) (relating to family development 
     accounts).''.
       (g) Conforming Amendments Regarding Commercial 
     Revitalization Deduction.--
       (1) Section 172 is amended by redesignating subsection (j) 
     as subsection (k) and by inserting after subsection (i) the 
     following new subsection:
       ``(j) No carryback of section 1400k Deduction Before Date 
     of the Enactment.--No portion of the net operating loss for 
     any taxable year which is attributable to any commercial 
     revitalization deduction determined under section 1400K may 
     be carried back to a taxable year ending before the date of 
     the enactment of section 1400K.''.
       (2) Subparagraph (B) of section 48(a)(2) is amended by 
     inserting ``or commercial revitalization'' after 
     ``rehabilitation'' each place it appears in the text and 
     heading.
       (3) Subparagraph (C) of section 469(i)(3) is amended--
       (A) by inserting ``or section 1400K'' after ``section 42''; 
     and
       (B) by inserting ``and commercial revitalization 
     deduction'' after ``credit'' in the heading.
       (h) Clerical Amendments.--The table of subchapters for 
     chapter 1 is amended by adding at the end the following new 
     item:

                ``Subchapter X. Renewal Communities.''.

                     Subtitle B--Farming Incentive

     SEC. 711. PRODUCTION FLEXIBILITY CONTRACT PAYMENTS.

       Any option to accelerate the receipt of any payment under a 
     production flexibility contract which is payable under the 
     Federal Agriculture Improvement and Reform Act of 1996 (7 
     U.S.C. 7200 et seq.), as in effect on the date of the 
     enactment of this Act, shall be disregarded in determining 
     the taxable year for which such payment is properly 
     includible in gross income for purposes of the Internal 
     Revenue Code of 1986.

                   Subtitle C--Oil and Gas Incentives

     SEC. 721. 5-YEAR NET OPERATING LOSS CARRYBACK FOR LOSSES 
                   ATTRIBUTABLE TO OPERATING MINERAL INTERESTS OF 
                   INDEPENDENT OIL AND GAS PRODUCERS.

       (a) In General.--Paragraph (1) of section 172(b) (relating 
     to years to which loss may be carried) is amended by adding 
     at the end the following new subparagraph:
       ``(H) Losses on operating mineral interests of independent 
     oil and gas producers.--In the case of a taxpayer--
       ``(i) which has an eligible oil and gas loss (as defined in 
     subsection (j)) for a taxable year, and
       ``(ii) which is not an integrated oil company (as defined 
     in section 291(b)(4)),

[[Page 19595]]

     such eligible oil and gas loss shall be a net operating loss 
     carryback to each of the 5 taxable years preceding the 
     taxable year of such loss.''.
       (b) Eligible Oil and Gas Loss.--Section 172 is amended by 
     redesignating subsection (j) as subsection (k) and by 
     inserting after subsection (i) the following new subsection:
       ``(j) Eligible Oil and Gas Loss.--For purposes of this 
     section--
       ``(1) In general.--The term `eligible oil and gas loss' 
     means the lesser of--
       ``(A) the amount which would be the net operating loss for 
     the taxable year if only income and deductions attributable 
     to operating mineral interests (as defined in section 614(d)) 
     in oil and gas wells are taken into account, or
       ``(B) the amount of the net operating loss for such taxable 
     year.
       ``(2) Coordination with subsection (b)(2).--For purposes of 
     applying subsection (b)(2), an eligible oil and gas loss for 
     any taxable year shall be treated in a manner similar to the 
     manner in which a specified liability loss is treated.
       ``(3) Election.--Any taxpayer entitled to a 5-year 
     carryback under subsection (b)(1)(H) from any loss year may 
     elect to have the carryback period with respect to such loss 
     year determined without regard to subsection (b)(1)(H).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to net operating losses for taxable years 
     beginning after December 31, 1998.

     SEC. 722. DEDUCTION FOR DELAY RENTAL PAYMENTS.

       (a) In General.--Section 263 (relating to capital 
     expenditures) is amended by adding after subsection (i) the 
     following new subsection:
       ``(j) Delay Rental Payments for Domestic Oil and Gas 
     Wells.--
       ``(1) In general.--Notwithstanding subsection (a), a 
     taxpayer may elect to treat delay rental payments incurred in 
     connection with the development of oil or gas within the 
     United States (as defined in section 638) as payments which 
     are not chargeable to capital account. Any payments so 
     treated shall be allowed as a deduction in the taxable year 
     in which paid or incurred.
       ``(2) Delay rental payments.--For purposes of paragraph 
     (1), the term `delay rental payment' means an amount paid for 
     the privilege of deferring development of an oil or gas 
     well.''.
       (b) Conforming Amendment.--Section 263A(c)(3) is amended by 
     inserting ``263(j),'' after ``263(i),''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred in taxable years 
     beginning after December 31, 1999.

     SEC. 723. ELECTION TO EXPENSE GEOLOGICAL AND GEOPHYSICAL 
                   EXPENDITURES.

       (a) In General.--Section 263 (relating to capital 
     expenditures) is amended by adding after subsection (j) the 
     following new subsection:
       ``(k) Geological and Geophysical Expenditures for Domestic 
     Oil and Gas Wells.--Notwithstanding subsection (a), a 
     taxpayer may elect to treat geological and geophysical 
     expenses incurred in connection with the exploration for, or 
     development of, oil or gas within the United States (as 
     defined in section 638) as expenses which are not chargeable 
     to capital account. Any expenses so treated shall be allowed 
     as a deduction in the taxable year in which paid or 
     incurred.''.
       (b) Conforming Amendment.--Section 263A(c)(3) is amended by 
     inserting ``263(k),'' after ``263(j),''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to costs paid or incurred in taxable years 
     beginning after December 31, 1999.

     SEC. 724. TEMPORARY SUSPENSION OF LIMITATION BASED ON 65 
                   PERCENT OF TAXABLE INCOME.

       (a) In General.--Subsection (d) of section 613A (relating 
     to limitation on percentage depletion in case of oil and gas 
     wells) is amended by adding at the end the following new 
     paragraph:
       ``(6) Temporary suspension of taxable income limit.--
     Paragraph (1) shall not apply to taxable years beginning 
     after December 31, 1998, and before January 1, 2005, 
     including with respect to amounts carried under the second 
     sentence of paragraph (1) to such taxable years.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 725. DETERMINATION OF SMALL REFINER EXCEPTION TO OIL 
                   DEPLETION DEDUCTION.

       (a) In General.--Paragraph (4) of section 613A(d) (relating 
     to certain refiners excluded) is amended to read as follows:
       ``(4) Certain refiners excluded.--If the taxpayer or a 
     related person engages in the refining of crude oil, 
     subsection (c) shall not apply to the taxpayer for a taxable 
     year if the average daily refinery runs of the taxpayer and 
     the related person for the taxable year exceed 50,000 
     barrels. For purposes of this paragraph, the average daily 
     refinery runs for any taxable year shall be determined by 
     dividing the aggregate refinery runs for the taxable year by 
     the number of days in the taxable year.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

                     Subtitle D--Timber Incentives

     SEC. 731. TEMPORARY SUSPENSION OF MAXIMUM AMOUNT OF 
                   AMORTIZABLE REFORESTATION EXPENDITURES.

       (a) Increase in Dollar Limitation.--Paragraph (1) of 
     section 194(b) (relating to amortization of reforestation 
     expenditures) is amended by striking ``$10,000 ($5,000'' and 
     inserting ``$25,000 ($12,500''.
       (b) Temporary Suspension of Increased Dollar Limitation.--
     Subsection (b) of section 194(b) (relating to amortization of 
     reforestation expenditures) is amended by adding at the end 
     the following new paragraph:
       ``(5) Suspension of dollar limitation.--Paragraph (1) shall 
     not apply to taxable years beginning after December 31, 1999, 
     and before January 1, 2004.
       (c) Conforming Amendment.--Paragraph (1) of section 48(b) 
     is amended by striking ``section 194(b)(1)'' and inserting 
     ``section 194(b)(1) and without regard to section 
     194(b)(5)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 732. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO 
                   APPLY TO OUTRIGHT SALES BY LAND OWNER.

       (a) In General.--Subsection (b) of section 631 (relating to 
     disposal of timber with a retained economic interest) is 
     amended--
       (1) by inserting ``and Outright Sales of Timber'' after 
     Economic Interest'' in the subsection heading, and
       (2) by adding before the last sentence the following new 
     sentence: ``The requirement in the first sentence of this 
     subsection to retain an economic interest in timber shall not 
     apply to an outright sale of such timber by the owner thereof 
     if such owner owned the land (at the time of such sale) from 
     which the timber is cut.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to sales after the date of the enactment of this 
     Act.

                TITLE VIII--RELIEF FOR SMALL BUSINESSES

     SEC. 801. DEDUCTION FOR 100 PERCENT OF HEALTH INSURANCE COSTS 
                   OF SELF-EMPLOYED INDIVIDUALS.

       (a) In General.--Paragraph (1) of section 162(l) is amended 
     to read as follows:
       ``(1) Allowance of deduction.--In the case of an individual 
     who is an employee within the meaning of section 401(c)(1), 
     there shall be allowed as a deduction under this section an 
     amount equal to 100 percent of the amount paid during the 
     taxable year for insurance which constitutes medical care for 
     the taxpayer and the taxpayer's spouse and dependents.''.
       (b) Clarification of Limitations on Other Coverage.--The 
     first sentence of section 162(l)(2)(B) is amended to read as 
     follows: ``Paragraph (1) shall not apply to any taxpayer for 
     any calendar month for which the taxpayer participates in any 
     subsidized health plan maintained by any employer (other than 
     an employer described in section 401(c)(4)) of the taxpayer 
     or the spouse of the taxpayer.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

      SEC. 802. INCREASE IN EXPENSE TREATMENT FOR SMALL 
                   BUSINESSES.

       (a) In General.--Paragraph (1) of section 179(b) (relating 
     to dollar limitation) is amended to read as follows:
       ``(1) Dollar limitation.--The aggregate cost which may be 
     taken into account under subsection (a) for any taxable year 
     shall not exceed $30,000.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 803. REPEAL OF FEDERAL UNEMPLOYMENT SURTAX.

       (a) In General.--Section 3301 (relating to rate of Federal 
     unemployment tax) is amended--
       (1) by striking ``2007'' and inserting ``2004'', and
       (2) by striking ``2008'' and inserting ``2005''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to calendar years beginning after the date of the 
     enactment of this Act.

     SEC. 804. INCREASED DEDUCTION FOR MEAL EXPENSES; INCREASED 
                   DEDUCTIBILITY OF BUSINESS MEAL EXPENSES FOR 
                   INDIVIDUALS SUBJECT TO FEDERAL LIMITATIONS ON 
                   HOURS OF SERVICE.

       (a) In General.--Paragraph (1) of section 274(n) (relating 
     to only 50 percent of meal and entertainment expenses allowed 
     as deduction) is amended by striking ``50 percent'' in the 
     text and inserting ``the allowable percentage''.
       (b) Allowable Percentages.--Subsection (n) of section 274 
     is amended by redesignating paragraphs (2) and (3) as 
     paragraphs (3) and (4), respectively, and by inserting after 
     paragraph (2) the following new paragraph:
       ``(2) Allowable percentage.--For purposes of paragraph (1), 
     the allowable percentage is--
       ``(A) in the case of amounts for items described in 
     paragraph (1)(B), 50 percent, and
       ``(B) in the case of expenses for food or beverages, the 
     percentage determined in accordance with the following table:


[[Page 19596]]


``For taxable years beginning                            The applicable
  in calendar year--                                    percentage is--
      2000 through 2005.............................................50 
      2006..........................................................55 
      2007 and thereafter........................................60.''.
       (c) Individuals Subject to Federal Limitations on Hours of 
     Service.--The table in section 274(n)(4)(B) (relating to 
     special rule for individuals subject to Federal hours of 
     service), as redesignated by subsection (b), is amended--
       (1) by striking ``or 2007'', and
       (2) by striking ``2008'' and inserting ``2007''.
       (d) Conforming Amendments.--
       (1) The heading for subsection (n) of section 274 is 
     amended by striking ``50 Percent'' and inserting ``Limited 
     Percentages''.
       (2) Subparagraph (A) of section 274(n)(4), as redesignated 
     by subsection (b), is amended by striking ``50 percent'' and 
     inserting ``the allowable percentage''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 805. INCOME AVERAGING FOR FARMERS AND FISHERMEN NOT TO 
                   INCREASE ALTERNATIVE MINIMUM TAX LIABILITY.

       (a) In General.--Section 55(c) (defining regular tax) is 
     amended by redesignating paragraph (2) as paragraph (3) and 
     by inserting after paragraph (1) the following:
       ``(2) Coordination with income averaging for farmers and 
     fishermen.--Solely for purposes of this section, section 1301 
     (relating to averaging of farm and fishing income) shall not 
     apply in computing the regular tax.''.
       (b) Allowing Income Averaging for Fishermen.--
       (1) In general.--Section 1301(a) is amended by striking 
     ``farming business'' and inserting ``farming business or 
     fishing business,''.
       (2) Definition of elected farm income.--
       (A) In general.--Clause (i) of section 1301(b)(1)(A) is 
     amended by inserting ``or fishing business'' before the 
     semicolon.
       (B) Conforming amendment.--Subparagraph (B) of section 
     1301(b)(1) is amended by inserting ``or fishing business'' 
     after ``farming business'' both places it occurs.
       (3) Definition of fishing business.--Section 1301(b) is 
     amended by adding at the end the following new paragraph:
       ``(4) Fishing business.--The term `fishing business' means 
     the conduct of commercial fishing as defined in section 3 of 
     the Magnuson-Stevens Fishery Conservation and Management Act 
     (16 U.S.C. 1802).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 806. FARM, FISHING, AND RANCH RISK MANAGEMENT ACCOUNTS.

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

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

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

[[Page 19597]]

     reason of subsection (a) shall not be taken into account in 
     determining an individual's net earnings from self-employment 
     (within the meaning of section 1402(a)) for purposes of 
     chapter 2.
       ``(g) Reports.--The trustee of a FFARRM Account shall make 
     such reports regarding such Account to the Secretary and to 
     the person for whose benefit the Account is maintained with 
     respect to contributions, distributions, and such other 
     matters as the Secretary may require under regulations. The 
     reports required by this subsection shall be filed at such 
     time and in such manner and furnished to such persons at such 
     time and in such manner as may be required by such 
     regulations.''.
       (b) Tax on Excess Contributions.--
       (1) Subsection (a) of section 4973 (relating to tax on 
     excess contributions to certain tax-favored accounts and 
     annuities) is amended by striking ``or'' at the end of 
     paragraph (3), by redesignating paragraph (4) as paragraph 
     (5), and by inserting after paragraph (3) the following:
       ``(4) a FFARRM Account (within the meaning of section 
     468C(d)), or''.
       (2) Section 4973 is amended by adding at the end the 
     following:
       ``(g) Excess Contributions to FFARRM Accounts.--For 
     purposes of this section, in the case of a FFARRM Account 
     (within the meaning of section 468C(d)), the term `excess 
     contributions' means the amount by which the amount 
     contributed for the taxable year to the Account exceeds the 
     amount which may be contributed to the Account under section 
     468C(b) for such taxable year. For purposes of this 
     subsection, any contribution which is distributed out of the 
     FFARRM Account in a distribution to which section 
     468C(e)(2)(B) applies shall be treated as an amount not 
     contributed.''.
       (3) The section heading for section 4973 is amended to read 
     as follows:

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

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

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

``Sec. 468C. Farm, Fishing and Ranch Risk Management Accounts.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 807. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM 
                   PASSIVE INCOME TEST FOR BANK S CORPORATIONS.

       (a) In General.--Section 1362(d)(3)(C) (defining passive 
     investment income) is amended by adding at the end the 
     following:
       ``(v) Exception for banks; etc.--In the case of a bank (as 
     defined in section 581), a bank holding company (as defined 
     in section 246A(c)(3)(B)(ii)), or a qualified subchapter S 
     subsidiary bank, the term `passive investment income' shall 
     not include--

       ``(I) interest income earned by such bank, bank holding 
     company, or qualified subchapter S subsidiary bank, or
       ``(II) dividends on assets required to be held by such 
     bank, bank holding company, or qualified subchapter S 
     subsidiary bank to conduct a banking business, including 
     stock in the Federal Reserve Bank, the Federal Home Loan 
     Bank, or the Federal Agricultural Mortgage Bank or 
     participation certificates issued by a Federal Intermediate 
     Credit Bank.''.

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

     SEC. 808. TREATMENT OF QUALIFYING DIRECTOR SHARES.

       (a) In General.--Section 1361 is amended by adding at the 
     end the following:
       ``(f) Treatment of Qualifying Director Shares.--
       ``(1) In general.--For purposes of this subchapter--
       ``(A) qualifying director shares shall not be treated as a 
     second class of stock, and
       ``(B) no person shall be treated as a shareholder of the 
     corporation by reason of holding qualifying director shares.
       ``(2) Qualifying director shares defined.--For purposes of 
     this subsection, the term `qualifying director shares' means 
     any shares of stock in a bank (as defined in section 581) or 
     in a bank holding company registered as such with the Federal 
     Reserve System--
       ``(i) which are held by an individual solely by reason of 
     status as a director of such bank or company or its 
     controlled subsidiary; and
       ``(ii) which are subject to an agreement pursuant to which 
     the holder is required to dispose of the shares of stock upon 
     termination of the holder's status as a director at the same 
     price as the individual acquired such shares of stock.
       ``(3) Distributions.--A distribution (not in part or full 
     payment in exchange for stock) made by the corporation with 
     respect to qualifying director shares shall be includible as 
     ordinary income of the holder and deductible to the 
     corporation as an expense in computing taxable income under 
     section 1363(b) in the year such distribution is received.''.
       (b) Conforming Amendments.--
       (1) Section 1361(b)(1) is amended by inserting ``, except 
     as provided in subsection (f),'' before ``which does not''.
       (2) Section 1366(a) is amended by adding at the end the 
     following:
       ``(3) Allocation with respect to qualifying director 
     shares.--The holders of qualifying director shares (as 
     defined in section 1361(f)) shall not, with respect to such 
     shares of stock, be allocated any of the items described in 
     paragraph (1).''.
       (3) Section 1373(a) is amended by striking ``and'' at the 
     end of paragraph (1), by striking the period at the end of 
     paragraph (2) and inserting ``, and'', and adding at the end 
     the following:
       ``(3) no amount of an expense deductible under this 
     subchapter by reason of section 1361(f)(3) shall be 
     apportioned or allocated to such income.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

                   TITLE IX--INTERNATIONAL TAX RELIEF

     SEC. 901. INTEREST ALLOCATION RULES.

       (a) Election To Allocate Interest on a Worldwide Basis.--
     Subsection (e) of section 864 (relating to rules for 
     allocating interest, etc.) is amended by redesignating 
     paragraphs (6) and (7) as paragraphs (7) and (8), 
     respectively, and by inserting after paragraph (5) the 
     following new paragraph:
       ``(6) Election to allocate interest on a worldwide basis.--
       ``(A) In general.--Except as provided in this paragraph, 
     this subsection shall be applied by treating a worldwide 
     affiliated group for which an election under this paragraph 
     is in effect as an affiliated group solely for purposes of 
     allocating and apportioning interest expense of each domestic 
     corporation which is a member of such group.
       ``(B) Worldwide affiliated group.--For purposes of this 
     paragraph, the term `worldwide affiliated group' means the 
     group of corporations which consists of--
       ``(i) all corporations in an affiliated group (as defined 
     in section 1504 without regard to paragraphs (2) and (4) of 
     section 1504(b)), and
       ``(ii) all foreign corporations (other than a FSC, as 
     defined in section 922(a)) with respect to which corporations 
     described in clause (i) own stock meeting the ownership 
     requirements of section 957(a).
     For purposes of clause (ii), ownership shall be determined 
     under section 958; except that paragraphs (3) and (4) of 
     section 318(a) shall not apply for purposes of section 
     958(b).
       ``(C) Treatment of worldwide affiliated group.--For 
     purposes of applying paragraph (1), the taxable income of the 
     domestic members of a worldwide affiliated group from sources 
     outside the United States shall be determined by allocating 
     and apportioning the interest expense of such domestic 
     members to such income in an amount equal to the excess (if 
     any) of--
       ``(i) the total interest expense of the worldwide 
     affiliated group multiplied by the ratio which the foreign 
     assets of the worldwide affiliated group bears to all the 
     assets of the worldwide affiliated group, over
       ``(ii) the interest expense of all foreign corporations 
     which are members of the worldwide affiliated group to the 
     extent such interest expense of such foreign corporations 
     would have been allocated and apportioned to foreign source 
     income if this subsection were applied to a group consisting 
     of all the foreign corporations in such worldwide affiliated 
     group.
       ``(D) Assets and interest expense of foreign 
     corporations.--
       ``(i) In general.--For purposes of subparagraph (C), only 
     the applicable percentage of the interest expense and assets 
     of a foreign corporation described in subparagraph (B)(ii) 
     shall be taken into account.
       ``(ii) Applicable percentage.--For purposes of this 
     paragraph, the term `applicable

[[Page 19598]]

     percentage' means, with respect to any foreign corporation, 
     the percentage equal to the ratio which the value of the 
     stock in such corporation taken into account under 
     subparagraph (B)(ii) (without regard to stock considered as 
     owned under section 958(b)) bears to the aggregate value of 
     all stock in such corporation.
       ``(E) Election.--An election under this paragraph with 
     respect to any worldwide affiliated group may be made only by 
     the common parent of the affiliated group referred to in 
     subparagraph (B)(i) and may be made only for the first 
     taxable year beginning after December 31, 2001, in which a 
     worldwide affiliated group exists which includes such 
     affiliated group and at least 1 corporation described in 
     subparagraph (B)(ii). Such an election, once made, shall 
     apply to such common parent and all other corporations which 
     are members of such worldwide affiliated group for such 
     taxable year and all subsequent years unless revoked with the 
     consent of the Secretary.''.
       (b) Election To Allocate Interest Within Financial 
     Institution Groups and Subsidiary Groups.--Section 864 is 
     amended by redesignating subsection (f) as subsection (g) and 
     by inserting after subsection (e) the following new 
     subsection:
       ``(f) Election To Apply Subsection (e) on Basis of 
     Financial Institution Group and Subsidiary Groups.--
       ``(1) In general.--In the case of a worldwide affiliated 
     group for which an election under subsection (e)(6) is in 
     effect, subsection (e) shall be applied--
       ``(A) by treating an electing financial institution group 
     as if it were a separate worldwide affiliated group, and
       ``(B) by treating each electing subsidiary group as if it 
     were a separate worldwide affiliated group for purposes of 
     allocating interest expense with respect to qualified 
     indebtedness of members of an electing subsidiary group.
     Subsection (e) shall apply to any such electing group in the 
     same manner as subsection (e) applies to the pre-election 
     worldwide affiliated group of which such electing group is a 
     part.
       ``(2) Electing financial institution group.--For purposes 
     of this subsection--
       ``(A) In general.--The term `electing financial institution 
     group' means any group of corporations if--
       ``(i) such group consists only of all of the financial 
     corporations in the pre-election worldwide affiliated group, 
     and
       ``(ii) an election under this paragraph is in effect for 
     such group of corporations.
       ``(B) Financial corporation.--
       ``(i) In general.--The term `financial corporation' means 
     any corporation if at least 80 percent of its gross income is 
     income described in section 904(d)(2)(C)(ii) and the 
     regulations thereunder which is derived from transactions 
     with unrelated persons.
       ``(ii) Income from related financial corporations.--
     Dividend income, and income described in section 
     904(d)(2)(C)(ii) and the regulations thereunder, which is 
     derived directly or indirectly from a financial corporation 
     (as defined in clause (i) without regard to this clause) 
     which is not an unrelated person shall be treated as income 
     described in clause (i).
       ``(iii) Bank holding companies.--To the extent provided in 
     regulations prescribed by the Secretary, a bank holding 
     company (within the meaning of section 2(a) of the Bank 
     Holding Company Act of 1956) shall be treated as a 
     corporation meeting the requirements of clause (i).
       ``(iv) Antiabuse rule.--For purposes of this subparagraph, 
     there shall be disregarded any item of income or gain from a 
     transaction or series of transactions a principal purpose of 
     which is the qualification of any corporation as a financial 
     corporation.
       ``(C) Effect of certain transactions.--Rules similar to the 
     rules of paragraph (3)(D) shall apply to transactions between 
     any member of the electing financial institution group and 
     any member of the pre-election worldwide affiliated group 
     (other than a member of the electing financial institution 
     group).
       ``(D) Election.--An election under this paragraph with 
     respect to any financial institution group may be made only 
     by the common parent of the pre-election worldwide affiliated 
     group and may be made only for the first taxable year 
     beginning after December 31, 2001, in which such affiliated 
     group includes 1 or more financial corporations described in 
     subparagraph (B). Such an election, once made, shall apply to 
     such taxable year and all subsequent years unless revoked 
     with the consent of the Secretary.
       ``(3) Electing subsidiary groups.--
       ``(A) In general.--The term `electing subsidiary group' 
     means any group of corporations if--
       ``(i) such group consists only of corporations in the pre-
     election worldwide affiliated group,
       ``(ii) such group includes--

       ``(I) a domestic corporation (which is not the common 
     parent of the pre-election worldwide affiliated group or a 
     member of an electing financial institution group) which 
     incurs interest expense with respect to qualified 
     indebtedness, and
       ``(II) every other corporation (other than a member of an 
     electing financial institution group) which is in the pre-
     election worldwide affiliated group and which would be a 
     member of an affiliated group having such domestic 
     corporation as the common parent, and

       ``(iii) an election under this paragraph is in effect for 
     such group.
       ``(B) Equalization rule.--All interest expense of a 
     domestic corporation which is a member of a pre-election 
     worldwide affiliated group (other than subsidiary group 
     interest expense) shall be treated as allocated to foreign 
     source income to the extent such expense does not exceed the 
     excess (if any) of--
       ``(i) the interest expense of the pre-election worldwide 
     affiliated group (including subsidiary group interest 
     expense) which would (but for any election under this 
     paragraph) be allocated to foreign source income, over
       ``(ii) the subsidiary group interest expense allocated to 
     foreign source income.
     For purposes of the preceding sentence, the subsidiary group 
     interest expense is the interest expense to which subsection 
     (e) applies separately by reason of paragraph (1)(B).
       ``(C) Qualified indebtedness.--For purposes of this 
     subsection, the term `qualified indebtedness' means any 
     indebtedness of a domestic corporation--
       ``(i) which is held by an unrelated person, and
       ``(ii) which is not guaranteed (or otherwise supported) by 
     any corporation which is a member of the pre-election 
     worldwide affiliated group other than a corporation which is 
     a member of the electing subsidiary group.
       ``(D) Effect of certain transactions on qualified 
     indebtedness.--In the case of a corporation which is a member 
     of an electing subsidiary group, to the extent that such 
     corporation--
       ``(i) distributes dividends or makes other distributions 
     with respect to its stock after the date of the enactment of 
     this paragraph to any member of the pre-election worldwide 
     affiliated group (other than to a member of the electing 
     subsidiary group) in excess of the greater of--

       ``(I) its average annual dividend (expressed as a 
     percentage of current earnings and profits) during the 5-
     taxable-year period ending with the taxable year preceding 
     the taxable year, or
       ``(II) 25 percent of its average annual earnings and 
     profits for such 5 taxable year period, or

       ``(ii) deals with any person in any manner not clearly 
     reflecting the income of the corporation (as determined under 
     principles similar to the principles of section 482),
     except as provided by the Secretary, an amount of qualified 
     indebtedness equal to the excess distribution or the 
     understatement or overstatement of income, as the case may 
     be, shall be recharacterized (for the taxable year and 
     subsequent taxable years) for purposes of this subsection as 
     indebtedness which is not qualified indebtedness. If a 
     corporation has not been in existence for 5 taxable years, 
     this subparagraph shall be applied with respect to the period 
     it was in existence.
       ``(E) Election.--An election under this paragraph with 
     respect to any electing subsidiary group may be made only by 
     the common parent of the pre-election worldwide affiliated 
     group. Such an election, once made, shall apply to the 
     taxable year for which made and the 4 succeeding taxable 
     years unless revoked with the consent of the Secretary. No 
     election may be made under this paragraph if the effect of 
     the election would be to have the same member of the pre-
     election worldwide affiliated group included in more than 1 
     electing subsidiary group.
       ``(4) Pre-election worldwide affiliated group.--For 
     purposes of this subsection, the term `pre-election worldwide 
     affiliated group' means, with respect to a corporation, the 
     worldwide affiliated group of which such corporation would 
     (but for an election under this subsection) be a member for 
     purposes of applying subsection (e).
       ``(5) Unrelated person.--For purposes of this subsection, 
     the term `unrelated person' means any person not bearing a 
     relationship specified in section 267(b) or 707(b)(1) to the 
     corporation.
       ``(6) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out this 
     subsection and subsection (e), including regulations--
       ``(A) providing for the direct allocation of interest 
     expense in other circumstances where such allocation would be 
     appropriate to carry out the purposes of this subsection,
       ``(B) preventing assets or interest expense from being 
     taken into account more than once, and
       ``(C) dealing with changes in members of any group (through 
     acquisitions or otherwise) treated under this subsection as 
     an affiliated group for purposes of subsection (e).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

     SEC. 902. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM 
                   NONCONTROLLED SECTION 902 CORPORATIONS.

       (a) In General.--Section 904(d)(4) (relating to application 
     of look-thru rules to dividends from noncontrolled section 
     902 corporations) is amended to read as follows:
       ``(4) Look-thru applies to dividends from noncontrolled 
     section 902 corporations.--

[[Page 19599]]

       ``(A) In general.--For purposes of this subsection, any 
     dividend from a noncontrolled section 902 corporation with 
     respect to the taxpayer shall be treated as income in a 
     separate category in proportion to the ratio of--
       ``(i) the portion of earnings and profits attributable to 
     income in such category, to
       ``(ii) the total amount of earnings and profits.
       ``(B) Special rules.--For purposes of this paragraph--
       ``(i) In general.--Rules similar to the rules of paragraph 
     (3)(F) shall apply; except that the term `separate category' 
     shall include the category of income described in paragraph 
     (1)(I).
       ``(ii) Earnings and profits.--

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

       ``(iii) Dividends not allocable to separate category.--The 
     portion of any dividend from a noncontrolled section 902 
     corporation which is not treated as income in a separate 
     category under subparagraph (A) shall be treated as a 
     dividend to which subparagraph (A) does not apply.
       ``(iv) Look-thru with respect to carryforwards of credit.--
     Rules similar to subparagraph (A) also shall apply to any 
     carryforward under subsection (c) from a taxable year 
     beginning before January 1, 2002, of tax allocable to a 
     dividend from a noncontrolled section 902 corporation with 
     respect to the taxpayer.''.
       (b) Conforming Amendments.--
       (1) Subparagraph (E) of section 904(d)(1), as in effect 
     both before and after the amendments made by section 1105 of 
     the Taxpayer Relief Act of 1997, is hereby repealed.
       (2) Section 904(d)(2)(C)(iii), as so in effect, is amended 
     by striking subclause (II) and by redesignating subclause 
     (III) as subclause (II).
       (3) The last sentence of section 904(d)(2)(D), as so in 
     effect, is amended to read as follows: ``Such term does not 
     include any financial services income.''.
       (4) Section 904(d)(2)(E) is amended by striking clauses 
     (ii) and (iv) and by redesignating clause (iii) as clause 
     (ii).
       (5) Section 904(d)(3)(F) is amended by striking ``(D), or 
     (E)'' and inserting ``or (D)''.
       (6) Section 864(d)(5)(A)(i) is amended by striking 
     ``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

     SEC. 903. CLARIFICATION OF TREATMENT OF PIPELINE 
                   TRANSPORTATION INCOME.

       (a) In General.--Section 954(g)(1) (defining foreign base 
     company oil related income) is amended by striking ``or'' at 
     the end of subparagraph (A), by striking the period at the 
     end of subparagraph (B) and inserting ``, or'', and by 
     inserting after subparagraph (B) the following new 
     subparagraph:
       ``(C) the pipeline transportation of oil or gas within such 
     foreign country.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of controlled foreign 
     corporations beginning after December 31, 2001, and taxable 
     years of United States shareholders with or within which such 
     taxable years of controlled foreign corporations end.

     SEC. 904. SUBPART F TREATMENT OF INCOME FROM TRANSMISSION OF 
                   HIGH VOLTAGE ELECTRICITY.

       (a) In General.--Paragraph (2) of section 954(e) (relating 
     to foreign base company services income) is amended by 
     striking ``or'' at the end of subparagraph (A), by striking 
     the period at the end of subparagraph (B) and inserting ``, 
     or'', and by inserting after subparagraph (B) the following 
     new subparagraph:
       ``(C) the transmission of high voltage electricity.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of controlled foreign 
     corporations beginning after December 31, 2001, and taxable 
     years of United States shareholders with or within which such 
     taxable years of controlled foreign corporations end.

     SEC. 905. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

       (a) General Rule.--Section 904 is amended by redesignating 
     subsections (g), (h), (i), (j), and (k) as subsections (h), 
     (i), (j), (k), and (l), respectively, and by inserting after 
     subsection (f) the following new subsection:
       ``(g) Recharacterization of Overall Domestic Loss.--
       ``(1) General rule.--For purposes of this subpart and 
     section 936, in the case of any taxpayer who sustains an 
     overall domestic loss for any taxable year beginning after 
     December 31, 2005, that portion of the taxpayer's taxable 
     income from sources within the United States for each 
     succeeding taxable year which is equal to the lesser of--
       ``(A) the amount of such loss (to the extent not used under 
     this paragraph in prior taxable years), or
       ``(B) 50 percent of the taxpayer's taxable income from 
     sources within the United States for such succeeding taxable 
     year,
     shall be treated as income from sources without the United 
     States (and not as income from sources within the United 
     States).
       ``(2) Overall domestic loss defined.--For purposes of this 
     subsection--
       ``(A) In general.--The term `overall domestic loss' means 
     any domestic loss to the extent such loss offsets taxable 
     income from sources without the United States for the taxable 
     year or for any preceding taxable year by reason of a 
     carryback. For purposes of the preceding sentence, the term 
     `domestic loss' means the amount by which the gross income 
     for the taxable year from sources within the United States is 
     exceeded by the sum of the deductions properly apportioned or 
     allocated thereto (determined without regard to any carryback 
     from a subsequent taxable year).
       ``(B) Taxpayer must have elected foreign tax credit for 
     year of loss.--The term `overall domestic loss' shall not 
     include any loss for any taxable year unless the taxpayer 
     chose the benefits of this subpart for such taxable year.
       ``(3) Characterization of subsequent income.--
       ``(A) In general.--Any income from sources within the 
     United States that is treated as income from sources without 
     the United States under paragraph (1) shall be allocated 
     among and increase the income categories in proportion to the 
     loss from sources within the United States previously 
     allocated to those income categories.
       ``(B) Income category.--For purposes of this paragraph, the 
     term `income category' has the meaning given such term by 
     subsection (f)(5)(E)(i).
       ``(4) Coordination with subsection (f).--The Secretary 
     shall prescribe such regulations as may be necessary to 
     coordinate the provisions of this subsection with the 
     provisions of subsection (f).''.
       (b) Conforming Amendments.--
       (1) Section 535(d)(2) is amended by striking ``section 
     904(g)(6)'' and inserting ``section 904(h)(6)''.
       (2) Subparagraph (A) of section 936(a)(2) is amended by 
     striking ``section 904(f)'' and inserting ``subsections (f) 
     and (g) of section 904''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to losses for taxable years beginning after 
     December 31, 2005.

     SEC. 906. TREATMENT OF MILITARY PROPERTY OF FOREIGN SALES 
                   CORPORATIONS.

       (a) In General.--Section 923(a) (defining exempt foreign 
     trade income) is amended by striking paragraph (5) and by 
     redesignating paragraph (6) as paragraph (5).
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

     SEC. 907. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED 
                   INVESTMENT COMPANIES.

       (a) Treatment of Certain Dividends.--
       (1) Nonresident alien individuals.--Section 871 (relating 
     to tax on nonresident alien individuals) is amended by 
     redesignating subsection (k) as subsection (l) and by 
     inserting after subsection (j) the following new subsection:
       ``(k) Exemption for Certain Dividends of Regulated 
     Investment Companies.--
       ``(1) Interest-related dividends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no tax shall be imposed under paragraph (1)(A) of subsection 
     (a) on any interest-related dividend received from a 
     regulated investment company.
       ``(B) Exceptions.--Subparagraph (A) shall not apply--
       ``(i) to any interest-related dividend received from a 
     regulated investment company by a person to the extent such 
     dividend is attributable to interest (other than interest 
     described in clause (i), (iii), or the last sentence of 
     subparagraph (E)) received by such company on indebtedness 
     issued by such person or by any corporation or partnership 
     with respect to which such person is a 10-percent 
     shareholder,
       ``(ii) to any interest-related dividend with respect to 
     stock of a regulated investment company unless the person who 
     would otherwise be required to deduct and withhold tax from 
     such dividend under chapter 3 receives a statement (which 
     meets requirements similar to the requirements of subsection 
     (h)(5)) that the beneficial owner of such stock is not a 
     United States person, and
       ``(iii) to any interest-related dividend paid to any person 
     within a foreign country (or any interest-related dividend 
     payment addressed to, or for the account of, persons within 
     such foreign country) during any period described in 
     subsection (h)(6) with respect to such country.
     Clause (iii) shall not apply to any dividend with respect to 
     any stock the holding period of which begins on or before the 
     date of the publication of the Secretary's determination 
     under subsection (h)(6).
       ``(C) Interest-related dividend.--For purposes of this 
     paragraph, an interest-related dividend is any dividend (or 
     part thereof) which is designated by the regulated investment 
     company as an interest-related dividend in a written notice 
     mailed to its shareholders not later than 60 days after the 
     close of its taxable year. If the aggregate amount so 
     designated with respect to a taxable year

[[Page 19600]]

     of the company (including amounts so designated with respect 
     to dividends paid after the close of the taxable year 
     described in section 855) is greater than the qualified net 
     interest income of the company for such taxable year, the 
     portion of each distribution which shall be an interest-
     related dividend shall be only that portion of the amounts so 
     designated which such qualified net interest income bears to 
     the aggregate amount so designated.
       ``(D) Qualified net interest income.--For purposes of 
     subparagraph (C), the term `qualified net interest income' 
     means the qualified interest income of the regulated 
     investment company reduced by the deductions properly 
     allocable to such income.
       ``(E) Qualified interest income.--For purposes of 
     subparagraph (D), the term `qualified interest income' means 
     the sum of the following amounts derived by the regulated 
     investment company from sources within the United States:
       ``(i) Any amount includible in gross income as original 
     issue discount (within the meaning of section 1273) on an 
     obligation payable 183 days or less from the date of original 
     issue (without regard to the period held by the company).
       ``(ii) Any interest includible in gross income (including 
     amounts recognized as ordinary income in respect of original 
     issue discount or market discount or acquisition discount 
     under part V of subchapter P and such other amounts as 
     regulations may provide) on an obligation which is in 
     registered form; except that this clause shall not apply to--

       ``(I) any interest on an obligation issued by a corporation 
     or partnership if the regulated investment company is a 10-
     percent shareholder in such corporation or partnership, and
       ``(II) any interest which is treated as not being portfolio 
     interest under the rules of subsection (h)(4).

       ``(iii) Any interest referred to in subsection (i)(2)(A) 
     (without regard to the trade or business of the regulated 
     investment company).
       ``(iv) Any interest-related dividend includable in gross 
     income with respect to stock of another regulated investment 
     company.
     Such term includes any interest derived by the regulated 
     investment company from sources outside the United States 
     other than interest that is subject to a tax imposed by a 
     foreign jurisdiction if the amount of such tax is reduced (or 
     eliminated) by a treaty with the United States.
       ``(F) 10-percent shareholder.--For purposes of this 
     paragraph, the term `10-percent shareholder' has the meaning 
     given such term by subsection (h)(3)(B).
       ``(2) Short-term capital gain dividends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no tax shall be imposed under paragraph (1)(A) of subsection 
     (a) on any short-term capital gain dividend received from a 
     regulated investment company.
       ``(B) Exception for aliens taxable under subsection 
     (a)(2).--Subparagraph (A) shall not apply in the case of any 
     nonresident alien individual subject to tax under subsection 
     (a)(2).
       ``(C) Short-term capital gain dividend.--For purposes of 
     this paragraph, a short-term capital gain dividend is any 
     dividend (or part thereof) which is designated by the 
     regulated investment company as a short-term capital gain 
     dividend in a written notice mailed to its shareholders not 
     later than 60 days after the close of its taxable year. If 
     the aggregate amount so designated with respect to a taxable 
     year of the company (including amounts so designated with 
     respect to dividends paid after the close of the taxable year 
     described in section 855) is greater than the qualified 
     short-term gain of the company for such taxable year, the 
     portion of each distribution which shall be a short-term 
     capital gain dividend shall be only that portion of the 
     amounts so designated which such qualified short-term gain 
     bears to the aggregate amount so designated.
       ``(D) Qualified short-term gain.--For purposes of 
     subparagraph (C), the term `qualified short-term gain' means 
     the excess of the net short-term capital gain of the 
     regulated investment company for the taxable year over the 
     net long-term capital loss (if any) of such company for such 
     taxable year. For purposes of this subparagraph--
       ``(i) the net short-term capital gain of the regulated 
     investment company shall be computed by treating any short-
     term capital gain dividend includible in gross income with 
     respect to stock of another regulated investment company as a 
     short-term capital gain, and
       ``(ii) the excess of the net short-term capital gain for a 
     taxable year over the net long-term capital loss for a 
     taxable year (to which an election under section 4982(e)(4) 
     does not apply) shall be determined without regard to any net 
     capital loss or net short-term capital loss attributable to 
     transactions after October 31 of such year, and any such net 
     capital loss or net short-term capital loss shall be treated 
     as arising on the 1st day of the next taxable year.
     To the extent provided in regulations, clause (ii) shall 
     apply also for purposes of computing the taxable income of 
     the regulated investment company.''.
       (2) Foreign corporations.--Section 881 (relating to tax on 
     income of foreign corporations not connected with United 
     States business) is amended by redesignating subsection (e) 
     as subsection (f) and by inserting after subsection (d) the 
     following new subsection:
       ``(e) Tax Not To Apply to Certain Dividends of Regulated 
     Investment Companies.--
       ``(1) Interest-related dividends.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no tax shall be imposed under paragraph (1) of subsection (a) 
     on any interest-related dividend (as defined in section 
     871(k)(1)) received from a regulated investment company.
       ``(B) Exception.--Subparagraph (A) shall not apply--
       ``(i) to any dividend referred to in section 871(k)(1)(B), 
     and
       ``(ii) to any interest-related dividend received by a 
     controlled foreign corporation (within the meaning of section 
     957(a)) to the extent such dividend is attributable to 
     interest received by the regulated investment company from a 
     person who is a related person (within the meaning of section 
     864(d)(4)) with respect to such controlled foreign 
     corporation.
       ``(C) Treatment of dividends received by controlled foreign 
     corporations.--The rules of subsection (c)(5)(A) shall apply 
     to any interest-related dividend received by a controlled 
     foreign corporation (within the meaning of section 957(a)) to 
     the extent such dividend is attributable to interest received 
     by the regulated investment company which is described in 
     clause (ii) of section 871(k)(1)(E) (and not described in 
     clause (i), (iii), or the last sentence of such section).
       ``(2) Short-term capital gain dividends.--No tax shall be 
     imposed under paragraph (1) of subsection (a) on any short-
     term capital gain dividend (as defined in section 871(k)(2)) 
     received from a regulated investment company.''.
       (3) Withholding taxes.--
       (A) Section 1441(c) (relating to exceptions) is amended by 
     adding at the end the following new paragraph:
       ``(12) Certain dividends received from regulated investment 
     companies.--
       ``(A) In general.--No tax shall be required to be deducted 
     and withheld under subsection (a) from any amount exempt from 
     the tax imposed by section 871(a)(1)(A) by reason of section 
     871(k).
       ``(B) Special rule.--For purposes of subparagraph (A), 
     clause (i) of section 871(k)(1)(B) shall not apply to any 
     dividend unless the regulated investment company knows that 
     such dividend is a dividend referred to in such clause. A 
     similar rule shall apply with respect to the exception 
     contained in section 871(k)(2)(B).''.
       (B) Section 1442(a) (relating to withholding of tax on 
     foreign corporations) is amended--
       (i) by striking ``and the reference in section 
     1441(c)(10)'' and inserting ``the reference in section 
     1441(c)(10)'', and
       (ii) by inserting before the period at the end the 
     following: ``, and the references in section 1441(c)(12) to 
     sections 871(a) and 871(k) shall be treated as referring to 
     sections 881(a) and 881(e) (except that for purposes of 
     applying subparagraph (A) of section 1441(c)(12), as so 
     modified, clause (ii) of section 881(e)(1)(B) shall not apply 
     to any dividend unless the regulated investment company knows 
     that such dividend is a dividend referred to in such 
     clause)''.
       (b) Estate Tax Treatment of Interest in Certain Regulated 
     Investment Companies.--Section 2105 (relating to property 
     without the United States for estate tax purposes) is amended 
     by adding at the end the following new subsection:
       ``(d) Stock in a RIC.--
       ``(1) In general.--For purposes of this subchapter, stock 
     in a regulated investment company (as defined in section 851) 
     owned by a nonresident not a citizen of the United States 
     shall not be deemed property within the United States in the 
     proportion that, at the end of the quarter of such investment 
     company's taxable year immediately preceding a decedent's 
     date of death (or at such other time as the Secretary may 
     designate in regulations), the assets of the investment 
     company that were qualifying assets with respect to the 
     decedent bore to the total assets of the investment company.
       ``(2) Qualifying assets.--For purposes of this subsection, 
     qualifying assets with respect to a decedent are assets that, 
     if owned directly by the decedent, would have been--
       ``(A) amounts, deposits, or debt obligations described in 
     subsection (b) of this section,
       ``(B) debt obligations described in the last sentence of 
     section 2104(c), or
       ``(C) other property not within the United States.''.
       (c) Treatment of Regulated Investment Companies Under 
     Section 897.--
       (1) Paragraph (1) of section 897(h) is amended by striking 
     ``REIT'' each place it appears and inserting ``qualified 
     investment entity''.
       (2) Paragraphs (2) and (3) of section 897(h) are amended to 
     read as follows:
       ``(2) Sale of stock in domestically controlled entity not 
     taxed.--The term `United States real property interest' does 
     not include any interest in a domestically controlled 
     qualified investment entity.
       ``(3) Distributions by domestically controlled qualified 
     investment entities.--In the case of a domestically 
     controlled qualified investment entity, rules similar to the

[[Page 19601]]

     rules of subsection (d) shall apply to the foreign ownership 
     percentage of any gain.''.
       (3) Subparagraphs (A) and (B) of section 897(h)(4) are 
     amended to read as follows:
       ``(A) Qualified investment entity.--The term `qualified 
     investment entity' means any real estate investment trust and 
     any regulated investment company.
       ``(B) Domestically controlled.--The term `domestically 
     controlled qualified investment entity' means any qualified 
     investment entity in which at all times during the testing 
     period less than 50 percent in value of the stock was held 
     directly or indirectly by foreign persons.''.
       (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
     amended by striking ``REIT'' and inserting ``qualified 
     investment entity''.
       (5) The subsection heading for subsection (h) of section 
     897 is amended by striking ``REITS'' and inserting ``Certain 
     Investment Entities''.
       (d) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to dividends with respect to taxable years of regulated 
     investment companies beginning after December 31, 2004.
       (2) Estate tax treatment.--The amendment made by subsection 
     (b) shall apply to estates of decedents dying after December 
     31, 2004.
       (3) Certain other provisions.--The amendments made by 
     subsection (c) (other than paragraph (1) thereof) shall take 
     effect on January 1, 2005.

     SEC. 908. REPEAL OF SPECIAL RULES FOR APPLYING FOREIGN TAX 
                   CREDIT IN CASE OF FOREIGN OIL AND GAS INCOME.

       (a) In General.--Section 907 (relating to special rules in 
     case of foreign oil and gas income) is repealed.
       (b) Conforming Amendments.--
       (1) Each of the following provisions are amended by 
     striking ``907,'':
       (A) Section 245(a)(10).
       (B) Section 865(h)(1)(B).
       (C) Section 904(d)(1).
       (D) Section 904(g)(10)(A).
       (2) Section 904(f)(5)(E)(iii) is amended by inserting ``, 
     as in effect before its repeal by the Taxpayer Refund and 
     Relief Act of 1999'' after ``section 907(c)(4)(B)''.
       (3) Section 954(g)(1) is amended by inserting ``, as in 
     effect before its repeal by the Taxpayer Refund and Relief 
     Act of 1999'' after ``907(c)''.
       (4) Section 6501(i) is amended--
       (A) by striking ``, or under section 907(f) (relating to 
     carryback and carryover of disallowed oil and gas extraction 
     taxes)'', and
       (B) by striking ``or 907(f)''.
       (5) The table of sections for subpart A of part III of 
     subchapter N of chapter 1 is amended by striking the item 
     relating to section 907.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2007.

     SEC. 909. ADVANCE PRICING AGREEMENTS TREATED AS CONFIDENTIAL 
                   TAXPAYER INFORMATION.

       (a) In General.--
       (1) Treatment as return information.--Paragraph (2) of 
     section 6103(b) (defining return information) is amended by 
     striking ``and'' at the end of subparagraph (A), by inserting 
     ``and'' at the end of subparagraph (B), and by inserting 
     after subparagraph (B) the following new subparagraph:
       ``(C) any advance pricing agreement entered into by a 
     taxpayer and the Secretary and any background information 
     related to such agreement or any application for an advance 
     pricing agreement,''.
       (2) Exception from public inspection as written 
     determination.--Paragraph (1) of section 6110(b) (defining 
     written determination) is amended by adding at the end the 
     following new sentence: ``Such term shall not include any 
     advance pricing agreement entered into by a taxpayer and the 
     Secretary and any background information related to such 
     agreement or any application for an advance pricing 
     agreement.''.
       (3) Effective date.--The amendments made by this subsection 
     shall take effect on the date of the enactment of this Act.
       (b) Annual Report Regarding Advance Pricing Agreements.--
       (1) In general.--Not later than 90 days after the end of 
     each calendar year, the Secretary of the Treasury shall 
     prepare and publish a report regarding advance pricing 
     agreements.
       (2) Contents of report.--The report shall include the 
     following for the calendar year to which such report relates:
       (A) Information about the structure, composition, and 
     operation of the advance pricing agreement program office.
       (B) A copy of each model advance pricing agreement.
       (C) The number of--
       (i) applications filed during such calendar year for 
     advanced pricing agreements;
       (ii) advance pricing agreements executed cumulatively to 
     date and during such calendar year;
       (iii) renewals of advanced pricing agreements issued;
       (iv) pending requests for advance pricing agreements;
       (v) pending renewals of advance pricing agreements;
       (vi) for each of the items in clauses (ii) through (v), the 
     number that are unilateral, bilateral, and multilateral, 
     respectively;
       (vii) advance pricing agreements revoked or canceled, and 
     the number of withdrawals from the advance pricing agreement 
     program; and
       (viii) advanced pricing agreements finalized or renewed by 
     industry.
       (D) General descriptions of--
       (i) the nature of the relationships between the related 
     organizations, trades, or businesses covered by advance 
     pricing agreements;
       (ii) the covered transactions and the business functions 
     performed and risks assumed by such organizations, trades, or 
     businesses;
       (iii) the related organizations, trades, or businesses 
     whose prices or results are tested to determine compliance 
     with transfer pricing methodologies prescribed in advanced 
     pricing agreements;
       (iv) methodologies used to evaluate tested parties and 
     transactions and the circumstances leading to the use of 
     those methodologies;
       (v) critical assumptions made and sources of comparables 
     used;
       (vi) comparable selection criteria and the rationale used 
     in determining such criteria;
       (vii) the nature of adjustments to comparables or tested 
     parties;
       (viii) the nature of any ranges agreed to, including 
     information regarding when no range was used and why, when 
     interquartile ranges were used, and when there was a 
     statistical narrowing of the comparables;
       (ix) adjustment mechanisms provided to rectify results that 
     fall outside of the agreed upon advance pricing agreement 
     range;
       (x) the various term lengths for advance pricing 
     agreements, including rollback years, and the number of 
     advance pricing agreements with each such term length;
       (xi) the nature of documentation required; and
       (xii) approaches for sharing of currency or other risks.
       (E) Statistics regarding the amount of time taken to 
     complete new and renewal advance pricing agreements.
       (F) A detailed description of the Secretary of the 
     Treasury's efforts to ensure compliance with existing advance 
     pricing agreements.
       (3) Confidentiality.--The reports required by this 
     subsection shall be treated as authorized by the Internal 
     Revenue Code of 1986 for purposes of section 6103 of such 
     Code, but the reports shall not include information--
       (A) which would not be permitted to be disclosed under 
     section 6110(c) of such Code if such report were a written 
     determination as defined in section 6110 of such Code, or
       (B) which can be associated with, or otherwise identify, 
     directly or indirectly, a particular taxpayer.
       (4) First report.--The report for calendar year 1999 shall 
     include prior calendar years after 1990.
       (c) User Fee.--Section 7527, as added by title XV of this 
     Act, is amended by redesignating subsection (c) as subsection 
     (d) and by inserting after subsection (b) the following new 
     subsection:
       ``(c) Advance Pricing Agreements.--
       ``(1) In general.--In addition to any fee otherwise imposed 
     under this section, the fee imposed for requests for advance 
     pricing agreements shall be increased by $500.
       ``(2) Reduced fee for small businesses.--The Secretary 
     shall provide an appropriate reduction in the amount imposed 
     by reason of paragraph (1) for requests for advance pricing 
     agreements for small businesses.''.
       (d) Regulations.--The Secretary of the Treasury or the 
     Secretary's delegate shall prescribe such regulations as may 
     be necessary or appropriate to carry out the purposes of 
     section 6103(b)(2)(C), and the last sentence of section 
     6110(b)(1), of the Internal Revenue Code of 1986, as added by 
     this section.

     SEC. 910. INCREASE IN DOLLAR LIMITATION ON SECTION 911 
                   EXCLUSION.

       (a) General Rule.--The table contained in clause (i) of 
     section 911(b)(2)(D) is amended to read as follows:

``For calendar year--                         The exclusion amount is--
    2000.......................................................$76,000 
    2001....................................................... 78,000 
    2002....................................................... 80,000 
    2003....................................................... 83,000 
    2004....................................................... 86,000 
    2005....................................................... 89,000 
    2006....................................................... 92,000 
    2007 and thereafter..................................... 95,000.''.
       (b) Conforming Amendment.--Clause (ii) of section 
     911(b)(2)(D) is amended by striking ``$80,000'' and inserting 
     ``$95,000''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 911. AIRLINE MILEAGE AWARDS TO CERTAIN FOREIGN PERSONS.

       (a) In General.--Paragraph (3) of section 4261(e) is 
     amended by redesignating subparagraph (C) as subparagraph (D) 
     and by inserting after subparagraph (B) the following new 
     subparagraph:
       ``(C) Mileage awards issued to individuals residing outside 
     the united states.--The tax imposed by subsection (a) shall 
     not apply to amounts attributable to mileage awards credited 
     to individuals whose mailing

[[Page 19602]]

     addresses on record with the person providing the right to 
     air transportation are outside the United States.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts paid after December 31, 2004.

        TITLE X--PROVISIONS RELATING TO TAX-EXEMPT ORGANIZATIONS

     SEC. 1001. EXEMPTION FROM INCOME TAX FOR STATE-CREATED 
                   ORGANIZATIONS PROVIDING PROPERTY AND CASUALTY 
                   INSURANCE FOR PROPERTY FOR WHICH SUCH COVERAGE 
                   IS OTHERWISE UNAVAILABLE.

       (a) In General.--Subsection (c) of section 501 (relating to 
     exemption from tax on corporations, certain trusts, etc.) is 
     amended by adding at the end the following new paragraph:
       ``(28)(A) Any association created before January 1, 1999, 
     by State law and organized and operated exclusively to 
     provide property and casualty insurance coverage for property 
     located within the State for which the State has determined 
     that coverage in the authorized insurance market is limited 
     or unavailable at reasonable rates, if--
       ``(i) no part of the net earnings of which inures to the 
     benefit of any private shareholder or individual,
       ``(ii) except as provided in clause (v), no part of the 
     assets of which may be used for, or diverted to, any purpose 
     other than--
       ``(I) to satisfy, in whole or in part, the liability of the 
     association for, or with respect to, claims made on policies 
     written by the association,
       ``(II) to invest in investments authorized by applicable 
     law,
       ``(III) to pay reasonable and necessary administration 
     expenses in connection with the establishment and operation 
     of the association and the processing of claims against the 
     association, or
       ``(IV) to make remittances pursuant to State law to be used 
     by the State to provide for the payment of claims on policies 
     written by the association, purchase reinsurance covering 
     losses under such policies, or to support governmental 
     programs to prepare for or mitigate the effects of natural 
     catastrophic events,
       ``(iii) the State law governing the association permits the 
     association to levy assessments on insurance companies 
     authorized to sell property and casualty insurance in the 
     State, or on property and casualty insurance policyholders 
     with insurable interests in property located in the State to 
     fund deficits of the association, including the creation of 
     reserves,
       ``(iv) the plan of operation of the association is subject 
     to approval by the chief executive officer or other official 
     of the State, by the State legislature, or both, and
       ``(v) the assets of the association revert upon dissolution 
     to the State, the State's designee, or an entity designated 
     by the State law governing the association, or State law does 
     not permit the dissolution of the association.
       ``(B)(i) An entity described in clause (ii) shall be 
     disregarded as a separate entity and treated as part of the 
     association described in subparagraph (A) from which it 
     receives remittances described in clause (ii) if an election 
     is made within 30 days after the date that such association 
     is determined to be exempt from tax.
       ``(ii) An entity is described in this clause if it is an 
     entity or fund created before January 1, 1999, pursuant to 
     State law and organized and operated exclusively to receive, 
     hold, and invest remittances from an association described in 
     subparagraph (A) and exempt from tax under subsection (a), to 
     make disbursements to pay claims on insurance contracts 
     issued by such association, and to make disbursements to 
     support governmental programs to prepare for or mitigate the 
     effects of natural catastrophic events.''.
       (b) Unrelated Business Taxable Income.--Subsection (a) of 
     section 512 (relating to unrelated business taxable income) 
     is amended by adding at the end the following new paragraph:
       ``(6) Special rule applicable to organizations described in 
     section 501(c)(28).--In the case of an organization described 
     in section 501(c)(28), the term `unrelated business taxable 
     income' means taxable income for a taxable year computed 
     without the application of section 501(c)(28) if at the end 
     of the immediately preceding taxable year the organization's 
     net equity exceeded 15 percent of the total coverage in force 
     under insurance contracts issued by the organization and 
     outstanding at the end of such preceding year.''.
       (c) Transitional Rule.--No income or gain shall be 
     recognized by an association as a result of a change in 
     status to that of an association described by section 
     501(c)(28) of the Internal Revenue Code of 1986, as amended 
     by subsection (a).
       (d) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 1002. MODIFICATION OF SPECIAL ARBITRAGE RULE FOR CERTAIN 
                   FUNDS.

       (a) In General.--Paragraph (1) of section 648 of the Tax 
     Reform Act of 1984 is amended to read as follows:
       ``(1) such securities or obligations are held in a fund--
       ``(A) which, except to the extent of the investment 
     earnings on such securities or obligations, cannot be used, 
     under State constitutional or statutory restrictions 
     continuously in effect since October 9, 1969, through the 
     date of issue of the bond issue, to pay debt service on the 
     bond issue or to finance the facilities that are to be 
     financed with the proceeds of the bonds, or
       ``(B) the annual distributions from which cannot exceed 7 
     percent of the average fair market value of the assets held 
     in such fund except to the extent distributions are necessary 
     to pay debt service on the bond issue,''.
       (b) Conforming Amendment.--Paragraph (3) of such section is 
     amended by striking ``the investment earnings of'' and 
     inserting ``distributions from''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on January 1, 2000.

     SEC. 1003. EXEMPTION PROCEDURE FROM TAXES ON SELF-DEALING.

       (a) In General.--Subsection (d) of section 4941 (relating 
     to taxes on self-dealing) is amended by adding at the end the 
     following new paragraph:
       ``(3) Special exemption.--The Secretary shall establish an 
     exemption procedure for purposes of this subsection. Pursuant 
     to such procedure, the Secretary may grant a conditional or 
     unconditional exemption of any disqualified person or 
     transaction or class of disqualified persons or transactions, 
     from all or part of the restrictions imposed by paragraph 
     (1). The Secretary may not grant an exemption under this 
     paragraph unless he finds that such exemption is--
       ``(A) administratively feasible,
       ``(B) in the interests of the private foundation, and
       ``(C) protective of the rights of the private foundation.
     Before granting an exemption under this paragraph, the 
     Secretary shall require adequate notice to be given to 
     interested persons and shall publish notice in the Federal 
     Register of the pendency of such exemption and shall afford 
     interested persons an opportunity to present views.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to transactions occurring after the date of the 
     enactment of this Act.

     SEC. 1004. EXPANSION OF DECLARATORY JUDGMENT REMEDY TO TAX-
                   EXEMPT ORGANIZATIONS.

       (a) In General.--Subsection (a) of section 7428 (relating 
     to creation of remedy) is amended--
       (1) in subparagraph (B) by inserting after ``509(a))'' the 
     following: ``or as a private operating foundation (as defined 
     in section 4942(j)(3))'', and
       (2) by amending subparagraph (C) to read as follows:
       ``(C) with respect to the initial qualification or 
     continuing qualification of an organization as an 
     organization described in section 501(c) (other than 
     paragraph (3)) which is exempt from tax under section 501(a), 
     or''.
       (b) Court Jurisdiction.--Subsection (a) of section 7428 is 
     amended in the material following paragraph (2) by striking 
     ``United States Tax Court, the United States Claims Court, or 
     the district court of the United States for the District of 
     Columbia'' and inserting the following: ``United States Tax 
     Court (in the case of any such determination or failure) or 
     the United States Claims Court or the district court of the 
     United States for the District of Columbia (in the case of a 
     determination or failure with respect to an issue referred to 
     in subparagraph (A) or (B) of paragraph (1)),''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to pleadings filed with respect to determinations 
     (or requests for determinations) made after the date of the 
     enactment of this Act.

     SEC. 1005. MODIFICATIONS TO SECTION 512(B)(13).

       (a) In General.--Paragraph (13) of section 512(b) is 
     amended by redesignating subparagraph (E) as subparagraph (F) 
     and by inserting after subparagraph (D) the following new 
     paragraph:
       ``(E) Paragraph to apply only to excess payments.--
       ``(i) In general.--Subparagraph (A) shall apply only to the 
     portion of a specified payment received by the controlling 
     organization that exceeds the amount which would have been 
     paid if such payment met the requirements prescribed under 
     section 482.
       ``(ii) Addition to tax for valuation misstatements.--The 
     tax imposed by this chapter on the controlling organization 
     shall be increased by an amount equal to 20 percent of such 
     excess.''.
       (b) Effective Date.--
       (1) In general.--The amendment made by this section shall 
     apply to payments received or accrued after December 31, 
     1999.
       (2) Payments subject to binding contract transition rule.--
     If the amendments made by section 1041 of the Taxpayer Relief 
     Act of 1997 do not apply to any amount received or accrued 
     after the date of the enactment of this Act under any 
     contract described in subsection (b)(2) of such section, such 
     amendments also shall not apply to amounts received or 
     accrued under such contract before January 1, 2000.

     SEC. 1006. MILEAGE REIMBURSEMENTS TO CHARITABLE VOLUNTEERS 
                   EXCLUDED FROM GROSS INCOME.

       (a) In General.--Part III of subchapter B of chapter 1 is 
     amended by inserting after section 138 the following new 
     section:

[[Page 19603]]



     ``SEC. 138A. MILEAGE REIMBURSEMENTS TO CHARITABLE VOLUNTEERS.

       ``(a) In General.--Gross income of an individual does not 
     include amounts received, from an organization described in 
     section 170(c), as reimbursement of operating expenses with 
     respect to use of a passenger automobile for the benefit of 
     such organization for which a deduction would otherwise be 
     allowable under section 170. The preceding sentence shall 
     apply only to the extent that such reimbursement would be 
     deductible under section 274(d) (determined by applying the 
     standard business mileage rate established pursuant to 
     section 274(d)) if the organization were not so described and 
     such individual were an employee of such organization.
       ``(b) No Double Benefit.--Subsection (a) shall not apply 
     with respect to any expenses if the individual claims a 
     deduction or credit for such expenses under any other 
     provision of this title.
       ``(c) Exemption From Reporting Requirements.--Section 6041 
     shall not apply with respect to reimbursements excluded from 
     income under subsection (a).''.
       (b) Clerical Amendment.--The table of sections for part III 
     of subchapter B of chapter 1 is amended by inserting after 
     the item relating to section 138 the following new items:

``Sec. 138A. Reimbursement for use of passenger automobile for 
              charity.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 1007. CHARITABLE CONTRIBUTION DEDUCTION FOR CERTAIN 
                   EXPENSES INCURRED IN SUPPORT OF NATIVE ALASKAN 
                   SUBSISTENCE WHALING.

       (a) In General.--Section 170 (relating to charitable, etc., 
     contributions and gifts) is amended by redesignating 
     subsection (m) as subsection (n) and by inserting after 
     subsection (l) the following new subsection:
       ``(m) Expenses Paid by Certain Whaling Captains in Support 
     of Native Alaskan Subsistence Whaling.--
       ``(1) In general.--In the case of an individual who is 
     recognized by the Alaska Eskimo Whaling Commission as a 
     whaling captain charged with the responsibility of 
     maintaining and carrying out sanctioned whaling activities 
     and who engages in such activities during the taxable year, 
     the amount described in paragraph (2) (to the extent such 
     amount does not exceed $7,500 for the taxable year) shall be 
     treated for purposes of this section as a charitable 
     contribution.
       ``(2) Amount described.--
       ``(A) In general.--The amount described in this paragraph 
     is the aggregate of the reasonable and necessary whaling 
     expenses paid by the taxpayer during the taxable year in 
     carrying out sanctioned whaling activities.
       ``(B) Whaling expenses.--For purposes of subparagraph (A), 
     the term `whaling expenses' includes expenses for--
       ``(i) the acquisition and maintenance of whaling boats, 
     weapons, and gear used in sanctioned whaling activities,
       ``(ii) the supplying of food for the crew and other 
     provisions for carrying out such activities, and
       ``(iii) storage and distribution of the catch from such 
     activities.
       ``(3) Sanctioned whaling activities.--For purposes of this 
     subsection, the term `sanctioned whaling activities' means 
     subsistence bowhead whale hunting activities conducted 
     pursuant to the management plan of the Alaska Eskimo Whaling 
     Commission.''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 1008. SIMPLIFICATION OF LOBBYING EXPENDITURE LIMITATION.

       (a) Repeal of Grassroots Expenditure Limit.--Paragraph (1) 
     of section 501(h) (relating to expenditures by public 
     charities to influence legislation) is amended to read as 
     follows:
       ``(1) General rule.--In the case of an organization to 
     which this subsection applies, exemption from taxation under 
     subsection (a) shall be denied because a substantial part of 
     the activities of such organization consists of carrying on 
     propaganda, or otherwise attempting, to influence 
     legislation, but only if such organization normally makes 
     lobbying expenditures in excess of the lobbying ceiling 
     amount for such organization for each taxable year.''.
       (b) Conforming Amendments.--
       (1) Section 501(h)(2) is amended by striking subparagraphs 
     (C) and (D).
       (2) Section 4911(b) is amended to read as follows:
       ``(b) Excess Lobbying Expenditures.--For purposes of this 
     section, the term `excess lobbying expenditures' means, for a 
     taxable year, the amount by which the lobbying expenditures 
     made by the organization during the taxable year exceed the 
     lobbying nontaxable amount for such organization for such 
     taxable year.''.
       (3) Section 4911(c) is amended by striking paragraphs (3) 
     and (4).
       (4) Paragraph (1)(A) of section 4911(f) is amended by 
     striking ``limits of section 501(h)(1) have'' and inserting 
     ``limit of section 501(h)(1) has''.
       (5) Paragraph (1)(C) of section 4911(f) is amended by 
     striking ``limits of section 501(h)(1) are'' and inserting 
     ``limit of section 501(h)(1) is''.
       (6) Paragraphs (4)(A) and (4)(B) of section 4911(f) are 
     each amended by striking ``limits of section 501(h)(1)'' and 
     inserting ``limit of section 501(h)(1)''.
       (7) Paragraph (8) of section 6033(b) (relating to certain 
     organizations described in section 501(c)(3)) is amended by 
     inserting ``and'' at the end of subparagraph (A) and by 
     striking subparagraphs (C) and (D).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 1009. TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT 
                   ACCOUNTS FOR CHARITABLE PURPOSES.

       (a) In General.--Subsection (d) of section 408 (relating to 
     individual retirement accounts) is amended by adding at the 
     end the following new paragraph:
       ``(8) Distributions for charitable purposes.--
       ``(A) In general.--In the case of a qualified charitable 
     distribution from an individual retirement account to an 
     organization described in section 170(c), no amount shall be 
     includible in the gross income of the distributee.
       ``(B) Qualified charitable distribution.--For purposes of 
     this paragraph, the term `qualified charitable distribution' 
     means any distribution from an individual retirement 
     account--
       ``(i) which is made on or after the date that the 
     individual for whose benefit the account is maintained has 
     attained age 70\1/2\, and
       ``(ii) which is a charitable contribution (as defined in 
     section 170(c)) made directly from the account to an 
     organization or entity described in section 170(c).
       ``(C) Denial of deduction.--The amount allowable as a 
     deduction to the taxpayer for the taxable year under section 
     170 for qualified charitable distributions shall be reduced 
     (but not below zero) by the sum of the amounts of the 
     qualified charitable distributions during such year which 
     (but for this paragraph) would have been includible in the 
     gross income of the taxpayer for such year.''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2002.

                    TITLE XI--REAL ESTATE PROVISIONS

         Subtitle A--Improvements in Low-Income Housing Credit

     SEC. 1101. MODIFICATION OF STATE CEILING ON LOW-INCOME 
                   HOUSING CREDIT.

       (a) In General.--Clauses (i) and (ii) of section 
     42(h)(3)(C) (relating to State housing credit ceiling) are 
     amended to read as follows:
       ``(i) the unused State housing credit ceiling (if any) of 
     such State for the preceding calendar year,
       ``(ii) the greater of--

       ``(I) the applicable amount under subparagraph (H) 
     multiplied by the State population, or
       ``(II) $2,000,000,''.

       (b) Applicable Amount.--Paragraph (3) of section 42(h) 
     (relating to housing credit dollar amount for agencies) is 
     amended by adding at the end the following new subparagraph:
       ``(H) Applicable amount of state ceiling.--For purposes of 
     subparagraph (C)(ii), the applicable amount shall be 
     determined under the following table:

                                              The applicable amount is:
      2000......................................................$1.35  
      2001.....................................................  1.45  
      2002.....................................................  1.55  
      2003.....................................................  1.65  
      2004 and thereafter.....................................  1.75.  
       (d) Adjustment of State Ceiling for Increases in Cost-of-
     Living.--Paragraph (3) of section 42(h) (relating to housing 
     credit dollar amount for agencies), as amended by subsection 
     (c), is amended by adding at the end the following new 
     subparagraph:
       ``(I) Cost-of-living adjustment.--
       ``(i) In general.--In the case of a calendar year after 
     2004, the $2,000,000 in subparagraph (C) and the $1.75 amount 
     in subparagraph (H) shall each be increased by an amount 
     equal to--

       ``(I) such dollar amount, multiplied by
       ``(II) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year by substituting 
     `calendar year 2003' for `calendar year 1992' in subparagraph 
     (B) thereof.

       ``(ii) Rounding.--

       ``(I) In the case of the amount in subparagraph (C), any 
     increase under clause (i) which is not a multiple of $5,000 
     shall be rounded to the next lowest multiple of $5,000.
       ``(II) In the case of the amount in subparagraph (H), any 
     increase under clause (i) which is not a multiple of 5 cents 
     shall be rounded to the next lowest multiple of 5 cents.''.

       (e) Conforming Amendments.--
       (1) Section 42(h)(3)(C), as amended by subsection (a), is 
     amended--
       (A) by striking ``clause (ii)'' in the matter following 
     clause (iv) and inserting ``clause (i)'', and
       (B) by striking ``clauses (i)'' in the matter following 
     clause (iv) and inserting ``clauses (ii)''.
       (2) Section 42(h)(3)(D)(ii) is amended--
       (A) by striking ``subparagraph (C)(ii)'' and inserting 
     ``subparagraph (C)(i)'', and

[[Page 19604]]

       (B) by striking ``clauses (i)'' in subclause (II) and 
     inserting ``clauses (ii)''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to calendar years after 2000 but shall not take 
     effect if sections 1102 and 1103 do not take effect.

     SEC. 1102. MODIFICATION OF CRITERIA FOR ALLOCATING HOUSING 
                   CREDITS AMONG PROJECTS.

       (a) Selection Criteria.--Subparagraph (C) of section 
     42(m)(1) (relating to certain selection criteria must be 
     used) is amended--
       (1) by inserting ``, including whether the project includes 
     the use of existing housing as part of a community 
     revitalization plan'' before the comma at the end of clause 
     (iii), and
       (2) by striking clauses (v), (vi), and (vii) and inserting 
     the following new clauses:
       ``(v) tenant populations with special housing needs,
       ``(vi) public housing waiting lists,
       ``(vii) tenant populations of individuals with children, 
     and
       ``(viii) projects intended for eventual tenant 
     ownership.''.
       (b) Preference for Community Revitalization Projects 
     Located in Qualified Census Tracts.--Clause (ii) of section 
     42(m)(1)(B) is amended by striking ``and'' at the end of 
     subclause (I), by adding ``and'' at the end of subclause 
     (II), and by inserting after subclause (II) the following new 
     subclause:

       ``(III) projects which are located in qualified census 
     tracts (as defined in subsection (d)(5)(C)) and the 
     development of which contributes to a concerted community 
     revitalization plan,''.

     SEC. 1103. ADDITIONAL RESPONSIBILITIES OF HOUSING CREDIT 
                   AGENCIES.

       (a) Market Study; Public Disclosure of Rationale for Not 
     Following Credit Allocation Priorities.--Subparagraph (A) of 
     section 42(m)(1) (relating to responsibilities of housing 
     credit agencies) is amended by striking ``and'' at the end of 
     clause (i), by striking the period at the end of clause (ii) 
     and inserting a comma, and by adding at the end the following 
     new clauses:
       ``(iii) a comprehensive market study of the housing needs 
     of low-income individuals in the area to be served by the 
     project is conducted before the credit allocation is made and 
     at the developer's expense by a disinterested party who is 
     approved by such agency, and
       ``(iv) a written explanation is available to the general 
     public for any allocation of a housing credit dollar amount 
     which is not made in accordance with established priorities 
     and selection criteria of the housing credit agency.''.
       (b) Site Visits.--Clause (iii) of section 42(m)(1)(B) 
     (relating to qualified allocation plan) is amended by 
     inserting before the period ``and in monitoring for 
     noncompliance with habitability standards through regular 
     site visits''.

     SEC. 1104. MODIFICATIONS TO RULES RELATING TO BASIS OF 
                   BUILDING WHICH IS ELIGIBLE FOR CREDIT.

       (a) Adjusted Basis To Include Portion of Certain Buildings 
     Used by Low-Income Individuals Who Are Not Tenants and by 
     Project Employees.--Paragraph (4) of section 42(d) (relating 
     to special rules relating to determination of adjusted basis) 
     is amended--
       (1) by striking ``subparagraph (B)'' in subparagraph (A) 
     and inserting ``subparagraphs (B) and (C)'',
       (2) by redesignating subparagraph (C) as subparagraph (D), 
     and
       (3) by inserting after subparagraph (B) the following new 
     subparagraph:
       ``(C) Inclusion of basis of property used to provide 
     services for certain nontenants.--
       ``(i) In general.--The adjusted basis of any building 
     located in a qualified census tract (as defined in paragraph 
     (5)(C)) shall be determined by taking into account the 
     adjusted basis of property (of a character subject to the 
     allowance for depreciation and not otherwise taken into 
     account) used throughout the taxable year in providing any 
     community service facility.
       ``(ii) Limitation.--The increase in the adjusted basis of 
     any building which is taken into account by reason of clause 
     (i) shall not exceed 10 percent of the eligible basis of the 
     qualified low-income housing project of which it is a part. 
     For purposes of the preceding sentence, all community service 
     facilities which are part of the same qualified low-income 
     housing project shall be treated as 1 facility.
       ``(iii) Community service facility.--For purposes of this 
     subparagraph, the term `community service facility' means any 
     facility designed to serve primarily individuals whose income 
     is 60 percent or less of area median income (within the 
     meaning of subsection (g)(1)(B)).''.
       (b) Certain Native American Housing Assistance Disregarded 
     in Determining Whether Building Is Federally Subsidized for 
     Purposes of the Low-Income Housing Credit.--Subparagraph (E) 
     of section 42(i)(2) (relating to determination of whether 
     building is federally subsidized) is amended--
       (1) in clause (i), by inserting ``or the Native American 
     Housing Assistance and Self-Determination Act of 1996 (25 
     U.S.C. 4101 et seq.) (as in effect on October 1, 1997)'' 
     after ``this subparagraph)'', and
       (2) in the subparagraph heading, by inserting ``or native 
     american housing assistance'' after ``home assistance''.

     SEC. 1105. OTHER MODIFICATIONS.

       (a) Allocation of Credit Limit to Certain Buildings.--
       (1) The first sentence of section 42(h)(1)(E)(ii) is 
     amended by striking ``(as of'' the first place it appears and 
     inserting ``(as of the later of the date which is 6 months 
     after the date that the allocation was made or''.
       (2) The last sentence of section 42(h)(3)(C) is amended by 
     striking ``project which'' and inserting ``project which 
     fails to meet the 10 percent test under paragraph (1)(E)(ii) 
     on a date after the close of the calendar year in which the 
     allocation was made or which''.
       (b) Determination of Whether Buildings Are Located in High 
     Cost Areas.--The first sentence of section 42(d)(5)(C)(ii)(I) 
     is amended--
       (1) by inserting ``either'' before ``in which 50 percent'', 
     and
       (2) by inserting before the period ``or which has a poverty 
     rate of at least 25 percent''.

     SEC. 1106. CARRYFORWARD RULES.

       (a) In General.--Clause (ii) of section 42(h)(3)(D) 
     (relating to unused housing credit carryovers allocated among 
     certain States) is amended by striking ``the excess'' and all 
     that follows and inserting ``the excess (if any) of--

       ``(I) the unused State housing credit ceiling for the year 
     preceding such year, over
       ``(II) the aggregate housing credit dollar amount allocated 
     for such year.''.

       (b) Conforming Amendment.--The second sentence of section 
     42(h)(3)(C) (relating to State housing credit ceiling) is 
     amended by striking ``clauses (i) and (iii)'' and inserting 
     ``clauses (i) through (iv)''.

     SEC. 1107. EFFECTIVE DATE.

       Except as otherwise provided in this subtitle, the 
     amendments made by this subtitle shall apply to--
       (1) housing credit dollar amounts allocated after December 
     31, 1999, and
       (2) buildings placed in service after such date to the 
     extent paragraph (1) of section 42(h) of the Internal Revenue 
     Code of 1986 does not apply to any building by reason of 
     paragraph (4) thereof, but only with respect to bonds issued 
     after such date.

    Subtitle B--Provisions Relating to Real Estate Investment Trusts

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

     SEC. 1111. 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)), and
       ``(ii) 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 1 issuer,
       ``(II) the trust does not hold securities possessing more 
     than 10 percent of the total voting power of the outstanding 
     securities of any 1 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 1 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. 1112. 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

[[Page 19605]]

     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.

     SEC. 1113. 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. 1114. 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. 1115. 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

[[Page 19606]]

     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. 1116. 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 1111.--
       (1) Existing arrangements.--
       (A) In general.--Except as otherwise provided in this 
     paragraph, the amendment made by section 1111 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--
       (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 1021 
     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. 1121. 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 1 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.''.

[[Page 19607]]

       (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. 1131. 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. 1141. 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. 1151. 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.

     Subtitle C--Modification of At-Risk Rules for Publicly Traded 
                            Nonrecourse Debt

     SEC. 1161. TREATMENT UNDER AT-RISK RULES OF PUBLICLY TRADED 
                   NONRECOURSE DEBT.

       (a) In General.--Subparagraph (A) of section 465(b)(6) 
     (relating to qualified nonrecourse financing treated as 
     amount at risk) is amended by striking ``share of'' and all 
     that follows and inserting ``share of--
       ``(i) any qualified nonrecourse financing which is secured 
     by real property used in such activity, and
       ``(ii) any other financing which--

       ``(I) would (but for subparagraph (B)(ii)) be qualified 
     nonrecourse financing,
       ``(II) is qualified publicly traded debt, and
       ``(III) is not borrowed by the taxpayer from a person 
     described in subclause (I), (II), or (III) of section 
     49(a)(1)(D)(iv).''.

       (b) Qualified Publicly Traded Debt.--Paragraph (6) of 
     section 465(b) is amended by adding at the end the following 
     new subparagraph:
       ``(F) Qualified publicly traded debt.--For purposes of 
     subparagraph (A), the term `qualified publicly traded debt' 
     means any debt instrument which is readily tradable on an 
     established securities market. Such term shall not include 
     any debt instrument which has a yield to maturity which 
     equals or exceeds the limitation in section 163(i)(1)(B).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to debt instruments issued after December 31, 
     1999.

 Subtitle D--Treatment of Certain Contributions to Capital of Retailers

     SEC. 1171. EXCLUSION FROM GROSS INCOME FOR CERTAIN 
                   CONTRIBUTIONS TO THE CAPITAL OF CERTAIN 
                   RETAILERS.

       (a) In General.--Section 118 (relating to contributions to 
     the capital of a corporation) is amended by redesignating 
     subsections (d) and (e) as subsections (e) and (f), 
     respectively, and by inserting after subsection (c) the 
     following new subsection:
       ``(d) Safe Harbor for Contributions to Certain Retailers.--
       ``(1) General rule.--For purposes of this section, the term 
     `contribution to the capital of the taxpayer' includes any 
     amount of money or other property received by the taxpayer 
     if--
       ``(A) the taxpayer has entered into an agreement to operate 
     (or cause to be operated) a qualified retail business at a 
     particular location for a period of at least 15 years,
       ``(B)(i) immediately after the receipt of such money or 
     other property, the taxpayer owns the land and the structure 
     to be used by the taxpayer in carrying on a qualified retail 
     business at such location, or
       ``(ii) the taxpayer uses such amount to acquire ownership 
     of at least such land and structure,
       ``(C) such amount meets the requirements of the expenditure 
     rule of paragraph (2), and
       ``(D) the contributor of such amount does not hold a 
     beneficial interest in any property located on the premises 
     of such qualified retail business other than de minimis 
     amounts of property associated with the operation of property 
     adjacent to such premises.
       ``(2) Expenditure rule.--An amount meets the requirements 
     of this paragraph if--
       ``(A) an amount equal to such amount is expended for the 
     acquisition of land or for acquisition or construction of 
     other property described in section 1231(b)--
       ``(i) which was the purpose motivating the contribution, 
     and
       ``(ii) which is used predominantly in a qualified retail 
     business at the location referred to in paragraph (1)(A),
       ``(B) the expenditure referred to in subparagraph (A) 
     occurs before the end of the second taxable year after the 
     year in which such amount was received, and
       ``(C) accurate records are kept of the amounts contributed 
     and expenditures made on the basis of the project for which 
     the contribution was made and on the basis of the year of the 
     contribution expenditure.
       ``(3) Definition of qualified retail business.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     the term `qualified retail business' means a trade or 
     business of selling tangible personal property to the general 
     public if the premises on which such trade or business is 
     conducted is in close proximity to property that the 
     contributor of the amount referred to in paragraph (1) is 
     developing or operating for profit (or, in the case of a 
     contributor which is a governmental entity, is attempting to 
     revitalize).
       ``(B) Services.--A trade or business shall not fail to be 
     treated as a qualified retail business by reason of sales of 
     services if such sales are incident to the sale of tangible 
     personal property or if the services are de minimis in 
     amount.
       ``(4) Special rules.--
       ``(A) Leases.--For purposes of paragraph (1)(B)(i), 
     property shall be treated as owned by the taxpayer if the 
     taxpayer is the lessee of such property under a lease having 
     a term of at least 30 years and on which only nominal rent is 
     required.
       ``(B) Controlled groups.--For purposes of this subsection, 
     all persons treated as a single employer under subsection (a) 
     or (b) of section 52 shall be treated as 1 person.
       ``(5) Disallowance of deductions and credits; adjusted 
     basis.--Notwithstanding any other provision of this subtitle, 
     no deduction or credit shall be allowed for, or by reason of, 
     any amount received by the taxpayer which constitutes a 
     contribution to capital to which this subsection applies. The 
     adjusted basis of any property acquired with the 
     contributions to which this subsection applies shall be 
     reduced by the amount of the contributions to which this 
     subsection applies.
       ``(6) Regulations.--The Secretary shall prescribe such 
     regulations are appropriate to prevent the abuse of the 
     purposes of the subsection, including regulations which 
     allocate income and deductions (or adjust the amount 
     excludable under this subsection) in cases in which--
       ``(A) payments in excess of fair market value are paid to 
     the contributor by the taxpayer, or
       ``(B) the contributor and the taxpayer are related 
     parties.''.
       (b) Conforming Amendment.--Subsection (e) of section 118 
     (as redesignated by subsection (a)) is amended by adding at 
     the end the following flush sentence:
     ``Rules similar to the rules of the preceding sentence shall 
     apply to any amount treated as a contribution to the capital 
     of the taxpayer under subsection (d).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts received after December 31, 1999.

[[Page 19608]]



              Subtitle E--Private Activity Bond Volume Cap

     SEC. 1181. ACCELERATION OF PHASE-IN OF INCREASE IN VOLUME CAP 
                   ON PRIVATE ACTIVITY BONDS.

       (a) In General.--The table contained in section 146(d)(2) 
     (relating to per capita limit; aggregate limit) is amended to 
     read as follows:
       

 
        Calendar Year            Per Capita Limit      Aggregate Limit
 
  2000.......................         $55.00             165,000,000
  2001.......................          60.00             180,000,000
  2002.......................          65.00             195,000,000
  2003.......................          70.00             210,000,000
  2004 and thereafter........          75.00            225,000,000.''
 

       (b) Effective Date.--The amendment made by this section 
     shall apply to calendar years beginning after 1999.

          Subtitle F--Deduction for Renovating Historic Homes

     SEC. 1191. DEDUCTION FOR RENOVATING HISTORIC HOMES.

       (a) In General.--Part VII of subchapter B of chapter 1 
     (relating to additional itemized deductions for individuals) 
     is amended by redesignating section 223 as section 224 and by 
     inserting after section 222 the following new section:

     ``SEC. 223. HISTORIC HOMEOWNERSHIP REHABILITATION DEDUCTION.

       ``(a) General Rule.--In the case of an individual, there 
     shall be allowed as a deduction an amount equal to 50 percent 
     of the qualified rehabilitation expenditures made by the 
     taxpayer with respect to a qualified historic home.
       ``(b) Dollar Limitation.--The deduction allowed by 
     subsection (a) with respect to any residence of a taxpayer 
     shall not exceed $50,000 ($25,000 in the case of a married 
     individual filing a separate return).
       ``(c) Qualified Rehabilitation Expenditure.--For purposes 
     of this section--
       ``(1) In general.--The term `qualified rehabilitation 
     expenditure' means any amount properly chargeable to capital 
     account--
       ``(A) in connection with the certified rehabilitation of a 
     qualified historic home, and
       ``(B) for property for which depreciation would be 
     allowable under section 168 if the qualified historic home 
     were used in a trade or business.
       ``(2) Certain expenditures not included.--
       ``(A) Exterior.--Such term shall not include any 
     expenditure in connection with the rehabilitation of a 
     building unless at least 5 percent of the total expenditures 
     made in the rehabilitation process are allocable to the 
     rehabilitation of the exterior of such building.
       ``(B) Other rules to apply.--Rules similar to the rules of 
     clauses (ii) and (iii) of section 47(c)(2)(B) shall apply.
       ``(3) Mixed use or multifamily building.--If only a portion 
     of a building is used as the principal residence of the 
     taxpayer, only qualified rehabilitation expenditures which 
     are properly allocable to such portion shall be taken into 
     account under this section.
       ``(d) Certified Rehabilitation.--For purposes of this 
     section:
       ``(1) In general.--Except as otherwise provided in this 
     subsection, the term `certified rehabilitation' has the 
     meaning given such term by section 47(c)(2)(C).
       ``(2) Factors to be considered in the case of targeted area 
     residences, etc.--
       ``(A) In general.--For purposes of applying section 
     47(c)(2)(C) under this section with respect to the 
     rehabilitation of a building to which this paragraph applies, 
     consideration shall be given to--
       ``(i) the feasibility of preserving existing architectural 
     and design elements of the interior of such building,
       ``(ii) the risk of further deterioration or demolition of 
     such building in the event that certification is denied 
     because of the failure to preserve such interior elements, 
     and
       ``(iii) the effects of such deterioration or demolition on 
     neighboring historic properties.
       ``(B) Buildings to which this paragraph applies.--This 
     paragraph shall apply with respect to any building--
       ``(i) any part of which is a targeted area residence within 
     the meaning of section 143(j)(1), or
       ``(ii) which is located within an enterprise community or 
     empowerment zone as designated under section 1391,
     but shall not apply with respect to any building which is 
     listed in the National Register.
       ``(3) Approved state program.--The term `certified 
     rehabilitation' includes a certification made by--
       ``(A) a State Historic Preservation Officer who administers 
     a State Historic Preservation Program approved by the 
     Secretary of the Interior pursuant to section 101(b)(1) of 
     the National Historic Preservation Act, as in effect on July 
     21, 1999, or
       ``(B) a local government, certified pursuant to section 
     101(c)(1) of the National Historic Preservation Act, as in 
     effect on July 21, 1999, and authorized by a State Historic 
     Preservation Officer, or the Secretary of the Interior where 
     there is no approved State program),
     subject to such terms and conditions as may be specified by 
     the Secretary of the Interior for the rehabilitation of 
     buildings within the jurisdiction of such officer (or local 
     government) for purposes of this section.
       ``(e) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Qualified historic home.--The term `qualified 
     historic home' means a certified historic structure--
       ``(A) which has been substantially rehabilitated, and
       ``(B) which (or any portion of which)--
       ``(i) is owned by the taxpayer, and
       ``(ii) is used (or will, within a reasonable period, be 
     used) by such taxpayer as his principal residence.
       ``(2) Substantially rehabilitated.--The term `substantially 
     rehabilitated' has the meaning given such term by section 
     47(c)(1)(C); except that, in the case of any building 
     described in subsection (d)(2), clause (i)(I) of section 
     47(c)(1)(C) shall not apply.
       ``(3) Principal residence.--The term `principal residence' 
     has the same meaning as when used in section 121.
       ``(4) Certified historic structure.--
       ``(A) In general.--The term `certified historic structure' 
     means any building (and its structural components) which--
       ``(i) is listed in the National Register, or
       ``(ii) is located in a registered historic district (as 
     defined in section 47(c)(3)(B)) within which only qualified 
     census tracts (or portions thereof) are located, and is 
     certified by the Secretary of the Interior to the Secretary 
     as being of historic significance to the district.
       ``(B) Certain structures included.--Such term includes any 
     building (and its structural components) which is designated 
     as being of historic significance under a statute of a State 
     or local government, if such statute is certified by the 
     Secretary of the Interior to the Secretary as containing 
     criteria which will substantially achieve the purpose of 
     preserving and rehabilitating buildings of historic 
     significance.
       ``(C) Qualified census tracts.--For purposes of 
     subparagraph (A)(ii)--
       ``(i) In general.--The term `qualified census tract' means 
     a census tract in which the median family income is less than 
     twice the statewide median family income.
       ``(ii) Data used.--The determination under clause (i) shall 
     be made on the basis of the most recent decennial census for 
     which data are available.
       ``(5) Rehabilitation not complete before certification.--A 
     rehabilitation shall not be treated as complete before the 
     date of the certification referred to in subsection (d).
       ``(6) Lessees.--A taxpayer who leases his principal 
     residence shall, for purposes of this section, be treated as 
     the owner thereof if the remaining term of the lease (as of 
     the date determined under regulations prescribed by the 
     Secretary) is not less than such minimum period as the 
     regulations require.
       ``(7) Tenant-stockholder in cooperative housing 
     corporation.--If the taxpayer holds stock as a tenant-
     stockholder (as defined in section 216) in a cooperative 
     housing corporation (as defined in such section), such 
     stockholder shall be treated as owning the house or apartment 
     which the taxpayer is entitled to occupy as such stockholder.
       ``(8) Allocation of expenditures relating to exterior of 
     building containing cooperative or condominium units.--The 
     percentage of the total expenditures made in the 
     rehabilitation of a building containing cooperative or 
     condominium residential units allocated to the rehabilitation 
     of the exterior of the building shall be attributed 
     proportionately to each cooperative or condominium 
     residential unit in such building for which a deduction under 
     this section is claimed.
       ``(f) When Expenditures Taken Into Account.--Qualified 
     rehabilitation expenditures shall be treated for purposes of 
     this section as made on the date the rehabilitation is 
     completed.
       ``(g) Recapture.--
       ``(1) In general.--If, before the end of the 5-year period 
     beginning on the date on which the rehabilitation of the 
     building is completed--
       ``(A) the taxpayer disposes of such taxpayer's interest in 
     such building, or
       ``(B) such building ceases to be used as the principal 
     residence of the taxpayer,
     the taxpayer's gross income for the taxable year in which 
     such disposition or cessation occurs shall be increased by 
     the recapture percentage of the deduction allowed under this 
     section for all prior taxable years with respect to such 
     rehabilitation.
       ``(2) Recapture percentage.--For purposes of paragraph (1), 
     the recapture percentage shall be determined in accordance 
     with the following table:


 
                                                                 The
                                                              recapture
     ``If the disposition or cessation occurs within--        percentage
                                                                 is--
 
(i) One full year after the taxpayer becomes entitled to             100
 the deduction.............................................
(ii) One full year after the close of the period described           805
 in clause (i).............................................
(iii) One full year after the close of the period described           60
 in clause (ii)............................................

[[Page 19609]]

 
(iv) One full year after the close of the period described            40
 in clause (iii)...........................................
(v) One full year after the close of the period described         20.''.
 in clause (iv)............................................
 

       ``(h) Basis Adjustments.--For purposes of this subtitle, if 
     a deduction is allowed under this section for any expenditure 
     with respect to any property, the increase in the basis of 
     such property which would (but for this subsection) result 
     from such expenditure shall be reduced by the amount of the 
     deduction so allowed.
       ``(i) Denial of Double Benefit.--No deduction shall be 
     allowed under this section for any amount for which credit is 
     allowed under section 47.
       ``(j) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out the purposes 
     of this section, including regulations where less than all of 
     a building is used as a principal residence and where more 
     than 1 taxpayer use the same dwelling unit as their principal 
     residence.''.
       (b) Conforming Amendments.--
       (1) Clause (i) of section 56(b)(1)(A) is amended by 
     inserting before the comma ``other than the deduction under 
     section 223 (relating to historic homeownership 
     rehabilitation deduction)''.
       (2) Subsection (a) of section 1016 is amended by striking 
     ``and'' at the end of paragraph (27), by striking the period 
     at the end of paragraph (28) and inserting ``, and'', and by 
     adding at the end the following new item:
       ``(29) to the extent provided in section 223(h).''.
       (c) Clerical Amendment.--The table of sections for part VII 
     of subchapter B of chapter 1 is amended by striking the item 
     relating to section 223 and inserting the following new 
     items:

``Sec. 223. Historic homeownership rehabilitation deduction.
``Sec. 224. Cross reference.''
       (d) Effective Date.--The amendments made by this section 
     shall apply to expenses paid or incurred in taxable years 
     beginning after December 31, 1999.

               TITLE XII--PROVISIONS RELATING TO PENSIONS

                     Subtitle A--Expanding Coverage

     SEC. 1201. INCREASE IN BENEFIT AND CONTRIBUTION LIMITS.

       (a) Defined Benefit Plans.--
       (1) Dollar limit.--
       (A) Subparagraph (A) of section 415(b)(1) (relating to 
     limitation for defined benefit plans) is amended by striking 
     ``$90,000'' and inserting ``$160,000''.
       (B) Subparagraphs (C) and (D) of section 415(b)(2) are each 
     amended by striking ``$90,000'' each place it appears in the 
     headings and the text and inserting ``$160,000''.
       (C) Paragraph (7) of section 415(b) (relating to benefits 
     under certain collectively bargained plans) is amended by 
     striking ``the greater of $68,212 or one-half the amount 
     otherwise applicable for such year under paragraph (1)(A) for 
     `$90,000' '' and inserting ``one-half the amount otherwise 
     applicable for such year under paragraph (1)(A) for 
     `$160,000' ''.
       (2) Limit reduced when benefit begins before age 62.--
     Subparagraph (C) of section 415(b)(2) is amended by striking 
     ``the social security retirement age'' each place it appears 
     in the heading and text and inserting ``age 62''.
       (3) Limit increased when benefit begins after age 65.--
     Subparagraph (D) of section 415(b)(2) is amended by striking 
     ``the social security retirement age'' each place it appears 
     in the heading and text and inserting ``age 65''.
       (4) Cost-of-living adjustments.--Subsection (d) of section 
     415 (related to cost-of-living adjustments) is amended--
       (A) by striking ``$90,000'' in paragraph (1)(A) and 
     inserting ``$160,000'', and
       (B) in paragraph (3)(A)--
       (i) by striking ``$90,000'' in the heading and inserting 
     ``$160,000'', and
       (ii) by striking ``October 1, 1986'' and inserting ``July 
     1, 2000''.
       (5) Conforming amendment.--Section 415(b)(2) is amended by 
     striking subparagraph (F).
       (b) Defined Contribution Plans.--
       (1) Dollar limit.--Subparagraph (A) of section 415(c)(1) 
     (relating to limitation for defined contribution plans) is 
     amended by striking ``$30,000'' and inserting ``$40,000''.
       (2) Cost-of-living adjustments.--Subsection (d) of section 
     415 (related to cost-of-living adjustments) is amended--
       (A) by striking ``$30,000'' in paragraph (1)(C) and 
     inserting ``$40,000'', and
       (B) in paragraph (3)(D)--
       (i) by striking ``$30,000'' in the heading and inserting 
     ``$40,000'', and
       (ii) by striking ``October 1, 1993'' and inserting ``July 
     1, 2000''.
       (c) Qualified Trusts.--
       (1) Compensation limit.--Sections 401(a)(17), 404(l), 
     408(k), and 505(b)(7) are each amended by striking 
     ``$150,000'' each place it appears and inserting 
     ``$200,000''.
       (2) Base period and rounding of cost-of-living 
     adjustment.--Subparagraph (B) of section 401(a)(17) is 
     amended--
       (A) by striking ``October 1, 1993'' and inserting ``July 1, 
     2000'', and
       (B) by striking ``$10,000'' both places it appears and 
     inserting ``$5,000''.
       (d) Elective Deferrals.--
       (1) In general.--Paragraph (1) of section 402(g) (relating 
     to limitation on exclusion for elective deferrals) is amended 
     to read as follows:
       ``(1) In general.--
       ``(A) Limitation.--Notwithstanding subsections (e)(3) and 
     (h)(1)(B), the elective deferrals of any individual for any 
     taxable year shall be included in such individual's gross 
     income to the extent the amount of such deferrals for the 
     taxable year exceeds the applicable dollar amount.
       ``(B) Applicable dollar amount.--For purposes of 
     subparagraph (A), the applicable dollar amount shall be the 
     amount determined in accordance with the following table:

    ``For taxable years                                  The applicable
      beginning in                                       dollar amount:
      calendar year:
      2001.....................................................$11,000 
      2002.....................................................$12,000 
      2003.....................................................$13,000 
      2004.....................................................$14,000 
      2005 or thereafter.....................................$15,000.''
       (2) Cost-of-living adjustment.--Paragraph (5) of section 
     402(g) is amended to read as follows:
       ``(5) Cost-of-living adjustment.--In the case of taxable 
     years beginning after December 31, 2005, the Secretary shall 
     adjust the $15,000 amount under paragraph (1)(B) at the same 
     time and in the same manner as under section 415(d), except 
     that the base period shall be the calendar quarter beginning 
     July 1, 2004, and any increase under this paragraph which is 
     not a multiple of $500 shall be rounded to the next lowest 
     multiple of $500.''.
       (3) Conforming amendments.--
       (A) Section 402(g) (relating to limitation on exclusion for 
     elective deferrals), as amended by paragraphs (1) and (2), is 
     further amended by striking paragraph (4) and redesignating 
     paragraphs (5), (6), (7), (8), and (9) as paragraphs (4), 
     (5), (6), (7), and (8), respectively.
       (B) Paragraph (2) of section 457(c) is amended by striking 
     ``402(g)(8)(A)(iii)'' and inserting ``402(g)(7)(A)(iii)''.
       (C) Clause (iii) of section 501(c)(18)(D) is amended by 
     striking ``(other than paragraph (4) thereof)''.
       (e) Deferred Compensation Plans of State and Local 
     Governments and Tax-Exempt Organizations.--
       (1) In general.--Section 457 (relating to deferred 
     compensation plans of State and local governments and tax-
     exempt organizations) is amended--
       (A) in subsections (b)(2)(A) and (c)(1) by striking 
     ``$7,500'' each place it appears and inserting ``the 
     applicable dollar amount'', and
       (B) in subsection (b)(3)(A) by striking ``$15,000'' and 
     inserting ``twice the dollar amount in effect under 
     subsection (b)(2)(A)''.
       (2) Applicable dollar amount; cost-of-living adjustment.--
     Paragraph (15) of section 457(e) is amended to read as 
     follows:
       ``(15) Applicable dollar amount.--
       ``(A) In general.--The applicable dollar amount shall be 
     the amount determined in accordance with the following table:

    ``For taxable years                                  The applicable
      beginning in                                       dollar amount:
      calendar year:
      2001.....................................................$11,000 
      2002.....................................................$12,000 
      2003.....................................................$13,000 
      2004.....................................................$14,000 
      2005 or thereafter.......................................$15,000.
       ``(B) Cost-of-living adjustments.--In the case of taxable 
     years beginning after December 31, 2005, the Secretary shall 
     adjust the $15,000 amount specified in the table in 
     subparagraph (A) at the same time and in the same manner as 
     under section 415(d), except that the base period shall be 
     the calendar quarter beginning July 1, 2004, and any increase 
     under this paragraph which is not a multiple of $500 shall be 
     rounded to the next lowest multiple of $500.''.
       (f) Simple Retirement Accounts.--
       (1) Limitation.--Clause (ii) of section 408(p)(2)(A) 
     (relating to general rule for qualified salary reduction 
     arrangement) is amended by striking ``$6,000'' and inserting 
     ``the applicable dollar amount''.
       (2) Applicable dollar amount.--Subparagraph (E) of 
     408(p)(2) is amended to read as follows:
       ``(E) Applicable dollar amount; cost-of-living 
     adjustment.--
       ``(i) In general.--For purposes of subparagraph (A)(ii), 
     the applicable dollar amount shall be the amount determined 
     in accordance with the following table:

    ``For taxable years                                  The applicable
      beginning in                                       dollar amount:
      calendar year:
          2001..................................................$7,000 
          2002..................................................$8,000 
          2003..................................................$9,000 
          2004 or thereafter...................................$10,000.
       ``(ii) Cost-of-living adjustment.--In the case of a year 
     beginning after December 31, 2004, the Secretary shall adjust 
     the $10,000 amount under clause (i) at the same time

[[Page 19610]]

     and in the same manner as under section 415(d), except that 
     the base period taken into account shall be the calendar 
     quarter beginning July 1, 2003, and any increase under this 
     subparagraph which is not a multiple of $500 shall be rounded 
     to the next lower multiple of $500.''.
       (3) Conforming amendments.--
       (A) Clause (I) of section 401(k)(11)(B)(i) is amended by 
     striking ``$6,000'' and inserting ``the amount in effect 
     under section 408(p)(2)(A)(ii)''.
       (B) Section 401(k)(11) is amended by striking subparagraph 
     (E).
       (g) Rounding Rule Relating to Defined Benefit Plans and 
     Defined Contribution Plans.--Paragraph (4) of section 415(d) 
     is amended to read as follows:
       ``(4) Rounding.--
       ``(A) $160,000 amount.--Any increase under subparagraph (A) 
     of paragraph (1) which is not a multiple of $5,000 shall be 
     rounded to the next lowest multiple of $5,000.
       ``(B) $40,000 amount.--Any increase under subparagraph (C) 
     of paragraph (1) which is not a multiple of $1,000 shall be 
     rounded to the next lowest multiple of $1,000.''.
       (h) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 2000.

     SEC. 1202. PLAN LOANS FOR SUBCHAPTER S OWNERS, PARTNERS, AND 
                   SOLE PROPRIETORS.

       (a) Amendment to 1986 Code.--Subparagraph (B) of section 
     4975(f)(6) (relating to exemptions not to apply to certain 
     transactions) is amended by adding at the end the following 
     new clause:
       ``(iii) Loan exception.--For purposes of subparagraph 
     (A)(i), the term `owner-employee' shall only include a person 
     described in subclause (II) or (III) of clause (i).''.
       (b) Amendment to ERISA.--Section 408(d)(2) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)(2)) 
     is amended by adding at the end the following new 
     subparagraph:
       ``(C) For purposes of paragraph (1)(A), the term `owner-
     employee' shall only include a person described in clause 
     (ii) or (iii) of subparagraph (A).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to loans made after December 31, 2000.

     SEC. 1203. MODIFICATION OF TOP-HEAVY RULES.

       (a) Simplification of Definition of Key Employee.--
       (1) In general.--Section 416(i)(1)(A) (defining key 
     employee) is amended--
       (A) by striking ``or any of the 4 preceding plan years'' in 
     the matter preceding clause (i),
       (B) by striking clause (i) and inserting the following:
       ``(i) an officer of the employer having an annual 
     compensation greater than $150,000,'',
       (C) by striking clause (ii) and redesignating clauses (iii) 
     and (iv) as clauses (ii) and (iii), respectively, and
       (D) by striking the second sentence in the matter following 
     clause (iii), as redesignated by subparagraph (C).
       (2) Conforming amendment.--Section 416(i)(1)(B)(iii) is 
     amended by striking ``and subparagraph (A)(ii)''.
       (b) Matching Contributions Taken Into Account for Minimum 
     Contribution Requirements.--Section 416(c)(2)(A) (relating to 
     defined contribution plans) is amended by adding at the end 
     the following: ``Employer matching contributions (as defined 
     in section 401(m)(4)(A)) shall be taken into account for 
     purposes of this subparagraph.''.
       (c) Distributions During Last Year Before Determination 
     Date Taken Into Account.--
       (1) In general.--Paragraph (3) of section 416(g) is amended 
     to read as follows:
       ``(3) Distributions during last year before determination 
     date taken into account.--
       ``(A) In general.--For purposes of determining--
       ``(i) the present value of the cumulative accrued benefit 
     for any employee, or
       ``(ii) the amount of the account of any employee,
     such present value or amount shall be increased by the 
     aggregate distributions made with respect to such employee 
     under the plan during the 1-year period ending on the 
     determination date. The preceding sentence shall also apply 
     to distributions under a terminated plan which if it had not 
     been terminated would have been required to be included in an 
     aggregation group.
       ``(B) 5-year period in case of in-service distribution.--In 
     the case of any distribution made for a reason other than 
     separation from service, death, or disability, subparagraph 
     (A) shall be applied by substituting `5-year period' for `1-
     year period'.''.
       (2) Benefits not taken into account.--Subparagraph (E) of 
     section 416(g)(4) is amended--
       (A) by striking ``last 5 years'' in the heading and 
     inserting ``last year before determination date'', and
       (B) by striking ``5-year period'' and inserting ``1-year 
     period''.
       (d) Definition of Top-Heavy Plans.--Paragraph (4) of 
     section 416(g) (relating to other special rules for top-heavy 
     plans) is amended by adding at the end the following new 
     subparagraph:
       ``(H) Cash or deferred arrangements using alternative 
     methods of meeting nondiscrimination requirements.--The term 
     `top-heavy plan' shall not include a plan which consists 
     solely of--
       ``(i) a cash or deferred arrangement which meets the 
     requirements of section 401(k)(12), and
       ``(ii) matching contributions with respect to which the 
     requirements of section 401(m)(11) are met.
     If, but for this subparagraph, a plan would be treated as a 
     top-heavy plan because it is a member of an aggregation group 
     which is a top-heavy group, contributions under the plan may 
     be taken into account in determining whether any other plan 
     in the group meets the requirements of subsection (c)(2).''.
       (e) Frozen Plan Exempt From Minimum Benefit Requirement.--
     Subparagraph (C) of section 416(c)(1) (relating to defined 
     benefit plans) is amended--
       (A) by striking ``clause (ii)'' in clause (i) and inserting 
     ``clause (ii) or (iii)'', and
       (B) by adding at the end the following:
       ``(iii) Exception for frozen plan.--For purposes of 
     determining an employee's years of service with the employer, 
     any service with the employer shall be disregarded to the 
     extent that such service occurs during a plan year when the 
     plan benefits (within the meaning of section 410(b)) no 
     employee or former employee.''.
       (f) Elimination of Family Attribution.--Section 
     416(i)(1)(B) (defining 5-percent owner) is amended by adding 
     at the end the following new clause:
       ``(iv) Family attribution disregarded.--Solely for purposes 
     of applying this paragraph (and not for purposes of any 
     provision of this title which incorporates by reference the 
     definition of a key employee or 5-percent owner under this 
     paragraph), section 318 shall be applied without regard to 
     subsection (a)(1) thereof in determining whether any person 
     is a 5-percent owner.''.
       (g) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 2000.

     SEC. 1204. ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR 
                   PURPOSES OF DEDUCTION LIMITS.

       (a) In General.--Section 404 (relating to deduction for 
     contributions of an employer to an employees' trust or 
     annuity plan and compensation under a deferred payment plan) 
     is amended by adding at the end the following new subsection:
       ``(n) Elective Deferrals Not Taken Into Account for 
     Purposes of Deduction Limits.--Elective deferrals (as defined 
     in section 402(g)(3)) shall not be subject to any limitation 
     contained in paragraph (3), (7), or (9) of subsection (a), 
     and such elective deferrals shall not be taken into account 
     in applying any such limitation to any other 
     contributions.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to years beginning after December 31, 2000.

     SEC. 1205. REPEAL OF COORDINATION REQUIREMENTS FOR DEFERRED 
                   COMPENSATION PLANS OF STATE AND LOCAL 
                   GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.

       (a) In General.--Subsection (c) of section 457 (relating to 
     deferred compensation plans of State and local governments 
     and tax-exempt organizations), as amended by section 1201, is 
     amended to read as follows:
       ``(c) Limitation.--The maximum amount of the compensation 
     of any one individual which may be deferred under subsection 
     (a) during any taxable year shall not exceed the amount in 
     effect under subsection (b)(2)(A) (as modified by any 
     adjustment provided under subsection (b)(3)).''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to years beginning after December 31, 2000.

     SEC. 1206. ELIMINATION OF USER FEE FOR REQUESTS TO IRS 
                   REGARDING PENSION PLANS.

       (a) Elimination of Certain User Fees.--The Secretary of the 
     Treasury or the Secretary's delegate shall not require 
     payment of user fees under the program established under 
     section 7527 of the Internal Revenue Code of 1986 for 
     requests to the Internal Revenue Service for determination 
     letters with respect to the qualified status of a pension 
     benefit plan maintained solely by one or more eligible 
     employers or any trust which is part of the plan. The 
     preceding sentence shall not apply to any request--
       (1) made after the 5th plan year the pension benefit plan 
     is in existence, or
       (2) made by the sponsor of any prototype or similar plan 
     which the sponsor intends to market to participating 
     employers.
       (b) Pension Benefit Plan.--For purposes of this section, 
     the term ``pension benefit plan'' means a pension, profit-
     sharing, stock bonus, annuity, or employee stock ownership 
     plan.
       (c) Eligible Employer.--For purposes of this section, the 
     term ``eligible employer'' has the same meaning given such 
     term in section 408(p)(2)(C)(i)(I) of the Internal Revenue 
     Code of 1986. The determination of whether an employer is an 
     eligible employer under this section shall be made as of the 
     date of the request described in subsection (a).
       (d) Effective Date.--The provisions of this section shall 
     apply with respect to requests made after December 31, 2000.

     SEC. 1207. DEDUCTION LIMITS.

       (a) In General.--Section 404(a) (relating to general rule) 
     is amended by adding at the end the following:

[[Page 19611]]

       ``(12) Definition of compensation.--For purposes of 
     paragraphs (3), (7), (8), and (9), the term `compensation' 
     shall include amounts treated as participant's compensation 
     under subparagraph (C) or (D) of section 415(c)(3).''.
       (b) Conforming Amendment.--Subparagraph (B) of section 
     404(a)(3) is amended by striking the last sentence thereof.
       (c) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 2000.

     SEC. 1208. OPTION TO TREAT ELECTIVE DEFERRALS AS AFTER-TAX 
                   CONTRIBUTIONS.

       (a) In General.--Subpart A of part I of subchapter D of 
     chapter 1 (relating to deferred compensation, etc.) is 
     amended by inserting after section 402 the following new 
     section:

     ``SEC. 402A. OPTIONAL TREATMENT OF ELECTIVE DEFERRALS AS PLUS 
                   CONTRIBUTIONS.

       ``(a) General Rule.--If an applicable retirement plan 
     includes a qualified plus contribution program--
       ``(1) any designated plus contribution made by an employee 
     pursuant to the program shall be treated as an elective 
     deferral for purposes of this chapter, except that such 
     contribution shall not be excludable from gross income, and
       ``(2) such plan (and any arrangement which is part of such 
     plan) shall not be treated as failing to meet any requirement 
     of this chapter solely by reason of including such program.
       ``(b) Qualified Plus Contribution Program.--For purposes of 
     this section--
       ``(1) In general.--The term `qualified plus contribution 
     program' means a program under which an employee may elect to 
     make designated plus contributions in lieu of all or a 
     portion of elective deferrals the employee is otherwise 
     eligible to make under the applicable retirement plan.
       ``(2) Separate accounting required.--A program shall not be 
     treated as a qualified plus contribution program unless the 
     applicable retirement plan--
       ``(A) establishes separate accounts (`designated plus 
     accounts') for the designated plus contributions of each 
     employee and any earnings properly allocable to the 
     contributions, and
       ``(B) maintains separate recordkeeping with respect to each 
     account.
       ``(c) Definitions and Rules Relating to Designated Plus 
     Contributions.--For purposes of this section--
       ``(1) Designated plus contribution.--The term `designated 
     plus contribution' means any elective deferral which--
       ``(A) is excludable from gross income of an employee 
     without regard to this section, and
       ``(B) the employee designates (at such time and in such 
     manner as the Secretary may prescribe) as not being so 
     excludable.
       ``(2) Designation limits.--The amount of elective deferrals 
     which an employee may designate under paragraph (1) shall not 
     exceed the excess (if any) of--
       ``(A) the maximum amount of elective deferrals excludable 
     from gross income of the employee for the taxable year 
     (without regard to this section), over
       ``(B) the aggregate amount of elective deferrals of the 
     employee for the taxable year which the employee does not 
     designate under paragraph (1).
       ``(3) Rollover contributions.--
       ``(A) In general.--A rollover contribution of any payment 
     or distribution from a designated plus account which is 
     otherwise allowable under this chapter may be made only if 
     the contribution is to--
       ``(i) another designated plus account of the individual 
     from whose account the payment or distribution was made, or
       ``(ii) a Roth IRA of such individual.
       ``(B) Coordination with limit.--Any rollover contribution 
     to a designated plus account under subparagraph (A) shall not 
     be taken into account for purposes of paragraph (1).
       ``(d) Distribution Rules.--For purposes of this title--
       ``(1) Exclusion.--Any qualified distribution from a 
     designated plus account shall not be includible in gross 
     income.
       ``(2) Qualified distribution.--For purposes of this 
     subsection--
       ``(A) In general.--The term `qualified distribution' has 
     the meaning given such term by section 408A(d)(2)(A) (without 
     regard to clause (iv) thereof).
       ``(B) Distributions within nonexclusion period.--A payment 
     or distribution from a designated plus account shall not be 
     treated as a qualified distribution if such payment or 
     distribution is made within the 5-taxable-year period 
     beginning with the earlier of--
       ``(i) the 1st taxable year for which the individual made a 
     designated plus contribution to any designated plus account 
     established for such individual under the same applicable 
     retirement plan, or
       ``(ii) if a rollover contribution was made to such 
     designated plus account from a designated plus account 
     previously established for such individual under another 
     applicable retirement plan, the 1st taxable year for which 
     the individual made a designated plus contribution to such 
     previously established account.
       ``(C) Distributions of excess deferrals and earnings.--The 
     term `qualified distribution' shall not include any 
     distribution of any excess deferral under section 402(g)(2) 
     and any income on the excess deferral.
       ``(3) Aggregation rules.--Section 72 shall be applied 
     separately with respect to distributions and payments from a 
     designated plus account and other distributions and payments 
     from the plan.
       ``(e) Other Definitions.--For purposes of this section--
       ``(1) Applicable retirement plan.--The term `applicable 
     retirement plan' means--
       ``(A) an employees' trust described in section 401(a) which 
     is exempt from tax under section 501(a), and
       ``(B) a plan under which amounts are contributed by an 
     individual's employer for an annuity contract described in 
     section 403(b).
       ``(2) Elective deferral.--The term `elective deferral' 
     means any elective deferral described in subparagraph (A) or 
     (C) of section 402(g)(3).''.
       (b) Excess Deferrals.--Section 402(g) (relating to 
     limitation on exclusion for elective deferrals) is amended--
       (1) by adding at the end of paragraph (1) the following new 
     sentence: ``The preceding sentence shall not apply to so much 
     of such excess as does not exceed the designated plus 
     contributions of the individual for the taxable year.'', and
       (2) by inserting ``(or would be included but for the last 
     sentence thereof)'' after ``paragraph (1)'' in paragraph 
     (2)(A).
       (c) Rollovers.--Subparagraph (B) of section 402(c)(8) is 
     amended by adding at the end the following:
     ``If any portion of an eligible rollover distribution is 
     attributable to payments or distributions from a designated 
     plus account (as defined in section 402A), an eligible 
     retirement plan with respect to such portion shall include 
     only another designated plus account and a Roth IRA.''.
       (d) Reporting Requirements.--
       (1) W-2 information.--Section 6051(a)(8) is amended by 
     inserting ``, including the amount of designated plus 
     contributions (as defined in section 402A)'' before the comma 
     at the end.
       (2) Information.--Section 6047 is amended by redesignating 
     subsection (f) as subsection (g) and by inserting after 
     subsection (e) the following new subsection:
       ``(f) Designated Plus Contributions.--The Secretary shall 
     require the plan administrator of each applicable retirement 
     plan (as defined in section 402A) to make such returns and 
     reports regarding designated plus contributions (as so 
     defined) to the Secretary, participants and beneficiaries of 
     the plan, and such other persons as the Secretary may 
     prescribe.''.
       (e) Conforming Amendments.--
       (1) Section 408A(e) is amended by adding after the first 
     sentence the following new sentence: ``Such term includes a 
     rollover contribution described in section 402A(c)(3)(A).''.
       (2) The table of sections for subpart A of part I of 
     subchapter D of chapter 1 is amended by inserting after the 
     item relating to section 402 the following new item:

``Sec. 402A. Optional treatment of elective deferrals as plus 
              contributions.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 1209. REDUCED PBGC PREMIUM FOR NEW PLANS OF SMALL 
                   EMPLOYERS.

       (a) In General.--Subparagraph (A) of section 4006(a)(3) of 
     the Employee Retirement Income Security Act of 1974 (29 
     U.S.C. 1306(a)(3)(A)) is amended--
       (1) in clause (i), by inserting ``other than a new single-
     employer plan (as defined in subparagraph (F)) maintained by 
     a small employer (as so defined),'' after ``single-employer 
     plan,'',
       (2) in clause (iii), by striking the period at the end and 
     inserting ``, and'', and
       (3) by adding at the end the following new clause:
       ``(iv) in the case of a new single-employer plan (as 
     defined in subparagraph (F)) maintained by a small employer 
     (as so defined) for the plan year, $5 for each individual who 
     is a participant in such plan during the plan year.''.
       (b) Definition of New Single-Employer Plan.--Section 
     4006(a)(3) of the Employee Retirement Income Security Act of 
     1974 (29 U.S.C. 1306(a)(3)) is amended by adding at the end 
     the following new subparagraph:
       ``(F)(i) For purposes of this paragraph, a single-employer 
     plan maintained by a contributing sponsor shall be treated as 
     a new single-employer plan for each of its first 5 plan years 
     if, during the 36-month period ending on the date of the 
     adoption of such plan, the sponsor or any member of such 
     sponsor's controlled group (or any predecessor of either) had 
     not established or maintained a plan to which this title 
     applies with respect to which benefits were accrued for 
     substantially the same employees as are in the new single-
     employer plan.
       ``(ii)(I) For purposes of this paragraph, the term `small 
     employer' means an employer which on the first day of any 
     plan year has, in aggregation with all members of the 
     controlled group of such employer, 100 or fewer employees.
       ``(II) In the case of a plan maintained by 2 or more 
     contributing sponsors that are not

[[Page 19612]]

     part of the same controlled group, the employees of all 
     contributing sponsors and controlled groups of such sponsors 
     shall be aggregated for purposes of determining whether any 
     contributing sponsor is a small employer.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plans established after December 31, 2000.

     SEC. 1210. REDUCTION OF ADDITIONAL PBGC PREMIUM FOR NEW AND 
                   SMALL PLANS.

       (a) New Plans.--Subparagraph (E) of section 4006(a)(3) of 
     the Employee Retirement Income Security Act of 1974 (29 
     U.S.C. 1306(a)(3)(E)) is amended by adding at the end the 
     following new clause:
       ``(v) In the case of a new defined benefit plan, the amount 
     determined under clause (ii) for any plan year shall be an 
     amount equal to the product of the amount determined under 
     clause (ii) and the applicable percentage. For purposes of 
     this clause, the term `applicable percentage' means--
       ``(I) 0 percent, for the first plan year.
       ``(II) 20 percent, for the second plan year.
       ``(III) 40 percent, for the third plan year.
       ``(IV) 60 percent, for the fourth plan year.
       ``(V) 80 percent, for the fifth plan year.
     For purposes of this clause, a defined benefit plan (as 
     defined in section 3(35)) maintained by a contributing 
     sponsor shall be treated as a new defined benefit plan for 
     its first 5 plan years if, during the 36-month period ending 
     on the date of the adoption of the plan, the sponsor and each 
     member of any controlled group including the sponsor (or any 
     predecessor of either) did not establish or maintain a plan 
     to which this title applies with respect to which benefits 
     were accrued for substantially the same employees as are in 
     the new plan.''.
       (b) Small Plans.--Paragraph (3) of section 4006(a) of the 
     Employee Retirement Income Security Act of 1974 (29 U.S.C. 
     1306(a)) is amended--
       (1) by striking ``The'' in subparagraph (E)(i) and 
     inserting ``Except as provided in subparagraph (G), the'', 
     and
       (2) by inserting after subparagraph (F) the following new 
     subparagraph:
       ``(G)(i) In the case of an employer who has 25 or fewer 
     employees on the first day of the plan year, the additional 
     premium determined under subparagraph (E) for each 
     participant shall not exceed $5 multiplied by the number of 
     participants in the plan as of the close of the preceding 
     plan year.
       ``(ii) For purposes of clause (i), whether an employer has 
     25 or fewer employees on the first day of the plan year is 
     determined taking into consideration all of the employees of 
     all members of the contributing sponsor's controlled group. 
     In the case of a plan maintained by 2 or more contributing 
     sponsors, the employees of all contributing sponsors and 
     their controlled groups shall be aggregated for purposes of 
     determining whether 25-or-fewer-employees limitation has been 
     satisfied.''.
       (c) Effective Dates.--
       (1) Subsection (a).--The amendments made by subsection (a) 
     shall apply to plans established after December 31, 2000.
       (2) Subsection (b).--The amendments made by subsection (b) 
     shall apply to plan years beginning after December 31, 2000.

                Subtitle B--Enhancing Fairness for Women

     SEC. 1221. CATCHUP CONTRIBUTIONS FOR INDIVIDUALS AGE 50 OR 
                   OVER.

       (a) In General.--Section 414 (relating to definitions and 
     special rules) is amended by adding at the end the following 
     new subsection:
       ``(v) Catchup Contributions for Individuals Age 50 or 
     Over.--
       ``(1) In general.--An applicable employer plan shall not be 
     treated as failing to meet any requirement of this title 
     solely because the plan permits an eligible participant to 
     make additional elective deferrals in any plan year.
       ``(2) Limitation on amount of additional deferrals.--
       ``(A) In general.--A plan shall not permit additional 
     elective deferrals under paragraph (1) for any year in an 
     amount greater than the lesser of--
       ``(i) the applicable percentage of the applicable dollar 
     amount for such elective deferrals for such year, or
       ``(ii) the excess (if any) of--

       ``(I) the participant's compensation for the year, over
       ``(II) any other elective deferrals of the participant for 
     such year which are made without regard to this subsection.

       ``(B) Applicable percentage.--For purposes of this 
     paragraph, the applicable percentage shall be determined in 
     accordance with the following table:

``For taxable years beginning in:         The applicable percentage is:
    2001....................................................10 percent 
    2002....................................................20 percent 
    2003....................................................30 percent 
    2004....................................................40 percent 
    2005 and thereafter.....................................50 percent.
       ``(3) Treatment of contributions.--In the case of any 
     contribution to a plan under paragraph (1)--
       ``(A) such contribution shall not, with respect to the year 
     in which the contribution is made--
       ``(i) be subject to any otherwise applicable limitation 
     contained in section 402(g), 402(h), 403(b), 404(a), 404(h), 
     408, 415, or 457, or
       ``(ii) be taken into account in applying such limitations 
     to other contributions or benefits under such plan or any 
     other such plan, and
       ``(B) such plan shall not be treated as failing to meet the 
     requirements of section 401(a)(4), 401(a)(26), 401(k)(3), 
     401(k)(11), 401(k)(12), 401(m), 403(b)(12), 408(k), 408(p), 
     408B, 410(b), or 416 by reason of the making of (or the right 
     to make) such contribution.
       ``(4) Eligible participant.--For purposes of this 
     subsection, the term `eligible participant' means, with 
     respect to any plan year, a participant in a plan--
       ``(A) who has attained the age of 50 before the close of 
     the plan year, and
       ``(B) with respect to whom no other elective deferrals may 
     (without regard to this subsection) be made to the plan for 
     the plan year by reason of the application of any limitation 
     or other restriction described in paragraph (3) or contained 
     in the terms of the plan.
       ``(5) Other definitions and rules.--For purposes of this 
     subsection--
       ``(A) Applicable dollar amount.--The term `applicable 
     dollar amount' means, with respect to any year, the amount in 
     effect under section 402(g)(1)(B), 408(p)(2)(E)(i), or 
     457(e)(15)(A), whichever is applicable to an applicable 
     employer plan, for such year.
       ``(B) Applicable employer plan.--The term `applicable 
     employer plan' means--
       ``(i) an employees' trust described in section 401(a) which 
     is exempt from tax under section 501(a),
       ``(ii) a plan under which amounts are contributed by an 
     individual's employer for an annuity contract described in 
     section 403(b),
       ``(iii) an eligible deferred compensation plan under 
     section 457 of an eligible employer as defined in section 
     457(e)(1)(A), and
       ``(iv) an arrangement meeting the requirements of section 
     408 (k) or (p).
       ``(C) Elective deferral.--The term `elective deferral' has 
     the meaning given such term by subsection (u)(2)(C).
       ``(D) Exception for section 457 plans.--This subsection 
     shall not apply to an applicable employer plan described in 
     subparagraph (B)(iii) for any year to which section 457(b)(3) 
     applies.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to contributions in taxable years beginning after 
     December 31, 2000.

     SEC. 1222. EQUITABLE TREATMENT FOR CONTRIBUTIONS OF EMPLOYEES 
                   TO DEFINED CONTRIBUTION PLANS.

       (a) Equitable Treatment.--
       (1) In general.--Subparagraph (B) of section 415(c)(1) 
     (relating to limitation for defined contribution plans) is 
     amended by striking ``25 percent'' and inserting ``100 
     percent''.
       (2) Application to section 403(b).--Section 403(b) is 
     amended--
       (A) by striking ``the exclusion allowance for such taxable 
     year'' in paragraph (1) and inserting ``the applicable limit 
     under section 415'',
       (B) by striking paragraph (2), and
       (C) by inserting ``or any amount received by a former 
     employee after the 5th taxable year following the taxable 
     year in which such employee was terminated'' before the 
     period at the end of the second sentence of paragraph (3).
       (3) Conforming amendments.--
       (A) Subsection (f) of section 72 is amended by striking 
     ``section 403(b)(2)(D)(iii))'' and inserting ``section 
     403(b)(2)(D)(iii), as in effect before the enactment of the 
     Taxpayer Refund and Relief Act of 1999)''.
       (B) Section 404(a)(10)(B) is amended by striking ``, the 
     exclusion allowance under section 403(b)(2),''.
       (C) Section 415(a)(2) is amended by striking ``, and the 
     amount of the contribution for such portion shall reduce the 
     exclusion allowance as provided in section 403(b)(2)''.
       (D) Section 415(c)(3) is amended by adding at the end the 
     following new subparagraph:
       ``(E) Annuity contracts.--In the case of an annuity 
     contract described in section 403(b), the term `participant's 
     compensation' means the participant's includible compensation 
     determined under section 403(b)(3).''.
       (E) Section 415(c) is amended by striking paragraph (4).
       (F) Section 415(c)(7) is amended to read as follows:
       ``(7) Certain contributions by church plans not treated as 
     exceeding limit.--
       ``(A) In general.--Notwithstanding any other provision of 
     this subsection, at the election of a participant who is an 
     employee of a church or a convention or association of 
     churches, including an organization described in section 
     414(e)(3)(B)(ii), contributions and other additions for an 
     annuity contract or retirement income account described in 
     section 403(b) with respect to such participant, when 
     expressed as an annual addition to such participant's 
     account, shall be treated as not exceeding the limitation of 
     paragraph (1) if such annual addition is not in excess of 
     $10,000.
       ``(B) $40,000 aggregate limitation.--The total amount of 
     additions with respect to any participant which may be taken 
     into account for purposes of this subparagraph for all years 
     may not exceed $40,000.
       ``(C) Annual addition.--For purposes of this paragraph, the 
     term `annual addition'

[[Page 19613]]

     has the meaning given such term by paragraph (2).''.
       (G) Subparagraph (B) of section 402(g)(7) (as redesignated 
     by section 1201) is amended by inserting before the period at 
     the end the following: ``(as in effect before the enactment 
     of the Taxpayer Refund and Relief Act of 1999)''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to years beginning after December 31, 2000.
       (b) Special Rules for Sections 403(b) and 408.--
       (1) In general.--Subsection (k) of section 415 is amended 
     by adding at the end the following new paragraph:
       ``(4) Special rules for sections 403(b) and 408.--For 
     purposes of this section, any annuity contract described in 
     section 403(b) for the benefit of a participant shall be 
     treated as a defined contribution plan maintained by each 
     employer with respect to which the participant has the 
     control required under subsection (b) or (c) of section 414 
     (as modified by subsection (h)). For purposes of this 
     section, any contribution by an employer to a simplified 
     employee pension plan for an individual for a taxable year 
     shall be treated as an employer contribution to a defined 
     contribution plan for such individual for such year.''.
       (2) Effective date.--
       (A) In general.--The amendment made by paragraph (1) shall 
     apply to limitation years beginning after December 31, 1999.
       (B) Exclusion allowance.--Effective for limitation years 
     beginning in 2000, in the case of any annuity contract 
     described in section 403(b) of the Internal Revenue Code of 
     1986, the amount of the contribution disqualified by reason 
     of section 415(g) of such Code shall reduce the exclusion 
     allowance as provided in section 403(b)(2) of such Code.
       (3) Modification of 403(b) exclusion allowance to conform 
     to 415 modification.--The Secretary of the Treasury shall 
     modify the regulations regarding the exclusion allowance 
     under section 403(b)(2) of the Internal Revenue Code of 1986 
     to render void the requirement that contributions to a 
     defined benefit pension plan be treated as previously 
     excluded amounts for purposes of the exclusion allowance. For 
     taxable years beginning after December 31, 1999, such 
     regulations shall be applied as if such requirement were 
     void.
       (c) Deferred Compensation Plans of State and Local 
     Governments and Tax-Exempt Organizations.--
       (1) In general.--Subparagraph (B) of section 457(b)(2) 
     (relating to salary limitation on eligible deferred 
     compensation plans) is amended by striking ``33\1/3\ 
     percent'' and inserting ``100 percent''.
       (2) Effective date.--The amendment made by this subsection 
     shall apply to years beginning after December 31, 2000.

     SEC. 1223. FASTER VESTING OF CERTAIN EMPLOYER MATCHING 
                   CONTRIBUTIONS.

       (a) Amendments to 1986 Code.--Section 411(a) (relating to 
     minimum vesting standards) is amended--
       (1) in paragraph (2), by striking ``A plan'' and inserting 
     ``Except as provided in paragraph (12), a plan'', and
       (2) by adding at the end the following:
       ``(12) Faster vesting for matching contributions.--In the 
     case of matching contributions (as defined in section 
     401(m)(4)(A)), paragraph (2) shall be applied--
       ``(A) by substituting `3 years' for `5 years' in 
     subparagraph (A), and
       ``(B) by substituting the following table for the table 
     contained in subparagraph (B):

``Years of service:                   The nonforfeitable percentage is:
    2...............................................................20 
    3...............................................................40 
    4...............................................................60 
    5...............................................................80 
    6...........................................................100.''.
       (b) Amendments to ERISA.--Section 203(a) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1053(a)) is 
     amended--
       (1) in paragraph (2), by striking ``A plan'' and inserting 
     ``Except as provided in paragraph (4), a plan'', and
       (2) by adding at the end the following:
       ``(4) Faster vesting for matching contributions.--In the 
     case of matching contributions (as defined in section 
     401(m)(4)(A) of the Internal Revenue Code of 1986), paragraph 
     (2) shall be applied--
       ``(A) by substituting `3 years' for `5 years' in 
     subparagraph (A), and
       ``(B) by substituting the following table for the table 
     contained in subparagraph (B):

``Years of service:                   The nonforfeitable percentage is:
    2...............................................................20 
    3...............................................................40 
    4...............................................................60 
    5...............................................................80 
    6...........................................................100.''.
       (c) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to contributions 
     for plan years beginning after December 31, 2000.
       (2) Collective bargaining agreements.--In the case of a 
     plan maintained pursuant to 1 or more collective bargaining 
     agreements between employee representatives and 1 or more 
     employers ratified by the date of enactment of this Act, the 
     amendments made by this section shall not apply to 
     contributions on behalf of employees covered by any such 
     agreement for plan years beginning before the earlier of--
       (A) the later of--
       (i) the date on which the last of such collective 
     bargaining agreements terminates (determined without regard 
     to any extension thereof on or after such date of enactment), 
     or
       (ii) January 1, 2001, or
       (B) January 1, 2005.
       (3) Service required.--With respect to any plan, the 
     amendments made by this section shall not apply to any 
     employee before the date that such employee has 1 hour of 
     service under such plan in any plan year to which the 
     amendments made by this section apply.

     SEC. 1224. SIMPLIFY AND UPDATE THE MINIMUM DISTRIBUTION 
                   RULES.

       (a) Simplification and Finalization of Minimum Distribution 
     Requirements.--
       (1) In general.--The Secretary of the Treasury shall--
       (A) simplify and finalize the regulations relating to 
     minimum distribution requirements under sections 401(a)(9), 
     408(a)(6) and (b)(3), 403(b)(10), and 457(d)(2) of the 
     Internal Revenue Code of 1986, and
       (B) modify such regulations to--
       (i) reflect current life expectancy, and
       (ii) revise the required distribution methods so that, 
     under reasonable assumptions, the amount of the required 
     minimum distribution does not decrease over a participant's 
     life expectancy.
       (2) Fresh start.--Notwithstanding subparagraph (D) of 
     section 401(a)(9) of such Code, during the first year that 
     regulations are in effect under this subsection, required 
     distributions for future years may be redetermined to reflect 
     changes under such regulations. Such redetermination shall 
     include the opportunity to choose a new designated 
     beneficiary and to elect a new method of calculating life 
     expectancy.
       (3) Effective date for regulations.--Regulations referred 
     to in paragraph (1) shall be effective for years beginning 
     after December 31, 2000, and shall apply in such years 
     without regard to whether an individual had previously begun 
     receiving minimum distributions.
       (b) Repeal of Rule Where Distributions Had Begun Before 
     Death Occurs.--
       (1) In general.--Subparagraph (B) of section 401(a)(9) is 
     amended by striking clause (i) and redesignating clauses 
     (ii), (iii), and (iv) as clauses (i), (ii), and (iii), 
     respectively.
       (2) Conforming changes.--
       (A) Clause (i) of section 401(a)(9)(B) (as so redesignated) 
     is amended--
       (i) by striking ``for other cases'' in the heading, and
       (ii) by striking ``the distribution of the employee's 
     interest has begun in accordance with subparagraph (A)(ii)'' 
     and inserting ``his entire interest has been distributed to 
     him,''.
       (B) Clause (ii) of section 401(a)(9)(B) (as so 
     redesignated) is amended by striking ``clause (ii)'' and 
     inserting ``clause (i)''.
       (C) Clause (iii) of section 401(a)(9)(B) (as so 
     redesignated) is amended--
       (i) by striking ``clause (iii)(I)'' and inserting ``clause 
     (ii)(I)'',
       (ii) by striking ``clause (iii)(III)'' in subclause (I) and 
     inserting ``clause (ii)(III)'',
       (iii) by striking ``the date on which the employee would 
     have attained the age 70\1/2\,'' in subclause (I) and 
     inserting ``April 1 of the calendar year following the 
     calendar year in which the spouse attains 70\1/2\,'', and
       (iv) by striking ``the distributions to such spouse 
     begin,'' in subclause (II) and inserting ``his entire 
     interest has been distributed to him,''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to years beginning after December 31, 2000.
       (c) Reduction in Excise Tax.--
       (1) In general.--Subsection (a) of section 4974 is amended 
     by striking ``50 percent'' and inserting ``10 percent''.
       (2) Effective date.--The amendment made by this subsection 
     shall apply to years beginning after December 31, 2000.

     SEC. 1225. CLARIFICATION OF TAX TREATMENT OF DIVISION OF 
                   SECTION 457 PLAN BENEFITS UPON DIVORCE.

       (a) In General.--Section 414(p)(11) (relating to 
     application of rules to governmental and church plans) is 
     amended--
       (1) by inserting ``or an eligible deferred compensation 
     plan (within the meaning of section 457(b))'' after 
     ``subsection (e))'', and
       (2) in the heading, by striking ``governmental and church 
     plans'' and inserting ``certain other plans''.
       (b) Waiver of Certain Distribution Requirements.--Paragraph 
     (10) of section 414(p) is amended by striking ``and section 
     409(d)'' and inserting ``section 409(d), and section 
     457(d)''.
       (c) Tax Treatment of Payments From a Section 457 Plan.--
     Subsection (p) of section 414 is amended by redesignating 
     paragraph (12) as paragraph (13) and inserting after 
     paragraph (11) the following new paragraph:
       ``(12) Tax treatment of payments from a section 457 plan.--
     If a distribution or payment from an eligible deferred 
     compensation plan described in section 457(b) is made 
     pursuant to a qualified domestic relations order, rules 
     similar to the rules of section 402(e)(1)(A) shall apply to 
     such distribution or payment.''.

[[Page 19614]]

       (d) Effective Date.--The amendments made by this section 
     shall apply to transfers, distributions, and payments made 
     after December 31, 2000.

     SEC. 1226. MODIFICATION OF SAFE HARBOR RELIEF FOR HARDSHIP 
                   WITHDRAWALS FROM CASH OR DEFERRED ARRANGEMENTS.

       (a) In General.--The Secretary of the Treasury shall revise 
     the regulations relating to hardship distributions under 
     section 401(k)(2)(B)(i)(IV) of the Internal Revenue Code of 
     1986 to provide that the period an employee is prohibited 
     from making elective and employee contributions in order for 
     a distribution to be deemed necessary to satisfy financial 
     need shall be equal to 6 months.
       (b) Effective Date.--The revised regulations under 
     subsection (a) shall apply to years beginning after December 
     31, 2000.

          Subtitle C--Increasing Portability for Participants

     SEC. 1231. ROLLOVERS ALLOWED AMONG VARIOUS TYPES OF PLANS.

       (a) Rollovers From and to Section 457 Plans.--
       (1) Rollovers from section 457 plans.--
       (A) In general.--Section 457(e) (relating to other 
     definitions and special rules) is amended by adding at the 
     end the following:
       ``(16) Rollover amounts.--
       ``(A) General rule.--In the case of an eligible deferred 
     compensation plan established and maintained by an employer 
     described in subsection (e)(1)(A), if--
       ``(i) any portion of the balance to the credit of an 
     employee in such plan is paid to such employee in an eligible 
     rollover distribution (within the meaning of section 
     402(c)(4) without regard to subparagraph (C) thereof),
       ``(ii) the employee transfers any portion of the property 
     such employee receives in such distribution to an eligible 
     retirement plan described in section 402(c)(8)(B), and
       ``(iii) in the case of a distribution of property other 
     than money, the amount so transferred consists of the 
     property distributed,
     then such distribution (to the extent so transferred) shall 
     not be includible in gross income for the taxable year in 
     which paid.
       ``(B) Certain rules made applicable.--The rules of 
     paragraphs (2) through (7) (other than paragraph (4)(C)) and 
     (9) of section 402(c) and section 402(f) shall apply for 
     purposes of subparagraph (A).
       ``(C) Reporting.--Rollovers under this paragraph shall be 
     reported to the Secretary in the same manner as rollovers 
     from qualified retirement plans (as defined in section 
     4974(c)).''.
       (B) Deferral limit determined without regard to rollover 
     amounts.--Section 457(b)(2) (defining eligible deferred 
     compensation plan) is amended by inserting ``(other than 
     rollover amounts)'' after ``taxable year''.
       (C) Direct rollover.--Paragraph (1) of section 457(d) 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 inserting after subparagraph (B) 
     the following:
       ``(C) in the case of a plan maintained by an employer 
     described in subsection (e)(1)(A), the plan meets 
     requirements similar to the requirements of section 
     401(a)(31).
     Any amount transferred in a direct trustee-to-trustee 
     transfer in accordance with section 401(a)(31) shall not be 
     includible in gross income for the taxable year of 
     transfer.''.
       (D) Withholding.--
       (i) Paragraph (12) of section 3401(a) is amended by adding 
     at the end the following:
       ``(E) under or to an eligible deferred compensation plan 
     which, at the time of such payment, is a plan described in 
     section 457(b) maintained by an employer described in section 
     457(e)(1)(A); or''.
       (ii) Paragraph (3) of section 3405(c) is amended to read as 
     follows:
       ``(3) Eligible rollover distribution.--For purposes of this 
     subsection, the term `eligible rollover distribution' has the 
     meaning given such term by section 402(f)(2)(A).''.
       (iii) Liability for withholding.--Subparagraph (B) of 
     section 3405(d)(2) is amended by striking ``or'' at the end 
     of clause (ii), by striking the period at the end of clause 
     (iii) and inserting ``, or'', and by adding at the end the 
     following:
       ``(iv) section 457(b).''.
       (2) Rollovers to section 457 plans.--
       (A) In general.--Section 402(c)(8)(B) (defining eligible 
     retirement plan) is amended by striking ``and'' at the end of 
     clause (iii), by striking the period at the end of clause 
     (iv) and inserting ``, and'', and by inserting after clause 
     (iv) the following new clause:
       ``(v) an eligible deferred compensation plan described in 
     section 457(b) of an employer described in section 
     457(e)(1)(A).''.
       (B) Separate accounting.--Section 402(c) is amended by 
     adding at the end the following new paragraph:
       ``(11) Separate accounting.--Unless a plan described in 
     clause (v) of paragraph (8)(B) agrees to separately account 
     for amounts rolled into such plan from eligible retirement 
     plans not described in such clause, the plan described in 
     such clause may not accept transfers or rollovers from such 
     retirement plans.''.
       (C) 10 percent additional tax.--Subsection (t) of section 
     72 (relating to 10-percent additional tax on early 
     distributions from qualified retirement plans) is amended by 
     adding at the end the following new paragraph:
       ``(9) Special rule for rollovers to section 457 plans.--For 
     purposes of this subsection, a distribution from an eligible 
     deferred compensation plan (as defined in section 457(b)) of 
     an employer described in section 457(e)(1)(A) shall be 
     treated as a distribution from a qualified retirement plan 
     described in 4974(c)(1) to the extent that such distribution 
     is attributable to an amount transferred to an eligible 
     deferred compensation plan from a qualified retirement plan 
     (as defined in section 4974(c)).''.
       (b) Allowance of Rollovers From and to 403(b) Plans.--
       (1) Rollovers from section 403(b) plans.--Section 
     403(b)(8)(A)(ii) (relating to rollover amounts) is amended by 
     striking ``such distribution'' and all that follows and 
     inserting ``such distribution to an eligible retirement plan 
     described in section 402(c)(8)(B), and''.
       (2) Rollovers to section 403(b) plans.--Section 
     402(c)(8)(B) (defining eligible retirement plan), as amended 
     by subsection (a), is amended by striking ``and'' at the end 
     of clause (iv), by striking the period at the end of clause 
     (v) and inserting ``, and'', and by inserting after clause 
     (v) the following new clause:
       ``(vi) an annuity contract described in section 403(b).''.
       (c) Expanded Explanation to Recipients of Rollover 
     Distributions.--Paragraph (1) of section 402(f) (relating to 
     written explanation to recipients of distributions eligible 
     for rollover treatment) is amended by striking ``and'' at the 
     end of subparagraph (C), by striking the period at the end of 
     subparagraph (D) and inserting ``, and'', and by adding at 
     the end the following new subparagraph:
       ``(E) of the provisions under which distributions from the 
     eligible retirement plan receiving the distribution may be 
     subject to restrictions and tax consequences which are 
     different from those applicable to distributions from the 
     plan making such distribution.''.
       (d) Spousal Rollovers.--Section 402(c)(9) (relating to 
     rollover where spouse receives distribution after death of 
     employee) is amended by striking ``; except that'' and all 
     that follows up to the end period.
       (e) Conforming Amendments.--
       (1) Section 72(o)(4) is amended by striking ``and 
     408(d)(3)'' and inserting ``403(b)(8), 408(d)(3), and 
     457(e)(16)''.
       (2) Section 219(d)(2) is amended by striking ``or 
     408(d)(3)'' and inserting ``408(d)(3), or 457(e)(16)''.
       (3) Section 401(a)(31)(B) is amended by striking ``and 
     403(a)(4)'' and inserting ``, 403(a)(4), 403(b)(8), and 
     457(e)(16)''.
       (4) Subparagraph (A) of section 402(f)(2) is amended by 
     striking ``or paragraph (4) of section 403(a)'' and inserting 
     ``, paragraph (4) of section 403(a), subparagraph (A) of 
     section 403(b)(8), or subparagraph (A) of section 
     457(e)(16)''.
       (5) Paragraph (1) of section 402(f) is amended by striking 
     ``from an eligible retirement plan''.
       (6) Subparagraphs (A) and (B) of section 402(f)(1) are 
     amended by striking ``another eligible retirement plan'' and 
     inserting ``an eligible retirement plan''.
       (7) Subparagraph (B) of section 403(b)(8) is amended to 
     read as follows:
       ``(B) Certain rules made applicable.--The rules of 
     paragraphs (2) through (7) and (9) of section 402(c) and 
     section 402(f) shall apply for purposes of subparagraph (A), 
     except that section 402(f) shall be applied to the payor in 
     lieu of the plan administrator.''.
       (8) Section 408(a)(1) is amended by striking ``or 
     403(b)(8)'' and inserting ``, 403(b)(8), or 457(e)(16)''.
       (9) Subparagraphs (A) and (B) of section 415(b)(2) are each 
     amended by striking ``and 408(d)(3)'' and inserting 
     ``403(b)(8), 408(d)(3), and 457(e)(16)''.
       (10) Section 415(c)(2) is amended by striking ``and 
     408(d)(3)'' and inserting ``408(d)(3), and 457(e)(16)''.
       (11) Section 4973(b)(1)(A) is amended by striking ``or 
     408(d)(3)'' and inserting ``408(d)(3), or 457(e)(16)''.
       (f) Effective Date; Special Rule.--
       (1) Effective date.--The amendments made by this section 
     shall apply to distributions after December 31, 2000.
       (2) Special rule.--Notwithstanding any other provision of 
     law, subsections (h)(3) and (h)(5) of section 1122 of the Tax 
     Reform Act of 1986 shall not apply to any distribution from 
     an eligible retirement plan (as defined in clause (iii) or 
     (iv) of section 402(c)(8)(B) of the Internal Revenue Code of 
     1986) on behalf of an individual if there was a rollover to 
     such plan on behalf of such individual which is permitted 
     solely by reason of any amendment made by this section.

     SEC. 1232. ROLLOVERS OF IRAS INTO WORKPLACE RETIREMENT PLANS.

       (a) In General.--Subparagraph (A) of section 408(d)(3) 
     (relating to rollover amounts) is amended by adding ``or'' at 
     the end of clause (i), by striking clauses (ii) and (iii), 
     and by adding at the end the following:
       ``(ii) the entire amount received (including money and any 
     other property) is paid into an eligible retirement plan for 
     the benefit of such individual not later than the 60th day 
     after the date on which the payment or distribution is 
     received, except that the maximum amount which may be paid 
     into such

[[Page 19615]]

     plan may not exceed the portion of the amount received which 
     is includible in gross income (determined without regard to 
     this paragraph).
     For purposes of clause (ii), the term `eligible retirement 
     plan' means an eligible retirement plan described in clause 
     (iii), (iv), (v), or (vi) of section 402(c)(8)(B).''.
       (b) Conforming Amendments.--
       (1) Paragraph (1) of section 403(b) is amended by striking 
     ``section 408(d)(3)(A)(iii)'' and inserting ``section 
     408(d)(3)(A)(ii)''.
       (2) Clause (i) of section 408(d)(3)(D) is amended by 
     striking ``(i), (ii), or (iii)'' and inserting ``(i) or 
     (ii)''.
       (3) Subparagraph (G) of section 408(d)(3) is amended to 
     read as follows:
       ``(G) Simple retirement accounts.--In the case of any 
     payment or distribution out of a simple retirement account 
     (as defined in subsection (p)) to which section 72(t)(6) 
     applies, this paragraph shall not apply unless such payment 
     or distribution is paid into another simple retirement 
     account.''.
       (c) Effective Date; Special Rule.--
       (1) Effective date.--The amendments made by this section 
     shall apply to distributions after December 31, 2000.
       (2) Special rule.--Notwithstanding any other provision of 
     law, subsections (h)(3) and (h)(5) of section 1122 of the Tax 
     Reform Act of 1986 shall not apply to any distribution from 
     an eligible retirement plan (as defined in clause (iii) or 
     (iv) of section 402(c)(8)(B) of the Internal Revenue Code of 
     1986) on behalf of an individual if there was a rollover to 
     such plan on behalf of such individual which is permitted 
     solely by reason of the amendments made by this section.

     SEC. 1233. ROLLOVERS OF AFTER-TAX CONTRIBUTIONS.

       (a) Rollovers From Exempt Trusts.--Paragraph (2) of section 
     402(c) (relating to maximum amount which may be rolled over) 
     is amended by adding at the end the following: ``The 
     preceding sentence shall not apply to such distribution to 
     the extent--
       ``(A) such portion is transferred in a direct trustee-to-
     trustee transfer to a qualified trust which is part of a plan 
     which is a defined contribution plan and which agrees to 
     separately account for amounts so transferred, including 
     separately accounting for the portion of such distribution 
     which is includible in gross income and the portion of such 
     distribution which is not so includible, or
       ``(B) such portion is transferred to an eligible retirement 
     plan described in clause (i) or (ii) of paragraph (8)(B).''.
       (b) Optional Direct Transfer of Eligible Rollover 
     Distributions.--Subparagraph (B) of section 401(a)(31) 
     (relating to limitation) is amended by adding at the end the 
     following: ``The preceding sentence shall not apply to such 
     distribution if the plan to which such distribution is 
     transferred--
       ``(i) agrees to separately account for amounts so 
     transferred, including separately accounting for the portion 
     of such distribution which is includible in gross income and 
     the portion of such distribution which is not so includible, 
     or
       ``(ii) is an eligible retirement plan described in clause 
     (i) or (ii) of section 402(c)(8)(B).''.
       (c) Rules for Applying Section 72 to IRAs.--Paragraph (3) 
     of section 408(d) (relating to special rules for applying 
     section 72) is amended by inserting at the end the following:
       ``(H) Application of section 72.--
       ``(i) In general.--If--

       ``(I) a distribution is made from an individual retirement 
     plan, and
       ``(II) a rollover contribution is made to an eligible 
     retirement plan described in section 402(c)(8)(B)(iii), (iv), 
     (v), or (vi) with respect to all or part of such 
     distribution,

     then, notwithstanding paragraph (2), the rules of clause (ii) 
     shall apply for purposes of applying section 72.
       ``(ii) Applicable rules.--In the case of a distribution 
     described in clause (i)--

       ``(I) section 72 shall be applied separately to such 
     distribution,
       ``(II) notwithstanding the pro rata allocation of income 
     on, and investment in, the contract to distributions under 
     section 72, the portion of such distribution rolled over to 
     an eligible retirement plan described in clause (i) shall be 
     treated as from income on the contract (to the extent of the 
     aggregate income on the contract from all individual 
     retirement plans of the distributee), and
       ``(III) appropriate adjustments shall be made in applying 
     section 72 to other distributions in such taxable year and 
     subsequent taxable years.''.

       (d) Effective Date.--The amendments made by this section 
     shall apply to distributions made after December 31, 2000.

     SEC. 1234. HARDSHIP EXCEPTION TO 60-DAY RULE.

       (a) Exempt Trusts.--Paragraph (3) of section 402(c) 
     (relating to transfer must be made within 60 days of receipt) 
     is amended to read as follows:
       ``(3) Transfer must be made within 60 days of receipt.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     paragraph (1) shall not apply to any transfer of a 
     distribution made after the 60th day following the day on 
     which the distributee received the property distributed.
       ``(B) Hardship exception.--The Secretary may waive the 60-
     day requirement under subparagraph (A) where the failure to 
     waive such requirement would be against equity or good 
     conscience, including casualty, disaster, or other events 
     beyond the reasonable control of the individual subject to 
     such requirement.''.
       (b) IRAs.--Paragraph (3) of section 408(d) (relating to 
     rollover contributions), as amended by section 1233, is 
     amended by adding after subparagraph (H) the following new 
     subparagraph:
       ``(I) Waiver of 60-day requirement.--The Secretary may 
     waive the 60-day requirement under subparagraphs (A) and (D) 
     where the failure to waive such requirement would be against 
     equity or good conscience, including casualty, disaster, or 
     other events beyond the reasonable control of the individual 
     subject to such requirement.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to distributions after December 31, 2000.

     SEC. 1235. TREATMENT OF FORMS OF DISTRIBUTION.

       (a) Plan Transfers.--
       (1) Amendment to internal revenue code of 1986.--Paragraph 
     (6) of section 411(d) (relating to accrued benefit not to be 
     decreased by amendment) is amended by adding at the end the 
     following:
       ``(D) Plan transfers.--
       ``(i) A defined contribution plan (in this subparagraph 
     referred to as the `transferee plan') shall not be treated as 
     failing to meet the requirements of this subsection merely 
     because the transferee plan does not provide some or all of 
     the forms of distribution previously available under another 
     defined contribution plan (in this subparagraph referred to 
     as the `transferor plan') to the extent that--

       ``(I) the forms of distribution previously available under 
     the transferor plan applied to the account of a participant 
     or beneficiary under the transferor plan that was transferred 
     from the transferor plan to the transferee plan pursuant to a 
     direct transfer rather than pursuant to a distribution from 
     the transferor plan,
       ``(II) the terms of both the transferor plan and the 
     transferee plan authorize the transfer described in subclause 
     (I),
       ``(III) the transfer described in subclause (I) was made 
     pursuant to a voluntary election by the participant or 
     beneficiary whose account was transferred to the transferee 
     plan,
       ``(IV) the election described in subclause (III) was made 
     after the participant or beneficiary received a notice 
     describing the consequences of making the election,
       ``(V) if the transferor plan provides for an annuity as the 
     normal form of distribution under the plan in accordance with 
     section 417, the transfer is made with the consent of the 
     participant's spouse (if any), and such consent meets 
     requirements similar to the requirements imposed by section 
     417(a)(2), and
       ``(VI) the transferee plan allows the participant or 
     beneficiary described in clause (iii) to receive any 
     distribution to which the participant or beneficiary is 
     entitled under the transferee plan in the form of a single 
     sum distribution.

       ``(ii) Clause (i) shall apply to plan mergers and other 
     transactions having the effect of a direct transfer, 
     including consolidations of benefits attributable to 
     different employers within a multiple employer plan.
       ``(E) Elimination of form of distribution.--Except to the 
     extent provided in regulations, a defined contribution plan 
     shall not be treated as failing to meet the requirements of 
     this section merely because of the elimination of a form of 
     distribution previously available thereunder. This 
     subparagraph shall not apply to the elimination of a form of 
     distribution with respect to any participant unless--
       ``(i) a single sum payment is available to such participant 
     at the same time or times as the form of distribution being 
     eliminated, and
       ``(ii) such single sum payment is based on the same or 
     greater portion of the participant's account as the form of 
     distribution being eliminated.''.
       (2) Amendment to erisa.--Section 204(g) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1054(g)) is 
     amended by adding at the end the following:
       ``(4)(A) A defined contribution plan (in this subparagraph 
     referred to as the `transferee plan') shall not be treated as 
     failing to meet the requirements of this subsection merely 
     because the transferee plan does not provide some or all of 
     the forms of distribution previously available under another 
     defined contribution plan (in this subparagraph referred to 
     as the `transferor plan') to the extent that--
       ``(i) the forms of distribution previously available under 
     the transferor plan applied to the account of a participant 
     or beneficiary under the transferor plan that was transferred 
     from the transferor plan to the transferee plan pursuant to a 
     direct transfer rather than pursuant to a distribution from 
     the transferor plan;
       ``(ii) the terms of both the transferor plan and the 
     transferee plan authorize the transfer described in clause 
     (i);
       ``(iii) the transfer described in clause (i) was made 
     pursuant to a voluntary election

[[Page 19616]]

     by the participant or beneficiary whose account was 
     transferred to the transferee plan;
       ``(iv) the election described in clause (iii) was made 
     after the participant or beneficiary received a notice 
     describing the consequences of making the election;
       ``(v) if the transferor plan provides for an annuity as the 
     normal form of distribution under the plan in accordance with 
     section 205, the transfer is made with the consent of the 
     participant's spouse (if any), and such consent meets 
     requirements similar to the requirements imposed by section 
     205(c)(2); and
       ``(vi) the transferee plan allows the participant or 
     beneficiary described in clause (iii) to receive any 
     distribution to which the participant or beneficiary is 
     entitled under the transferee plan in the form of a single 
     sum distribution.
       ``(B) Subparagraph (A) shall apply to plan mergers and 
     other transactions having the effect of a direct transfer, 
     including consolidations of benefits attributable to 
     different employers within a multiple employer plan.
       ``(5) Elimination of form of distribution.--Except to the 
     extent provided in regulations, a defined contribution plan 
     shall not be treated as failing to meet the requirements of 
     this section merely because of the elimination of a form of 
     distribution previously available thereunder. This paragraph 
     shall not apply to the elimination of a form of distribution 
     with respect to any participant unless--
       ``(A) a single sum payment is available to such participant 
     at the same time or times as the form of distribution being 
     eliminated; and
       ``(B) such single sum payment is based on the same or 
     greater portion of the participant's account as the form of 
     distribution being eliminated.''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to years beginning after December 31, 2000.
       (b) Regulations.--
       (1) Amendment to internal revenue code of 1986.--The last 
     sentence of paragraph (6)(B) of section 411(d) (relating to 
     accrued benefit not to be decreased by amendment) is amended 
     to read as follows: ``The Secretary shall by regulations 
     provide that this subparagraph shall not apply to any plan 
     amendment that does not adversely affect the rights of 
     participants in a material manner.''.
       (2) Amendment to erisa.--The last sentence of section 
     204(g)(2) of the Employee Retirement Income Security Act of 
     1974 (29 U.S.C. 1054(g)(2)) is amended to read as follows: 
     ``The Secretary of the Treasury shall by regulations provide 
     that this paragraph shall not apply to any plan amendment 
     that does not adversely affect the rights of participants in 
     a material manner.''.
       (3) Secretary directed.--Not later than December 31, 2001, 
     the Secretary of the Treasury is directed to issue final 
     regulations under section 411(d)(6) of the Internal Revenue 
     Code of 1986 and section 204(g) of the Employee Retirement 
     Income Security Act of 1974, including the regulations 
     required by the amendments made by this subsection. Such 
     regulations shall apply to plan years beginning after 
     December 31, 2001, or such earlier date as is specified by 
     the Secretary of the Treasury.

     SEC. 1236. RATIONALIZATION OF RESTRICTIONS ON DISTRIBUTIONS.

       (a) Modification of Same Desk Exception.--
       (1) Section 401(k).--
       (A) Section 401(k)(2)(B)(i)(I) (relating to qualified cash 
     or deferred arrangements) is amended by striking ``separation 
     from service'' and inserting ``severance from employment''.
       (B) Subparagraph (A) of section 401(k)(10) (relating to 
     distributions upon termination of plan or disposition of 
     assets or subsidiary) is amended to read as follows:
       ``(A) In general.--An event described in this subparagraph 
     is the termination of the plan without establishment or 
     maintenance of another defined contribution plan (other than 
     an employee stock ownership plan as defined in section 
     4975(e)(7)).''.
       (C) Section 401(k)(10) is amended--
       (i) in subparagraph (B)--

       (I) by striking ``An event'' in clause (i) and inserting 
     ``A termination'', and
       (II) by striking ``the event'' in clause (i) and inserting 
     ``the termination'',

       (ii) by striking subparagraph (C), and
       (iii) by striking ``or disposition of assets or 
     subsidiary'' in the heading.
       (2) Section 403(b).--
       (A) Paragraphs (7)(A)(ii) and (11)(A) of section 403(b) are 
     each amended by striking ``separates from service'' and 
     inserting ``has a severance from employment''.
       (B) The heading for paragraph (11) of section 403(b) is 
     amended by striking ``separation from service'' and inserting 
     ``severance from employment''.
       (3) Section 457.--Clause (ii) of section 457(d)(1)(A) is 
     amended by striking ``is separated from service'' and 
     inserting ``has a severance from employment''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to distributions after December 31, 2000.

     SEC. 1237. PURCHASE OF SERVICE CREDIT IN GOVERNMENTAL DEFINED 
                   BENEFIT PLANS.

       (a) 403(b) Plans.--Subsection (b) of section 403 is amended 
     by adding at the end the following new paragraph:
       ``(13) Trustee-to-trustee transfers to purchase permissive 
     service credit.--No amount shall be includible in gross 
     income by reason of a direct trustee-to-trustee transfer to a 
     defined benefit governmental plan (as defined in section 
     414(d)) if such transfer is--
       ``(A) for the purchase of permissive service credit (as 
     defined in section 415(n)(3)(A)) under such plan, or
       ``(B) a repayment to which section 415 does not apply by 
     reason of subsection (k)(3) thereof.''.
       (b) 457 Plans.--
       (1) Subsection (e) of section 457 is amended by adding 
     after paragraph (16) the following new paragraph:
       ``(17) Trustee-to-trustee transfers to purchase permissive 
     service credit.--No amount shall be includible in gross 
     income by reason of a direct trustee-to-trustee transfer to a 
     defined benefit governmental plan (as defined in section 
     414(d)) if such transfer is--
       ``(A) for the purchase of permissive service credit (as 
     defined in section 415(n)(3)(A)) under such plan, or
       ``(B) a repayment to which section 415 does not apply by 
     reason of subsection (k)(3) thereof.''.
       (2) Section 457(b)(2) is amended by striking ``(other than 
     rollover amounts)'' and inserting ``(other than rollover 
     amounts and amounts received in a transfer referred to in 
     subsection (e)(17))''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to trustee-to-trustee transfers after December 
     31, 2000.

     SEC. 1238. EMPLOYERS MAY DISREGARD ROLLOVERS FOR PURPOSES OF 
                   CASH-OUT AMOUNTS.

       (a) Qualified Plans.--
       (1) Amendment to internal revenue code of 1986.--Section 
     411(a)(11) (relating to restrictions on certain mandatory 
     distributions) is amended by adding at the end the following:
       ``(D) Special rule for rollover contributions.--A plan 
     shall not fail to meet the requirements of this paragraph if, 
     under the terms of the plan, the present value of the 
     nonforfeitable accrued benefit is determined without regard 
     to that portion of such benefit which is attributable to 
     rollover contributions (and earnings allocable thereto). For 
     purposes of this subparagraph, the term `rollover 
     contributions' means any rollover contribution under sections 
     402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 
     457(e)(16).''.
       (2) Amendment to erisa.--Section 203(e) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1053(c)) is 
     amended by adding at the end the following:
       ``(4) A plan shall not fail to meet the requirements of 
     this subsection if, under the terms of the plan, the present 
     value of the nonforfeitable accrued benefit is determined 
     without regard to that portion of such benefit which is 
     attributable to rollover contributions (and earnings 
     allocable thereto). For purposes of this subparagraph, the 
     term `rollover contributions' means any rollover contribution 
     under sections 402(c), 403(a)(4), 403(b)(8), 
     408(d)(3)(A)(ii), and 457(e)(16) of the Internal Revenue Code 
     of 1986.''.
       (b) Eligible Deferred Compensation Plans.--Clause (i) of 
     section 457(e)(9)(A) is amended by striking ``such amount'' 
     and inserting ``the portion of such amount which is not 
     attributable to rollover contributions (as defined in section 
     411(a)(11)(D))''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to distributions after December 31, 2000.

     SEC. 1239. MINIMUM DISTRIBUTION AND INCLUSION REQUIREMENTS 
                   FOR SECTION 457 PLANS.

       (a) Minimum Distribution Requirements.--Paragraph (2) of 
     section 457(d) (relating to distribution requirements) is 
     amended to read as follows:
       ``(2) Minimum distribution requirements.--A plan meets the 
     minimum distribution requirements of this paragraph if such 
     plan meets the requirements of section 401(a)(9).''.
       (b) Inclusion in Gross Income.--
       (1) Year of inclusion.--Subsection (a) of section 457 
     (relating to year of inclusion in gross income) is amended to 
     read as follows:
       ``(a) Year of inclusion in gross income.--
       ``(1) In general.--Any amount of compensation deferred 
     under an eligible deferred compensation plan, and any income 
     attributable to the amounts so deferred, shall be includible 
     in gross income only for the taxable year in which such 
     compensation or other income--
       ``(A) is paid to the participant or other beneficiary, in 
     the case of a plan of an eligible employer described in 
     subsection (e)(1)(A), and
       ``(B) is paid or otherwise made available to the 
     participant or other beneficiary, in the case of a plan of an 
     eligible employer described in subsection (e)(1)(B).
       ``(2) Special rule for rollover amounts.--To the extent 
     provided in section 72(t)(9), section 72(t) shall apply to 
     any amount includible in gross income under this 
     subsection.''.
       (2) Conforming amendments.--

[[Page 19617]]

       (A) So much of paragraph (9) of section 457(e) as precedes 
     subparagraph (A) is amended to read as follows:
       ``(9) Benefits of tax exempt organization plans not treated 
     as made available by reason of certain elections, etc.--In 
     the case of an eligible deferred compensation plan of an 
     employer described in subsection (e)(1)(B)--''.
       (B) Section 457(d) is amended by adding at the end the 
     following new paragraph:
       ``(3) Special rule for government plan.--An eligible 
     deferred compensation plan of an employer described in 
     subsection (e)(1)(A) shall not be treated as failing to meet 
     the requirements of this subsection solely by reason of 
     making a distribution described in subsection (e)(9)(A).''
       (c) Effective Date.--The amendments made by this section 
     shall apply to distributions after December 31, 2000.

       Subtitle D--Strengthening Pension Security and Enforcement

     SEC. 1241. REPEAL OF 150 PERCENT OF CURRENT LIABILITY FUNDING 
                   LIMIT.

       (a) Amendment to Internal Revenue Code of 1986.--Section 
     412(c)(7) (relating to full-funding limitation) is amended--
       (1) by striking ``the applicable percentage'' in 
     subparagraph (A)(i)(I) and inserting ``in the case of plan 
     years beginning before January 1, 2004, the applicable 
     percentage'', and
       (2) by amending subparagraph (F) to read as follows:
       ``(F) Applicable percentage.--For purposes of subparagraph 
     (A)(i)(I), the applicable percentage shall be determined in 
     accordance with the following table:

``In the case of any plan year beginning The applicable percentage is--
      2001.........................................................160 
      2002.........................................................165 
      2003......................................................170.''.
       (b) Amendment to ERISA.--Section 302(c)(7) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7)) 
     is amended--
       (1) by striking ``the applicable percentage'' in 
     subparagraph (A)(i)(I) and inserting ``in the case of plan 
     years beginning before January 1, 2004, the applicable 
     percentage'', and
       (2) by amending subparagraph (F) to read as follows:
       ``(F) Applicable percentage.--For purposes of subparagraph 
     (A)(i)(I), the applicable percentage shall be determined in 
     accordance with the following table:

``In the case of any plan year beginning The applicable percentage is--
      2001.........................................................160 
      2002.........................................................165 
      2003......................................................170.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 2000.

     SEC. 1242. MAXIMUM CONTRIBUTION DEDUCTION RULES MODIFIED AND 
                   APPLIED TO ALL DEFINED BENEFIT PLANS.

       (a) In General.--Subparagraph (D) of section 404(a)(1) 
     (relating to special rule in case of certain plans) is 
     amended to read as follows:
       ``(D) Special rule in case of certain plans.--
       ``(i) In general.--In the case of any defined benefit plan, 
     except as provided in regulations, the maximum amount 
     deductible under the limitations of this paragraph shall not 
     be less than the unfunded termination liability (determined 
     as if the proposed termination date referred to in section 
     4041(b)(2)(A)(i)(II) of the Employee Retirement Income 
     Security Act of 1974 were the last day of the plan year).
       ``(ii) Plans with less than 100 participants.--For purposes 
     of this subparagraph, in the case of a plan which has less 
     than 100 participants for the plan year, termination 
     liability shall not include the liability attributable to 
     benefit increases for highly compensated employees (as 
     defined in section 414(q)) resulting from a plan amendment 
     which is made or becomes effective, whichever is later, 
     within the last 2 years before the termination date.
       ``(iii) Rule for determining number of participants.--For 
     purposes of determining whether a plan has more than 100 
     participants, all defined benefit plans maintained by the 
     same employer (or any member of such employer's controlled 
     group (within the meaning of section 412(l)(8)(C))) shall be 
     treated as 1 plan, but only employees of such member or 
     employer shall be taken into account.
       ``(iv) Plans established and maintain by professional 
     service employers.--Clause (i) shall not apply to a plan 
     described in section 4021(b)(13) of the Employee Retirement 
     Income Security Act of 1974.''.
       (b) Conforming Amendment.--Paragraph (6) of section 4972(c) 
     is amended to read as follows:
       ``(6) Exceptions.--In determining the amount of 
     nondeductible contributions for any taxable year, there shall 
     not be taken into account so much of the contributions to 1 
     or more defined contribution plans which are not deductible 
     when contributed solely because of section 404(a)(7) as does 
     not exceed the greater of--
       ``(A) the amount of contributions not in excess of 6 
     percent of compensation (within the meaning of section 
     404(a)) paid or accrued (during the taxable year for which 
     the contributions were made) to beneficiaries under the 
     plans, or
       ``(B) the sum of--
       ``(i) the amount of contributions described in section 
     401(m)(4)(A), plus
       ``(ii) the amount of contributions described in section 
     402(g)(3)(A).
     For purposes of this paragraph, the deductible limits under 
     section 404(a)(7) shall first be applied to amounts 
     contributed to a defined benefit plan and then to amounts 
     described in subparagraph (B).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 2000.

     SEC. 1243. MISSING PARTICIPANTS.

       (a) In General.--Section 4050 of the Employee Retirement 
     Income Security Act of 1974 (29 U.S.C. 1350) is amended by 
     redesignating subsection (c) as subsection (e) and by 
     inserting after subsection (b) the following:
       ``(c) Multiemployer Plans.--The corporation shall prescribe 
     rules similar to the rules in subsection (a) for 
     multiemployer plans covered by this title that terminate 
     under section 4041A.
       ``(d) Plans Not Otherwise Subject to Title.--
       ``(1) Transfer to corporation.--The plan administrator of a 
     plan described in paragraph (4) may elect to transfer a 
     missing participant's benefits to the corporation upon 
     termination of the plan.
       ``(2) Information to the corporation.--To the extent 
     provided in regulations, the plan administrator of a plan 
     described in paragraph (4) shall, upon termination of the 
     plan, provide the corporation information with respect to 
     benefits of a missing participant if the plan transfers such 
     benefits--
       ``(A) to the corporation, or
       ``(B) to an entity other than the corporation or a plan 
     described in paragraph (4)(B)(ii).
       ``(3) Payment by the corporation.--If benefits of a missing 
     participant were transferred to the corporation under 
     paragraph (1), the corporation shall, upon location of the 
     participant or beneficiary, pay to the participant or 
     beneficiary the amount transferred (or the appropriate 
     survivor benefit) either--
       ``(A) in a single sum (plus interest), or
       ``(B) in such other form as is specified in regulations of 
     the corporation.
       ``(4) Plans described.--A plan is described in this 
     paragraph if--
       ``(A) the plan is a pension plan (within the meaning of 
     section 3(2))--
       ``(i) to which the provisions of this section do not apply 
     (without regard to this subsection), and
       ``(ii) which is not a plan described in paragraphs (2) 
     through (11) of section 4021(b), and
       ``(B) at the time the assets are to be distributed upon 
     termination, the plan--
       ``(i) has missing participants, and
       ``(ii) has not provided for the transfer of assets to pay 
     the benefits of all missing participants to another pension 
     plan (within the meaning of section 3(2)).
       ``(5) Certain provisions not to apply.--Subsections (a)(1) 
     and (a)(3) shall not apply to a plan described in paragraph 
     (4).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to distributions made after final regulations 
     implementing subsections (c) and (d) of section 4050 of the 
     Employee Retirement Income Security Act of 1974 (as added by 
     subsection (a)), respectively, are prescribed.

     SEC. 1244. EXCISE TAX RELIEF FOR SOUND PENSION FUNDING.

       (a) In General.--Subsection (c) of section 4972 (relating 
     to nondeductible contributions) is amended by adding at the 
     end the following new paragraph:
       ``(7) Defined benefit plan exception.--In determining the 
     amount of nondeductible contributions for any taxable year, 
     an employer may elect for such year not to take into account 
     any contributions to a defined benefit plan except to the 
     extent that such contributions exceed the full-funding 
     limitation (as defined in section 412(c)(7), determined 
     without regard to subparagraph (A)(i)(I) thereof). For 
     purposes of this paragraph, the deductible limits under 
     section 404(a)(7) shall first be applied to amounts 
     contributed to defined contribution plans and then to amounts 
     described in this paragraph. If an employer makes an election 
     under this paragraph for a taxable year, paragraph (6) shall 
     not apply to such employer for such taxable year.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 2000.

     SEC. 1245. EXCISE TAX ON FAILURE TO PROVIDE NOTICE BY DEFINED 
                   BENEFIT PLANS SIGNIFICANTLY REDUCING FUTURE 
                   BENEFIT ACCRUALS.

       (a) Amendment to 1986 Code.--Chapter 43 of subtitle D 
     (relating to qualified pension, etc., plans) is amended by 
     adding at the end the following new section:

     ``SEC. 4980F. FAILURE OF APPLICABLE PLANS REDUCING BENEFIT 
                   ACCRUALS TO SATISFY NOTICE REQUIREMENTS.

       ``(a) Imposition of Tax.--There is hereby imposed a tax on 
     the failure of any applicable pension plan to meet the 
     requirements of subsection (e) with respect to any applicable 
     individual.

[[Page 19618]]

       ``(b) Amount of Tax.--
       ``(1) In general.--The amount of the tax imposed by 
     subsection (a) on any failure with respect to any applicable 
     individual shall be $100 for each day in the noncompliance 
     period with respect to such failure.
       ``(2) Noncompliance period.--For purposes of this section, 
     the term `noncompliance period' means, with respect to any 
     failure, the period beginning on the date the failure first 
     occurs and ending on the date the failure is corrected.
       ``(c) Limitations on Amount of Tax.--
       ``(1) Overall limitation for unintentional failures.--In 
     the case of failures that are due to reasonable cause and not 
     to willful neglect, the tax imposed by subsection (a) for 
     failures during the taxable year of the employer (or, in the 
     case of a multiemployer plan, the taxable year of the trust 
     forming part of the plan) shall not exceed $500,000. For 
     purposes of the preceding sentence, all multiemployer plans 
     of which the same trust forms a part shall be treated as 1 
     plan. For purposes of this paragraph, if not all persons who 
     are treated as a single employer for purposes of this section 
     have the same taxable year, the taxable years taken into 
     account shall be determined under principles similar to the 
     principles of section 1561.
       ``(2) Waiver by secretary.--In the case of a failure which 
     is due to reasonable cause and not to willful neglect, the 
     Secretary may waive part or all of the tax imposed by 
     subsection (a) to the extent that the payment of such tax 
     would be excessive relative to the failure involved.
       ``(d) Liability for Tax.--The following shall be liable for 
     the tax imposed by subsection (a):
       ``(1) In the case of a plan other than a multiemployer 
     plan, the employer.
       ``(2) In the case of a multiemployer plan, the plan.
       ``(e) Notice Requirements for Plans Significantly Reducing 
     Benefit Accruals.--
       ``(1) In general.--If an applicable pension plan is amended 
     to provide for a significant reduction in the rate of future 
     benefit accrual, the plan administrator shall provide written 
     notice to each applicable individual (and to each employee 
     organization representing applicable individuals).
       ``(2) Notice.--The notice required by paragraph (1) shall 
     be written in a manner calculated to be understood by the 
     average plan participant and shall provide sufficient 
     information (as determined in accordance with regulations 
     prescribed by the Secretary) to allow applicable individuals 
     to understand the effect of the plan amendment.
       ``(3) Timing of notice.--Except as provided in regulations, 
     the notice required by paragraph (1) shall be provided within 
     a reasonable time before the effective date of the plan 
     amendment.
       ``(4) Designees.--Any notice under paragraph (1) may be 
     provided to a person designated, in writing, by the person to 
     which it would otherwise be provided.
       ``(5) Notice before adoption of amendment.--A plan shall 
     not be treated as failing to meet the requirements of 
     paragraph (1) merely because notice is provided before the 
     adoption of the plan amendment if no material modification of 
     the amendment occurs before the amendment is adopted.
       ``(f) Applicable Individual; Applicable Pension Plan.--For 
     purposes of this section--
       ``(1) Applicable individual.--The term `applicable 
     individual' means, with respect to any plan amendment--
       ``(A) any participant in the plan, and
       ``(B) any beneficiary who is an alternate payee (within the 
     meaning of section 414(p)(8)) under an applicable qualified 
     domestic relations order (within the meaning of section 
     414(p)(1)(A)),
     who may reasonably be expected to be affected by such plan 
     amendment.
       ``(2) Applicable pension plan.--The term `applicable 
     pension plan' means--
       ``(A) any defined benefit plan, or
       ``(B) an individual account plan which is subject to the 
     funding standards of section 412,
     which had 100 or more participants who had accrued a benefit, 
     or with respect to whom contributions were made, under the 
     plan (whether or not vested) as of the last day of the plan 
     year preceding the plan year in which the plan amendment 
     becomes effective. Such term shall not include a governmental 
     plan (within the meaning of section 414(d)) or a church plan 
     (within the meaning of section 414(e)) with respect to which 
     the election provided by section 410(d) has not been made.''.
       (b) Amendment to ERISA.--Section 204(h) of the Employee 
     Retirement Income Security Act or 1974 (29 U.S.C. 1054(h)) is 
     amended by adding at the end the following new paragraph:
       ``(3)(A) A plan to which paragraph (1) applies shall not be 
     treated as meeting the requirements of such paragraph unless, 
     in addition to any notice required to be provided to an 
     individual or organization under such paragraph, the plan 
     administrator provides the notice described in subparagraph 
     (B).
       ``(B) The notice required by subparagraph (A) shall be 
     written in a manner calculated to be understood by the 
     average plan participant and shall provide sufficient 
     information (as determined in accordance with regulations 
     prescribed by the Secretary of the Treasury) to allow 
     individuals to understand the effect of the plan amendment.
       ``(C) Except as provided in regulations prescribed by the 
     Secretary of the Treasury, the notice required by 
     subparagraph (A) shall be provided within a reasonable time 
     before the effective date of the plan amendment.
       ``(D) A plan shall not be treated as failing to meet the 
     requirements of subparagraph (A) merely because notice is 
     provided before the adoption of the plan amendment if no 
     material modification of the amendment occurs before the 
     amendment is adopted.''.
       (c) Clerical Amendment.--The table of sections for chapter 
     43 of subtitle D is amended by adding at the end the 
     following new item:

 ``Sec. 4980F. Failure of applicable plans reducing benefit accruals to 
              satisfy notice requirements.''.
       (d) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to plan amendments taking effect on or after the date 
     of the enactment of this Act.
       (2) Transition.--Until such time as the Secretary of the 
     Treasury issues regulations under sections 4980F(e)(2) and 
     (3) of the Internal Revenue Code of 1986 and section 
     204(h)(3) of the Employee Retirement Income Security Act of 
     1974 (as added by the amendments made by this section), a 
     plan shall be treated as meeting the requirements of such 
     sections if it makes a good faith effort to comply with such 
     requirements.
       (3) Special rule.--The period for providing any notice 
     required by the amendments made by this section shall not end 
     before the date which is 3 months after the date of the 
     enactment of this Act.

     SEC. 1246. PROTECTION OF INVESTMENT OF EMPLOYEE CONTRIBUTIONS 
                   TO 401(K) PLANS.

       (a) In General.--Section 1524(b) of the Taxpayer Relief Act 
     of 1997 is amended to read as follows:
       ``(b) Effective Date.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to elective 
     deferrals for plan years beginning after December 31, 1998.
       ``(2) Nonapplication to previously acquired property.--The 
     amendments made by this section shall not apply to any 
     elective deferral which is invested in assets consisting of 
     qualifying employer securities, qualifying employer real 
     property, or both, if such assets were acquired before 
     January 1, 1999.''
       (b) Effective Date.--The amendment made by this section 
     shall apply as if included in the provision of the Taxpayer 
     Relief Act of 1997 to which it relates.

     SEC. 1247. TREATMENT OF MULTIEMPLOYER PLANS UNDER SECTION 
                   415.

       (a) Compensation Limit.--Paragraph (11) of section 415(b) 
     (relating to limitation for defined benefit plans) is amended 
     to read as follows:
       ``(11) Special limitation rule for governmental and 
     multiemployer plans.--In the case of a governmental plan (as 
     defined in section 414(d)) or a multiemployer plan (as 
     defined in section 414(f)), subparagraph (B) of paragraph (1) 
     shall not apply.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to years beginning after December 31, 2000.

                Subtitle E--Reducing Regulatory Burdens

     SEC. 1251. MODIFICATION OF TIMING OF PLAN VALUATIONS.

       (a) In General.--Section 412(c)(9) (relating to annual 
     valuation) is amended--
       (1) by striking ``For purposes'' and inserting the 
     following:
       ``(A) In general.--For purposes'', and
       (2) by adding at the end the following:
       ``(B) Election to use prior year valuation.--
       ``(i) In general.--Except as provided in clause (ii), if, 
     for any plan year--

       ``(I) an election is in effect under this subparagraph with 
     respect to a plan, and
       ``(II) the assets of the plan are not less than 125 percent 
     of the plan's current liability (as defined in paragraph 
     (7)(B)), determined as of the valuation date for the 
     preceding plan year,

     then this section shall be applied using the information 
     available as of such valuation date.
       ``(ii) Exceptions.--

       ``(I) Actual valuation every 3 years.--Clause (i) shall not 
     apply for more than 2 consecutive plan years and valuation 
     shall be under subparagraph (A) with respect to any plan year 
     to which clause (i) does not apply by reason of this 
     subclause.
       ``(II) Regulations.--Clause (i) shall not apply to the 
     extent that more frequent valuations are required under the 
     regulations under subparagraph (A).

       ``(iii) Adjustments.--Information under clause (i) shall, 
     in accordance with regulations, be actuarially adjusted to 
     reflect significant differences in participants.
       ``(iv) Election.--An election under this subparagraph, once 
     made, shall be irrevocable without the consent of the 
     Secretary.''.
       (b) Amendments to ERISA.--Paragraph (9) of section 302(c) 
     of the Employee Retirement Income Security Act of 1974 (29 
     U.S.C. 1053(c)) is amended--

[[Page 19619]]

       (1) by inserting ``(A)'' after ``(9)'', and
       (2) by adding at the end the following:
       ``(B)(i) Except as provided in clause (ii), if, for any 
     plan year--
       ``(I) an election is in effect under this subparagraph with 
     respect to a plan, and
       ``(II) the assets of the plan are not less than 125 percent 
     of the plan's current liability (as defined in paragraph 
     (7)(B)), determined as of the valuation date for the 
     preceding plan year,
     then this section shall be applied using the information 
     available as of such valuation date.
       ``(ii)(I) Clause (i) shall not apply for more than 2 
     consecutive plan years and valuation shall be under 
     subparagraph (A) with respect to any plan year to which 
     clause (i) does not apply by reason of this subclause.
       ``(II) Clause (i) shall not apply to the extent that more 
     frequent valuations are required under the regulations under 
     subparagraph (A).
       ``(iii) Information under clause (i) shall, in accordance 
     with regulations, be actuarially adjusted to reflect 
     significant differences in participants.
       ``(iv) An election under this subparagraph, once made, 
     shall be irrevocable without the consent of the Secretary of 
     the Treasury.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 2000.

     SEC. 1252. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF 
                   DIVIDEND DEDUCTION.

       (a) In General.--Section 404(k)(2)(A) (defining applicable 
     dividends) is amended by striking ``or'' at the end of clause 
     (ii), by redesignating clause (iii) as clause (iv), and by 
     inserting after clause (ii) the following new clause:
       ``(iii) is, at the election of such participants or their 
     beneficiaries--

       ``(I) payable as provided in clause (i) or (ii), or
       ``(II) paid to the plan and reinvested in qualifying 
     employer securities, or''.

       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 1253. REPEAL OF TRANSITION RULE RELATING TO CERTAIN 
                   HIGHLY COMPENSATED EMPLOYEES.

       (a) In General.--Paragraph (4) of section 1114(c) of the 
     Tax Reform Act of 1986 is hereby repealed.
       (b) Effective Date.--The repeal made by subsection (a) 
     shall apply to plan years beginning after December 31, 1999.

     SEC. 1254. EMPLOYEES OF TAX-EXEMPT ENTITIES.

       (a) In General.--The Secretary of the Treasury shall modify 
     Treasury Regulations section 1.410(b)-6(g) to provide that 
     employees of an organization described in section 
     403(b)(1)(A)(i) of the Internal Revenue Code of 1986 who are 
     eligible to make contributions under section 403(b) of such 
     Code pursuant to a salary reduction agreement may be treated 
     as excludable with respect to a plan under section 401 (k) or 
     (m) of such Code that is provided under the same general 
     arrangement as a plan under such section 401(k), if--
       (1) no employee of an organization described in section 
     403(b)(1)(A)(i) of such Code is eligible to participate in 
     such section 401(k) plan or section 401(m) plan, and
       (2) 95 percent of the employees who are not employees of an 
     organization described in section 403(b)(1)(A)(i) of such 
     Code are eligible to participate in such plan under such 
     section 401 (k) or (m).
       (b) Effective Date.--The modification required by 
     subsection (a) shall apply as of the same date set forth in 
     section 1426(b) of the Small Business Job Protection Act of 
     1996.

     SEC. 1255. CLARIFICATION OF TREATMENT OF EMPLOYER-PROVIDED 
                   RETIREMENT ADVICE.

       (a) In General.--Subsection (a) of section 132 (relating to 
     exclusion from gross income) is amended by striking ``or'' at 
     the end of paragraph (5), by striking the period at the end 
     of paragraph (6) and inserting ``, or'', and by adding at the 
     end the following new paragraph:
       ``(7) qualified retirement planning services.''.
       (b) Qualified Retirement Planning Services Defined.--
     Section 132 is amended by redesignating subsection (m) as 
     subsection (n) and by inserting after subsection (l) the 
     following:
       ``(m) Qualified Retirement Planning Services.--
       ``(1) In general.--For purposes of this section, the term 
     `qualified retirement planning services' means any retirement 
     planning service provided to an employee and his spouse by an 
     employer maintaining a qualified employer plan.
       ``(2) Nondiscrimination rule.--Subsection (a)(7) shall 
     apply in the case of highly compensated employees only if 
     such services are available on substantially the same terms 
     to each member of the group of employees normally provided 
     education and information regarding the employer's qualified 
     employer plan.
       ``(3) Qualified employer plan.--For purposes of this 
     subsection, the term `qualified employer plan' means a plan, 
     contract, pension, or account described in section 
     219(g)(5).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 2000.

     SEC. 1256. REPORTING SIMPLIFICATION.

       (a) Simplified Annual Filing Requirement for Owners and 
     Their Spouses.--
       (1) In general.--The Secretary of the Treasury shall modify 
     the requirements for filing annual returns with respect to 
     one-participant retirement plans to ensure that such plans 
     with assets of $250,000 or less as of the close of the plan 
     year need not file a return for that year.
       (2) One-participant retirement plan defined.--For purposes 
     of this subsection, the term ``one-participant retirement 
     plan'' means a retirement plan that--
       (A) on the first day of the plan year--
       (i) covered only the employer (and the employer's spouse) 
     and the employer owned the entire business (whether or not 
     incorporated), or
       (ii) covered only one or more partners (and their spouses) 
     in a business partnership (including partners in an S or C 
     corporation),
       (B) meets the minimum coverage requirements of section 
     410(b) of the Internal Revenue Code of 1986 without being 
     combined with any other plan of the business that covers the 
     employees of the business,
       (C) does not provide benefits to anyone except the employer 
     (and the employer's spouse) or the partners (and their 
     spouses),
       (D) does not cover a business that is a member of an 
     affiliated service group, a controlled group of corporations, 
     or a group of businesses under common control, and
       (E) does not cover a business that leases employees.
       (3) Other definitions.--Terms used in paragraph (2) which 
     are also used in section 414 of the Internal Revenue Code of 
     1986 shall have the respective meanings given such terms by 
     such section.
       (b) Simplified Annual Filing Requirement for Plans With 
     Fewer Than 25 Employees.--In the case of a retirement plan 
     which covers less than 25 employees on the 1st day of the 
     plan year and meets the requirements described in 
     subparagraphs (B), (D), and (E) of subsection (a)(2), the 
     Secretary of the Treasury shall provide for the filing of a 
     simplified annual return that is substantially similar to the 
     annual return required to be filed by a one-participant 
     retirement plan.
       (c) Effective Date.--The provisions of this section shall 
     take effect on January 1, 2001.

     SEC. 1257. IMPROVEMENT OF EMPLOYEE PLANS COMPLIANCE 
                   RESOLUTION SYSTEM.

       The Secretary of the Treasury shall continue to update and 
     improve the Employee Plans Compliance Resolution System (or 
     any successor program) giving special attention to--
       (1) increasing the awareness and knowledge of small 
     employers concerning the availability and use of the program,
       (2) taking into account special concerns and circumstances 
     that small employers face with respect to compliance and 
     correction of compliance failures,
       (3) extending the duration of the self-correction period 
     under the Administrative Policy Regarding Self-Correction for 
     significant compliance failures,
       (4) expanding the availability to correct insignificant 
     compliance failures under the Administrative Policy Regarding 
     Self-Correction during audit, and
       (5) assuring that any tax, penalty, or sanction that is 
     imposed by reason of a compliance failure is not excessive 
     and bears a reasonable relationship to the nature, extent, 
     and severity of the failure.

     SEC. 1258. SUBSTANTIAL OWNER BENEFITS IN TERMINATED PLANS.

       (a) Modification of Phase-In of Guarantee.--Section 
     4022(b)(5) of the Employee Retirement Income Security Act of 
     1974 (29 U.S.C. 1322(b)(5)) is amended to read as follows:
       ``(5)(A) For purposes of this paragraph, the term `majority 
     owner' means an individual who, at any time during the 60-
     month period ending on the date the determination is being 
     made--
       ``(i) owns the entire interest in an unincorporated trade 
     or business,
       ``(ii) in the case of a partnership, is a partner who owns, 
     directly or indirectly, 50 percent or more of either the 
     capital interest or the profits interest in such partnership, 
     or
       ``(iii) in the case of a corporation, owns, directly or 
     indirectly, 50 percent or more in value of either the voting 
     stock of that corporation or all the stock of that 
     corporation.
     For purposes of clause (iii), the constructive ownership 
     rules of section 1563(e) of the Internal Revenue Code of 1986 
     shall apply (determined without regard to section 
     1563(e)(3)(C)).
       ``(B) In the case of a participant who is a majority owner, 
     the amount of benefits guaranteed under this section shall 
     equal the product of--
       ``(i) a fraction (not to exceed 1) the numerator of which 
     is the number of years from the later of the effective date 
     or the adoption date of the plan to the termination date, and 
     the denominator of which is 10, and
       ``(ii) the amount of benefits that would be guaranteed 
     under this section if the participant were not a majority 
     owner.''.
       (b) Modification of Allocation of Assets.--
       (1) Section 4044(a)(4)(B) of the Employee Retirement Income 
     Security Act of 1974 (29

[[Page 19620]]

     U.S.C. 1344(a)(4)(B)) is amended by striking ``section 
     4022(b)(5)'' and inserting ``section 4022(b)(5)(B)''.
       (2) Section 4044(b) of such Act (29 U.S.C. 1344(b)) is 
     amended--
       (A) by striking ``(5)'' in paragraph (2) and inserting 
     ``(4), (5),'', and
       (B) by redesignating paragraphs (3) through (6) as 
     paragraphs (4) through (7), respectively, and by inserting 
     after paragraph (2) the following:
       ``(3) If assets available for allocation under paragraph 
     (4) of subsection (a) are insufficient to satisfy in full the 
     benefits of all individuals who are described in that 
     paragraph, the assets shall be allocated first to benefits 
     described in subparagraph (A) of that paragraph. Any 
     remaining assets shall then be allocated to benefits 
     described in subparagraph (B) of that paragraph. If assets 
     allocated to such subparagraph (B) are insufficient to 
     satisfy in full the benefits described in that subparagraph, 
     the assets shall be allocated pro rata among individuals on 
     the basis of the present value (as of the termination date) 
     of their respective benefits described in that 
     subparagraph.''.
       (c) Conforming Amendments.--
       (1) Section 4021 of the Employee Retirement Income Security 
     Act of 1974 (29 U.S.C. 1321) is amended--
       (A) in subsection (b)(9), by striking ``as defined in 
     section 4022(b)(6)'', and
       (B) by adding at the end the following:
       ``(d) For purposes of subsection (b)(9), the term 
     `substantial owner' means an individual who, at any time 
     during the 60-month period ending on the date the 
     determination is being made--
       ``(1) owns the entire interest in an unincorporated trade 
     or business,
       ``(2) in the case of a partnership, is a partner who owns, 
     directly or indirectly, more than 10 percent of either the 
     capital interest or the profits interest in such partnership, 
     or
       ``(3) in the case of a corporation, owns, directly or 
     indirectly, more than 10 percent in value of either the 
     voting stock of that corporation or all the stock of that 
     corporation.
     For purposes of paragraph (3), the constructive ownership 
     rules of section 1563(e) of the Internal Revenue Code of 1986 
     shall apply (determined without regard to section 
     1563(e)(3)(C)).''.
       (2) Section 4043(c)(7) of such Act (29 U.S.C. 1343(c)(7)) 
     is amended by striking ``section 4022(b)(6)'' and inserting 
     ``section 4021(d)''.
       (d) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to plan 
     terminations--
       (A) under section 4041(c) of the Employee Retirement Income 
     Security Act of 1974 (29 U.S.C. 1341(c)) with respect to 
     which notices of intent to terminate are provided under 
     section 4041(a)(2) of such Act (29 U.S.C. 1341(a)(2)) after 
     December 31, 2000, and
       (B) under section 4042 of such Act (29 U.S.C. 1342) with 
     respect to which proceedings are instituted by the 
     corporation after such date.
       (2) Conforming amendments.--The amendments made by 
     subsection (c) shall take effect on the date of enactment of 
     this Act.

     SEC. 1259. MODIFICATION OF EXCLUSION FOR EMPLOYER PROVIDED 
                   TRANSIT PASSES.

       (a) In General.--Section 132(f)(3) (relating to cash 
     reimbursements) is amended by striking the last sentence.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 1260. REPEAL OF THE MULTIPLE USE TEST.

       (a) In General.--Paragraph (9) of section 401(m) is amended 
     to read as follows:
       ``(9) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection and subsection (k), including regulations 
     permitting appropriate aggregation of plans and 
     contributions.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to years beginning after December 31, 2000.

     SEC. 1261. FLEXIBILITY IN NONDISCRIMINATION, COVERAGE, AND 
                   LINE OF BUSINESS RULES.

       (a) Nondiscrimination.--
       (1) In general.--The Secretary of the Treasury shall, by 
     regulation, provide that a plan shall be deemed to satisfy 
     the requirements of section 401(a)(4) of the Internal Revenue 
     Code of 1986 if such plan satisfies the facts and 
     circumstances test under section 401(a)(4) of such Code, as 
     in effect before January 1, 1994, but only if--
       (A) the plan satisfies conditions prescribed by the 
     Secretary to appropriately limit the availability of such 
     test, and
       (B) the plan is submitted to the Secretary for a 
     determination of whether it satisfies such test.
     Subparagraph (B) shall only apply to the extent provided by 
     the Secretary.
       (2) Effective dates.--
       (A) Regulations.--The regulation required by paragraph (1) 
     shall apply to years beginning after December 31, 2000.
       (B) Conditions of availability.--Any condition of 
     availability prescribed by the Secretary under paragraph 
     (1)(A) shall not apply before the first year beginning not 
     less than 120 days after the date on which such condition is 
     prescribed.
       (b) Coverage Test.--
       (1) In general.--Section 410(b)(1) (relating to minimum 
     coverage requirements) is amended by adding at the end the 
     following:
       ``(D) In the case that the plan fails to meet the 
     requirements of subparagraphs (A), (B) and (C), the plan--
       ``(i) satisfies subparagraph (B), as in effect immediately 
     before the enactment of the Tax Reform Act of 1986,
       ``(ii) is submitted to the Secretary for a determination of 
     whether it satisfies the requirement described in clause (i), 
     and
       ``(iii) satisfies conditions prescribed by the Secretary by 
     regulation that appropriately limit the availability of this 
     subparagraph.
     Clause (ii) shall apply only to the extent provided by the 
     Secretary.''.
       (2) Effective dates.--
       (A) In general.--The amendment made by paragraph (1) shall 
     apply to years beginning after December 31, 2000.
       (B) Conditions of availability.--Any condition of 
     availability prescribed by the Secretary under regulations 
     prescribed by the Secretary under section 410(b)(1)(D) of the 
     Internal Revenue Code of 1986 shall not apply before the 
     first year beginning not less than 120 days after the date on 
     which such condition is prescribed.
       (c) Line of Business Rules.--The Secretary of the Treasury 
     shall, on or before December 31, 2000, modify the existing 
     regulations issued under section 414(r) of the Internal 
     Revenue Code of 1986 in order to expand (to the extent that 
     the Secretary determines appropriate) the ability of a 
     pension plan to demonstrate compliance with the line of 
     business requirements based upon the facts and circumstances 
     surrounding the design and operation of the plan, even though 
     the plan is unable to satisfy the mechanical tests currently 
     used to determine compliance.

     SEC. 1262. EXTENSION TO INTERNATIONAL ORGANIZATIONS OF 
                   MORATORIUM ON APPLICATION OF CERTAIN 
                   NONDISCRIMINATION RULES APPLICABLE TO STATE AND 
                   LOCAL PLANS.

       (a) In General.--Subparagraph (G) of section 401(a)(5), 
     subparagraph (H) of section 401(a)(26), subparagraph (G) of 
     section 401(k)(3), and paragraph (2) of section 1505(d) of 
     the Taxpayer Relief Act of 1997 are each amended by inserting 
     ``or by an international organization which is described in 
     section 414(d)'' after ``or instrumentality thereof)''.
       (b) Conforming Amendments.--
       (1) The headings for subparagraph (G) of section 401(a)(5) 
     and subparagraph (H) of section 401(a)(26) are each amended 
     by inserting ``and international organization'' after 
     ``governmental''.
       (2) Subparagraph (G) of section 401(k)(3) is amended by 
     inserting ``State and local governmental and international 
     organization plans.--'' after ``(G)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 2000.

                      Subtitle F--Plan Amendments

     SEC. 1271. PROVISIONS RELATING TO PLAN AMENDMENTS.

       (a) In General.--If this section applies to any plan or 
     contract amendment--
       (1) such plan or contract shall be treated as being 
     operated in accordance with the terms of the plan during the 
     period described in subsection (b)(2)(A), and
       (2) such plan shall not fail to meet the requirements of 
     section 411(d)(6) of the Internal Revenue Code of 1986 by 
     reason of such amendment.
       (b) Amendments to Which Section Applies.--
       (1) In general.--This section shall apply to any amendment 
     to any plan or annuity contract which is made--
       (A) pursuant to any amendment made by this title, or 
     pursuant to any regulation issued under this title, and
       (B) on or before the last day of the first plan year 
     beginning on or after January 1, 2003.
     In the case of a government plan (as defined in section 
     414(d) of the Internal Revenue Code of 1986), this paragraph 
     shall be applied by substituting ``2005'' for ``2003''.
       (2) Conditions.--This section shall not apply to any 
     amendment unless--
       (A) during the period--
       (i) beginning on the date the legislative or regulatory 
     amendment described in paragraph (1)(A) takes effect (or in 
     the case of a plan or contract amendment not required by such 
     legislative or regulatory amendment, the effective date 
     specified by the plan), and
       (ii) ending on the date described in paragraph (1)(B) (or, 
     if earlier, the date the plan or contract amendment is 
     adopted),
     the plan or contract is operated as if such plan or contract 
     amendment were in effect, and
       (B) such plan or contract amendment applies retroactively 
     for such period.

                  TITLE XIII--MISCELLANEOUS PROVISIONS

         Subtitle A--Provisions Primarily Affecting Individuals

     SEC. 1301. CONSISTENT TREATMENT OF SURVIVOR BENEFITS FOR 
                   PUBLIC SAFETY OFFICERS KILLED IN THE LINE OF 
                   DUTY.

       Subsection (b) of section 1528 of the Taxpayer Relief Act 
     of 1997 (Public Law 105-34) is amended by striking the period 
     and inserting

[[Page 19621]]

     `, and to amounts received in taxable years beginning after 
     December 31, 1999, with respect to individuals dying on or 
     before December 31, 1996.''.

     SEC. 1302. EXPANSION OF DC HOMEBUYER TAX CREDIT.

       (a) Expansion of Income Limitation.--Section 1400C(b)(1) 
     (relating to limitation based on modified adjusted gross 
     income) is amended--
       (1) by striking ``$110,000'' in subparagraph (A)(i) and 
     inserting ``$140,000'', and
       (2) by inserting ``($40,000 in the case of a joint 
     return)'' after ``$20,000'' in subparagraph (B).
       (b) Effective Date.--The amendments made by this section 
     shall apply to purchases on or after the date of the 
     enactment of this Act.

     SEC. 1303. NO FEDERAL INCOME TAX ON AMOUNTS AND LANDS 
                   RECEIVED BY HOLOCAUST VICTIMS OR THEIR HEIRS.

       (a) In General.--For purposes of the Internal Revenue Code 
     of 1986, gross income shall not include--
       (1) any amount received by an individual (or any heir of 
     the individual)--
       (A) from the Swiss Humanitarian Fund established by the 
     Government of Switzerland or from any similar fund 
     established by any foreign country, or
       (B) as a result of the settlement of the action entitled 
     ``In re Holocaust Victims' Asset Litigation'', (E.D. NY), 
     C.A. No. 96-4849, or as a result of any similar action; and
       (2) the value of any land (including structures thereon) 
     recovered by an individual (or any heir of the individual) 
     from a government of a foreign country as a result of a 
     settlement of a claim arising out of the confiscation of such 
     land in connection with the Holocaust.
       (b) Effective Date.--This section shall apply to any amount 
     received on or after the date of the enactment of this Act.

         Subtitle B--Provisions Primarily Affecting Businesses

     SEC. 1311. DISTRIBUTIONS FROM PUBLICLY TRADED PARTNERSHIPS 
                   TREATED AS QUALIFYING INCOME OF REGULATED 
                   INVESTMENT COMPANIES.

       (a) In General.--Paragraph (2) of section 851(b) (defining 
     regulated investment company) is amended by inserting 
     ``income derived from an interest in a publicly traded 
     partnership (as defined in section 7704(b)),'' after 
     ``dividends, interest,''.
       (b) Source Flow-Through Rule Not To Apply.--The last 
     sentence of section 851(b) is amended by inserting ``(other 
     than a publicly traded partnership (as defined in section 
     7704(b)))'' after ``derived from a partnership''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 1312. SPECIAL PASSIVE ACTIVITY RULE FOR PUBLICLY TRADED 
                   PARTNERSHIPS TO APPLY TO REGULATED INVESTMENT 
                   COMPANIES.

       (a) In General.--Subsection (k) of section 469 (relating to 
     separate application of section in case of publicly traded 
     partnerships) is amended by adding at the end the following 
     new paragraph:
       ``(4) Application to regulated investment companies.--For 
     purposes of this section, a regulated investment company (as 
     defined in section 851) holding an interest in a publicly 
     traded partnership shall be treated as a taxpayer described 
     in subsection (a)(2) with respect to items attributable to 
     such interest.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

     SEC. 1313. LARGE ELECTRIC TRUCKS, VANS, AND BUSES ELIGIBLE 
                   FOR DEDUCTION FOR CLEAN-FUEL VEHICLES IN LIEU 
                   OF CREDIT.

       (a) In General.--Paragraph (1) of section 30(c) (relating 
     to credit for qualified electric vehicles) is amended by 
     adding at the end the following new flush sentence:
     ``Such term shall not include any vehicle described in 
     subclause (I) or (II) of section 179A(b)(1)(A)(iii).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to property placed in service after December 31, 
     1999.

     SEC. 1314. MODIFICATIONS TO SPECIAL RULES FOR NUCLEAR 
                   DECOMMISSIONING COSTS.

       (a) Repeal of Limitation on Deposits Into Fund Based on 
     Cost of Service.--Subsection (b) of section 468A is amended 
     to read as follows:
       ``(b) Limitation on Amounts Paid Into Fund.--The amount 
     which a taxpayer may pay into the Fund for any taxable year 
     shall not exceed the ruling amount applicable to such taxable 
     year.''.
       (b) Clarification of Treatment of Fund Transfers.--
     Subsection (e) of section 468A is amended by adding at the 
     end the following new paragraph:
       ``(8) Treatment of fund transfers.--If, in connection with 
     the transfer of the taxpayer's interest in a nuclear 
     powerplant, the taxpayer transfers the Fund with respect to 
     such powerplant to the transferee of such interest and the 
     transferee elects to continue the application of this section 
     to such Fund--
       ``(A) the transfer of such Fund shall not cause such Fund 
     to be disqualified from the application of this section, and
       ``(B) no amount shall be treated as distributed from such 
     Fund, or be includible in gross income, by reason of such 
     transfer.''.
       (c) Transfers of Balances in Nonqualified Funds.--Section 
     468A is amended by redesignating subsections (f) and (g) as 
     subsections (g) and (h), respectively, and by inserting after 
     subsection (e) the following new subsection:
       ``(f) Transfers of Balances in Nonqualified Funds Into 
     Qualified Funds.--
       ``(1) In general.--Notwithstanding subsection (b), any 
     taxpayer maintaining a Fund to which this section applies 
     with respect to a nuclear powerplant may transfer into such 
     Fund amounts held in any nonqualified fund of such taxpayer 
     with respect to such powerplant.
       ``(2) Maximum amount permitted to be transferred.--The 
     amount permitted to be transferred under paragraph (1) shall 
     not exceed the balance in the nonqualified fund as of 
     December 31, 1998.
       ``(3) Deduction for amounts transferred.--
       ``(A) In general.--The deduction allowed by subsection (a) 
     for any transfer permitted by this subsection shall be 
     allowed ratably over the remaining estimated useful life 
     (within the meaning of subsection (d)(2)(A)) of the nuclear 
     powerplant, beginning with the later of the taxable year 
     during which the transfer is made or the taxpayer's first 
     taxable year beginning after December 31, 2001.
       ``(B) Denial of deduction for previously deducted 
     amounts.--No deduction shall be allowed for any transfer 
     under this subsection of an amount for which a deduction was 
     allowed when such amount was paid into the nonqualified fund. 
     For purposes of the preceding sentence, a ratable portion of 
     each transfer shall be treated as being from previously 
     deducted amounts to the extent thereof.
       ``(C) Transfers of qualified funds.--If--
       ``(i) any transfer permitted by this subsection is made to 
     any Fund to which this section applies, and
       ``(ii) such Fund is transferred thereafter,
     any deduction under this subsection for taxable years ending 
     after the date that such Fund is transferred shall be allowed 
     to the transferee and not to the transferor. The preceding 
     sentence shall not apply if the transferor is an organization 
     exempt from tax imposed by this chapter.
       ``(4) New ruling amount required.--Paragraph (1) shall not 
     apply to any transfer unless the taxpayer requests from the 
     Secretary a new schedule of ruling amounts in connection with 
     such transfer.
       ``(5) Nonqualified fund.--For purposes of this subsection, 
     the term `nonqualified fund' means, with respect to any 
     nuclear powerplant, any fund in which amounts are irrevocably 
     set aside pursuant to the requirements of any State or 
     Federal agency exclusively for the purpose of funding the 
     decommissioning of such powerplant.
       ``(6) No basis in qualified funds.--Notwithstanding any 
     other provision of law, the basis of any Fund to which this 
     section applies shall not be increased by reason of any 
     transfer permitted by this subsection.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 1315. CONSOLIDATION OF LIFE INSURANCE COMPANIES WITH 
                   OTHER CORPORATIONS.

       (a) In General.--Section 1504(b) (defining includible 
     corporation) is amended by striking paragraph (2).
       (b) Conforming Amendments.--
       (1) Subsection (c) of section 1503 is amended by striking 
     paragraph (2) (relating to losses of recent nonlife 
     affiliates).
       (2) Section 1504 is amended by striking subsection (c) and 
     by redesignating subsections (d), (e), and (f) as subsections 
     (c), (d), and (e), respectively.
       (3) Section 1503(c)(1) (relating to special rule for 
     application of certain losses against income of insurance 
     companies taxed under section 801) is amended by striking 
     ``an election under section 1504(c)(2) is in effect for the 
     taxable year and''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 2000.
       (2) Losses of recent nonlife affiliates.--The amendment 
     made by subsection (b)(1) shall apply to taxable years 
     beginning after December 31, 2005.
       (d) No Carryback Before January 1, 2006.--To the extent 
     that a consolidated net operating loss is allowed or 
     increased by reason of the amendments made by this section, 
     such loss may not be carried back to a taxable year beginning 
     before January 1, 2006.
       (e) Nontermination of Group.--No affiliated group shall 
     terminate solely as a result of the amendments made by this 
     section.
       (f) Waiver of 5-Year Waiting Period.--Under regulations 
     prescribed by the Secretary of the Treasury or his delegate, 
     an automatic waiver from the 5-year waiting period for 
     reconsolidation provided in section 1504(a)(3) of the 
     Internal Revenue Code of 1986 shall be granted to any 
     corporation which was previously an includible corporation 
     but was subsequently deemed a nonincludible corporation as a 
     result of becoming a subsidiary of a corporation which was 
     not an includible corporation solely by operation of section 
     1504(c)(2) of such Code (as in effect on the day before the 
     date of the enactment of this Act).

[[Page 19622]]



     SEC. 1316. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER 
                   SECTION 355.

       (a) In General.--Section 355(b) (defining active conduct of 
     a trade or business) is amended by adding at the end the 
     following new paragraph:
       ``(3) Special rules relating to active business 
     requirement.--
       ``(A) In general.--For purposes of determining whether a 
     corporation meets the requirement of paragraph (2)(A), all 
     members of such corporation's separate affiliated group shall 
     be treated as 1 corporation. For purposes of the preceding 
     sentence, a corporation's separate affiliated group is the 
     affiliated group which would be determined under section 
     1504(a) if such corporation were the common parent and 
     section 1504(b) did not apply.
       ``(B) Control.--For purposes of paragraph (2)(D), all 
     distributee corporations which are members of the same 
     affiliated group (as defined in section 1504(a) without 
     regard to section 1504(b)) shall be treated as 1 distributee 
     corporation.''.
       (b) Conforming Amendments.--
       (1) Subparagraph (A) of section 355(b)(2) is amended to 
     read as follows:
       ``(A) it is engaged in the active conduct of a trade or 
     business,''.
       (2) Section 355(b)(2) is amended by striking the last 
     sentence.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to distributions after the date of the enactment of 
     this Act.
       (2) Transition rule.--The amendments made by this section 
     shall not apply to any distribution pursuant to a transaction 
     which is--
       (A) made pursuant to an agreement which was binding on such 
     date and at all times thereafter,
       (B) described in a ruling request submitted to the Internal 
     Revenue Service on or before such date, or
       (C) described on or before such date in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission.
       (3) Election to have amendments apply.--Paragraph (2) shall 
     not apply if the distributing corporation elects not to have 
     such paragraph apply to distributions of such corporation. 
     Any such election, once made, shall be irrevocable.

     SEC. 1317. EXPANSION OF EXEMPTION FROM PERSONAL HOLDING 
                   COMPANY TAX FOR LENDING OR FINANCE COMPANIES.

       (a) In General.--Paragraph (6) of section 542(c) (defining 
     personal holding company) is amended--
       (1) by striking ``rents,'' in subparagraph (B), and
       (2) by adding ``and'' at the end of subparagraph (B),
       (3) by striking subparagraph (C), and
       (4) by redesignating subparagraph (D) as subparagraph (C).
       (b) Exception for Lending or Finance Companies Determined 
     on Affiliated Group Basis.--Subsection (d) of section 542 is 
     amended by striking paragraphs (1) and (2) and inserting the 
     following new paragraphs:
       ``(1) Lending or finance business defined.-- For purposes 
     of subsection (c)(6), the term `lending or finance business' 
     means a business of--
       ``(A) making loans,
       ``(B) purchasing or discounting accounts receivable, notes, 
     or installment obligations,
       ``(C) engaging in leasing (including entering into leases 
     and purchasing, servicing, and disposing of leases and leased 
     assets),
       ``(D) rendering services or making facilities available in 
     the ordinary course of a lending or finance business.
       ``(E) rendering services or making facilities available in 
     connection with activities described in subparagraphs (A), 
     (B), and (C) carried on by the corporation rendering services 
     or making facilities available, or
       ``(F) rendering services or making facilities available to 
     another corporation which is engaged in the lending or 
     finance business (within the meaning of this paragraph), if 
     such services or facilities are related to the lending or 
     finance business (within such meaning) of such other 
     corporation and such other corporation and the corporation 
     rendering services or making facilities available are members 
     of the same affiliated group (as defined in section 1504).
       ``(2) Exception determined on an affiliated group basis.--
     In the case of a lending or finance company which is a member 
     of an affiliated group (as defined in section 1504), such 
     company shall be treated as meeting the requirements of 
     subsection (c)(6) if such group (determined by taking into 
     account only members of such group which are engaged in a 
     lending or finance business) meets such requirements.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after December 31, 1999.

     SEC. 1318. EXTENSION OF EXPENSING OF ENVIRONMENTAL 
                   REMEDIATION COSTS.

       (a) Expansion of Qualified Contaminated Site.--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 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 
     (2), 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.

            Subtitle C--Provisions Relating to Excise Taxes

     SEC. 1321. CONSOLIDATION OF HAZARDOUS SUBSTANCE SUPERFUND AND 
                   LEAKING UNDERGROUND STORAGE TANK TRUST FUND.

       (a) In General.--Subchapter A of chapter 98 (relating to 
     trust fund code) is amended by striking sections 9507 and 
     9508 and inserting the following new section:

     ``SEC. 9507. ENVIRONMENTAL REMEDIATION TRUST FUND.

       ``(a) Creation of Trust Fund.--There is established in the 
     Treasury of the United States a trust fund to be known as the 
     `Environmental Remediation Trust Fund' consisting of such 
     amounts as may be--
       ``(1) appropriated to the Environmental Remediation Trust 
     Fund as provided in this section,
       ``(2) appropriated to the Environmental Remediation Trust 
     Fund pursuant to section 517(b) of the Superfund Revenue Act 
     of 1986, or
       ``(3) credited to the Environmental Remediation Trust Fund 
     as provided in section 9602(b).
       ``(b) Transfers to Environmental Remediation Trust Fund.--
       ``(1) In general.--There are hereby appropriated to the 
     Environmental Remediation Trust Fund amounts equivalent to--
       ``(A) the taxes received in the Treasury under--
       ``(i) section 59A, 4611, 4661, or 4671 (relating to 
     environmental taxes),
       ``(ii) section 4041(d) (relating to additional taxes on 
     motor fuels),
       ``(iii) section 4081 (relating to tax on gasoline, diesel 
     fuel, and kerosene) to the extent attributable to the 
     Environmental Remediation Trust Fund financing rate under 
     such section,
       ``(iv) section 4091 (relating to tax on aviation fuel) to 
     the extent attributable to the Environmental Remediation 
     Trust Fund financing rate under such section, and
       ``(v) section 4042 (relating to tax on fuel used in 
     commercial transportation on inland waterways) to the extent 
     attributable to the Environmental Remediation Trust Fund 
     financing rate under such section,
       ``(B) amounts recovered on behalf of the Environmental 
     Remediation Trust Fund under the Comprehensive Environmental 
     Response, Compensation, and Liability Act of 1980 
     (hereinafter in this section referred to as `CERCLA'),
       ``(C) all moneys recovered or collected under section 
     311(b)(6)(B) of the Clean Water Act,
       ``(D) penalties assessed under title I of CERCLA,
       ``(E) punitive damages under section 107(c)(3) of CERCLA, 
     and
       ``(F) amounts received in the Treasury and collected under 
     section 9003(h)(6) of the Solid Waste Disposal Act.
       ``(2) Limitation on transfers.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     no amount may be appropriated or credited to the 
     Environmental Remediation Trust Fund on and after the date of 
     any expenditure from any such Trust Fund which is not 
     permitted by this section. The determination of whether an 
     expenditure is so permitted shall be made without regard to--
       ``(i) any provision of law which is not contained or 
     referenced in this title or in a revenue Act, and
       ``(ii) whether such provision of law is a subsequently 
     enacted provision or directly or indirectly seeks to waive 
     the application of this paragraph.

[[Page 19623]]

       ``(B) Exception for prior obligations.--Subparagraph (A) 
     shall not apply to any expenditure to liquidate any contract 
     entered into (or for any amount otherwise obligated) in 
     accordance with the provisions of this section.''.
       ``(c) Expenditures From Environmental Remediation Trust 
     Fund.--
       ``(1) In general.--Amounts in the Environmental Remediation 
     Trust Fund shall be available, as provided in appropriation 
     Acts, only for purposes of making expenditures--
       ``(A) to carry out the purposes of--
       ``(i) paragraphs (1), (2), (5), and (6) of section 111(a) 
     of CERCLA as in effect on July 12, 1999,
       ``(ii) section 111(c) of CERCLA (as so in effect), other 
     than paragraphs (1) and (2) thereof, and
       ``(iii) section 111(m) of CERCLA (as so in effect), or
       ``(B) to carry out section 9003(h) of the Solid Waste 
     Disposal Act as in effect on July 12, 1999.
       ``(2) Exception for certain transfers, etc., of hazardous 
     substances.--No amount in the Environmental Remediation Trust 
     Fund or derived from the Environmental Remediation Trust Fund 
     shall be available or used for the transfer or disposal of 
     hazardous waste carried out pursuant to a cooperative 
     agreement between the Administrator of the Environmental 
     Protection Agency and a State if the following conditions 
     apply--
       ``(A) the transfer or disposal, if made on December 13, 
     1985, would not comply with a State or local requirement,
       ``(B) the transfer is to a facility for which a final 
     permit under section 3005(a) of the Solid Waste Disposal Act 
     was issued after January 1, 1983, and before November 1, 
     1984, and
       ``(C) the transfer is from a facility identified as the 
     McColl Site in Fullerton, California.
       ``(3) Transfers from trust fund for certain repayments and 
     credits.--
       ``(A) In general.--The Secretary shall pay from time to 
     time from the Environmental Remediation Trust Fund into the 
     general fund of the Treasury amounts equivalent to--
       ``(i) amounts paid under--

       ``(I) section 6420 (relating to amounts paid in respect of 
     gasoline used on farms),
       ``(II) section 6421 (relating to amounts paid in respect of 
     gasoline used for certain nonhighway purposes or by local 
     transit systems), and
       ``(III) section 6427 (relating to fuels not used for 
     taxable purposes), and

       ``(ii) credits allowed under section 34,
     with respect to the taxes imposed by section 4041(d) or by 
     sections 4081 and 4091 (to the extent attributable to the 
     Leaking Underground Storage Tank Trust Fund financing rate or 
     the Environmental Remediation Trust Fund financing rate under 
     such sections).
       ``(B) Transfers based on estimates.--Transfers under 
     subparagraph (A) shall be made on the basis of estimates by 
     the Secretary, and proper adjustments shall be made in 
     amounts subsequently transferred to the extent prior 
     estimates were in excess of or less than the amounts required 
     to be transferred.
       ``(d) Liability of United States Limited to Amount in Trust 
     Fund.--
       ``(1) General rule.--Any claim filed against the 
     Environmental Remediation Trust Fund may be paid only out of 
     the Environmental Remediation Trust Fund.
       ``(2) Coordination with other provisions.--Nothing in 
     CERCLA or the Superfund Amendments and Reauthorization Act of 
     1986 (or in any amendment made by either of such Acts) shall 
     authorize the payment by the United States Government of any 
     amount with respect to any such claim out of any source other 
     than the Environmental Remediation Trust Fund.
       ``(3) Order in which unpaid claims are to be paid.--If at 
     any time the Environmental Remediation Trust Fund has 
     insufficient funds to pay all of the claims payable out of 
     the Environmental Remediation Trust Fund at such time, such 
     claims shall, to the extent permitted under paragraph (1), be 
     paid in full in the order in which they were finally 
     determined.
       ``(e) Separate Accounting if Superfund Reauthorized.--
       ``(1) In general.--If a Federal law is enacted after 
     September 30, 1999, which authorizes expenditures out of the 
     Environmental Remediation Trust Fund for purposes of carrying 
     out provisions of CERCLA not described in subsection 
     (c)(1)(A), this section shall be applied as if such Fund 
     consisted of 2 accounts: a Superfund Account and a Leaking 
     Underground Storage Tank Account.
       ``(2) Amounts in accounts.--
       ``(A) Leaking underground storage tank account.--The 
     Leaking Underground Storage Tank Account--
       ``(i) shall consist of amounts which would have been 
     appropriated or credited to the Leaking Underground Storage 
     Tank Trust Fund but for the amendments made by section 1321 
     of the Taxpayer Refund and Relief Act of 1999, and
       ``(ii) shall be available, as provided in appropriation 
     Acts, for the purposes for which the Leaking Underground 
     Storage Tank Trust Fund was available (as in effect on the 
     day before the date of the enactment of such amendments).
       ``(B) Superfund account.--The Superfund Account--
       ``(i) shall consist of amounts which would have been 
     appropriated or credited to the Hazardous Substance Superfund 
     but for such amendments, and
       ``(ii) shall be available, as provided in appropriation 
     Acts, for the purposes for which the Hazardous Substance 
     Superfund was available (as so in effect).
       ``(3) Opening balances.--
       ``(A) Leaking underground storage tank account.--The 
     balance in the Leaking Underground Storage Tank Account as of 
     the date of the enactment of the Federal law referred to in 
     paragraph (1) shall be the sum of--
       ``(i) the amount which bears the same ratio to the balance 
     in such Trust Fund as of such date, bears to the sum of the 
     balances (as of the close of September 30, 1999) in Leaking 
     Underground Storage Tank Trust Fund and the Hazardous 
     Substance Superfund, and
       ``(ii) the aggregate amount appropriated to the 
     Environmental Remediation Trust Fund after September 30, 
     1999, by reason of taxes received in the Treasury.
       ``(B) Superfund account.--The balance in the Superfund 
     Account as of the date of the enactment of the Federal law 
     referred to in paragraph (1) shall be the excess of the 
     balance in such Trust Fund as of such date over the balance 
     of the Leaking Underground Storage Tank Account determined 
     under subparagraph (A).
       ``(4) Special transfer rule.--If the balance in the 
     Environmental Remediation Trust Fund as of the date of the 
     enactment of the Federal law referred to in paragraph (1) is 
     less than the required balance for the Leaking Underground 
     Storage Tank Account, amounts otherwise required to be 
     deposited in the Superfund Account shall be reduced (to the 
     extent of the shortfall) and deposited into the Leaking 
     Underground Storage Tank Account.''.
       (b) Conforming Amendments.--
       (1) Subsections (c) and (e) of section 4611 are each 
     amended by striking ``Hazardous Substance Superfund'' each 
     place it appears and inserting ``Environmental Remediation 
     Trust Fund''.
       (2) Subsection (c) of section 4661 is amended by striking 
     ``Hazardous Substance Superfund'' and inserting 
     ``Environmental Remediation Trust Fund''.
       (3) Sections 4041(d), 4042(b), 4081(a)(2)(B), 4081(d)(3), 
     4091(b), 4092(b), 6421(f), and 6427(l) are each amended by 
     striking ``Leaking Underground Storage Tank'' each place it 
     appears (other than the headings) and inserting 
     ``Environmental Remediation''.
       (4) The heading for subsection (d) of section 4041 is 
     amended by striking ``Leaking Underground Storage Tank'' and 
     inserting ``Environmental Remediation''.
       (5) The headings for subsections (a)(2)(B) and (d)(3) of 
     section 4081 and section 4091(b)(2) are each amended by 
     striking ``Leaking underground storage tank'' and inserting 
     ``Environmental remediation''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on October 1, 1999.
       (d) Environmental Remediation Trust Fund Treated as 
     Continuation of Old Trust Funds.--The Environmental 
     Remediation Trust Fund established by the amendments made by 
     this section shall be treated for all purposes of law as a 
     continuation of both the Hazardous Substance Superfund and 
     the Leaking Underground Storage Tank Trust Fund. Any 
     reference in any law to the Hazardous Substance Superfund or 
     the Leaking Underground Storage Tank Trust Fund shall be 
     deemed to include (wherever appropriate) a reference to the 
     Environmental Remediation Trust Fund established by such 
     amendments.

     SEC. 1322. REPEAL OF CERTAIN MOTOR FUEL EXCISE TAXES ON FUEL 
                   USED BY RAILROADS AND ON INLAND WATERWAY 
                   TRANSPORTATION.

       (a) Repeal of Leaking Underground Storage Tank Trust Fund 
     Taxes on Fuel Used in Trains.--
       (1) In general.--Paragraph (1) of section 4041(d) is 
     amended by adding at the end the following new sentence: 
     ``The preceding sentence shall not apply to any sale for use, 
     or use, of fuel in a diesel-powered train.''.
       (2) Conforming amendments.--
       (A) Paragraph (3) of section 6421(f) is amended by striking 
     ``with respect to--'' and all that follows through ``so much 
     of'' and inserting ``with respect to so much of''.
       (B) Paragraph (3) of section 6427(l) is amended by striking 
     ``with respect to--'' and all that follows through ``so much 
     of'' and inserting ``with respect to so much of''.
       (b) Repeal of 4.3-Cent Motor Fuel Excise Taxes on Railroads 
     and Inland Waterway Transportation Which Remain in General 
     Fund.--
       (1) Taxes on trains.--
       (A) In general.--Subparagraph (A) of section 4041(a)(1) is 
     amended by striking ``or a diesel-powered train'' each place 
     it appears and by striking ``or train''.
       (B) Conforming amendments.--
       (i) Subparagraph (C) of section 4041(a)(1) is amended by 
     striking clause (ii) and by redesignating clause (iii) as 
     clause (ii).
       (ii) Subparagraph (C) of section 4041(b)(1) is amended by 
     striking all that follows ``section 6421(e)(2)'' and 
     inserting a period.

[[Page 19624]]

       (iii) Paragraph (3) of section 4083(a) is amended by 
     striking ``or a diesel-powered train''.
       (iv) Section 6421(f) is amended by striking paragraph (3).
       (v) Section 6427(l) is amended by striking paragraph (3).
       (2) Fuel used on inland waterways.--
       (A) In general.--Paragraph (1) of section 4042(b) is 
     amended by adding ``and'' at the end of subparagraph (A), by 
     striking ``, and'' at the end of subparagraph (B) and 
     inserting a period, and by striking subparagraph (C).
       (B) Conforming amendment.--Paragraph (2) of section 4042(b) 
     is amended by striking subparagraph (C).
       (c) Effective Date.--The amendments made by this subsection 
     shall take effect on October 1, 1999 (October 1, 2003, in the 
     case of the amendments made by subsection (b)), but shall not 
     take effect if section 1321 does not take effect.

     SEC. 1323. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES.

       (a) Repeal.--Paragraph (6) of section 4162(a) (defining 
     sport fishing equipment) is amended by striking subparagraph 
     (C) and by redesignating subparagraphs (D) through (J) as 
     subparagraphs (C) through (I), respectively.
       (b) Modification of Transfer to Aquatic Resources Trust 
     Fund.--Section 9503(b)(4)(D) is amended--
       (1) by striking ``11.5 cents'' in clause (i) and inserting 
     ``11.7 cents'',
       (2) by striking ``13 cents'' in clause (ii) and inserting 
     ``13.2 cents'', and
       (3) by striking ``13.5 cents'' in clause (iii) and 
     inserting ``13.7 cents''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect 30 days after the date of the enactment of 
     this Act.

     SEC. 1324. CLARIFICATION OF EXCISE TAX IMPOSED ON ARROW 
                   COMPONENTS.

       (a) In General.--Paragraph (2) of section 4161(b) (relating 
     to bows and arrows, etc.) is amended to read as follows:
       ``(2) Arrows.--
       ``(A) In general.--There is hereby imposed on the sale by 
     the manufacturer, producer, or importer of any shaft, point, 
     article used to attach a point to a shaft, nock, or vane of a 
     type used in the manufacture of any arrow which after its 
     assembly--
       ``(i) measures 18 inches overall or more in length, or
       ``(ii) measures less than 18 inches overall in length but 
     is suitable for use with a bow described in paragraph (1)(A),
     a tax equal to 12.4 percent of the price for which so sold.
       ``(B) Reduced rate on certain hunting points.--Subparagraph 
     (A) shall be applied by substituting `11 percent' for `12.4 
     percent' in the case of a point which is designed primarily 
     for use in hunting fish or large animals.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to articles sold by the manufacturer, producer, 
     or importer after the close of the first calendar month 
     ending more than 30 days after the date of the enactment of 
     this Act.

     SEC. 1325. EXEMPTION FROM TICKET TAXES FOR CERTAIN 
                   TRANSPORTATION PROVIDED BY SMALL SEAPLANES.

       (a) In General.--Section 4281 (relating to small aircraft 
     on nonestablished lines) is amended to read as follows:

     ``SEC. 4281. SMALL AIRCRAFT.

       ``The taxes imposed by sections 4261 and 4271 shall not 
     apply to--
       ``(1) transportation by an aircraft having a maximum 
     certificated takeoff weight of 6,000 pounds or less, except 
     when such aircraft is operated on an established line, and
       ``(2) transportation by a seaplane having a maximum 
     certificated takeoff weight of 6,000 pounds or less with 
     respect to any segment consisting of a takeoff from, and a 
     landing on, water.
     For purposes of the preceding sentence, the term `maximum 
     certificated takeoff weight' means the maximum such weight 
     contained in the type certificate or airworthiness 
     certificate.''.
       (b) Clerical Amendment.--The table of sections for part III 
     of subchapter C of chapter 33 is amended by striking ``on 
     nonestablished lines'' in the item relating to section 4281.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid for transportation beginning 
     after December 31, 1999, but shall not apply to any amount 
     paid on or before such date with respect to taxes imposed by 
     sections 4261 and 4271 of the Internal Revenue Code of 1986.

     SEC. 1326. MODIFICATION OF RURAL AIRPORT DEFINITION.

       (a) In General.--Clause (ii) of section 4261(e)(1)(B) 
     (defining rural airport) is amended by striking the period at 
     the end of subclause (II) and inserting ``, or'', and by 
     adding at the end the following new subclause:

       ``(III) is not connected by paved roads to another 
     airport.''.

       (b) Effective Date.--The amendments made by this section 
     shall apply to calendar years beginning after 1999.

                      Subtitle D--Other Provisions

     SEC. 1331. TAX-EXEMPT FINANCING OF QUALIFIED HIGHWAY 
                   INFRASTRUCTURE CONSTRUCTION.

       (a) Treatment as Exempt Facility Bond.--A bond described in 
     subsection (b) shall be treated as described in section 
     141(e)(1)(A) of the Internal Revenue Code of 1986, except 
     that--
       (1) section 146 of such Code shall not apply to such bond, 
     and
       (2) section 147(c)(1) of such Code shall be applied by 
     substituting ``any portion of'' for ``25 percent or more''.
       (b) Bond Described.--
       (1) In general.--A bond is described in this subsection if 
     such bond is issued after December 31, 1999, as part of an 
     issue--
       (A) 95 percent or more of the net proceeds of which are to 
     be used to provide a qualified highway infrastructure 
     project, and
       (B) to which there has been allocated a portion of the 
     allocation to the project under paragraph (2)(C)(ii) which is 
     equal to the aggregate face amount of bonds to be issued as 
     part of such issue.
       (2) Qualified highway infrastructure projects.--
       (A) In general.--For purposes of paragraph (1), the term 
     ``qualified highway infrastructure project'' means a 
     project--
       (i) for the construction or reconstruction of a highway, 
     and
       (ii) designated under subparagraph (B) as an eligible pilot 
     project.
       (B) Eligible pilot project.--
       (i) In general.--The Secretary of Transportation, in 
     consultation with the Secretary of the Treasury, shall select 
     not more than 15 highway infrastructure projects to be pilot 
     projects eligible for tax-exempt financing.
       (ii) Eligibility criteria.--In determining the criteria 
     necessary for the eligibility of pilot projects, the 
     Secretary of Transportation shall include the following:

       (I) The project must serve the general public.
       (II) The project is necessary to evaluate the potential of 
     the private sector's participation in the provision of the 
     highway infrastructure of the United States.
       (III) The project must be located on publicly-owned rights-
     of-way.
       (IV) The project must be publicly owned or the ownership of 
     the highway constructed or reconstructed under the project 
     must revert to the public.
       (V) The project must be consistent with a transportation 
     plan developed pursuant to section 134(g) or 135(e) of title 
     23, United States Code.

       (C) Aggregate face amount of tax-exempt financing.--
       (i) In general.--The aggregate face amount of bonds issued 
     pursuant to this section shall not exceed $15,000,000,000, 
     determined without regard to any bond the proceeds of which 
     are used exclusively to refund (other than to advance refund) 
     a bond issued pursuant to this section (or a bond which is a 
     part of a series of refundings of a bond so issued) if the 
     amount of the refunding bond does not exceed the outstanding 
     amount of the refunded bond.
       (ii) Allocation.--The Secretary of Transportation, in 
     consultation with the Secretary of the Treasury, shall 
     allocate the amount described in clause (i) among the 
     eligible pilot projects designated under subparagraph (B).
       (iii) Reallocation.--If any portion of an allocation under 
     clause (ii) is unused on the date which is 3 years after such 
     allocation, the Secretary of Transportation, in consultation 
     with the Secretary of the Treasury, may reallocate such 
     portion among the remaining eligible pilot projects.

     SEC. 1332. TAX TREATMENT OF ALASKA NATIVE SETTLEMENT TRUSTS.

       (a) In General.--Subpart A of part I of subchapter J of 
     chapter 1 (relating to general rules for taxation of trusts 
     and estates) is amended by adding at the end the following 
     new section:

     ``SEC. 646. ELECTING ALASKA NATIVE SETTLEMENT TRUSTS.

       ``(a) In General.--Except as otherwise provided in this 
     section, the provisions of this subchapter and section 1(e) 
     shall apply to all Settlement Trusts.
       ``(b) Beneficiaries of Electing Trust Not Taxed on 
     Contributions.--
       ``(1) In general.--In the case of a Settlement Trust for 
     which an election under paragraph (2) is in effect for any 
     taxable year, no amount shall be includible in the gross 
     income of a beneficiary of the Settlement Trust by reason of 
     a contribution to the Settlement Trust made during such 
     taxable year.
       ``(2) One-time election.--
       ``(A) In general.--A Settlement Trust may elect to have the 
     provisions of this section apply to the trust and its 
     beneficiaries.
       ``(B) Time and method of election.--An election under 
     subparagraph (A) shall be made--
       ``(i) on or before the due date (including extensions) for 
     filing the Settlement Trust's return of tax for the 1st 
     taxable year of the Settlement Trust ending after December 
     31, 1999, and
       ``(ii) by attaching to such return of tax a statement 
     specifically providing for such election.
       ``(C) Period election in effect.--Except as provided in 
     paragraph (3), an election under subparagraph (A)--
       ``(i) shall apply to the 1st taxable year described in 
     subparagraph (B)(i) and all subsequent taxable years, and

[[Page 19625]]

       ``(ii) may not be revoked once it is made.
       ``(c) Special Rules Where Transfer Restrictions Modified.--
       ``(1) Transfer of beneficial interests.--If, at any time, a 
     beneficial interest in a Settlement Trust may be disposed of 
     to a person in a manner which would not be permitted by 
     section 7(h) of the Alaska Native Claims Settlement Act (43 
     U.S.C. 1606(h)) if the interest were Settlement Common 
     Stock--
       ``(A) no election may be made under subsection (b)(2) with 
     respect to such trust, and
       ``(B) if such an election is in effect as of such time, 
     such election shall cease to apply for purposes of subsection 
     (b)(1) as of the 1st day of the taxable year following the 
     taxable year in which such disposition is first permitted.
       ``(2) Stock in corporation.--If--
       ``(A) the Settlement Common Stock in any Native Corporation 
     which transferred assets to a Settlement Trust making an 
     election under subsection (b)(2) may be disposed of to a 
     person in a manner not permitted by section 7(h) of the 
     Alaska Native Claims Settlement Act (43 U.S.C. 1606(h)), and
       ``(B) at any time after such disposition of stock is first 
     permitted, such corporation transfers assets to such trust,
     subparagraph (B) of paragraph (1) shall be applied to such 
     trust on and after the date of the transfer in the same 
     manner as if the trust permitted dispositions of beneficial 
     interests in the trust in a manner not permitted by such 
     section 7(h).
       ``(c) Tax Treatment of Distributions to Beneficiaries.--
       ``(1) In general.--In the case of a Settlement Trust for 
     which an election under subsection (b)(2) is in effect for 
     any taxable year, any distribution to a beneficiary shall be 
     included in gross income of the beneficiary as ordinary 
     income to the extent such distribution reduces the earnings 
     and profits of any Native Corporation making a contribution 
     to such Trust.
       ``(2) Earnings and profits.--The earnings and profits of 
     any Native Corporation making a contribution to a Settlement 
     Trust shall not be reduced on account thereof at the time of 
     such contribution, but such earnings and profits shall be 
     reduced (up to the amount of such contribution) as 
     distributions are thereafter made by the Settlement Trust 
     which exceed the sum of--
       ``(A) such Trust's total undistributed net income for all 
     prior years during which an election under subsection (b)(2) 
     is in effect, and
       ``(B) such Trust's distributable net income.
       ``(d) Definitions.--For purposes of this section--
       ``(1) Native corporation.--The term `Native Corporation' 
     has the meaning given such term by section 3(m) of the Alaska 
     Native Claims Settlement Act (43 U.S.C. 1602(m)).
       ``(2) Settlement trust.--The term `Settlement Trust' means 
     a trust which constitutes a Settlement Trust under section 39 
     of the Alaska Native Claims Settlement Act (43 U.S.C. 
     1629e).''.
       (b) Withholding on Distributions by Electing ANCSA 
     Settlement Trusts.--Section 3402 is amended by adding at the 
     end the following new subsection:
       ``(t) Tax Withholding on Distributions by Electing ANCSA 
     Settlement Trusts.--
       ``(1) In general.--Any Settlement Trust (as defined in 
     section 646(d)) for which an election under section 646(b)(2) 
     is in effect (in this subsection referred to as an `electing 
     trust') and which makes a payment to any beneficiary which is 
     includable in gross income under section 646(c) shall deduct 
     and withhold from such payment a tax in an amount equal to 
     such payment's proportionate share of the annualized tax.
       ``(2) Exception.--The tax imposed by paragraph (1) shall 
     not apply to any payment to the extent that such payment, 
     when annualized, does not exceed an amount equal to the 
     amount in effect under section 6012(a)(1)(A)(i) for taxable 
     years beginning in the calendar year in which the payment is 
     made.
       ``(3) Annualized tax.--For purposes of paragraph (1), the 
     term `annualized tax' means, with respect to any payment, the 
     amount of tax which would be imposed by section 1(c) 
     (determined without regard to any rate of tax in excess of 31 
     percent) on an amount of taxable income equal to the excess 
     of--
       ``(A) the annualized amount of such payment, over
       ``(B) the amount determined under paragraph (2).
       ``(4) Annualization.--For purposes of this subsection, 
     amounts shall be annualized in the manner prescribed by the 
     Secretary.
       ``(5) Alternate withholding procedures.--At the election of 
     an electing trust, the tax imposed by this subsection on any 
     payment made by such trust shall be determined in accordance 
     with such tables or computational procedures as may be 
     specified in regulations prescribed by the Secretary (in lieu 
     of in accordance with paragraphs (2) and (3)).
       ``(6) Coordination with other sections.--For purposes of 
     this chapter and so much of subtitle F as relates to this 
     chapter, payments which are subject to withholding under this 
     subsection shall be treated as if they were wages paid by an 
     employer to an employee.''.
       (c) Reporting.--Section 6041 is amended by adding at the 
     end the following new subsection:
       ``(f) Application to Alaska Native Settlement Trusts.--In 
     the case of any distribution from a Settlement Trust (as 
     defined in section 646(d)) to a beneficiary which is 
     includable in gross income under section 646(c), this section 
     shall apply, except that--
       ``(1) this section shall apply to such distribution without 
     regard to the amount thereof,
       ``(2) the Settlement Trust shall include on any return or 
     statement required by this section information as to the 
     character of such distribution (if applicable) and the amount 
     of tax imposed by chapter 1 which has been deducted and 
     withheld from such distribution, and
       ``(3) the filing of any return or statement required by 
     this section shall satisfy any requirement to file any other 
     form or schedule under this title with respect to 
     distributive share information (including any form or 
     schedule to be included with the trust's tax return).''.
       (d) Clerical Amendment.--The table of sections for subpart 
     A of part I of subchapter J of chapter 1 is amended by adding 
     at the end the following new item:

``Sec. 646. Electing Alaska Native Settlement Trusts.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years of Settlement Trusts ending 
     after December 31, 1999, and to contributions to such trusts 
     after such date.

     SEC. 1333. INCREASE IN THRESHOLD FOR JOINT COMMITTEE REPORTS 
                   ON REFUNDS AND CREDITS.

       (a) General Rule.--Subsections (a) and (b) of section 6405 
     are each amended by striking ``$1,000,000'' and inserting 
     ``$2,000,000''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall take effect on the date of the enactment of this Act, 
     except that such amendment shall not apply with respect to 
     any refund or credit with respect to a report that has been 
     made before such date of the enactment under section 6405 of 
     the Internal Revenue Code of 1986.

     SEC. 1334. CREDIT FOR CLINICAL TESTING RESEARCH EXPENSES 
                   ATTRIBUTABLE TO CERTAIN QUALIFIED ACADEMIC 
                   INSTITUTIONS INCLUDING TEACHING HOSPITALS.

       (a) In General.--Subpart D of part IV of subchapter A of 
     chapter 1 (relating to business related credits) is amended 
     by inserting after section 41 the following:

     ``SEC. 41A. CREDIT FOR MEDICAL INNOVATION EXPENSES.

       ``(a) General Rule.--For purposes of section 38, the 
     medical innovation credit determined under this section for 
     the taxable year shall be an amount equal to 40 percent of 
     the excess (if any) of--
       ``(1) the qualified medical innovation expenses for the 
     taxable year, over
       ``(2) the medical innovation base period amount.
       ``(b) Qualified Medical Innovation Expenses.--For purposes 
     of this section--
       ``(1) In general.--The term `qualified medical innovation 
     expenses' means the amounts which are paid or incurred by the 
     taxpayer during the taxable year directly or indirectly to 
     any qualified academic institution for clinical testing 
     research activities.
       ``(2) Clinical testing research activities.--
       ``(A) In general.--The term `clinical testing research 
     activities' means human clinical testing conducted at any 
     qualified academic institution in the development of any 
     product, which occurs before--
       ``(i) the date on which an application with respect to such 
     product is approved under section 505(b), 506, or 507 of the 
     Federal Food, Drug, and Cosmetic Act (as in effect on the 
     date of the enactment of this section),
       ``(ii) the date on which a license for such product is 
     issued under section 351 of the Public Health Service Act (as 
     so in effect), or
       ``(iii) the date classification or approval of such product 
     which is a device intended for human use is given under 
     section 513, 514, or 515 of the Federal Food, Drug, and 
     Cosmetic Act (as so in effect).
       ``(B) Product.--The term `product' means any drug, 
     biologic, or medical device.
       ``(3) Qualified academic institution.--The term `qualified 
     academic institution' means any of the following 
     institutions:
       ``(A) Educational institution.--A qualified organization 
     described in section 170(b)(1)(A)(iii) which is owned by, or 
     affiliated with, an institution of higher education (as 
     defined in section 3304(f)).
       ``(B) Teaching hospital.--A teaching hospital which--
       ``(i) is publicly supported or owned by an organization 
     described in section 501(c)(3), and
       ``(ii) is affiliated with an organization meeting the 
     requirements of subparagraph (A).
       ``(C) Foundation.--A medical research organization 
     described in section 501(c)(3) (other than a private 
     foundation) which is affiliated with, or owned by--
       ``(i) an organization meeting the requirements of 
     subparagraph (A), or

[[Page 19626]]

       ``(ii) a teaching hospital meeting the requirements of 
     subparagraph (B).
       ``(D) Charitable research hospital.--A hospital that is 
     designated as a cancer center by the National Cancer 
     Institute.
       ``(4) Exclusion for amounts funded by grants, etc.--The 
     term `qualified medical innovation expenses' shall not 
     include any amount to the extent such amount is funded by any 
     grant, contract, or otherwise by another person (or any 
     governmental entity).
       ``(c) Medical Innovation Base Period Amount.--For purposes 
     of this section, the term `medical innovation base period 
     amount' means the average annual qualified medical innovation 
     expenses paid by the taxpayer during the 3-taxable year 
     period ending with the taxable year immediately preceding the 
     first taxable year of the taxpayer beginning after December 
     31, 1998.
       ``(d) Special Rules.--
       ``(1) Limitation on foreign testing.--No credit shall be 
     allowed under this section with respect to any clinical 
     testing research activities conducted outside the United 
     States.
       ``(2) Certain rules made applicable.--Rules similar to the 
     rules of subsections (f) and (g) of section 41 shall apply 
     for purposes of this section.
       ``(3) Election.--This section shall apply to any taxpayer 
     for any taxable year only if such taxpayer elects to have 
     this section apply for such taxable year.
       ``(4) Coordination with credit for increasing research 
     expenditures and with credit for clinical testing expenses 
     for certain drugs for rare diseases.--Any qualified medical 
     innovation expense for a taxable year to which an election 
     under this section applies shall not be taken into account 
     for purposes of determining the credit allowable under 
     section 41 or 45C for such taxable year.''.
       (b) Credit To Be Part of General Business Credit.--
       (1) In general.--Section 38(b) (relating to current year 
     business credits) is amended by striking ``plus'' at the end 
     of paragraph (11), by striking the period at the end of 
     paragraph (12) and inserting ``, plus'', and by adding at the 
     end the following:
       ``(13) the medical innovation expenses credit determined 
     under section 41A(a).''.
       (2) Transition rule.--Section 39(d) is amended by adding at 
     the end the following new paragraph:
       ``(9) No carryback of section 41a credit before 
     enactment.--No portion of the unused business credit for any 
     taxable year which is attributable to the medical innovation 
     credit determined under section 41A may be carried back to a 
     taxable year beginning before January 1, 1999.''.
       (c) Denial of Double Benefit.--Section 280C is amended by 
     adding at the end the following new subsection:
       ``(d) Credit for Increasing Medical Innovation Expenses.--
       ``(1) In general.--No deduction shall be allowed for that 
     portion of the qualified medical innovation expenses (as 
     defined in section 41A(b)) otherwise allowable as a deduction 
     for the taxable year which is equal to the amount of the 
     credit determined for such taxable year under section 41A(a).
       ``(2) Certain rules to apply.--Rules similar to the rules 
     of paragraphs (2), (3), and (4) of subsection (c) shall apply 
     for purposes of this subsection.''.
       (d) Deduction for Unused Portion of Credit.--Section 196(c) 
     (defining qualified business credits) is amended by 
     redesignating paragraphs (5) through (8) as paragraphs (6) 
     through (9), respectively, and by inserting after paragraph 
     (4) the following new paragraph:
       ``(5) the medical innovation expenses credit determined 
     under section 41A(a) (other than such credit determined under 
     the rules of section 280C(d)(2)),''.
       (e) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1 is amended by 
     adding after the item relating to section 41 the following:

``Sec. 41A. Credit for medical innovation expenses.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 1335. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES 
                   WITHOUT REDUCING PATRONAGE DIVIDENDS.

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

                    Subtitle E--Tax Court Provisions

     SEC. 1341. TAX COURT FILING FEE IN ALL CASES COMMENCED BY 
                   FILING PETITION.

       (a) In General.--Section 7451 (relating to fee for filing a 
     Tax Court petition) is amended by striking all that follows 
     ``petition'' and inserting a period.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 1342. EXPANDED USE OF TAX COURT PRACTICE FEE.

       Subsection (b) of section 7475 (relating to use of fees) is 
     amended by inserting before the period at the end ``and to 
     provide services to pro se taxpayers''.

     SEC. 1343. CONFIRMATION OF AUTHORITY OF TAX COURT TO APPLY 
                   DOCTRINE OF EQUITABLE RECOUPMENT.

       (a) Confirmation of Authority of Tax Court To Apply 
     Doctrine of Equitable Recoupment.--Subsection (b) of section 
     6214 (relating to jurisdiction over other years and quarters) 
     is amended by adding at the end the following new sentence: 
     ``Notwithstanding the preceding sentence, the Tax Court may 
     apply the doctrine of equitable recoupment to the same extent 
     that it is available in civil tax cases before the district 
     courts of the United States and the United States Court of 
     Federal Claims.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to any action or proceeding in the Tax Court with 
     respect to which a decision has not become final (as 
     determined under section 7481 of the Internal Revenue Code of 
     1986) as of the date of the enactment of this Act.

              TITLE XIV--EXTENSIONS OF EXPIRING PROVISIONS

     SEC. 1401. RESEARCH CREDIT.

       (a) Extension.--
       (1) In general.--Paragraph (1) of section 41(h) (relating 
     to termination) is amended--
       (A) by striking ``June 30, 1999'' and inserting ``June 30, 
     2004'', and
       (B) by striking the material following subparagraph (B).
       (2) Technical amendment.--Subparagraph (D) of section 
     45C(b)(1) is amended by striking ``June 30, 1999'' and 
     inserting ``June 30, 2004''.
       (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.

     SEC. 1402. SUBPART F EXEMPTION FOR ACTIVE FINANCING INCOME.

       (a) In General.--Sections 953(e)(10) and 954(h)(9) are each 
     amended--
       (1) by striking ``the first taxable year'' and inserting 
     ``taxable years'', and
       (2) by striking ``January 1, 2000'' and inserting ``January 
     1, 2005''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 1403. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR 
                   MARGINAL PRODUCTION.

       (a) In General.--Subparagraph (H) of section 613A(c)(6) is 
     amended by striking ``January 1, 2000'' and inserting 
     ``January 1, 2005''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1999.

     SEC. 1404. WORK OPPORTUNITY CREDIT AND WELFARE-TO-WORK 
                   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, 2001''.
       (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. 1405. EXTENSION AND MODIFICATION OF CREDIT FOR PRODUCING 
                   ELECTRICITY 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 July 1, 2003.
       ``(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 originally placed in service after December 
     31, 1992, and before July 1, 2003.
       ``(C) Poultry waste facility.--In the case of a facility 
     using 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 July 1, 2003.''.
       (b) Expansion of Qualified Energy Resources.--

[[Page 19627]]

       (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 ``, and'', and by adding at 
     the end the following new subparagraph:
       ``(C) poultry waste.''.
       (2) Definition.--Section 45(c) is amended by adding at the 
     end the following new paragraph:
       ``(4) 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) Credit not to apply to electricity sold to utilities 
     under certain contracts.--
       ``(A) In general.--The credit determined under subsection 
     (a) shall not apply to electricity--
       ``(i) produced at a qualified facility described in 
     paragraph (3)(A) which is placed in service by the taxpayer 
     after June 30, 1999, and
       ``(ii) sold to a utility pursuant to a contract originally 
     entered into before January 1, 1987 (whether or not amended 
     or restated after that date).
       ``(B) Exception.--Subparagraph (A) shall not apply if--
       ``(i) the prices for energy and capacity from such facility 
     are established pursuant to an amendment to the contract 
     referred to in subparagraph (A)(ii);
       ``(ii) such amendment provides that the prices set forth in 
     the contract which exceed avoided cost prices determined at 
     the time of delivery shall apply only to annual quantities of 
     electricity (prorated for partial years) which do not exceed 
     the greater of--

       ``(I) the average annual quantity of electricity sold to 
     the utility under the contract during calendar years 1994, 
     1995, 1996, 1997, and 1998, or
       ``(II) the estimate of the annual electricity production 
     set forth in the contract, or, if there is no such estimate, 
     the greatest annual quantity of electricity sold to the 
     utility under the contract in any of the calendar years 1996, 
     1997, or 1998; and

       ``(iii) such amendment provides that energy and capacity in 
     excess of the limitation in clause (ii) may be--

       ``(I) sold to the utility only at prices that do not exceed 
     avoided cost prices determined at the time of delivery, or
       ``(II) sold to a third party subject to a mutually agreed 
     upon advance notice to the utility.

     For purposes of this subparagraph, avoided cost prices shall 
     be determined as provided for in 18 CFR 292.304(d)(1) or any 
     successor regulation.''.
       (d) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

                       TITLE XV--REVENUE OFFSETS

     SEC. 1501. RETURNS RELATING TO CANCELLATIONS OF INDEBTEDNESS 
                   BY ORGANIZATIONS LENDING MONEY.

       (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. 1502. EXTENSION OF INTERNAL REVENUE SERVICE USER FEES.

       (a) In General.--Chapter 77 (relating to miscellaneous 
     provisions) is amended by adding at the end the following new 
     section:

     ``SEC. 7527. INTERNAL REVENUE SERVICE USER FEES.

       ``(a) General Rule.--The Secretary shall establish a 
     program requiring the payment of user fees for--
       ``(1) requests to the Internal Revenue Service for ruling 
     letters, opinion letters, and determination letters, and
       ``(2) other similar requests.
       ``(b) Program Criteria.--
       ``(1) In general.--The fees charged under the program 
     required by subsection (a)--
       ``(A) shall vary according to categories (or subcategories) 
     established by the Secretary,
       ``(B) shall be determined after taking into account the 
     average time for (and difficulty of) complying with requests 
     in each category (and subcategory), and
       ``(C) shall be payable in advance.
       ``(2) Exemptions, etc.--The Secretary shall provide for 
     such exemptions (and reduced fees) under such program as the 
     Secretary determines to be appropriate.
       ``(3) Average fee requirement.--The average fee charged 
     under the program required by subsection (a) shall not be 
     less than the amount determined under the following table:

``Category:                                                Average Fee:
    Employee plan ruling and opinion..............................$250 
    Exempt organization ruling....................................$350 
    Employee plan determination...................................$300 
    Exempt organization determination.............................$275 
    Chief counsel ruling..........................................$200.
       ``(c) Termination.--No fee shall be imposed under this 
     section with respect to requests made after September 30, 
     2009.''.
       (b) Conforming Amendments.--
       (1) The table of sections for chapter 77 is amended by 
     adding at the end the following new item:

``Sec. 7527. Internal Revenue Service user fees.''.
       (2) Section 10511 of the Revenue Act of 1987 is repealed.
       (c) Effective Date.--The amendments made by this section 
     shall apply to requests made after the date of the enactment 
     of this Act.

     SEC. 1503. LIMITATIONS ON WELFARE BENEFIT FUNDS OF 10 OR MORE 
                   EMPLOYER PLANS.

       (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 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. 1504. 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. 1505. 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
       ``(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.

[[Page 19628]]

       ``(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 1 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.
       ``(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.

     SEC. 1506. TREATMENT OF GAIN 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--

[[Page 19629]]

       ``(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 1 or more other transactions (or 
     acquires 1 or more positions) that have substantially the 
     same effect as a transaction described in any of the 
     preceding subparagraphs.
       ``(2) Exception for 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. 1507. TRANSFER OF EXCESS DEFINED BENEFIT PLAN ASSETS FOR 
                   RETIREE HEALTH BENEFITS.

       (a) Extension.--
       (1) In General.--Paragraph (5) of section 420(b) (relating 
     to expiration) is amended by 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 ``1995'' and inserting ``2001''.
       (B) Section 403(c)(1) of such Act (29 U.S.C. 1103(c)(1)) is 
     amended by striking ``1995'' and inserting ``2001''.
       (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 ``1995'' and inserting ``2001''.
       (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 
     2 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. 1508. 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

[[Page 19630]]

     other dispositions occurring on or after the date of the 
     enactment of this Act.

     SEC. 1509. 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. 1510. CHARITABLE SPLIT-DOLLAR LIFE INSURANCE, ANNUITY, 
                   AND ENDOWMENT CONTRACTS.

       (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 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. 1511. RESTRICTION ON USE OF REAL ESTATE INVESTMENT 
                   TRUSTS TO AVOID ESTIMATED TAX PAYMENT 
                   REQUIREMENTS.

       (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 
     September 15, 1999.

     SEC. 1512. MODIFICATION OF ANTI-ABUSE RULES RELATED TO 
                   ASSUMPTION OF LIABILITY.

       (a) In General.--Section 357(b)(1) (relating to tax 
     avoidance purpose) is amended--
       (1) by striking ``the principal purpose'' and inserting ``a 
     principal purpose'', and
       (2) by striking ``on the exchange'' in subparagraph (A).
       (b) Effective Date.--The amendments made by this section 
     shall apply to assumptions of liability after July 14, 1999.

[[Page 19631]]



     SEC. 1513. ALLOCATION OF BASIS ON 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. 1514. DISTRIBUTIONS 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
       ``(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 
     (by reason of being distributed from a partnership) 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. 1515. PROHIBITED ALLOCATIONS OF S CORPORATION STOCK HELD 
                   BY AN 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 Allocation 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 individual.
       ``(2) Failure to meet requirements.--If a plan fails to 
     meet the requirements of paragraph (1)--
       ``(A) the plan shall be treated as having distributed to 
     any disqualified individual the amount allocated to the 
     account of such individual in violation of paragraph (1) at 
     the time of such allocation,
       ``(B) the provisions of section 4979A shall apply, and
       ``(C) the statutory period for the assessment of any tax 
     imposed by section 4979A shall not expire before the date 
     which is 3 years from the later of--
       ``(i) the allocation of employer securities resulting in 
     the failure under paragraph (1) giving rise to such tax, or
       ``(ii) the date on which the Secretary is notified of such 
     failure.
       ``(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 individuals own at least 50 percent of 
     the number of outstanding shares of stock in such 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), disqualified 
     individuals shall be treated as owning deemed-owned shares.
       ``(4) Disqualified individual.--For purposes of this 
     subsection--
       ``(A) In general.--The term `disqualified individual' means 
     any individual who is a participant or beneficiary under the 
     employee stock ownership plan if--
       ``(i) the aggregate number of deemed-owned shares of such 
     individual and the members of the individual's family is at 
     least 20 percent of the number of outstanding shares of stock 
     in the S corporation constituting employer securities of such 
     plan, or
       ``(ii) if such individual is not described in clause (i), 
     the number of deemed-owned shares of such individual is at 
     least 10 percent of the number of outstanding shares of stock 
     in such corporation.
       ``(B) Treatment of family members.--In the case of a 
     disqualified individual described in subparagraph (A)(i), any 
     member of the individual's family with deemed-owned shares 
     shall be treated as a disqualified individual if not 
     otherwise a disqualified individual under subparagraph (A).

[[Page 19632]]

       ``(C) Deemed-owned shares.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `deemed-owned shares' means, 
     with respect to any participant or beneficiary under the 
     employee stock ownership plan--

       ``(I) the stock in the S corporation constituting employer 
     securities of such plan which is allocated to such 
     participant or beneficiary under the plan, and
       ``(II) such participant's or beneficiary's share of the 
     stock in such corporation which is held by such trust but 
     which is not allocated under the plan to employees.

       ``(ii) Individual's share of unallocated stock.--For 
     purposes of clause (i)(II), an individual's share of 
     unallocated S corporation stock held by the trust is the 
     amount of the unallocated stock which would be allocated to 
     such individual if the unallocated stock were allocated to 
     individuals 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 person described in clause (ii) or 
     (iii).
       ``(5) 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).
       ``(6) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection, including regulations providing for the 
     treatment of any stock option, restricted stock, stock 
     appreciation right, phantom stock unit, performance unit, or 
     similar instrument granted by an S corporation as stock or 
     not stock.''.
       (b) Excise Tax.--
       (1) In general.--Section 4979A(b) (defining prohibited 
     allocation) is amended by striking ``and'' at the end of 
     paragraph (1), by striking the period at the end of paragraph 
     (2) and inserting ``, and'', and by adding at the end the 
     following new paragraph:
       ``(3) any allocation of employer securities which violates 
     the provisions of section 409(p).''.
       (2) Liability.--Section 4979A(c) (defining liability for 
     tax) is amended by adding at the end the following new 
     sentence: ``In the case of a prohibited allocation described 
     in subsection (b)(3), such tax shall be paid by the S 
     corporation the stock in which was allocated in violation of 
     section 409(p).''.
       (c) 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.

                 TITLE XVI--COMPLIANCE WITH BUDGET ACT

     SEC. 1601. COMPLIANCE WITH BUDGET ACT.

       (a) In General.--Except as provided in subsection (b), all 
     provisions of, and amendments made by, this Act which are in 
     effect on September 30, 2009, shall cease to apply as of the 
     close of September 30, 2009.
       (b) Sunset for Certain Provisions.--The amendments made by 
     sections 101, 111, 121, 201, 202, 211, 214, and 1221 of this 
     Act shall not apply to any taxable year beginning after 
     December 31, 2008.
       And the Senate agrees to the same.
     For consideration of the House bill, and the Senate 
     amendment, and modfications committed to conference:
     Wm. Archer.
     Dick Armey.
     Philip M. Crane.
     Wm. Thomas.
     As additional conferees for consideration of sections 313, 
     315-16, 318, 325, 335, 338, 341-42, 344-45, 351, 362-63, 365, 
     369, 371, 381, 1261, 1305, and 1406 of the Senate amendment, 
     and modfications committed to conference:
     Bill Goodling.
     John Boehner.
                                Managers on the Part of the House.

     Wm. V. Roth, Jr.
     Trent Lott.
                               Managers on the Part of the Senate.

       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

       The managers on the part of the House and the Senate at the 
     conference on the disagreeing votes of the two Houses on the 
     amendment of the Senate to the bill (H.R. 2488) to provide 
     for reconciliation pursuant to sections 105 and 211 of the 
     concurrent resolution on the budget for fiscal year 2000, 
     submit the following joint statement to the House and the 
     Senate in explanation of the effect of the action agreed upon 
     by the managers and recommended in the accompanying 
     conference report:
       The Senate amendment struck all of the House bill after the 
     enacting clause and inserted a substitute text.
       The House recedes from its disagreement to the amendment of 
     the Senate with an amendment that is a substitute for the 
     House bill and the Senate amendment. The differences between 
     the House bill, the Senate amendment, and the substitute 
     agreed to in conference are noted below, except for clerical 
     corrections, conforming changes made necessary by agreements 
     reached by the conferees, and minor drafting and clerical 
     changes.

                  I. BROAD-BASED AND FAMILY TAX RELIEF

  A. Reduction in Individual Income Tax Rates and Expansion of Lowest 
Individual Regular Income Tax Rate Bracket (sec. 101 of the House bill, 
  secs. 101 and 102 of the Senate amendment and secs. 1 and 55 of the 
                                 Code)

                              Present Law

     Income tax rate structure
       To determine regular income tax liability, a taxpayer 
     generally must apply the tax rate schedules (or the tax 
     tables) to his or her taxable income. The rate schedules are 
     divided into several ranges of income, known as income 
     brackets, and the marginal tax rate increases as a taxpayer's 
     income increases. The income bracket amounts are indexed for 
     inflation. Separate rate schedules apply based on an 
     individual's filing status. In order to limit multiple uses 
     of a graduated rate schedule within a family, the net 
     unearned income of a child under age 14 is taxed as if it 
     were the parent's income.
     Individual alternative minimum tax (``AMT'') rate structure
       Present law imposes the individual AMT on an individual to 
     the extent the taxpayer's minimum tax liability exceeds his 
     or her regular tax liability. The AMT is imposed on 
     individuals at rates of (1) 26 percent on the first $175,000 
     of alternative minimum taxable income (``AMTI'') in excess of 
     a phased-out exemption amount and (2) 28 percent on the 
     amount in excess of $175,000. The lower capital gains rates 
     applicable to the regular tax also apply for purposes of the 
     AMT.

                               House Bill

     Individual regular tax rates
       The House bill reduces the regular income tax rates by 10 
     percent over a 10-year period (2000-2009). Specifically, each 
     rate is reduced by 1.0 percent for taxable years beginning in 
     2001-2003, 2.5 percent for taxable years beginning in 2004, 5 
     percent for taxable years beginning in 2005-2007, 7.5 percent 
     for taxable years beginning in 2008, and 10 percent for 
     taxable years beginning in 2009 and thereafter. The tax rates 
     will be rounded up in 2001, rounded down in 2002 and 2003 and 
     rounded up in 2004 and thereafter, annually to the nearest 
     one-tenth of a percent. This rate reduction does not apply to 
     the capital gains tax rates. However, a separate provision of 
     the House bill would reduce individual capital gains rates.
     Individual AMT
       The House bill reduces the individual AMT tax rates by a 
     total of 10 percent over a 10- year period (2000-2009). 
     Specifically, the individual AMT tax rates are reduced by 1.0 
     percent for taxable years beginning in 2001-2003, 2.5 percent 
     for taxable years beginning in 2004, 5 percent for taxable 
     years beginning in 2005-2007, 7.5 percent for taxable years 
     beginning in 2008, and 10 percent for taxable years beginning 
     in 2009 and thereafter. The rates will be rounded annually to 
     the nearest one-tenth of a percent, like the regular income 
     tax rates.
     Effective date
       The House bill is effective for taxable years beginning 
     after December 31, 2000.

                            Senate Amendment

     Individual regular income tax rates
       The Senate amendment reduces the lowest individual regular 
     income tax rate from 15 percent to 14 percent. This rate 
     reduction does not apply to the capital gains tax rates.
       The Senate amendment also phases in an increase in the size 
     of the 14-percent rate bracket. Specifically, the amendment 
     increases the size of the otherwise applicable 14-percent 
     rate bracket by $2,000 ($4,000 for a married couple filing a 
     joint return) in 2006, and by $2,500 ($5,000 for a married 
     couple filing a joint return) in 2007 and thereafter. The 
     $2,500/$5,000 amounts in 2007 and thereafter are the total 
     increase and are not in addition to the $2,000/$4,000 amounts 
     in 2006. These amounts are indexed for inflation beginning in 
     2008.
     Individual AMT
       The Senate amendment does not contain a provision relating 
     to AMT tax rates. A separate provision would make permanent 
     the present-law provision to allow the nonrefundable personal 
     credits fully against the AMT and to allow personal 
     exemptions against the AMT.
     Effective date
       The Senate amendment provision reducing the tax rate from 
     15 percent to 14 percent is

[[Page 19633]]

     effective for taxable years beginning after December 31, 
     2000. The provision increasing the size of the 14-percent 
     rate bracket is effective for taxable years beginning after 
     December 31, 2005.

                          Conference Agreement

     Individual regular income tax rates
       The conference agreement reduces the individual regular 
     income tax rates as follows: (1) from 15 percent to 14 
     percent; (2) from 28 percent to 27 percent; (3) from 31 
     percent to 30 percent; (4) from 36 percent to 35 percent; and 
     (5) from 39.6 percent to 38.6 percent. These rate reductions 
     do not apply to the capital gains tax rates. The reduction of 
     the 15-percent rate to a 14-percent rate is phased-in over 
     three years; (1) 14.5 percent in 2001 and 2002; and (2) 14 
     percent in 2003 and thereafter. Therefore, the 14 percent 
     rate applies to taxable years beginning after December 31, 
     2002. The reductions in the other rates (both regular and 
     AMT) are effective for taxable years beginning after December 
     31, 2004.
       The conference agreement also widens the lowest (currently 
     15 percent) regular income tax rate brackets for both singles 
     and head of households by $3,000 for taxable years beginning 
     after December 31, 2005. For taxable years beginning after 
     December 31, 2006, the $3,000 amounts are indexed for 
     inflation.
     Individual AMT
       The conference agreement reduces the AMT rates as follows; 
     (1) from 26 percent to 25 percent, and (2) from 28 percent 
     rate to 27 percent. The lower capital gains rates applicable 
     to the regular tax also apply for purposes of the AMT.
     Effective date
       The reduction of the 15-percent rate to a 14-percent rate 
     is effective for taxable years beginning after December 31, 
     2000. The reductions in the other rates (both regular and 
     AMT) are effective for taxable years beginning after December 
     31, 2004. The widening of the lowest applicable rate bracket 
     for single and head of household returns is effective for 
     taxable years beginning after December 31, 2005.

 B. Marriage Penalty Relief Provisions Relating to the Rate Structure 
 and Standard Deduction Amounts (sec. 111 of the House bill, secs. 201 
  and 209 of the Senate amendment and secs. 63 and 6013A of the Code)

                              Present Law

     Marriage penalty
       A married couple generally is treated as one tax unit that 
     must pay tax on the unit's total taxable income. Although 
     married couples may elect to file separate returns, the rate 
     schedules and provisions are structured so that filing 
     separate returns usually results in a higher tax than filing 
     a joint return. Other rate schedules apply to single persons 
     and to single heads of households.
       A ``marriage penalty'' exists when the sum of the tax 
     liabilities of two unmarried individuals filing their own tax 
     returns (either single or head of household returns) is less 
     than their tax liability under a joint return (if the two 
     individuals were to marry). A ``marriage bonus'' exists when 
     the sum of the tax liabilities of the individuals is greater 
     than their combined tax liability under a joint return.
       While the size of any marriage penalty or bonus under 
     present law depends upon the individuals' incomes, number of 
     dependents, and itemized deductions, as a general rule 
     married couples whose incomes are split more evenly than 70-
     30 suffer a marriage penalty. Married couples whose incomes 
     are largely attributable to one spouse generally receive a 
     marriage bonus.
       Under present law, the size of the standard deduction and 
     the tax bracket breakpoints follow certain customary ratios 
     across filing statuses. The standard deduction and tax 
     bracket breakpoints for single filers are roughly 60 percent 
     of those for joint filers.\1\ With these ratios, unmarried 
     individuals have standard deductions whose sum exceeds the 
     standard deduction they would receive as a married couple 
     filing a joint return. Thus, their taxable income as joint 
     filers may exceed the sum of their taxable incomes as 
     unmarried individuals.
---------------------------------------------------------------------------
     \1\ This is not true for the 39.6-percent rate. The beginning 
     point of this rate bracket is the same for all taxpayers 
     regardless of filing status.
---------------------------------------------------------------------------
     Basic standard deduction
       Taxpayers who do not itemize deductions may choose the 
     basic standard deduction (and additional standard deductions, 
     if applicable), which is subtracted (along with the deduction 
     for personal exemptions) from adjusted gross income (``AGI'') 
     in arriving at taxable income. The size of the basic standard 
     deduction varies according to filing status and is indexed 
     for inflation. For 1999, the size of the basic standard 
     deduction is: (1) $7,200 for married couples filing a joint 
     return; (2) $6,250 for head of household returns; (3) $4,300 
     for single returns; and (4) $3,600 for married couples filing 
     separate returns. Therefore in 1999, the basic standard 
     deduction for joint returns is 1.674 times the basic standard 
     deduction for single returns.

                               House Bill

     Basic standard deduction
       The House bill increases the basic standard deduction for a 
     married couple filing a joint return to twice the basic 
     standard deduction for an unmarried individual in each 
     taxable year. This increase is phased-in over three years 
     beginning in 2001 by increasing the standard deduction for a 
     married couple filing a joint return to 1.778 times the 
     standard deduction for an unmarried individual in 2001 and to 
     1.889 times such amount in 2002. Therefore, the House bill 
     provision is fully effective, (i.e., the basic standard 
     deduction for a married couple will be twice the basic 
     standard deduction for a unmarried individual) for taxable 
     years beginning after December 31, 2002. Also, the basic 
     standard deduction for a married taxpayer filing separately 
     will be increased so that it will continue to equal one-half 
     of the basic standard deduction for a married couple filing 
     jointly. The basic standard deduction for a head of household 
     will be unchanged.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 2000.
     Separate calculations
       No provision.

                            Senate Amendment

     Basic standard deduction
       The Senate amendment increases the basic standard deduction 
     for a married couple filing a joint return to twice the basic 
     standard deduction for an unmarried individual in each 
     taxable year. This increase is phased-in over eight years 
     beginning in 2001 by increasing the standard deduction for a 
     married couple filing a joint return to: (1) 1.671 times the 
     standard deduction for an unmarried individual in 2001; (2) 
     1.700 times the standard deduction for an unmarried 
     individual in 2002; (3) 1.727 times the standard deduction 
     for an unmarried individual in 2003; (4) 1.837 times the 
     standard deduction for an unmarried individual in 2004; (5) 
     1.951 times the standard deduction for an unmarried 
     individual in 2005; (6) 1.953 times the standard deduction 
     for an unmarried individual in 2006; and (7) 1.973 times the 
     standard deduction for an unmarried taxpayer in 2007. 
     Therefore, the Senate amendment provision is fully effective, 
     (i.e., the basic standard deduction for a married couple will 
     be twice the basic standard deduction for a unmarried 
     individual) for taxable years beginning after December 31, 
     2007. Also, the basic standard deduction for a married 
     taxpayer filing separately will be increased so that it will 
     continue to equal one-half of the basic standard deduction 
     for a married couple filing jointly. The basic standard 
     deduction for a head of household will be unchanged.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2000.
     Separate calculations
       Under the Senate amendment, married taxpayers have the 
     option to calculate separate taxable income for each spouse 
     and to be taxed as two single individuals on the same return. 
     The tax due is calculated by applying the tax rates for 
     single individuals to the separate taxable incomes. Under the 
     Senate amendment, both spouses must elect to either use a 
     standard deduction or to itemize their deductions. Thus, one 
     spouse is not permitted to itemize deductions while the other 
     spouse claims a standard deduction. If a married couple 
     elects to compute taxable income separately and claim the 
     standard deduction, the applicable standard deduction for 
     each spouse is the standard deduction for single individuals. 
     Under the Senate amendment, once tax liability is calculated 
     on a separate basis, all tax credits and payments of tax are 
     applied as if the couple is filing a joint return.
       Income from the performance of services (e.g., wages, 
     salaries, and pensions) are treated as the income of the 
     spouse who performed the services. Income from property is 
     divided between the spouses in accordance with their 
     respective ownership rights in such property. Jointly owned 
     assets are divided evenly.
       Deductions generally are allocated to the spouse treated as 
     having the income to which the deduction relates. Special 
     rules apply for certain deductions. The deduction for 
     contributions to an individual retirement arrangement are 
     allocated to the spouse for whom the contribution is made. 
     The deduction for alimony is allocated to the spouse who has 
     the liability to pay the alimony. The deduction for 
     contributions to medical savings accounts is allocated to the 
     spouse with respect to whose employment or self employment 
     the account relates.
       Each spouse is entitled to claim one personal exemption. 
     Exemptions for dependents are allocated based on each 
     spouse's relative income.
       All credits are determined as if the spouses had filed a 
     joint return. The credit amounts are then applied against the 
     combined tax liability of the couple as calculated under this 
     provision.
       For purposes of determining the alternative minimum tax 
     imposed by section 55, the tentative minimum tax shall be the 
     tax which would be computed as if the spouses had filed a 
     joint return, and the regular tax shall be the tax liability 
     computed under section 6013A.
       The Secretary of the Treasury is directed to prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the provision.

[[Page 19634]]

       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2004.

                          Conference Agreement

     Basic standard deduction
       The conference agreement increases the basic standard 
     deduction for a married couple filing a joint return to twice 
     the basic standard deduction for an unmarried individual. 
     This increase is phased-in over five years beginning in 2001 
     by increasing the standard deduction for a married couple 
     filing a joint return to: (1) 1.728 times the standard 
     deduction for an unmarried individual in 2001; (2) 1.801 
     times the standard deduction for an unmarried individual in 
     2002; (3) 1.870 times the standard deduction for an unmarried 
     individual in 2003; (4) 1.935 times the standard deduction 
     for an unmarried individual in 2004; and 2.000 times the 
     standard deduction for an unmarried individual in 2005. 
     Therefore, the provision is fully effective, (i.e., the basic 
     standard deduction for a married couple will be twice the 
     basic standard deduction for a unmarried individual) for 
     taxable years beginning after December 31, 2004. Also, the 
     basic standard deduction for a married taxpayer filing 
     separately will be increased so that it will continue to 
     equal one-half of the basic standard deduction for a married 
     couple filing jointly. The basic standard deduction for a 
     head of household will be unchanged.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2000.
     Width of 15-percent rate bracket for a married couple filing 
         a joint return
       The conference agreement increases the size of the lowest 
     (currently, 15 percent) regular income tax rate bracket for a 
     married couple filing a joint return to twice the size of the 
     corresponding rate bracket for an unmarried individual. This 
     increase is phased-in over four years beginning in 2005 by 
     increasing the lowest regular income tax rate bracket for a 
     married couple filing a joint return to: (1) 1.737 times the 
     lowest regular income tax rate bracket for an unmarried 
     individual in 2005; (2) 1.761 times the lowest regular income 
     tax rate bracket for an unmarried individual in 2006; (3) 
     1.881 times the lowest regular income tax rate bracket for an 
     unmarried individual in 2007; and (4) 2.000 times the lowest 
     regular income tax rate bracket for an unmarried individual 
     in 2008. Therefore, this provision is fully effective, (i.e., 
     the size of the lowest regular income tax rate bracket for a 
     married couple filing a joint return will be twice the size 
     of the lowest regular income tax rate bracket for an 
     unmarried individual) for taxable years beginning after 
     December 31, 2007.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2004.
     Separate calculations
       The conference agreement does not include the Senate 
     amendment provision.

 C. Marriage Penalty Relief Relating to the Earned Income Credit (sec. 
          202 of the Senate amendment and sec. 32 of the Code)

                              Present Law

       Certain eligible low-income workers are entitled to claim a 
     refundable earned income credit (``EIC'') on their income tax 
     return. A refundable credit is a credit that not only reduces 
     an individual's tax liability but allows refunds to the 
     individual in excess of income tax liability. The amount of 
     the credit an eligible individual may claim depends upon 
     whether the individual has one, more than one, or no 
     qualifying children, and is determined by multiplying the 
     credit rate by the individual's earned income up to an earned 
     income amount. In the case of a married individual who files 
     a joint return with his or her spouse, the income for 
     purposes of these tests is the combined income of the couple. 
     The maximum amount of the credit is the product of the credit 
     rate and the earned income amount. The credit is phased out 
     above certain income levels. For individuals with earned 
     income (or modified AGI, if greater) in excess of the 
     beginning of the phase-out range, the maximum credit amount 
     is reduced by the phase-out rate multiplied by the earned 
     income (or modified AGI, if greater) in excess of the 
     beginning of the phase-out range. For individuals with earned 
     income (or modified AGI, if greater) in excess of the end of 
     the phase-out range, no credit is allowed.
       The parameters of the credit for 1999 are provided in the 
     following table.

                 EARNED INCOME CREDIT PARAMETERS (1999)
------------------------------------------------------------------------
                                   Two or more      One           No
                                    qualifying   qualifying   qualifying
                                     children      child       children
------------------------------------------------------------------------
Credit rate (percent)............        40.00        34.00         7.65
Earned income amount.............       $9,540       $6,800       $4,530
Maximum credit...................       $3,816       $2,312         $347
Phase-out begins.................      $12,460      $12,460       $5,670
Phase-out rate (percent).........        21.06        15.98         7.65
Phase-out ends...................      $30,580      $26,928      $10,200
------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment increases the beginning point of the 
     phase out of the EIC for married couples filing a joint 
     return by $2,000. Because the rate of the phase out is not 
     changed by the provision, the end-point of the phase-out 
     ranges is also increased by $2,000. The effect of the 
     increase in the beginning point of the phase-out is to 
     increase the EIC for taxpayers in the phase-out range by an 
     amount up to $2,000 times the phase-out rate. For example, 
     for couples with two or more qualifying children, the maximum 
     increase in the EIC as a result of the proposal would be 
     $2,000 times 21.06 percent, or $421.20. The provision also 
     expands the universe of taxpayers eligible for the EIC. 
     Specifically, the $2,000 increase in the end of the phase-out 
     range makes taxpayers with earnings up to $2,000 beyond the 
     present-law phase-out range newly eligible for the credit. 
     Beginning in 2006, the $2,000 amount is indexed for 
     inflation.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2004.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     a modification to the effective date. The provision is 
     effective for taxable years beginning after December 31, 
     2005.

D. Individual Alternative Minimum Tax Provisions (sec. 121 of the House 
 bill, secs. 206 and 1134 of the Senate amendment, and secs. 26 and 55 
                              of the Code)

                              Present Law

     In general
       Present law imposes a minimum tax (``AMT'') on an 
     individual to the extent the taxpayer's minimum tax liability 
     exceeds his or her regular tax liability. The AMT is imposed 
     on individuals at rates of (1) 26 percent on the first 
     $175,000 of alternative minimum taxable income (``AMTI'') in 
     excess of a phased-out exemption amount and (2) 28 percent on 
     the remaining AMTI. The exemptions amounts are $45,000 in the 
     case of married individuals filing a joint return and 
     surviving spouses; $33,750 in the case of other unmarried 
     individuals; and $22,500 in the case of married individuals 
     filing a separate return. These exemption amounts are phased-
     out by an amount equal to 25 percent of the amount that the 
     individual's AMTI exceeds a threshold amount. These threshold 
     amounts are $150,000 in the case of married individuals 
     filing a joint return and surviving spouses; $112,500 in the 
     case of other unmarried individuals; and $75,000 in the case 
     of married individuals filing a separate return, estates, and 
     trusts. The exemption amounts, the threshold phase-out 
     amounts, and the $175,000 break-point amount are not indexed 
     for inflation. The lower capital gains rates applicable to 
     the regular tax apply for purposes of the AMT.
       AMTI is the taxpayer's taxable income increased by certain 
     preference items and adjusted by determining the tax 
     treatment of certain items in a manner that negates the 
     deferral of income resulting from the regular tax treatment 
     of those items.
     Preference items in computing AMTI
       The minimum tax preference items are:
       (1) The excess of the deduction for percentage depletion 
     over the adjusted basis of the property at the end of the 
     taxable year. This preference does not apply to percentage 
     depletion allowed with respect to oil and gas properties.
       (2) The amount by which excess intangible drilling costs 
     arising in the taxable year exceed 65 percent of the net 
     income from oil, gas, and geothermal properties. This 
     preference does not apply to an independent producer to the 
     extent the preference would not reduce the producer's AMTI by 
     more than 40 percent.
       (3) Tax-exempt interest income on private activity bonds 
     (other than qualified 501(c)(3) bonds) issued after August 7, 
     1986.
       (4) Accelerated depreciation or amortization on certain 
     property placed in service before January 1, 1987.
       (5) Forty-two percent of the amount excluded from income 
     under section 1202 (relating to gains on the sale of certain 
     small business stock).
       In addition, losses from any tax shelter, farm, or passive 
     activities are denied.\2\
---------------------------------------------------------------------------
     \2\ Given the passage of section 469 by the Tax Reform Act of 
     1986 (relating to the deductibility of losses from passive 
     activities), these provisions are largely ``deadwood.''
---------------------------------------------------------------------------
     Adjustments in computing AMTI
       The adjustments that individuals must make in computing 
     AMTI are:
       (1) Depreciation on property placed in service after 1986 
     and before January 1, 1999, must be computed by using the 
     generally longer class lives prescribed by the alternative 
     depreciation system of section 168(g) and either (a) the 
     straight-line method in the case of property subject to the 
     straight-line method under the regular tax or (b) the 150-
     percent declining balance method in the case of other 
     property. Depreciation on property placed in service after 
     December 31, 1998, is computed by using the regular tax 
     recovery periods and the AMT methods described in the 
     previous sentence.
       (2) Mining exploration and development costs must be 
     capitalized and amortized over a 10-year period.
       (3) Taxable income from a long-term contract (other than a 
     home construction contract) must be computed using the 
     percentage of completion method of accounting.

[[Page 19635]]

       (4) The amortization deduction allowed for pollution 
     control facilities placed in service before January 1, 1999 
     (generally determined using 60-month amortization for a 
     portion of the cost of the facility under the regular tax), 
     must be calculated under the alternative depreciation system 
     (generally, using longer class lives and the straight-line 
     method). The amortization deduction allowed for pollution 
     control facilities placed in service after December 31, 1998, 
     is calculated using the regular tax recovery periods and the 
     straight-line method.
       (5) Miscellaneous itemized deductions are not allowed.
       (6) Itemized deductions for State, local, and foreign real 
     property taxes, State and local personal property taxes, and 
     State, local, and foreign income, war profits, and excess 
     profits taxes are not allowed.
       (7) Medical expenses are allowed only to the extent they 
     exceed 10 percent of the taxpayer's adjusted gross income 
     (AGI).
       (8) Standard deductions and personal exemptions are not 
     allowed.
       (9) The amount allowable as a deduction for circulation 
     expenditures must be capitalized and amortized over a 3-year 
     period.
       (10) The amount allowable as a deduction for research and 
     experimental expenditures must be capitalized and amortized 
     over a 10-year period. \3\
---------------------------------------------------------------------------
     \3\ No adjustment is required if the taxpayer materially 
     participates in the activity that relates to the research and 
     experimental expenditures.
---------------------------------------------------------------------------
       (11) The regular tax rules relating to incentive stock 
     options do not apply.
     Other rules
       The combination of the taxpayer's net operating loss 
     carryover and foreign tax credits cannot reduce the 
     taxpayer's AMT liability by more than 90 percent of the 
     amount determined without these items.
       The various nonrefundable credits allowed under the regular 
     tax generally are allowed only to the extent that the 
     individual's regular tax exceeds the tentative minimum tax. 
     The earned income credit and the child credit of those 
     taxpayers with three or more qualified children are 
     refundable credits and may offset the taxpayer's tentative 
     minimum tax. However, a taxpayer must reduce these refundable 
     credits by the amount the taxpayer's tentative minimum tax 
     exceeds his or her regular tax liability. \4\
---------------------------------------------------------------------------
     \4\ For 1998 only, the nonrefundable personal credits were 
     not limited by the tentative minimum tax, and the refundable 
     child credit was not reduced by the minimum tax.
---------------------------------------------------------------------------
       If an individual is subject to AMT in any year, the amount 
     of tax exceeding the taxpayer's regular tax liability is 
     allowed as a credit (the ``AMT credit'') in any subsequent 
     taxable year to the extent the taxpayer's regular tax 
     liability exceeds his or her tentative minimum tax in such 
     subsequent year. For individuals, the AMT credit is allowed 
     only to the extent the taxpayer's AMT liability is a result 
     of adjustments that are timing in nature. Most individual AMT 
     adjustments relate to itemized deductions and personal 
     exemptions and are not timing in nature.

                               House Bill

       The House bill allows an individual to offset the entire 
     regular tax liability (without regard to the minimum tax) by 
     the personal nonrefundable credits, and also repeals the 
     provision reducing the refundable child credit by the AMT.
       The House bill phases out the individual AMT. For taxable 
     years beginning in 2005, only 80 percent of the full AMT 
     liability will be imposed. That percentage will be reduced to 
     70 percent in 2006, 60 percent in 2007, 50 percent in 2008, 
     and the AMT will be fully repealed for taxable years 
     beginning after 2008.
       Under the House bill, an individual will be allowed to use 
     the AMT credit to offset 90 percent of its regular tax 
     liability (determined after the application of the other 
     nonrefundable credits).
       Effective date.--The provisions relating to the personal 
     credits are effective for taxable years beginning after 
     December 31, 1998. The phase-out of the AMT will be effective 
     for taxable years beginning after December 31, 2004. The 
     repeal of the AMT and the provision relating to the use of 
     AMT credits apply to taxable years beginning after December 
     31, 2008.

                            Senate Amendment

       The Senate amendment follows the House bill in the 
     treatment of personal credits under the AMT.
       The Senate amendment allows the personal exemption in 
     computing AMT (except for $300 per exemption).
       Effective date.--The provisions relating to the personal 
     credits are effective for taxable years beginning after 
     December 31, 1998. The provision relating to the personal 
     exemption applies to taxable years beginning after December 
     31, 2005.

                          Conference Agreement

       The conference agreement follows the House bill, except 
     that the AMT is repealed for taxable years beginning after 
     December 31, 2007.

 E. Expand the Exclusion from Income for Certain Foster Care Payments 
(sec. 1301 of the House bill sec. 203 of the Senate amendment and sec. 
                            131 of the Code)

                              Present Law

       Generally, a foster care provider may exclude qualified 
     foster care payments, (including difficulty of care payments) 
     from gross income if certain requirements are satisfied.\5\ 
     First, such payments must be paid to the foster care 
     providers by either (1) a State or political subdivision of a 
     State; or (2) a tax-exempt placement agency. Second, the 
     payments, including difficulty of care payments, must be paid 
     to the foster care provider for the care of a ``qualified 
     foster individual'' in the foster care provider's home. A 
     qualified foster individual is an individual living in a 
     foster care family home in which the individual was placed 
     by: (1) an agency of the State or a political subdivision of 
     a State; or (2) a tax-exempt placement agency if such 
     individual was under the age of 19 at the time of placement. 
     Third, the exclusion of foster care payments generally 
     applies to qualified foster care payments for five or fewer 
     foster care individuals over the age of 19 in a foster home. 
     In the case of difficulty of care payments, the exclusion 
     applies to payments for ten or fewer foster care individuals 
     under the age of 19 in a foster home and to payments for five 
     or fewer foster care individuals at least age 19 in a foster 
     home.
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     \5\ A difficulty of care payment is a payment designated by 
     the person making such payment as compensation for providing 
     the additional care of a qualified foster care individual 
     which is required by reason of a physical, mental, or 
     emotional handicap of such individual and with respect to 
     which the State has determined that there is a need for 
     additional compensation.
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                               House Bill

       The House bill makes two principal modifications to the 
     exclusion for qualified foster care payments. First, the 
     House bill expands the list of persons eligible to make 
     qualified foster care payments. Therefore, the exclusion 
     applies to qualified payments made pursuant to a foster care 
     program of a State or local government which are paid by 
     either: (1) a State or political subdivision of a State; or 
     (2) a qualified foster care placement agency, whether taxable 
     or tax-exempt. Second, the bill expands the list of persons 
     eligible to place foster care individuals. Specifically, the 
     bill allows placements by either: (1) a State or a political 
     subdivision of a State; or (2) a qualified foster care 
     placement agency. For these purposes, a qualified foster care 
     placement agency is defined as any placement agency which is 
     licensed or certified by: (1) a State or political 
     subdivision of a State; or (2) an entity designated by a 
     State or political subdivision thereof, for the foster care 
     program of such State or political subdivision to make 
     payments to providers of foster care.
       The House bill allows State and local governments to employ 
     both tax-exempt and taxable entities to administer their 
     foster care programs more efficiently; however, it does not 
     extend the exclusion to payments outside such foster care 
     programs (e.g., payments to a foster care provider from 
     friends or relatives of foster care individual in its care).
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 1999.

                            Senate Amendment

       Same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

   F. Increase and Expand the Dependent Care Credit (sec. 204 of the 
               Senate amendment and sec. 21 of the Code)

                              Present Law

     In general
       A taxpayer who maintains a household which includes one or 
     more qualifying individuals may claim a nonrefundable credit 
     against income tax liability for up to 30 percent of a 
     limited amount of employment-related dependent care expenses. 
     Eligible employment-related expenses are limited to $2,400 if 
     there is one qualifying individual or $4,800 if there are two 
     or more qualifying individuals. Generally, a qualifying 
     individual is a dependent under the age of 13 or a physically 
     or mentally incapacitated dependent or spouse. No credit is 
     allowed for any qualifying individual unless a valid taxpayer 
     identification number (``TIN'') has been provided for that 
     individual. A taxpayer is treated as maintaining a household 
     for a period if the taxpayer (or the taxpayer's spouse, if 
     married) provides more than one-half the cost of maintaining 
     the household for that period. In the case of married 
     taxpayers, the credit is not available unless they file a 
     joint return.
       Employment-related dependent care expenses are expenses for 
     the care of a qualifying individual incurred to enable the 
     taxpayer to be gainfully employed, other than expenses 
     incurred for an overnight camp. For example, amounts paid for 
     the services of a housekeeper generally qualify if such 
     services are performed at least partly for the benefit of a 
     qualifying individual; amounts paid for a chauffeur or 
     gardener do not qualify.
       Expenses that may be taken into account in computing the 
     credit generally may not exceed an individual's earned income 
     or, in the case of married taxpayers, the earned income of 
     the spouse with the lesser earnings.

[[Page 19636]]

     Thus, if one spouse has no earned income, generally no credit 
     is allowed.
       The 30-percent credit rate is reduced, but not below 20 
     percent, by 1 percentage point for each $2,000 (or fraction 
     thereof) of adjusted gross income (``AGI'') above $10,000.
     Interaction with employer-provided dependent care assistance
       For purposes of the dependent care credit, the maximum 
     amounts of employment-related expenses ($2,400/$4,800) are 
     reduced to the extent that the taxpayer has received 
     employer-provided dependent care assistance that is 
     excludable from gross income (sec. 129). The exclusion for 
     dependent care assistance is limited to $5,000 per year and 
     does not vary with the number of children.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment makes three changes to the dependent 
     care tax credit. First, the maximum credit percentage is 
     increased from 30 percent to 40 percent for taxpayers with 
     AGI of $30,000 or less. The 40-percent credit rate is phased-
     down by one percentage point for each $1,000 of AGI, or 
     fraction thereof, between $30,001 and $49,000. The credit 
     percentage is 20 percent for taxpayers with AGI of $49,001 or 
     greater. Second, beginning in 2001, the maximum amount of 
     eligible employment-related expenses ($2,400/$4,800) is 
     indexed for inflation. Finally, the Senate amendment extends 
     up to $960 of additional credit ($1,920 for two or more 
     qualifying dependents) to taxpayers with qualifying 
     dependents under the age of one. This additional credit, 
     computed as the applicable credit rate times $200 of deemed 
     expenses per month ($400 of deemed expenses per month for two 
     or more qualifying dependents), is available regardless of 
     whether the taxpayer actually incurred any out-of-pocket 
     child care expenses.
       The present-law reduction of the dependent care credit for 
     employer-provided dependent care assistance is not changed.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     two modifications to the effective date. First, the maximum 
     credit percentage will be 35 percent for taxable years 
     beginning in 2001 through 2005, and 40 percent for taxable 
     years beginning after 2005. Second, the extension of the 
     credit to taxpayers with qualifying dependents under the age 
     of one will be effective for taxable years beginning after 
     2005.
       The present-law reduction of the dependent care credit for 
     employer-provided dependent care assistance is not changed.

G. Tax Credit for Employer-Provided Child Care Facilities (sec. 205 of 
           the Senate amendment and new sec. 45D of the Code)

                              Present Law

       Generally, present law does not provide a tax credit to 
     employers for supporting child care or child care resource 
     and referral services.\6\ An employer, however, may be able 
     to claim such expenses as deductions for ordinary and 
     necessary business expenses. Alternatively, the employer may 
     be required to capitalize the expenses and claim depreciation 
     deductions over time.
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     \6\ An employer may claim the welfare-to-work tax credit on 
     the eligible wages of certain long-term family assistance 
     recipients. For purposes of the welfare-to-work credit, 
     eligible wages includes amounts paid by the employer for 
     dependent care assistance.
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                               House Bill

       No provision.

                            Senate Amendment

     Employer tax credit for supporting employee child care
       Under the Senate amendment, taxpayers receive a tax credit 
     equal to 25 percent of qualified expenses for employee child 
     care. These expenses include costs incurred: (1) to acquire, 
     construct, rehabilitate or expand property that is to be used 
     as part of the taxpayer's qualified child care facility; (2) 
     for the operation of the taxpayer's qualified child care 
     facility, including the costs of training and continuing 
     education for employees of the child care facility; or (3) 
     under a contract with a qualified child care facility to 
     provide child care services to employees of the taxpayer. To 
     be a qualified child care facility, the principal use of the 
     facility must be for child care, and the facility must be 
     duly licensed by the State agency with jurisdiction over its 
     operations. Also, if the facility is owned or operated by the 
     taxpayer, at least 30 percent of the children enrolled in the 
     center (based on an annual average or the enrollment measured 
     at the beginning of each month) must be children of the 
     taxpayer's employees. If a taxpayer opens a new facility, it 
     must meet the 30-percent employee enrollment requirement 
     within two years of commencing operations. If a new facility 
     failed to meet this requirement, the credit would be subject 
     to recapture.
       To qualify for the credit, the taxpayer must offer child 
     care services, either at its own facility or through third 
     parties, on a basis that does not discriminate in favor of 
     highly compensated employees.
     Employer tax credit for child care resource and referral 
         services
       Under the Senate amendment, a taxpayer is entitled to a tax 
     credit equal to 10 percent of expenses incurred to provide 
     employees with child care resource and referral services.
     Other rules
       The maximum total credit that may be claimed by a taxpayer 
     under the Senate amendment can not exceed $150,000 per year. 
     Any amounts for which the taxpayer may otherwise claim a tax 
     deduction are reduced by the amount of these credits. 
     Similarly, if the credits are taken for expenses of 
     acquiring, constructing, rehabilitating, or expanding a 
     facility, the taxpayer's basis in the facility is reduced by 
     the amount of the credits.
     Effective date
       The credits are effective for taxable years beginning after 
     December 31, 2000.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

H. Extension and Expansion of the Adoption Tax Credit (sec. 210 of the 
               Senate amendment and sec. 23 of the Code)

                              Present Law

       Taxpayers are entitled to a maximum nonrefundable credit 
     against income tax liability of $5,000 per child for 
     qualified adoption expenses paid or incurred by the taxpayer 
     (sec. 23). In the case of a special needs adoption, the 
     maximum credit amount is $6,000 ($5,000 in the case of a 
     foreign special needs adoption). A special needs child is a 
     child who the State has determined: (1) cannot or should not 
     be returned to the home of the birth parents, and (2) has a 
     specific factor or condition because of which the child 
     cannot be placed with adoptive parents without adoption 
     assistance. The adoption of a child who is not a citizen or a 
     resident of the United States is a foreign adoption.
       Qualified adoption expenses are reasonable and necessary 
     adoption fees, court costs, attorneys' fees, and other 
     expenses that are directly related to the legal adoption of 
     an eligible child. All reasonable and necessary expenses 
     required by a State as a condition of adoption are qualified 
     adoption expenses. Otherwise qualified adoption expenses paid 
     or incurred in one taxable year are not taken into account 
     for purposes of the credit until the next taxable year unless 
     the expenses are paid or incurred in the year the adoption 
     becomes final.
       An eligible child is an individual (1) who has not attained 
     age 18 or (2) who is physically or mentally incapable of 
     caring for himself or herself. After December 31, 2001, the 
     credit will be available only for domestic special needs 
     adoptions. No credit is allowed for expenses incurred (1) in 
     violation of State or Federal law, (2) in carrying out any 
     surrogate parenting arrangement, (3) in connection with the 
     adoption of a child of the taxpayer's spouse, (4) that are 
     reimbursed under an employer adoption assistance program or 
     otherwise, or (5) for a foreign adoption that is not 
     finalized.
       The credit is phased out ratably for taxpayers with 
     modified AGI above $75,000, and is fully phased out at 
     $115,000 of modified AGI. For these purposes modified AGI is 
     computed by increasing the taxpayer's AGI by the amount 
     otherwise excluded from gross income under Code sections 911, 
     931, or 933.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment makes three changes to the adoption 
     credit. First, it provides that the maximum credit for 
     domestic special needs adoptions is increased to $10,000 from 
     $6,000. Second, taxpayers making a domestic special needs 
     adoption are deemed to have paid or incurred $10,000 of 
     qualified expenses in all cases. Third, the sunset for non-
     special needs adoptions is repealed.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2000.

                          Conference Agreement

       The conference agreement makes two changes to the adoption 
     credit. First, it provides that the maximum credit for 
     special needs adoptions is increased to $10,000 from $6,000. 
     Second, taxpayers making a special needs adoption are deemed 
     to have paid or incurred $10,000 of qualified expenses in all 
     cases. The conference agreement does not change the present-
     law sunset of the adoption credit for non-special needs 
     adoptions.
       Effective date.--The conference agreement provision is 
     effective for taxable years beginning after December 31, 
     2000.

            II. SAVINGS AND INVESTMENT TAX RELIEF PROVISIONS

A. Partial Exclusion for Interest and Dividends (sec. 201 of the House 
                   bill and new sec. 116 of the Code)

                              Present Law

       The Code states that, except as otherwise provided, ``gross 
     income means all income from whatever source derived'' (sec. 
     61). Because there is no exclusion for interest and 
     dividends, interest and dividends received by individuals are 
     includible in gross income and subject to tax.

[[Page 19637]]



                               House Bill

       The House bill gives individual taxpayers an exclusion from 
     income of interest and dividends (other than capital gain 
     dividends from RICs and REITs, dividends from farmers' 
     cooperative associations, and dividends received from an 
     employee stock ownership plan), received during a taxable 
     year.\7\ This exclusion is phased-in over five years. The 
     maximum exclusion from income is $50 of combined interest and 
     dividends ($100 for married couples filing a joint return) 
     for taxable years beginning in 2001 and 2002. The maximum 
     exclusion from income is $100 of combined interest and 
     dividends ($200 for married couples filing a joint return) 
     for taxable years beginning in 2003 and 2004. The maximum 
     exclusion is $200 of combined interest and dividends ($400 
     for married couples filing a joint return) for taxable years 
     beginning after December 31, 2004. The amount of the combined 
     interest and dividends excluded under the House bill is in 
     addition to the amount of any interest or dividend which is 
     exempt from tax under any other provision (e.g., interest on 
     certain State and local bonds which is exempt from tax under 
     section 103 of the Code).
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     \7\ From 1954 until 1986, the Code (sec. 116) contained an 
     exclusion from income (in varying amounts) for dividends. For 
     1981 only, that provision was also extended to interest; this 
     proposal is generally parallel to that provision. The 
     exclusion for dividends was repealed by the Tax Reform Act of 
     1986.
---------------------------------------------------------------------------
       In determining eligibility for the earned income credit 
     (``EIC''), any interest or dividends excluded from gross 
     income under the House bill are included in modified adjusted 
     gross income for purposes of phase-out rules of the EIC and 
     disqualified income for purposes of the EIC disqualified 
     income test. Similarly, any interest or dividends excluded 
     from gross income under the House bill are included in 
     modified adjusted gross income for purposes of the taxation 
     of certain Social Security benefits.
       The fact that dividends may be excluded from income 
     pursuant to the House bill does not affect the computation of 
     the foreign tax credit.
       The exclusion under the House bill is in addition to, and 
     is applied after, the exclusion for educational savings bond 
     interest (sec. 135). In applying those provisions of the Code 
     (such as secs. 86, 219, 221, and 469) that determine modified 
     adjusted gross income without regard to section 135, it is 
     intended that the exclusion under this provision be computed 
     without regard to the exclusion under section 135.
       In addition, the IRS is encouraged to simplify the process 
     of completing tax forms to the greatest extent practicable, 
     including, for example, considering raising the 
     administratively-established dollar thresholds for completing 
     Schedule B or for being able to use the Form 1040EZ.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 2000.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

 B. Individual Capital Gains (sec. 202 of the House bill, sec. 207 of 
       the Senate amendment, and secs. 1(h) and 1022 of the Code)

                              Present Law

       In general, gain or loss reflected in the value of an asset 
     is not recognized for income tax purposes until a taxpayer 
     disposes of the asset. On the sale or exchange of capital 
     assets, any gain generally is included in income, and the net 
     capital gain of an individual is taxed at maximum rates lower 
     than the rates applicable to ordinary income. Net capital 
     gain is the excess of the net long-term capital gain for the 
     taxable year over the net short-term capital loss for the 
     year. Gain or loss is treated as long-term if the asset is 
     held for more than one year. In determining gain or loss, no 
     adjustment is allowed for inflation.
       A capital asset generally means any property except (1) 
     inventory, stock in trade, or property held primarily for 
     sale to customers in the ordinary course of the taxpayer's 
     trade or business, (2) depreciable or real property used in 
     the taxpayer's trade or business, (3) specified literary or 
     artistic property, (4) business accounts or notes receivable, 
     or (5) certain U.S. publications. In addition, the net gain 
     from the disposition of certain property used in the 
     taxpayer's trade or business is treated as long-term capital 
     gain. Gain from the disposition of depreciable personal 
     property is not treated as capital gain to the extent of all 
     previous depreciation allowances. Gain from the disposition 
     of depreciable real property is generally not treated as 
     capital gain to the extent of the depreciation allowances in 
     excess of the allowances that would have been available under 
     the straight-line method of depreciation.
       The maximum rate of tax on the adjusted net capital gain of 
     an individual is 20 percent. In addition, any adjusted net 
     capital gain which otherwise would be taxed at the lowest 
     individual rate (currently 15 percent) is taxed at a 10-
     percent rate. These rates apply for purposes of both the 
     regular tax and the alternative minimum tax.
       The ``adjusted net capital gain'' of an individual is the 
     net capital gain reduced (but not below zero) by the sum of 
     the 28-percent rate gain and the unrecaptured section 1250 
     gain. The net capital gain is reduced by the amount of gain 
     which the individual treats as investment income for purposes 
     of determining the investment interest limitation under 
     section 163(d).
       The term ``28-percent rate gain'' means the amount of net 
     gain attributable to long-term capital gains and losses from 
     the sale or exchange of collectibles (as defined in section 
     408(m) without regard to paragraph (3) thereof) 
     (``collectibles gain and loss''), an amount of gain equal to 
     the amount of gain excluded from gross income under section 
     1202, relating to certain small business stock (``section 
     1202 gain''),\8\ the net short-term capital loss for the 
     taxable year, and any long-term capital loss carryover to the 
     taxable year.
---------------------------------------------------------------------------
     \8\ This results in a maximum effective regular tax rate on 
     qualified gain from small business stock of 14 percent.
---------------------------------------------------------------------------
       ``Unrecaptured section 1250 gain'' means any long-term 
     capital gain from the sale or exchange of section 1250 
     property (i.e., depreciable real estate) held more than one 
     year to the extent of the gain that would have been treated 
     as ordinary income if section 1250 applied to all 
     depreciation, rather than only to a portion of the 
     depreciation, reduced by the net loss (if any) attributable 
     to the items taken into account in computing 28-percent rate 
     gain. The amount of unrecaptured section 1250 gain (before 
     the reduction for the net loss) attributable to the 
     disposition of property to which section 1231 applies shall 
     not exceed the net section 1231 gain for the year.
       The unrecaptured section 1250 gain is taxed at a maximum 
     rate of 25 percent, and the 28- percent rate gain is taxed at 
     a maximum rate of 28 percent.
       For taxable years beginning after December 31, 2000, any 
     gain from the sale or exchange of property held more than 
     five years which would otherwise be taxed at the 10-percent 
     rate will instead be taxed at an 8-percent rate. Any gain 
     from the sale or exchange of property held more than five 
     years and the holding period for which begins after December 
     31, 2000, which would otherwise be taxed at a 20-percent rate 
     will be taxed at an 18-percent rate. A taxpayer holding a 
     capital asset or property used in the trade or business on 
     January 1, 2001, may elect to treat the asset as having been 
     sold in a taxable transaction on that date for an amount 
     equal to its fair market value, and having been reacquired 
     for an amount equal to such value.

                               House Bill

       The House bill reduces the 10- and 20-percent rates on the 
     adjusted net capital gain to 7.5 and 15 percent, 
     respectively. The 25-percent rate on unrecaptured section 
     1250 gain is reduced to 20 percent. These lower rates apply 
     to both the regular tax and the alternative minimum tax.\9\
---------------------------------------------------------------------------
     \9\ The provision does not change the regular tax rate for 
     gain from collectibles and small business stock. The 
     provision reduces the maximum effective AMT rate on small 
     business stock to slightly below 15 percent (depending on the 
     amount of individual rate cut for the taxable year).
---------------------------------------------------------------------------
       The bill repeals the 8- and 18-percent rates on certain 
     gain from property held more than 5 years.
       Effective date.--The provision applies to taxable years 
     ending on or after July 1, 1999.
       For taxable years which include July 1, 1999, the lower 
     rates apply to amounts properly taken into account for the 
     portion of the year on or after that date. This generally has 
     the effect of applying the lower rates to capital assets sold 
     or exchanged (and installment payments received) on or after 
     July 1, 1999. In the case of gain taken into account by a 
     pass-through entity, the date taken into account by the 
     entity is the appropriate date for applying this rule.

                            Senate Amendment

       The Senate amendment allows an individual a deduction for 
     up to $1,000 of net capital gain. Collectible gain and loss 
     is taxed as short-term capital gain or loss.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31. 2005.

                          Conference Agreement

     Rates
       The conference agreement follows the House bill, except 
     that the rates on adjusted net capital gain are reduced to 8 
     and 18 percent respectively, and the rate on unrecaptured 
     section 1250 gain is reduced to 23 percent.
       Effective date.--The reduced rates apply to taxable years 
     beginning after December 31, 1998.
     Indexing
       The conference agreement also generally provides for an 
     inflation adjustment to (i.e., indexing of) the adjusted 
     basis of certain assets (called ``indexed assets'') held more 
     than one year for purposes of determining gain (but not loss) 
     upon a sale or other disposition of such assets by a taxpayer 
     other than a C corporation. Assets held by trusts, estates, S 
     corporations, regulated investment companies (``RICs''), real 
     estate investment trusts (``REITs''), and partnerships are 
     eligible for indexing, to the extent gain on such

[[Page 19638]]

     assets is taken into account by taxpayers other than C 
     corporations.
       Assets eligible for the inflation adjustment generally 
     include common (but not preferred) stock of C corporations 
     and tangible property that are capital assets or property 
     used in a trade or business. A personal residence does not 
     qualify for indexing.
       The inflation adjustment under the provision would be 
     computed by multiplying the taxpayer's adjusted basis in the 
     indexed asset by an inflation adjustment percentage. The 
     inflation adjustment percentage would be the percentage by 
     which the GDP deflator for the last calendar quarter ending 
     before the disposition exceeds the GDP deflator for the last 
     calendar quarter ending before the asset was acquired by the 
     taxpayer. The inflation adjustment percentage will be rounded 
     to the nearest one-tenth of a percent. No adjustment will be 
     made if the inflation adjustment is one or less.
       In the case of a RIC or a REIT, the indexing adjustments 
     generally apply in computing the taxable income and the 
     earnings and profits of the RIC or REIT. The indexing 
     adjustments, however, are not applicable in determining 
     whether a corporation qualifies as a RIC or REIT.
       In the case of shares held in a RIC or REIT, partial 
     indexing generally is provided by the provision based on the 
     ratio of the value of indexed assets held by the entity to 
     the value of all its assets. The ratio of indexed assets to 
     total assets will be determined quarterly (for RICs, the 
     quarterly ratio would be based on a three-month average). If 
     the ratio of indexed assets to total assets exceeds 80 
     percent in any quarter, full indexing of the shares will be 
     allowed for that quarter. If less than 20 percent of the 
     assets are indexed assets in any quarter, no indexing will be 
     allowed for that quarter for the shares. Partnership 
     interests held by a RIC or REIT will be subject to a look-
     through test for purposes of determining whether, and to what 
     degree, the shares in the RIC or REIT are indexed.
       A return of capital distribution by a RIC or REIT generally 
     will be treated by a shareholder as allocable to stock 
     acquired by the shareholder in the order in which the stock 
     was acquired.
       Stock in an S corporation or an interest in a partnership 
     or common trust fund is not an indexed asset. Under the 
     provision, the individual owner receives the benefit of the 
     indexing adjustment when the S corporation, partnership, or 
     common trust fund disposes of indexed assets. Under the 
     provision, any inflation adjustments at the entity level 
     flows through to the holders and result in a corresponding 
     increase in the basis of the holder's interest in the entity. 
     Where a partnership has a section 754 election in effect, a 
     partner transferring his interest in the partnership is 
     entitled to any indexing adjustment that has accrued at the 
     partnership level with respect to the partner and the 
     transferee partner is entitled to the benefits of indexing 
     for inflation occurring after the transfer.
       The indexing adjustment is disregarded in determining any 
     loss on the sale of an interest in a partnership, S 
     corporation or common trust fund.
       Common stock of a foreign corporation generally is an 
     indexed asset if the stock is regularly traded on an 
     established securities market. Indexed assets, however, do 
     not include stock in a foreign investment company, a passive 
     foreign investment company (including a qualified electing 
     fund), a foreign personal holding company, or, in the hands 
     of a shareholder who meets the requirements of section 
     1248(a)(2) (generally pertaining to 10-percent shareholders 
     of controlled foreign corporations), any other foreign 
     corporation. An American Depository Receipt (ADR) for common 
     stock in a foreign corporation is treated as common stock in 
     the foreign corporation and, therefore, the basis in an ADR 
     for common stock generally will be indexed.
       No indexing is provided for improvements or contributions 
     to capital if the aggregate amount of the improvements or 
     contributions to capital during the taxable year with respect 
     to the property or stock is less than $1,000. If the 
     aggregate amount of such improvements or contributions to 
     capital is $1,000 or more, each addition is treated as a 
     separate asset acquired at the close of the taxable year.
       No indexing adjustment is allowed during any period during 
     which there is a substantial diminution of the taxpayer's 
     risk of loss from holding the indexed asset by reason of any 
     transaction entered into by the taxpayer, or a related party.
       In the case of a short sale of an indexed asset with a 
     short sale period in excess of one year, the proposal 
     requires that the amount realized be indexed for inflation 
     for the short sale period.
       The provision does not index the basis of property for 
     sales or dispositions between related persons, except to the 
     extent the adjusted basis of property in the hands of the 
     transferee is a substituted basis (e.g., gifts).
       Under the provision, indexing reduces the amount of 
     ordinary gain that would be recognized in cases where a 
     corporation is treated as a collapsible corporation (under 
     sec. 341) with respect to a distribution or sale of stock.
       Effective date.--The indexing provision applies to assets 
     the holding period for which begins after December 31, 1999. 
     An individual holding an indexed asset on January 1, 2000, 
     may elect to treat the indexed asset as having been sold on 
     such date for its fair market value, and having been 
     reacquired for that value. If an election is made, any gain 
     is recognized (and any loss disallowed).

   C. Apply Capital Gain Rates to Capital Gains Earned by Designated 
Settlement Funds (sec. 203 of the House bill and sec. 468B of the Code)

                              Present Law

       Under present law, designated settlement funds are taxed at 
     the highest rate of tax imposed on individuals, currently 
     39.6 percent, on their entire taxable income (sec. 468B).

                               House Bill

       Under the House bill, the net capital gain of a designated 
     settlement fund will be taxed in the same manner as in the 
     case of an individual, i.e., the lower rates applicable to 
     net capital gain set forth in section 1(h), as amended by the 
     bill, will apply.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

 D. Exclusion of Gain on the Sale of a Principal Residence by a Member 
of the Uniformed Service or the Foreign Service of the United States or 
Certain Other Individuals Relocated Outside of the United States (sec. 
            204 of the House bill and sec. 121 of the Code)

                              Present Law

       Under present law, an individual taxpayer may exclude up to 
     $250,000 ($500,000 if married filing a joint return) of gain 
     realized on the sale or exchange of a principal residence. To 
     be eligible for the exclusion, the taxpayer must have owned 
     and used the residence as a principal residence for at least 
     two of the five years prior to the sale or exchange. A 
     taxpayer who fails to meet these requirements by reason of a 
     change of place of employment, health, or, to the extent 
     provided under regulations, unforeseen circumstances is able 
     to exclude an amount equal to the fraction of the $250,000 
     ($500,000 if married filing a joint return) that is equal to 
     the fraction of the two years that the ownership and use 
     requirements are met. There are no special rules relating to: 
     (1) members of the uniformed services or the Foreign Service 
     of the United States or (2) individuals relocated outside of 
     the United States.

                               House Bill

       Under the House bill, the five-year test period for 
     ownership and use is suspended during certain absences due to 
     service in the uniformed services or the Foreign Service of 
     the United States. The uniformed services include: (1) the 
     armed forces (the Army, Navy, Air Force, Marine Corp, and 
     Coast Guard); (2) the commissioned corps of the National 
     Oceanic and Atmospheric Administration; and (3) the 
     commissioned corps of the Public Health Service. 
     Specifically, the five-year period ending on the date of the 
     sale or exchange of a principal residence will not include 
     any periods during which the taxpayer or the taxpayer's 
     spouse is on qualified official extended duty as a member of 
     the uniformed services or the Foreign Service of the United 
     States. Qualified official extended duty is any period of 
     extended duty by a member of the uniformed services or the 
     Foreign Service of the United States while serving at a place 
     of duty at least 50 miles away from the taxpayer's principal 
     residence or under orders compelling residence in Government 
     furnished quarters. Extended duty is defined as any period of 
     active duty pursuant to a call or order to such duty for a 
     period in excess of 90 days or for an indefinite period.
       The House bill also suspends for up to five years, the 
     five-year test period for an individual relocated for a 
     period of more than 90 days outside of the United States by 
     the individual's (or spouse's) employer. This provision does 
     not apply to self-employed individuals.
       Effective date.--The House bill provision is effective for 
     sales or exchanges of principal residences after the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

E. Clarify the Tax Treatment of Income and Losses on Derivatives (sec. 
205 of the House bill, sec. 1306 of the Senate amendment, and sec. 1221 
                              of the Code)

                              Present Law

       Capital gain treatment applies to gain on the sale or 
     exchange of a capital asset. Capital assets include property 
     other than (1)

[[Page 19639]]

     stock in trade or other types of assets includible in 
     inventory, (2) property used in a trade or business that is 
     real property or property subject to depreciation, (3) 
     accounts or notes receivable acquired in the ordinary course 
     of a trade or business, (4) certain copyrights (or similar 
     property), and (5) U.S. government publications. Gain or loss 
     on such assets generally is treated as ordinary, rather than 
     capital, gain or loss. Certain other Code sections also treat 
     gains or losses as ordinary. For example, the gains or losses 
     of securities dealers or certain electing commodities dealers 
     or electing traders in securities or commodities that are 
     subject to ``mark-to-market'' accounting are treated as 
     ordinary (sec. 475).
       Treasury regulations (which were finalized in 1994) require 
     ordinary character treatment for most business hedges and 
     provide timing rules requiring that gains or losses on 
     hedging transactions be taken into account in a manner that 
     matches the income or loss from the hedged item or items. The 
     regulations apply to hedges that meet a standard of ``risk 
     reduction'' with respect to ordinary property held (or to be 
     held) or certain liabilities incurred (or to be incurred) by 
     the taxpayer and that meet certain identification and other 
     requirements (Treas. reg. sec. 1.1221-2).

                               House Bill

       The House bill adds three categories to the list of assets 
     the gain or loss on which is treated as ordinary (sec. 1221). 
     The new categories are: (1) commodities derivative financial 
     instruments entered into by derivatives dealers; (2) hedging 
     transactions; and (3) supplies of a type regularly consumed 
     by the taxpayer in the ordinary course of a taxpayer's trade 
     or business. In defining a hedging transaction, the House 
     bill generally codifies the approach taken by the Treasury 
     regulations, but modifies the rules. The ``risk reduction'' 
     standard of the regulations is broadened to ``risk 
     management'' with respect to ordinary property held (or to be 
     held) or certain liabilities incurred (or to be incurred).
       Effective date.--The house bill is effective for any 
     instrument held, acquired or entered into, any transaction 
     entered into, and supplies held or acquired on or after the 
     date of enactment.

                            Senate Amendment

       The Senate amendment generally follows the House bill 
     except that the Senate amendment makes one modification to 
     the definition of a hedging transaction. In addition to 
     managing certain risks with respect to ordinary property held 
     (or to be held) or certain liabilities incurred (or to be 
     incurred), the Senate amendment provides that the definition 
     of a hedging transaction includes a transaction entered into 
     primarily to manage such other risks as the Secretary may 
     prescribe in regulations.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

F. Treatment of Loss on Worthless Stock of Subsidiary (sec. 206 of the 
               House bill and sec. 165(g)(3) of the Code)

                              Present Law

       Under present law, the loss on stock of a subsidiary 
     corporation that becomes worthless is treated as an ordinary 
     loss (rather than a capital loss), unless 10 percent or more 
     of its gross receipts for all taxable years has been, with 
     minor exceptions, from royalties, rents, dividends, interest, 
     annuities, and gains from the sales or exchanges of stocks 
     and securities (sec. 165(g)(3)).

                               House Bill

       Under the House bill, income from the conduct of an active 
     trade or business of an insurance company or financial 
     institution will not be included as gross receipts from the 
     types of passive income listed above. Thus, a loss recognized 
     with respect to the worthless stock of a subsidiary 
     corporation which is an insurance company or financial 
     institution could be treated as an ordinary loss, rather than 
     as a capital loss.
       Effective date.--The provision applies to stock becoming 
     worthless in taxable years beginning after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows he House bill.

G. Individual Retirement Arrangements (``IRAs'') (sec. 113 of the House 
 bill, secs. 301-303, 305, and 321 of the Senate amendment, and secs. 
                    219, 408, and 408A of the Code)

                              Present Law

     In general
       There are two general types of individual retirement 
     arrangements (``IRAs'') under present law: traditional IRAs, 
     to which both deductible and nondeductible contributions may 
     be made, and Roth IRAs. The Federal income tax rules 
     regarding each type of IRA (and IRA contribution) differ.
     Traditional IRAs
       Under present law, an individual may make deductible 
     contributions to an IRA up to the lesser of $2,000 or the 
     individual's compensation if neither the individual nor the 
     individual's spouse is an active participant in an employer-
     sponsored retirement plan. In the case of a married couple, 
     deductible IRA contributions of up to $2,000 can be made for 
     each spouse (including, for example, a homemaker who does not 
     work outside the home), if the combined compensation of both 
     spouses is at least equal to the contributed amount. If the 
     individual (or the individual's spouse) is an active 
     participant in an employer-sponsored retirement plan, the 
     $2,000 deduction limit is phased out for taxpayers with 
     adjusted gross income (``AGI'') over certain levels for the 
     taxable year.
       The AGI phase-out limits for taxpayers who are active 
     participants in employer- sponsored plans are as follows.


                            Single Taxpayers


        Taxable years beginning in:                     Phase-out range
1998.....................................................$30,000-40,000
1999......................................................31,000-41,000
2000......................................................32,000-42,000
2001......................................................33,000-43,000
2002......................................................34,000-44,000
2003......................................................40,000-50,000
2004......................................................45,000-55,000
2005 and thereafter.......................................50,000-60,000


                             Joint Returns


        Taxable years beginning in:                     Phase-out range
1998.....................................................$50,000-60,000
1999......................................................51,000-61,000
2000......................................................52,000-62,000
2001......................................................53,000-63,000
2002......................................................54,000-64,000
2003......................................................60,000-70,000
2004......................................................65,000-75,000
2005......................................................70,000-80,000
2006......................................................75,000-85,000
2007 and thereafter......................................80,000-100,000

       If the individual is not an active participant in an 
     employer-sponsored retirement plan, but the individual's 
     spouse is, the $2,000 deduction limit is phased out for 
     taxpayers with AGI between $150,000 and $160,000.
       To the extent an individual cannot or does not make 
     deductible contributions to an IRA or contributions to a Roth 
     IRA, the individual may make nondeductible contributions to a 
     traditional IRA.
       Amounts held in a traditional IRA are includible in income 
     when withdrawn (except to the extent the withdrawal is a 
     return of nondeductible contributions). Includible amounts 
     withdrawn prior to attainment of age 59-1/2 are subject to an 
     additional 10-percent early withdrawal tax, unless the 
     withdrawal is due to death or disability, is made in the form 
     of certain periodic payments, is used to pay medical expenses 
     in excess of 7.5 percent of AGI, is used to purchase health 
     insurance of an unemployed individual, is used for education 
     expenses, or is used for first-time homebuyer expenses of up 
     to $10,000.
     Roth IRAs
       Individuals with AGI below certain levels may make 
     nondeductible contributions to a Roth IRA. The maximum annual 
     contribution that may be made to a Roth IRA is the lesser of 
     $2,000 or the individual's compensation for the year. The 
     contribution limit is reduced to the extent an individual 
     makes contributions to any other IRA for the same taxable 
     year. As under the rules relating to IRAs generally, a 
     contribution of up to $2,000 for each spouse may be made to a 
     Roth IRA provided the combined compensation of the spouses is 
     at least equal to the contributed amount. The maximum annual 
     contribution that can be made to a Roth IRA is phased out for 
     single individuals with AGI between $95,000 and $110,000 and 
     for joint filers with AGI between $150,000 and $160,000.
       Taxpayers with modified AGI of $100,000 or less generally 
     may convert a traditional IRA into an Roth IRA. The amount 
     converted is includible in income as if a withdrawal had been 
     made, except that the 10-percent early withdrawal tax does 
     not apply and, if the conversion occurred in 1998, the income 
     inclusion may be spread ratably over 4 years. Married 
     taxpayers who file separate returns cannot convert a 
     traditional IRA into a Roth IRA.
       Amounts held in a Roth IRA that are withdrawn as a 
     qualified distribution are not includible in income, nor 
     subject to the additional 10-percent tax on early 
     withdrawals. A qualified distribution is a distribution that 
     (1) is made after the 5-taxable year period beginning with 
     the first taxable year for which the individual made a 
     contribution to a Roth IRA, and (2) which is made after 
     attainment of age 59-1/2, on account of death or disability, 
     or is made for first-time homebuyer expenses of up to 
     $10,000.
       Distributions from a Roth IRA that are not qualified 
     distributions are includible in income to the extent 
     attributable to earnings, and subject to the 10-percent early 
     withdrawal tax (unless an exception applies).\10\ The same 
     exceptions to the early withdrawal tax that apply to IRAs 
     apply to Roth IRAs.
---------------------------------------------------------------------------
     \10\ Early distribution of converted amounts may also 
     accelerate income inclusion of converted amounts that are 
     taxable under the 4-year rule applicable to 1998 conversions.
---------------------------------------------------------------------------
     IRA investments
       In general, IRAs may not invest in collectibles. Under one 
     exception to this rule, IRAs may invest in certain gold, 
     silver, and platinum coins and coins issued under the laws of 
     any State.

[[Page 19640]]



                               House Bill

       The House bill increases the AGI limit on conversions of 
     traditional IRAs to Roth IRAs to $160,000 for joint filers.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 1999.

                            Senate Amendment

     Increase in annual contribution limits
       The Senate amendment provision increases the maximum annual 
     dollar contribution limit for IRA contributions in $1,000 
     annual increments, beginning in 2001, until the limit reaches 
     $5,000 in 2003. Thereafter, the limit is indexed for 
     inflation in $100 increments.
     Additional catch-up contributions
       The Senate amendment increases the IRA maximum contribution 
     limit for individuals who have attained age 50 before the end 
     of the taxable year. The otherwise maximum dollar 
     contribution limit (before application of the AGI phase-out 
     limits) for such an individual is increased by the applicable 
     percentage. The applicable percentage is 10 percent in 2001, 
     and increases by 10 percentage points until the applicable 
     percent is 50 in 2005 and thereafter.
     Increase in AGI limits for deductible IRA contributions
       Under the Senate amendment provision, the AGI phase-out 
     limits for active participants in an employer-sponsored plan 
     is increased by $2,000 ($4,000 in the case of married 
     taxpayers filing a joint return) in 2008 and by $2,500 
     ($5,000 in the case of married taxpayers filing a joint 
     return) in 2009. Thus, the phase-out limits are as follows 
     for taxable years beginning in 2008-2009.


                             Single Returns


        Taxable years beginning in:                     Phase-out range
2008.....................................................$52,000-62,000
2009......................................................54,500-64,500


                             Joint Returns


        Taxable years beginning in:                     Phase-out range
2008....................................................$84,000-104,000
2009.....................................................89,000-109,000

       The present-law income phase-out range for an individual 
     who is not an active participant, but whose spouse is, 
     remains at $150,000 to $160,000.
     AGI limits for Roth IRAs
       The provision repeals the Roth IRA contribution AGI phase-
     out limits. The provision also increases the AGI limit on 
     conversions of traditional IRAs to Roth IRAs to $1 million 
     ($500,000 in the case of a married taxpayer filing a separate 
     return).
     IRA investments in coins
       The provision allows IRAs to invest in any coin certified 
     by a recognized grading service and traded on a nationally 
     recognized electronic network, or listed by a recognized 
     wholesale reporting service and which (1) is or was at any 
     time legal tender in the United States, or (2) issued under 
     the laws of any State. Such coins must be in the physical 
     possession of the IRA trustee or custodian.
     Deemed IRAs under employer plans
       If a qualified retirement plan or a section 403(b) annuity 
     permits employees to make voluntary employee contributions to 
     a separate account or annuity that (1) is established under 
     the qualified plan or section 403(b) annuity, and (2) meets 
     the requirements applicable to either traditional IRAs (sec. 
     408) or Roth IRAs (sec. 408A), the separate account or 
     annuity will be deemed a traditional IRA or a Roth IRA, as 
     applicable. The deemed IRA, and contributions thereto, will 
     not be subject to the Code rules pertaining to qualified 
     plans or section 403(b) annuities, as applicable. In 
     addition, the deemed IRA, and contributions thereto, will not 
     be taken into account in applying these rules to any other 
     contributions under the qualified plan or section 403(b) 
     annuity. The deemed IRA, and contributions thereto, will be 
     subject to the exclusive benefit and fiduciary rules of 
     ERISA, but will not be subject to the ERISA reporting and 
     disclosure, participation, vesting, funding, and enforcement 
     requirements that apply to pension plans.
     Effective date
       The Senate amendment provision generally is effective for 
     taxable years beginning after December 31, 2000. The increase 
     in the AGI limits for deductible IRA contributions is 
     effective for taxable years beginning after December 31, 
     2007. The provision increasing the AGI limit for conversions 
     to Roth IRAs is effective for taxable years beginning after 
     December 31, 2002. The provision relating to IRA investment 
     in coins is effective for taxable years beginning after 
     December 31, 1999. The provision relating to deemed IRAs is 
     effective for plan years beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications.
     Increase in annual contribution limits
       Under the conference agreement, the maximum IRA 
     contribution limit is increased from $2,000 as follows: 
     $3,000 in 2001-2003; $4,000 in 2004-2005; $5,000 in 2006-
     2008, with indexing thereafter.
     Additional catch-up contributions
       The conference agreement follows the Senate amendment.
     Increase in AGI limits for deductible IRA contributions
       The conference agreement does not include the Senate 
     amendment.
     AGI limits for Roth IRAs
       The conference agreement increases the AGI phase-out limits 
     for Roth IRAs to $200,000--$210,000 for joint filers and to 
     $100,000--$110,000 for all other filers.
       The conference agreement increases the Roth IRA AGI 
     conversion limit to $200,000 for joint filers ($100,000 for 
     all other filers).
     IRA investments in coins
       The conference agreement does not include the Senate 
     amendment.
     Deemed IRAs under employer plans
       The conference agreement follows the Senate amendment.
     Effective date
       The conference agreement generally is effective for years 
     beginning after December 31, 2000. The provisions increasing 
     the AGI phase-out limits for Roth IRAs and the Roth IRA AGI 
     conversion limit are effective for years beginning after 
     December 31, 2002.

H. Creation of Individual Development Accounts (sec. 304 of the Senate 
               amendment, and new sec. 530A of the Code)

     Present Law
       There are no tax benefits to encourage financial 
     institutions to match savings of low- income individuals.
     House Bill
       No provision.

                            Senate Amendment

     In general
       The Senate amendment creates individual development 
     accounts (``IDAs'') to which eligible individuals can 
     contribute. In addition, the Senate amendment provides a tax 
     credit for certain matching contributions made to an IDA by 
     the financial institution maintaining the IDA. Eligible 
     individuals are individuals who are: (1) at least 18 years of 
     age; (2) a citizen or legal resident of the United States; 
     and (3) a member of a household eligible for the earned 
     income credit, Temporary Assistance for Needy Families 
     (``TANF''), or with family gross income of 60 percent or less 
     of area median gross income and net worth of $10,000 or less.
     Contributions to an IDA by eligible individuals
       Only eligible individuals are allowed to contribute to an 
     IDA. Contributions to IDAs by individuals are not deductible, 
     and earnings on such contributions are includible in income. 
     The maximum contribution that can be made to an IDA for a 
     taxable year is the lesser of (1) $350 or (2) the 
     individual's taxable compensation for the year. A special 
     rule would allow contributions of up to $350 for each spouse 
     in a married couple if the total compensation of the spouses 
     is at least equal to the amount contributed.
     Matching contributions
       The Senate amendment provides a tax credit to financial 
     institutions that make matching contributions to IDAs of 
     individuals. \11\ The tax credit equals 85 percent of 
     matching contributions, rounded up to the nearest $10, up to 
     a maximum annual credit of $300 per eligible individual. The 
     credit is available in each year that a matching contribution 
     is made.
---------------------------------------------------------------------------
     \11\ Matching contributions (and earnings) are accounted for 
     separately from individual IDA contributions (and earnings).
---------------------------------------------------------------------------
       Matching contributions (and earnings thereon) are not 
     includible in the gross income of the eligible individual.
       If an individual withdraws his or her own IDA contributions 
     (or earnings thereon) for a purpose other than a qualified 
     purpose, the matching contribution attributable to such 
     individual contribution is forfeited. \12\ Matching 
     contributions may be withdrawn only in a qualified purpose 
     distribution.
---------------------------------------------------------------------------
     \12\ The financial institution is to use forfeited amounts to 
     make other matching contributions. No credit is provided with 
     respect to such reallocated contributions.
---------------------------------------------------------------------------
       A qualified purpose distribution is a distribution (1) that 
     is made after the individual has completed an economic 
     literacy course, (2) that is made by the financial 
     institution directly to the person to whom the funds are to 
     (or to another IDA) and (3) is used for (a) certain 
     educational expenses, (b) first-time homebuyer expenses, and 
     (c) business start-up expenses.
     Effect on means-tested programs
       Any amounts in the IDA are not to be taken into account for 
     certain Federal means-tested programs.
     Effective date
       The provision is effective for contributions to IDAs and 
     matching contributions made with respect to such IDAs after 
     December 31, 2000, and before January 1, 2006.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

          III. BUSINESS INVESTMENT AND JOB CERTAIN PROVISIONS

 A. Alternative Tax for Corporate Capital Gains (sec. 301 of the House 
                    bill and sec. 1201 of the Code)

                              Present Law

       Under present law, the net capital gain of a corporation is 
     taxed at the same rates as

[[Page 19641]]

     ordinary income, and subject to tax at graduated rates up to 
     35 percent.

                               House Bill

       Under the House bill, an alternative tax rate of 30 percent 
     applies to the net capital gain of a corporation if that tax 
     is lower than the corporation's regular tax.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not contain the provision in 
     the House bill.

 B. Corporate Alternative Minimum Tax (sec. 302(a) of the House bill, 
   sec. 1103 of the Senate amendment and secs. 53 and 56 of the Code)

                              Present Law

     In general
       Present law imposes a minimum tax on a corporation to the 
     extent the corporation's minimum tax liability exceeds its 
     regular tax liability. This alternative minimum tax (``AMT'') 
     is imposed on corporations at the rate of 20 percent on the 
     alternative minimum taxable income (``AMTI'') in excess of a 
     $40,000 phased-out exemption amount. The exemption amount is 
     phased-out by an amount equal to 25 percent of the amount 
     that the corporation's AMTI exceeds $150,000.
       AMTI is the taxpayer's taxable income increased by certain 
     preference items and adjusted by determining the tax 
     treatment of certain items in a manner that negates the 
     deferral of income resulting from the regular tax treatment 
     of those items.
       A corporation with average gross receipts of less that $7.5 
     million for the prior three taxable years is exempt from the 
     corporate minimum tax. The $7.5 million threshold is reduced 
     to $5 million for the corporation's first 3-taxable year 
     period.
     Preference items in computing AMTI
       The corporate minimum tax preference items are:
       (1) The excess of the deduction for percentage depletion 
     over the adjusted basis of the property at the end of the 
     taxable year. This preference does not apply to percentage 
     depletion allowed with respect to oil and gas properties.
       (2) The amount by which excess intangible drilling costs 
     arising in the taxable year exceed 65 percent of the net 
     income from oil, gas, and geothermal properties. This 
     preference does not apply to an independent producer to the 
     extent the preference would not reduce the producer's AMTI by 
     more than 40 percent.
       (3) Tax-exempt interest income on private activity bonds 
     (other than qualified 501(c)(3) bonds) issued after August 7, 
     1986.
       (4) Accelerated depreciation or amortization on certain 
     property placed in service before January 1, 1987.
     Adjustments in computing AMTI
       The adjustments that corporations must make in computing 
     AMTI are:
       (1) Depreciation on property placed in service after 1986 
     and before January 1, 1999, must be computed by using the 
     generally longer class lives prescribed by the alternative 
     depreciation system of section 168(g) and either (a) the 
     straight-line method in the case of property subject to the 
     straight-line method under the regular tax or (b) the 150-
     percent declining balance method in the case of other 
     property. Depreciation on property placed in service after 
     December 31, 1998, is computed by using the regular tax 
     recovery periods and the AMT methods described in the 
     previous sentence.
       (2) Mining exploration and development costs must be 
     capitalized and amortized over a 10-year period.
       (3) Taxable income from a long-term contract (other than a 
     home construction contract) must be computed using the 
     percentage of completion method of accounting.
       (4) The amortization deduction allowed for pollution 
     control facilities placed in service before January 1, 1999 
     (generally determined using 60-month amortization for a 
     portion of the cost of the facility under the regular tax), 
     must be calculated under the alternative depreciation system 
     (generally, using longer class lives and the straight-line 
     method). The amortization deduction allowed for pollution 
     control facilities placed in service after December 31, 1998, 
     is calculated using the regular tax recovery periods and the 
     straight-line method.
       (5) The special rules applicable to Merchant Marine 
     construction funds are not applicable.
       (6) The special deduction allowable under section 833(b) 
     for Blue Cross and Blue Shield organizations is not allowed.
       (7) The adjusted current earnings adjustment, described 
     below.
     Adjusted current earning (``ACE'') adjustment
       The adjusted current earnings adjustment is the amount 
     equal to 75 percent of the amount by which the adjusted 
     current earnings (``ACE'') of a corporation exceeds its AMTI 
     (determined without the ACE adjustment and the alternative 
     tax net operating loss deduction. In determining ACE the 
     following rules apply:
       (1) For property placed in service before 1994, 
     depreciation generally is determined using the straight-line 
     method and the class life determined under the alternative 
     depreciation system.
       (2) Any amount that is excluded from gross income under the 
     regular tax but is included for purposes of determining 
     earnings and profits is included in determining ACE.
       (3) The inside build-up of a life insurance contract is 
     included in ACE (and the related premiums are deductible).
       (4) Intangible drilling costs of integrated oil companies 
     must be capitalized and amortized over a 60-month period.
       (5) The regular tax rules of section 173 (allowing 
     circulation expenses to be amortized) and section 248 
     (allowing organizational expenses to be amortized) do not 
     apply.
       (6) Inventory must be calculated using the FIFO, rather 
     than LIFO, method.
       (7) The installment sales method generally may not be used.
       (8) No loss may be recognized on the exchange of any pool 
     of debt obligations for another pool of debt obligations 
     having substantially the same effective interest rates and 
     maturities.
       (9) Depletion (other than for oil and gas) must be 
     calculated using the cost, rather than the percentage, 
     method.
       (10) In certain cases, the assets of a corporation that has 
     undergone an ownership change must be stepped-down to their 
     fair market values.
     Other rules
       The combination of the taxpayer's net operating loss 
     carryover and foreign tax credits cannot reduce the 
     taxpayer's AMT liability by more than 90 percent of the 
     amount determined without these items.
       The various nonrefundable business credits allowed under 
     the regular tax generally are not allowed against the AMT.
       If a corporation is subject to AMT in any year, the amount 
     of tax exceeding the taxpayer's regular tax liability is 
     allowed as a credit (the ``AMT credit'') in any subsequent 
     taxable year to the extent the taxpayer's regular tax 
     liability exceeds its tentative minimum tax in such 
     subsequent year.

                               House Bill

       For taxable years beginning in 2005, the limitation on the 
     amount of AMT credits allowable to a corporation will be 
     increased by 20 percent of the corporation's tentative 
     minimum tax. This percentage is raised to 30, 40 and 50 
     percent, respectively, for 2006, 2007 and 2008. The AMT 
     credit may not exceed an amount equal to the sum of the 
     regular tax and minimum tax less the other nonrefundable 
     credits.
       For taxable years beginning after 2008, the provision 
     repeals the corporate AMT. A corporation then will be allowed 
     to use the AMT credit to offset 90 percent of its regular tax 
     liability (determined after the application of other 
     nonrefundable credits).
       Effective dates.--The provision allowing the AMT credit to 
     be offset a portion of the minimum tax applies to taxable 
     years beginning after December 31, 2004.
       The provision repealing the AMT applies to taxable years 
     beginning after December 31, 2008.

                            Senate Amendment

       The Senate amendment allows a corporation with long-term 
     AMT credits to use the AMT credit to offset a portion of its 
     tentative minimum tax. The portion so allowed is the least of 
     : (1) the amount of the corporation's long-term minimum tax 
     credit; (2) 50 percent of the corporation's tentative minimum 
     tax; or (3) the amount by which the corporation's tentative 
     minimum tax exceeds its regular tax for the taxable year.
       Under the amendment, an AMT credit is a long-term minimum 
     tax credit if the credit is attributable to the adjusted net 
     minimum tax of the corporation for a taxable year that began 
     after 1986 and ended before the fifth taxable year 
     immediately preceding the taxable year for which the 
     determination is being made.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2003.

                          Conference Agreement

       The conference agreement allows a corporation to increase 
     the use of minimum tax credits to the extent of the lesser of 
     50 percent of the tentative minimum tax for the taxable year 
     or the excess (if any) of the tentative minimum tax over the 
     regular tax for the taxable year.
       The conference agreement also allows a corporation to use 
     AMT net operating loss deductions to offset 100 percent 
     (rather than 90 percent) of the AMTI.
       Effective dates.--The credit provision applies to taxable 
     years beginning after December 31, 2004. The net operating 
     deduction provision applies to taxable years beginning after 
     December 31, 2001.

C. Repeal of Limitation of Foreign Tax Credit Under Alternative Minimum 
 Tax (sec. 302(b) of the House bill, sec. 907 of the Senate amendment, 
                        and sec. 59 of the Code)

                              Present Law

       Under present law, taxpayers are subject to an alternative 
     minimum tax (``AMT''), which is payable, in addition to all 
     other tax liabilities, to the extent that it exceeds the 
     taxpayer's regular income tax liability. The tax is imposed 
     at a flat rate of 20 percent, in the case of corporate 
     taxpayers, on alternative minimum taxable income (``AMTI'')

[[Page 19642]]

     in excess of a phased-out exemption amount. The maximum rate 
     for noncorporate taxpayers is 28 percent. AMTI is the 
     taxpayer's taxable income increased for certain tax 
     preferences and adjusted by determining the tax treatment of 
     certain items in a manner which negates the exclusion or 
     deferral of income resulting from the regular tax treatment 
     of those items.
       Taxpayers are permitted to reduce their AMT liability by an 
     AMT foreign tax credit. The AMT foreign tax credit for a 
     taxable year is determined under principles similar to those 
     used in computing the regular tax foreign tax credit, except 
     that (1) the numerator of the AMT foreign tax credit 
     limitation fraction is foreign source AMTI and (2) the 
     denominator of that fraction is total AMTI.\13\ Taxpayers may 
     elect to use as their AMT foreign tax credit limitation 
     fraction the ratio of foreign source regular taxable income 
     to total AMTI (sec. 59(a)(4)).
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     \13\ Similar to the regular tax foreign tax credit, the AMT 
     foreign tax credit is subject to the separate limitation 
     categories set forth in section 904(d). Under the AMT foreign 
     tax credit, however, the determination of whether any income 
     is high taxed for purposes of the high-tax-kick-out rules 
     (sec. 904(d)(2)) is made on the basis of the applicable AMT 
     rate rather than the highest applicable rate of regular tax.
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       The AMT foreign tax credit for any taxable year generally 
     may not offset a taxpayer's entire pre-credit AMT. Rather, 
     the AMT foreign tax credit is limited to 90 percent of AMT 
     computed without an AMT net operating loss deduction, an AMT 
     energy preference deduction, or an AMT foreign tax credit. 
     For example, assume that a corporation has $10 million of 
     AMTI from foreign sources, has no AMT net operating loss or 
     energy preference deductions, and is subject to the AMT. In 
     the absence of the AMT foreign tax credit, the corporation's 
     tax liability would be $2 million. Accordingly, the AMT 
     foreign tax credit cannot be applied to reduce the taxpayer's 
     tax liability below $200,000. Any unused AMT foreign tax 
     credit may be carried back 2 years and carried forward 5 
     years for use against AMT in those years under the principles 
     of the foreign tax credit carryback and carryforward rules 
     set forth in section 904(c).

                               House Bill

       The House bill repeals the 90-percent limitation on the 
     utilization of the AMT foreign tax credit.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001.

                           Senate Amendment 

       The Senate amendment is the same as the House bill, with a 
     modification to the effective date.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2004.

                          Conference Agreement

       The conference agreement follows the House bill.

                  IV. EDUCATION TAX RELIEF PROVISIONS

  A. Student Loan Interest Deduction (secs. 112 and 406 of the House 
   bill, sec. 401 of the Senate amendment, and sec. 221 of the Code)

                              Present Law

       Certain individuals who have paid interest on qualified 
     education loans may claim an above-the-line deduction for 
     such interest expenses, subject to a maximum annual deduction 
     limit (sec. 221). The deduction is allowed only with respect 
     to interest paid on a qualified education loan during the 
     first 60 months in which interest payments are required. 
     Required payments of interest generally do not include 
     nonmandatory payments, such as interest payments made during 
     a period of loan forbearance. Months during which interest 
     payments are not required because the qualified education 
     loan is in deferral or forbearance do not count against the 
     60-month period. No deduction is allowed to an individual if 
     that individual is claimed as a dependent on another 
     taxpayer's return for the taxable year.
       A qualified education loan generally is defined as any 
     indebtedness incurred solely to pay for certain costs of 
     attendance (including room and board) of a student (who may 
     be the taxpayer, the taxpayer's spouse, or any dependent of 
     the taxpayer as of the time the indebtedness was incurred) 
     who is enrolled in a degree program on at least a half-time 
     basis at (1) an accredited post-secondary educational 
     institution defined by reference to section 481 of the Higher 
     Education Act of 1965, or (2) an institution conducting an 
     internship or residency program leading to a degree or 
     certificate from an institution of higher education, a 
     hospital, or a health care facility conducting postgraduate 
     training.
       The maximum allowable deduction per taxpayer return is 
     $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and 
     thereafter.\14\ The deduction is phased out ratably for 
     individual taxpayers with modified adjusted gross income 
     (``AGI'') of $40,000-$55,000 and $60,000-$75,000 for joint 
     returns. The income ranges will be indexed for inflation 
     after 2002.
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     \14\ The maximum allowable deduction for 1998 was $1,000.
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                              House Bill 

       The House bill increases the beginning point of the income 
     phaseout for the student loan interest deduction for 
     taxpayers filing joint returns to twice the beginning point 
     of the income phaseouts applicable to single taxpayers and 
     doubles the phaseout range for joint filers. The House bill 
     also repeals both the limit on the number of months during 
     which interest paid on a qualified education loan is 
     deductible and the restriction that nonmandatory payments of 
     interest are not deductible.
       Effective date.--The House bill generally is effective for 
     taxable years beginning after December 31, 1999. The House 
     bill provision repealing the 60-month limit on deductible 
     student loan interest is effective for interest paid on 
     qualified education loans after December 31, 1999.

                           Senate Amendment 

       The Senate amendment is the same as the House bill, except 
     that it increases the beginning point of the income phaseout 
     for the student loan interest deduction for individual 
     taxpayers from $40,000 to $50,000 and does not double the 
     phaseout range for joint filers. Like the House bill, the 
     Senate amendment increases the beginning point of the income 
     phaseout for taxpayers filing joint returns to twice the 
     beginning point of the income phaseouts applicable to single 
     taxpayers.
       Effective date.--The Senate amendment generally is 
     effective generally for taxable years ending after December 
     31, 1999. The Senate amendment provision repealing the 60-
     month limit on deductible student loan interest is effective 
     for interest paid on qualified education loans after December 
     31, 1999, in taxable years ending after such date.

                         Conference Agreement 

       The conference agreement follows the Senate amendment, with 
     the modification that the beginning point of the income 
     phaseout for individual taxpayers is $45,000. Thus, beginning 
     in 2000, the deduction will be phased out ratably for 
     individual taxpayers with modified AGI of $45,000 to $60,000 
     and for taxpayers filing joint returns with modified AGI of 
     $90,000-$105,000.

 B. Expand Education Savings Accounts (sec. 401 of the House bill and 
                    secs. 530 and 4973 of the Code)

                              Present Law

     In general
       Section 530 provides tax-exempt status to education 
     individual retirement accounts (``education IRAs''), meaning 
     certain trusts (or custodial accounts) which are created or 
     organized in the United States exclusively for the purpose of 
     paying the qualified higher education expenses of a named 
     beneficiary.\15\ Contributions to education IRAs may be made 
     only in cash. Annual contributions to education IRAs may not 
     exceed $500 per designated beneficiary (except in cases 
     involving certain tax-free rollovers, as described below), 
     and may not be made after the designated beneficiary reaches 
     age 18.\16\ Moreover, an excise tax is imposed if a 
     contribution is made by any person to an education IRA 
     established on behalf of a beneficiary during any taxable 
     year in which any contributions are made by anyone to a 
     qualified State tuition program (defined under sec. 529) on 
     behalf of the same beneficiary.
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     \15\ Education IRAs generally are not subject to Federal 
     income tax, but are subject to the unrelated business income 
     tax (``UBIT'') imposed by section 511.
     \16\ An excise tax may be imposed under present law to the 
     extent that excess contributions above the $500 annual limit 
     are made to an education IRA.
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     Phase-out of contribution limit
       The $500 annual contribution limit for education IRAs is 
     phased out ratably for contributors with modified adjusted 
     gross income (``AGI'') between $95,000 and $110,000 (between 
     $150,000 and $160,000 for joint returns). Individuals with 
     modified AGI above the phase-out range are not allowed to 
     make contributions to an education IRA established on behalf 
     of any individual.
     Treatment of distributions
       Amounts distributed from an education IRA are excludable 
     from gross income to the extent that the amounts distributed 
     do not exceed qualified higher education expenses of the 
     designated beneficiary incurred during the year the 
     distribution is made (provided that a HOPE credit or Lifetime 
     Learning credit is not claimed with respect to the 
     beneficiary for the same taxable year). Distributions from an 
     education IRA are generally deemed to consist of 
     distributions of principal (which, under all circumstances, 
     are excludable from gross income) and earnings (which may be 
     excludable from gross income) by applying the ratio that the 
     aggregate amount of contributions to the account for the 
     beneficiary bears to the total balance of the account. If the 
     qualified higher education expenses of the student for the 
     year are at least equal to the total amount of the 
     distribution (i.e., principal and earnings combined) from an 
     education IRA, then the earnings in their entirety are 
     excludable from gross income. If, on the other hand, the 
     qualified higher education expenses of the student for the 
     year are less than the total amount of the distribution 
     (i.e., principal and earnings combined) from an education

[[Page 19643]]

     IRA, then the qualified higher education expenses are deemed 
     to be paid from a pro-rata share of both the principal and 
     earnings components of the distribution. Thus, in such a 
     case, only a portion of the earnings are excludable (i.e., a 
     portion of the earnings based on the ratio that the qualified 
     higher education expenses bear to the total amount of the 
     distribution) and the remaining portion of the earnings is 
     includible in the distributee's gross income.
       To the extent that a distribution exceeds qualified higher 
     education expenses of the designated beneficiary, an 
     additional 10-percent tax is imposed on the earnings portion 
     of such excess distribution, unless such distribution is made 
     on account of the death or disability of, or scholarship 
     received by, the designated beneficiary. The additional 10-
     percent tax also does not apply to the distribution of any 
     contribution to an education IRA made during the taxable year 
     if such distribution is made on or before the date that a 
     return is required to be filed (including extensions of time) 
     by the beneficiary for the taxable year during which the 
     contribution was made (or, if the beneficiary is not required 
     to file such a return, April 15th of the year following the 
     taxable year during which the contribution was made).
       Present law allows tax-free transfers or rollovers of 
     account balances from one education IRA benefitting one 
     beneficiary to another education IRA benefitting another 
     beneficiary (as well as redesignations of the named 
     beneficiary), provided that the new beneficiary is a member 
     of the family of the old beneficiary. For this purpose, a 
     ``member of the family'' means persons described in 
     paragraphs (1) through (8) of section 152(a)--e.g., sons, 
     daughters, brothers, sisters, nephews and nieces, certain in-
     laws--and any spouse of such persons or of the original 
     beneficiary.
       Any balance remaining in an education IRA is deemed to be 
     distributed within 30 days after the date that the named 
     beneficiary reaches age 30 (or, if earlier, within 30 days of 
     the date that the beneficiary dies).
     Qualified higher education expenses
       The term ``qualified higher education expenses'' includes 
     tuition, fees, books, supplies, and equipment required for 
     the enrollment or attendance of the designated beneficiary at 
     an eligible education institution, regardless of whether the 
     beneficiary is enrolled at an eligible educational 
     institution on a full-time, half-time, or less than half-time 
     basis. Moreover, the term ``qualified higher education 
     expenses'' includes certain room and board expenses for any 
     period during which the beneficiary is at least a half-time 
     student. Qualified higher education expenses include expenses 
     with respect to undergraduate or graduate-level courses. In 
     addition, qualified higher education expenses include amounts 
     paid or incurred to purchase tuition credits (or to make 
     contributions to an account) under a qualified State tuition 
     program, as defined in section 529, for the benefit of the 
     beneficiary of the education IRA.
       Qualified higher education expenses generally include only 
     out-of-pocket expenses. Such qualified higher education 
     expenses do not include expenses covered by educational 
     assistance for the benefit of the beneficiary that is 
     excludable from gross income. Thus, total qualified higher 
     education expenses are reduced by scholarship or fellowship 
     grants excludable from gross income under present-law section 
     117, as well as any other tax-free educational benefits, such 
     as employer-provided educational assistance that is 
     excludable from the employee's gross income under section 
     127.\17\
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     \17\ No reduction of qualified higher education expenses is 
     required, however, for a gift, bequest, devise, or 
     inheritance.
---------------------------------------------------------------------------
       Present law also provides that, if any qualified higher 
     education expenses are taken into account in determining the 
     amount of the exclusion for a distribution from an education 
     IRA, then no deduction (e.g., for trade or business expenses 
     deductible under sec. 162), or exclusion (e.g., for expenses 
     paid with interest on education savings bonds excludable 
     under sec. 135), or credit is allowed with respect to such 
     expenses.
     Eligible educational institution
       Eligible educational institutions are defined by reference 
     to section 481 of the Higher Education Act of 1965. Such 
     institutions generally are accredited post-secondary 
     educational institutions offering credit toward a bachelor's 
     degree, an associate's degree, a graduate-level or 
     professional degree, or another recognized post-secondary 
     credential. Certain proprietary institutions and post-
     secondary vocational institutions also are eligible 
     institutions. The institution must be eligible to participate 
     in Department of Education student aid programs.

                               House Bill

     Annual contribution limit
       The House bill increases the annual education IRA 
     contribution limit to $2,000. Thus, in years beginning after 
     2000, aggregate contributions that can be made by all 
     contributors to one (or more) education IRAs established on 
     behalf of any particular beneficiary are limited to $2,000 
     for each year.
     Qualified expenses
       The House bill expands the definition of qualified 
     education expenses that may be paid with tax-free 
     distributions from an education IRA for distributions made in 
     taxable years beginning after December 31, 2000. 
     Specifically, the definition of qualified education expenses 
     is expanded to include ``qualified elementary and secondary 
     education expenses,'' meaning (1) tuition, fees, academic 
     tutoring, special needs services, books, supplies, and 
     equipment (including computers and related software and 
     services) incurred in connection with the enrollment or 
     attendance of the designated beneficiary as an elementary or 
     secondary student at a public, private, or religious school 
     providing elementary or secondary education (kindergarten 
     through grade 12), and (2) room and board, uniforms, 
     transportation, and supplementary items and services 
     (including extended-day programs) required or provided by 
     such a school in connection with such enrollment or 
     attendance of the designated beneficiary.\18\ ``Qualified 
     elementary and secondary education expenses'' also include 
     certain homeschooling education expenses if the requirements 
     of any applicable State or local law are met with respect to 
     such homeschooling.
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     \18\ Contributions made to education IRAs prior to December 
     31, 2000, (and earnings thereon) may be used for 
     distributions for qualified elementary and secondary 
     education expenses made after January 1, 2001. Thus, it is 
     not necessary for trustees of education IRAs to keep separate 
     accounts with respect to contributions made prior to January 
     1, 2001, and earnings thereon.
---------------------------------------------------------------------------
       Under the House bill, the definition of ``qualified higher 
     education expenses'' is modified to mean: (1) tuition and 
     fees required for the enrollment or attendance of a 
     designated beneficiary at an eligible education institution, 
     and (2) expenses for books, supplies, and equipment incurred 
     in connection with such enrollment or attendance (but not in 
     excess of the allowance for books and supplies determined by 
     the educational institution for purposes of Federal financial 
     assistance programs).\19\ The House bill also provides that 
     ``qualified higher education expenses'' does not include 
     expenses for education involving sports, games, or hobbies 
     unless this education is part of the student's degree program 
     or is taken to acquire or improve job skills of the 
     individual. The House bill does not change the definition of 
     ``qualified higher education expenses'' with respect to 
     expenses for room and board.
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     \19\ ``Qualified higher education expenses'' for purposes of 
     education IRAs are defined by reference to the definition of 
     such expenses for purposes of qualified State tuition 
     programs (sec. 530(b)(2)(A)). Because the House bill modifies 
     the definition of ``qualified higher education expenses'' for 
     purposes of qualified State tuition programs (sec. 
     529(e)(3)), the definition of ``qualified higher education 
     expenses'' for education IRAs is also modified.
---------------------------------------------------------------------------

                      Special needs beneficiaries

       The House bill also provides that, although contributions 
     to an education IRA generally may not be made after the 
     designated beneficiary reaches age 18, contributions may 
     continue to be made to an education IRA in the case of a 
     special needs beneficiary (as defined by Treasury Department 
     regulations). In addition, under the House bill, in the case 
     of a special needs beneficiary, a deemed distribution of any 
     balance in an education IRA will not occur when the 
     beneficiary reaches age 30.
     Contributions by persons other than individuals
       The House bill clarifies that corporations and other 
     entities (including tax-exempt organizations) are permitted 
     to make contributions to education IRAs, regardless of the 
     income of the corporation or entity during the year of the 
     contribution. As under present law, the eligibility of high-
     income individuals to make contributions to education IRAs is 
     phased out ratably for individuals with modified AGI between 
     $95,000 and $110,000 ($150,000 and $160,000 for joint 
     returns).
     Contributions permitted until April 15
       Under the House bill, individual contributors to education 
     IRAs are deemed to have made a contribution on the last day 
     of the preceding taxable year if the contribution is made on 
     account of such taxable year and is made not later than the 
     time prescribed by law for filing the return for such taxable 
     year (not including extensions), generally April 15. \20\ The 
     House bill also provides that the additional 10-percent tax 
     does not apply to the distribution of any contribution to an 
     education IRA made during the taxable year if such 
     distribution is made on or before the first day of the sixth 
     month of the taxable year (generally June 1) following the 
     taxable year during which the contribution was or was deemed 
     made.
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     \20\ Trustees of education IRAs will require documentation 
     from a contributor (whether an individual, corporation, or 
     other entity) indicating the taxable year to which the 
     contribution should be allocated.
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     Coordination with HOPE and Lifetime Learning credits
       For distributions made after December 31, 2000, the House 
     bill allows a taxpayer to claim a HOPE credit or Lifetime 
     Learning credit for a taxable year and to exclude from gross 
     income amounts distributed (both the principal and the 
     earnings portions) from an education IRA on behalf of the 
     same student

[[Page 19644]]

     as long as the distribution is not used for the same 
     educational expenses for which a credit was claimed.
     Coordination with qualified tuition programs
       The House bill repeals the excise tax on contributions made 
     by any person to an education IRA on behalf of a beneficiary 
     during any taxable year in which any contributions are made 
     by anyone to a qualified State tuition program on behalf of 
     the same beneficiary (sec. 4973(e)(1)(B)).
     Change name to ``Education Savings Accounts'
       The House bill changes the name of education IRAs to 
     ``Education Savings Accounts.''
     Effective date
       The House bill provisions modifying education IRAs 
     generally are effective for taxable years beginning after 
     December 31, 2000. The House bill provision modifying the 
     definition of ``qualified higher education expenses'' applies 
     to amounts paid for education furnished after December 31, 
     1999, the same date that this provision is effective for 
     qualified state tuition plans described in section 529. The 
     House bill provision changing the name of education IRAs to 
     Education Savings Accounts is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

   C. Allow Tax-free Distributions From State and Private Education 
Programs (sec. 402 of the House bill, sec. 402 of the Senate amendment, 
                       and sec. 529 of the Code)

                              Present Law

       Section 529 provides tax-exempt status to ``qualified State 
     tuition programs,'' meaning certain programs established and 
     maintained by a State (or agency or instrumentality thereof) 
     under which persons may (1) purchase tuition credits or 
     certificates on behalf of a designated beneficiary that 
     entitle the beneficiary to a waiver or payment of qualified 
     higher education expenses of the beneficiary, or (2) make 
     contributions to an account that is established for the 
     purpose of meeting qualified higher education expenses of the 
     designated beneficiary of the account (a ``savings account 
     plan''). The term ``qualified higher education expenses'' 
     generally has the same meaning as does the term for purposes 
     of education IRAs (as described above) and, thus, includes 
     expenses for tuition, fees, books, supplies, and equipment 
     required for the enrollment or attendance at an eligible 
     educational institution \21\, as well as certain room and 
     board expenses for any period during which the student is at 
     least a half-time student.
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     \21\ ``Eligible educational institutions'' are defined the 
     same for purposes of education IRAs and qualified State 
     tuition programs.
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       No amount is included in the gross income of a contributor 
     to, or beneficiary of, a qualified State tuition program with 
     respect to any distribution from, or earnings under, such 
     program, except that (1) amounts distributed or educational 
     benefits provided to a beneficiary (e.g., when the 
     beneficiary attends college) are included in the 
     beneficiary's gross income (unless excludable under another 
     Code section) to the extent such amounts or the value of the 
     educational benefits exceed contributions made on behalf of 
     the beneficiary, and (2) amounts distributed to a contributor 
     (e.g., when a parent receives a refund) are included in the 
     contributor's gross income to the extent such amounts exceed 
     contributions made on behalf of the beneficiary. \22\
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     \22\ Distributions from qualified State tuition programs are 
     treated as representing a pro- rata share of the principal 
     (i.e., contributions) and accumulated earnings in the 
     account.
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       A qualified State tuition program is required to provide 
     that purchases or contributions only be made in cash. \23\ 
     Contributors and beneficiaries are not allowed to directly or 
     indirectly direct the investment of contributions to the 
     program (or earnings thereon). The program is required to 
     maintain a separate accounting for each designated 
     beneficiary. A specified individual must be designated as the 
     beneficiary at the commencement of participation in a 
     qualified State tuition program (i.e., when contributions are 
     first made to purchase an interest in such a program), unless 
     interests in such a program are purchased by a State or local 
     government or a tax-exempt charity described in section 
     501(c)(3) as part of a scholarship program operated by such 
     government or charity under which beneficiaries to be named 
     in the future will receive such interests as scholarships. A 
     transfer of credits (or other amounts) from one account 
     benefitting one designated beneficiary to another account 
     benefitting a different beneficiary is considered a 
     distribution (as is a change in the designated beneficiary of 
     an interest in a qualified State tuition program), unless the 
     beneficiaries are members of the same family. For this 
     purpose, the term ``member of the family'' means persons 
     described in paragraphs (1) through (8) of section 152(a)--
     e.g., sons, daughters, brothers, sisters, nephews and nieces, 
     certain in-laws--and any spouse of such persons or of the 
     original beneficiary. Earnings on an account may be refunded 
     to a contributor or beneficiary, but the State or 
     instrumentality must impose a more than de minimis monetary 
     penalty unless the refund is (1) used for qualified higher 
     education expenses of the beneficiary, (2) made on account of 
     the death or disability of the beneficiary, or (3) made on 
     account of a scholarship received by the designated 
     beneficiary to the extent the amount refunded does not exceed 
     the amount of the scholarship used for higher education 
     expenses.
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     \23\ Sections 529(c)(2), (c)(4), and (c)(5), and section 
     530(d)(3) provide special estate and gift tax rules for 
     contributions made to, and distributions made from, qualified 
     State tuition programs and education IRAs.
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       To the extent that a distribution from a qualified State 
     tuition program is used to pay for qualified tuition and 
     related expenses (as defined in sec. 25A(f)(1)), the 
     distributee (or another taxpayer claiming the distributee as 
     a dependent) may claim the HOPE credit or Lifetime Learning 
     credit under section 25A with respect to such tuition and 
     related expenses (assuming that the other requirements for 
     claiming the HOPE credit or Lifetime Learning credit are 
     satisfied and the modified AGI phaseout for those credits 
     does not apply).

                               House Bill

     Qualified tuition program
       The House bill expands the definition of ``qualified 
     tuition program'' to include certain prepaid tuition programs 
     established and maintained by one or more eligible 
     educational institutions (which may be private institutions) 
     that satisfy the requirements under section 529 (other than 
     the present-law State sponsorship rule). In the case of a 
     qualified tuition program maintained by one or more private 
     educational institutions, persons will be able to purchase 
     tuition credits or certificates on behalf of a designated 
     beneficiary (as described in section 529(b)(1)(A)(i)), but 
     will not be able to make contributions to a savings account 
     plan (described in section 529(b)(1)(A)(ii)).
     Exclusion from gross income
       Under the House bill, an exclusion from gross income is 
     provided for distributions made in taxable years beginning 
     after December 31, 2000, from qualified State tuition 
     programs to the extent that the distribution is used to pay 
     for qualified higher education expenses. This exclusion from 
     gross income is extended to distributions from qualified 
     tuition programs established and maintained by an entity 
     other than a State or agency or instrumentality thereof, for 
     distributions made in taxable years after December 31, 2003.
       The House bill also allows a taxpayer to claim a HOPE 
     credit or Lifetime Learning credit for a taxable year and to 
     exclude from gross income amounts distributed (both the 
     principal and the earnings portions) from a qualified tuition 
     program on behalf of the same student as long as the 
     distribution is not used for the same expenses for which a 
     credit was claimed.
     Definition of qualified higher education expenses
       Under the House bill, the definition of ``qualified higher 
     education expenses'' is modified to mean: (1) tuition and 
     fees required for the enrollment or attendance of a 
     designated beneficiary at an eligible educational 
     institution, and (2) expenses for books, supplies, and 
     equipment incurred in connection with such enrollment or 
     attendance (but not in excess of the allowance for books and 
     supplies determined by the educational institution for 
     purposes of Federal financial assistance programs). \24\ The 
     House bill also provides that ``qualified higher education 
     expenses'' will not include expenses for education involving 
     sports, games, or hobbies unless this education is part of 
     the student's degree program or is taken to acquire or 
     improve job skills of the individual. The bill does not 
     change the definition of ``qualified higher education 
     expenses'' with respect to expenses for room and board.
---------------------------------------------------------------------------
     \24\ The conferees intend that, with respect to a 
     distribution made from a qualified tuition program that does 
     not exceed the allowance for books and supplies determined 
     for purposes of Federal financial assistance by the eligible 
     educational institution where the beneficiary is enrolled, 
     Treasury regulations will provide that beneficiaries need not 
     substantiate actual purchases of books, supplies, and 
     equipment.
---------------------------------------------------------------------------
     Rollovers for benefit of same beneficiary
       The House bill provides that a transfer of credits (or 
     other amounts) from one qualified tuition program for the 
     benefit of a designated beneficiary to another qualified 
     tuition program for the benefit of the same beneficiary will 
     not be considered a distribution for a maximum of one such 
     transfer in each 1-year period.
     Member of family
       The House bill further provides that, for purposes of tax-
     free rollovers and changes of designated beneficiaries, a 
     ``member of the family'' includes first cousins of such 
     beneficiary.
     Effective date
       The House bill provision permitting the establishment of 
     qualified tuition programs

[[Page 19645]]

     maintained by one or more private educational institutions is 
     effective for taxable years beginning after December 31, 
     2000. The exclusion from gross income for certain 
     distributions from qualified State tuition programs under 
     section 529 is effective for distributions made in taxable 
     years beginning after December 31, 2000. In the case of a 
     qualified tuition program established and maintained by an 
     entity other than a State or agency or instrumentality 
     thereof, the House bill provision allowing an exclusion from 
     gross income for certain distributions is effective for 
     distributions made in taxable years beginning after December 
     31, 2003. The House bill provision coordinating distributions 
     from qualified tuition programs with the HOPE and Lifetime 
     Learning credits is effective for distributions made after 
     December 31, 2000. The House bill provision modifying the 
     definition of qualified higher education expenses is 
     effective for amounts paid for education furnished after 
     December 31, 1999. The House bill provisions allowing 
     rollovers for the same beneficiary and including first 
     cousins as a member of the family are effective for taxable 
     years beginning after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that it provides for coordination of the HOPE credit or 
     Lifetime Learning credit with distributions from education 
     individual retirement accounts (``education IRAs'') (in 
     addition to distributions from qualified tuition plans) as 
     long as the distributions are not used for the same expenses 
     for which a credit was claimed. The Senate amendment also 
     provides that the section may be cited as the ``Collegiate 
     Learning and Student Savings (CLASS) Act.''
       Effective date.--The Senate amendment provision permitting 
     the establishment of qualified tuition programs maintained by 
     one or more private educational institutions is effective for 
     taxable years beginning after December 31, 1999. The 
     exclusion from gross income for certain distributions from 
     qualified State tuition programs under section 529 is 
     effective for distributions made in taxable years beginning 
     after December 31, 1999. In the case of a qualified tuition 
     program established and maintained by an entity other than a 
     State or agency or instrumentality thereof, the Senate 
     amendment provision allowing an exclusion from gross income 
     for certain distributions is effective for distributions made 
     in taxable years beginning after December 31, 2003. The 
     Senate amendment provision coordinating distributions from 
     qualified tuition programs and education IRAs with the HOPE 
     and Lifetime Learning credits is effective for distributions 
     made after December 31, 1999. The Senate amendment provision 
     modifying the definition of qualified higher education 
     expenses is effective for amounts paid for courses beginning 
     after December 31, 1999. The provisions allowing rollovers 
     for the same beneficiary and including first cousins as a 
     member of the family is effective for taxable years beginning 
     after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that the provision coordinating the HOPE and Lifetime 
     Learning credits with distributions from education IRAs is 
     not included because this provision is included in the 
     conference agreement provision for education IRAs.

    D. Eliminate Tax on Awards under National Health Service Corps 
 Scholarship Program, F. Edward Hebert Armed Forces Health Professions 
 Scholarship and Financial Assistance Program, National Institutes of 
 Health Undergraduate Scholarship Program, and Certain State-sponsored 
    Scholarship Programs (sec. 403 of the House bill and the Senate 
                  amendment and sec. 117 of the Code)

                              Present Law

       Section 117 excludes from gross income qualified 
     scholarships received by an individual who is a candidate for 
     a degree and used for tuition and fees required for the 
     enrollment or attendance (or for fees, books, supplies, and 
     equipment required for courses of instruction) at a primary, 
     secondary, or post-secondary educational institution. The 
     tax-free treatment provided by section 117 does not extend to 
     scholarship amounts covering regular living expenses, such as 
     room and board. In addition to the exclusion for qualified 
     scholarships, section 117 provides an exclusion from gross 
     income for qualified tuition reductions for certain education 
     provided to employees (and their spouses and dependents) of 
     certain educational organizations.
       Section 117(c) specifically provides that the exclusion for 
     qualified scholarships and qualified tuition reductions does 
     not apply to any amount received by a student that represents 
     payment for teaching, research, or other services by the 
     student required as a condition for receiving the scholarship 
     or tuition reduction.
       The National Health Service Corps Scholarship Program (the 
     ``NHSC Scholarship Program''), the F. Edward Hebert Armed 
     Forces Health Professions Scholarship and Financial 
     Assistance Program (the ``Armed Forces Scholarship 
     Program''), and the National Institutes of Health 
     Undergraduate Scholarship Program (the ``NIH Scholarship 
     Program'') provide education awards to participants on 
     condition that the participants provide certain services. In 
     the case of the NHSC Program, the recipient of the 
     scholarship is obligated to provide medical services in a 
     geographic area (or to an underserved population group or 
     designated facility) identified by the Public Health Service 
     as having a shortage of health-care professionals. In the 
     case of the Armed Forces Scholarship Program, the recipient 
     of the scholarship is obligated to serve a certain number of 
     years in the military at an armed forces medical facility. 
     The National Institutes of Health Undergraduate Scholarship 
     Program (the ``NIH Scholarship Program'') awards scholarships 
     to students from disadvantaged backgrounds interested in 
     pursuing a career in biomedical research. In exchange, the 
     recipients must work for the National Institutes of Health 
     after graduation. Several States also provide a limited 
     number of scholarships to students in health professions who 
     are obligated to work in underserved areas for a period of 
     time after graduation. Because the recipients of scholarships 
     in all of these programs are required to perform services in 
     exchange for the education awards, the awards used to pay 
     higher education expenses are taxable income to the 
     recipient.

                               House Bill

       The House bill provides that amounts received by an 
     individual under the NHSC Scholarship Program, the Armed 
     Forces Scholarship Program, the NIH Scholarship Program, or 
     any State-sponsored health scholarship program determined by 
     the Secretary of the Treasury to have substantially similar 
     objectives to these programs are eligible for tax-free 
     treatment as qualified scholarships under section 117, 
     without regard to any service obligation by the recipient. As 
     with other qualified scholarships under section 117, the tax-
     free treatment does not apply to amounts received by students 
     for regular living expenses, including room and board.
       Effective date.--The House bill is effective for education 
     awards received under the NHSC Scholarship Program, the Armed 
     Forces Scholarship Program, and the NIH Scholarship Program 
     after December 31, 1993. The House bill is effective for 
     education awards received under any State-sponsored health 
     scholarship program designated by the Secretary of the 
     Treasury after December 31, 1999.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that it does not extend the exclusion from gross income to 
     the NIH Scholarship Program or State-sponsored health 
     scholarship programs.

                          Conference Agreement

       The conference agreement follows the House bill.

E. Exclusion for Employer-Provided Educational Assistance (sec. 404 of 
             the Senate amendment and sec. 127 of the Code)

                              Present Law

       Educational expenses paid by an employer for its employees 
     are generally deductible to the employer.
       Employer-paid educational expenses are excludable from the 
     gross income and wages of an employee if provided under a 
     section 127 educational assistance plan or if the expenses 
     qualify as a working condition fringe benefit under section 
     132. Section 127 provides an exclusion of $5,250 annually for 
     employer-provided educational assistance. The exclusion does 
     not apply to graduate courses. The exclusion for employer-
     provided educational assistance expires with respect to 
     courses beginning on or after June 1, 2000.
       In order for the exclusion to apply, certain requirements 
     must be satisfied. The educational assistance must be 
     provided pursuant to a separate written plan of the employer. 
     The educational assistance program must not discriminate in 
     favor of highly compensated employees. In addition, not more 
     than 5 percent of the amounts paid or incurred by the 
     employer during the year for educational assistance under a 
     qualified educational assistance plan can be provided for the 
     class of individuals consisting of more than 5-percent owners 
     of the employer (and their spouses and dependents).
       Educational expenses that do not qualify for the section 
     127 exclusion may be excludable from income as a working 
     condition fringe benefit. \25\ In general, education 
     qualifies as a working condition fringe benefit if the 
     employee could have deducted the education expenses under 
     section 162 if the employee paid for the education. In 
     general, education expenses are deductible by an individual 
     under section 162 if the education (1) maintains or improves 
     a skill required in a trade or business currently engaged in 
     by the taxpayer, or (2) meets the express requirements of the 
     taxpayer's employer, applicable law or regulations imposed as 
     a condition of continued employment. However, education 
     expenses are generally not deductible if they relate to 
     certain minimum educational requirements or to education or 
     training that

[[Page 19646]]

     enables a taxpayer to begin working in a new trade or 
     business. \26\
---------------------------------------------------------------------------
     \25\ These rules also apply in the event that section 127 
     expires and is not reinstated.
     \26\ In the case of an employee, education expenses (if not 
     reimbursed by the employer) may be claimed as an itemized 
     deduction only if such expenses, along with other 
     miscellaneous deductions, exceed 2 percent of the taxpayer's 
     AGI. The 2-percent floor limitation is disregarded in 
     determining whether an item is excludable as a working 
     condition fringe benefit.
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       The provision extends the exclusion for employer-provided 
     educational assistance through 2003, thus, the exclusion is 
     not available with respect to courses beginning after 
     December 31, 2003. The provision also extends the exclusion 
     to graduate education, effective for courses beginning on or 
     after January 1, 2000, and before January 1, 2004.
       Effective date.--The provision is generally effective on 
     the date of enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     respect to the extension of the exclusion as applied to 
     undergraduate education, but does not include the extension 
     of the exclusion to graduate education.

F. Liberalize Tax-Exempt Financing Rules for Public School Construction 
    (secs. 404-405 of the House bill, secs. 405--407 of the Senate 
          amendment, and secs. 103, 148, and 149 of the Code)

                              Present Law

       Tax-exempt bonds
     In general
       Interest on debt incurred by States or local governments is 
     excluded from income if the proceeds of the borrowing are 
     used to carry out governmental functions of those entities or 
     the debt is repaid with governmental funds (sec. 103). Like 
     other activities carried out and paid for by States and local 
     governments, the construction, renovation, and operation of 
     public schools is an activity eligible for financing with the 
     proceeds of tax-exempt bonds.
       Interest on bonds that nominally are issued by States or 
     local governments, but the proceeds of which are used 
     (directly or indirectly) by a private person and payment of 
     which is derived from funds of such a private person is 
     taxable unless the purpose of the borrowing is approved 
     specifically in the Code or in a non-Code provision of a 
     revenue Act. These bonds are called ``private activity 
     bonds.'' The term ``private person'' includes the Federal 
     Government and all other individuals and entities other than 
     States or local governments.
     Private activities eligible for financing with tax-exempt 
         private activity bonds
       The Code includes several exceptions permitting States or 
     local governments to act as conduits providing tax-exempt 
     financing for private activities. Both capital expenditures 
     and limited working capital expenditures of charitable 
     organizations described in section 501(c)(3) of the Code--
     including elementary, secondary, and post-secondary schools--
     may be financed with tax-exempt private activity bonds 
     (``qualified 501(c)(3) bonds'').
       In most cases, the volume of tax-exempt private activity 
     bonds is restricted by aggregate annual limits imposed on 
     bonds issued by issuers within each State. These annual 
     volume limits equal $50 per resident of the State, or $150 
     million if greater. The annual State private activity bond 
     volume limits are scheduled to increase to the greater of $75 
     per resident of the State or $225 million in calendar year 
     2007. The increase will be phased in ratably beginning in 
     calendar year 2003. This increase was enacted by the Tax and 
     Trade Relief Extension Act of 1998. Qualified 501(c)(3) bonds 
     are among the tax-exempt private activity bonds that are not 
     subject to these volume limits.
       Private activity tax-exempt bonds may not be used to 
     finance schools owned or operated by private, for-profit 
     businesses.
     Arbitrage restrictions on tax-exempt bonds
       The Federal income tax does not apply to income of States 
     and local governments that is derived from the exercise of an 
     essential governmental function. To prevent these tax-exempt 
     entities from issuing more Federally subsidized tax-exempt 
     bonds than is necessary for the activity being financed or 
     from issuing such bonds earlier than necessary, the Code 
     includes arbitrage restrictions limiting the ability to 
     profit from investment of tax-exempt bond proceeds. In 
     general, arbitrage profits may be earned only during 
     specified periods (e.g., defined ``temporary periods'') 
     before funds are needed for the purpose of the borrowing or 
     on specified types of investments (e.g., ``reasonably 
     required reserve or replacement funds''). Subject to limited 
     exceptions, investment profits that are earned during these 
     periods or on such investments must be rebated to the Federal 
     Government.
       The Code includes three exceptions applicable to education-
     related bonds. First, issuers of all types of tax-exempt 
     bonds are not required to rebate arbitrage profits if all of 
     the proceeds of the bonds are spent for the purpose of the 
     borrowing within six months after issuance. In the case of 
     governmental bonds (including bonds to finance public 
     schools) the six-month expenditure exception is treated as 
     satisfied if at least 95 percent of the proceeds is spent 
     within six months and the remaining five percent is spent 
     within 12 months after the bonds are issued.
       Second, in the case of bonds to finance certain 
     construction activities, including school construction and 
     renovation, the six-month period is extended to 24 months for 
     construction proceeds. Arbitrage profits earned on 
     construction proceeds are not required to be rebated if all 
     such proceeds (other than certain retainage amounts) are 
     spent by the end of the 24-month period and prescribed 
     intermediate spending percentages are satisfied.
       Third, governmental bonds issued by ``small'' governments 
     are not subject to the rebate requirement. Small governments 
     are defined as general purpose governmental units that issue 
     no more than $5 million of tax-exempt governmental bonds in a 
     calendar year. The $5 million limit is increased to $10 
     million if at least $5 million of the bonds are used to 
     finance public schools.
     Restriction on Federal guarantees of tax-exempt bonds
       Unlike interest on State or local government bonds, 
     interest on Federal debt (e.g., Treasury bills) is taxable. 
     Generally, interest on State and local government bonds that 
     are Federally guaranteed does not qualify for tax-exemption. 
     This restriction was enacted in 1984. The 1984 legislation 
     included exceptions for housing bonds and for certain other 
     Federal insurance programs that were in existence when the 
     restriction was enacted.

                      Qualified zone academy bonds

       As an alternative to traditional tax-exempt bonds, certain 
     States and local governments are given the authority to issue 
     ``qualified zone academy bonds.'' Under present law, a total 
     of $400 million of qualified zone academy bonds may be issued 
     in each of 1998 and 1999. The $400 million aggregate bond 
     authority is allocated each year to the States according to 
     their respective populations of individuals below the poverty 
     line. Each State, in turn, allocates the credit to qualified 
     zone academies within such State. A State may carry over any 
     unused allocation into subsequent years.
     1. Increase amount of governmental bonds that may be issued 
         by governments qualifying for the ``small governmental 
         unit'' arbitrage rebate exception

                               House Bill

       The additional amount of governmental bonds for public 
     schools that small governmental units may issue without being 
     subject to the arbitrage rebate requirement is increased from 
     $5 million to $10 million. Thus, these governmental units may 
     issue up to $15 million of governmental bonds in a calendar 
     year provided that at least $10 million of the bonds are used 
     to finance public school construction expenditures.
       Effective date.--The provision is effective for bonds 
     issued in calendar years beginning after December 31, 1999.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Liberalize construction bond expenditure rule for 
         governmental bonds for public schools

                               House Bill

       The present-law 24-month expenditure exception to the 
     arbitrage rebate requirement are liberalized for certain 
     public school bonds. Under the bill, no rebate is required 
     with respect to earnings on available construction proceeds 
     of public school bonds if the proceeds are spent within 48 
     months after the bonds are issued and the following 
     intermediate spending levels are satisfied:

 
 
 
12 months.................................  At least 10 percent
24 months.................................  At least 30 percent
36 months.................................  At least 60 percent
48 months.................................  100 percent (less present-
                                             law retainage amounts which
                                             must be spent within 60
                                             months of issuance)
 

       Effective date.--The provision applies to bonds issued in 
     calendar years beginning after 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     3. Allow issuance of tax-exempt private activity bonds for 
         public school facilities

                               House Bill

       No provision.

                            Senate Amendment

       The private activities for which tax-exempt bonds may be 
     issued are expanded to include elementary and secondary 
     public school facilities which are owned by private, for-
     profit corporations pursuant to public-private partnership 
     agreements with a State or local educational agency. The term 
     school facility includes school buildings and functionally 
     related and subordinate land (including stadiums or other 
     athletic facilities primarily used for school events) and 
     depreciable personal property used in the school

[[Page 19647]]

     facility. The school facilities for which these bonds are 
     issued must be operated by a public educational agency as 
     part of a system of public schools.
       A public-private partnership agreement is defined as an 
     arrangement pursuant to which the for-profit corporate party 
     constructs, rehabilitates, refurbishes or equips a school 
     facility. The agreement must provide that, at the end of the 
     contract term, ownership of the bond-financed property is 
     transferred to the public school agency party to the 
     agreement for no additional consideration.
       Issuance of these bonds is subject to a separate annual 
     per-State volume limit equal to the greater of $10 per 
     resident ($5 million, if greater) in lieu of the present-law 
     State private activity bond volume limits. As with the 
     present-law State private activity bond volume limits, States 
     decide how to allocate the bond authority to State and local 
     government agencies. Bond authority that is unused in the 
     year in which it arises may be carried forward for up to 
     three years for public school projects under rules similar to 
     the carryforward rules of the present-law private activity 
     bond volume limits.
       Effective date.--The provision applies to bonds issued 
     after December 31, 1999.

                          Conference Agreement

       The conference does not include the Senate amendment 
     provision.
     4. Permit limited Federal guarantees of school construction 
         bonds by the Federal Housing Finance Board

                               House Bill

       No provision.

                            Senate Amendment

       The Federal Housing Finance Board is permitted to authorize 
     the regional Federal Home Loan Banks in its system to 
     guarantee limited amounts of public school bonds. Eligible 
     bonds are governmental bonds with respect to which 95 percent 
     of more of the proceeds are used for public school 
     construction. The aggregate amount of bonds which may be 
     guaranteed by all such Banks pursuant to this provision is 
     $500 million per year.
       Effective date.--The provision will become effective upon 
     enactment (after the date of enactment of the amendment) of 
     legislation authorizing the Federal Housing Finance Board and 
     Federal Home Loan Banks to provide the guarantees.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

G. Expansion of Deduction for Computer Donations to Schools (sec. 1124 
        of the Senate amendment and sec. 170(e)(6) of the Code)

                              Present Law

       The maximum charitable contribution deduction that may be 
     claimed by a corporation for any one taxable year is limited 
     to 10 percent of the corporation's taxable income for that 
     year (disregarding charitable contributions and with certain 
     other modifications) (sec. 170(b)(2)). Corporations also are 
     subject to certain limitations based on the type of property 
     contributed. In the case of a charitable contribution of 
     short-term gain property, inventory, or other ordinary income 
     property, the amount of the deduction generally is limited to 
     the taxpayer's basis (generally, cost) in the property. 
     However, special rules in the Code provide an augmented 
     deduction for certain corporate contributions. Under these 
     special rules, the amount of the augmented deduction is equal 
     to the lesser of (1) the basis of the donated property plus 
     one-half of the amount of ordinary income that would have 
     been realized if the property had been sold, or (2) twice 
     basis.
       Section 170(e)(6) allows corporate taxpayers an augmented 
     deduction for qualified contributions of computer technology 
     and equipment (i.e., computer software, computer or 
     peripheral equipment, and fiber optic cable related to 
     computer use) to be used within the United States for 
     educational purposes in grades K-12. Eligible donees are: (1) 
     any educational organization that normally maintains a 
     regular faculty and curriculum and has a regularly enrolled 
     body of pupils in attendance at the place where its 
     educational activities are regularly carried on; and (2) tax-
     exempt charitable organizations that are organized primarily 
     for purposes of supporting elementary and secondary 
     education. A private foundation also is an eligible donee, 
     provided that, within 30 days after receipt of the 
     contribution, the private foundation contributes the property 
     to an eligible donee described above.
       Qualified contributions are limited to gifts made no later 
     than two years after the date the taxpayer acquired or 
     substantially completed the construction of the donated 
     property. In addition, the original use of the donated 
     property must commence with the donor or the donee. 
     Accordingly, qualified contributions generally are limited to 
     property that is no more than two years old. Such donated 
     property could be computer technology or equipment that is 
     inventory or depreciable trade or business property in the 
     hands of the donor.
       Donee organizations are not permitted to transfer the 
     donated property for money or services (e.g., a donee 
     organization cannot sell the computers). However, a donee 
     organization may transfer the donated property in furtherance 
     of its exempt purposes and be reimbursed for shipping, 
     installation, and transfer costs. For example, if a 
     corporation contributes computers to a charity that 
     subsequently distributes the computers to several elementary 
     schools in a given area, the charity could be reimbursed by 
     the elementary schools for shipping, transfer, and 
     installation costs.
       The special treatment applies only to donations made by C 
     corporations; S corporations, personal holding companies, and 
     service organizations are not eligible donors.
       The provision is scheduled to expire for contributions made 
     in taxable years beginning after December 31, 2000.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment makes the augmented deduction of 
     section 170(e)(6) available for gifts made no later than 
     three years after the date the taxpayer acquired or 
     substantially completed the construction of the donated 
     property. The Senate amendment also modifies the current-law 
     original use requirement (i.e., the original use of the 
     donated property must be the donor or the donee) by making 
     the deduction available to donors who reacquire computers 
     prior to donation. Thus, a corporation would be permitted to 
     donate computers that were traded in or returned to them 
     under a lease program.
       Effective date.--The Senate amendment is effective for 
     contributions made in taxable years ending after the date of 
     enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 H. Credit for Computer Donations to Schools and Senior Centers (sec. 
       1125 of the Senate amendment and new sec. 45E of the Code)

                              Present Law

       The maximum charitable contribution deduction that may be 
     claimed by a corporation for any one taxable year is limited 
     to 10 percent of the corporation's taxable income for that 
     year (disregarding charitable contributions and with certain 
     other modifications) (sec. 170(b)(2)). Corporations also are 
     subject to certain limitations based on the type of property 
     contributed. In the case of a charitable contribution of 
     short-term gain property, inventory, or other ordinary income 
     property, the amount of the deduction generally is limited to 
     the taxpayer's basis (generally, cost) in the property. 
     However, special rules in the Code provide an augmented 
     deduction for certain corporate contributions. Under these 
     special rules, the amount of the augmented deduction is equal 
     to the lesser of (1) the basis of the donated property plus 
     one-half of the amount of ordinary income that would have 
     been realized if the property had been sold, or (2) twice 
     basis.
       Section 170(e)(6) allows corporate taxpayers an augmented 
     deduction for qualified contributions of computer technology 
     and equipment (i.e., computer software, computer or 
     peripheral equipment, and fiber optic cable related to 
     computer use) to be used within the United States for 
     educational purposes in grades K-12. Qualified contributions 
     are limited to gifts made no later than two years after the 
     date the taxpayer acquired or substantially completed the 
     construction of the donated property. In addition, the 
     original use of the donated property must commence with the 
     donor or the donee. Eligible donees are: (1) any educational 
     organization that normally maintains a regular faculty and 
     curriculum and has a regularly enrolled body of pupils in 
     attendance at the place where its educational activities are 
     regularly carried on; and (2) tax-exempt charitable 
     organizations that are organized primarily for purposes of 
     supporting elementary and secondary education. A private 
     foundation also is an eligible donee, provided that, within 
     30 days after receipt of the contribution, the private 
     foundation contributes the property to an eligible donee 
     described above.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment permits businesses to claim a tax 
     credit in lieu of the augmented deduction for qualified 
     contributions of computer technology and equipment, as 
     defined under section 170(e)(6)(B).\27\ In addition, the 
     Senate amendment allows businesses to claim a credit for 
     contributions of computer technology or equipment to 
     multipurpose senior centers (as defined by reference to the 
     Older Americans Act of 1965) for use by individuals who are 
     at least 60 years old to improve job skills in computers.
---------------------------------------------------------------------------
     \27\ In addition, the Senate amendment provides that the term 
     ``qualified computer contribution,'' for purposes of the 
     computer donation credit, includes a computer only if the 
     computer software that serves as the computer's operating 
     system has been lawfully installed.
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       The credit is equal to 30 percent of the amount calculated 
     for purposes of determining the augmented deduction under 
     section 170(e)(6)(A) (i.e., the lesser of the basis of the 
     donated property plus one-half of the amount of ordinary 
     income that would have been realized if the property had been 
     sold,

[[Page 19648]]

     or twice basis). If the donee is a qualified educational 
     organization or senior center located in an empowerment zone, 
     enterprise community, or Indian reservation (as defined in 
     sec. 168(j)(6)), the proposed credit would be equal to 50 
     percent of the amount calculated for purposes of determining 
     the augmented deduction under section 170(e)(6)(A). No 
     deduction is allowed for the portion of computer donations 
     made during a taxable year that is equal to the amount of the 
     credit claimed during the year.
       Effective date.--The Senate amendment provision providing a 
     30-percent credit for qualified computer donations is 
     effective for contributions made in taxable years beginning 
     one year after the date of enactment and before taxable years 
     beginning on or after the date which is three years after the 
     date of enactment. The Senate amendment provision providing a 
     50-percent credit for qualified computer donations to 
     eligible recipients in empowerment zones, enterprise 
     communities, and Indian reservations is effective for 
     contributions made during taxable years beginning after the 
     date of enactment and before taxable years beginning on or 
     after the date which is three years after the date of 
     enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

I. Two-Percent Floor Not To Apply to Professional Development Expenses 
of Teachers (sec. 1123 of the Senate amendment and sec. 67 of the Code)

                              Present Law

       In general, taxpayers are not permitted to deduct education 
     expenses. However, employees may deduct the cost of certain 
     work-related education. For costs to be deductible, the 
     education must either be required by the taxpayer's employer 
     or by law to retain taxpayer's current job or be necessary to 
     maintain or improve skills required in the taxpayer's current 
     job. Expenses incurred for education that is necessary to 
     meet minimum education requirements of an employee's present 
     trade or business or that can qualify an employee for a new 
     trade or business are not deductible.
       An employee is allowed to deduct work-related education and 
     other business expenses only to the extent such expenses 
     (together with other miscellaneous itemized deductions) 
     exceed 2 percent of the taxpayer's adjusted gross income.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that qualified professional 
     development expenses incurred by an elementary or secondary 
     school teacher (including instructors, aides, counselors and 
     principals) with respect to certain courses of instruction 
     would not be subject to the 2-percent floor on miscellaneous 
     itemized deductions. Qualified professional development 
     expenses are expenses for tuition, fees, books, supplies, 
     equipment, and transportation required for enrollment or 
     attendance in a qualified course of instruction, provided 
     that such expenses are otherwise deductible under present 
     law. A qualified course of instruction means a professional 
     conference or a course of instruction at an institution of 
     higher education (as defined in sec. 481 of the Higher 
     Education Act of 1965), and which is part of a program of 
     professional development that is approved and certified by 
     the appropriate local educational agency as furthering the 
     individual's teaching skills.
       Additionally, the 2-percent floor would not apply to 
     incidental expenses paid by an eligible teacher in an amount 
     not greater than $125 for any taxable year for books, 
     supplies and equipment related to instruction, teaching, or 
     other educational job-related activities of the teacher. The 
     exception to the 2-percent for incidental expenses would also 
     apply to homeschooling if the requirements of applicable 
     State or local law are met with respect to the homeschooling.
       Effective date.--Taxable years beginning after December 31, 
     2000, and ending on or before December 31, 2004.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications. The conference agreement provides an exception 
     to the 2-percent floor for the qualified professional 
     development expenses of eligible teachers, not to exceed 
     $1,000 per year. The conference agreement does not provide an 
     exception to the 2-percent floor for job-related incidental 
     expenses.

 J. Exclusion for Education Benefits Provided by Employers to Children 
  of Employees (sec. 404 of the Senate amendment and sec. 117 of the 
                                 Code)

                              Present Law

       If certain requirements are satisfied, employer-paid 
     educational expenses are excludable from the gross income and 
     wages of an employee if provided under a section 127 
     educational assistance plan or if the expenses qualify as a 
     working condition fringe benefit under section 132. Section 
     127 provides an exclusion of $5,250 annually for employer-
     provided educational assistance. The exclusion does not apply 
     to graduate courses. The exclusion for employer-provided 
     educational assistance expires with respect to courses 
     beginning on or after June 1, 2000. These exclusions do not 
     apply with respect to education provided to an individual 
     other than the employee.
       Section 117 provides that, if certain conditions are 
     satisfied, a qualified scholarship is excludable from the 
     gross income of an individual who is a candidate for a 
     degree.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that educational benefits 
     provided to children of employees are excludable from gross 
     income as a scholarship, regardless of whether the child is a 
     candidate for a degree program. Any such benefits must be in 
     addition to any other compensation payable to the employee. 
     The exclusion does not apply to any amount provided to a 
     child of an individual who owns more than 5 percent of the 
     employer.
       The maximum amount excludable for a taxable year with 
     respect to a child of an employee may not exceed $2,000. In 
     addition, the maximum amount excludable from an employee's 
     income for a year under the provision may not exceed the 
     excess of the amount excludable under section 127 ($5,250) 
     over the amount excluded from the employee's income under 
     section 127 for that year.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

   K. Credit for Interest on Higher Education Loans (sec. 208 of the 
             Senate amendment and new sec. 25B of the Code)

                              Present Law

       Certain individuals who have paid interest on qualified 
     education loans may claim an above-the-line deduction for 
     such interest expenses, subject to a maximum annual deduction 
     limit (sec. 221). The deduction is allowed only with respect 
     to interest paid on a qualified education loan during the 
     first 60 months in which interest payments are required. 
     Required payments of interest generally do not include 
     nonmandatory payments, such as interest payments made during 
     a period of loan forbearance. Months during which interest 
     payments are not required because the qualified education 
     loan is in deferral or forbearance do not count against the 
     60-month period. No deduction is allowed to an individual if 
     that individual is claimed as a dependent on another 
     taxpayer's return for the taxable year.
       A qualified education loan generally is defined as any 
     indebtedness incurred solely to pay for certain costs of 
     attendance (including room and board) of a student (who may 
     be the taxpayer, the taxpayer's spouse, or any dependent of 
     the taxpayer as of the time the indebtedness was incurred) 
     who is enrolled in a degree program on at least a half-time 
     basis at (1) an accredited post-secondary educational 
     institution defined by reference to section 481 of the Higher 
     Education Act of 1965, or (2) an institution conducting an 
     internship or residency program leading to a degree or 
     certificate from an institution of higher education, a 
     hospital, or a health care facility conducting postgraduate 
     training.
       The maximum allowable deduction per taxpayer return is 
     $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and 
     thereafter.\28\ The deduction is phased out ratably for 
     individual taxpayers with modified adjusted gross income 
     (``AGI'') of $40,000-$55,000 and $60,000-$75,000 for joint 
     returns. The income ranges will be indexed for inflation 
     after 2002.
---------------------------------------------------------------------------
     \28\ The maximum allowable deduction for 1998 was $1,000.
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, certain individuals who have 
     paid interest on qualified education loans may claim a tax 
     credit for such interest expenses, up to a maximum credit of 
     $1,500 per year. The credit is allowed only with respect to 
     interest paid on a qualified education loan during the first 
     60 months in which interest payments are required. A 
     qualified education loan is defined in the same manner as for 
     the deduction for student loan interest under section 221. No 
     credit is allowed to an individual if that individual is 
     claimed as a dependent on another taxpayer's return for the 
     taxable year. In addition, no credit is allowed for any 
     amount taken into account for any deduction under chapter 1 
     of the Code.
       The credit is phased out ratably for individual taxpayers 
     with modified AGI of $50,000-$70,000 ($80,000-$100,000 for 
     joint returns). The income phase-out ranges will be indexed 
     for inflation after the year 2005, rounded to the closest 
     multiple of $50.
       Effective date.--The Senate amendment is effective for 
     interest due and paid after December 31, 2004, on any 
     qualified education loan.

[[Page 19649]]



                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

                  V. HEALTH CARE TAX RELIEF PROVISIONS

A. Above-the-Line Deduction for Health Insurance Expenses (sec. 501 of 
 the House bill and the Senate amendment and new sec. 222 of the Code)

                              Present Law

       Under present law, the tax treatment of health insurance 
     expenses depends on the individual's circumstances. Self-
     employed individuals may deduct a portion of health insurance 
     expenses for the individual and his or her spouse and 
     dependents. The deductible percentage of health insurance 
     expenses of a self-employed individual is 60 percent in 1999 
     through 2001; 70 percent in 2002; and 100 percent in 2003 and 
     thereafter. The deduction for health insurance expenses of 
     self-employed individuals is not available for any month in 
     which the taxpayer is eligible to participate in a subsidized 
     health plan maintained by the employer of the taxpayer or the 
     taxpayer's spouse. The deduction applies to qualified long-
     term care insurance premiums treated as medical expenses 
     under the itemized deduction for medical expenses, described 
     below.
       Employees can exclude from income 100 percent of employer-
     provided health insurance.
       Individuals who itemize deductions may deduct their health 
     insurance expenses only to the extent that the total medical 
     expenses of the individual exceed 7.5 percent of adjusted 
     gross income (sec. 213). Subject to certain dollar 
     limitations, premiums for qualified long-term care insurance 
     are treated as medical expenses for purposes of the itemized 
     deduction for medical expenses (sec. 213). The amount of 
     qualified long-term care insurance premiums that may be taken 
     into account for 1999 is as follows: $210 in the case of an 
     individual 40 years old or less; $400 in the case of an 
     individual who is more than 40 but not more than 50; $800 in 
     the case of an individual who is more than 50 but not more 
     than 60; $2,120 in the case of an individual who is more than 
     60 but not more than 70; and $2,660 in the case of an 
     individual who is more than 70. These dollar limits are 
     indexed for inflation.

                               House Bill

       The House bill provides an above-the-line deduction for a 
     percentage of the amount paid during the year for insurance 
     which constitutes medical care (as defined under sec. 213, 
     other than long-term care insurance treated as medical care 
     under sec. 213) for the taxpayer and his or her spouse and 
     dependents.\29\ The deductible percentage is: 25 percent in 
     2001; 40 percent in 2002; 50 percent in 2003 through 2006; 75 
     percent in 2007; and 100 percent in 2008 and thereafter.
---------------------------------------------------------------------------
     \29\ The deduction only applies to health insurance that 
     constitutes medical care; it does not apply to medical 
     expenses. The deduction applies to self-insured arrangements 
     (provided such arrangements constitute insurance, e.g., there 
     is appropriate risk-shifting) and coverage under employer 
     plans treated as insurance under section 104. Another 
     provision of the bill provides a similar deduction for 
     qualified long-term care insurance expenses.
---------------------------------------------------------------------------
       The deduction is not available to an individual for any 
     month in which the individual is covered under an employer-
     sponsored health plan if at least 50 percent of the cost of 
     the coverage is paid or incurred by the employer \30\ For 
     purposes of this rule, any amounts excludable from the gross 
     income of the employee under the exclusion for employer-
     provided health coverage is treated as paid or incurred by 
     the employer; thus, for example, health insurance purchased 
     by an employee through a cafeteria plan with salary reduction 
     amounts is considered to be paid for by the employer.\31\ In 
     determining whether the 50-percent threshold is met, all 
     health plans of the employer in which the employee 
     participates are treated as a single plan. If the employer 
     pays for less than 50 percent of the cost of all health plans 
     in which the individual participates, the deduction is 
     available only with respect to each plan with respect to 
     which the employer subsidy is less than 50 percent. Cost is 
     determined as under the health care continuation rules.
---------------------------------------------------------------------------
     \30\ This rule is applied separately with respect to 
     qualified long-term care insurance.
     \31\ Excludable employer contributions to a health flexible 
     spending arrangement or medical savings account (including 
     salary reduction contributions) are also considered amounts 
     paid by the employer for health insurance that constitutes 
     medical care. Salary reduction contributions are not 
     considered to be amounts paid by the employee.
---------------------------------------------------------------------------
       The deduction is not available to individuals enrolled in 
     Medicare, Medicaid, the Federal Employees Health Benefit 
     Program (``FEHBP''),\32\ Champus, VA, Indian Health Service, 
     or Children's Health Insurance programs. Thus, for example, 
     the deduction is not available with respect to Medigap 
     coverage, because such coverage is provided to individuals 
     enrolled in Medicare.
---------------------------------------------------------------------------
     \32\ This rule does not prevent individuals covered by the 
     FEHBP from deducting premiums for health care continuation 
     coverage, provided the requirements for the deduction are 
     otherwise met.
---------------------------------------------------------------------------
       The provision authorizes the Secretary to prescribe rules 
     necessary to carry out the provision, including appropriate 
     reporting requirements for employers.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that the deductible percentage of health care insurance 
     expenses is as follows: 25 percent in 2001, 2002, and 2003; 
     50 percent in 2004 and 2005; and 100 percent in 2006 and 
     thereafter.
       In addition, under the Senate amendment, the deduction is 
     not available with respect to insurance providing coverage 
     for accidents, disability, dental care, vision care or a 
     specific disease or making payments of a fixed amount per day 
     (or other period) on account of hospitalization. Such 
     insurance and employer payments for such insurance are not 
     taken into account in determining whether the employee pays 
     more than half the cost of the health insurance.
       Effective date.--Same as the House bill.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications to the deductible percentage.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001.

 B. Provisions Relating to Long-term Care Insurance (secs. 501 and 502 
of the House bill, secs. 501 and 502 of the Senate amendment and secs. 
               105 and 125 and new sec. 222 of the Code)

                              Present Law

     Tax treatment of health insurance and long-term care 
         insurance
       Under present law, the tax treatment of health insurance 
     expenses depends on the individual's circumstances. Self-
     employed individuals may deduct a portion of health insurance 
     expenses for the individual and his or her spouse and 
     dependents. The deductible percentage of health insurance 
     expenses of a self-employed individual is 60 percent in 1999 
     through 2001; 70 percent in 2002; and 100 percent in 2003 and 
     thereafter. The deduction for health insurance expenses of 
     self-employed individuals is not available for any month in 
     which the taxpayer is eligible to participate in a subsidized 
     health plan maintained by the employer of the taxpayer or the 
     taxpayer's spouse. The deduction applies to qualified long-
     term care insurance premiums treated as medical expenses 
     under the itemized deduction for medical expenses, described 
     below.
       Employees can exclude from income 100 percent of employer-
     provided health insurance or qualified long-term care 
     insurance.
       Individuals who itemize deductions may deduct their health 
     insurance expenses only to the extent that the total medical 
     expenses of the individual exceed 7.5 percent of adjusted 
     gross income (sec. 213). Subject to certain dollar 
     limitations, premiums for qualified long-term care insurance 
     are treated as medical expenses for purposes of the itemized 
     deduction for medical expenses (sec. 213). The amount of 
     qualified long-term care insurance premiums that may be taken 
     into account for 1999 is as follows: $210 in the case of an 
     individual 40 years old or less; $400 in the case of an 
     individual who is more than 40 but not more than 50; $800 in 
     the case of an individual who is more than 50 but not more 
     than 60; $2,120 in the case of an individual who is more than 
     60 but not more than 70; and $2,660 in the case of an 
     individual who is more than 70. These dollar limits are 
     indexed for inflation.
     Cafeteria plans
       Under present law, compensation generally is includible in 
     gross income when actually or constructively received. An 
     amount is constructively received by an individual if it is 
     made available to the individual or the individual has an 
     election to receive such amount. Under one exception to the 
     general principle of constructive receipt, amounts are not 
     included in the gross income of a participant in a cafeteria 
     plan described in section 125 of the Code solely because the 
     participant may elect among cash and certain employer-
     provided qualified benefits under the plan. This constructive 
     receipt exception is not available if the individual is 
     permitted to revoke a benefit election during a period of 
     coverage in the absence of a change in family status or 
     certain other events.
       In general, qualified benefits are certain specified 
     benefits that are excludable from an employee's gross income 
     by reason of a specific provision of the Code. Thus, 
     employer-provided accident or health coverage, group-term 
     life insurance coverage (whether or not subject to tax by 
     reason of being in excess of the dollar limit on the 
     exclusion for such insurance), and benefits under dependent 
     care assistance programs may be provided through a cafeteria 
     plan. The cafeteria plan exception from the principle of 
     constructive receipt generally also applies for employment 
     tax (FICA and FUTA) purposes. \33\
---------------------------------------------------------------------------
     \33\ Elective contributions under a qualified cash or 
     deferred arrangement that is part of a cafeteria plan are 
     subject to employment taxes.
---------------------------------------------------------------------------
       Long-term care insurance cannot be provided under a 
     cafeteria plan.
     Flexible spending arrangements
       A flexible spending arrangement (``FSA'') is a 
     reimbursement account or other arrangement under which an 
     employer pays or

[[Page 19650]]

     reimburses employees for medical expenses or certain other 
     nontaxable employer-provided benefits, such as dependent 
     care. An FSA may be part of a cafeteria plan and may be 
     funded through salary reduction. FSAs may also be provided by 
     an employer outside a cafeteria plan. FSAs are commonly used, 
     for example, to reimburse employees for medical expenses not 
     covered by insurance. Qualified long-term care services 
     cannot be provided through an FSA.

                               House Bill

     Deduction for qualified long-term care insurance expenses
       The provision provides an above-the-line deduction for a 
     percentage of the amount paid during the year for long-term 
     care insurance which constitutes medical care (as defined 
     under sec. 213) for the taxpayer and his or her spouse and 
     dependents. \34\ The deductible percentage is: 25 percent in 
     2001, 2002, and 2003; 50 percent in 2004 and 2005; and 100 
     percent in 2006 and thereafter.
---------------------------------------------------------------------------
     \34\ The deduction would only apply to insurance that 
     constitutes medical care; it would not apply to long-term 
     care insurance expenses. The deduction would apply to self-
     insured arrangements (provided such arrangements constitute 
     insurance, e.g., there is appropriate risk- shifting) and 
     coverage under employer plans treated as insurance under 
     section 104. Another provision of the bill provides a similar 
     deduction for health insurance expenses.
---------------------------------------------------------------------------
       The deduction is not available to an individual for any 
     month in which the individual is covered under an employer-
     sponsored health plan if at least 50 percent of the cost of 
     the coverage is paid or incurred by the employer. \35\ For 
     purposes of this rule, any amounts excludable from the gross 
     income of the employee with respect to qualified long-term 
     care insurance are treated as paid or incurred by the 
     employer. In determining whether the 50-percent threshold is 
     met, all plans of the employer providing long-term care in 
     which the employee participates are treated as a single plan. 
     If the employer pays less than 50 percent of the cost of all 
     long-term care plans in which the individual participates, 
     the deduction is available only with respect to each plan 
     with respect to which the employer pays for less than 50 
     percent of the cost. Cost is determined as under the health 
     care continuation rules.
---------------------------------------------------------------------------
     \35\ This rule is applied separately with respect to health 
     insurance.
---------------------------------------------------------------------------
     Long-term care insurance provided through a cafeteria plan
       The provision authorizes the Secretary to prescribe rules 
     necessary to carry out the provision, including appropriate 
     reporting requirements for employers.
       The provision provides that qualified long-term care 
     insurance is a qualified benefit under a cafeteria plan. The 
     provision also provides that qualified long-term care 
     services can be provided under an FSA. \36\
---------------------------------------------------------------------------
     \36\ Excludable employer contributions to a flexible spending 
     arrangement or a cafeteria plan for qualified long-term care 
     insurance or services are considered an amount paid by the 
     employer for long-term care insurance.
---------------------------------------------------------------------------
     Effective date
       The provision is effective for taxable years beginning 
     after December 31, 2000.

                            Senate Amendment

     Deduction for qualified long-term care insurance expenses
       The provision is the same as the House bill, with the 
     following modification. Under the Senate amendment, the 
     percentage deduction for qualified long-term care insurance 
     expenses is as follows: 25 percent in 2001, 2002, and 2003; 
     50 percent in 2004 and 2005; and 100 percent in 2006 and 
     thereafter.
     Long-term care insurance provided through a cafeteria plan
       The Senate amendment is the same as the House bill, with 
     the modification that qualified long-term care insurance is 
     treated as a qualified benefit under the cafeteria plan rules 
     only to the extent that such insurance is treated as a 
     medical expense under the itemized deduction for medical 
     expenses (i.e., only to the extent of the premium limitations 
     under sec. 213).
     Effective date
       The Senate amendment is the same as the House bill.

                          Conference Agreement

     Deduction for qualified long-term care insurance expenses
       The conference agreement follows the Senate amendment, with 
     modifications to the deductible percentage.
       As under the Senate amendment, the 50-percent rule is 
     applied separately to health insurance and qualified long-
     term care insurance. For example, suppose an employee 
     participates in a health insurance plan of the employer and 
     that the employer pays for 100 percent of the cost of the 
     coverage. The employee also participates in an employer-
     sponsored qualified long-term care insurance plan, and the 
     employer pays for 10 percent of the cost of the qualified 
     long-term care insurance. The employee pays for the remaining 
     90 percent of the long-term care insurance premium on an 
     after-tax basis. The employee is not entitled to the 
     deduction for health insurance expenses, but may deduct the 
     90 percent of the long-term care insurance premium she pays 
     on an after-tax basis (subject to the premium limitations 
     contained in section 213).
     Long-term care insurance provided through a cafeteria plan
       The conference agreement follows the Senate amendment. 
     Under the conference agreement, as under the Senate 
     amendment, the qualified long-term care insurance may only be 
     offered under a cafeteria plan to the extent the cost of such 
     insurance does not exceed the premium limitations contained 
     in section 213.
     Effective date
       The provision is effective with respect to years beginning 
     after December 31, 2001.

  C. Extend Availability of Medical Savings Accounts (sec. 503 of the 
                  House bill and sec. 220 of the Code)

                              Present Law

     In general
       Within limits, contributions to a medical savings account 
     (``MSA'') \37\ are deductible in determining AGI if made by 
     an eligible individual and are excludable from gross income 
     and wages for employment tax purposes if made by the employer 
     of an eligible individual. Earnings on amounts in an MSA are 
     not currently taxable. Distributions from an MSA for medical 
     expenses are not taxable. Distributions not used for medical 
     expenses are taxable. In addition, distributions not used for 
     medical expenses are subject to an additional 15-percent tax 
     unless the distribution is made after age 65, death, or 
     disability.
---------------------------------------------------------------------------
     \37\ In general, an MSA is a trust or custodial account 
     created exclusively for the benefit of the account holder and 
     is subject to rules similar to those applicable to individual 
     retirement arrangements. The trustee of an MSA can be a bank, 
     insurance company, or other person who demonstrates to the 
     satisfaction of the Secretary that the manner in which such 
     person will administer the trust will be consistent with 
     applicable requirements.
---------------------------------------------------------------------------
     Eligible individuals
       MSAs are available to employees covered under an employer-
     sponsored high deductible plan of a small employer and self-
     employed individuals regardless of the size of the entity for 
     which the individual performs services. \38\ An employer is a 
     small employer if it employed, on average, no more than 50 
     employees on business days during either the preceding or the 
     second preceding year.
---------------------------------------------------------------------------
     \38\ Self-employed individuals include more than 2-percent 
     shareholders of S corporations who are treated as partners 
     for purposes of fringe benefit rules pursuant to section 
     1372.
---------------------------------------------------------------------------
       In order for an employee of a small employer to be eligible 
     to make MSA contributions (or to have employer contributions 
     made on his or her behalf), the employee must be covered 
     under an employer-sponsored high deductible health plan (see 
     the definition below) and must not be covered under any other 
     health plan (other than a plan that provides certain 
     permitted coverage, described below). In the case of an 
     employee, contributions can be made to an MSA either by the 
     individual or by the individual's employer. However, an 
     individual is not eligible to make contributions to an MSA 
     for a year if any employer contributions are made to an MSA 
     on behalf of the individual for the year. Similarly, if the 
     individual's spouse is covered under the high deductible plan 
     covering such individual and the spouse's employer makes a 
     contribution to an MSA for the spouse, the individual may not 
     make MSA contributions for the year.
       Similarly, in order to be eligible to make contributions to 
     an MSA, a self-employed individual must be covered under a 
     high deductible health plan and no other health plan (other 
     than a plan that provides certain permitted coverage, 
     described below). A self-employed individual is not an 
     eligible individual (by reason of being self-employed) if the 
     high deductible plan under which the individual is covered is 
     established or maintained by an employer of the individual 
     (or the individual's spouse).
       An individual with other coverage in addition to a high 
     deductible plan is still eligible for an MSA if such other 
     coverage is certain permitted insurance or is coverage 
     (whether provided through insurance or otherwise) for 
     accidents, disability, dental care, vision care, or long-term 
     care. Permitted insurance is: (1) Medicare supplemental 
     insurance; (2) insurance if substantially all of the coverage 
     provided under such insurance relates to (a) liabilities 
     incurred under worker's compensation law, (b) tort 
     liabilities, (c) liabilities relating to ownership or use of 
     property (e.g., auto insurance), or (d) such other similar 
     liabilities as the Secretary may prescribe by regulations; 
     (3) insurance for a specified disease or illness; and (4) 
     insurance that provides a fixed payment for hospitalization.
       If a small employer with an MSA plan ceases to become a 
     small employer (i.e., exceeds the 50-employee limit), then 
     the employer (and its employees) can continue to establish 
     and make contributions to MSAs (including contributions for 
     new employees and employees that did not previously have an 
     MSA) until the year following the first year in which the 
     employer has more than 200 employees. After that, those 
     employees who had an MSA (to which individual or employer 
     contributions were made in any year) can continue to make 
     contributions (or have contributions made on their behalf) 
     even if the employer has more than 200 employees.

[[Page 19651]]


     Tax treatment of and limits on contributions
       Individual contributions to an MSA are deductible (within 
     limits) in determining adjusted gross income (i.e., ``above 
     the line''). In addition, employer contributions are 
     excludable from gross income and wages for employment tax 
     purposes (within the same limits), except that this exclusion 
     does not apply to contributions made through a cafeteria 
     plan. No deduction is allowed to any individual for MSA 
     contributions if such individual is a dependent on another 
     taxpayer's tax return.
       In the case of a self-employed individual, the deduction 
     cannot exceed the individual's earned income from the trade 
     or business with respect to which the high deductible plan is 
     established. In the case of an employee, the deduction cannot 
     exceed the individual's compensation attributable to the 
     employer sponsoring the high deductible plan in which the 
     individual is enrolled.
       The maximum annual contribution that can be made to an MSA 
     for a year is 65 percent of the deductible under the high 
     deductible plan in the case of individual coverage and 75 
     percent of the deductible in the case of family coverage.
       Contributions for a year can be made until the due date for 
     the individual's tax return for the year (determined without 
     regard to extensions).
       If an employer provides high deductible health plan 
     coverage coupled with an MSA to employees and makes employer 
     contributions to the MSAs during a calendar year, the 
     employer must make available a comparable contribution on 
     behalf of all employees with comparable coverage during the 
     same coverage period in the calendar year. Contributions are 
     considered comparable if they are either of the same dollar 
     amount or the same percentage of the deductible under the 
     high deductible plan. The comparability rule does not 
     restrict contributions that can be made to an MSA by a self-
     employed individual.
       If employer contributions do not comply with the 
     comparability rule during a calendar year, then the employer 
     is subject to an excise tax equal to 35 percent of the 
     aggregate amount contributed by the employer to MSAs of the 
     employer for the year. In the case of a failure to comply 
     with the comparability rule which is due to reasonable cause 
     and not to willful neglect, the Secretary may waive part or 
     all of the tax imposed to the extent that the payment of the 
     tax is excessive relative to the failure involved.
     Definition of high deductible plan
       A high deductible plan is a health plan with an annual 
     deductible of at least $1,550 and no more than $2,300 in the 
     case of individual coverage and at least $3,050 and no more 
     than $4,600 in the case of family coverage. In addition, the 
     maximum out-of-pocket expenses with respect to allowed costs 
     (including the deductible) must be no more than $3,050 in the 
     case of individual coverage and no more than $5,600 in the 
     case of family coverage. \39\ A plan does not fail to qualify 
     as a high deductible plan merely because it does not have a 
     deductible for preventive care as required by State law. A 
     plan does not qualify as a high deductible health plan if 
     substantially all of the coverage under the plan is for 
     permitted coverage (as described above). In the case of a 
     self-insured plan, the plan must in fact be insurance (e.g., 
     there must be appropriate risk shifting) and not merely a 
     reimbursement arrangement.
---------------------------------------------------------------------------
     \39\ These dollar amounts are for 1999. These amounts are 
     indexed for inflation in $50 increments.
---------------------------------------------------------------------------
     Tax treatment of MSAs
       Earnings on amounts in an MSA are not currently includible 
     in income.
     Taxation of distributions
       Distributions from an MSA for the medical expenses of the 
     individual and his or her spouse or dependents generally are 
     excludable from income.\40\ However, in any year for which a 
     contribution is made to an MSA, withdrawals from an MSA 
     maintained by that individual generally are excludable from 
     income only if the individual for whom the expenses were 
     incurred was covered under a high deductible plan for the 
     month in which the expenses were incurred.\41\ This rule is 
     designed to ensure that MSAs are in fact used in conjunction 
     with a high deductible plan, and that they are not primarily 
     used by other individuals who have health plans that are not 
     high deductible plans.
---------------------------------------------------------------------------
     \40\ This exclusion does not apply to expenses that are 
     reimbursed by insurance or otherwise.
     \41\ The exclusion still applies to expenses for continuation 
     coverage or coverage while the individual is receiving 
     unemployment compensation, even if for an individual who is 
     not an eligible individual.
---------------------------------------------------------------------------
       For this purpose, medical expenses are defined as under the 
     itemized deduction for medical expenses, except that medical 
     expenses do not include expenses for insurance other than 
     long-term care insurance, premiums for health care 
     continuation coverage, and premiums for health care coverage 
     while an individual is receiving unemployment compensation 
     under Federal or State law.
       Distributions that are not used for medical expenses are 
     includible in income. Such distributions are also subject to 
     an additional 15-percent tax unless made after age 65, death, 
     or disability.
     Cap on taxpayers utilizing MSAs
       The number of taxpayers benefiting annually from an MSA 
     contribution is limited to a threshold level (generally 
     750,000 taxpayers). If it is determined in a year that the 
     threshold level has been exceeded (called a ``cut-off'' year) 
     then, in general, for succeeding years during the 4-year 
     pilot period 1997-2000, only those individuals who (1) made 
     an MSA contribution or had an employer MSA contribution for 
     the year or a preceding year (i.e., are active MSA 
     participants) or (2) are employed by a participating 
     employer, is eligible for an MSA contribution. In determining 
     whether the threshold for any year has been exceeded, MSAs of 
     individuals who were not covered under a health insurance 
     plan for the six month period ending on the date on which 
     coverage under a high deductible plan commences would not be 
     taken into account.\42\ However, if the threshold level is 
     exceeded in a year, previously uninsured individuals is 
     subject to the same restriction on contributions in 
     succeeding years as other individuals. That is, they would 
     not be eligible for an MSA contribution for a year following 
     a cut-off year unless they are an active MSA participant 
     (i.e., had an MSA contribution for the year or a preceding 
     year) or are employed by a participating employer.
---------------------------------------------------------------------------
     \42\ Permitted coverage, as described above, does not 
     constitute coverage under a health insurance plan for this 
     purpose.
---------------------------------------------------------------------------
       The number of MSAs established has not exceeded the 
     threshold level.
     End of MSA pilot program
       After December 31, 2000, no new contributions may be made 
     to MSAs except by or on behalf of individuals who previously 
     had MSA contributions and employees who are employed by a 
     participating employer. An employer is a participating 
     employer if (1) the employer made any MSA contributions for 
     any year to an MSA on behalf of employees or (2) at least 20 
     percent of the employees covered under a high deductible plan 
     made MSA contributions of at least $100 in the year 2000.
       Self-employed individuals who made contributions to an MSA 
     during the period 1997- 2000 also may continue to make 
     contributions after 2000.

                               House Bill

     Eligible individuals and cap on MSAs
       The House bill expands availability of MSAs to include all 
     employees covered under a high deductible plan of an 
     employer. Self-employed individuals continue to be eligible 
     to contribute to an MSA.
       The House bill also eliminates the cap on the number of 
     taxpayers that can benefit annually from MSA contributions.
     Definition of high deductible plan and limits on 
         contributions
       The provision modifies the definition of a high deductible 
     plan by decreasing the lower threshold for the annual 
     deductible. Thus, under the provision, a high deductible plan 
     means a plan with an annual deductible of at least $1,000 and 
     not more than $2,300 (indexed) in the case of individual 
     coverage and at least $2,000 and not more than $4,600 
     (indexed) in the case of family coverage. The limits on out-
     of-pocket expenses is the same as under present law.
       The provision increases the amount of deductible (or 
     excludable) contributions to an MSA to 100 percent of the 
     deductible under the high deductible plan. The provision also 
     allows an individual to make deductible contributions to an 
     MSA even if the individual's employer also made 
     contributions. The provision provides that MSAs may be 
     offered as part of a cafeteria plan. The total contributions 
     to MSAs on behalf on an individual for a year may not exceed 
     100 percent of the deductible under the high deductible plan.
     End of MSA pilot program
       The provision makes MSAs permanent.
     Effective date
       The provision is effective for taxable years beginning 
     after December 31, 2000.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

D. Additional Personal Exemption for Caretakers (sec. 504 of the House 
    bill, sec. 503 of the Senate amendment and sec. 151 of the Code)

                              Present Law

       Present law does not provide an additional personal 
     exemption based solely on the custodial care of parents or 
     grandparents. However, taxpayers with dependent parents 
     generally are able to claim a personal exemption for each of 
     these dependents, if they satisfy five tests: (1) a member of 
     household or relationship test; (2) a citizenship test; (3) a 
     joint return test; (4) a gross income test; and (5) a support 
     test. The taxpayer is also required to list each dependent's 
     tax identification number (the ``TIN'') on the tax return.
       The total amount of personal exemptions is subtracted 
     (along with certain other items) from adjusted gross income 
     (``AGI'')

[[Page 19652]]

     in arriving at taxable income. The amount of each personal 
     exemption is $2,750 for 1999, and is adjusted annually for 
     inflation. For 1999, the total amount of the personal 
     exemptions is phased out for taxpayers with AGI in excess of 
     $126,600 for single taxpayers, $158,300 for heads of 
     household, and $189,950 for married couples filing joint 
     returns. For 1999, the point at which a taxpayer's personal 
     exemptions are completely phased- out is $249,100 for single 
     taxpayers, $280,800 for heads of households, and $312,450 for 
     married couples filing joint returns.

                               House Bill

       The House bill provides taxpayers who maintain a household 
     including one or more ``qualified persons'' with an 
     additional personal exemption for each qualified person.
       A ``qualified person ``is an individual who: (1) satisfies 
     a relationship test, (2) satisfies a residency test, (3) 
     satisfies an identification test, and (4) has been certified 
     as having long-term care needs. The individual satisfies the 
     relationship test if the individual was the father or mother 
     of: (a) the taxpayer, (b) the taxpayer's spouse, or (c) a 
     former spouse of the taxpayer. A stepfather, stepmother, and 
     ancestors of the father or mother are treated as a father or 
     mother for these purposes.
       An individual satisfies the residency test if the 
     individual had the same principal place of abode as the 
     taxpayer for the taxpayer's entire taxable year.
       An individual satisfies the identification test if the 
     individual's name and taxpayer identification number 
     (``TIN'') is included on the taxpayer's return for the 
     taxable year.
       In order to be a qualified individual, an individual must 
     be certified before the due date of the return for the 
     taxable year (without extensions) by a licensed physician as 
     having long-term care needs for period which is at least 180 
     consecutive days and a portion of which occurs within the 
     taxable year. The certification must be made no more than 39-
     1/2 months before the due date for the return (or within such 
     other period as the Secretary has prescribed).
       Under the provision, an individual has long-term care needs 
     if the individual is unable to perform at least 2 activities 
     of daily living (``ADLs'') without substantial assistance 
     from another individual, due to a loss of functional 
     capacity. As with the present-law rules relating to long- 
     term care, ADLs are: (1) eating; (2) toileting; (3) 
     transferring; (4) bathing; (5) dressing; and (6) continence. 
     Substantial assistance includes hands-on assistance (that is, 
     the physical assistance of another person without which the 
     individual is unable to perform the ADL) and stand-by 
     assistance (that is, the presence of another person within 
     arm's reach of the individual that is necessary to prevent, 
     by physical intervention, injury to the individual when 
     performing the ADL).
       As an alternative to the 2-ADL test described above, an 
     individual is considered to have long-term care needs if he 
     or she (1) requires substantial supervision for at least 6 
     months to be protected from threats to health and safety due 
     to severe cognitive impairment and (2) is unable for at least 
     6 months to perform at least one or more ADLs or to engage in 
     age appropriate activities as determined under regulations 
     prescribed by the Secretary of the Treasury in consultation 
     with the Secretary of Health and Human Services.
       The House bill provides that a taxpayer is treated as 
     maintaining a household for any period only if over one-half 
     of the cost of maintaining the household for such period is 
     furnished by such taxpayer or, if such taxpayer is married, 
     by such taxpayer and the taxpayer's spouse. The House bill 
     also provides that taxpayers who are married at the end of 
     the taxable year must file a joint return to receive the 
     credit unless they lived apart from their respective spouse 
     for the last six months of the taxable year and the 
     individual claiming the credit (1) maintained as his or her 
     home a household for the qualified person for the entire 
     taxable year and (2) furnished over one-half of the cost of 
     maintaining that household in that taxable year. Finally, the 
     House bill provides that a taxpayer legally separated from 
     his or her spouse under a decree of divorce or of separate 
     maintenance will not be considered married for purposes of 
     this provision.
       Effective date.--The House bill provision is effective for 
     taxable years beginning after December 31, 1999.

                            Senate Amendment

       Same as House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

E. Expand Human Clinical Trials Expenses Qualifying for the Orphan Drug 
    Tax Credit (sec. 505 of the House bill and sec. 45C of the Code)

                              Present Law

       Taxpayers may claim a 50-percent credit for expenses 
     related to human clinical testing of drugs for the treatment 
     of certain rare diseases and conditions, generally those that 
     afflict less than 200,000 persons in the United States. 
     Qualifying expenses are those paid or incurred by the 
     taxpayer after the date on which the drug is designated as a 
     potential treatment for a rare disease or disorder by the 
     Food and Drug Administration (``FDA'') in accordance with the 
     section 526 of the Federal Food, Drug, and Cosmetic Act.

                               House Bill

       The House bill expands qualifying expenses to include those 
     expenses related to human clinical testing incurred after the 
     date on which the taxpayer files an application with the FDA 
     for designation of the drug under section 526 of the Federal 
     Food, Drug, and Cosmetic Act as a potential treatment for a 
     rare disease or disorder. As under present law, the credit 
     may only be claimed for such expenses related to drugs 
     designated as a potential treatment for a rare disease or 
     disorder by the FDA in accordance with section 526 of such 
     Act.
       Effective date.--The provision would be effective for 
     expenditures paid or incurred after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
       Effective date.--The provision would be effective for 
     expenditures paid or incurred after December 31, 1999.

F. Add Certain Vaccines Against Streptococcus Pneumoniae to the List of 
  Taxable Vaccines; Reduce Vaccine Excise Tax (sec. 506 of the House 
 bill, sec. 504 of the Senate amendment and secs. 4131 and 4132 of the 
                                 Code)

                              Present Law

       A manufacturer's excise tax is imposed at the rate of 75 
     cents per dose (sec. 4131) on the following vaccines 
     recommended for routine administration to children: 
     diphtheria, pertussis, tetanus, measles, mumps, rubella, 
     polio, HIB (haemophilus influenza type B), hepatitis B, 
     varicella (chicken pox), and rotavirus gastroenteritis. The 
     tax applied to any vaccine that is a combination of vaccine 
     components equals 75 cents times the number of components in 
     the combined vaccine.
       Amounts equal to net revenues from this excise tax are 
     deposited in the Vaccine Injury Compensation Trust Fund 
     (``Vaccine Trust Fund'') to finance compensation awards under 
     the Federal Vaccine Injury Compensation Program for 
     individuals who suffer certain injuries following 
     administration of the taxable vaccines. This program provides 
     a substitute Federal, ``no fault'' insurance system for the 
     State-law tort and private liability insurance systems 
     otherwise applicable to vaccine manufacturers and physicians. 
     All persons immunized after September 30, 1988, with covered 
     vaccines must pursue compensation under this Federal program 
     before bringing civil tort actions under State law.

                               House Bill

       The House bill adds any conjugate vaccine against 
     streptococcus pneumoniae to the list of taxable vaccines.
       In addition, the House bill directs the General Accounting 
     Office (``GAO'') to report to the House Committee on Ways and 
     Means and the Senate Committee on Finance on the operation 
     and management of expenditures from the Vaccine Trust Fund 
     and to advise the Committees on the adequacy of the Vaccine 
     Trust Fund to meet future claims under the Federal Vaccine 
     Injury Compensation Program.
       The GAO is directed to report its findings to the House 
     Committee on Ways and Means and the Senate Committee on 
     Finance not later than December 31, 1999.
       Effective date.--The provision is effective for vaccine 
     purchases beginning on the day after the date on which the 
     Centers for Disease Control make final recommendation for 
     routine administration of conjugated streptococcus pneumonia 
     vaccines to children.

                            Senate Amendment

       The Senate amendment is identical to the House bill in 
     adding any conjugate vaccine against streptococcus pneumoniae 
     to the list of taxable vaccines.
       The Senate amendment also reduces the rate of tax 
     applicable to all taxable vaccines from 75 cents per dose to 
     25 cents per dose for sales of vaccines after December 31, 
     2004.
       The Senate amendment also changes the effective date 
     enacted in Public Law 105-277 and certain other conforming 
     amendments to expenditure purposes to enable certain payments 
     to be made from the Trust Fund.
       In addition, the Senate amendment is identical to the House 
     bill in directing the General Accounting Office (``GAO'') to 
     report to the House Committee on Ways and Means and the 
     Senate Committee on Finance on the operation and management 
     of expenditures from the Vaccine Trust Fund and to advise the 
     Committees on the adequacy of the Vaccine Trust Fund to meet 
     future claims under the Federal Vaccine Injury Compensation 
     Program, except that the GAO is directed to report its 
     findings to the House Committee on Ways and Means and the 
     Senate Committee on Finance within one year of the date of 
     enactment.
       Effective date.--The provision is effective for vaccine 
     purchases beginning on the day after the date on which the 
     Centers for Disease Control make final recommendation for 
     routine administration of conjugated streptococcus pneumonia 
     vaccines to children. The addition of conjugate streptococcus

[[Page 19653]]

     pneumoniae vaccines to the list of taxable vaccines is 
     contingent upon the inclusion in this legislation of the 
     modifications to Public Law 105-277.
       The provision to reduce the rate of tax to 25 cents per 
     dose would be effective for sales after December 31, 2004. No 
     floor stocks refunds would be permitted for vaccines held on 
     December 31, 2004. For the purpose of determining the amount 
     of refund of tax on a vaccine returned to the manufacturer or 
     importer, for vaccines returned after August 31, 2004 and 
     before January 1, 2005, the amount of tax assumed to have 
     been paid on the initial purchase of the returned vaccine is 
     not to exceed $0.25 per dose. The reduction in the rate of 
     tax is contingent upon the inclusion in this legislation of 
     the modifications to Public Law 105-277.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment in adding any conjugate vaccine against 
     streptococcus pneumoniae to the list of taxable vaccines. In 
     addition, the conference agreement follows the House bill and 
     the Senate amendment by changing the effective date enacted 
     in Public Law 105-277 and certain other conforming amendments 
     to expenditure purposes to enable certain payments to be made 
     from the Trust Fund.
       The conference agreement also reduces the rate of tax 
     applicable to all taxable vaccines from 75 cents per dose to 
     50 cents per dose for sales of vaccines after December 31, 
     2004.
       In addition, the conferees direct the General Accounting 
     Office (``GAO'') to report to the House Committee on Ways and 
     Means and the Senate Committee on Finance on the operation 
     and management of expenditures from the Vaccine Trust Fund 
     and to advise the Committees on the adequacy of the Vaccine 
     Trust Fund to meet future claims under the Federal Vaccine 
     Injury Compensation Program.
       Within its report, to the greatest extent possible, the 
     conferees would like to see a thorough statistical report of 
     the number of claims submitted annually, the number of claims 
     settled annually, and the value of settlements. The conferees 
     would like to learn about the statistical distribution of 
     settlements, including the mean and median values of 
     settlements, and the extent to which the value of settlements 
     varies with an injury attributed to an identifiable vaccine. 
     The conferees also would like to learn about the settlement 
     process, including a statistical distribution of the amount 
     of time required from the initial filing of a claim to a 
     final resolution.
       The Code provides that certain administrative expenses may 
     be charged to the Vaccine Trust Fund. The conferees intend 
     that the GAO report include an analysis of the overhead and 
     administrative expenses charged to the Vaccine Trust Fund.
       The conferees request that the GAO report its findings to 
     the House Committee on Ways and Means and the Senate 
     Committee on Finance not later than December 31, 1999.
       Effective date.--The provision is effective for vaccine 
     purchases beginning on the day after the date on which the 
     Centers for Disease Control make final recommendation for 
     routine administration of conjugated streptococcus pneumonia 
     vaccines to children. No floor stocks tax is to be collected 
     for amounts held for sale on that date. For sales on or 
     before the date on which the Centers for Disease Control make 
     final recommendation for routine administration of conjugate 
     streptococcus pneumonia vaccines to children for which 
     delivery is made after such date, the delivery date is deemed 
     to be the sale date. The addition of conjugate streptococcus 
     pneumoniae vaccines to the list of taxable vaccines is 
     contingent upon the inclusion in this legislation of the 
     modifications to Public Law 105-277.
       The provision to reduce the rate of tax to 50 cents per 
     dose would be effective for sales after December 31, 2004. No 
     floor stocks refunds would be permitted for vaccines held on 
     December 31, 2004. For the purpose of determining the amount 
     of refund of tax on a vaccine returned to the manufacturer or 
     importer, for vaccines returned after August 31, 2004 and 
     before January 1, 2005, the amount of tax assumed to have 
     been paid on the initial purchase of the returned vaccine is 
     not to exceed $0.50 per dose.

G. Above-the-Line Deduction for Prescription Drug Insurance Coverage of 
 Medicare Beneficiaries if Certain Medicare and Low-Income Assistance 
 Provisions Are in Effect (sec. 507 of the House bill and sec. 213 of 
                               the Code)

                              Present Law

       Individuals who itemize deductions may deduct their health 
     insurance expenses, including the cost of prescription drugs, 
     to the extent that the total medical expenses of the 
     individual exceed 7.5 percent of adjusted gross income (sec. 
     213).

                               House Bill

       The provision provides an above-the-line deduction for 
     Medicare beneficiaries for prescription drug insurance. The 
     deduction will take effect when (a) the Federal Government 
     provides assistance for prescription drug coverage for low-
     income Medicare beneficiaries, (b) all policies supplemental 
     to Medicare provide coverage for costs of prescription drugs, 
     and (c) coverage for outpatient prescription drugs for 
     Medicare beneficiaries is provided only through integrated 
     comprehensive health plans which offer current Medicare 
     covered services and maximum limitations on out-of-pocket 
     spending and such comprehensive plans sponsored by the Health 
     Care Financing Administration compete on the same basis as 
     private plans.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill with 
     modifications. The conference agreement modifies the 
     contingency with respect to Medicare supplemental policies 
     requiring all such policies to provide prescription drug 
     coverage to require that at least one of the benefit packages 
     authorized to be offered under a Medicare supplemental policy 
     is a package which provides solely for the coverage of costs 
     for prescription drugs. The conference agreement also 
     includes an additional contingency in order for the above-
     the-line deduction contained in the House bill to take 
     effect. Under the conference agreement, the above-the-line 
     deduction is also contingent upon the enactment of a 
     provision, included in the conference agreement effective for 
     taxable years beginning after December 31, 2002, that 
     provides that, in the case of individuals enrolled in 
     Medicare, medical expenses for purposes of the itemized 
     deduction for medical care includes formerly prescription 
     drugs. Formerly prescription drugs are drugs that within the 
     year of purchase or the two preceding taxable years were 
     available by prescription only.

  H. Credit for Employee Health Insurance Expenses of Small Employers 
    (sec. 609 of the Senate amendment and new sec. 45E of the Code)

                              Present Law

       Under present law, employee health insurance expenses paid 
     by the employer are generally deductible as an ordinary and 
     necessary business expense.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment allows small employers a credit for 
     the amount paid by the employer during the taxable year with 
     respect to health insurance expenses of qualified employees. 
     \43\ The credit is equal to 60 percent of such expenses in 
     the case of self-only coverage of a qualified employee and 70 
     percent in the case of family coverage. The maximum amount 
     that can be taken into account in determining the credit with 
     respect to any qualified employee for a taxable year may not 
     exceed $1,000 in the case of self-only coverage and $1,715 in 
     the case of family coverage. No deduction is allowed with 
     respect to expenses taken into account under the credit.
---------------------------------------------------------------------------
     \43\ Salary reduction contributions are not treated as 
     employer payments for purposes of the credit.
---------------------------------------------------------------------------
       An employer is a small employer for a year if the employer 
     employed an average of 9 or fewer employees on business days 
     during either of the 2 preceding calendar years. A special 
     rule applies in the case of employers that were not in 
     business in the preceding calendar year.
       A qualified employee is an employee of the employer 
     receiving total wages at an annual rate of more than $5,000 
     and not more than $16,000. Beginning after 2001, the $16,000 
     limit is indexed for cost-of-living adjustments. An employee 
     does not include self-employed individuals. Leased employees 
     (with in the meaning of sec. 414(n) are treated as employees 
     for purposes of the credit.
       The credit is part of the general business credit.
       Effective date.--The provision is effective for amounts 
     paid or incurred in taxable years beginning after December 
     31, 2000.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

     VI. ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX RELIEF 
                               PROVISIONS

   A. Phase in Repeal of Estate, Gift, and Generation-Skipping Taxes 
 (secs. 601-603, 611, and 621 of the House bill, secs. 701-702 of the 
           Senate amendment, and secs. 2001-2704 of the Code)

                              Present Law

       A gift tax is imposed on lifetime transfers and an estate 
     tax is imposed on transfers at death. The gift tax and the 
     estate tax are unified so that a single graduated rate 
     schedule applies to cumulative taxable transfers made by a 
     taxpayer during his or her lifetime and at death. The unified 
     estate and gift tax rates begin at 18 percent on the first 
     $10,000 in cumulative taxable transfers and reach 55 percent 
     on cumulative taxable transfers over $3 million. In addition, 
     a 5- percent surtax is imposed on taxable transfers at death 
     between $10 million and the amount necessary to phase out the 
     benefits of the graduated rates.
       A unified credit is available with respect to taxable 
     transfers by gift and at death. The

[[Page 19654]]

     unified credit amount effectively exempts from tax a total of 
     $650,000 in 1999, $675,000 in 2000 and 2001, $700,000 in 2002 
     and 2003, $850,000 in 2004, $950,000 in 2005, and $1 million 
     in 2006 and thereafter.
       A generation-skipping transfer (``GST'') tax generally is 
     imposed on transfers, either directly or through a trust or 
     similar arrangement, to a ``skip person'' (i.e., a 
     beneficiary in a generation more than one generation below 
     that of the transferor). Transfers subject to the GST tax 
     include direct skips, taxable terminations, and taxable 
     distributions. The GST tax is imposed at the top estate and 
     gift tax rate (which, under present law, is 55 percent) on 
     cumulative generation-skipping transfers in excess of $1 
     million (indexed beginning in 1999).
       The basis of property acquired or passing from a decedent 
     generally is its fair market value on the date of the 
     decedent's death (or, if the alternative valuation date is 
     elected, the earlier of six months after death or the date 
     the property is sold or distributed by the estate). This step 
     up (or step down) in basis eliminates the recognition of any 
     income on the appreciation of the property that occurred 
     prior to the decedent's death, and it has the effect of 
     eliminating any tax benefit from any unrealized loss. The 
     basis of property acquired by gift generally is the same as 
     it was in the hands of the donor. However, if the donor's 
     basis was greater than the fair market value of the property 
     at the time of gift, then, for purposes of determining loss 
     on the disposition of the property, the basis is its fair 
     market value at the time of gift.

                               House Bill

       The House bill repeals the 5-percent surtax (which phases 
     out the benefit of the graduated rates), the unified credit 
     is converted into a unified exemption, and the rates in 
     excess of 53 percent are repealed beginning in 2001. In 2002, 
     the rates in excess of 50 percent are repealed.
       In 2003 through 2006, all estate and gift tax rates are 
     reduced by 1 percentage point per year. In 2007, all estate 
     and gift tax rates are reduced by 1.5 percentage points. In 
     2008, all estate and gift tax rates are reduced by 2 
     percentage points.
       Beginning in 2009, the estate, gift, and GST taxes are 
     repealed, and carryover basis applies for transfers from 
     estates in excess of $2 million (the carryover basis regime 
     is phased in for transfers from estates valued in excess of 
     $1.3 million and not over $2 million). Transfers to surviving 
     spouses will continue to receive a step up in basis.
       Effective date.--The unified credit is replaced with a 
     unified exemption, and the 5-percent surtax and rates in 
     excess of 53 percent are repealed for estates of decedents 
     dying and gifts and generation-skipping transfers made after 
     December 31, 2000. The rates in excess of 50 percent are 
     repealed for estates of decedents dying and gifts and 
     generation-skipping transfers made after December 31, 2001.
       All estate and gift tax rates are reduced by 1 percentage 
     point for estates of decedents dying and gifts and 
     generation-skipping transfers made after December 31, 2002, 
     but before January 1, 2007. All estate and gift tax rates are 
     reduced by 1.5 percentage points for estates of decedents 
     dying and gifts and generation-skipping transfers made after 
     December 31, 2006, but before January 1, 2008. All estate and 
     gift tax rates are reduced by 2 percentage points for estates 
     of decedents dying and gifts and generation-skipping 
     transfers made after December 31, 2008.
       The estate, gift, and GST taxes are repealed and the 
     carryover basis regime takes effect for estates of decedents 
     dying and gifts and generation-skipping transfers made after 
     December 31, 2008.

                            Senate Amendment

       The Senate amendment repeals the rates in excess of 53 
     percent beginning in 2001. Beginning in 2004, the 5-percent 
     bubble (which phases out the benefits of the graduated rates) 
     is repealed and the unified credit is converted into a 
     unified exemption. Beginning in 2007, the unified exemption 
     is increased from $1 million to $1.5 million.
       Effective date.--The rates in excess of 53 percent are 
     repealed and the unified credit is converted into a unified 
     exemption, both for estates of decedents dying and gifts and 
     generation-skipping transfers made after December 31, 2003. 
     The unified exemption is increased from $1 million to $1.5 
     million for estates of decedents dying and gifts made after 
     December 31, 2006.

                          Conference Agreement

       The conference agreement follows the House bill, with 
     modifications. After the estate, gift, and GST taxes are 
     repealed and the carryover basis regime takes effect, the 
     first $3 million of transfers from decedents to surviving 
     spouses will receive a step up in basis. Transfers to 
     surviving spouses that are eligible for a step up in basis 
     are not counted toward the transfers for which the carryover 
     basis regime is phased in for estates valued in excess of 
     $1.3 million and not over $2 million.
       Effective date.--Same as the House bill.

            B. Modify Generation-Skipping Transfer Tax Rules

     1. Deemed allocation of the generation-skipping transfer 
         (``GST'') tax exemption to lifetime transfers to trusts 
         that are not direct skips (sec. 631 of the House bill and 
         sec. 2632 of the Code)

                              Present Law

       A GST tax generally is imposed on transfers, either 
     directly or through a trust or similar arrangement, to a 
     ``skip person'' (i.e., a beneficiary in a generation more 
     than one generation below that of the transferor). Transfers 
     subject to the GST tax include direct skips, taxable 
     terminations, and taxable distributions. An exemption of $1 
     million (indexed beginning in 1999) is provided for each 
     person making generation-skipping transfers. The exemption 
     may be allocated by a transferor (or his or her executor) to 
     transferred property.
       A direct skip is any transfer subject to estate or gift tax 
     of an interest in property to a skip person. A skip person 
     may be a natural person or certain trusts. All persons 
     assigned to the second or more remote generation below the 
     transferor are skip persons (e.g., grandchildren and great-
     grandchildren). Trusts are skip persons if (1) all interests 
     in the trust are held by skip persons, or (2) no person holds 
     an interest in the trust and at no time after the transfer 
     may a distribution (including distributions and terminations) 
     be made to a non-skip person.
       A taxable termination is a termination (by death, lapse of 
     time, release of power, or otherwise) of an interest in 
     property held in trust unless, immediately after such 
     termination, a non-skip person has an interest in the 
     property, or unless at no time after the termination may a 
     distribution (including a distribution upon termination) be 
     made from the trust to a skip person. A taxable distribution 
     is a distribution from a trust to a skip person (other than a 
     taxable termination or direct skip).
       The tax rate on generation-skipping transfers is a flat 
     rate of tax equal to the maximum estate and gift tax rate in 
     effect at the time of the transfer (55 percent under present 
     law) multiplied by the ``inclusion ratio.'' The inclusion 
     ratio with respect to any property transferred in a GST 
     indicates the amount of GST tax exemption allocated to a 
     trust. The allocation of GST tax exemption reduces the 55-
     percent tax rate on a GST.
       If an individual makes a direct skip during his or her 
     lifetime, any unusued GST tax exemption is automatically 
     allocated to the direct skip to the extent necessary to make 
     the inclusion ratio for such property as low as possible. An 
     individual may elect out of the automatic allocation for 
     lifetime direct skips.
       For lifetime transfers made to a trust that are not direct 
     skips, the transferor must allocate GST tax exemption'the 
     allocation is not automatic. If GST tax exemption is 
     allocated on a timely-filed gift tax return, then the portion 
     of the trust which is exempt from GST tax is based on the 
     value of the property at the time of the transfer. If, 
     however, the allocation is not made on a timely-filed gift 
     tax return, then the portion of the trust which is exempt 
     from GST tax is based on the value of the property at the 
     time the allocation of GST tax exemption was made.
       Treas. Reg. 26.2632-1(d) further provides that any unused 
     GST tax exemption, which has not been allocated to transfers 
     made during an individual's life, is automatically allocated 
     on the due date for filing the decedent's estate tax return. 
     Unused GST tax exemption is allocated pro rata on the basis 
     of the value of the property as finally determined for estate 
     tax purposes, first to direct skips treated as occurring at 
     the transferor's death. The baalance, if any, of unused GST 
     tax exemption is allocated pro rata on the basis of the 
     estate tax value of the nonexempt portion of the trust 
     property (or in the case of trusts that are not included in 
     the gross estate, on the basis of the date of death value of 
     the trust) to trusts with respect to which a taxable 
     termination may occur or from which a taxable distribution 
     may be made.

                               House Bill

       Under the House bill, GST tax exemption is automatically 
     allocated to transfers made during life that are ``indirect 
     skips.'' An indirect skip is any transfer of property (that 
     is not a direct skip) subject to the gift tax that is made to 
     a GST trust.
       A GST trust is defined as a trust that could have a GST 
     with respect to the transferor (e.g., a taxable termination 
     or taxable distribution), unless:
       the trust instrument provides that more than 25 percent of 
     the trust corpus must be distributed to or may be withdrawn 
     by 1 or more individuals who are non-skip persons (a) before 
     the date that the individual attains age 46, or (b) on or 
     before 1 or more dates specified in the trust instrument that 
     will occur before the date that such individual attains age 
     46, or (c) upon the occurrence of an event that, in 
     accordance with regulations prescribed by the Treasury 
     Secretary, may reasonably be expected to occur before the 
     date that such individual attains age 46;
       the trust instrument provides that more than 25 percent of 
     the trust corpus must be distributed to or may be withdrawn 
     by 1 or more individuals who are non-skip persons and who are 
     living on the date of death of another person identified in 
     the instrument (by name of by class) who is more than 10 
     years older than such individuals;
       the trust instrument provides that, if 1 or more 
     individuals who are non-skip persons

[[Page 19655]]

     die on or before a date or event described in clause (1) or 
     (2), more than 25 percent of the trust corpus either must be 
     distributed to the estate or estates of 1 or more of such 
     individuals or is subject to a general power of appointment 
     exercisable by 1 or more of such individuals;
       the trust is a trust any portion of which would be included 
     in the gross estate of a non- skip person (other than the 
     transferor) if such person died immediately after the 
     transfer;
       the trust is a charitable lead annuity trust or a 
     charitable remainder annuity trust or a charitable unitrust; 
     or
       the trust is a trust with respect to which a deduction was 
     allowed under section 2522 for the amount of an interest in 
     the form of the right to receive annual payments of a fixed 
     percentage of the net fair market value of the trust property 
     (determined yeaerly) and which is required to pay principal 
     to a non-skip person if such person is alive when the yearly 
     payments for which the deduction was allowed terminate.
       If any individual makes an indirect skip during the 
     individual's lifetime, then any unused portion of such 
     individual's GST tax exemption is allocated to the property 
     transferred to the extent necessary to produce the lowest 
     possible inclusion ratio for such property.
       An individual may elect not to have the automatic 
     allocation rules apply to an indirect skip, and such 
     elections will be deemed timely if filed on a timely-filed 
     gift tax return for the calendar year in which the transfer 
     was made or deemed to have bee made or on such later date or 
     dates as may be prescribed by the Treasury Secretary. An 
     individual may elect not to have the automatic allocation 
     rules apply to any or all transfers made by such individual 
     to a particular trust and may elect to treat any trust as a 
     GST trust with respect to any or all transfers made by the 
     individual to such trust, and such election may be made on a 
     timely-filed gift tax return for the calendar year for which 
     the election is to become effective.
       Effective date.--The provision applies to transfers subject 
     to estate or gift tax made after December 31, 1999, and to 
     estate tax inclusion periods ending after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     2. Retroactive allocation of the GST tax exemption (sec. 631 
         of the House bill, sec. 731 of the Senate amendment, and 
         sec. 2632 of the Code)

                              Present Law

       A taxable termination is a termination (by death, lapse of 
     time, release of power, or otherwise) of an interest in 
     property held in trust unless, immediately after such 
     termination, a non-skip person has an interest in the 
     property, or unless at no time after the termination may a 
     distribution (including a distribution upon termination) be 
     made from the trust to a skip person. A taxable distribution 
     is a distribution from a trust to a skip person (other than a 
     taxable termination or direct skip). If a transferor 
     allocates GST tax exemption to a trust prior to the taxable 
     termination or taxable distribution, GST tax may be avoided.
       A transferor likely will not allocate GST tax exemption to 
     a trust that the transferor expects will benefit only non-
     skip persons. However, if a taxable termination occurs 
     because, for example, the transferor's child unexpectedly 
     dies such that the trust terminates in favor of the 
     transferor's grandchild, and GST tax exemption had not been 
     allocated to the trust, then GST tax would be due even if the 
     transferor had unused GST tax exemption.

                               House Bill

       Under the House bill, GST tax exemption may be allocated 
     retroactively when there is an unnatural order of death. If a 
     lineal descendant of the transferor predeceased the 
     transferor, then the transferor may allocate any unused GST 
     tax exemption to any previous transfer or transfers to the 
     trust on a chronological basis. The provision allows a 
     transferor to retroactively allocate GST tax exemption to a 
     trust where a beneficiary (a) is a non-skip person, (b) is a 
     lineal descendant of the transferor's grandparent or 
     grandparent of the transferor's spouse, (c) is a generation 
     younger than the generation of the transferor, and (d) dies 
     before the transferor. Exemption is allocated under this rule 
     retroactively, and the applicable fraction and inclusion 
     ratio under this provision are determined based on the value 
     of the property on the date that the property was transferred 
     to the trust.
       Effective date.--The provision applies to deaths of non-
     skip persons occurring after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Severing of trusts holding property having an inclusion 
         ratio of greater than zero (sec. 632 of the House bill, 
         sec. 732 of the Senate amendment, and sec. 2642 of the 
         Code)

                              Present Law

       An exemption of $1 million (indexed beginning in 1999) is 
     provided for each person making generation-skipping 
     transfers. The exemption may be allocated by a transferor (or 
     his or her executor) to transferred property.
       If the value of transferred property exceeds the amount of 
     the GST tax exemption allocated to that property, then the 
     GST tax generally is determined by multiplying a flat tax 
     rate equal to the highest estate tax rate (55 percent under 
     present law) by the ``inclusion ratio'' and the value of the 
     taxable property at the time of the taxable event. The 
     ``inclusion ratio'' is the number one minus the ``applicable 
     fraction.'' The applicable fraction is a fraction calculated 
     by dividing the amount of the GST tax exemption allocated to 
     the property by the value of the property.
       Under Treas. Reg. 26.2654-1(b), a trust may be severed into 
     two or more trusts (e.g., one with an inclusion ratio of zero 
     and one with an inclusion ratio of one) only if (1) the trust 
     is severed according to a direction in the governing 
     instrument or (2) the trust is severed pursuant to the 
     trustee's discretionary powers, but only if certain other 
     conditions are satisfied (e.g., the severance occurs or a 
     reformation proceeding begins before the estate tax return is 
     due). Under current Treasury regulations, however, a trustee 
     cannot establish inclusion ratios of zero and one by severing 
     a trust that is subject to the GST tax after the trust has 
     been created.

                               House Bill

       Under the House bill, a trust may be severed in a 
     ``qualified severance.'' A qualified severance is defined as 
     the division of a single trust and the creation of two or 
     more trusts if (1) the single trust was divided on a 
     fractional basis, and (2) the terms of the new trusts, in the 
     aggregate, provide for the same succession of interests of 
     beneficiaries as are provided in the original trust. If a 
     trust has an inclusion ratio of greater than zero and less 
     than one, a severance is a qualified severance only if the 
     single trust is divided into two trusts, one of which 
     receives a fractional share of the total value of all trust 
     assets equal to the applicable fraction of the single trust 
     immediately before the severance. In such case, the trust 
     receiving such fractional share shall have an inclusion ratio 
     of one. Under the provision, a trustee may elect to sever a 
     trust in a qualified severance at any time.
       Effective date.--The provision is effective for severances 
     of trusts occurring after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Modification of certain valuation rules (sec. 633 of the 
         House bill, sec. 733 of the Senate amendment, and sec. 
         2642 of the Code)

                              Present Law

       Under present law, the inclusion ratio is determined using 
     gift tax values for allocations of GST tax exemption made on 
     timely filed gift tax returns. The inclusion ratio generally 
     is determined using estate tax values for allocations of GST 
     tax exemption made to transfers at death. Treas. Reg. 
     26.2642-5(b) provides that, with respect to taxable 
     terminations and taxable distributions, the inclusion ratio 
     becomes final on the later of the period of assessment with 
     respect to the first transfer using the inclusion ratio or 
     the period for assessing the estate tax with respect to the 
     transferor's estate.

                               House Bill

       Under the House bill, in connection with timely and 
     automatic allocations of GST tax exemption, the value of the 
     property for purposes of determining the inclusion ratio 
     shall be its finally determined gift tax value or estate tax 
     value depending on the circumstances of the transfer. In the 
     case of a GST tax exemption allocation deemed to be made at 
     the conclusion of an estate tax inclusion period, the value 
     for purposes of determining the inclusion ratio shall be its 
     value at that time.
       Effective date.--The provision is effective as though 
     included in the amendments made by section 1431 of the Tax 
     Reform Act of 1986.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Relief from late elections (sec. 634 of the House bill, 
         sec. 734 of the Senate amendment, and sec. 2642 of the 
         Code)

                              Present Law

       An election to allocate GST tax exemption to a specific 
     transfer may be made at any time up to the time for filing 
     the transferor's estate tax return. If an allocation is made 
     on a gift tax return filed timely with respect to the 
     transfer to a trust, then the value on the date of transfer 
     to the trust is used for determining GST tax exemption 
     allocation. However, if the allocation relating to a specific

[[Page 19656]]

     transfer is not made on a timely-filed gift tax return, then 
     the value on the date of allocation must be used. There is no 
     statutory provision allowing relief for an inadvertent 
     failure to make an election on a timely-filed gift tax return 
     to allocate GST tax exemption.

                               House Bill

       Under the House bill, the Treasury Secretary is authorized 
     and directed to grant extensions of time to make the election 
     to allocate GST tax exemption and to grant exceptions to the 
     time requirement. If such relief is granted, then the value 
     on the date of transfer to a trust would be used for 
     determining GST tax exemption allocation.
       In determining whether to grant relief for late elections, 
     the Treasury Secretary is directed to consider all relevant 
     circumstances, including evidence of intent contained in the 
     trust instrument or instrument of transfer and such other 
     factors as the Treasury Secretary deems relevant. For 
     purposes of determining whether to grant relief, the time for 
     making the allocation (or election) is treated as if not 
     expressly prescribed by statute.
       Effective date.--The provision applies to requests pending 
     on, or filed after, the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. The conferees expect that the Treasury 
     Secretary will issue regulations that will facilitate the 
     liberal granting of relief under this provision.
     6. Substantial compliance (sec. 634 of the House bill, sec. 
         734 of the Senate amendment, and sec. 2642 of the Code)

                              Present Law

       Under present law, there is no statutory rule which 
     provides that substantial compliance with the statutory and 
     regulatory requirements for allocating GST tax exemption will 
     suffice to establish that GST tax exemption was allocated to 
     a particular transfer or trust.

                               House Bill

       Under the House bill, substantial compliance with the 
     statutory and regulatory requirements for allocating GST tax 
     exemption will suffice to establish that GST tax exemption 
     was allocated to a particular transfer or a particular trust. 
     If a taxpayer demonstrates substantial compliance, then so 
     much of the transferor's unused GST tax exemption will be 
     allocated to the extent it produces the lowest possible 
     inclusion ratio. In determining whether there has been 
     substantial compliance, all relevant circumstances will be 
     considered, including evidence of intent contained in the 
     trust instrument or instrument of transfer and such other 
     factors as the Treasury Secretary deems appropriate.
       Effective date.--The substantial compliance provisions are 
     effective on the date of enactment and apply to allocations 
     made prior to such date for purposes of determining the tax 
     consequences of generation-skipping transfers with respect to 
     which the period of time for filing claims for refund has not 
     expired.\44\
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     \44\ No implication is intended with respect to the 
     application of a rule of substantial compliance prior to 
     enactment of this provision.
---------------------------------------------------------------------------

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 C. Expand Estate Tax Rule for Conservation Easements (sec. 711 of the 
              Senate amendment and sec. 2031 of the Code)

                              Present Law

       An executor may elect to exclude from the taxable estate 40 
     percent of the value of any land subject to a qualified 
     conservation easement, up to a maximum exclusion of $100,000 
     in 1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 
     2001, and $500,000 in 2002 and thereafter (sec. 2031(c)). The 
     exclusion percentage is reduced by 2 percentage points for 
     each percentage point (or fraction thereof) by which the 
     value of the qualified conservation easement is less than 30 
     percent of the value of the land (determined without regard 
     to the value of such easement and reduced by the value of any 
     retained development right).
       A qualified conservation easement is one that meets the 
     following requirements: (1) the land is located within 25 
     miles of a metropolitan area (as defined by the Office of 
     Management and Budget) or a national park or wilderness area, 
     or within 10 miles of an Urban National Forest (as designated 
     by the Forest Service of the U.S. Department of Agriculture); 
     (2) the land has been owned by the decedent or a member of 
     the decedent's family at all times during the three- year 
     period ending on the date of the decedent's death; and (3) a 
     qualified conservation contribution (within the meaning of 
     sec. 170(h)) of a qualified real property interest (as 
     generally defined in sec. 170(h)(2)(C)) was granted by the 
     decedent or a member of his or her family. For purposes of 
     the provision, preservation of a historically important land 
     area or a certified historic structure does not qualify as a 
     conservation purpose.
       In order to qualify for the exclusion, a qualifying 
     easement must have been granted by the decedent, a member of 
     the decedent's family, the executor of the decedent's estate, 
     or the trustee of a trust holding the land, no later than the 
     date of the election. To the extent that the value of such 
     land is excluded from the taxable estate, the basis of such 
     land acquired at death is a carryover basis (i.e., the basis 
     is not stepped-up to its fair market value at death). 
     Property financed with acquisition indebtedness is eligible 
     for this provision only to the extent of the net equity in 
     the property. The exclusion from estate taxes does not extent 
     to the value of any development rights retained by the 
     decedent or donor.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment expands the availability of qualified 
     conservation easements by modifying the distance 
     requirements. Under the provision, the distance from which 
     the land must be situated from a metropolitan area, national 
     park, or wilderness area is increased from 25 to 50 miles, 
     and the distance from which the land must be situated from an 
     Urban National Forest is increased from 10 to 25 miles. The 
     Senate amendment also clarifies that the date for determining 
     easement compliance is the date on which the donation was 
     made.
       Effective date.--The provision that clarifies the date for 
     determining easement compliance is effective for estates of 
     decedents dying after December 31, 1997. The provisions that 
     modify the distance rules are effective for estates of 
     decedents dying after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

  D. Increase Annual Gift Exclusion (sec. 721 of the Senate amendment)

                              Present Law

       An annual exclusion of $10,000 of transfers of present 
     interests in property is provided for each donee. If the non-
     donor spouse consents to split the gift with the donor 
     spouse, then the annual exclusion is $20,000 for each donee. 
     Unlimited transfers between spouses are permitted without 
     imposition of a gift tax. In the case of gifts made after 
     1998, the $10,000 amount is increased by a cost-of-living 
     adjustment.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, the annual gift exclusion for 
     each donee is increased to $20,000 beginning in 2005.
       Effective date.--The annual gift exclusion is increased to 
     $20,000, for each donee, for gifts made after December 31, 
     2004.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

  E. Increase Estate Tax Deduction for Family-Owned Business Interest 
      (sec. 608 of the Senate amendment and sec. 2057 of the Code)

                              Present Law

       An estate is permitted to deduct the adjusted value of the 
     qualified ``family-owned business interests'' of the 
     decedent, up to a total of $675,000. The deduction plus the 
     unified credit exclusion amount may not exceed $1.3 million. 
     If the deduction is taken, then the unified credit exclusion 
     amount is $625,000; however, if the deduction is less than 
     $675,000, then the unified credit is increased (but not above 
     the unified credit that would apply without regard to the 
     deduction) by the excess of $675,000 over the deduction 
     allowed. (Code sec. 2057.)
       A qualified family-owned business interest is defined as 
     any interest in a trade or business (regardless of the form 
     in which it is held) with a principal place of business in 
     the United States if one family owns at least 50 percent of 
     the trade or business, two families own 70 percent, or three 
     families own 90 percent, as long as the decedent's family 
     owns at least 30 percent of the trade or business. An 
     interest in a trade or business does not qualify if any 
     interest in the business (or a related entity) was publicly-
     traded at any time within three years of the decedent's 
     death. An interest in a trade or business also does not 
     qualify if more than 35 percent of the adjusted ordinary 
     gross income of the business for the year of the decedent's 
     death was personal holding company income (as defined in sec. 
     543). In the case of a trade or business that owns an 
     interest in another trade or business (i.e., ``tiered 
     entities''), special look-through rules apply. The value of a 
     trade or business qualifying as a family-owned business 
     interest is reduced to the extent the business holds passive 
     assets or excess cash or marketable securities.
       To qualify for the deduction, the decedent (or a member of 
     the decedent's family) must have owned and materially 
     participated in the trade or business for at least 5 of the 8 
     years preceding the decedent's date of death.

[[Page 19657]]

     In addition, each qualified heir (or a member of the 
     qualified heir's family) is required to actively participate 
     in the trade or business for at least 10 years following the 
     decedent's death.
       The benefit of the deduction for qualified family-owned 
     business interests is subject to recapture if, within 10 
     years of the decedent's death and before the qualified heir's 
     death, one of the following ``recapture events'' occurs: (1) 
     the qualified heir ceases to meet the material participation 
     requirements; (2) the qualified heir disposes of any portion 
     of his or her interest in the family-owned business, other 
     than by a disposition to a member of the qualified heir's 
     family or through a qualified conservation contribution; (3) 
     the principal place of business of the trade or business 
     ceases to be located in the United States; or (4) the 
     qualified heir loses U.S. citizenship.
       The portion of the reduction in estate taxes that is 
     recaptured depends upon the number of years that the 
     qualified heir (or members of the qualified heir's family) 
     materially participated in the trade or business between the 
     date of the decedent's death and the date of the recapture 
     event. If the qualified heir (or his or her family members) 
     materially participated in the trade or business after the 
     decedent's death for less than six years, 100 percent of the 
     reduction in estate taxes attributable to that heir's 
     interest is recaptured; if the participation was for at least 
     six years but less than seven years, 80 percent of the 
     reduction in estate taxes is recaptured; if the participation 
     was for at least seven years but less than eight years, 60 
     percent is recaptured; if the participation was for at least 
     eight years but less than nine years, 40 percent is 
     recaptured; and if the participation was for at least nine 
     years but less than ten years, 20 percent of the reduction in 
     estates taxes is recaptured. In general, there is no 
     requirement that the qualified heir (or members of his or her 
     family) continue to hold or participate in the trade or 
     business more than 10 years after the decedent's death. As 
     under section 2032A(c)(7)(A), however, the 10-year recapture 
     period may be extended for a period of up to two years if the 
     qualified heir does not begin to use the property for a 
     period of up to two years after the decedent's death.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment increases the qualified ``family-owned 
     business interests'' deduction from $675,000 to $1.975 
     million. The deduction plus the unified credit exclusion 
     amount may not exceed $2.6 million.
       Effective date.--The provision is effective for decedents 
     dying after December 31, 2000.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

         VII. DISTRESSED COMMUNITIES AND INDUSTRIES PROVISIONS

 A. Renewal Community Provisions (secs. 701-706 of the House bill and 
 secs. 51, 198, 4973, 4975, 6047, 6104, 6693, and new secs. 1400E-L of 
                               the Code)

                              Present Law

       Pursuant to the Omnibus Budget Reconciliation Act of 1993 
     (``OBRA 1993''), the Secretaries of Housing and Urban 
     Development (``HUD'') and the Department of Agriculture 
     designated a total of nine empowerment zones and 95 
     enterprise communities on December 21, 1994. Of the nine 
     empowerment zones, six are in urban areas and three are in 
     rural areas.\45\
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     \45\ The six urban empowerment zones are located in New York 
     City, Chicago, Atlanta, Detroit, Baltimore, and Philadelphia-
     Camden (New Jersey). The three rural empowerment zones are 
     located in the Kentucky Highlands (Clinton, Jackson and Wayne 
     counties, Kentucky), Mid- Delta Mississippi (Bolivar, Holmes, 
     Humphreys, Leflore counties, Mississippi), and Rio Grande 
     Valley Texas (Cameron, Hidalgo, Starr, and Willacy counties, 
     Texas).
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       In general, businesses located in these empowerment zones 
     qualify for the following tax incentives: (1) a 20-percent 
     wage credit for the first $15,000 of wages paid to a zone 
     resident who works in the empowerment zone; (2) an additional 
     $20,000 of section 179 expensing for certain property placed 
     in service by an enterprise zone business; and (3) special 
     tax-exempt financing for certain zone facilities. Businesses 
     located in enterprise communities are eligible for the 
     special tax-exempt financing benefits but not the other tax 
     incentives available in the empowerment zones. The tax 
     incentives for empowerment zones and enterprise communities 
     generally remain in effect for ten years.
       The Taxpayer Relief Act of 1997 (``1997 Act'') authorized 
     the designation of two new urban empowerment zones \46\ and 
     20 additional empowerment zones. The new urban empowerment 
     zones, whose designations take effect on January 1, 2000, are 
     eligible for substantially the same tax incentives as the 
     nine empowerment zones authorized by OBRA 1993 except that 
     the wage credit is phased down beginning in 2005 and expires 
     after 2007. Businesses in the 20 additional empowerment zones 
     are not eligible for the wage credit (but are eligible to 
     receive up to $20,000 of additional section 179 expensing and 
     to utilize the special tax-exempt financing benefits).
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     \46\ The new urban empowerment zones are located in Los 
     Angeles and Cleveland.
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                               House Bill

       The House bill authorizes the designation of 20 ``renewal 
     communities'' within which special tax incentives would be 
     available. The following is a description of the designation 
     process and the tax incentives that would be available within 
     the renewal communities.
     Designation process
       Designation of 20 renewal communities.--The House bill 
     authorizes the Secretary of HUD to designate up to 20 
     ``renewal communities'' from areas nominated by States and 
     local governments. At least four of the designated 
     communities must be in rural areas (defined as areas which 
     are (1) within local government jurisdictions with a 
     population less than 50,000, (2) outside of a metropolitan 
     statistical area, or (3) determined by HUD to be a rural 
     area). The Secretary of HUD would be required to publish 
     (within four months after enactment) regulations describing 
     the selection process; all designations of renewal 
     communities would have to be made within 24 months after such 
     regulations are published. The designation of an area as a 
     renewal community terminates after December 31, 2007.\47\
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     \47\ The designation would terminate earlier than December 
     31, 2007, if (1) an earlier termination date is designated by 
     the State or local government in their designation, or (2) 
     the Secretary of HUD revokes the designation as of an earlier 
     date.
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       Old empowerment zones and enterprise communities could seek 
     additional designation as renewal communities.--The bill 
     allows the previously designated empowerment zones and 
     enterprise communities to apply for designation as renewal 
     communities. Priority is given in the designation of the 
     first ten renewal communities to nominated areas that are 
     designated as empowerment zones or enterprise communities 
     under present law and that otherwise meet the requirements 
     for designation as a renewal community. If a previously 
     designated empowerment zone or enterprise community is 
     selected as one of the 20 renewal communities, then the 
     area's designation as an empowerment zone or enterprise 
     community remains in effect and the same area would also be 
     designated as a renewal community. For such an area obtaining 
     dual- designation status, the special tax incentives 
     available for empowerment zones (or enterprise communities, 
     as the case may be) and for renewal communities would be 
     available.
       Eligibility criteria.--To be designated as a renewal 
     community, a nominated area must meet all of the following 
     criteria: (1) each census tract has a poverty rate of at 
     least 20 percent; (2) in the case of an urban area, at least 
     70 percent of the households have incomes below 80 percent of 
     the median income of households within the local government 
     jurisdiction; (3) the unemployment rate is at least 1.5 times 
     the national unemployment rate; and (4) the area is one of 
     pervasive poverty, unemployment, and general distress.
       Except with respect to the designation of the first ten 
     renewal communities when priority would be given to existing 
     empowerment zones and enterprise communities (as described 
     above), those areas with the highest average ranking of 
     eligibility factors (1), (2), and (3) above would be 
     designated as renewal communities. The Secretary of HUD shall 
     take into account in selecting areas for designation the 
     extent to which such areas have a high incidence of crime, as 
     well as whether the area has census tracts identified in the 
     May 12, 1998, report of the Government Accounting Office 
     regarding the identification of economically distressed 
     areas.
       There are no geographic size or maximum population 
     limitations placed on the designated renewal communities. The 
     provision merely requires that the boundary of a designated 
     community be ``continuous'' and that the designated community 
     have a minimum population of 4,000 if the community is 
     located within a metropolitan statistical area (at least 
     1,000 in all other cases, or the community must be entirely 
     within an Indian reservation).
       Required State and local government course of action.--In 
     order for an area to be designated as a renewal community, 
     State and local governments are required to submit a written 
     course of action that promises within the nominated area at 
     least five of the following: (1) a reduction of tax rates or 
     fees; (2) an increase in the level of efficiency of local 
     services; (3) crime reduction strategies; (4) actions to 
     remove or streamline governmental requirements; (5) 
     involvement by private entities and community groups, such as 
     to provide jobs and job training and financial assistance; 
     (6) State or local income tax benefits for fees paid for 
     services performed by a nongovernmental entity that were 
     formerly performed by a government entity; and (7) the gift 
     (or sale at below fair market value) of surplus realty by the 
     State or local government to community organizations or 
     private companies.
       In addition, the bill requires that the nominating State 
     and local governments promise to promote economic growth in 
     the nominated area by repealing or not enforcing (1) 
     licensing requirements for occupations that do not ordinarily 
     require a professional

[[Page 19658]]

     degree, (2) zoning restrictions on home-based businesses 
     which do not create a public nuisance, (3) permit 
     requirements for street vendors who do not create a public 
     nuisance, (4) zoning or other restrictions that impede the 
     formation of schools or child care centers, and (5) 
     franchises or other restrictions on competition for 
     businesses providing public services, including but not 
     limited to taxicabs, jitneys, cable television, or trash 
     hauling, unless such regulations are necessary for and well-
     tailored to the protection of health and safety.

                 Tax incentives for renewal communities

       The following tax incentives generally would be available 
     during the seven-year period beginning January 1, 2001, and 
     ending December 31, 2007.
       100-percent capital gain exclusion.--The bill provides for 
     a 100 percent capital gains exclusion for capital gain from 
     the sale of any qualified community asset acquired after 
     December 31, 2000, and before January 1, 2008, and held for 
     more than five years. A ``qualified community asset'' 
     includes: (1) qualified community stock (meaning original-
     issue stock purchased for cash in a ``renewal community 
     business''); (2) a qualified community partnership interest 
     (meaning a partnership interest acquired for cash in a 
     renewal community business); and (3) qualified community 
     business property (meaning tangible real and personal 
     property used in a renewal community business if acquired (or 
     substantially improved) by the taxpayer after December 31, 
     2000). A ``renewal community business'' is similar to the 
     present-law definition of an enterprise zone business \48\ 
     except that 80 percent of the gross income must be derived 
     from the conduct of a qualified business within a renewal 
     community. Property continues to be a ``qualified community 
     asset'' if sold (or otherwise transferred) to a subsequent 
     purchaser, provided that the property continues to represent 
     an interest in (or is tangible property used in) a renewal 
     community business. The termination of an area's status as a 
     renewal community does not affect whether property is a 
     qualified community asset. Gain attributable to the period 
     before January 1, 2001, and after December 31, 2007, is not 
     eligible for the 100-percent exclusion.
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     \48\ An ``enterprise zone business'' is defined as a 
     corporation or partnership (or proprietorship) if for the 
     taxable year: (1) the sole trade or business of the 
     corporation or partnership is the active conduct of a 
     qualified business within an empowerment zone or enterprise 
     community;  (2) at least 50 percent of the total gross income 
     is derived from the active conduct of a ``qualified 
     business'' within a zone or community; (3) a substantial 
     portion of the business' tangible property is used within a 
     zone or community; (4) a substantial portion of the business' 
     intangible property is used in the active conduct of such 
     business; (5) a substantial portion of the services performed 
     by employees are performed within a zone or community; (6) at 
     least 35 percent of the employees are residents of the zone 
     or community; and (7) less than five percent of the average 
     of the aggregate unadjusted bases of the property owned by 
     the business is attributable to (a) certain financial 
     property, or (b) collectibles not held primarily for sale to 
     customers in the ordinary course of an active trade or 
     business (sec. 1397B).
     A ``qualified business'' is defined as any trade or business 
     other than a trade or business that consists predominantly of 
     the development or holding of intangibles for sale or 
     license. In addition, the leasing of real property that is 
     located within the empowerment zone or community to others is 
     treated as a qualified business only if (1) the leased 
     property is not residential property, and (2) at least 50 
     percent of the gross rental income from the real property is 
     from enterprise zone businesses. The rental of tangible 
     personal property to others is not a qualified business 
     unless at least 50 percent of the rental of such property is 
     by enterprise zone businesses or by residents of an 
     empowerment zone or enterprise community (sec. 1397B(d)).
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       Family development accounts.--The bill allow individuals to 
     claim an above-the-line deduction for certain amounts paid in 
     cash to a family development account (``FDA'') established 
     for the benefit of a ``qualified individual,'' meaning an 
     individual who both resides in a renewal community throughout 
     the taxable year and was allowed to claim the earned income 
     credit (EIC) during the preceding taxable year. A qualified 
     individual may claim a deduction of up to $2,000 per year for 
     amounts he or she contributes to his or her own FDA. Any 
     other person may contribute amounts to one or more FDAs 
     established for the benefit of a qualified individual and 
     deduct up to $1,000 per qualified individual. Contributions 
     to an FDA made on or before April 15th of the current taxable 
     year could be treated as made during the preceding taxable 
     year. The bill permits (but does not require) individuals to 
     direct that the IRS directly deposit their EIC refunds into 
     an FDA on behalf of such individual.
       The bill provides that up to five of the renewal 
     communities may be designated by the Secretary of HUD as 
     ``FDA matching demonstration areas,'' with respect to which 
     HUD will, at the request of a qualified individual, match 
     amounts contributed to FDAs, up to $1,000 per individual per 
     taxable year (with a $2,000 lifetime cap). At least two of 
     the FDA matching demonstration areas must be rural areas. The 
     Secretary of HUD may designate renewal communities as FDA 
     matching demonstration areas only during the 24-month period 
     after such Secretary prescribes regulations regarding such 
     areas. The matching grant amounts made under this 
     demonstration program are excluded from the gross income of 
     the account holder, and no deduction is allowed for matching 
     grant amounts. The Treasury Secretary must provide notice to 
     residents of FDA matching demonstration areas of the 
     availability of matching contributions.
       An FDA is exempt from taxation (other than UBIT imposed by 
     present-law section 511). A distribution from an FDA is not 
     included in the gross income of the distributee if it is a 
     ``qualified family development distribution.'' A qualified 
     family development distribution is defined as a distribution 
     from an FDA that is used exclusively to pay for (1) qualified 
     higher educational expenses, (2) qualified first-time 
     homebuyer expenses, (3) qualified business capitalization 
     costs \49\, or (4) qualified medical expenses. Such qualified 
     expenses must be incurred on behalf of the FDA account 
     holder, or the spouse or dependent of the account holder.
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     \49\ As is the case for enterprise zone businesses, a 
     qualified business capitalization cost would not include 
     expenditures incurred for the capitalization of any trade or 
     business described in section 144(c)(6)(B) (e.g., a country 
     club, hot tub facility, or liquor store).
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       Distributions from an FDA that are not qualified family 
     development distributions are included in gross income and 
     subject to either a 100-percent additional tax (in the case 
     of a distribution attributable to a demonstration matching 
     contribution) or a 10-percent additional tax (in the case of 
     any other distribution). The 100-percent and 10-percent 
     additional taxes do not apply to distributions that are made 
     on or after the account holder attains age 59\1/2\, dies, or 
     becomes disabled. Any distribution from an FDA that is not a 
     qualified family development distribution is deemed to have 
     been made from demonstration matching contributions (thus 
     subject to a 100-percent additional tax) until all such 
     demonstration matching contributions have been withdrawn. 
     This is to encourage account holders to use the amounts 
     contributed to the FDA for qualified family development 
     distributions or to save such amounts for retirement.
       The bill permits tax-free rollovers of amounts in an FDA 
     into another such account established for the benefit of an 
     individual who (1) both resides in a renewal community 
     throughout the taxable year and was allowed to claim the 
     earned income credit during the preceding taxable year, and 
     (2) either is the account holder or is a spouse or dependent 
     of the account holder.
       Commercial revitalization deduction.--The bill allows each 
     State to allocate an amount of ``commercial revitalization 
     deductions'' with respect to qualified revitalization 
     expenditures incurred in connection with a qualified 
     revitalization building. The commercial revitalization 
     deduction is equal to (a) 50 percent of qualified 
     revitalization expenditures for the taxable year in which a 
     qualified revitalization building is placed in service or, at 
     the election of the taxpayer, (b) a ten-percent deduction for 
     qualified revitalization expenditures per year for a 10-year 
     period beginning with the year in which the building is 
     placed in service. A ``qualified revitalization expenditure'' 
     means the cost (up to $10 million) of constructing or 
     substantially rehabilitating a building used for commercial 
     purposes in a designated renewal community, including certain 
     land acquisition costs. A commercial revitalization deduction 
     would be in lieu of any depreciation deduction otherwise 
     allowable on account of such expenditure.
       Each State would be allowed to allocate no more than $6 
     million worth of commercial revitalization deductions to each 
     renewal community located within the State for each calendar 
     year after 2000 and before 2008. The appropriate State agency 
     would make the allocations pursuant to a qualified allocation 
     plan. The qualified allocation plan would (1) set forth the 
     selection criteria to be used to determine priorities as 
     appropriate to local conditions; (2) consider how the 
     building project would contribute to the renewal community 
     and its residents, and (3) provide a procedure that the 
     agency would follow to monitor compliance.
       A qualified revitalization building must be located in a 
     renewal community and placed in service after December 31, 
     2000, and before January 1, 2008.
       Additional section 179 expensing.--A renewal community 
     business is allowed an additional $35,000 of section 179 
     expensing for qualified renewal property placed in service 
     after December 31, 2000, and before January 1, 2008. If a 
     renewal community business is located in an area that is 
     designated as both an empowerment zone and a renewal 
     community, such business could be allowed an additional 
     $55,000 of section 179 expensing (i.e., $20,000 of additional 
     expensing because the area is designated an empowerment zone 
     plus $35,000 of additional expensing because the area is 
     designated a renewal community). The section 179 expensing 
     allowed to a taxpayer is phased out by the amount by which 50 
     percent of the cost of qualified renewal property placed in 
     service during the year by the taxpayer exceeds $200,000. The 
     term qualified renewal property'' is similar to ``qualified 
     zone property'' under section 1397C.
       Expensing of environmental remediation costs 
     (``brownfields'').--A renewal community is treated as a 
     ``targeted area'' under section

[[Page 19659]]

     198 which permits expensing of certain environmental 
     remediation costs. Thus, taxpayers can elect to treat certain 
     environmental remediation expenditures that otherwise would 
     be capitalized as deductible in the year paid or incurred. 
     The expenditure must be incurred in connection with the 
     abatement or control of environmental contaminants, as 
     required by Federal and State law, at a trade or business 
     site located within a designated renewal community. This 
     provision applies to expenditures incurred after December 31, 
     2000, and before January 1, 2008.
       Extension of work opportunity tax credit (``WOTC'').--The 
     provision makes two changes to the WOTC. Beginning in 2001, 
     the provision expands the high-risk youth and qualified 
     summer youth categories in the present-law WOTC to include 
     qualified individuals who live in a renewal community. 
     Second, in the event that the WOTC program were to expire and 
     not be extended, the bill permits employers engaged in a 
     trade or business in a renewal community to claim a tax 
     credit with respect to individuals hired from one or more 
     targeted groups that live and perform substantially all of 
     their work in a renewal community. The tax credit equals 15 
     percent of the qualified first-year wages and 30 percent of 
     the qualified second-year wages through December 31, 2007. No 
     more than $10,000 of wages may be taken into account in each 
     year. Qualified wages generally consist of wages paid or 
     incurred during the period for which the WOTC is being 
     calculated.
       Targeted groups eligible for the tax credit include: (1) 
     certain individuals certified by the designated local agency 
     as being a member of a family receiving assistance under a 
     IV-A program for any nine months during the 18-month period 
     ending on the hiring date; (2) certain ex-felons having a 
     hiring date within one year of release from prison or date of 
     conviction; (3) individuals who are at least 18 but not 25 
     years of age and have a principal place of abode within an 
     empowerment zone, enterprise community, or renewal community; 
     (4) individuals who are at least 18 but not 25 years of age 
     who are certified as being a member of a family receiving 
     assistance under a food stamp program under the Food Stamp 
     Act of 1977 for a period of at least six months ending on the 
     hiring date; (5) individuals who have a physical or mental 
     disability that constitutes a substantial handicap to 
     employment and who have been referred to the employer while 
     receiving, or after completing, vocational rehabilitation 
     services; (6) individuals who are 16 or 17 years of age, 
     perform services during any 90-day period between May 1 and 
     September 15, and have a principal place of abode within an 
     empowerment zone, enterprise community, or renewal community; 
     (7) certain veterans who receive food stamps; and (8) 
     recipients of certain Supplemental Security Income benefits.
       HUD reports.--Not later than the close of the fourth 
     calendar year after the year the Secretary of HUD first 
     designates an area as a renewal community and every four 
     years thereafter, the Secretary of HUD must report to 
     Congress on the effects of such designation in stimulating 
     the creation of new jobs, particularly for disadvantaged 
     workers and long-term unemployed individuals, and promoting 
     the revitalization of economically distressed areas.
     Effective date
       Although renewal communities would be designated within 24 
     months after publication of regulations by HUD, the tax 
     benefits available in renewal communities are effective for 
     the 7-year period beginning January 1, 2001, and ending 
     December 31, 2007.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement generally follows the House bill 
     with the following modifications. The conference agreement 
     does not provide for the designation of the ``FDA matching 
     demonstration areas.'' In addition, the conference agreement 
     does not include the provision requiring a report by the 
     Secretary of HUD to Congress.

 B. Provide That Federal Production Payments to Farmers Are Taxable in 
             the Year Received (sec. 711 of the House bill)

                              Present Law

       A taxpayer generally is required to include an item in 
     income no later than the time of its actual or constructive 
     receipt, unless such amount properly is accounted for in a 
     different period under the taxpayer's method of accounting. 
     If a taxpayer has an unrestricted right to demand the payment 
     of an amount, the taxpayer is in constructive receipt of that 
     amount whether or not the taxpayer makes the demand and 
     actually receives the payment.
       The Federal Agriculture Improvement and Reform Act of 1996 
     (the ``FAIR Act'') provides for production flexibility 
     contracts between certain eligible owners and producers and 
     the Secretary of Agriculture. These contracts generally cover 
     crop years from 1996 through 2002. Annual payments are made 
     under such contracts at specific times during the Federal 
     government's fiscal year. Section 112(d)(2) of the FAIR Act 
     provides that one-half of each annual payment is to be made 
     on either December 15 or January 15 of the fiscal year, at 
     the option of the recipient. \50\ The remaining one-half of 
     the annual payment must be made no later than September 30 of 
     the fiscal year. The Emergency Farm Financial Relief Act of 
     1998 added section 112(d)(3) to the FAIR Act which provides 
     that all payments for fiscal year 1999 are to be paid at such 
     time or times during fiscal year 1999 as the recipient may 
     specify. Thus, the one-half of the annual amount that would 
     otherwise be required to be paid no later than September 30, 
     1999 can be specified for payment in calendar year 1998.
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     \50\ This rule applies to fiscal years after 1996. For fiscal 
     year 1996, this payment was to be made not later than 30 days 
     after the production flexibility contract was entered into.
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       These options potentially would have resulted in the 
     constructive receipt (and thus inclusion in income) of the 
     payments to which they relate at the time they could have 
     been exercised, whether or not they were in fact exercised. 
     However, section 2012 of the Tax and Trade Relief Extension 
     Act of 1998 provided that the time a production flexibility 
     contract payment under the FAIR Act properly is includible in 
     income is to be determined without regard to either option, 
     effective for production flexibility contract payments made 
     under the FAIR Act in taxable years ending after December 31, 
     1995.

                               House Bill

       Any option to accelerate the receipt of any payment under a 
     production flexibility contract which is payable under the 
     FAIR Act, as in effect on the date of enactment of the 
     provision, is to be disregarded in determining the taxable 
     year in which such payment is properly included in gross 
     income. Options to accelerate payments that are enacted in 
     the future are covered by this rule, providing the payment to 
     which they relate is mandated by the FAIR Act as in effect on 
     the date of enactment of this Act.
       The provision does not delay the inclusion of any amount in 
     gross income beyond the taxable period in which the amount is 
     received.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

C. Allow Net Operating Losses from Oil and Gas Properties To Be Carried 
Back for Up to Five Years (sec. 721 of the House bill, sec. 1104 of the 
              Senate amendment, and sec. 172 of the Code)

                              Present Law

       A net operating loss (``NOL'') generally is the amount by 
     which business deductions of a taxpayer exceed business gross 
     income. In general, an NOL may be carried back two years and 
     carried forward 20 years to offset taxable income in such 
     years. A carryback of an NOL results in the refund of Federal 
     income tax for the carryback year. A carryforward of an NOL 
     reduces Federal income tax for the carryforward year. Special 
     NOL carryback rules apply to (1) casualty and theft losses of 
     individual taxpayers, (2) Presidentially declared disasters 
     for taxpayers engaged in a farming business or a small 
     business, (3) real estate investment trusts, (4) specified 
     liability losses, (5) excess interest losses, and (6) farm 
     losses.

                               House Bill

       The House bill provides a special five-year carryback for 
     certain eligible oil and gas losses. The carryforward period 
     remains 20 years. An ``eligible oil and gas loss'' is defined 
     as the lesser of (1) the amount which would be the taxpayer's 
     NOL for the taxable year if only income and deductions 
     attributable to operating mineral interests in oil and gas 
     wells were taken into account, or (2) the amount of such net 
     operating loss for such taxable year. In calculating the 
     amount of a taxpayer's NOL carrybacks, the portion of the NOL 
     that is attributable to an eligible oil and gas loss is 
     treated as a separate NOL and taken into account after the 
     remaining portion of the NOL for the taxable year.
       Effective date.--The provision applies to net operating 
     losses arising in taxable years beginning after December 31, 
     1998.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

  D. Deduction for Delay Rental Payments (sec. 722 of the House bill, 
     sec. 1106 of the Senate amendment, and sec. 263A of the Code)

                              Present Law

       Present law generally requires costs associated with 
     inventory and property held for resale to be capitalized 
     rather than currently deducted as they are incurred. (sec. 
     263). Oil and gas producers typically contract for mineral 
     production in exchange for royalty payments. If mineral 
     production is delayed, these contracts provide for ``delay 
     rental payments'' as a condition of their extension. The 
     Treasury Department has taken the position that the uniform 
     capitalization rules of section 263A require delay rental 
     payments to be capitalized.

[[Page 19660]]



                               House Bill

       The House bill allows delay rental payments to be deducted 
     currently.
       Effective date.--The provision applies to rental payments 
     incurred in taxable years beginning after December 31, 1999.
       No inference is intended from the prospective effective 
     date of this provision as to the proper treatment of pre-
     effective date delay rental payments.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 E. Election to Expense Geological and Geophysical Expenditures (sec. 
723 of the House bill, sec. 1105 of the Senate amendment, and sec. 263 
                              of the Code)

                              Present Law

       Under present law, current deductions are not allowed for 
     any amount paid for new buildings or for permanent 
     improvements or betterments made to increase the value of any 
     property or estate (sec. 263(a)). Treasury Department 
     regulations define capital amounts to include amounts paid or 
     incurred (1) to add to the value, or substantially prolong 
     the useful life, of property owned by the taxpayer or (2) to 
     adapt property to a new or different use. \51\
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     \51\ Treas. Reg. sec. 1.263(a)-(1)(b).
---------------------------------------------------------------------------
       The proper income tax treatment of geological and 
     geophysical costs (``G&G costs'') associated with oil and gas 
     production has been the subject of a number of court 
     decisions and administrative rulings. G&G costs are incurred 
     by the taxpayer for the purpose of obtaining and accumulating 
     data that will serve as a basis for the acquisition and 
     retention of oil or gas properties by taxpayers exploring for 
     the minerals. Courts have ruled that such costs are capital 
     in nature and are not deductible as ordinary and necessary 
     business expenses.

                               House Bill

       The House bill allows geological and geophysical costs 
     incurred in connection with oil and gas exploration in the 
     United States to be deducted currently.
       Effective date.--The provision is effective for G&G costs 
     incurred in taxable years beginning after December 31, 1999.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 F. Temporary Suspension of Limitation Based on 65 Percent of Taxable 
      Income (sec. 724 of the House bill and sec. 613 of the Code)

                              Present Law

       Depletion, like depreciation, is a form of capital cost 
     recovery. In both cases, the taxpayer is allowed a deduction 
     in recognition of the fact that an asset--in the case of 
     depletion for oil or gas interests, the mineral reserve 
     itself--is being expended in order to produce income. Certain 
     costs incurred prior to drilling an oil or gas property are 
     recovered through the depletion deduction. These include 
     costs of acquiring the lease or other interest in the 
     property and geological and geophysical costs (in advance of 
     actual drilling). Depletion is available to any person having 
     an economic interest in a producing property.
       Two methods of depletion currently are allowable under the 
     Code: (1) the cost depletion method, and (2) the percentage 
     depletion method (secs. 611-613). Under the cost depletion 
     method, the taxpayer deducts that portion of the adjusted 
     basis of the depletable property which is equal to the ratio 
     of units sold from that property during the taxable year to 
     the number of units remaining as of the end of taxable year 
     plus the number of units sold during the taxable year. Thus, 
     the amount recovered under cost depletion may never exceed 
     the taxpayer's basis in the property.
       Under the percentage depletion method, generally, 15 
     percent of the taxpayer's gross income from an oil- or gas-
     producing property is allowed as a deduction in each taxable 
     year (sec. 613A(c)). The amount deducted generally may not 
     exceed 100 percent of the net income from that property in 
     any year (the ``net-income limitation'') (sec. 613(a)). \52\ 
     Additionally, the percentage depletion deduction for all oil 
     and gas properties may not exceed 65 percent of the 
     taxpayer's overall taxable income (determined before such 
     deduction and adjusted for certain loss carrybacks and trust 
     distributions) (sec. 613A(d)(1)).
---------------------------------------------------------------------------
     \52\ The Taxpayer Relief Act of 1997 suspended the 100-
     percent net-income limitation for production from marginal 
     wells for taxable years beginning after December, 31, 1997, 
     and before January 1, 2000. This suspension is extended for 
     an additional period, through December 31, 2004, in another 
     section of the House bill and the Senate amendment.
---------------------------------------------------------------------------

                               House Bill

       The limit on percentage depletion deductions to no more 
     than 65 percent of the taxpayer's overall taxable income is 
     suspended for taxable years beginning after December 31, 
     1998, and before January 1, 2005.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

G. Modify Small Refiner Limit for Eligibility for Percentage Depletion 
   Deductions (sec. 725 of the House bill and sec. 613A of the Code)

                              Present Law

       Present law classifies oil and gas producers as independent 
     producers or integrated companies. The Code provides numerous 
     different, and typically more generous, tax rules for 
     operations by independent producers. One such rule allows 
     independent producers to claim percentage depletion 
     deductions rather than deducting the costs of their asset, a 
     producing well, based on actual production from the well 
     (i.e., cost depletion).
       A producer is an independent producer only if its refining 
     and retail operations are relatively small. For example, an 
     independent producer may not have refining operations the 
     runs from which exceed 50,000 barrels on any day in the 
     taxable year during which independent producer status is 
     claimed.

                               House Bill

       The House bill changes the refinery limitation on claiming 
     independent producer status from a limit based on actual 
     daily production to a limit based on average daily production 
     for the taxable year: the average daily refinery run for the 
     taxable year may not exceed 50,000 barrels. For this purpose, 
     the taxpayer shall calculate average daily production by 
     dividing total production for the taxable year by the total 
     number of days in the taxable year.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

  H. Increase the Maximum Dollar Amount of Reforestation Expenditures 
Eligible for Amortization and Credit (sec. 731 of the House bill, sec. 
        1108 of the Senate amendment, and sec. 194 of the Code)

                              Present Law

             Amortization of reforestation costs (sec. 194)

       A taxpayer may elect to amortize up to $10,000 ($5,000 in 
     the case of a separate return by a married individual) of 
     qualifying reforestation expenditures incurred during the 
     taxable year with respect to qualifying timber property. 
     Amortization is taken over 84 months (7 years) and is subject 
     to a mandatory half-year convention. \53\ In the case of an 
     individual, the amortization deduction is allowed in 
     determining adjusted gross income (an above-the-line 
     deduction) rather than as an itemized deduction. The amount 
     eligible for amortization has not been increased since the 
     election was added to the Code in 1980. \54\
---------------------------------------------------------------------------
     \53\ Under the half-year convention, all reforestation 
     expenditures are considered to be incurred on the first day 
     of the first month of the second half of the taxable year. 
     Thus, an amortization deduction equal to 6/84 of the 
     expenditures for the year is allowed in the first and eighth 
     years and an amortization deduction equal to 1/7 (12/84) of 
     such expenditures is allowed in the second through seventh 
     years.
     \54\ Sec. 301(a) of the Multiemployer Pension Plan Amendments 
     Act of 1980.
---------------------------------------------------------------------------
       Qualifying reforestation expenditures are the direct costs 
     a taxpayer incurs in connection with the forestation or 
     reforestation of a site by planting or seeding, and include 
     costs for the preparation of the site, the cost of the seed 
     or seedlings, and the cost of the labor and tools (including 
     depreciation of long lived assets such as tractors and other 
     machines) used in the reforestation activity. Qualifying 
     reforestation expenditures do not include expenditures that 
     would otherwise be deductible and do not include costs for 
     which the taxpayer has been reimbursed under a governmental 
     cost sharing program, unless the amount of the reimbursement 
     is also included in the taxpayer's gross income.
       Qualifying timber property includes any woodlot or other 
     site that is located in the United States that will contain 
     trees in significant commercial quantities and that is held 
     by the taxpayer for the planting, cultivating, caring for, 
     and cutting of trees for sale or use in the commercial 
     production of timber products. The regulations require that 
     the site consist of at least one acre that is devoted to such 
     activities. \55\ A taxpayer may hold qualifying timber 
     property in fee or by lease. Where the property is held by 
     one person for life with the remainder to another person, the 
     life tenant is considered the owner of the property for this 
     purpose.
---------------------------------------------------------------------------
     \55\ Treas. Reg. sec. 1.194-3(a).
---------------------------------------------------------------------------
       Reforestation amortization is subject to recapture as 
     ordinary income on sale of qualifying timber property within 
     10 years of the year in which the qualifying reforestation 
     expenditures were incurred. \56\
---------------------------------------------------------------------------
     \56\ Sec. 1245(b)(7); Treas. Reg. sec. 1.194-1(c).
---------------------------------------------------------------------------
     Reforestation tax credit (sec. 48(b))
       A tax credit is allowed equal to 10 percent of the 
     reforestation expenditures incurred

[[Page 19661]]

     during the year that are properly elected to be amortized. An 
     amount allowed as a credit is subject to recapture if the 
     qualifying timber property to which the expenditure relates 
     is disposed of within 5 years.

                               House Bill

       The provision increases the amount of reforestation 
     expenditures eligible for 7-year amortization and the 
     reforestation credit from $10,000 to $25,000 per taxable year 
     (from $5,000 to $12,500 in the case of a separate return by a 
     married individual).
       For taxable years beginning in 2000 through 2003, the 
     provision removes the limitation on the amount eligible for 
     7-year amortization.
       Effective date.--The provision is effective for 
     expenditures paid or incurred in taxable years beginning 
     after December 31, 1998. Expenditures paid or incurred prior 
     to the effective date would continue to be recovered under 
     the rules of present law. For taxable years beginning in 1999 
     and after 2003, the amount of reforestation expenditures 
     eligible for 7-year amortization and for the credit is 
     limited to $25,000. For taxable years beginning in 2000 
     through 2003, the amount of reforestation expenditures 
     eligible for the credit is limited to $25,000 and no limit 
     would apply to the amount eligible for 7-year amortization.

                            Senate Amendment

       The Senate amendment is generally the same as the House 
     bill, except that the Senate amendment is effective for 
     taxable years beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, effective as provided in the Senate 
     amendment. Accordingly, there is no change in the amount of 
     reforestation expenditures eligible for amortization and the 
     credit for taxable years beginning in 1999. For taxable years 
     beginning in 2000 through 2003, the amount of reforestation 
     expenditures eligible for the credit is limited to $25,000 
     and no limit applies to the amount eligible for 7-year 
     amortization. For taxable years beginning after 2003, the 
     amount of reforestation expenditures eligible for 7-year 
     amortization and for the credit is limited to $25,000.

 I. Capital Gains Treatment Under Section 631(b) to Apply to Outright 
   Sales by Landowners (sec. 732 of the House bill, sec. 1136 of the 
             Senate amendment, and sec. 631(b) of the Code)

                              Present Law

       Gain on the cutting and sale of timber generally is 
     eligible for capital gains treatment, provided the growing 
     timber has been held for more than one year. If the taxpayer 
     sells the timber at the time it is cut, the capital gain is 
     measured as the difference between the sales price of the 
     timber less cost of sales and any unrecovered costs of 
     growing the timber.
       If the taxpayer sells the timber prior to its being cut, a 
     special rule allows the taxpayer to treat the sale as a 
     capital gain, provided the taxpayer retains an economic 
     interest in the timber and holds the timber for more than one 
     year prior to the date of disposal. The date of disposal is 
     deemed to be the date the timber is cut, unless the taxpayer 
     receives payment for the timber prior to the date it is cut 
     and elects to treat the date of payment as the date of 
     disposal.

                               House Bill

       In the case of a sale of timber by the owner of the land 
     from which the timber is cut, the requirement that a taxpayer 
     retain an economic interest in the timber in order to treat 
     gains on sales prior to the time the timber is cut as capital 
     gains does not apply. Outright sales of timber by the 
     landowner will qualify for capital gains treatment in the 
     same manner as sales with a retained economic interest 
     qualify under present law. The provision does not modify the 
     rule that deems the date of cutting to be the date of 
     disposition. Thus, unless the taxpayer receives payment prior 
     to the date of cutting and elects to treat that date as the 
     date of disposition, the date of sale will be the date of 
     cutting whether or not an economic interest is retained.
       Effective date.--The provision is effective for sales of 
     timber after the date of enactment. A sale will not be 
     considered to occur after the date of enactment if the 
     taxpayer conveys its interest in the timber on or before the 
     date of enactment, even if the deemed date of disposition is 
     after the date of enactment.

                            Senate Amendment

       Same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

  J. Minimum Tax Relief for the Steel Industry (sec. 741 of the House 
                     bill and sec. 53 of the Code)

                              Present Law

       A corporate taxpayer receives a minimum tax credit for any 
     year in which it pays alternative minimum tax. The 
     alternative minimum tax is the excess of tentative minimum 
     tax over regular tax \57\ and generally represents the 
     additional tax a corporate taxpayer is required to pay in any 
     year as a result of the alternative minimum tax system. The 
     minimum tax credit may be used in future years to the extent 
     regular tax exceeds tentative minimum tax. The minimum tax 
     credit may not be used to reduce liability below tentative 
     minimum tax. The credit may be carried forward indefinitely.
---------------------------------------------------------------------------
     \57\ For this purpose, tentative minimum tax is determined 
     net of alternative minimum tax foreign tax credits and 
     regular tax is determined net of regular tax foreign tax 
     credits.
---------------------------------------------------------------------------
       For example, a corporate taxpayer has $1,000 of minimum tax 
     credits available in a year in which its regular tax is $200 
     and its tentative minimum tax is $100. The taxpayer may use 
     $100 of its minimum tax credits (the excess of regular tax 
     over tentative minimum tax) to reduce its current liability 
     to $100. The taxpayer would then have $900 of minimum tax 
     credits available in the following year.
       If instead the corporate taxpayer had regular tax of $100 
     and tentative minimum tax of $200, it would not be allowed to 
     use any of its minimum tax credits because there is no excess 
     of regular tax over tentative minimum tax. The taxpayer would 
     have a current liability of $200 ($100 of regular tax and 
     $100 of alternative minimum tax) and would generate an 
     additional $100 of minimum tax credits, giving it minimum tax 
     credits of $1100 available for the following year.

                               House Bill

       The provision allows minimum tax credits to offset 90 
     percent of tentative minimum tax \58\ in the case of a steel 
     company, in addition to any excess of regular tax over 
     tentative minimum tax. The benefit of the provision is 
     limited to amounts that are attributable to the trade or 
     business of manufacturing steel within the United States for 
     sale to customers. The rules regarding the determination of 
     minimum tax credits are not changed. The Secretary is 
     authorized to issue regulations to insure that the benefit of 
     the provision is limited to steel companies.
---------------------------------------------------------------------------
     \58\ Determined net of the alternative minimum tax foreign 
     tax credit.
---------------------------------------------------------------------------
       For example, under the provision, a company that has 
     exclusively engaged in the trade or business of manufacturing 
     steel within the United States for sale to customers has 
     $1,000 of minimum tax credits available in a year in which 
     its regular tax is $200 and its tentative minimum tax is 
     $100. The taxpayer may use minimum tax credits of $100 (the 
     excess of its regular tax over its tentative minimum tax) 
     plus $90 (90 percent of its tentative minimum tax), for a 
     total of $190, to reduce its current liability to $10. The 
     taxpayer would then have $810 of minimum tax credits 
     available in the following year.
       If instead the steel company had regular tax of $100 and 
     tentative minimum tax of $200, it would be allowed to use 
     $180 (90 percent of its tentative minimum tax) of its minimum 
     tax credits to reduce its current liability to $20. The net 
     effect on its minimum tax credits would be a reduction of $80 
     \59\, giving it minimum tax credits of $920 available for the 
     following year.
---------------------------------------------------------------------------
     \59\ The determination of minimum tax credits available in 
     the following year is a multiple step process, involving an 
     increase in the stock of minimum tax credits by the amount 
     that tentative minimum tax exceeds regular tax ($100), 
     combined with a reduction by the amount used ($180), for a 
     net reduction of $80.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1998.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

               VIII. SMALL BUSINESS TAX RELIEF PROVISIONS

  A. Accelerate 100-Percent Self-Employed Health Insurance Deduction 
(sec. 801 of the House bill, sec. 601 of the Senate amendment, and sec. 
                          162(l) of the Code)

                              Present Law

       Under present law, the tax treatment of health insurance 
     expenses depends on the individual's circumstances. Self-
     employed individuals may deduct a portion of health insurance 
     expenses for the individual and his or her spouse and 
     dependents. The deductible percentage of health insurance 
     expenses of a self-employed individual is 60 percent in 1999 
     through 2001, 70 percent in 2002, and 100 percent in 2003 and 
     thereafter. The deduction for health insurance expenses of 
     self-employed individuals is not available for any month in 
     which the taxpayer is eligible to participate in a subsidized 
     health plan maintained by the employer of the taxpayer or the 
     taxpayer's spouse.
       The self-employed health deduction also applies to 
     qualified long-term care insurance premiums treated as 
     medical care for purposes of the itemized deduction for 
     medical expenses.

                               House Bill

       Beginning in 2000, the House bill increases the deduction 
     for health insurance expenses (and qualified long-term care 
     insurance expenses) of self-employed individuals to 100 
     percent.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

[[Page 19662]]



                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that the Senate amendment also provides that the self-
     employed health deduction is not available for any month in 
     which the taxpayer participates in any subsidized health plan 
     maintained by any employer of the taxpayer or the taxpayer's 
     spouse.
       Effective date.--Same as the House bill.

                          Conference Agreement

       The conference agreement follows the Senate amendment. 
     Under the conference agreement, as under the Senate 
     amendment, the self-employed health deduction is not 
     available for any month in which the taxpayer participates in 
     any subsidized health plan maintained by any employer of the 
     taxpayer or the taxpayer's spouse. Thus, for example, suppose 
     that A is a sole proprietor and that A and his spouse, S, are 
     eligible to participate in the health plan sponsored by S's 
     employer, but decline to participate. A and S are entitled to 
     the self-employed health deduction.
       Effective date.--Taxable years beginning after December 31, 
     1999.

B. Increase Section 179 Expensing (sec. 802 of the House bill, sec. 602 
           of the Senate amendment, and sec. 179 of the Code)

                              Present Law

       Present law provides that, in lieu of depreciation, a 
     taxpayer with a sufficiently small amount of annual 
     investment may elect to deduct up to $19,000 (for taxable 
     years beginning in 1999) of the cost of qualifying property 
     placed in service for the taxable year (sec. 179). In 
     general, qualifying property is defined as depreciable 
     tangible personal property that is purchased for use in the 
     active conduct of a trade or business. The $19,000 amount is 
     reduced (but not below zero) by the amount by which the cost 
     of qualifying property placed in service during the taxable 
     year exceeds $200,000. In addition, the amount eligible to be 
     expensed for a taxable year may not exceed the taxable income 
     for a taxable year that is derived from the active conduct of 
     a trade or business (determined without regard to this 
     provision). Any amount that is not allowed as a deduction 
     because of the taxable income limitation may be carried 
     forward to succeeding taxable years (subject to similar 
     limitations).
       The $19,000 amount is increased to $25,000 for taxable 
     years beginning in 2003 and thereafter. The increase is 
     phased in as follows: for taxable years beginning in 2000, 
     the amount is $20,000; for taxable years beginning in 2001 or 
     2002, the amount is $24,000; and for taxable years beginning 
     in 2003 and thereafter, the amount is $25,000.

                               House Bill

       The House bill provides that the maximum dollar amount that 
     may be deducted under section 179 is increased to $30,000 for 
     taxable years beginning in 2000 and thereafter, without the 
     present-law phase-in rule.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                            Senate Amendment

       Same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

  C. Repeal of Temporary Federal Unemployment Surtax (sec. 803 of the 
House bill, sec. 603 of the Senate amendment and sec. 3301 of the Code)

                              Present Law

       The Federal Unemployment Tax Act (``FUTA'') imposes a 6.2-
     percent gross tax rate on the first $7,000 paid annually by 
     covered employers to each employee. Employers in States with 
     programs approved by the Federal Government and with no 
     delinquent Federal loans may credit 5.4-percentage points 
     against the 6.2-percent tax rate, making the minimum, net 
     Federal unemployment tax rate 0.8 percent. Since all States 
     currently have approved programs, 0.8 percent is the Federal 
     tax rate that generally applies. This Federal revenue 
     finances administration of the unemployment system, half of 
     the Federal-State extended benefits program, and a Federal 
     account for State loans. The States use the revenue turned 
     back to them by the 5.4-percent credit to finance their 
     regular State programs and half of the Federal-State extended 
     benefits program.
       In 1976, Congress passed a temporary surtax of 0.2 percent 
     of taxable wages to be added to the permanent FUTA tax rate. 
     Thus, the current 0.8-percent FUTA tax rate has two 
     components: a permanent tax rate of 0.6 percent, and a 
     temporary surtax rate of 0.2 percent. The temporary surtax 
     subsequently has been extended through 2007.

                               House Bill

       The House bill repeals the temporary FUTA surtax after 
     December 31, 2004.
       Effective date.--The House bill provision is effective for 
     labor performed on or after January 1, 2005.

                            Senate Amendment

       Same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

   D. Farmer and Fisherman Income Averaging (sec. 604 of the Senate 
            amendment and secs. 55(c) and 1301 of the Code)

                              Present Law

       An individual taxpayer may elect to compute his or her 
     current year tax liability by averaging, over the prior 
     three-year period, all or portion of his or her taxable 
     income from the trade or business of farming. The averaging 
     election is not coordinated with the alternative minimum tax. 
     Thus, some farmers may become subject to the alternative 
     minimum tax solely as a result of the averaging election.

                               House Bill

       No provision.

                            Senate Amendment

       The election to average income is extended to cover income 
     from the trade or business of fishing as well as farming. For 
     this purpose, the trade or business of fishing is the conduct 
     of commercial fishing as defined in Section 3 of the 
     Magnuson-Stevens Fishery Conservation and Management Act (16 
     U.S.C. 1802) and includes the trade or business of catching, 
     taking or harvesting fish that are intended to enter commerce 
     through sale, barter or trade.
       The provision coordinates farmers' and fishermen's income 
     averaging with the alternative minimum tax. A farmer of 
     fisherman electing to average his or her farm income will owe 
     alternative minimum tax only to the extent he or she would 
     have owed alternative minimum tax had averaging not been 
     elected. This is achieved by excluding the impact of the 
     election to average farm income from the calculation of both 
     regular tax and tentative minimum tax, solely for the purpose 
     of determining alternative minimum tax.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

   E. Farm, Fish and Ranch Risk Management Accounts (sec. 605 of the 
         Senate amendment and secs. 468C and 4973 of the Code)

                              Present Law

       There is no provision in present law allowing the elective 
     deferral of farm or fishing income.

                               House Bill

       No provision.

                            Senate Amendment

       The bill allows taxpayers engaged in an eligible business 
     to establish Farm, Fish and Ranch Risk Management (FFARRM) 
     accounts. An eligible business is any trade or business of 
     farming in which the taxpayer actively participates, 
     including the operation of a nursery or sod farm or the 
     raising or harvesting of crop-bearing or ornamental trees 
     \60\. An eligible business is also the trade or business of 
     commercial fishing as that term is defined under section (3) 
     of the Magnuson-Stevens Fishery Conservation and Management 
     Act (16 U.S.C. 1802) and includes the trade or business of 
     catching, taking or harvesting fish that are intended to 
     enter commerce through sale, barter or trade.
---------------------------------------------------------------------------
     \60\ An evergreen tree that is more than 6 years old when 
     severed from the roots (and thus eligible for captial gains 
     treatment on cutting) is not considered an ornamental tree 
     for this purpose.
---------------------------------------------------------------------------
       Contributions to a FFARRM account are deductible and are 
     limited to 20 percent of the taxable income that is 
     attributable to the eligible business. The deduction is to be 
     taken into account in determining adjusted gross income and 
     will reduce income attributable to the eligible business for 
     all income tax purposes other than the determination of the 
     20 percent of eligible income limitation on contributions to 
     a FFARRM account. Contributions will be deemed to have been 
     made on the last day of the taxable year if made on or before 
     the due date (without regard to extensions) of the taxpayer's 
     return for that year.
       A FFARRM account is taxed as a grantor trust and any 
     earnings are required to be distributed currently. Thus, any 
     income earned in the FFARRM account is taxed currently to the 
     farmer or fisherman who established the account.
       Contributions to a FFARRM account do not reduce earnings 
     from self-employment. Accordingly, distributions are not 
     included in self-employment income.
       Amounts may remain on deposit in a FFARRM account for up to 
     five years. Any amount that has not been distributed by the 
     close of the fourth year following the year of deposit is 
     deemed to be distributed and includible in the gross income 
     of the account owner. Distributions for the year are 
     considered to first be made from the earnings that are 
     required to be distributed. Additional amounts distributed 
     for the year are considered to be made from the oldest 
     deposits.
       Distributions from a FFARRM account may not be used to 
     purchase, lease, or finance any new fishing vessel, add 
     capacity to any fishery, or otherwise contribute to the 
     overcapitalization of any fishery. The Secretary of Commerce 
     shall implement regulations enforcing this restriction.
       A FFARRM account may not be maintained by a taxpayer who 
     has ceased to engage in an eligible business. If the taxpayer 
     does not engage in an eligible business during two 
     consecutive taxable years, the balance in the FFARRM account 
     is deemed to

[[Page 19663]]

     be distributed to the taxpayer on the last day of such two 
     year period.
       If the taxpayer who established the FFARRM account dies, 
     and the taxpayer's surviving spouse acquires the taxpayer's 
     interest in the FFARRM account by reason of being designated 
     as the beneficiary of the account at the death of the 
     taxpayer, the surviving spouse will ``step into the shoes'' 
     of the deceased taxpayer with respect to the FFARRM account. 
     In other cases, the account will cease to be a FFARRM account 
     on the date of the taxpayer's death and the balance in the 
     account will be deemed distributed to the taxpayer on the 
     date of death.
       A FFARRM account is a trust that is created or organized in 
     the United States for the exclusive benefit of the taxpayer 
     who establishes it. The trustee must be a bank or other 
     person who demonstrates to the satisfaction of the Secretary 
     that it will administer the trust in a manner consistent with 
     the requirements of the section. At all times, the assets of 
     the trust must consist entirely of cash and obligations which 
     have adequate stated interest (as defined in section 
     1274(c)(2)) and which pay such adequate interest not less 
     often than annually. The trust must distribute all income 
     currently, and its assets may not be commingled except in a 
     common trust fund or common investment fund. Additional 
     protections, including rules preventing the trust from 
     engaging in prohibited transactions or from being pledged as 
     security for a loan, are provided.
       Penalties apply in the case of excess contributions and 
     failures to make required distributions.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

                    F. S Corporation Bank Provisions

     1. Definition of passive investment income for banks (sec. 
         606 of the Senate amendment and sec. 1362 of the Code)

                              Present Law

       An S corporation is subject to corporate-level tax, at the 
     highest marginal corporate tax rate, on its net passive 
     income if the corporation has (1) accumulated earnings and 
     profits \61\ at the close of the taxable year and (2) gross 
     receipts more than 25 percent of which are passive investment 
     income. In addition, an S corporation election is terminated 
     whenever the corporation has accumulated C earnings and 
     profits at the close of three consecutive taxable years and 
     has gross receipts for each of such years more than 25 
     percent of which are passive investment income.
---------------------------------------------------------------------------
     \61\ An S corporation generally will have accumulated 
     corporation earnings and profits if it had been a C 
     corporation prior to electing to be an S corporation.
---------------------------------------------------------------------------
       For these purposes, ``passive investment income'' generally 
     means gross receipts derived from royalties, rents, 
     dividends, interest, annuities, and sales or exchanges of 
     stock or securities (to the extent of gains).
       Treasury regulations provide that passive income does not 
     include gross receipts directly derived in the ordinary 
     course of a trade or business of lending or financing.\62\ 
     The Internal Revenue Service has ruled that income earned by 
     an S corporation on specified banking assets will be treated 
     as gross receipts directly derived from the active and 
     regular conduct of a banking business.\63\
---------------------------------------------------------------------------
     \62\ Treas. Regulation sec. 1-1362-2(c)(5)(iii)(B).
     \63\ Notice 97-5, 1997-1 C. B. 352 (January 13, 1997).
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that, for purposes of 
     applying the passive income test to a bank or a bank holding 
     company, interest income and dividends received on assets 
     required to conduct a banking business are not to be treated 
     as passive income.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     2. Bank director stock (sec. 607 of the Senate amendment and 
         sec. 1361 of the Code)

                              Present Law

       The taxable income or loss of an S corporation is taken 
     into account by the corporation's shareholders, rather than 
     by the entity, whether or not such income is distributed. A 
     small business corporation may elect to be treated as an S 
     corporation. A ``small business corporation'' generally is 
     defined as a domestic corporation which does not have (1) 
     more than 75 shareholders; (2) a shareholder (other than 
     certain trusts, estates, and tax-exempt organizations) who is 
     not an individual; (3) a nonresident alien as a shareholder; 
     and (4) more than one class of stock.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, qualifying director shares is 
     not treated as a second class of stock. Instead, payments on 
     the stock are deductible by the corporation and includible in 
     income of the holder of the stock. No allocations of income 
     or loss are made with respect to the stock. Qualifying 
     director shares are shares of stock in a bank or bank holding 
     company that are held by an individual solely by reason of 
     being a director and which are subject to an agreement to 
     dispose of the shares upon termination of director status at 
     the price paid to acquire the shares.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

                IX. INTERNATIONAL TAX RELIEF PROVISIONS

A. Allocate Interest Expense on Worldwide Basis (sec. 901 of the House 
   bill, sec. 901 of the Senate amendment, and sec. 864 of the Code)

                              Present Law

     In general
       In order to compute the foreign tax credit limitation, a 
     taxpayer must determine the amount of taxable income from 
     foreign sources. Thus, the taxpayer must allocate and 
     apportion deductions between items of U.S.-source gross 
     income, on the one hand, and items of foreign- source gross 
     income, on the other. Generally, it is left to the Treasury 
     to provide detailed rules for the allocation and 
     apportionment of expenses.
       In the case of interest expense, regulations generally are 
     based on the approach that money is fungible and that 
     interest expense is properly attributable to all business 
     activities and property of a taxpayer, regardless of any 
     specific purpose for incurring an obligation on which 
     interest is paid. (Exceptions to the fungibility concept are 
     recognized or required, however, in particular cases, some of 
     which are described below.) The Code provides that for 
     interest allocation purposes all members of an affiliated 
     group of corporations generally are to be treated as a single 
     corporation (the so-called ``one-taxpayer rule''), and that 
     allocation must be made on the basis of assets rather than 
     gross income.
     Affiliated group
       In general
       The term ``affiliated group'' in this context generally is 
     defined by reference to the rules for determining whether 
     corporations are eligible to file consolidated returns. 
     However, some groups of corporations are eligible to file 
     consolidated returns yet are not treated as affiliated for 
     interest allocation purposes, and other groups of 
     corporations are treated as affiliated for interest 
     allocation purposes even though they are not eligible to file 
     consolidated returns. Thus, under the one-taxpayer rule, the 
     factors affecting the allocation of interest expense of one 
     corporation may affect the sourcing of taxable income of 
     another, related corporation even if the two corporations do 
     not elect to file, or are ineligible to file, consolidated 
     returns. (See, e.g., Treas. Reg. sec. 1.861-11T(g).)
       Definition of affiliated group--consolidated return rules
       For consolidation purposes, the term ``affiliated group'' 
     means one or more chains of includible corporations connected 
     through stock ownership with a common parent corporation 
     which is an includible corporation, but only if the common 
     parent owns directly at least 80 percent of the total voting 
     power of all classes of stock and at least 80 percent of the 
     total value of all outstanding stock of at least one other 
     includible corporation. In addition, for each such other 
     includible corporation (except the common parent), stock 
     possessing at least 80 percent of the total voting power of 
     all classes of its stock and at least 80 percent of the total 
     value of all of its outstanding stock must be directly owned 
     by one or more other includible corporations.
       Generally the term ``includible corporation'' means any 
     domestic corporation except certain corporations exempt from 
     tax under section 501 (for example, corporations organized 
     and operated exclusively for charitable or educational 
     purposes), certain life insurance companies, corporations 
     electing application of the possession tax credit, regulated 
     investment companies, real estate investment trusts, and 
     domestic international sales corporations. A foreign 
     corporation generally is not an includible corporation.
       Definition of affiliated group--special interest allocation 
           rules
       Subject to exceptions, the consolidated return and interest 
     allocation definitions of affiliation generally are 
     consistent with each other.\64\ For example, both definitions 
     exclude all foreign corporations from the affiliated group. 
     Thus, while debt generally is considered fungible among the 
     assets of a group of domestic affiliated corporations, the 
     same rule does not apply as between the domestic and foreign 
     members of a group with the same degree of common control as 
     the domestic affiliated group.
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     \64\ One such exception is that the affiliated group for 
     interest allocation purposes includes section 936 
     corporations that are excluded from the consolidated group.

[[Page 19664]]


       Banks, savings institutions and other financial affiliates
       The affiliated group for interest allocation purposes 
     generally excludes what are referred to in the regulations as 
     ``financial corporations'' (Treas. Reg. sec. 1.861-
     11T(d)(4)). These include any corporation, otherwise a member 
     of the affiliated group for consolidation purposes, that is a 
     financial institution (described in section 581 or section 
     591), the business of which is predominantly with persons 
     other than related persons or their customers, and which is 
     required by State or Federal law to be operated separately 
     from any other entity which is not a financial institution 
     (sec. 864(e)(5)(C)). The category of financial corporations 
     also includes, to the extent provided in regulations, bank 
     holding companies, subsidiaries of banks and bank holding 
     companies, and savings institutions predominantly engaged in 
     the active conduct of a banking, financing, or similar 
     business (sec. 864(e)(5)(D)).
       A financial corporation is not treated as a member of the 
     regular affiliated group for purposes of applying the one-
     taxpayer rule to other nonfinancial members of that group. 
     Instead, all such financial corporations that would be so 
     affiliated are treated as a separate single corporation for 
     interest allocation purposes.

                               House Bill

     Worldwide affiliated group election
       The House bill modifies the present-law interest expense 
     allocation rules (which generally apply for purposes of 
     computing the foreign tax credit limitations) by providing a 
     one- time election under which the taxable income of the 
     domestic members of an affiliated group from sources outside 
     the United States generally would be determined by allocating 
     and apportioning interest expense of the domestic members of 
     a worldwide affiliated group on a worldwide-group basis. The 
     election provides taxpayers with the option either to apply 
     fungibility principles on a worldwide basis or to continue to 
     apply present law.
       Under the House bill, the common parent of an affiliated 
     group can make a one-time election to apply the present-law 
     interest expense allocation and apportionment rules under 
     section 864(e) by allocating and apportioning interest 
     expense of the domestic members of the worldwide affiliated 
     group on a worldwide-group basis. If an affiliated group 
     makes this election, subject to certain modifications and 
     exceptions discussed below, the taxable income of the 
     domestic members of the worldwide affiliated group from 
     sources outside the United States is determined by allocating 
     and apportioning the interest expense of those domestic 
     members to foreign-source income in an amount equal to the 
     worldwide affiliated group's worldwide interest expense 
     multiplied by a ratio of the foreign assets of the worldwide 
     affiliated group over the total assets of the worldwide 
     affiliated group.
       For purposes of the new elective rules based on worldwide 
     fungibility, the worldwide affiliated group means all 
     corporations in an affiliated group (as that term is defined 
     under present law for interest expense allocation purposes) 
     \65\ as well as any foreign corporations with respect to 
     which domestic members of the affiliated group own stock 
     meeting the ownership requirements for treatment as a 
     controlled foreign corporation under section 957(a) (without 
     regard to the constructive ownership rules of section 
     958(b)). Hence, if more than 50 percent of the total combined 
     voting power or the total value of the stock of a foreign 
     corporation is owned (directly or indirectly) by domestic 
     members of the affiliated group that are U.S. shareholders 
     (i.e., that own 10 percent or more of the total combined 
     voting power of the stock of such foreign corporation), then 
     such foreign corporation is included in an electing worldwide 
     affiliated group.
---------------------------------------------------------------------------
     \65\ The bill expands the present-law definition of an 
     affiliated group for interest expense allocation purposes to 
     include certain insurance companies that are generally 
     excluded from an affiliated group under section 1504(b)(2) 
     (without regard to whether such companies are covered by an 
     election under section 1504(c)(2)). As is the case under 
     present law, the affiliated group includes section 936 
     corporations.
---------------------------------------------------------------------------
       With respect to foreign corporations included in a 
     worldwide affiliated group, the House bill provides that only 
     a pro rata portion of such foreign corporation's interest 
     expense and assets is treated as attributable to the 
     worldwide affiliated group and taken into account for 
     purposes of determining the allocation and apportionment of 
     interest expense. The pro rata portion is determined by the 
     ratio of the value of the stock of the foreign corporation 
     owned by domestic members of the worldwide affiliated group 
     (regardless of whether the foreign corporation qualifies as 
     more than 50-percent owned because of either vote or value) 
     to the total value of the stock of such foreign corporation.
       In short, the taxable income from sources outside the 
     United States of electing domestic group members generally is 
     determined by allocating and apportioning interest expense of 
     the domestic members of the worldwide affiliated group as if 
     all of the interest expense and assets of 80-percent or 
     greater owned domestic corporations (i.e., corporations that 
     are part of the affiliated group under present-law section 
     864(e)(5)(A) as modified to include insurance companies) and 
     a pro rata portion of the interest expense and assets of 
     greater than 50-percent owned foreign subsidiaries were 
     attributable to a single corporation.
       Although a pro rata portion of the interest expense of a 
     foreign subsidiary is taken into account for purposes of 
     allocating the interest expense of the domestic members of 
     the electing worldwide affiliated group for foreign tax 
     credit limitation purposes, the interest expense incurred by 
     a foreign subsidiary is not deductible on a U.S. return. 
     After calculating the interest expense allocation based on 
     the worldwide affiliated group, the interest expense of the 
     domestic members preliminarily allocable to foreign-source 
     income is reduced (but not below zero) by the applicable pro 
     rata portion of the interest expense incurred by a foreign 
     member of the group to the extent that such interest would be 
     allocated to foreign sources if the provision's principles 
     were applied separately to the foreign members of the group.
       The worldwide affiliated group election is to be made by 
     the common parent of the affiliated group. It must be made 
     for the first taxable year beginning after December 31, 2001 
     (the effective date under the House bill), in which a 
     worldwide affiliated group exists that includes at least one 
     foreign corporation that meets the requirements for inclusion 
     in a worldwide affiliated group. Once made, the election 
     applies to the common parent and all other members of the 
     worldwide affiliated group for the taxable year for which the 
     election was made and all subsequent taxable years.
     Annual elections
       Regardless of whether a taxpayer elects to continue to be 
     governed by the present-law allocation rules or to apply the 
     new worldwide fungibility principle, the House bill provides 
     two annual elections that are exceptions to the ``one-
     taxpayer'' rule described above: (1) the ``subsidiary group'' 
     election, and (2) a ``financial institution group'' election.
       Subsidiary group election
       Under the subsidiary group election, at the annual election 
     of the common parent of the affiliated group, certain 
     interest expense attributable to qualified indebtedness 
     incurred by a domestic member of the affiliated group (other 
     than the common parent) is allocated and apportioned by 
     treating the borrower and its direct and indirect 
     subsidiaries as a separate group (in which the borrower would 
     be treated as the common parent). The regime that is elected 
     by the entire affiliated group (i.e., present law or the 
     worldwide fungibility principles of the House bill) applies 
     to all the qualified indebtedness of the members of that 
     separate electing subsidiary group. For this purpose, 
     qualified indebtedness generally means any borrowing from 
     unrelated parties that is not guaranteed or in any other way 
     supported by any corporation within the same affiliated group 
     (other than a member of the subsidiary group) of the 
     borrower.
       If the common parent of the affiliated group makes the 
     election with respect to a domestic member of an affiliated 
     group, the subsidiary group election applies to all direct 
     and indirect subsidiaries of that member. No member of an 
     electing subsidiary group can be treated as a member of 
     another electing subsidiary group. Therefore, a separate 
     subsidiary group election could not be made with respect to 
     lower-tier subsidiaries in an electing subsidiary group. If 
     the subsidiary group election is made, the House bill also 
     provides that an ``equalization'' rule applies under which 
     interest expense (if any) incurred by domestic members of the 
     affiliated group with respect to indebtedness that is not 
     qualified indebtedness of an electing subsidiary group is 
     allocated first to foreign-source income to the extent 
     necessary to achieve (if possible) the allocation and 
     apportionment of interest expense to foreign-source income 
     that would have resulted had the subsidiary group election 
     not been made. In addition, the House bill provides anti-
     abuse rules under which certain transfers from one member of 
     a subsidiary group to a member of the affiliated group 
     outside of the subsidiary group are treated as reducing the 
     amount of qualified indebtedness.
       Financial institution group election
       The House bill provides a financial institution group 
     election that expands and replaces the bank group rules of 
     present law (sec. 864(e)(5)(B)-(D)). At the annual election 
     of the common parent of the affiliated group, the interest 
     expense allocation and apportionment rules that apply to the 
     affiliated group as a whole (i.e., present law or the 
     worldwide approach), can be applied separately to a subgroup 
     of the affiliated group consisting of corporations that are 
     predominantly engaged in a banking, insurance, financing, or 
     similar business (as well as certain bank holding companies). 
     For this purpose, a corporation is predominantly engaged in 
     such a business if at least 80 percent of its gross income is 
     ``financial services income'' as described in section 
     904(d)(2)(C)(ii) and the regulations thereunder.\66\ The 
     financial institution group rules, if elected, apply to all 
     members of the affiliated group that

[[Page 19665]]

     are considered to be predominantly engaged in the active 
     conduct of a banking, insurance, financing, or similar 
     business, or otherwise considered to be a bank holding 
     company. In addition, if a financial institution group 
     election has been made, a member of the affiliated group that 
     is part of the financial institution group could not also be 
     a member of a separate subsidiary group at the same time. 
     Anti-abuse rules similar to those that apply in connection 
     with the subsidiary group election also apply to the 
     financial institution group.
---------------------------------------------------------------------------
     \66\ See Treas. Reg. sec. 1.904-4(e)(2).
---------------------------------------------------------------------------
     Regulatory authority
       The House bill grants the Treasury Secretary authority to 
     prescribe rules to carry out the purposes of the provision, 
     including rules (1) to address changes in members of an 
     affiliated group (including acquisitions or other business 
     combinations of affiliated groups in which one group has made 
     an election to apply the worldwide approach and the other 
     group applies present law); (2) to prevent assets and 
     interest expense from being taken into account more than 
     once; and (3) to provide for direct allocation of interest 
     expense in circumstances where such allocation would be 
     appropriate to carry out the purposes of the provision.
     Effective date
       The provision in the House bill is effective for taxable 
     years beginning after December 31, 2001.

                            Senate Amendment

       The Senate amendment generally follows the House bill, but 
     makes the following modifications.
     Worldwide affiliated group election
       The Senate amendment follows the House bill in that the 
     common parent of an affiliated group can make a one-time 
     election to apply the present-law interest expense allocation 
     and apportionment rules under section 864(e) by allocating 
     and apportioning interest expense of the domestic members of 
     the worldwide affiliated group on a worldwide-group basis. If 
     an affiliated group makes this election, subject to certain 
     modifications and exceptions, the taxable income of the 
     domestic members of the worldwide affiliated group from 
     sources outside the United States is determined by allocating 
     and apportioning the interest expense of those domestic 
     members to foreign-source income in an amount equal to the 
     excess (if any) of (1) the worldwide affiliated group's 
     worldwide interest expense multiplied by the ratio which the 
     foreign assets of the worldwide affiliated group bears to the 
     total assets of the worldwide affiliated group, over (2) the 
     interest expense incurred by a foreign member of the group to 
     the extent that such interest would be allocated to foreign 
     sources if the provision's principles were applied separately 
     to the foreign members of the group.\67\ While this approach 
     is generally the same as that under the House bill, the 
     Senate amendment modifies the House bill to provide the 
     actual allocation and apportionment formula in the statute.
---------------------------------------------------------------------------
     \67\ Although the interest expense of a foreign subsidiary is 
     taken into account for purposes of allocating the interest 
     expense of the domestic members of the electing worldwide 
     affiliated group for foreign tax credit limitation purposes, 
     the interest expense incurred by a foreign subsidiary is not 
     deductible on a U.S. return.
---------------------------------------------------------------------------
       The Senate amendment modifies the House bill definition of 
     a worldwide affiliated group for purposes of the new elective 
     rules based on worldwide fungibility. Under the Senate 
     amendment, the worldwide affiliated group means all 
     corporations in an affiliated group (as that term is defined 
     under present law for interest expense allocation purposes) 
     \68\ as well as any foreign corporations that would be 
     members of such an affiliated group if section 1504(b)(3) did 
     not apply (i.e., in which at least 80 percent of the vote and 
     value of the stock of such corporations is owned by one or 
     more other corporations included in the affiliated group). In 
     addition, unlike the House bill, the Senate amendment takes 
     into account all of the interest expense and assets of 
     foreign corporations that are part of an electing worldwide 
     affiliated group rather than a pro rata portion. In short, 
     under the Senate amendment, the taxable income from sources 
     outside the United States of electing domestic group members 
     generally is determined by allocating and apportioning 
     interest expense of the domestic members of the worldwide 
     affiliated group as if all of the interest expense and assets 
     of 80-percent or greater owned domestic corporations (i.e., 
     corporations that are part of the affiliated group under 
     present-law section 864(e)(5)(A) as modified to include 
     insurance companies) and 80-percent or greater owned foreign 
     corporations were attributable to a single corporation.
---------------------------------------------------------------------------
     \68\ The Senate amendment follows the House bill by expanding 
     the definition of an affiliated group for interest expense 
     allocation purposes to include certain insurance companies 
     that are generally excluded from an affiliated group under 
     section 1504(b)(2) (without regard to whether such companies 
     are covered by an election under section 1504(c)(2)). The 
     Senate amendment modifies this expansion, however, to apply 
     only when the worldwide affiliated group election has been 
     made.
---------------------------------------------------------------------------
       The worldwide affiliated group election is to be made by 
     the common parent of the affiliated group. It must be made 
     for the first taxable year beginning after December 31, 2004 
     (the effective date under the Senate amendment), in which a 
     worldwide affiliated group exists that includes at least one 
     foreign corporation that meets the requirements for inclusion 
     in a worldwide affiliated group. Once made, the election 
     applies to the common parent and all other members of the 
     worldwide affiliated group for the taxable year for which the 
     election is made and all subsequent taxable years.
     Subsidiary group election
       The Senate amendment modifies the House bill to exclude the 
     annual ``subsidiary group'' election.
     Financial institution group election
       The Senate amendment provides a ``financial institution 
     group'' election that expands the bank group rules of present 
     law (sec. 864(e)(5)(B)-(D)), but modifies the House bill by 
     providing that this election is a one-time election as 
     opposed to an annual election, and by providing that the 
     election is only available to the extent that a worldwide 
     affiliated group election has been made. Thus, unlike the 
     House bill, under the Senate amendment the election would not 
     be available to an affiliated group that continues to apply 
     the present-law interest expense allocation rules.
       Under the Senate amendment, at the election of the common 
     parent of the affiliated group that has made the election to 
     apply the worldwide affiliated group rules, those rules can 
     be applied separately to a subgroup of the worldwide 
     affiliated group that consists of (1) all corporations that 
     are part of the present-law bank group and (2) all 
     ``financial corporations.'' For this purpose, the Senate 
     amendment follows the House bill by providing that a 
     corporation is a financial corporation if at least 80 percent 
     of its gross income is ``financial services income'' (as 
     described in section 904(d)(2)(C)(ii) and the regulations 
     thereunder).\69\ The Senate amendment modifies the House 
     bill, however, by requiring that such income be derived from 
     transactions with unrelated persons.
---------------------------------------------------------------------------
     \69\ See Treas. Reg. sec. 1.904-4(e)(2).
---------------------------------------------------------------------------
       Under the Senate amendment, the financial institution group 
     rules, if elected, apply to all members of the worldwide 
     affiliated group that are financial corporations within the 
     meaning of the provision. The election must be made for the 
     first taxable year beginning after December 31, 2004, in 
     which a worldwide affiliated group includes a financial 
     corporation that would qualify as part of the expanded 
     financial institution group (other than a corporation that 
     would qualify as part of the present-law bank group). Once 
     made, the election applies to the financial institution group 
     for the taxable year and all subsequent taxable years. In 
     addition, the Senate amendment provides anti-abuse rules 
     under which certain transfers from one member of a financial 
     institution group to a member of the worldwide affiliated 
     group outside of the financial institution group are treated 
     as reducing the amount of indebtedness of the separate 
     financial institution group.
     Effective date
       The provision in the Senate amendment is effective for 
     taxable years beginning after December 31, 2004.

                          Conference Agreement

       The conference agreement generally follows the House bill 
     with the following modifications.
     Worldwide affiliated group election
       The conference agreement modifies the present-law interest 
     expense allocation rules by providing a one-time election 
     under which the taxable income of the domestic members of an 
     affiliated group from sources outside the United States 
     generally would be determined by allocating and apportioning 
     interest expense of the domestic members of a worldwide 
     affiliated group on a worldwide-group basis. The election 
     provides taxpayers with the option either to apply 
     fungibility principles on a worldwide basis or to continue to 
     apply present law. The conference agreement makes no changes 
     to the present-law interest expense allocation rules; all 
     aspects of the provision apply only to the extent that a 
     worldwide affiliated group election is made.
       Under the conference agreement, if an affiliated group 
     makes the worldwide affiliated group election, subject to 
     certain modifications and exceptions, the taxable income of 
     the domestic members of the worldwide affiliated group from 
     sources outside the United States is determined by allocating 
     and apportioning the interest expense of those domestic 
     members to foreign-source income in an amount equal to the 
     excess (if any) of (1) the worldwide affiliated group's 
     worldwide interest expense multiplied by the ratio which the 
     foreign assets of the worldwide affiliated group bears to the 
     total assets of the worldwide affiliated group, over (2) the 
     interest expense incurred by a foreign member of the group 
     (and taken into account for allocation purposes) to the 
     extent that such interest would be allocated to foreign 
     sources if the provision's principles were applied separately 
     to the foreign members of the group. While this approach is 
     generally the same as that under the House bill, the 
     conference agreement follows the Senate

[[Page 19666]]

     amendment by providing the actual allocation and 
     apportionment formula in the statute.
       For purposes of the new elective rules based on worldwide 
     fungibility, the worldwide affiliated group means all 
     corporations in an affiliated group (as that term is defined 
     under present law for interest expense allocation purposes) 
     \70\ as well as any foreign corporations with respect to 
     which domestic members of the affiliated group own stock 
     meeting the ownership requirements for treatment as a 
     controlled foreign corporation under section 957(a). For this 
     purpose, the conference agreement modifies the House bill to 
     permit limited constructive ownership rules (as described in 
     section 958(b)) to apply. The conferees, however, believe 
     that certain constructive ownership rules such as option 
     attribution and ``to-corporation'' attribution (sec. 
     318(a)(3) and (4)) does not provide sufficient economic 
     ownership to justify inclusion in the worldwide affiliated 
     group. The conference agreement therefore disregards these 
     types of constructive ownership. Hence, if more than 50 
     percent of the total combined voting power or the total value 
     of the stock of a foreign corporation is owned (directly, 
     indirectly, or, in certain circumstances, constructively) by 
     domestic members of the affiliated group that are U.S. 
     shareholders (i.e., that own 10 percent or more of the total 
     combined voting power of the stock of such foreign 
     corporation), then such foreign corporation is included in an 
     electing worldwide affiliated group.
---------------------------------------------------------------------------
     \70\ The conference agreement expands the present-law 
     definition of an affiliated group for interest expense 
     allocation purposes with respect to an electing worldwide 
     affiliated group to include certain insurance companies that 
     are generally excluded from an affiliated group under section 
     1504(b)(2) (without regard to whether such companies are 
     covered by an election under section 1504(c)(2)). As is the 
     case under present law, the affiliated group includes section 
     936 corporations.
---------------------------------------------------------------------------
       With respect to foreign corporations included in a 
     worldwide affiliated group, the conference agreement follows 
     the House bill in providing that only a pro rata portion of 
     such foreign corporation's interest expense and assets is 
     treated as attributable to the worldwide affiliated group and 
     taken into account for purposes of determining the allocation 
     and apportionment of interest expense. The pro rata portion 
     is determined by the ratio of the value of the stock of the 
     foreign corporation owned (within the meaning of section 
     958(a)) by domestic members of the worldwide affiliated group 
     (regardless of whether the foreign corporation qualifies as 
     more than 50-percent owned because of either vote or value) 
     to the total value of the stock of such foreign corporation.
       Under the conference agreement, the worldwide affiliated 
     group election is to be made by the common parent of the 
     affiliated group. It must be made for the first taxable year 
     beginning after December 31, 2001 (the effective date under 
     the conference agreement), in which a worldwide affiliated 
     group exists that includes at least one foreign corporation 
     that meets the requirements for inclusion in a worldwide 
     affiliated group. Once made, the election applies to the 
     common parent and all other members of the worldwide 
     affiliated group for the taxable year for which the election 
     was made and all subsequent taxable years.
     Additional elections
       The conference agreement modifies the annual elections 
     provided in the House bill as follows. To the extent that a 
     worldwide affiliated group elects to apply the new worldwide 
     fungibility principle, the conference agreement provides two 
     additional elections that are exceptions to the ``one-
     taxpayer'' rule described above: (1) the ``subsidiary group'' 
     election, and (2) the ``financial institution group'' 
     election.
       Subsidiary group election
       Under the subsidiary group election, at the election of the 
     common parent of the affiliated group, certain interest 
     expense attributable to qualified indebtedness incurred by a 
     domestic member of the affiliated group (other than the 
     common parent) is allocated and apportioned by treating the 
     borrower and its direct and indirect subsidiaries as a 
     separate group (in which the borrower would be treated as the 
     common parent). The conference agreement modifies the House 
     bill by providing that election is only available to the 
     extent that the affiliated group has elected the worldwide 
     fungibility rules, and those rules apply to the qualified 
     indebtedness of the members of that separate electing 
     subsidiary group. For this purpose, qualified indebtedness 
     generally means any borrowing from unrelated parties that is 
     not guaranteed or in any other way supported by any 
     corporation within the same worldwide affiliated group (other 
     than a member of the subsidiary group) of the borrower.
       If the common parent of the worldwide affiliated group 
     makes the election with respect to a domestic member of an 
     affiliated group, the subsidiary group election applies to 
     all direct and indirect subsidiaries of that member. The 
     conference agreement modifies the House bill to provide that 
     the election, once made, applies to the taxable year and the 
     four succeeding taxable years (unless revoked with the 
     consent of the Treasury Secretary). The conferees are 
     concerned with certain potentials for abuse and believe that 
     a five-year period is a reasonable duration for which the 
     subsidiary group election should apply. In addition, as under 
     the House bill, no member of an electing subsidiary group can 
     be treated as a member of another electing subsidiary group. 
     Therefore, a separate subsidiary group election cannot be 
     made with respect to lower-tier subsidiaries in an electing 
     subsidiary group.
       The conference agreement follows the House bill by 
     providing that, if the subsidiary group election is made, an 
     ``equalization'' rule applies under which interest expense 
     (if any) incurred by domestic members of the worldwide 
     affiliated group with respect to indebtedness that is not 
     qualified indebtedness of an electing subsidiary group is 
     allocated first to foreign- source income to the extent 
     necessary to achieve (if possible) the allocation and 
     apportionment of interest expense to foreign-source income 
     that would have resulted had the subsidiary group election 
     not been made. In addition, the conference agreement provides 
     anti-abuse rules under which certain transfers from one 
     member of a subsidiary group to a member of the affiliated 
     group outside of the subsidiary group would be 
     recharacterized as reducing the amount of qualified 
     indebtedness, except as otherwise provided by the Treasury 
     Secretary.
       Financial institution group election
       The conference agreement generally follows the Senate 
     amendment with respect to the financial institution group 
     election, with certain technical modifications. The 
     conference agreement provides a one-time financial 
     institution group election that replaces and expands the bank 
     group rules of present law (sec. 864(e)(5)(B)-(D)). At the 
     election of the common parent of the affiliated group that 
     has made the election to apply the worldwide affiliated group 
     rules, those rules can be applied separately to a subgroup of 
     the worldwide affiliated group that consists of all 
     ``financial corporations'' that are part of the worldwide 
     affiliated group.
       For purposes of the financial institution group election, 
     the conference agreement provides that a corporation is a 
     financial corporation if at least 80 percent of its gross 
     income is (1) ``financial services income'' (as described in 
     section 904(d)(2)(C)(ii) and the regulations thereunder), 
     \71\ that is derived from transactions with unrelated persons 
     or (2) dividends or financial services income derived 
     directly or indirectly from related corporations that satisfy 
     the 80-percent test by deriving financial services income 
     from transactions with unrelated persons. \72\ For this 
     purpose, the conferees intend that certain ordering rules and 
     netting rules with respect to amounts paid or accrued to and 
     amounts received or accrued from related persons, similar to 
     those provided in Treas. Reg. sec. 1.904-5(k), will apply. 
     The conferees also intend that, for this purpose, gross 
     income will not include gain from the disposition of the 
     stock of a corporation that is related to the transferor 
     prior to such disposition. \73\ In addition, the conference 
     agreement provides an anti-abuse rule under which items of 
     income or gain from a transaction a principal purpose of 
     which is to qualify a corporation as a financial corporation 
     under these rules are disregarded.
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     \71\ See Treas. Reg. sec. 1.904-4(e)(2).
     \72\ As is the case under the House bill, the conference 
     agreement provides that certain bank holding companies that 
     would qualify as part of the present-law bank group are also 
     considered to be financial corporations.
     \73\ See Treas. Reg. sec. 1.904-4(e)(3)(i).
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       Under the conference agreement, the financial institution 
     group rules, if elected, apply to all members of the 
     worldwide affiliated group that are financial corporations 
     within the meaning of the provision. If a financial 
     institution group election has been made, a member of the 
     worldwide affiliated group that is part of the financial 
     institution group cannot also be a member of a separate 
     subsidiary group. The election must be made for the first 
     taxable year beginning after December 31, 2001, in which a 
     worldwide affiliated group includes a corporation that 
     qualifies as a financial corporation. Once made, the election 
     applies to the financial institution group for the taxable 
     year and all subsequent taxable years. Therefore, if a 
     financial institution group election is in place, a 
     corporation that qualifies as a financial corporation for a 
     taxable year will be included in the financial institution 
     group for that year notwithstanding that it may not have 
     qualified in prior years for which the election was in place. 
     Similarly, a corporation that was a financial corporation in 
     the first year in which an election was made will be included 
     in the financial institution group for all subsequent years, 
     but only to the extent that such corporation qualifies as a 
     financial corporation for a given year. In addition, the 
     conference agreement provides anti-abuse rules similar to 
     those that apply in connection with the subsidiary group 
     election.

                          Regulatory authority

       The conference agreement follows the House bill and the 
     Senate amendment in granting the Treasury Secretary authority 
     to prescribe rules to carry out the purposes of the 
     provision. Such authority includes, among other things, the 
     authority to provide

[[Page 19667]]

     for direct allocation of interest expense in appropriate 
     circumstances. The conferees intend that this authority to 
     provide for direct allocation of interest expense includes, 
     for example, circumstances in which interest expense is 
     incurred by foreign corporations in order to circumvent the 
     purposes of the provision.

                             Effective date

       The provision in the conference agreement is effective for 
     taxable years beginning after December 31, 2001.

B. Look-Through Rules to Apply to Dividends from Noncontrolled Section 
 902 Corporations (sec. 902 of the House bill, sec. 902 of the Senate 
                  amendment, and sec. 904 of the Code)

                              Present Law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign-source income. The amount of foreign tax credits that 
     may be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S.-source income. Separate limitations are 
     applied to specific categories of income.
       Special foreign tax credit limitations apply in the case of 
     dividends received from a foreign corporation in which the 
     taxpayer owns at least 10 percent of the stock by vote and 
     which is not a controlled foreign corporation (a so-called 
     ``10/50 company''). \74\ Dividends paid by a 10/50 company in 
     taxable years beginning before January 1, 2003, are subject 
     to a separate foreign tax credit limitation for each 10/50 
     company. Dividends paid by a 10/50 company that is not a 
     passive foreign investment company in taxable years beginning 
     after December 31, 2002, out of earnings and profits 
     accumulated in taxable years beginning before January 1, 
     2003, are subject to a single foreign tax credit limitation 
     for all 10/50 companies (other than passive foreign 
     investment companies). Dividends paid by a 10/50 company that 
     is a passive foreign investment company out of earnings and 
     profits accumulated in taxable years beginning before January 
     1, 2003, continue to be subject to a separate foreign tax 
     credit limitation for each such 10/50 company. Dividends paid 
     by a 10/50 company in taxable years beginning after December 
     31, 2002, out of earnings and profits accumulated in taxable 
     years after December 31, 2002, are treated as income in a 
     foreign tax credit limitation category in proportion to the 
     ratio of the earnings and profits attributable to income in 
     such foreign tax credit limitation category to the total 
     earnings and profits (a so-called ``look-through'' approach). 
     For these purposes, distributions are treated as made from 
     the most recently accumulated earnings and profits. 
     Regulatory authority is granted to provide rules regarding 
     the treatment of distributions out of earnings and profits 
     for periods prior to the taxpayer's acquisition of such 
     stock.
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     \74\ A controlled foreign corporation in which the taxpayer 
     owns at least 10 percent of the stock by vote is treated as a 
     10/50 company with respect to any distribution out of 
     earnings and profits for periods when it was not a controlled 
     foreign corporation.
---------------------------------------------------------------------------

                               House Bill

       The House bill simplifies the application of the foreign 
     tax credit limitation by applying the look-through approach 
     to all dividends paid by a 10/50 company, regardless of the 
     year in which the earnings and profits out of which the 
     dividend is paid were accumulated. The House bill eliminates 
     the single-basket limitation approach for dividends from such 
     companies for foreign tax credit limitation purposes.
       The House bill provides a transition rule under which pre-
     effective date foreign tax credits associated with a 10/50 
     company separate limitation category can be carried forward 
     into post-effective date years. Under the House bill, look-
     through principles similar to those applicable to post-
     effective date dividends from a 10/50 company apply to 
     determine the appropriate foreign tax credit limitation 
     category or categories with respect to the foreign tax credit 
     carryforward.
       The House bill also provides a default rule in cases in 
     which taxpayers are unable to obtain the necessary 
     information to apply the look-through rules with respect to 
     dividends from a 10/50 company (or in which the income is not 
     treated as falling within one of certain enumerated 
     limitation categories). In such cases, the House bill treats 
     the dividend (or a portion thereof) from such 10/50 company 
     as a dividend that is not subject to the look-through rules.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001.

                            Senate Amendment

       The Senate amendment is the same as the House bill, with a 
     modification to the effective date.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2004.

                          Conference Agreement

       The conference agreement follows the House bill.

  C. Subpart F Treatment of Pipeline Transportation Income and Income 
  from Transmission of High Voltage Electricity (secs. 903-904 of the 
House bill, secs. 903-904 of the Senate amendment, and sec. 954 of the 
                                 Code)

                              Present Law

       Under the subpart F rules, U.S. 10-percent shareholders of 
     a controlled foreign corporation (``CFC'') are subject to 
     U.S. tax currently on their shares of certain income earned 
     by the foreign corporation, whether or not such income is 
     distributed to the shareholders (referred to as ``subpart F 
     income''). Subpart F income includes foreign base company 
     income, which in turn includes five categories of income: 
     foreign personal holding company income, foreign base company 
     sales income, foreign base company services income, foreign 
     base company shipping income, and foreign base company oil 
     related income (sec. 954(a)).
       Foreign base company services income includes income from 
     services performed (1) for or on behalf of a related party 
     and (2) outside the country of the CFC's incorporation (sec. 
     954(e)). Treasury regulations provide that the services of 
     the foreign corporation will be treated as performed for or 
     on behalf of the related party if, for example, a party 
     related to the foreign corporation furnishes substantial 
     assistance to the foreign corporation in connection with the 
     provision of services (Treas. Reg. sec. 1.954-4(b)(1)(iv)).
       Foreign base company oil related income is income derived 
     outside the United States from the processing of minerals 
     extracted from oil or gas wells into their primary products; 
     the transportation, distribution, or sale of such minerals or 
     primary products; the disposition of assets used by the 
     taxpayer in a trade or business involving the foregoing; or 
     the performance of any related services. However, foreign 
     base company oil related income does not include income 
     derived from a source within a foreign country in connection 
     with: (1) oil or gas which was extracted from a well located 
     in such foreign country or, (2), oil, gas, or a primary 
     product of oil or gas which is sold by the CFC or a related 
     person for use or consumption within such foreign country or 
     is loaded in such country as fuel on a vessel or aircraft. An 
     exclusion also is provided for income of a CFC that is a 
     small producer (i.e., a corporation whose average daily oil 
     and natural gas production, including production by related 
     corporations, is less than 1,000 barrels).

                               House Bill

       The House bill exempts income derived in connection with 
     the performance of services which are directly related to the 
     transmission of high voltage electricity from the definition 
     of foreign base company services income. Thus, the income of 
     a CFC that owns a high voltage transmission line for the 
     purpose of providing electricity generated by a related party 
     to a third party outside the CFC's country of incorporation 
     does not constitute foreign base company services income. No 
     inference is intended as to the treatment of such income 
     under present law.
       The House bill also provides an additional exception to the 
     definition of foreign base company oil related income. Under 
     the House bill, foreign base company oil related income does 
     not include income derived from a source within a foreign 
     country in connection with the pipeline transportation of oil 
     or gas within such foreign country. Thus, the exception 
     applies whether or not the CFC that owns the pipeline also 
     owns any interest in the oil or gas transported. In addition, 
     the exception applies to income earned from the 
     transportation of oil or gas by pipeline in a country in 
     which the oil or gas was neither extracted nor consumed.
       Effective date.--The provision is effective for taxable 
     years of CFCs beginning after December 31, 2001, and taxable 
     years of U.S. shareholders with or within which such taxable 
     years of CFCs end.

                            Senate Amendment

       The Senate amendment is the same as the House bill, with a 
     modification to the effective date.
       Effective date.--The provision is effective for taxable 
     years of CFCs beginning after December 31, 2002, and taxable 
     years of U.S. shareholders with or within which such taxable 
     years of CFCs end.

                          Conference Agreement

       The conference agreement follows the House bill.

 D. Recharacterization of Overall Domestic Loss (sec. 905 of the House 
                     bill and sec. 904 of the Code)

                              Present Law

       A premise of the foreign tax credit is that it should not 
     reduce a taxpayer's U.S. tax on its U.S.-source income; 
     rather, it should only reduce U.S. tax on foreign-source 
     income. An overall foreign tax credit limitation prevents 
     taxpayers from using foreign tax credits to offset U.S. tax 
     on U.S.-source income. The overall limitation is calculated 
     by prorating a taxpayer's pre-credit U.S. tax on its 
     worldwide income between its U.S.-source and foreign-source 
     taxable income. The ratio (not exceeding 100 percent) of the 
     taxpayer's foreign-source taxable income to worldwide taxable 
     income is multiplied by its pre-credit U.S. tax to establish 
     the amount of U.S. tax allocable to the taxpayer's foreign-
     source income and, thus, the upper limit on the foreign tax 
     credit for the year. If the taxpayer's foreign-source taxable 
     income exceeds worldwide taxable income (because of a

[[Page 19668]]

     domestic source loss), then the full amount of pre-credit 
     U.S. tax may be offset by the foreign tax credit.
       If a taxpayer's losses from foreign sources exceed its 
     foreign-source income, the excess (``overall foreign loss'' 
     or ``OFL'') may offset U.S.-source income. Such an offset 
     reduces the effective rate of U.S. tax on U.S.-source income. 
     To eliminate a double benefit (that is, the reduction of U.S. 
     tax previously noted and, later, full allowance of a foreign 
     tax credit with respect to foreign-source income), an OFL 
     recapture rule applies. Under this rule, a portion of 
     foreign-source taxable income earned after an OFL year is 
     recharacterized as U.S.-source taxable income for foreign tax 
     credit purposes (and for purposes of the possessions tax 
     credit) (sec. 904(f)(1)). Foreign-source taxable income up to 
     the amount of the unrecaptured OFL may be so treated. In 
     general, no more than 50 percent of the foreign-source 
     taxable income earned in any particular taxable year is 
     recharacterized as U.S.-source taxable income, unless a 
     taxpayer elects a higher percentage.\75\ The effect of the 
     recapture is to reduce the foreign tax credit limitation in 
     one or more years following an OFL year and, therefore, the 
     amount of U.S. tax that can be offset by foreign tax credits 
     in the later year or years.
---------------------------------------------------------------------------
     \75\ If a taxpayer with an OFL disposes of property that was 
     used predominantly outside the United States in a trade or 
     business, the taxpayer generally is deemed to have received 
     and recognized foreign-source taxable income as the result of 
     a disposition in an amount at least equal to the lesser of 
     the gain actually realized on the disposition or the 
     remaining amount of the unrecaptured OFL. Furthermore, the 
     annual 50-percent limit on the resourcing of foreign-source 
     income does not apply to that amount of foreign-source income 
     realized by reason of the disposition.
---------------------------------------------------------------------------
       An overall U.S.-source loss reduces pre-credit U.S. tax on 
     worldwide income to an amount less than the hypothetical tax 
     that would apply to the taxpayer's foreign-source income if 
     viewed in isolation. The existence of foreign-source taxable 
     income in the year of the U.S. loss reduces or eliminates any 
     net operating loss carryover that the U.S. loss would 
     otherwise have generated absent the foreign income. In 
     addition, as the pre-credit U.S. tax on worldwide income is 
     reduced, so is the foreign tax credit limitation. As a 
     result, some foreign tax credits in the year of the U.S. loss 
     must be credited, if at all, in a carryover year. Tax on 
     domestic-source taxable income in a subsequent year may be 
     offset by a net operating loss carryforward (if any), but not 
     by a foreign tax credit carryforward. There is presently no 
     mechanism for resourcing such subsequent U.S.-source income 
     as foreign-source income.

                               House Bill

       The House bill applies a resourcing rule to U.S.-source 
     income where the taxpayer has suffered a reduction in the 
     amount of its foreign tax credit limitation due to a prior 
     overall domestic loss. Under the House bill, in the case of a 
     taxpayer that has incurred an overall domestic loss, the 
     portion of the taxpayer's U.S.-source taxable income for each 
     succeeding taxable year that is equal to the lesser of (1) 
     the amount of the unrecharacterized overall domestic loss, or 
     (2) 50 percent of the taxpayer's U.S.-source taxable income 
     for such succeeding taxable year is recharacterized as 
     foreign-source taxable income.
       The House bill defines an overall domestic loss for this 
     purpose as any domestic loss to the extent it offsets 
     foreign-source taxable income for the current taxable year or 
     for any preceding taxable year by reason of a loss carryback. 
     For this purpose, a domestic loss means the amount by which 
     the U.S.-source gross income for the taxable year is exceeded 
     by the sum of the deductions properly apportioned or 
     allocated thereto, determined without regard to any loss 
     carried back from a subsequent taxable year. Under the House 
     bill, an overall domestic loss does not include any loss for 
     any taxable year unless the taxpayer elected the use of the 
     foreign tax credit for such taxable year.
       Any U.S.-source income resourced under the House bill is 
     allocated among the various foreign tax credit separate 
     limitation categories in the same proportion that those 
     categories were reduced by the prior overall domestic loss. 
     In addition, the House bill grants the Treasury Secretary 
     authority to prescribe regulations as may be necessary to 
     coordinate the operation of the OFL recapture rules with the 
     operation of the overall domestic loss recharacterization 
     rules that would be added by the House bill.
       Effective date.--The provision applies to losses incurred 
     in taxable years beginning after December 31, 2004.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with a 
     modification to the effective date.
       Effective date.--The provision applies to losses incurred 
     in taxable years beginning after December 31, 2005.

 E. Treatment of Military Property of Foreign Sales Corporations (sec. 
 906 of the House bill, sec. 908 of the Senate amendment, and sec. 923 
                              of the Code)

                              Present Law

       A portion of the foreign trade income of an eligible 
     foreign sales corporation (``FSC'') is exempt from federal 
     income tax. Foreign trade income is defined as the gross 
     income of a FSC that is attributable to foreign trading gross 
     receipts. In general, the term ``foreign trading gross 
     receipts'' means the gross receipts of a FSC from the sale or 
     lease of export property, services related and subsidiary to 
     the sale or lease of export property, engineering or 
     architectural services for construction projects located 
     outside the United States, and certain managerial services 
     for an unrelated FSC or DISC.
       Section 923(a)(5) contains a special limitation relating to 
     the export of military property. Under regulations prescribed 
     by the Treasury Secretary, the portion of a FSC's foreign 
     trading gross receipts from the disposition of, or services 
     relating to, military property that may be treated as exempt 
     foreign trade income is limited to 50 percent of the amount 
     that would otherwise be so treated. For this purpose, the 
     term ``military property'' means any property that is an arm, 
     ammunition, or implement of war designated in the munitions 
     list published pursuant to federal law. Under this provision, 
     the export of military property through a FSC is accorded 
     one-half the tax benefit that is accorded to exports of non-
     military property.

                               House Bill

       The House bill repeals the special FSC limitation relating 
     to the export of military property, thus providing exports of 
     military property through a FSC with the same treatment 
     currently provided exports of non-military property.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001.

                            Senate Amendment

       The Senate amendment is the same as the House bill, with a 
     modification to the effective date.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2004.

                          Conference Agreement

       The conference agreement follows the House bill.

F. Modify Treatment of RIC Dividends Paid to Foreign Persons (sec. 907 
of the House bill and secs. 871, 881, 897, 1441, 1442, and 2105 of the 
                                 Code)

                              Present Law

     Regulated investment companies
       A regulated investment company (``RIC'') is a domestic 
     corporation that, at all times during the taxable year, is 
     registered under the Investment Company Act of 1940 as a 
     management company or as a unit investment trust, or has 
     elected to be treated as a business development company under 
     that Act (sec. 851(a)). In addition, to qualify as a RIC, a 
     corporation must elect such status and must satisfy certain 
     tests (sec. 851(b)). Generally, a RIC pays no income tax 
     because it is permitted to deduct dividends paid to its 
     shareholders in computing its taxable income.
       A RIC generally may pass through to its shareholders the 
     character of its long-term capital gains. It does this by 
     designating a dividend it pays as a capital gain dividend to 
     the extent that the RIC has net capital gain (i.e., net long-
     term capital gain over net short-term capital loss). These 
     capital gain dividends are treated as long-term capital gains 
     by the shareholders. A RIC generally also can pass through to 
     its shareholders the character of tax-exempt interest from 
     State and municipal bonds, but only if, at the close of each 
     quarter of its taxable year, at least 50 percent of the value 
     of the total assets of the RIC consists of these obligations. 
     In this case, the RIC generally may designate a dividend it 
     pays as an exempt-interest dividend to the extent that the 
     RIC has tax-exempt interest income. These exempt-interest 
     dividends are treated as interest excludable from gross 
     income by the shareholders.
     U.S. source investment income of foreign persons
       The United States generally imposes a flat 30-percent tax, 
     collected by withholding, on the gross amount of U.S.-source 
     investment income payments, such as interest, dividends, 
     rents, royalties, or similar types of income, to nonresident 
     alien individuals and foreign corporations (``foreign 
     persons'') (secs. 871(a), 881, 1441, and 1442). Under 
     treaties, the United States may reduce or eliminate such 
     taxes. Even taking into account U.S. treaties, however, the 
     tax on a dividend generally is not entirely eliminated. 
     Instead, U.S.-source portfolio investment dividends received 
     by foreign persons generally are subject to U.S. withholding 
     tax at a rate of at least 15 percent.
       Although payments of U.S.-source interest that is not 
     effectively connected with a U.S. trade or business generally 
     are subject to the 30-percent withholding tax, there are 
     significant exceptions to that rule under which the U.S.-
     source interest payments to foreign persons are exempt from 
     U.S. tax.
       In addition, foreign persons generally are not subject to 
     U.S. tax on gain realized on the disposition of stock or 
     securities issued by a U.S. person, unless the gain is 
     effectively connected with the conduct of a trade or business 
     in the United States. Under the

[[Page 19669]]

     Foreign Investment in Real Property Tax Act of 1980 
     (``FIRPTA''), as amended, gain or loss of a foreign person 
     from the disposition of a U.S. real property interest is 
     subject to net basis tax as if the taxpayer were engaged in a 
     trade or business within the United States and the gain or 
     loss were effectively connected with such trade or business 
     (sec. 897). Under the FIRPTA provisions, a distribution by a 
     real estate investment trust (``REIT'') to a foreign person 
     generally is, to the extent attributable to gain from sales 
     or exchanges by the REIT of U.S. real property interests, 
     treated as gain recognized by the foreign person from the 
     sale or exchange of a U.S. real property interest (sec. 
     897(h)). In view of the nature of a REIT, an interest in a 
     REIT may in some cases be considered to be a U.S. real 
     property interest.
     Estate taxation
       Decedents who were citizens or residents of the United 
     States are generally subject to Federal estate tax on all 
     property, wherever situated. Nonresidents who are not U.S. 
     citizens, however, are subject to estate tax only on their 
     property which is within the United States. Property within 
     the United States generally includes debt obligations of U.S. 
     persons, including the Federal government and State and local 
     governments (sec. 2104(c)), but does not include either bank 
     deposits or portfolio obligations, the interest on which 
     would be exempt from U.S. income tax under section 871 (sec. 
     2105(b)).

                               House Bill

       Under the House bill, a RIC that earns certain net interest 
     income that would not be subject to U.S. tax if earned by a 
     foreign person directly may, to the extent of such income, 
     designate a dividend it pays as derived from such net 
     interest income. A foreign person who is a shareholder in the 
     RIC generally would treat such a dividend as exempt from 
     gross-basis U.S. tax, just as if the foreign person had 
     earned the interest directly. Similarly, a RIC that earns an 
     excess of net short-term capital gains over net long-term 
     capital losses, which excess would not be subject to U.S. tax 
     if earned by a foreign person directly, generally may, to the 
     extent of such excess, designate a dividend it pays as 
     derived from such excess. A foreign person who is a 
     shareholder in the RIC generally would treat such a dividend 
     as exempt from gross-basis U.S. tax, just as if the foreign 
     person had realized the amount directly.
       As is true under present law for distributions from REITs, 
     the House bill provides that any distribution by a RIC to a 
     foreign person shall, to the extent attributable to gain from 
     the sale or exchange by the RIC of an asset that is 
     considered a U.S. real property interest, be treated as gain 
     recognized by the foreign person from the sale or exchange of 
     a U.S. real property interest.
       The House bill also extends the special rules for 
     domestically-controlled REITS to domestically- controlled 
     RICs. The House bill provides that the estate of a foreign 
     decedent is exempt from U.S. estate tax on a transfer of 
     stock in the RIC in the proportion that the assets held by 
     the RIC are debt obligations, deposits, or other property 
     that would generally be treated as situated outside the 
     United States if held directly by the estate.
       Effective date.--The House bill generally applies to 
     dividends with respect to taxable years of RICs beginning 
     after December 31, 2004. With respect to the treatment of a 
     RIC for estate tax purposes, the House bill applies to 
     estates of decedents dying after December 31, 2004. With 
     respect to the treatment of RICs under section 897 (dealing 
     with U.S. real property interests), the House bill is 
     effective on January 1, 2005.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

 G. Repeal of Special Rules for Applying Foreign Tax Credit in Case of 
Foreign Oil and Gas Income (sec. 908 of the House bill and sec. 907 of 
                               the Code)

                              Present Law

       U.S. persons are subject to U.S. income tax on their 
     worldwide income. A credit against U.S. tax on foreign-source 
     income is allowed for foreign taxes paid or accrued (or 
     deemed paid) (secs. 901, 902).
       The amount of foreign tax credits that a taxpayer may claim 
     in a year is subject to a limitation that prevents taxpayers 
     from using foreign tax credits to offset U.S. tax on U.S.-
     source income (sec. 904). The foreign tax credit limitation 
     is calculated on an overall basis and separately for specific 
     categories of income. The amount of creditable taxes paid or 
     accrued (or deemed paid) in any taxable year that exceeds the 
     respective foreign tax credit limitations is permitted to be 
     carried back two years and carried forward five years (sec. 
     904(c)).
       Special rules apply with respect to the foreign tax credit 
     in the case of foreign oil and gas income (sec. 907). Under a 
     special limitation, taxes on foreign oil and gas extraction 
     income are creditable only to the extent that they do not 
     exceed a specified amount (e.g., 35 percent of such income in 
     the case of a corporation) (sec. 907(a)). For this purpose, 
     foreign oil and gas extraction income is income derived from 
     foreign sources from the extraction of minerals from oil or 
     gas wells or the sale or exchange of assets used by the 
     taxpayer in such extraction. A taxpayer must have excess 
     limitation under the special rules applicable to foreign 
     extraction taxes and excess limitation under the general 
     foreign tax credit provisions in order to utilize excess 
     foreign oil and gas extraction taxes in a carryback or 
     carryforward year. In addition, in the case of taxes paid or 
     accrued to any foreign country with respect to certain 
     foreign oil related income, discriminatory foreign taxes are 
     not treated as creditable foreign taxes (sec. 907(b)).

                               House Bill

       The House bill repeals the special rules of section 907 for 
     applying the foreign tax credit in the case of foreign oil 
     and gas income.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2004.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with a 
     modification to the effective date.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2007.

  H. Study of Proper Treatment of European Union under Subpart F Same 
            Country Exceptions (sec. 909 of the House bill)

                              Present Law

       In general, U.S. 10-percent shareholders of a controlled 
     foreign corporation (``CFC'') are required to include in 
     income for U.S. tax purposes currently certain income of the 
     CFC (referred to as ``subpart F income''), without regard to 
     whether the income is distributed to the shareholders (sec. 
     951(a)(1)(A)). In effect, the Code treats the U.S. 10-percent 
     shareholders of a CFC as having received a current 
     distribution of their pro rata shares of the CFC's subpart F 
     income. For this purpose, a U.S. 10-percent shareholder is a 
     U.S. person that owns 10 percent or more of the corporation's 
     stock (measured by vote) (sec. 951(b)). In general, a foreign 
     corporation is a CFC if U.S. 10-percent shareholders own more 
     than 50 percent of such corporation's stock (measured by vote 
     or by value) (sec. 957).
       Subpart F income typically is passive income or income that 
     is relatively movable from one taxing jurisdiction to 
     another. Subpart F income consists of foreign base company 
     income (defined in sec. 954), insurance income (defined in 
     sec. 953), and certain income relating to international 
     boycotts and other violations of public policy (defined in 
     sec. 952(a)(3)-(5)). Subpart F income does not include income 
     of the CFC that is effectively connected with the conduct of 
     a trade or business within the United States (on which income 
     the CFC is subject to current U.S. tax) (sec. 952(b)).
       Income of a CFC may be excepted from the subpart F 
     provisions under various same country exceptions. For 
     example, a major category of foreign base company income is 
     foreign personal holding company income, which generally 
     includes, among other things, certain dividends, interest, 
     rents and royalties (sec. 954(c)). Same country exceptions 
     from treatment as subpart F foreign personal holding company 
     income generally are provided for dividends and interest 
     received by the CFC from a related person that (1) is a 
     corporation organized under the laws of the same foreign 
     country in which the CFC is created or organized and (2) has 
     a substantial part of its assets used in a trade or business 
     located in such same foreign country. Similarly, same country 
     exceptions from subpart F foreign personal holding income 
     generally are provided for rents and royalties received by 
     the CFC from a related corporation for the use of property 
     within the country in which the CFC is created or organized 
     (sec. 954(c)(3)).

                               House Bill

       The House bill directs the Treasury Secretary to conduct a 
     study of the feasibility of treating all countries included 
     in the European Union as one country for purposes of applying 
     same country exceptions under subpart F. The House bill 
     requires the results of the study to be reported to the House 
     Committee on Ways and Means and the Senate Committee on 
     Finance, along with any legislative recommendations, no later 
     than 6 months after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the provision in 
     the House bill. The conferees, however, encourage the 
     Treasury Department to study the feasibility of treating all 
     countries included in the European Union as one country for 
     purposes of applying same country exceptions under subpart F.

  Provide Waiver from Denial of Foreign Tax Credits (sec. 910 of the 
                House bill and sec. 901(j) of the Code)

                              Present Law

       In general, U.S. persons may credit foreign taxes against 
     U.S. tax on foreign-source income. The amount of foreign tax 
     credits that can be claimed in a year is subject to a 
     limitation that prevents taxpayers from using

[[Page 19670]]

     foreign tax credits to offset U.S. tax on U.S.-source income. 
     Separate limitations are applied to specific categories of 
     income.
       Pursuant to special rules applicable to taxes paid to 
     certain foreign countries, no foreign tax credit is allowed 
     for income, war profits, or excess profits taxed paid, 
     accrued, or deemed paid to a country which satisfies 
     specified criteria, to the extent that the taxes are with 
     respect to income attributable to a period during which such 
     criteria were satisfied (sec. 901(j)). Section 901(j) applies 
     with respect to any foreign country: (1) the government of 
     which the United States does not recognize, unless such 
     government is otherwise eligible to purchase defense articles 
     or services under the Arms Export Control Act, (2) with 
     respect to which the United States has severed diplomatic 
     relations, (3) with respect to which the United States has 
     not severed diplomatic relations but does not conduct such 
     relations, or (4) which the Secretary of State has, pursuant 
     to section 6(j) of the Export Administration Act of 1979, as 
     amended, designated as a foreign country which repeatedly 
     provides support for acts of international terrorisms (a 
     ``section 901(j) foreign country''). The denial of credits 
     applies to any foreign country during the period beginning on 
     the later of January 1, 1987, or six months after such 
     country becomes a section 901(j) country, and ending on the 
     date the Secretary of State certifies to the Secretary of the 
     Treasury that such country is no longer a section 901(j) 
     country.
       Taxes treated as noncreditable under section 901(j) 
     generally are permitted to be deducted notwithstanding the 
     fact that the taxpayer elects use of the foreign tax credit 
     for the taxable year with respect to other taxes. In 
     addition, income for which foreign tax credits are denied 
     generally cannot be sheltered from U.S. tax by other 
     creditable foreign taxes.
       Under the rules of subpart F, U.S. 10-percent shareholders 
     of a controlled foreign corporation (``CFC'') are required to 
     include in income currently certain types of income of the 
     CFC, whether or not such income is actually distributed 
     currently to the shareholders (referred to as ``subpart F 
     income''). Subpart F income includes income derived from any 
     foreign country during a period in which the taxes imposed by 
     that country are denied eligibility for the foreign tax 
     credit under section 901(j) (sec. 952(a)(5)).

                               House Bill

       The House bill provides that section 901(j) no longer 
     applies with respect to a foreign country if the President 
     determines that the application of section 901(j) to such 
     foreign country is not in the national interests of the 
     United States.
       Effective date.--The provision is effective as of the date 
     of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the provision in 
     the House bill.

 J. Prohibit Disclosure of APAs and APA Background Files (sec. 911 of 
  the House bill, sec. 905 of the Senate amendment and secs. 6103 and 
                           6110 of the Code)

                              Present Law

     Section 6103
       Under section 6103, returns and return information are 
     confidential and cannot be disclosed unless authorized by the 
     Internal Revenue Code.
       The Code defines return information broadly. Return 
     information includes:
       A taxpayer's identity, the nature, source or amount of 
     income, payments, receipts, deductions, exemptions, credits, 
     assets, liabilities, net worth, tax liability, tax withheld, 
     deficiencies, overassessments, or tax payments;
       Whether the taxpayer's return was, is being, or will be 
     examined or subject to other investigation or processing; or
       Any other data, received by, recorded by, prepared by, 
     furnished to, or collected by the Secretary with respect to a 
     return or with respect to the determination of the existence, 
     or possible existence, of liability (or the amount thereof) 
     of any person under this title for any tax, penalty, 
     interest, fine, forfeiture, or other imposition, or 
     offense.\76\
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     \76\ Sec. 6103(b)(2)(A).
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     Section 6110 and the Freedom of Information Act
       With certain exceptions, section 6110 makes the text of any 
     written determination the IRS issues available for public 
     inspection. A written determination is any ruling, 
     determination letter, technical advice memorandum, or Chief 
     Counsel advice. Once the IRS makes the written determination 
     publicly available, the background file documents associated 
     with such written determination are available for public 
     inspection upon written request. The Code defines 
     ``background file documents'' as any written material 
     submitted in support of the request. Background file 
     documents also include any communications between the IRS and 
     persons outside the IRS concerning such written determination 
     that occur before the IRS issues the determination.
       Before making them available for public inspection, section 
     6110 requires the IRS to delete specific categories of 
     sensitive information from the written determination and 
     background file documents.\77\ It also provides judicial and 
     administrative procedures to resolve disputes over the scope 
     of the information the IRS will disclose. In addition, 
     Congress has also wholly exempted certain matters from 
     section 6110's public disclosure requirements.\78\ Any part 
     of a written determination or background file that is not 
     disclosed under section 6110 constitutes ``return 
     information.'' \79\
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     \77\ Sec. 6110(c) provides for the deletion of identifying 
     information, trade secrets, confidential commercial and 
     financial information and other material.
     \78\ Sec. 6110(l).
     \79\ Sec. 6103(b)(2)(B) (``The term ``return information'' 
     means . . . any part of any written determination or any 
     background file document relating to such written 
     determination (as such terms are defined in section 6110(b)) 
     which is not open to public inspection under section 6110'').
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       The Freedom of Information Act (FOIA) lists categories of 
     information that a federal agency must make available for 
     public inspection.\80\ It establishes a presumption that 
     agency records are accessible to the public. The FOIA, 
     however, also provides nine exemptions from public 
     disclosure. One of those exemptions is for matters 
     specifically exempted from disclosure by a statute other than 
     the FOIA if the exempting statute meets certain 
     requirements.\81\ Section 6103 qualifies as an exempting 
     statute under this FOIA provision. Thus, returns and return 
     information that section 6103 deems confidential are exempt 
     from disclosure under the FOIA.
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     \80\ Unless published promptly and offered for sale, an 
     agency must provide for public inspection and copying: (1) 
     final opinions as well as orders made in the adjudication of 
     cases; (2) statements of policy and interpretations not 
     published in the Federal Register; (3) administrative staff 
     manuals and instructions to staff that affect a member of the 
     public; and (4) agency records which have been or the agency 
     expects to be, the subject of repetitive FOIA requests. 5 
     U.S.C. sec. 552(a)(2). An agency must also publish in the 
     Federal Register: the organizational structure of the agency 
     and procedures for obtaining information under the FOIA; 
     statements describing the functions of the agency and all 
     formal and informal procedures; rules of procedure, 
     descriptions of forms and statements describing all papers, 
     reports and examinations; rules of general applicability and 
     statements of general policy; and amendments, revisions and 
     repeals of the foregoing. 5 U.S.C. sec. 552(a)(1). All other 
     agency records can be sought by FOIA request; however, some 
     records may be exempt from disclosure.
     \81\ Exemption 3 of the FOIA provides that an agency is not 
     required to disclose matters that are: ``(3) specifically 
     exempted from disclosure by statute (other than section 552b 
     of this title) provided that such statute (A) requires that 
     the matters be withheld from the public in such a manner as 
     to leave no discretion on the issue, or (B) establishes 
     particular criteria for withholding or refers to particular 
     types of matters to be withheld; . . .'' 5 U.S.C. 
     Sec. 552(b)(3).
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       Section 6110 is the exclusive means for the public to view 
     IRS written determinations.\82\ If section 6110 covers the 
     written determination, then the public cannot use the FOIA to 
     obtain that determination.
---------------------------------------------------------------------------
     \82\ Sec. 6110(m).
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     Advance Pricing Agreements
       The Advanced Pricing Agreement (``APA'') program is an 
     alternative dispute resolution program conducted by the IRS, 
     which resolves international transfer pricing issues prior to 
     the filing of the corporate tax return. Specifically, an APA 
     is an advance agreement establishing an approved transfer 
     pricing methodology entered into among the taxpayer, the IRS, 
     and a foreign tax authority. The IRS and the foreign tax 
     authority generally agree to accept the results of such 
     approved methodology. Alternatively, an APA also may be 
     negotiated between just the taxpayer and the IRS; such an APA 
     establishes an approved transfer pricing methodology for U.S. 
     tax purposes. The APA program focuses on identifying the 
     appropriate transfer pricing methodology; it does not 
     determine a taxpayer's tax liability. Taxpayers voluntarily 
     participate in the program.
       To resolve the transfer pricing issues, the taxpayer 
     submits detailed and confidential financial information, 
     business plans and projections to the IRS for consideration. 
     Resolution involves an extensive analysis of the taxpayer's 
     functions and risks. Since its inception in 1991, the APA 
     program has resolved more than 180 APAs, and approximately 
     195 APA requests are pending.
       Currently pending in the U.S. District Court for the 
     District of Columbia are three consolidated lawsuits 
     asserting that APAs are subject to public disclosure under 
     either section 6110 or the FOIA.\83\ Prior to this litigation 
     and since the inception of the APA program, the IRS held the 
     position that APAs were confidential return information 
     protected from disclosure by section 6103.\84\

[[Page 19671]]

     On January 11, 1999, the IRS conceded that APAs are 
     ``rulings'' and therefore are ``written determinations'' for 
     purposes of section 6110.\85\ Although the court has not yet 
     issued a ruling in the case, the IRS announced its plan to 
     publicly release both existing and future APAs. The IRS then 
     transmitted existing APAs to the respective taxpayers with 
     proposed deletions. It has received comments from some of the 
     affected taxpayers. Where appropriate, foreign tax 
     authorities have also received copies of the relevant APAs 
     for comment on the proposed deletions. No APAs have yet been 
     released to the public.
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     \83\ BNA v. IRS, Nos. 96-376, 96-2820, and 96-1473 (D.D.C.). 
     The Bureau of National Affairs, Inc. (BNA) publishes matters 
     of interest for use by its subscribers. BNA contends that 
     APAs are not return information as they are prospective in 
     application. Thus at the time they are entered into they do 
     not relate to ``the determination of the existence, or 
     possible existence, of liability or amount thereof . . .''
     \84\ The IRS contended that information received or generated 
     as part of the APA process pertains to a taxpayer's liability 
     and therefore was return information as defined in sec. 
     6103(b)(2)(A). Thus, the information was subject to section 
     6103's restrictions on the dissemination of returns and 
     return information. Rev. Proc. 91-22, sec. 11, 1991-1 C.B. 
     526, 534 and Rev. Proc. 96-53, sec. 12, 1996-2 C.B. 375, 386.
     \85\ IR 1999-05.
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       Some taxpayers assert that the IRS erred in adopting the 
     position that APAs are subject to section 6110 public 
     disclosure. Several have sought to participate as amici in 
     the lawsuit to block the release of APAs. They are concerned 
     that release under section 6110 could expose them to 
     expensive litigation to defend the deletion of the 
     confidential information from their APAs. They are also 
     concerned that the section 6110 procedures are insufficient 
     to protect the confidentiality of their trade secrets and 
     other financial and commercial information.

                               House Bill

       The House bill amends section 6103 to provide that APAs and 
     related background information are confidential return 
     information under section 6103. Related background 
     information is meant to include: the request for an APA, any 
     material submitted in support of the request, and any 
     communication (written or otherwise) prepared or received by 
     the Secretary in connection with an APA, regardless of when 
     such communication is prepared or received. Protection is not 
     limited to agreements actually executed; it includes material 
     received and generated in the APA process that does not 
     result in an executed agreement.
       Further, APAs and related background information are not 
     ``written determinations'' as that term is defined in section 
     6110. Therefore, the public inspection requirements of 
     section 6110 do not apply to APAs and related background 
     information. A document's incorporation in a background file, 
     however, is not intended to be grounds for not disclosing an 
     otherwise disclosable document from a source other than a 
     background file.
       The House bill statutorily requires that the Treasury 
     Department prepare and publish an annual report on the status 
     of APAs. The annual report is to contain the following 
     information:
       Information about the structure, composition, and operation 
     of the APA program office;
       A copy of each current model APA;
       Statistics regarding the amount of time to complete new and 
     renewal APAs;
       The number of APA applications filed during such year;
       The number of APAs executed to date and for the year;
       The number of APA renewals issued to date and for the year;
       The number of pending APA requests;
       The number of pending APA renewals;
       The number of APAs executed and pending (including renewals 
     and renewal requests) that are unilateral, bilateral and 
     multilateral, respectively;
       The number of APAs revoked or canceled, and the number of 
     withdrawals from the APA program, to date and for the year;
       The number of finalized new APAs and renewals by industry; 
     \86\ and
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     \86\ This information was previously released in IRS 
     Publication 3218, ``IRS Report on Application and 
     Administration of I.R.C. Section 482.''
---------------------------------------------------------------------------
       General descriptions of:
       the nature of the relationships between the related 
     organizations, trades, or businesses covered by APAs;
       the related organizations, trades, or businesses whose 
     prices or results are tested to determine compliance with the 
     transfer pricing methodology prescribed in the APA;
       the covered transactions and the functions performed and 
     risks assumed by the related organizations, trades or 
     businesses involved;
       methodologies used to evaluate tested parties and 
     transactions and the circumstances leading to the use of 
     those methodologies;
       critical assumptions;
       sources of comparables;
       comparable selection criteria and the rationale used in 
     determining such criteria;
       the nature of adjustments to comparables and/or tested 
     parties;
       the nature of any range agreed to, including information 
     such as whether no range was used and why, whether an inter-
     quartile range was used, or whether there was a statistical 
     narrowing of the comparables;
       adjustment mechanisms provided to rectify results that fall 
     outside of the agreed upon APA range;
       the various term lengths for APAs, including rollback 
     years, and the number of APAs with each such term length;
       the nature of documentation required; and
       approaches for sharing of currency or other risks.
       The first report is to cover the period January 1, 1991, 
     through the calendar year including the date of enactment. 
     The Treasury Department cannot include any information in the 
     report which would have been deleted under section 6110(c) if 
     the report were a written determination as defined in section 
     6110. Additionally, the report cannot include any information 
     which can be associated with or otherwise identify, directly 
     or indirectly, a particular taxpayer. The Secretary is 
     expected to obtain input from taxpayers to ensure proper 
     protection of taxpayer information and, if necessary, utilize 
     its regulatory authority to implement appropriate processes 
     for obtaining this input. For purposes of section 6103, the 
     report requirement is treated as part of Title 26.
       The IRS user fee otherwise required to be paid for an APA 
     is increased by $500. The Secretary has the authority to make 
     appropriate reductions in such fee for small businesses.
       While the House bill statutorily requires an annual report, 
     it is not intended to discourage the Treasury Department from 
     issuing other forms of guidance, such as regulations or 
     revenue rulings, consistent with the confidentiality 
     provisions of the Code.
       Effective date.--The provision is effective on the date of 
     enactment; accordingly, no APAs, regardless of whether 
     executed before or after enactment, or related background 
     file documents can be released to the public after the date 
     of enactment. It requires the Treasury Department to publish 
     the first annual report no later than March 30, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. In addition, the conference agreement 
     requires the IRS to describe, in each annual report, its 
     efforts to ensure compliance with existing APA agreements.

K. Increase Dollar Limitation on Section 911 Exclusion (sec. 912 of the 
                  House bill and sec. 911 of the Code)

                              Present Law

       U.S. citizens generally are subject to U.S. income tax on 
     their worldwide income. A U.S. citizen who earns income in a 
     foreign country also may be taxed on such income by that 
     foreign country. A credit against the U.S. income tax imposed 
     on foreign-source income is allowed for foreign taxes paid on 
     such income.
       U.S. citizens living abroad may be eligible to exclude from 
     their income for U.S. tax purposes certain foreign earned 
     income and foreign housing costs. In order to qualify for 
     these exclusions, a U.S. citizen must be either (1) a bona 
     fide resident of a foreign country or countries for an 
     uninterrupted period that includes an entire taxable year, or 
     (2) present in a foreign country or countries for 330 days 
     out of any 12 consecutive month period. In addition, the 
     taxpayer must have his or her tax home in a foreign country.
       The exclusion for foreign earned income generally applies 
     to income earned from sources outside the United States as 
     compensation for personal services actually rendered by the 
     taxpayer. The maximum exclusion for foreign earned income for 
     taxable years before 1998 is $70,000. Beginning in 1998, the 
     maximum exclusion is increased in increments of $2,000 per 
     year until the exclusion amount is $80,000 (i.e., in the year 
     2002). The maximum exclusion is $74,000 for 1999. The 
     exclusion is indexed for inflation beginning in 2008 (for 
     inflation after 2006).
       The exclusion for housing costs applies to reasonable 
     expenses, other than deductible interest and taxes, paid or 
     incurred by or on behalf of the taxpayer for housing for the 
     taxpayer and his or her spouse and dependents in a foreign 
     country. The exclusion amount for housing costs for a taxable 
     year is equal to the excess of such housing costs for the 
     taxable year over an amount computed pursuant to a specified 
     formula.
       The combined earned income exclusion and housing cost 
     exclusion may not exceed the taxpayer's total foreign earned 
     income. The taxpayer's foreign tax credit is reduced by the 
     amount of the credit that is attributable to excluded income.

                               House Bill

       The House bill increases the maximum exclusion for foreign 
     earned income in annual increments of $3,000 per year 
     beginning in 2003, until the exclusion amount is $95,000 
     (i.e., in the year 2007). Thus, for the years 2003 through 
     2007, the maximum exclusion gradually increases from $83,000 
     to $95,000. Beginning in 2008, the maximum exclusion amount 
     of $95,000 is indexed for inflation.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

L. Exempt Certain Sales of Frequent-Flyer and Similar Reduced-Fare Air 
   Transportation Rights from Aviation Excise Taxes (sec. 906 of the 
              Senate amendment and sec. 4261 of the Code)

                              Present Law

       An 7.5-percent excise tax is imposed on the sale by an air 
     transportation provider of the

[[Page 19672]]

     right to frequent-flyer or similar reduced-fare air 
     transportation. Like the aviation excise taxes imposed on the 
     sale of actual air transportation, this tax is imposed on all 
     amounts paid for the right to air transportation if the right 
     can be used for transportation to, from, or within the United 
     States. In both cases, tax is imposed without regard to 
     whether the sale occurs within the United States or 
     elsewhere. Further, subject to an exception for rights 
     actually used for purposes other than air transportation (as 
     determined under Treasury Department regulations), the tax is 
     imposed without regard to whether the rights ultimately are 
     used for travel (to, from, or within United States or between 
     two or more points in foreign countries) or expire without 
     use.
       The current authority granted to the Treasury Department to 
     exempt certain awards does not permit an exemption unless the 
     rights actually are used for a purpose other than air 
     transportation (e.g., hotels or car rentals). Thus, under 
     present law, rights are taxable even if transportation for 
     which they ultimately are used has no nexus to the United 
     States.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment exempts from the 7.5-percent tax, air 
     transportation rights sold which are credited to accounts of 
     persons having a mailing address outside the United States. 
     Mailing addresses are those listed on the records of the 
     operator of the frequent-flyer or similar program.
       Effective date.--The provision applies to air 
     transportation rights sold after December 31, 2004.

                          Conference Agreement

       The conference agreement follows the Senate amendment. As 
     with the present-law regulatory exception for certain rights 
     shown to be used for purposes other than air transportation, 
     this statutory exemption is limited to amounts which are 
     documented by the person providing the right to 
     transportation (i.e., the operator of the frequent-flyer or 
     similar program) as credited to accounts of persons having 
     mailing addresses outside the United States.

                 X. TAX-EXEMPT ORGANIZATION PROVISIONS

   A. Provide Tax Exemption for Organizations Created by a State to 
Provide Property and Casualty Insurance Coverage for Property for Which 
 Such Coverage Is Otherwise Unavailable (sec. 1001 of the House bill, 
   sec. 801 of the Senate amendment, and sec. 501(c)(28) of the Code)

                              Present Law

       A life insurance company is subject to tax on its life 
     insurance company taxable income, which is its life insurance 
     income reduced by life insurance deductions (sec. 801). 
     Similarly, a property and casualty insurance company is 
     subject to tax on its taxable income, which is determined as 
     the sum of its underwriting income and investment income (as 
     well as gains and other income items) (sec. 831). Present law 
     provides that the term ``corporation'' includes an insurance 
     company (sec. 7701(a)(3)).
       In general, the Internal Revenue Service (``IRS'') takes 
     the position that organizations that provide insurance for 
     their members or other individuals are not considered to be 
     engaged in a tax-exempt activity. The IRS maintains that such 
     insurance activity is either (1) a regular business of a kind 
     ordinarily carried on for profit, or (2) an economy or 
     convenience in the conduct of members' businesses because it 
     relieves the members from obtaining insurance on an 
     individual basis.
       Certain insurance risk pools have qualified for tax 
     exemption under Code section 501(c)(6). In general, these 
     organizations (1) assign any insurance policies and 
     administrative functions to their member organizations 
     (although they may reimburse their members for amounts paid 
     and expenses); (2) serve an important common business 
     interest of their members; and (3) must be membership 
     organizations financed, at least in part, by membership dues.
       State insurance risk pools may also qualify for tax exempt 
     status under section 501(c)(4) as a social welfare 
     organization or under section 115 as serving an essential 
     governmental function of a State. In seeking qualification 
     under section 501(c)(4), insurance organizations generally 
     are constrained by the restrictions on the provision of 
     ``commercial-type insurance'' contained in section 501(m). 
     Section 115 generally provides that gross income does not 
     include income derived from the exercise of any essential 
     governmental function or accruing to a State or any political 
     subdivision thereof.
       Certain specific provisions provide tax-exempt status to 
     organizations meeting statutory requirements.
     Health coverage for high-risk individuals
       Section 501(c)(26) provides tax-exempt status to any 
     membership organization that is established by a State 
     exclusively to provide coverage for medical care on a 
     nonprofit basis to certain high-risk individuals, provided 
     certain criteria are satisfied. The organization may provide 
     coverage for medical care either by issuing insurance itself 
     or by entering into an arrangement with a health maintenance 
     organization (``HMO'').
       High-risk individuals eligible to receive medical care 
     coverage from the organization must be residents of the State 
     who, due to a pre-existing medical condition, are unable to 
     obtain health coverage for such condition through insurance 
     or an HMO, or are able to acquire such coverage only at a 
     rate that is substantially higher than the rate charged for 
     such coverage by the organization. The State must determine 
     the composition of membership in the organization. For 
     example, a State could mandate that all organizations that 
     are subject to insurance regulation by the State must be 
     members of the organization.
       The provision further requires the State or members of the 
     organization to fund the liabilities of the organization to 
     the extent that premiums charged to eligible individuals are 
     insufficient to cover such liabilities. Finally, no part of 
     the net earnings of the organization can inure to the benefit 
     of any private shareholder or individual.
     Workers' compensation reinsurance organizations
       Section 501(c)(27)(A) provides tax-exempt status to any 
     membership organization that is established by a State before 
     June 1, 1996, exclusively to reimburse its members for 
     workers' compensation insurance losses, and that satisfies 
     certain other conditions. A State must require that the 
     membership of the organization consist of all persons who 
     issue insurance covering workers' compensation losses in such 
     State, and all persons and governmental entities who self-
     insure against such losses. In addition, the organization 
     must operate as a nonprofit organization by returning surplus 
     income to members or to workers' compensation policyholders 
     on a periodic basis and by reducing initial premiums in 
     anticipation of investment income.
     State workmen's compensation act companies
       Section 501(c)(27)(B) provides tax-exempt status for any 
     organization that is created by State law, and organized and 
     operated exclusively to provide workmen's compensation 
     insurance and related coverage that is incidental to 
     workmen's compensation insurance, and that meets certain 
     additional requirements. The workmen's compensation insurance 
     must be required by State law, or be insurance with respect 
     to which State law provides significant disincentives if it 
     is not purchased by an employer (such as loss of exclusive 
     remedy or forfeiture of affirmative defenses such as 
     contributory negligence). The organization must provide 
     workmen's compensation to any employer in the State (for 
     employees in the State or temporarily assigned out-of-State) 
     seeking such insurance and meeting other reasonable 
     requirements. The State must either extend its full faith and 
     credit to the initial debt of the organization or provide the 
     initial operating capital of such organization. For this 
     purpose, the initial operating capital can be provided by 
     providing the proceeds of bonds issued by a State authority; 
     the bonds may be repaid through exercise of the State's 
     taxing authority, for example. For periods after the date of 
     enactment, either the assets of the organization must revert 
     to the State upon dissolution, or State law must not permit 
     the dissolution of the organization absent an act of the 
     State legislature. Should dissolution of the organization 
     become permissible under applicable State law, then the 
     requirement that the assets of the organization revert to the 
     State upon dissolution applies. Finally, the majority of the 
     board of directors (or comparable oversight body) of the 
     organization must be appointed by an official of the 
     executive branch of the State or by the State legislature, or 
     by both.

                               House Bill

       The provision provides tax-exempt status for any 
     association created before January 1, 1999, by State law and 
     organized and operated exclusively to provide property and 
     casualty insurance coverage for property located within the 
     State for which the State has determined that coverage in the 
     authorized insurance market is limited or unavailable at 
     reasonable rates, provided certain requirements are met.
       Under the provision, no part of the net earnings of the 
     association may inure to the benefit of any private 
     shareholder or individual. Except as provided in the case of 
     dissolution, no part of the assets of the association may be 
     used for, or diverted to, any purpose other than: (1) to 
     satisfy, in whole or in part, the liability of the 
     association for, or with respect to, claims made on policies 
     written by the association; (2) to invest in investments 
     authorized by applicable law; (3) to pay reasonable and 
     necessary administration expenses in connection with the 
     establishment and operation of the association and the 
     processing of claims against the association (4) to make 
     remittances pursuant to State law to be used by the State to 
     provide for the payment of claims on policies written by the 
     association, purchase reinsurance covering losses under such 
     policies, or to support governmental programs to prepare for 
     or mitigate the effects of natural catastrophic events. The 
     provision requires that the State law governing the 
     association permit the association to levy assessments on 
     insurance companies authorized to sell

[[Page 19673]]

     property and casualty insurance in the State, or on property 
     and casualty insurance policyholders with insurable interests 
     in property located in the State to fund deficits of the 
     association, including the creation of reserves. The 
     provision requires that the plan of operation of the 
     association be subject to approval by the chief executive 
     officer or other official of the State, by the State 
     legislature, or both. In addition, the provision requires 
     that the assets of the association revert upon dissolution to 
     the State, the State's designee, or an entity designated by 
     the State law governing the association, or that State law 
     not permit the dissolution of the association.
       The provision provides a special rule in the case of any 
     entity or fund created before January 1, 1999, pursuant to 
     State law and organized and operated exclusively to receive, 
     hold, and invest remittances from an association exempt from 
     tax under the provision, to make disbursements to pay claims 
     on insurance contracts issued by the association, and to make 
     disbursements to support governmental programs to prepare for 
     or mitigate the effects of natural catastrophic events. The 
     special rule provides that the entity or fund may elect to be 
     disregarded as a separate entity and be treated as part of 
     the association exempt from tax under the provision, from 
     which it receives such remittances. The election is required 
     to be made no later than 30 days following the date on which 
     the association is determined to be exempt from tax under the 
     provision, and would be effective as of the effective date of 
     that determination.
       An organization described in the provision is treated as 
     having unrelated business taxable income (``UBIT'') in the 
     amount of its taxable income (computed as if the organization 
     were not exempt from tax under the proposal), if at the end 
     of the immediately preceding taxable year, the organization's 
     net equity exceeded 15 percent of the total coverage in force 
     under insurance contracts issued by the organization and 
     outstanding at the end of that preceding year.
       Under the provision, no income or gain is recognized solely 
     as a result of the change in status to that of an association 
     exempt from tax under the provision.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999. No inference is 
     intended as to the tax status under present law of 
     associations described in the provision.

                            Senate Amendment

       Same as House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

   B. Conform Provisions Relating to Arbitrage Treatment to Reflect 
 Proposed State Constitutional Amendments (sec. 1002 of the House bill)

                              Present Law

       In general, present-law tax-exempt bond arbitrage 
     restrictions provide that interest on a State or local 
     government bond is not eligible for tax-exemption if the 
     proceeds are invested, directly or indirectly, in materially 
     higher yielding investments or if the debt service on the 
     bond is secured by or paid from (directly or indirectly) such 
     investments. An exception, enacted in 1984, provides that the 
     pledge of income from investments in a Fund established under 
     a provision of a State constitution adopted in 1876 as 
     security for a limited amount of tax-exempt bonds for two 
     State university systems will not cause interest on those 
     bonds to be taxable. The terms of this exception are limited 
     to State constitutional or statutory restrictions in effect 
     as of October 9, 1969.
       The General Assembly of the State has approved proposed 
     constitutional amendments regarding the manner in which 
     amounts in the Fund are paid for the benefit of the two 
     university systems. These proposed amendments are to be voted 
     on by the State's citizens in November 1999. If approved, the 
     amendments will in substance eliminate the benefits of the 
     1984 exception from the tax-exempt bond arbitrage 
     restrictions for future debt.

                               House Bill

       The 1984 exception is conformed to the proposed State 
     constitutional amendments to permit its continued 
     applicability to bonds of the two university systems. 
     Limitations on the aggregate amount of bonds which may 
     benefit from the exception are not modified.
       Effective date.--The provision applies to bonds issued 
     after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

 C. Authorize Secretary of Treasury to Grant Waivers from Section 4941 
  Prohibitions (sec. 1004 of the House bill and sec. 4941 of the Code)

                              Present Law

       In order to prohibit transactions between tax-exempt 
     private foundations and certain related persons, present law 
     provides for the imposition of excise taxes when 
     ``disqualified persons'' engage in acts of ``self-dealing'' 
     with a private foundation (sec. 4941). Disqualified persons 
     include foundation managers (directors, trustees, and 
     officers of the foundation), substantial contributors to the 
     foundation, certain family members of these persons, and 
     certain entities related to these persons. Disqualified 
     persons also include government officials at certain levels.
       Acts of self-dealing include any direct or indirect: (1) 
     sale, exchange, or leasing of property between a private 
     foundation and a disqualified person, (2) lending of money or 
     extensions of credit between a private foundation and a 
     disqualified person, (3) furnishing of goods, services, or 
     facilities between a private foundation and a disqualified 
     person, (4) payment of compensation (or payment or 
     reimbursement of expenses) by a private foundation to a 
     disqualified person, (5) transfer to, or use by or for the 
     benefit of, a disqualified person of the income or assets of 
     a private foundation, and (6) agreement by a private 
     foundation to make any payment of money or other property to 
     a government official. \87\ There is no exception from the 
     prohibition on acts of self-dealing for inadvertent 
     violations, and even transactions which arguably may benefit 
     the private foundation may be subject to tax as an act of 
     self-dealing.
---------------------------------------------------------------------------
     \87\ There are certain limited transactions between 
     disqualified persons and private foundations that are defined 
     by statute not to constitute acts of self-dealing.
---------------------------------------------------------------------------
       Self-dealing excise taxes are imposed on a disqualified 
     person who has engaged in a self- dealing transaction, and on 
     any foundation manager who knowingly participates in the 
     transaction. At the first level of tax, a disqualified person 
     is subject to an initial tax at a rate of 5 percent and a 
     foundation manager at a rate of 2.5 percent (up to a maximum 
     of $10,000) of the ``amount involved'' in the act of self-
     dealing. Where the self-dealing transaction involves the use 
     of money (e.g., a loan) or other property, the ``amount 
     involved'' generally is the greater of the amount of money 
     and the fair market value of the other property given or the 
     amount of money and the fair market value of the property 
     received. Section 4941 also imposes a second level of taxes 
     at higher rates where an act of self-dealing has occurred and 
     the transaction is not corrected within a specified period of 
     time.

                               House Bill

       The House bill requires the Secretary of the Treasury to 
     establish an exemption procedure pursuant to which the 
     Secretary can grant a conditional or unconditional exemption 
     from the self- dealing prohibition of section 4941. The 
     Secretary is permitted to grant an exemption for any 
     disqualified person or transaction, or class of disqualified 
     persons or transactions, if such exemption is: (1) 
     administratively feasible, (2) in the interests of the 
     private foundation, and (3) protective of the rights of the 
     private foundation. The House bill requires that, prior to 
     granting such an exemption, the Secretary must: (1) require 
     that adequate notice be given to interested persons, (2) 
     publish notice in the Federal Register of the pendency of a 
     request for an exemption, and (3) afford interested persons 
     an opportunity to present their views.
       Effective date.--The House bill is effective for 
     transactions occurring after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

 D. Extend Declaratory Judgment Procedures to Non-501(c)(3) Tax-exempt 
 Organizations (sec. 1005 of the House bill and sec. 7428 of the Code)

                              Present Law

       In order for an organization to be granted tax exemption as 
     a charitable entity described in section 501(c)(3), it 
     generally must file an application for recognition of 
     exemption with the IRS and receive a favorable determination 
     of its status. Similarly, for most organizations, a 
     charitable organization's eligibility to receive tax-
     deductible contributions is dependent upon its receipt of a 
     favorable determination from the IRS. In general, a section 
     501(c)(3) organization can rely on a determination letter or 
     ruling from the IRS regarding its tax-exempt status, unless 
     there is a material change in its character, purposes, or 
     methods of operation. In cases where an organization violates 
     one or more of the requirements for tax exemption under 
     section 501(c)(3), the IRS is authorized to revoke an 
     organization's tax exemption, notwithstanding an earlier 
     favorable determination.
       In situations where the IRS denies an organization's 
     application for recognition of exemption under section 
     501(c)(3) or fails to act on such application, or where the 
     IRS informs a section 501(c)(3) organization that it is 
     considering revoking or adversely modifying its tax- exempt 
     status, present law authorizes the organization to seek a 
     declaratory judgment regarding its tax status (sec. 7428). 
     Section 7428 provides a remedy in the case of a dispute 
     involving a determination by the IRS with respect to: (1) the 
     initial qualification or continuing qualification of an 
     organization as a charitable organization

[[Page 19674]]

     for tax exemption purposes or for charitable contribution 
     deduction purposes; (2) the initial classification or 
     continuing classification of an organization as a private 
     foundation; (3) the initial classification or continuing 
     classification of an organization as a private operating 
     foundation; or (4) the failure of the IRS to make a 
     determination with respect to (1), (2), or (3). A 
     ``determination'' in this context generally means a final 
     decision by the IRS affecting the tax qualification of a 
     charitable organization, although it also can include a 
     proposed revocation of an organization's tax-exempt status or 
     public charity classification. Section 7428 vests 
     jurisdiction over controversies involving such a 
     determination in the U.S. District Court for the District of 
     Columbia, the U.S. Court of Federal Claims, and the U.S. Tax 
     Court.
       Prior to utilizing the declaratory judgment procedure, an 
     organization must have exhausted all administrative remedies 
     available to it within the IRS. For the first 270 days after 
     a request for a determination is made, an organization is 
     deemed to not have exhausted its administrative remedies. 
     Provided that no determination is made during the 270-day 
     period, the organization may initiate an action for 
     declaratory judgment after the period has elapsed. If, 
     however, the IRS makes an adverse determination during the 
     270-day period, an organization may initiate a declaratory 
     judgment immediately. The 270-day period does not begin with 
     respect to applications for recognition of tax-exempt status 
     until the date a substantially completed application is 
     submitted.
       In contrast to the rules governing charities, it is a 
     disputed issue as to whether non-charities (i.e., 
     organizations not described in section 501(c)(3), including 
     trade associations, social welfare organizations, social 
     clubs, labor and agricultural organizations, and fraternal 
     organizations) are required to file an application with the 
     IRS to obtain a determination of their tax-exempt status. If 
     an organization voluntarily files an application for 
     recognition of exemption and receives a favorable 
     determination from the IRS, the determination of tax-exempt 
     status is usually effective as of the date of formation of 
     the organization if its purposes and activities during the 
     period prior to the date of the determination letter were 
     consistent with the requirements for exemption. However, if 
     the organization files an application for recognition of 
     exemption and later receives an adverse determination from 
     the IRS, the IRS may assert that the organization is subject 
     to tax on some or all of its income for open taxable years. 
     In addition, as with charitable organizations, the IRS may 
     revoke or modify an earlier favorable determination regarding 
     an organization's tax-exempt status.
       Under present law, a non-charity (i.e., an organization not 
     described in section 501(c)(3)) may not seek a declaratory 
     judgment with respect to an IRS determination regarding its 
     tax- exempt status. The only remedies available to such an 
     organization are to petition the U.S. Tax Court for relief 
     following the issuance of a notice of deficiency or to pay 
     any tax owed and sue for refund in federal district court or 
     the U.S. Court of Federal Claims.

                               House Bill

       The House bill extends declaratory judgment procedures 
     similar to those currently available only to charities under 
     section 7428 to other section 501(c) determinations. 
     Jurisdiction over controversies involving such determinations 
     is limited to the United States Tax Court.
       Effective date.--The House bill is effective for pleadings 
     with respect to determinations made after the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

 E. Modify Section 512(b)(13) (sec. 1006 of the bill and, Sec. 802 of 
        the Senate amendment and section 512(b)(13) of the Code)

                              Present Law

       In general, interest, rents, royalties and annuities are 
     excluded from the unrelated business income (``UBI'') of tax-
     exempt organizations. However, section 512(b)(13) treats 
     otherwise excluded rent, royalty, annuity, and interest 
     income as UBI if such income is received from a taxable or 
     tax-exempt subsidiary that is 50 percent controlled by the 
     parent tax-exempt organization. In the case of a stock 
     subsidiary, ``control'' means ownership by vote or value of 
     more than 50 percent of the stock. In the case of a 
     partnership or other entity, control means ownership of more 
     than 50 percent of the profits, capital or beneficial 
     interests. In addition, present law applies the constructive 
     ownership rules of section 318 for purposes of section 
     512(b)(13). Thus, a parent exempt organization is deemed to 
     control any subsidiary in which it holds more than 50 percent 
     of the voting power or value, directly (as in the case of a 
     first-tier subsidiary) or indirectly (as in the case of a 
     second-tier subsidiary).
       Under present law, interest, rent, annuity, or royalty 
     payments made by a controlled entity to a tax-exempt 
     organization are includable in the latter organization's UBI 
     and are subject to the unrelated business income tax to the 
     extent the payment reduces the net unrelated income (or 
     increases any net unrelated loss) of the controlled entity.
       The Taxpayer Relief Act of 1997 (the ``1997 Act'') made 
     several modifications, as described above, to the control 
     requirement of section 512(b)(13). In order to provide 
     transitional relief, the changes made by the 1997 Act do not 
     apply to any payment received or accrued during the first two 
     taxable years beginning on or after the date of enactment of 
     the 1997 Act (August 5, 1997) if such payment is received or 
     accrued pursuant to a binding written contract in effect on 
     June 8, 1997, and at all times thereafter before such payment 
     (but not pursuant to any contract provision that permits 
     optional accelerated payments).

                               House Bill

       The House bill provides that the general rule of section 
     512(b)(13), which includes interest, rent, annuity, or 
     royalty payments made by a controlled entity to a tax-exempt 
     organization in the latter organization's UBI, applies only 
     to the portion of payments received in a taxable year that 
     exceed the amount of the specified payment which would have 
     been paid if such payment had been determined under the 
     principles of section 482. Thus, if a payment of rent by a 
     controlled subsidiary to its tax-exempt parent organization 
     exceeds fair market value, the excess amount of such payment 
     over fair market value (as determined in accordance with 
     section 482) is included in the parent organizations's UBI. 
     The House bill also imposes an addition to tax of 20 percent 
     of the excess amount of any such payment.
       The House bill provides relief for payments under contracts 
     that are still subject to the binding contract transition 
     rule of the 1997 Act on the date of enactment of the proposal 
     (but for which the transition rule would expire prior to the 
     effective date of the proposal) by extending the transition 
     rule until December 31, 1999.
       Effective date.--The provision providing an exception from 
     the general rule of section 512(b)(13) for interest, rent, 
     annuity, or royalty payments from controlled subsidiaries 
     that do not exceed fair market value generally applies to 
     payments received or accrued after December 31, 1999.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 F. Simplify Lobbying Expenditure Limitations (sec. 803 of the Senate 
            amendment and secs. 501(h) and 4911 of the Code)

                              Present Law

       An organization does not qualify for tax-exempt status as a 
     charitable organization under section 501(c)(3) unless no 
     substantial part of its activities constitutes carrying on 
     propaganda or otherwise attempting to influence legislation 
     (commonly referred to as ``lobbying''). For purposes of 
     determining whether legislative activities are a substantial 
     part of a public charity's overall functions, a public 
     charity may elect either the ``substantial part'' test or the 
     ``expenditure'' test.
       The substantial part test uses a facts and circumstances 
     approach to measure the permissible level of legislative 
     activities. Because there is no statutory or regulatory 
     guidance, it is not clear whether the determination is based 
     on the organization's activities, its expenditures, or both.
       As an alternative to the substantial part test, the 
     expenditure test permits public charities to elect to be 
     governed by specific expenditure limitations on their 
     lobbying activities under section 501(h). The expenditure 
     test establishes two expenditure limits: one restricts the 
     total amount of lobbying expenditures the public charity can 
     make, the other restricts grass roots lobbying expenditures 
     as a subset of total lobbying expenditures. A public 
     charity's total lobbying expenditures for a year are the sum 
     of its expenditures for direct lobbying and its expenditures 
     for grass roots lobbying.
       Direct lobbying is defined as an attempt to influence 
     legislation through communication with a member or staff of a 
     legislative body or with any other government official or 
     employee who may participate in the formulation of 
     legislation. The communication will constitute direct 
     lobbying only if such communication ``refers to specific 
     legislation'' and reflects a view on such legislation (Treas. 
     Reg. sec. 56.4911-2(b)(1)(ii)). Grass roots lobbying is 
     defined as an attempt to influence legislation through a 
     communication with members of the public that seeks to affect 
     their opinions about the legislation (Treas. Reg. sec. 
     56.4911-2(b)(2)(i)). The communication must refer to specific 
     legislation, reflect a view on the legislation, and encourage 
     the recipient of the communication to take action with 
     respect to the legislation.
       Under the expenditure test, a public charity will be denied 
     exemption under section 501(c)(3) because of lobbying 
     activities only if it normally either (1) makes total 
     lobbying expenditures in excess of the ``lobbying ceiling 
     amount'' or (2) makes grass roots expenditures in excess of 
     the ``grass roots ceiling amount'' (sec. 501(h)(1)). The 
     lobbying ceiling amount is 150 percent of the organization's 
     ``lobbying nontaxable amount'' and

[[Page 19675]]

     the grass roots ceiling amount is 150 percent of the ``grass 
     roots nontaxable amount.'' The lobbying nontaxable amount is 
     the lesser of $1 million or an amount determined as a 
     percentage of an organization's exempt purpose expenditures. 
     The grass roots nontaxable amount is 25 percent of the 
     organization's lobbying nontaxable amount for that taxable 
     year. A public charity that has elected the expenditure test 
     and that exceeds either or both of these limitations is 
     subject to a 25 percent tax on the greater of the two excess 
     lobbying expenditures.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment removes the separate percentage 
     limitation on grass roots lobbying expenditures. 
     Consequently, public charities that have elected the 
     expenditure test under section 501(h) are subject to an 
     expenditure limitation only on their total lobbying 
     expenditures.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

G. Tax-Free Withdrawals From IRAs for Charitable Purposes (sec. 804 of 
           the Senate amendment and sec. 408(d) of the Code)

                              Present Law

       Under present law, individuals may make deductible 
     contributions to a traditional individual retirement 
     arrangement (``IRA''). Amounts in an IRA are includible in 
     income when withdrawn (except to the extent the withdrawal 
     represents a return of after-tax contributions). Includible 
     amounts withdrawn before attainment of age 59\1/2\ are 
     subject to an additional 10- percent early withdrawal tax, 
     unless an exception applies.
       Generally, a taxpayer who itemizes deductions may deduct 
     cash contributions to charity, as well as the fair market 
     value of contributions of property. The amount of the 
     deduction otherwise allowable for the taxable year with 
     respect to a charitable contribution may be reduced, 
     depending on the type of property contributed, the type of 
     charitable organization to which the property is contributed, 
     and the income of the taxpayer.
       For donations of cash by individuals, total deductible 
     contributions to public charities may not exceed 50 percent 
     of a taxpayer's adjusted gross income (``AGI'') for a taxable 
     year. To the extent a taxpayer has not exceeded the 50-
     percent limitation, contributions of cash to private 
     foundations and certain other nonprofit organizations and 
     contributions of capital gain property to public charities 
     generally may be deducted up to 30 percent of the taxpayer's 
     AGI. If a taxpayer makes a contribution in one year which 
     exceeds the applicable 50-percent or 30-percent limitation, 
     the excess amount of the contribution may be carried over and 
     deducted during the next five taxable years.
       In addition to the percentage limitations imposed 
     specifically on charitable contributions, present law imposes 
     a reduction on most itemized deductions, including charitable 
     contribution deductions, for taxpayers with adjusted gross 
     income in excess of a threshold amount, which is indexed 
     annually for inflation. The threshold amount for 1999 is 
     $126,600 ($63,300 for married individuals filing separate 
     returns). For those deductions that are subject to the limit, 
     the total amount of itemized deductions is reduced by 3 
     percent of AGI over the threshold amount, but not by more 
     than 80 percent of itemized deductions subject to the limit. 
     The effect of this reduction may be to limit a taxpayer's 
     ability to deduct some of his or her charitable 
     contributions.

                               House Bill

       No provision.

                            Senate Amendment

       The provision provides an exclusion from gross income for 
     qualified charitable distributions from an IRA: (1) to a 
     charitable organization to which deductible contributions can 
     be made; (2) to a charitable remainder annuity trust or 
     charitable remainder unitrust; (3) to a pooled income fund 
     (as defined in sec. 642(c)(5)); or (4) for the issuance of a 
     charitable gift annuity. The exclusion applies with respect 
     to distributions described in (2), (3), or (4) only if no 
     person holds an income interest in the trust, fund, or 
     annuity attributable to such distributions other than the IRA 
     owner, his or her spouse, or a charitable organization.
       In determining the character of distributions from a 
     charitable remainder annuity trust or a charitable remainder 
     unitrust to which a qualified charitable distribution from an 
     IRA was made, the charitable remainder trust is required to 
     treat as ordinary income the portion of the distribution from 
     the IRA to the trust which would have been includible in 
     income but for the provision, and as corpus any remaining 
     portion of the distribution. Similarly, in determining the 
     amount includible in gross income by reason of a payment from 
     a charitable gift annuity purchased with a qualified 
     charitable distribution from an IRA, the taxpayer is not 
     permitted to treat the portion of the distribution from the 
     IRA used to purchase the annuity as an investment in the 
     annuity contract.
       A qualified charitable distribution is any distribution 
     from an IRA which is made after age 70\1/2\, which qualifies 
     as a charitable contribution (within the meaning of sec. 
     170(c)), and which is made directly to the charitable 
     organization or to a charitable remainder annuity trust, 
     charitable remainder unitrust, pooled income fund, or 
     charitable gift annuity (as described above).\88\ A taxpayer 
     is not permitted to claim a charitable contribution deduction 
     for amounts transferred from his or her IRA to charity or to 
     a trust, fund, or annuity that, because of the provision, are 
     excluded from the taxpayer's income.
---------------------------------------------------------------------------
     \88\ The Committee intends that, in the case of transfer to a 
     trust, fund, or annuity, the full amount distributed from an 
     IRA will meet the definition of a qualified charitable 
     distribution if the charitable organization's interest in the 
     distribution would qualify as a charitable contribution under 
     section 170.
---------------------------------------------------------------------------
       Effective date.--The provision is effective with respect to 
     distributions after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that an exclusion from gross income for a qualified 
     charitable distribution from an IRA is available only for a 
     distribution made to a charitable organization to which 
     deductible contributions can be made, and not for 
     distributions to charitable remainder trusts, pooled income 
     funds, or for the issuance of charitable gift annuities.
       Effective date.--The provision is effective for 
     distributions in taxable years beginning after December 31, 
     2002.

     H. Provide Exclusion for Mileage Reimbursements by Charitable 
  Organizations (sec. 1302 of the House bill, sec. 805 of the Senate 
               amendment, and new sec. 138A of the Code)

                              Present Law

       In computing taxable income, individuals who do not elect 
     the standard deduction may claim itemized deductions, 
     including a deduction (subject to certain limitations) for 
     charitable contributions or gifts made during the taxable 
     year to a qualified charitable organization or governmental 
     entity (sec. 170). Individuals who elect the standard 
     deduction may not claim a deduction for charitable 
     contributions made during the taxable year.
       No charitable contribution deduction is allowed for a 
     contribution of services. However, unreimbursed expenditures 
     made incident to providing donated services to a qualified 
     charitable organization--such as out-of-pocket transportation 
     expenses necessarily incurred in performing donated 
     services--may constitute a deductible contribution (Treas. 
     Reg. sec. 1.170A-1(g)).\89\ However, no charitable 
     contribution deduction is allowed for traveling expenses 
     (including expenses for meals and lodging) while away from 
     home, whether paid directly or by reimbursement, unless there 
     is no significant element of personal pleasure, recreation, 
     or vacation in such travel (sec. 170(j)). Moreover, a 
     taxpayer may not deduct as a charitable contribution out-of-
     pocket expenditures incurred on behalf of a charity if such 
     expenditures are made for the purposes of influencing 
     legislation (sec. 170(f)(6)).
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     \89\ Treasury Regulation section 1.170A-1(g) allows taxpayers 
     to deduct only their own unreimbursed expenses incurred in 
     performing services for a qualified charitable organization, 
     and not expenses incident to a third party's performance of 
     services. See Davis v. United States, 495 U.S. 472 (1990).
---------------------------------------------------------------------------
       For purposes of computing the charitable contribution 
     deduction for the use of a passenger automobile (including 
     vans, pickups, and panel trucks) in connection with providing 
     donated services to a qualified charitable organization, the 
     standard mileage rate is 14 cents per mile (sec. 170(i)). 
     Volunteer drivers who are reimbursed for mileage expenses 
     have taxable income to the extent the reimbursement exceeds 
     14 cents per mile.

                               House Bill

       Under the House bill, reimbursement by an entity or 
     organization described in section 170(c) (including public 
     charities and private foundations) for the costs of using an 
     automobile in connection with providing donated services is 
     excludable from the gross income of the volunteer, provided 
     that (1) reimbursement does not exceed the rate prescribed 
     for business use, and (2) applicable recordkeeping 
     requirements are satisfied. The expenditures for which a 
     volunteer is reimbursed must be expenditures for which a 
     deduction would otherwise be allowable under section 170. The 
     bill does not permit a volunteer to exclude a reimbursement 
     from income if the volunteer claims a deduction or credit 
     with respect to his or her automobile transportation expenses 
     incurred in connection with providing donated services.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

[[Page 19676]]



I. Charitable Contribution Deduction for Certain Expenses in Support of 
 Native Alaskan Subsistence Whaling (sec. 806 of the Senate amendment 
                       and sec. 170 of the Code)

                              Present Law

       In computing taxable income, individuals who do not elect 
     the standard deduction may claim itemized deductions, 
     including a deduction (subject to certain limitations) for 
     charitable contributions or gifts made during the taxable 
     year to a qualified charitable organization or governmental 
     entity (sec. 170). Individuals who elect the standard 
     deduction may not claim a deduction for charitable 
     contributions made during the taxable year.
       No charitable contribution deduction is allowed for a 
     contribution of services. However, unreimbursed expenditures 
     made incident to the rendition of services to an 
     organization, contributions to which are deductible, may 
     constitute a deductible contribution (Treas. Reg. sec. 
     1.170A-1(g)). Specifically, section 170(j) provides that no 
     charitable contribution deduction is allowed for traveling 
     expenses (including amounts expended for meals and lodging) 
     while away from home, whether paid directly or by 
     reimbursement, unless there is no significant element of 
     personal pleasure, recreation, or vacation in such travel.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment allows individuals to claim a 
     deduction under section 170 not exceeding $7,500 per taxable 
     year for certain expenses incurred in carrying out sanctioned 
     whaling activities. The deduction is available only to an 
     individual who is recognized by the Alaska Eskimo Whaling 
     Commission as a whaling captain charged with the 
     responsibility of maintaining and carrying out sanctioned 
     whaling activities. The deduction is available for reasonable 
     and necessary expenses paid by the taxpayer during the 
     taxable year for (1) the acquisition and maintenance of 
     whaling boats, weapons, and gear used in sanctioned whaling 
     activities, (2) the supplying of food for the crew and other 
     provisions for carrying out such activities, and (3) storage 
     and distribution of the catch from such activities.
       For purposes of the provision, the term ``sanctioned 
     whaling activities'' means subsistence bowhead whale hunting 
     activities conducted pursuant to the management plan of the 
     Alaska Eskimo Whaling Commission. No inference is intended 
     regarding the deductibility of any whaling expenses incurred 
     in a taxable year ending before January 1, 2000.
       Effective date.--The Senate amendment is effective for 
     taxable years ending after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

J. Charitable Giving Provisions (secs. 807-809 of the Senate amendment 
                   and secs. 170 and 63 of the Code)

                              Present Law

       Generally, a taxpayer who itemizes deductions may deduct 
     cash contributions to charity made within a taxable year 
     (generally, January 1-December 31 for calendar-year 
     taxpayers), as well as the fair market value of contributions 
     of property. The amount of the deduction otherwise allowable 
     for the taxable year with respect to a charitable 
     contribution may be reduced, depending on the type of 
     property contributed, the type of charitable organization to 
     which the property is contributed, and the income of the 
     taxpayer. Taxpayers who do not itemize their deductions may 
     not claim a deduction for charitable contributions made 
     during the taxable year.
       For donations of cash by individuals, total deductible 
     contributions to public charities, private operating 
     foundations, and certain types of private non-operating 
     foundations may not exceed 50 percent of a taxpayer's 
     ``contribution base,'' which is typically the taxpayer's 
     adjusted gross income (``AGI''), for a taxable year (sec. 
     170(b)(1)). To the extent a taxpayer has not exceeded the 50-
     percent limitation, contributions of cash to private 
     foundations and certain other charitable organizations and 
     contributions of capital gain property to public charities 
     generally may be deducted up to 30 percent of the taxpayer's 
     contribution base. If a taxpayer makes a contribution in one 
     year which exceeds the applicable 50-percent or 30-percent 
     limitation, the excess amount of the contribution may be 
     carried over and deducted during the next five taxable years.
       The maximum charitable contribution deduction that may be 
     claimed by a corporation for any one taxable year is limited 
     to 10 percent of the corporation's taxable income for that 
     year. (sec. 170(b)(2)).

                               House Bill

       No provision.

                            Senate Amendment

     Deadline for contributions to low-income schools extended 
         until return filing date
       The Senate amendment allows taxpayers to claim a charitable 
     contribution deduction for donations to public, private, and 
     parochial low-income elementary and secondary schools made 
     after the end of the taxable year and on or before the date 
     for filing the taxpayer's Federal income tax return (not 
     including extensions). For example, a calendar-year taxpayer 
     may make a contribution to a qualifying school on March 23, 
     2001, and claim a charitable contribution deduction for that 
     gift on his or her Federal income tax return for the year 
     2000 filed on April 15, 2001. \90\ For purposes of the 
     provision, a low-income school is defined as one where more 
     than 50 percent of the students qualify for free or reduced 
     price lunches.
---------------------------------------------------------------------------
     \90\ The taxpayer will not be permitted to claim a deduction 
     for the same gift on his or her 2001 Federal income tax 
     return filed in 2002.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 1999.
     Charitable contribution deduction for non-itemizers
       For 2005 and 2006, the Senate amendment allows taxpayers 
     who do not itemize their deductions to claim a deduction for 
     charitable contributions in addition to the standard 
     deduction. The deduction is limited to $50 for individual 
     taxpayers and $100 for taxpayers filing joint returns. The 
     deduction is available for any donation that is allowable as 
     a deductible charitable contribution under section 170(a). 
     Thus, contributions of cash, as well as tangible personal 
     property (e.g., clothing and furniture), are eligible for the 
     deduction.
       Effective date.--The Senate amendment is effective for 
     taxable years 2005 and 2006.
     Increase AGI percentage limits for individuals
       The Senate amendment phases up the percentage limitations 
     applicable to charitable contributions of cash and capital 
     gain property to public charities and certain other 
     charitable entities (organizations and entities described in 
     section 170(b)(1)(A)) by individuals. Beginning in 2002, the 
     Senate amendment increases the 50-percent and 30-percent 
     limitations by 2 percent per year until the limitations are 
     equal to 60 percent and 30 percent, respectively, in 2006. In 
     2007, the limitations are increased to 70 percent and 50 
     percent, respectively.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2001.
     Increase AGI percentage limits for corporations
       The Senate amendment phases up the percentage limitation 
     applicable to charitable contributions by corporations. 
     Beginning in 2002, the Senate amendment increases the 10- 
     percent limitation by 2 percent per year until the limitation 
     is equal to 20 percent in 2006.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2001.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment charitable giving provisions.

  K. Modify Excess Business Holdings Rules for Publicly Traded Stock 
      (sec. 810 of the Senate amendment and sec. 4943 of the Code)

                              Present Law

       Private foundations, which are charitable organizations 
     that do not qualify as public charities, are subject to 
     certain restrictions on their operations. Violations of these 
     restrictions may subject the foundation and, in some cases, 
     their foundation managers to excise taxes. One such 
     restriction prohibits a private foundation from owning more 
     than specified equity interests in business enterprises, 
     including corporations, partnerships, estates, or trusts 
     (sec. 4943). A private foundation, together with all 
     disqualified persons, generally may not hold more than 20 
     percent of a corporation's voting stock, a partnership's 
     profits interest, or similar interest in a business 
     enterprise. \91\ The limit increases to 35 percent if 
     effective control of the business is in the hands of one or 
     more persons who are not disqualified persons. These rules do 
     not apply if the foundation owns less than 2 percent of a 
     business, or if the business engages in activities that are 
     substantially related to the foundation's charitable purpose.
---------------------------------------------------------------------------
     \91\ A disqualified person is a person (including an 
     individual, corporation, partnership, trust, or estate) that 
     has a particularly influential relationship with respect to a 
     private foundation. Disqualified persons include: (1) 
     substantial contributors to a foundation (e.g., the founder 
     of a foundation); (2) foundation managers (officers, 
     directors, or trustees of a foundation, or an individual 
     having powers or responsibilities similar to these 
     positions); (3) persons who own more than a 20 percent 
     interest in an entity (corporation, partnership, trust, or 
     other unincorporated enterprise) that is a disqualified 
     person with respect to a foundation; (4) family members of 
     persons described in (1), (2), and (3); (5) corporations, 
     partnerships, trusts, or estates that are more than 35 
     percent owned by persons described in (1), (2), (3), and (4); 
     and (6) only for purposes of the self-dealing rules of 
     section 4943, government officials at certain levels.
---------------------------------------------------------------------------
       If a foundation acquires business holdings other than by 
     purchase (i.e., by gift or bequest), and the holdings would 
     result in the foundation having excess business holdings, the 
     foundation effectively has five years to reduce those 
     holdings to permissible levels. In the case of an unusually 
     large gift or bequest, the initial five-year disposition 
     period

[[Page 19677]]

     may be extended by the Internal Revenue Service for an 
     additional five years if the foundation is able to 
     demonstrate that it has made diligent efforts to dispose of 
     the excess holdings within the initial five-year period and 
     that disposition within that period was not possible (except 
     at a price substantially below fair market value) because of 
     the size and complexity or diversity of the holdings.
       The initial tax imposed on a foundation with excess 
     business holdings is 5 percent of the value of such holdings 
     during the taxable year. The amount of tax is computed with 
     respect to the greatest amount of excess business holdings 
     during the taxable year. If the foundation fails to divest 
     itself of the excess holdings within a certain period of 
     time, an additional tax equal to 200 percent of their value 
     is imposed on the excess business holdings remaining at the 
     end of the period.
       Present law also prohibits transactions between private 
     foundations and disqualified persons by imposing excise taxes 
     when disqualified persons engage in acts of ``self-dealing'' 
     with a private foundation (sec. 4941). Acts of self-dealing 
     include any direct or indirect: (1) sale, exchange, or 
     leasing of property between a private foundation and a 
     disqualified person, (2) lending of money or extensions of 
     credit between a private foundation and a disqualified 
     person, (3) furnishing of goods, services, or facilities 
     between a private foundation and a disqualified person, (4) 
     payment of compensation (or payment or reimbursement of 
     expenses) by a private foundation to a disqualified person, 
     (5) transfer to, or use by or for the benefit of, a 
     disqualified person of the income or assets of a private 
     foundation, and (6) agreement by a private foundation to make 
     any payment of money or other property to a government 
     official. \92\ There is no exception from the prohibition on 
     acts of self-dealing for inadvertent violations, and even 
     transactions which arguably may benefit the private 
     foundation may be subject to tax as an act of self-dealing.
---------------------------------------------------------------------------
     \92\ There are certain limited transactions between 
     disqualified persons and private foundations that are defined 
     by statute not to constitute acts of self-dealing.
---------------------------------------------------------------------------
       Self-dealing excise taxes are imposed on a disqualified 
     person who has engaged in a self- dealing transaction, and on 
     any foundation manager who knowingly participates in the 
     transaction.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides an exception to the excess 
     business holdings rules of section 4943 in certain 
     circumstances. Under the Senate amendment, for the taxable 
     year 2007, a private foundation and all disqualified persons 
     are permitted to own up to 40 percent of the voting stock and 
     40 percent in value of all outstanding shares of all classes 
     of stock in an incorporated business enterprise if the stock 
     held by the foundation and disqualified persons is publicly 
     traded stock for which market quotations are readily 
     available. For the taxable year 2008 and thereafter, the 
     percentage of stock that may be owned by a private foundation 
     and all disqualified persons for purposes of this provision 
     increases to 49 percent.
       The Senate amendment limits the extent to which 
     disqualified persons with respect to the foundation can 
     engage in transactions with up to 49-percent owned 
     corporations. Disqualified persons are not permitted to 
     receive compensation from the corporation or to engage in any 
     act with the corporation that would constitute self-dealing 
     under section 4941 if the corporation were a private 
     foundation and the disqualified persons were disqualified 
     persons with respect to such corporation. Disqualified 
     persons may not own, in the aggregate, more than 2 percent of 
     the voting stock and not more than 2 percent in value of all 
     outstanding shares of all classes of stock in such 
     corporation. Finally, an audit committee of the board of 
     directors (consisting of a majority of persons who are not 
     disqualified persons) of each corporation that is up to 49-
     percent owned by a private foundation must certify in writing 
     to the foundation that the committee is not aware, after due 
     inquiry, that any disqualified person has received 
     compensation from the corporation or has engaged in an act of 
     self-dealing with the corporation. This certification must be 
     filed by the private foundation with its annual information 
     return.
       Effective date.--The provision is effective for foundations 
     established by bequest of decedents dying after December 31, 
     2006.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

L. Certain Costs of Private Foundation in Removing Hazardous Substances 
 Treated as Qualifying Distribution (sec. 811 of the Senate amendment 
                       and sec. 4942 of the Code)

                              Present Law

       Tax-exempt private foundations generally are required to 
     make annual ``qualifying distributions'' of a specified 
     minimum amount called the ``distributable amount'' (sec. 
     4942). The ``distributable amount'' is an amount equal to 5 
     percent of the fair market value of the foundation's 
     investment assets for the year, reduced by (1) any excise tax 
     on the foundation's investment income (under sec. 4940), (2) 
     any tax on unrelated business taxable income (under sec. 
     511), and (3) by carryovers of excess distributions from 
     prior years. ``Qualifying distributions'' include direct 
     expenditures to accomplish charitable purposes and grants to 
     public charities or private operating foundations. In 
     addition, if certain requirements are met, a qualifying 
     distribution also may include amounts ``set aside'' to be 
     paid with five years for a specific charitable project.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, the distributable amount of a 
     private foundation for purposes of section 4942 is reduced by 
     any amounts paid or incurred for (1) investigatory costs, (2) 
     direct costs of removal, and (3) costs of remedial action 
     with respect to a hazardous substance released at a facility 
     which was owned or operated by the private foundation. The 
     provision is limited to a facility that was transferred to 
     the foundation before December 11, 1980, for which active 
     operation by the foundation was terminated before December 
     12, 1980. In addition, the provision does not apply to costs 
     that were incurred pursuant to a pending order issued to the 
     foundation unilaterally by the President or the President's 
     assignee under section 106 of the Comprehensive Response, 
     Compensation and Liability Act, or pursuant to a 
     nonconsensual judgement against the foundation in a 
     governmental costs recovery action under section 107 of such 
     Act. For purpose of this provision, ``hazardous substance'' 
     has the meaning given to such term by section 9601(14) of the 
     Comprehensive Environmental Compensation and Liability Act.
       Effective date.--Taxable years beginning after December 31, 
     1999.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

                 XI. REAL ESTATE TAX RELIEF PROVISIONS

 A. Provisions Relating to REITs ( secs. 1101-1106, 1111, 1121, 1131, 
 1141, and 1151 of the House bill, secs. 1021-1026, 1031, 1041, 1051, 
 1061 and 1071 of the Senate amendment, and secs. 852, 856, and 857 of 
                               the Code)

                              Present Law

       Real estate investment trust (``REITs'') are treated, in 
     substance, as pass-through entities under present law. Pass-
     through status is achieved by allowing the REIT a deduction 
     for dividends paid to its shareholders. REITs are restricted 
     to investing in passive investments primarily in real estate 
     and securities. Specifically, a REIT is required to receive 
     at least 95 percent of its income from real property rents 
     and from securities. Amounts received as impermissible 
     ``tenant services income'' are not treated as rents from real 
     property. In general, such amounts are for services rendered 
     to tenants that are not ``customarily furnished'' in 
     connection with the rental of real property. Rents for 
     certain personal property leased in connection with real 
     property are treated as rents from real property if the 
     adjusted basis of the personal property does not exceed 15 
     percent of the aggregate adjusted bases of the real and the 
     personal property. Special rules also permit amounts to be 
     received from certain ``foreclosure property,'' treated as 
     such for 3 years after the property is acquired by the REIT 
     in foreclosure after a default (or imminent default) on a 
     lease of such property or on indebtedness which such property 
     secured.
       A REIT is not treated as providing services that produce 
     impermissible tenant services income if such services are 
     provided by an independent contractor from whom the REIT does 
     not derive or receive any income. An independent contractor 
     is defined as a person who does not own, directly or 
     indirectly, more than 35 percent of the shares of the REIT. 
     Also, no more than 35 percent of the total shares of stock of 
     an independent contractor (or of the interests in assets or 
     net profits, if not a corporation) can be owned directly or 
     indirectly by persons owning 35 percent or more of the 
     interests in the REIT.
       A REIT is limited in the amount that it can own in other 
     corporations. Specifically, a REIT cannot own securities 
     (other than Government securities and certain real estate 
     assets) in an amount greater than 25 percent of the value of 
     REIT assets. In addition, it cannot own securities of any one 
     issuer representing more than 5 percent of the total value of 
     REIT assets or more than 10 percent of the voting securities 
     of any corporate issuer. Under an exception to this rule, a 
     REIT can own 100 percent of the stock of a corporation, but 
     in that case the income and assets of such corporation are 
     treated as income and assets of the REIT. Securities for 
     purposes of these rules are defined by reference to the 
     Investment Company Act of 1940. \93\
---------------------------------------------------------------------------
     \93\ 15 U.S.C. 80a-1 and following.
---------------------------------------------------------------------------
       A REIT is generally required to distribute 95 percent of 
     its income before the end of its taxable year, as deductible 
     dividends paid to shareholders. This rule is similar to a 
     rule for regulated investment companies (``RICs'') that 
     requires distribution of 90 percent of income. Both REITS and 
     RICs can make certain ``deficiency dividends'' after

[[Page 19678]]

     the close of the taxable year, and have these treated as made 
     before the end of the year. The regulations applicable to 
     REITS state that a distribution will be treated as a 
     ``deficiency dividend'' and thus as made before the end of 
     the prior taxable year, only to the extent the earnings and 
     profits for that year exceed the amount of distributions 
     actually made during the taxable year.
       A REIT that has been or has combined with a C corporation 
     will be disqualified if, as of the end of its taxable year, 
     it has accumulated earnings and profits from a non-REIT year. 
     A similar rule applies to regulated investment companies 
     (``RICs''). In the case of a REIT, any distribution made in 
     order to comply with this requirement is treated a being 
     first from pre-REIT accumulated earnings and profits. RICs do 
     not have a similar ordering rule.
       In the case of a RIC, under a provision entitled 
     ``procedures similar to deficiency dividend procedures'', any 
     distribution made within a specified period after 
     determination that the investment company did not qualify as 
     a RIC for the taxable year will, ``for purposes of applying 
     [the earnings and profits rule that forbids a RIC to have 
     non-RIC earnings and profits] to subsequent taxable years'', 
     be treated as applying to the RIC for the non-RIC year. The 
     REIT rules do not specify any particular separate treatment 
     of distributions made after the end of the taxable year for 
     purposes of the earnings and profits rule. Treasury 
     regulations under the REIT provisions state that 
     ``distribution procedures similar to those .-.-. for 
     regulated investment companies apply to non-REIT earnings and 
     profits of a real estate investment trust.''

                               House Bill

     Taxable REIT subsidiaries
       Under the provision, a REIT generally cannot own more than 
     10 percent of the total value of securities of a single 
     issuer, in addition to the present law rule that a REIT 
     cannot own more than 10 percent of the outstanding voting 
     securities of a single issuer.
       For purposes of the new 10-percent value test, securities 
     are generally defined to exclude safe harbor debt owned by a 
     REIT (as defined for purposes of sec. 1361(c)(5)(B)(i) and 
     (ii)) if the REIT (and any taxable REIT subsidiary of such 
     REIT) owns no other securities of the issuer. However, in the 
     case of a REIT that owns securities of a partnership, safe 
     harbor debt is excluded from the definition of securities 
     only if the REIT owns at least 20-percent or more of the 
     profits interest in the partnership. The purpose of the 
     partnership rule requiring a 20 percent profits interest is 
     to assure that if the partnership produces income that would 
     be disqualified income to the REIT, the REIT will be treated 
     as receiving a significant portion of that income directly, 
     even though it may also derive qualified interest income 
     through its safe harbor debt interest.
       An exception to the limitations on ownership of securities 
     of a single issuer applies in the case of a ``taxable REIT 
     subsidiary'' that meets certain requirements. To qualify as a 
     taxable REIT subsidiary, both the REIT and the subsidiary 
     corporation must join in an election. In addition, any 
     corporation (other than a REIT or a qualified REIT subsidiary 
     under section 856(i) that does not properly elect with the 
     REIT to be a taxable REIT subsidiary) of which a taxable REIT 
     subsidiary owns, directly or indirectly, more than 35 percent 
     of the vote or value is automatically treated as a taxable 
     REIT subsidiary. Securities (as defined in the Investment 
     Company Act of 1940) of taxable REIT subsidiaries could not 
     exceed 25 percent of the total value of a REIT's assets.
       A taxable REIT subsidiary can engage in certain business 
     activities that under present law could disqualify the REIT 
     because, but for the proposal, the taxable REIT subsidiary's 
     activities and relationship with the REIT could prevent 
     certain income from qualifying as rents from real property. 
     Specifically, the subsidiary can provide services to tenants 
     of REIT property (even if such services were not considered 
     services customarily furnished in connection with the rental 
     of real property), and can manage or operate properties, 
     generally for third parties, without causing amounts received 
     or accrued directly or indirectly by REIT for such activities 
     to fail to be treated as rents from real property.
       However, the subsidiary cannot directly or indirectly 
     operate or manage a lodging or healthcare facility. 
     Nevertheless, it can lease a qualified lodging facility (e.g, 
     a hotel) from the REIT (provided no gambling revenues were 
     derived by the hotel or on its premises); and the rents paid 
     are treated as rents from real property so long as the 
     lodging facility was operated by an independent contractor 
     for a fee. The subsidiary can bear all expenses of operating 
     the facility and receive all the net revenues, minus the 
     independent contractor's fee.
       For purposes of the rule that an independent contractor may 
     operate a qualified lodging facility, an independent 
     contractor will qualify so long as, at the time it enters 
     into the management agreement with the taxable REIT 
     subsidiary, it is actively engaged in the trade or business 
     of operating qualified lodging facilities for any person who 
     is not related to the REIT or the taxable REIT subsidiary. 
     The REIT may receive income from such an independent 
     contractor with respect to certain pre-existing leases.
       Also, the subsidiary generally cannot provide to any person 
     rights to any brand name under which hotels or healthcare 
     facilities are operated. An exception applies to rights 
     provided to an independent contractor to operate or manage a 
     lodging facility, if the rights are held by the subsidiary as 
     licensee or franchisee, and the lodging facility is owned by 
     the subsidiary or leased to it by the REIT.
       Interest paid by a taxable REIT subsidiary to the related 
     REIT is subject to the earnings stripping rules of section 
     163(j). Thus the taxable REIT subsidiary cannot deduct 
     interest in any year that would exceed 50 percent of the 
     subsidiary's adjusted gross income.
       If any amount of interest, rent, or other deductions of the 
     taxable REIT subsidiary for amounts paid to the REIT is 
     determined to be other than at arm's length (``redetermined'' 
     items) , an excise tax of 100 percent is imposed on the 
     portion that was excessive. ``Safe harbors'' are provided for 
     certain rental payments where the amounts are de minimis, 
     there is specified evidence that charges to unrelated parties 
     are substantially comparable, certain charges for services 
     from the taxable REIT subsidiary are separately stated, or 
     the subsidiary's gross income from the service is not less 
     than 150 percent of the subsidiary's direct cost in 
     furnishing the service.
       In determining whether rents are arm's length rents, the 
     fact that such rents do not meet the requirements of the 
     specified safe harbors shall not be taken into account. In 
     addition, rent received by a REIT shall not fail to qualify 
     as rents from real property by reason of the fact that all or 
     any portion of such rent is redetermined for purposes of the 
     excise tax.
       The Commissioner of Internal Revenue is to conduct a study 
     to determine how many taxable REIT subsidiaries are in 
     existence and the aggregate amount of taxes paid by such 
     subsidiaries. A report shall be submitted to the Congress 
     describing the results of such study.
     Health care REITS
       The provision permits a REIT to own and operate a health 
     care facility for at least two years, and treat it as 
     permitted ``foreclosure'' property, if the facility is 
     acquired by the termination or expiration of a lease of the 
     property. Extensions of the 2 year period can be granted.
     Conformity with regulated investment company rules
       Under the provision, the REIT distribution requirements are 
     modified to conform to the rules for regulated investment 
     companies. Specifically, a REIT is required to distribute 
     only 90 percent, rather than 95 percent, of its income.
     Definition of independent contractor
       If any class of stock of the REIT or the person being 
     tested as an independent contractor is regularly traded on an 
     established securities market, only persons who directly or 
     indirectly own 5 percent or more of such class of stock shall 
     be counted in determining whether the 35 percent ownership 
     limitations have been exceeded.
     Modification of earnings and profits rules for RICs and REITS
       The rule allowing a RIC to make a distribution after a 
     determination that it had failed RIC status, and thus meet 
     the requirement of no non-RIC earnings and profits in 
     subsequent years, is modified to clarify that, when the 
     reason for the determination is that the RIC had non- RIC 
     earnings and profits in the initial year, the procedure would 
     apply to permit RIC qualification in the initial year to 
     which such determination applied, in addition to subsequent 
     years.
       The RIC earnings and profits rules are also modified to 
     provide an ordering rule similar to the REIT rule, treating a 
     distribution to meet the requirements of no non-RIC earnings 
     and profits as coming first from the earliest earnings and 
     profits accumulated in any year for which the RIC did not 
     qualify as a RIC. In addition, the REIT deficiency dividend 
     rules are modified to apply the same earnings and profits 
     ordering rule to such dividends as other REIT dividends.
     Effective date
       The House bill is generally effective for taxable years 
     beginning after December 31, 2000. The provision with respect 
     to modification of earnings and profits rules is effective 
     for distributions after December 31, 2000.
       In the case of the provisions relating to permitted 
     ownership of securities of an issuer, special transition 
     rules apply. The new rules forbidding a REIT to own more than 
     10 percent of the value of securities of a single issuer do 
     not apply to a REIT with respect to securities held directly 
     or indirectly by such REIT on July 12, 1999, or acquired 
     pursuant to the terms of written binding contract in effect 
     on that date and at all times thereafter until the 
     acquisition. Also, securities received in a tax-free exchange 
     or reorganization, with respect to or in exchange for such 
     grandfathered securities would be grandfathered. This 
     transition ceases 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

[[Page 19679]]

     substantial asset, other than pursuant to a binding contract 
     in effect on such date and at all times thereafter, or in a 
     reorganization or transaction in which gain or loss is not 
     recognized by reason of section 1031 or 1033 of the Code. If 
     a corporation makes an election to become a taxable REIT 
     subsidiary, effective before January 1, 2004 and at a time 
     when the REIT's ownership is grandfathered under these rules, 
     the election is treated as a reorganization under section 
     368(a)(1)(A) of the Code.

                            Senate Amendment

       The Senate amendment is the same as the House bill with 
     certain clarifications and one additional provision.
     General clarifications
       The Senate amendment clarifies that straight-debt 
     securities of an individual issuer are not treated as 
     securities for purposes of the new prohibition on a REIT 
     owning 10 percent of the value of a single issuer.
       The Senate amendment clarifies the definition of 
     ``redetermined deductions'' for purposes of the 100 percent 
     excise tax, to indicate that these are deductions of the 
     taxable REIT subsidiary that would be reduced (not increased) 
     under the arm's length rules of section 482.
       The Senate amendment clarifies the application of the 
     transition rule permitting a REIT to own more than 10 percent 
     of the value of securities of an issuer if such securities 
     are held by the REIT on July 12, 1999. Under the Senate 
     amendment, the grandfathering of such securities ceases to 
     apply if the REIT acquires additional securities of that 
     issuer after that date, other than pursuant to a binding 
     contract in effect on that date and at all times thereafter, 
     or in a reorganization with another corporation the 
     securities of which are grandfathered.
     Rental income clarification
       The Senate amendment clarifies that rents paid to a REIT 
     are not generally qualified rents if the REIT owns more than 
     10 percent of the value, (as well as of the vote) of a 
     corporation paying the rents. The amendment clarifies that 
     the only exception is for rents that are paid by taxable REIT 
     subsidiaries and that also meet the limited rental exception 
     (where 90 percent of space is leased to third parties) or the 
     exception for certain lodging facilities (operated by an 
     independent contractor) specified in the House bill.
       Effective date.--The new 10 percent of value limitation for 
     purposes of defining qualified rents is effective for taxable 
     years beginning after December 31, 1999. There is an 
     exception for rents paid under a lease or pursuant to a 
     binding contract in effect on July 12, 1999 and at all times 
     thereafter.
     Provision regarding rental income from certain personal 
         property
       The Senate amendment modifies the present law rule that 
     permits certain rents from personal property to be treated as 
     real estate rental income if such personal property does not 
     exceed 15 percent of the aggregate of real and personal 
     property. The Senate amendment replaces the present law 
     comparison of the adjusted bases of properties with a 
     comparison based on fair market values.
       Effective date.--The provision regarding rental income from 
     certain personal property is effective for taxable years 
     beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The effective dates of the conference 
     agreement are the same as under the Senate amendment, except 
     that the effective dates of (i) the clarification that a 10 
     percent of value ownership limitation applies to certain 
     rents, and (2) the provision using a fair market value test 
     for rental income from certain personal property, are for 
     taxable years beginning after December 31, 2000 (rather than 
     after December 31, 1999).

B. Modify At-Risk Rules for Publicly Traded Nonrecourse Debt (sec. 1161 
           of the House bill and sec. 465(b)(6) of the Code)

                              Present Law

       Present law provides an at-risk limitation on losses from 
     business and income-producing activities, applicable to 
     individuals and certain closely held corporations (sec. 465). 
     Under the at-risk rules, a taxpayer generally is not 
     considered at risk with respect to borrowed amounts if the 
     taxpayer is not personally liable for repayment of the debt 
     (e.g., nonrecourse loans), and in certain other 
     circumstances.
       In the case of the activity of holding real property, 
     however, an exception is provided for qualified nonrecourse 
     financing that is secured by real property used in the 
     activity (sec. 465(b)(6)). The qualified nonrecourse 
     financing rules require, among other things, that the 
     financing be borrowed by the taxpayer from a qualified person 
     or from certain governmental entities. For this purpose, a 
     qualified person is one that is actively and regularly 
     engaged in the business of lending money (and that is not a 
     related person with respect to the taxpayer, is not a person 
     from whom the taxpayer acquired the property or a related 
     person, and is not a person that receives a fee with respect 
     to the taxpayer's investment or a related person (sec. 
     49(a)(1)(D)(iv)). A related person is one with certain types 
     of relationships to the taxpayer defined by statute (sec. 
     465(b)(3)(C)). The qualified nonrecourse financing rules also 
     require that the financing be secured by real property used 
     in the activity (sec. 465(b)(6)(A)).

                               House Bill

       The House bill modifies the rules relating to qualified 
     nonrecourse financing to provide that, in the case of an 
     activity of holding real property, a taxpayer is considered 
     at risk with respect to the taxpayer's share of certain 
     financing that is not borrowed from a person that is 
     regularly engaged in the business of lending money, and that 
     is not secured by real property used in the activity, if the 
     financing is qualified publicly traded debt.
       The financing may not be borrowed from a person that is a 
     related person with respect to the taxpayer, that is a person 
     from whom the taxpayer acquired the property or a related 
     person, or that is a person that receives a fee with respect 
     to the taxpayer's investment or a related person.
       Qualified publicly traded debt generally means any debt 
     instrument that is readily tradable on an established 
     securities market. However, qualified publicly traded debt 
     does not include any debt instrument, the yield to maturity 
     on which equals or exceeds the applicable Federal rate of 
     interest for the calendar month in which it is issued, plus 5 
     percentage points. The applicable Federal rate is the rate 
     determined under section 1274(d) with respect to the term of 
     the debt instrument. Under the provision, it is intended that 
     ``readily tradable on an established securities market'' have 
     the same meaning as under section 453(f)(5).
       Effective date.--The provision is effective for debt 
     instruments issued after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

 C. Qualified Lessee Construction Allowances Not Limited to Short-term 
Leases for Certain Retailers (sec. 1171 of the House bill and sec. 110 
                              of the Code)

                              Present Law

       Section 110 provides that the gross income of a lessee does 
     not include amounts received in cash (or treated as a rent 
     reduction) from a lessor under a short-term lease of retail 
     space for the purpose of the lessee's construction or 
     improvement of qualified long-term real property for use in 
     the lessee's trade or business at the retail space subject to 
     the short-term lease. The exclusion only applies to the 
     extent the allowance does not exceed the amount expended by 
     the lessee on the construction or improvement of qualified 
     long-term real property. For this purpose, ``qualified long-
     term real property'' means nonresidential real property that 
     is part of, or otherwise present at, retail space used by the 
     lessee and that reverts to the lessor at the termination of 
     the lease. A ``short-term lease'' means a lease or other 
     agreement for the occupancy or use of retail space for a term 
     of 15 years or less (as determined pursuant to sec. 
     168(i)(3)). ``Retail space'' means real property leased, 
     occupied, or otherwise used by the lessee in its trade or 
     business of selling tangible personal property or services to 
     the general public.
       The lessor must treat the amounts expended on the 
     construction allowance as nonresidential real property owned 
     by the lessor. The Secretary is granted the authority to 
     require reporting to ensure that both the lessor and lessee 
     treat such amounts as nonresidential real property owned by 
     the lessor.\94\
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     \94\ Section 110 provides for regulations to be issued 
     establishing the time and manner information must be provided 
     the Secretary concerning amounts received (or treated as a 
     rent reduction), amounts expended on qualified long-term real 
     property, and such other information as the Secretary deems 
     necessary to carry out the provision. These regulations have 
     not yet been issued.
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                               House Bill

       The provision eliminates the section 110 requirement that 
     the lease be for a term of 15 years or less in the case of 
     payment (or rent reduction) to a ``qualified retail 
     business.'' Payments by a lessor to such businesses for the 
     purpose of constructing or improving long-term real property 
     would not be included in the income of the lessee regardless 
     of the term of the lease, provided the payments are used for 
     such purpose.
       For this purpose, a qualified retail business would be 
     defined as a trade or business of selling tangible personal 
     property to the general public. A trade or business will not 
     fail to be considered a qualified retail business by reason 
     of sales of services to the general public if such sales are 
     incidental to the sale of tangible personal property (such as 
     tailoring services provided incidental to the sale of a suit 
     or dress) or are de minimis in amount. For this purpose, 
     services would be considered de minimis in amount if they 
     represent 10% or less of the gross receipts of the business 
     at the retail space subject to the lease.
       The provision does not eliminate the short-term lease 
     requirement in all situations that are otherwise eligible for 
     section 110 under present law. Section 110 presently applies

[[Page 19680]]

     (assuming the other standards are met) if the retail space of 
     the lessee will be used in the trade or business of selling 
     tangible personal property or services to the public. If the 
     lessee will earn more than 10% of the gross receipts of the 
     space from the sale of services (other than from services 
     that are incidental to the sale of tangible personal 
     property), section 110 will continue to be available only if 
     the lease is for a term of 15 years or less.
       Effective date.--The provision applies to leases entered 
     into after December 31, 1999. No inference is intended as to 
     the treatment of amounts that are not affected by the 
     provision.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

D. Exclusion From Gross Income for Certain Contributions to the Capital 
 of Certain Retailers (sec. 1172 of the House bill and sec. 118 of the 
                                 Code)

                              Present Law

       Section 118(a) provides that gross income does not include 
     any contribution to the capital of a corporation. The test 
     for determining whether a particular payment is a 
     contribution to capital is the intent or motive of the 
     transferor. The contribution (1) must become a part of the 
     recipient's capital structure; (2) may not be compensation 
     for a ``specific, quantifiable service''; (3) must be 
     bargained for; (4) must result in a benefit to the recipient; 
     and (5) ordinarily will contribute to the production of 
     additional income. United States v. Chicago, Burlington & 
     Quincy R.R., 412 U.S. 401, 411, 93 S. Ct. 2169, 2175, 37 L. 
     Ed. 2d 30 (1973).
       Two appellate courts have applied section 118(a) to 
     inducements paid by developers to retailers in exchange for 
     the agreement of the retailers to ``anchor'' future shopping 
     centers. Federated Department Stores v. Commissioner 51 TC 
     500 ( 1968), aff'd 426 F. 2d 417 (6th Cir., 1970), May 
     Department Stores Co. v. Commissioner, 33 TCM 1128 (1974), 
     aff'd 519 F. 2d 1154 (8th Cir., 1975). In both cases, the 
     courts held that the benefits anticipated by the developer 
     were speculative and intangible, and thus could not be 
     considered in payment for any particular service.
       The recipient taxpayer is allowed no basis in any property 
     it receives as a contribution to capital, or an property it 
     acquires within 12 months with the proceeds of a contribution 
     to capital (sec. 362).
       A portion of a single payment may qualify as a nontaxable 
     contribution to capital, while the remainder is considered to 
     be part of a taxable transaction. Where there are multiple 
     purposes to the payment, the payment may be examined to 
     determine what portion is eligible for section 118(a) 
     treatment. G.M. Trading Corporation v. Commissioner, 121 F. 
     3d 977 (5th Cir., 1997).

                               House Bill

       The provision establishes a safe harbor allowing certain 
     inducements received by retailers to be treated as nontaxable 
     contributions to capital. In order to qualify for the safe 
     harbor, the inducement must be in exchange for the retailer's 
     agreement to operate a qualified retail business at 
     particular location for a period of at least 15 years. The 
     retailer must, immediately after the receipt of the 
     contribution, own the land and structures to be used by the 
     taxpayer in carrying on the qualified retail business at the 
     agreed location and must satisfy an expenditure rule.
       The safe harbor does not apply if the contributor owns a 
     beneficial interest in property located on the premises of 
     the qualified retail business, other than de minimis amounts 
     of property associated with the operation of adjacent 
     property. For example, a developer may be the owner of the 
     pipes and related equipment making up the water system of a 
     shopping mall. Ownership of such property on premises owned 
     by the retailer is expected to be considered de minimis and 
     would not prevent the application of the safeharbor. On the 
     other hand, ownership of more than a de minimis amount of 
     assets or the ownership of assets disqualifies the inducement 
     from safeharbor treatment. For example, if a developer owns 
     and leases to a retailer the retailer's point of sale 
     equipment, any inducement paid by the developer to the 
     retailer will not qualify under the safeharbor as a 
     nontaxable contribution to capital.\95\ The rule applies to 
     property owned by the developer on the premises of the 
     retailer. The premises of the retailer is the area in which 
     the retailer holds out personal property for sale to the 
     general public. The premises of the retailer do not include 
     adjacent space, such as a parking facility under the store 
     which is owned and operated by the developer whose use is not 
     limited to customers of the taxpayer. The rule also does not 
     prevent the developer paying the inducement from owning a 
     beneficial interest in the retailers, or joining in a joint 
     venture with the retailer unless the joint venture involves 
     ownership of property on the premises of the retailer that 
     would prevent the use of the safeharbor if owned directly by 
     the developer.
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     \95\ Ownership of property on the premises of the retailer by 
     the developer does not automatically prevent an inducement 
     from qualifying as a nontaxable contribution to capital under 
     section 118(a), provided the taxpayer can establish the facts 
     required for that provision to apply.
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       The expenditure rule requires that, prior to the end of the 
     second taxable year after the year in the contribution was 
     received, the retailer spend an amount equal to the amount of 
     the contribution for the acquisition of land or structure, or 
     for the acquisition or construction of other property to be 
     used in the qualified retail business at the agreed location. 
     Accurate records would be required to be kept that establish 
     the satisfaction of the expenditure rule. It is not intended 
     that the retailer be required to trace specific expenditures 
     to the inducement.
       A qualified retail business is defined as a trade or 
     business of selling tangible personal property to the general 
     public. A trade or business will not fail to be considered a 
     qualified retail business by reason of sales of services to 
     the general public if such sales are incidental to the sale 
     of tangible personal property (such as tailoring services 
     provided incidental to the sale of a suit or dress) or are de 
     minimis in amount. For this purpose, services are considered 
     de minimis in amount if they represent 10 percent or less of 
     the gross receipts of the business at the retail space 
     subject to the lease.
       Anti-abuse rules are provided to prevent the use of the 
     safeharbor for amounts that are not intended by the parties 
     as contributions to capital. The Secretary is authorized to 
     allocate income and deductions, or to reduce the amount of 
     any contribution to capital under the safeharbor, in cases in 
     which it is established that above market rates have been 
     paid from the retailer to the developer in another 
     transaction. A rate is not expected to be considered to be 
     above market if it is the same on a square footage basis as 
     the rate charged other retailers at the same location. For 
     example, a developer charges all retailers in the mall a 
     common area maintenance charge. If this charge is equal to a 
     standard rate times the square footage of each store in the 
     mall, it will not be considered to be an above market rate 
     with respect to any single retailer.
       The Secretary is also authorized to allocate income and 
     deductions, or reduce the amount of any contribution to 
     capital, to the extent necessary to prevent the abuse of the 
     purposes of this section where the transaction takes place 
     between related parties. It is expected that this authority 
     will be used to prevent the conversion of nondepreciable or 
     longer lived property into costs that may be recovered over a 
     shorter period of time. For example, if a retailer who owns a 
     piece of land contributes that land to a joint venture and 
     then accept the land from the joint venture as an inducement 
     to operate a retail facility for 20 years an anchor for a new 
     mall, it is expected that the Secretary will use its 
     authority to reduce the amount of any contribution to capital 
     in a transaction between related parties to prevent the 
     application of the safeharbor. However, it is not intended 
     that the authority to will be used simply because the 
     retailer and a related party engage in transactions that are 
     concluded on an arm's-length basis and do not result in the 
     conversion of nondepreciable or longer lived assets into 
     costs that may be recovered over a shorter period of time.
       The provision does not limit the application of section 
     118(a) of present law. No inference is intended as to whether 
     any payment constitutes a nontaxable contribution to capital 
     under section 118(a) whether or not such payment qualifies 
     for the safeharbor provided by this provision.
       Effective date.--The provision is effective for 
     contributions received after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

   E. Increase the Low-Income Housing Tax Credit Cap and Make Other 
  Modifications (secs. 1331-1337 of the House Bill, sec. 1001 of the 
               Senate amendment and sec. 42 of the Code)

                              Present Law

     In general
       The low-income housing tax credit may be claimed over a 10-
     year period for the cost of rental housing occupied by 
     tenants having incomes below specified levels. The credit 
     percentage for newly constructed or substantially 
     rehabilitated housing that is not Federally subsidized is 
     adjusted monthly by the Internal Revenue Service so that the 
     10 annual installments have a present value of 70 percent of 
     the total qualified expenditures. The credit percentage for 
     new substantially rehabilitated housing that is Federally 
     subsidized and for existing housing that is substantially 
     rehabilitated is calculated to have a present value of 30 
     percent qualified expenditures.
     Credit cap
       The aggregate credit authority provided annually to each 
     State is $1.25 per resident, except in the case of projects 
     that also receive financing with proceeds of tax-exempt bonds 
     issued subject to the private activity bond volume limit and 
     certain carry-over amounts,

[[Page 19681]]


     Expenditure test
       Generally, the building must be placed in service in the 
     year in which it receives an allocation to qualify for the 
     credit. An exception is provided in the case where the 
     taxpayer has expended an amount equal to 10-percent or more 
     of the taxpayer's reasonably expected basis in the building 
     by the end of the calendar year in which the allocation is 
     received and certain other requirements are met.
     Basis of building eligible for the credit
       Buildings receiving assistance under the HOME investment 
     partnerships act (``HOME'') are not eligible for the enhanced 
     credit for buildings located in high cost areas (i.e., 
     qualified census tracts and difficult development areas). 
     Under the enhanced credit, the 70-percent and 30-percent 
     credit are increased to a 91-percent and 39-percent credit, 
     respectfully.
       Eligible basis is generally limited to the portion of the 
     building used by qualified low- income tenants for 
     residential living and some common areas.
     State allocation plans
       Each State must develop a plan for allocating credits and 
     such plan must include certain allocation criteria including: 
     (1) project location; (2) housing needs characteristics; (3) 
     project characteristics; (4) sponsor characteristics; (5) 
     participation of local tax-exempts; (6) tenant populations 
     with special needs; and (7) public housing waiting lists. The 
     State allocation plan must also give preference to housing 
     projects: (1) that serve the lowest income tenants; and (2) 
     that are obligated to serve qualified tenants for the longest 
     periods.
     Credit administration
       There are no explicit requirements that housing credit 
     agencies perform a comprehensive market study of the housing 
     needs of the low-income individuals in the area to be served 
     by the project, nor that such agency conduct site visits to 
     monitor for compliance with habitability standards.
     Stacking rule
       Authority to allocate credits remains at the State (as 
     opposed to local) government level unless State law provides 
     otherwise. \96\ Generally, credits may be allocated only from 
     volume authority arising during the calendar year in which 
     the building is placed in service, except in the case of: (1) 
     credits claimed on additions to qualified basis; (2) credits 
     allocated in a later year pursuant to an earlier binding 
     commitment made no later than the year in which the building 
     is placed in service; and (3) carryover allocations.
---------------------------------------------------------------------------
     \96\ For example, constitutional home rule cities in Illinois 
     are guaranteed their proportionate share of the $1.25 amount, 
     based on their population relative to that of the State as a 
     whole.
---------------------------------------------------------------------------
       Each State annually receives low-income housing credit 
     authority equal to $1.25 per State resident for allocation to 
     qualified low-income projects. \97\ In addition to this $1.25 
     per resident amount, each State's ``housing credit ceiling'' 
     includes the following amounts: (1) the unused State housing 
     credit ceiling (if any) of such State for the preceding 
     calendar year; \98\ (2) the amount of the State housing 
     credit ceiling (if any) returned in the calendar year; \99\ 
     and (3) the amount of the national pool (if any) allocated to 
     such State by the Treasury Department.
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     \97\ A State's population, for these purposes, is the most 
     recent estimate of the State's population released by the 
     Bureau of the Census before the beginning of the year to 
     which the limitation applies. Also, for these purposes, the 
     District of Columbia and the U.S. possessions (i.e., Puerto 
     Rico, the Virgin Islands, Guam, the Northern Marianas and 
     American Samoa) are treated as States.
     \98\ The unused State housing credit ceiling is the amount 
     (if positive) of the previous year's annual credit limitation 
     plus credit returns less the credit actually allocated in 
     that year.
     \99\ Credit returns are the sum of any amounts allocated to 
     projects within a State which fail to become a qualified low-
     income housing project within the allowable time period plus 
     any amounts allocated to a project within a State under an 
     allocation which is canceled by mutual consent of the housing 
     credit agency and the allocation recipient.
---------------------------------------------------------------------------
       The national pool consists of States' unused housing credit 
     carryovers. For each State, the unused housing credit 
     carryover for a calendar year consists of the excess (if any) 
     of the unused State housing credit ceiling for such year over 
     the excess (if any) of the aggregate housing credit dollar 
     amount allocated for such year over the sum of $1.25 per 
     resident and the credit returns for such year. The amounts in 
     the national pool are allocated only to a State which 
     allocated its entire housing credit ceiling for the preceding 
     calendar year, and requested a share in the national pool not 
     later than May 1 of the calendar year. The national pool 
     allocation to qualified States is made on a pro rata basis 
     equivalent to the fraction that a State's population enjoys 
     relative to the total population of all qualified States for 
     that year.
       The present-law stacking rule provides that a State is 
     treated as using its annual allocation of credit authority 
     ($1.25 per State resident) and any returns during the 
     calendar year followed by any unused credits carried forward 
     from the preceding year's credit ceiling and finally any 
     applicable allocations from the National pool.

                               House Bill

     Credit cap
       The $1.25 per capita cap is increased to $1.75 per capita. 
     This increase is phased-in by increasing the credit cap by 10 
     cents per capita each year for five years. The credit cap 
     would be: $1.35 in calendar year 2000; $1.45 in calendar 
     2001; $1.55 in calendar year 2002; $1.65 in calendar year 
     2003; and $1.75 in calendar year 2004. The $1.75 per capita 
     credit cap is indexed for inflation beginning in 2004.
     Expenditure test
       The bill allows a building which receives an allocation in 
     the second half of a calendar to qualify under the 10-percent 
     test if the taxpayer expends an amount equal to 10-percent or 
     more of the taxpayer's reasonably expected basis in the 
     building within six months of receiving the allocation 
     regardless of whether the 10-percent test is met by the end 
     of the calendar year.
     Basis of building eligible for the credit
       The bill makes three changes to the basis rules of the 
     credit. First, buildings receiving HOME assistance are made 
     eligible for the enhanced credit. Second, the definition of 
     qualified census tracts for purposes of the enhanced credit 
     is expanded to include any census tracts with a poverty rate 
     of 25 percent or more. Third, the bill extends the credit to 
     a portion of the building used as a community service 
     facility not in excess of 20 percent of the total eligible 
     basis in the building. A community service facility is 
     defined as any facility designed to serve primarily 
     individuals whose income is 60 percent or less of area median 
     income.
     State allocation plans
       The bill strikes the plan criteria relating to 
     participation of local tax-exempts, replacing it with two 
     other criteria: tenant populations of individuals with 
     children and projects intended for eventual tenant ownership. 
     It also provides that the present-law criteria relating to 
     sponsor characteristics include whether the project involves 
     the use of existing housing as part of a community 
     revitalization plan. Also, the bill adds a third category of 
     housing projects to the preferential list. That third 
     category is for projects located in qualified census tracts 
     which contribute to a concerted community revitalization 
     plan.
     Credit administration
       The bill requires a comprehensive market study of the 
     housing needs of the low-income individuals in the area to be 
     served by the project and a written explanation available to 
     the general public for any allocation not made in accordance 
     with the established priorities and selection criteria of the 
     housing credit agency. It also requires site inspections by 
     the housing credit agency to monitor compliance with 
     habitability standards applicable to the project.
     Stacking rule
       The bill modifies the stacking rule so that each State 
     would be treated as using its allocation of the unused State 
     housing credit ceiling (if any) from the preceding calendar 
     before the current year's allocation of credit (including any 
     credits returned to the State) and then finally any National 
     pool allocations.
     Effective date
       In general, the House bill is effective for calendar years 
     beginning after December 31, 2000, and buildings placed-in-
     service after such date in the case of projects that also 
     receive financing with proceeds of tax-exempt bonds subject 
     to the private activity bond volume limit which are issued 
     after such date. The increase and indexing of the credit cap 
     is effective for calendar years after December 31, 1999.

                            Senate Amendment

     Credit cap
       The Senate amendment makes two changes to the credit cap. 
     First, the $1.25 per capita cap for each State modified so 
     that small population State are given a minimum of $2 million 
     of annual credit cap. Second, the $1.25 per capita element of 
     the credit cap is increased to $1.75 per capita. This 
     increase is phased-in by increasing the credit cap by 10 
     cents per capita each year for five years. Therefore the 
     credit cap will be: $1.35 per capita or $2 million, whichever 
     is greater, in calendar year 2001; $1.45 per capita or $2 
     million, whichever is greater, in calendar 2002; $1.55 per 
     capita or $2 million, whichever is greater, in calendar year 
     2003; $1.65 per capita or $2 million, whichever is greater, 
     in calendar year 2004; and $1.75 per capita or $2 million, 
     whichever is greater, in calendar year 2005 and thereafter.
     Expenditure test
       No provision.
     Basis of building eligible for the credit
       The Senate amendment provides that assistance received 
     under the Native American Housing Assistance and Self-
     Determination Act of 1996 is not taken into account in 
     determining whether a building is Federally subsidized for 
     purposes of the credit. This allows such buildings to qualify 
     for something other than the 30-percent credit generally 
     applicable to Federally subsidized buildings.
     State allocation plans
       No provision.
     Credit administration
       No provision.

[[Page 19682]]


     Stacking rule
       Same as the House bill.
     Effective date
       The Senate amendment provision is effective for calendar 
     years beginning after December 31, 2000.

                          Conference Agreement

     Credit cap
       The conference agreement follows the House bill with a 
     modification. The modification provides a minimum of $2 
     million of annual credit cap to small population states 
     beginning in calendar year 2000. The $2 million annual credit 
     cap is indexed for inflation, beginning in the same year that 
     indexing begins for the per capita cap.
     Expenditure test
       The conference agreement follows the House bill.
     Basis of building eligible for the credit
       The conference agreement includes two of the three House 
     bill changes to the credit basis rules and the Senate 
     amendment provision relating to assistance received under the 
     Native American Housing Assistance and Self-Determination Act 
     of 1996. The first House bill provision included in the 
     conference agreement provides that the definition of 
     qualified census tracts for purposes of the enhanced credit 
     is expanded to include any census tracts with a poverty rate 
     of 25 percent or more. The second House bill provision 
     included in the conference agreement is modified so that it 
     extends the credit to a portion of the building used as a 
     community service facility not in excess of 10 percent of the 
     total eligible basis in the building. A community service 
     facility is defined as any facility designed to serve 
     primarily individuals whose income is 60 percent or less of 
     area median income. The House bill provision relating to 
     buildings receiving HOME assistance being made eligible for 
     the enhanced credit is not included in the conference 
     agreement.
     State allocation plans
       The conference agreement includes the House bill provision.
     Credit administration
       The conference agreement includes the House bill provision.
     Stacking rule
       The conference agreement follows the House bill and the 
     Senate amendment.
     Effective date
       The provision is generally effective for calendar years 
     beginning after December 31, 1999, and buildings placed-in-
     service after such date in the case of projects that also 
     receive financing with proceeds of tax-exempt bonds subject 
     to the private activity bond volume limit which are issued 
     after such date.
       The increase in the credit cap is contingent upon enactment 
     as part of the bill of the separate provisions relating to 
     State allocation plans and credit administration.

F. Tax Credit for Renovating Historic Homes (section 1011 of the Senate 
               amendment and new section 25B of the Code)

                              Present Law

       Present law provides an income tax credit for certain 
     expenditures incurred in rehabilitating certified historic 
     structures and certain nonresidential buildings placed in 
     service before 1936 (Code sec. 47). The amount of the credit 
     is determined by multiplying the applicable rehabilitation 
     percentage by the basis of the property that is attributable 
     to qualified rehabilitation expenditures. The applicable 
     rehabilitation percentage is 20 percent for certified 
     historic structures and 10 percent for qualified 
     rehabilitated buildings (other than certified historic 
     structures) that were originally placed in service before 
     1936.
       A qualified rehabilitated building is a nonresidential 
     building eligible for the 10-percent credit only if the 
     building is substantially rehabilitated and a specific 
     portion of the existing structure of the building is retained 
     in place upon completion of the rehabilitation. A residential 
     or nonresidential building is eligible for the 20-percent 
     credit that applies to certified historic structures only if 
     the building is substantially rehabilitated (as determined 
     under the eligibility rules for the 10-percent credit). In 
     addition, the building must be listed in the National 
     Register or the building must be located in a registered 
     historic district and must be certified by the Secretary of 
     the Interior as being of historical significance to the 
     district.

                               House bill

       No provision.

                            Senate Amendment

       The Senate amendment permits a taxpayer to claim a 20-
     percent credit for qualified rehabilitation expenditures made 
     with respect to a qualified historic home which the taxpayer 
     subsequently occupies as his or her principal residence for 
     at least five years. The total credit which could be claimed 
     by the taxpayer is limited to $20,000 ($10,000 in the case of 
     married taxpayer filing a separate return) with respect to 
     any qualified historic home.
       The bill applies to (1) structures listed in the National 
     Register; (2) structures located in a registered national, 
     State, or local historic district, and certified by the 
     Secretary of the Interior as being of historic significance 
     to the district, but only if the median income of the 
     historic district is less than twice the State median income; 
     (3) any structure designated as being of historic 
     significance under a State or local statute, if such statute 
     is certified by the Secretary of the Interior as achieving 
     the purpose of preserving and rehabilitating buildings of 
     historic significance.
       For this purpose, a building generally is considered 
     substantially rehabilitated if the qualified rehabilitation 
     expenditures incurred during a 24-month measuring period 
     exceed the greater of (1) the adjusted basis of the building 
     as of the later of the first day of the 24-month period or 
     the beginning of the taxpayer's holding period for the 
     building, or (2) $5,000. In the case of structures in 
     empowerment zones, in enterprise communities, in a census 
     tract in which 70 percent of families have income which is 80 
     percent or less of the State median family income, and areas 
     of chronic distress as designated by the State and approved 
     by the Secretary of Housing and Urban Development only the 
     $5,000 expenditure requirement applies. In addition, for all 
     structures, at least 5 percent of the rehabilitation 
     expenditures have to be allocable to the exterior of the 
     structure.
       To qualify for the credit, the rehabilitation must be 
     certified by a State or local government subject to 
     conditions specified by the Secretary of the Interior.
       The credit may be claimed in one of three ways. First, if 
     the taxpayer directly incurs the qualifying expenditures in 
     rehabilitation of his or her principal residence, the 
     taxpayer may claim the tax credit on his or her return.
       Second, the taxpayer may claim the credit on his or her 
     return if the taxpayer is the first purchaser of a structure 
     on which qualified rehabilitation expenditures have been 
     made.
       Third, the taxpayer may elect to receive an historic 
     rehabilitation mortgage credit certificate. An historic 
     rehabilitation mortgage credit certificate is a certificate 
     stating the value of the credit that would be allowable to 
     the taxpayer for qualified historic rehabilitation 
     expenditures. The taxpayer may transfer the historic 
     rehabilitation mortgage credit certificate to a lending 
     institution in connection with a loan that is to be secured 
     by the structure on which the qualified rehabilitation 
     expenditures were incurred. In exchange for the 
     rehabilitation mortgage credit certificate, the lending 
     institution provides the taxpayer with a loan, the rate of 
     interest on which is less than that for which the taxpayer 
     otherwise would have qualified.
       In the case of structures located in empowerment zones, in 
     enterprise communities, in a census tract in which 70 percent 
     of families have income which is 80 percent or less of the 
     State median family income, and areas of chronic distress as 
     designated by the State and approved by the Secretary of 
     Housing and Urban Development, the taxpayer may elect that 
     the loan be satisfied by principal payments less than those 
     that would otherwise be required such that the present value 
     of the reduced principal payments over the term of the loan 
     be substantially equivalent to the value stated on the 
     historic rehabilitation mortgage credit certificate.
       The lending institution that enters into the exchange with 
     the taxpayer may claim the credit amount against its regular 
     income tax liability. Reductions in interest payments and 
     reductions in principal payments resulting from a qualified 
     exchange of a rehabilitation mortgage credit certificate 
     would not be taxable income to the taxpayer.
       If a taxpayer ceases to maintain the structure as his or 
     her personal residence within five years from the date of the 
     rehabilitation, the credit is recaptured on a pro rata basis. 
     In the case of a taxpayer who elected to receive and exchange 
     a rehabilitation mortgage credit certificate with a lending 
     institution, any recapture liability would be paid by the 
     taxpayer.
       Effective date.--The provision is effective for 
     expenditures paid or incurred beginning after December 31, 
     1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment, but 
     modifies the provision to provide a tax deduction for 
     qualified expenses incurred by a homeowner who makes 
     renovations to his or her principal residence. Thus, the 
     conference agreement provides that a taxpayer may claim a 
     deduction for 50 percent of qualified rehabilitation 
     expenditures made with respect to a qualified historic home 
     which the taxpayer subsequently occupies as his or her 
     principal residence for at least five years. The total amount 
     of deduction which could be claimed by the taxpayer is 
     limited to $50,000 ($25,000 in the case of married taxpayer 
     filing a separate return) with respect to any qualified 
     historic home. The deduction is to be treated as a 
     miscellaneous itemized deduction, subject to the present-law 
     two-percent floor on miscellaneous deductions. For taxpayers 
     subject to the alternative minimum tax, the deduction for 
     qualified expenditures may be claimed against the taxpayer's 
     alternative minimum taxable income.
       The conference agreement follows the Senate amendment with 
     respect to the definitions of qualifying structures and 
     qualifying

[[Page 19683]]

     expenditures, and regarding certification requirements.
       If a taxpayer ceases to maintain the structure as his or 
     her personal residence within five years from the date of the 
     rehabilitation, the deduction is recaptured, on a pro rata 
     basis, as taxable income to the taxpayer.
       Effective date.--The provision is effective for 
     expenditures paid or incurred beginning after December 31, 
     1999.

  G. Accelerate the Scheduled Increase in State Volume Limits on Tax-
 Exempt Private Activity Bonds (sec. 1351 of the House bill, sec. 1081 
           of the Senate amendment and sec. 146 of the Code)

                              Present Law

       Interest on bonds issued by States and local governments is 
     excluded from income if the proceeds of the bonds are used to 
     finance activities conducted and paid for by the governmental 
     units (sec. 103). Interest on bonds issued by these 
     governmental units to finance activities carried out and paid 
     for by private persons (``private activity bonds'') is 
     taxable unless the activities are specified in the Internal 
     Revenue Code. Private activity bonds on which interest may be 
     tax-exempt include bonds for privately operated 
     transportation facilities (airports, docks and wharves, mass 
     transit, and high speed rail facilities), privately owned 
     and/or provided municipal services (water, sewer, solid waste 
     disposal, and certain electric and heating facilities), 
     economic development (small manufacturing facilities and 
     redevelopment in economically depressed areas), and certain 
     social programs (low-income rental housing, qualified 
     mortgage bonds, student loan bonds, and exempt activities of 
     charitable organizations described in sec. 501(c)(3)).
       The volume of tax-exempt private activity bonds that States 
     and local governments may issue for most of these purposes in 
     each calendar year is limited by State-wide volume limits. 
     The current annual volume limits are $50 per resident of the 
     State or $150 million if greater. The volume limits do not 
     apply to private activity bonds to finance airports, docks 
     and wharves, certain governmentally owned, but privately 
     operated solid waste disposal facilities, certain high speed 
     rail facilities, and to certain types of private activity 
     tax-exempt bonds that are subject to other limits on their 
     volume (qualified veterans' mortgage bonds and certain 
     ``new'' empowerment zone and enterprise community bonds).
       The current annual volume limits that apply to private 
     activity tax-exempt bonds increase to $75 per resident of 
     each State or $225 million, if greater, beginning in calendar 
     year 2007. The increase is, ratably phased in, beginning with 
     $55 per capita or $165 million, if greater, in calendar year 
     2003.

                               House Bill

       The House bill increases the present-law annual State 
     private activity bond volume limits to $75 per resident of 
     each State or $225 million (if greater).
       Effective date.--The House bill volume limit increases are 
     effective for calender years after December 31, 1999.

                            Senate Amendment

       The Senate amendment increases the present-law annual State 
     private activity bond volume limits to $75 per resident of 
     each State or $225 million (if greater) beginning in calendar 
     year 2005. The increase is phased-in as follows, beginning in 
     calendar year 2001:

------------------------------------------------------------------------
            Calendar year                        Volume limit
------------------------------------------------------------------------
2001................................  $55 per resident ($165 million if
                                       greater).
2002................................  $60 per resident ($180 million if
                                       greater).
2003................................  $65 per resident ($195 million if
                                       greater).
2004................................  $70 per resident ($210 million if
                                       greater).
------------------------------------------------------------------------

       Effective date.--The Senate amendment volume limit 
     increases are effective beginning in calendar year 2001 and 
     will be fully effective in calendar year 2005 and thereafter.

                          Conference Agreement

       The conference agreement increases the present-law annual 
     State private activity bond volume limits to $75 per resident 
     of each State or $225 million (if greater) beginning in 
     calendar year 2004. The increase is phased-in as follows, 
     beginning in calendar year 2000:

------------------------------------------------------------------------
            Calendar year                        Volume limit
------------------------------------------------------------------------
2000................................  $55 per resident ($165 million if
                                       greater).
2001................................  $60 per resident ($180 million if
                                       greater).
2002................................  $65 per resident ($195 million if
                                       greater).
2003................................  $70 per resident ($210 million if
                                       greater).
------------------------------------------------------------------------

       Effective date.--The provision is effective beginning in 
     calendar year 2000 and will be fully effective in calendar 
     year 2004 and thereafter.

    H. Treatment of Leasehold Improvements (sec. 1091 of the Senate 
                  amendment and sec. 168 of the Code)

                              Present Law

     Depreciation of leasehold improvements
       Depreciation allowances for property used in a trade or 
     business generally are determined under the modified 
     Accelerated Cost Recovery System (``MACRS'') of section 168. 
     Depreciation allowances for improvements made on leased 
     property are determined under MACRS, even if the MACRS 
     recovery period assigned to the property is longer than the 
     term of the lease (sec. 168(i)(8)).\100\ This rule applies 
     regardless whether the lessor or lessee places the leasehold 
     improvements in service.\101\ If a leasehold improvement 
     constitutes an addition or improvement to nonresidential real 
     property already placed in service, the improvement is 
     depreciated using the straight-line method over a 39-year 
     recovery period, beginning in the month the addition or 
     improvement was placed in service (secs. 168(b)(3), (c)(1), 
     (d)(2), and (i)(6)).\102\
---------------------------------------------------------------------------
     \100\ The Tax Reform Act of 1986 modified the Accelerated 
     Cost Recovery System (``ACRS'') to institute MACRS. Prior to 
     the adoption of ACRS by the Economic Recovery Act of 1981, 
     taxpayers were allowed to depreciate the various components 
     of a building as separate assets with separate useful lives. 
     The use of component depreciation was repealed upon the 
     adoption of ACRS. The Tax Reform Act of 1986 also denied the 
     use of component depreciation under MACRS.
     \101\ Former Code sections 168(f)(6) and 178 provided that in 
     certain circumstances, a lessee could recover the cost of 
     leasehold improvements made over the remaining term of the 
     lease. These provisions were repealed by the Tax Reform Act 
     of 1986.
     \102\ If the improvement is characterized as tangible 
     personal property, ACRS or MACRS depreciation is calculated 
     using the shorter recovery periods and accelerated methods 
     applicable to such property. The determination of whether 
     certain improvements are characterized as tangible personal 
     property or as nonresidential real property often depends on 
     whether or not the improvements constitute a ``structural 
     component'' of a building (as defined by Treas. Reg. sec. 
     1.48-1(e)(1)). See, for example, Metro National Corp., 52 TCM 
     1440 (1987); King Radio Corp., 486 F.2d 1091 (10th Cir., 
     1973); Mallinckrodt, Inc., 778 F.2d 402 (8th Cir., 1985) 
     (with respect various leasehold improvements).
---------------------------------------------------------------------------
     Treatment of dispositions of leasehold improvements
       A lessor of leased property that disposes of a leasehold 
     improvement which was made by the lessor for the lessee of 
     the property may take the adjusted basis of the improvement 
     into account for purposes of determining gain or loss if the 
     improvement is irrevocably disposed of or abandoned by the 
     lessor at the termination of the lease.\103\ This rule 
     conforms the treatment of lessors and lessees with respect to 
     leasehold improvements disposed of at the end of a term of 
     lease. For purposes of applying this rule, it is expected 
     that a lessor must be able to separately account for the 
     adjusted basis of the leasehold improvement that is 
     irrevocably disposed of or abandoned. This rule does not 
     apply to the extent section 280B applies to the demolition of 
     a structure, a portion of which may include leasehold 
     improvements.\104\
---------------------------------------------------------------------------
     \103\ The conference report describing this provision 
     mistakenly states that the provision applies to improvements 
     that are irrevocably disposed of or abandoned by the lessee 
     (rather than the lessor) at the termination of the lease.
     \104\ Under present law, section 280B denies a deduction for 
     any loss sustained on the demolition of any structure.
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       The provision provides that 15-year property for purposes 
     of the depreciation rules of section 168 includes qualified 
     leasehold improvement property. The straight line method is 
     required to be used with respect to qualified leasehold 
     improvement property.
       Qualified leasehold improvement property is any improvement 
     to an interior portion of a building that is nonresidential 
     real property, provided certain requirements are met. The 
     improvement must be made under or pursuant to a lease either 
     by the lessee (or sublessee) of that portion of the building, 
     or by the lessor of that portion of the building. That 
     portion of the building is to be occupied exclusively by the 
     lessee (or any sublessee). The original use of the qualified 
     leasehold improvement property must begin with the lessee, 
     and must begin after December 31, 2002.\105\ The improvement 
     must be placed in service more than three years after the 
     date the building was first placed in service.
---------------------------------------------------------------------------
     \105\ The Finance Committee report describing the provision 
     erroneously states that this date is December 31, 2000.
---------------------------------------------------------------------------
       Qualified leasehold improvement property does not include 
     any improvement for which the expenditure is attributable to 
     the enlargement of the building, any elevator or escalator, 
     any structural component benefitting a common area, or the 
     internal structural framework of the building.
       No special rule is specified for the class life of 
     qualified leasehold improvement property. Therefore, the 
     general rule that the class life for nonresidential real and 
     residential rental property is 40 years applies.
       For purposes of the provision, a commitment to enter into a 
     lease is treated as a lease, and the parties to the 
     commitment are treated as lessor and lessee, provided the 
     lease is in effect at the time the qualified leasehold 
     improvement property is placed in service. A lease between 
     related persons is not considered a lease for this purpose.
       Effective date.--The provision is effective for qualified 
     leasehold improvement property placed in service after 
     December 31, 2002.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision. However, the conferees expect that the 
     depreciation study (pursuant to section 2022 of the Tax and 
     Trade Relief Extension Act of 1998) will

[[Page 19684]]

     include an examination of the depreciation issues raised in 
     the House bill and the Senate amendment, including leasehold 
     improvements and section 1250 property used in connection 
     with a franchise.

                     XII. PENSION REFORM PROVISIONS

                         A. Expanding Coverage

     1. Increase in benefit and contribution limits (sec. 1201 of 
         the House bill, sec. 312 of the Senate amendment, and 
         secs. 401(a)(17), 402(g), 408(p), 415 and 457 of the 
         Code)

                              Present Law

     In general
       Under present law, limits apply to contributions and 
     benefits under qualified plans (sec. 415), the amount of 
     compensation that may be taken into account under a plan for 
     determining benefits (sec. 401(a)(17)), the maximum amount of 
     elective deferrals that an individual may make to a salary 
     reduction plan or tax sheltered annuity (sec. 402(g)), and 
     deferrals under an eligible deferred compensation plan of a 
     tax-exempt organization or a State or local government (sec. 
     457).

               Limitations on contributions and benefits

       Under present law, the limits on contributions and benefits 
     under qualified plans are based on the type of plan. Under a 
     defined contribution plan, the qualification rules limit the 
     annual additions to the plan with respect to each plan 
     participant to the lesser of (1) 25 percent of compensation 
     or (2) $30,000 (for 1999). Annual additions are the sum of 
     employer contributions, employee contributions, and 
     forfeitures with respect to an individual under all defined 
     contribution plans of the same employer. The $30,000 limit is 
     indexed for cost-of-living adjustments in $5,000 increments.
       Under a defined benefit plan, the maximum annual benefit 
     payable at retirement is generally the lesser of (1) 100 
     percent of average compensation, or (2) $130,000 (for 1999). 
     The dollar limit is adjusted for cost-of-living increases in 
     $5,000 increments.
       Under present law, in general, the dollar limit on annual 
     benefits is reduced if benefits under the plan begin before 
     the social security retirement age (currently, age 65) and 
     increased if benefits begin after social security retirement 
     age.\1\
---------------------------------------------------------------------------
     \1\ An overall limit applies if a participant participates in 
     a defined contribution plan and a defined benefit plan 
     maintained by the same employer (sec. 415(e)). This limit is 
     repealed for years beginning after December 31, 1999.
---------------------------------------------------------------------------

                        Compensation limitation

       Under present law, the annual compensation of each 
     participant that may be taken into account for purposes of 
     determining contributions and benefits under a plan, applying 
     the deduction rules, and for nondiscrimination testing 
     purposes is limited to $160,000 (for 1999). The compensation 
     limit is indexed for cost-of-living adjustments in $10,000 
     increments.

                     Elective deferral limitations

       Under present law, under certain salary reduction 
     arrangements, an employee may elect to have the employer make 
     payments as contributions to a plan on behalf of the 
     employee, or to the employee directly in cash. Contributions 
     made at the election of the employee are called elective 
     deferrals.
       The maximum annual amount of elective deferrals that an 
     individual may make to a qualified cash or deferred 
     arrangement (a ``section 401(k) plan''), a tax-sheltered 
     annuity (``section 403(b) annuity'') or a salary reduction 
     simplified employee pension plan (``SEP'') is $10,000 (for 
     1999). The maximum annual amount of elective deferrals that 
     an individual may make to a SIMPLE plan is $6,000. These 
     limits are indexed for inflation in $500 increments.

                           Section 457 plans

       The maximum annual deferral under a deferred compensation 
     plan of a State or local government or a tax-exempt 
     organization (a ``section 457 plan'') is the lesser of (1) 
     $8,000 (for 1999) or (2) 33-1/3 percent of compensation. The 
     $8,000 dollar limit is increased for inflation in $500 
     increments. Under a special catch-up rule, the section 457 
     plan may provide that, for one or more of the participant's 
     last 3 years before retirement, the otherwise applicable 
     limit is increased to the lesser of (1) $15,000 or (2) the 
     sum of the otherwise applicable limit for the year plus the 
     amount by which the limit applicable in preceding years of 
     participation exceeded the deferrals for that year.

                               House Bill

     Limits on contributions and benefits
       The House bill increases the $30,000 annual addition limit 
     for defined contribution plans to $40,000. This amount is 
     indexed in $1,000 increments.\2\
---------------------------------------------------------------------------
     \2\ The 25 percent of compensation limitation is increased to 
     100 percent of compensation under another provision of the 
     House bill.
---------------------------------------------------------------------------
       The House bill increases the $130,000 annual benefit limit 
     under a defined benefit plan to $160,000. The dollar limit is 
     reduced for benefit commencement before age 62 and increased 
     for benefit commencement after age 65.
     Compensation limitation
       The House bill increases the limit on compensation that may 
     be taken into account under a plan to $200,000. This amount 
     is indexed in $5,000 increments.
     Elective deferral limitations
       Beginning in 2001, the House bill increases the dollar 
     limit on annual elective deferrals under section 401(k) 
     plans, section 403(b) annuities and salary reduction SEPs in 
     $1,000 annual increments until the limits reach $15,000 in 
     2005. Beginning in 2001, the House bill increases the maximum 
     annual elective deferrals that may be made to a SIMPLE plan 
     in $1,000 annual increments until the limit reaches $10,000 
     in 2004. The $15,000 and $10,000 dollar limits are indexed in 
     $500 increments, as under present law.
     Section 457 plans
       The House bill increases the dollar limit on deferrals 
     under a section 457 plan to conform to the elective deferral 
     limitation. Thus, the limit is $11,000 in 2001, and is 
     increased in $1,000 annual increments until the limit reaches 
     $15,000 in 2005. The limit is indexed thereafter in $500 
     increments. The limit is twice the otherwise applicable 
     dollar limit in the three years prior to retirement.\3\
---------------------------------------------------------------------------
     \3\ Another provision of the bill increases the 33-1/3 
     percentage of compensation limit to 100 percent.
---------------------------------------------------------------------------
     Effective date
       The House bill is effective for years beginning after 
     December 31, 2000, with a delayed effective date for plans 
     maintained pursuant to a collective bargaining agreement.

                            Senate Amendment

       Beginning in 2001, the Senate amendment increases the 
     dollar limit on annual elective deferrals under section 
     401(k) plans, section 403(b) annuities and salary reduction 
     SEPs in $1,000 annual increments until the limits reach 
     $15,000 in 2005. Beginning in 2001, the Senate amendment 
     increases the maximum annual elective deferrals that may be 
     made to a SIMPLE plan in $1,000 annual increments until the 
     limit reaches $10,000 in 2004. The $15,000 and $10,000 dollar 
     limits are indexed in $500 increments, as under present law.
       The Senate amendment increases the dollar limit on 
     deferrals under a section 457 plan to $9,000 in 2001, $10,000 
     in 2002, $11,000 in 2003, and $12,000 in 2004. The limit is 
     indexed thereafter in $500 increments. The limit is twice the 
     otherwise applicable dollar limit in the three years prior to 
     retirement.\4\
---------------------------------------------------------------------------
     \4\ Another provision of the Senate amendment increases the 
     33-1/3 percentage of compensation limit to 100 percent.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective for 
     years beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the House bill.
       Effective date.--The conference agreement is effective for 
     years beginning after December 31, 2000.
     2. Plan loans for subchapter S shareholders, partners, and 
         sole proprietors (sec. 1202 of the House bill, sec. 313 
         of the Senate amendment and sec. 4975 of the Code)

                              Present Law

       The Internal Revenue Code prohibits certain transactions 
     (``prohibited transactions'') between a qualified plan and a 
     disqualified person in order to prevent persons with a close 
     relationship to the qualified plan from using that 
     relationship to the detriment of plan participants and 
     beneficiaries. \5\ Certain types of transactions are exempted 
     from the prohibited transaction rules, including loans from 
     the plan to plan participants, if certain requirements are 
     satisfied. In addition, the Department of Labor can grant an 
     administrative exemption from the prohibited transaction 
     rules if she finds the exemption is administratively 
     feasible, in the interest of the plan and plan participants 
     and beneficiaries, and protective of the rights of 
     participants and beneficiaries of the plan.
---------------------------------------------------------------------------
     \5\ Title I of the Employee Retirement Income Security Act of 
     1974, as amended (``ERISA''), also contains prohibited 
     transaction rules. The Code and ERISA provisions are 
     substantially similar, although not identical.
---------------------------------------------------------------------------
       For purposes of the prohibited transaction rules, an owner-
     employee means (1) a sole proprietor, (2) a partner who owns 
     more than 10 percent of either the capital interest or the 
     profits interest in the partnership, (3) an employee or 
     officer of a Subchapter S corporation who owns more than 5 
     percent of the outstanding stock of the corporation, and (4) 
     the owner of an individual retirement arrangement (``IRA''). 
     The term owner-employee also includes certain family members 
     of an owner-employee and certain corporations owned by an 
     owner-employee.
       Under the Internal Revenue Code, a two-tier excise tax is 
     imposed on disqualified persons who engage in a prohibited 
     transaction. The first level tax is equal to 15 percent of 
     the amount involved in the transaction. The second level tax 
     is imposed if the prohibited transaction is not corrected 
     within a certain period, and is equal to 100 percent of the 
     amount involved.

                               House Bill

       The House bill generally eliminates the special present-law 
     rules relating to plan loans made to an owner-employee. Thus, 
     the general statutory exemption applies to such transactions. 
     Present law continues to apply with respect to IRAs.

[[Page 19685]]

       Effective date.--The House bill is effective with respect 
     to loans made after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill. \6\
---------------------------------------------------------------------------
     \6\ The Senate amendment also amends the corresponding 
     provisions of ERISA.
---------------------------------------------------------------------------

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Modification of top-heavy rules (sec. 1203 of the House 
         bill, sec. 319 of the Senate amendment, and sec. 416 of 
         the Code)

                              Present Law

     In general
       Under present law, additional qualification requirements 
     apply to plans that primarily benefit an employer's key 
     employees (``top-heavy plans''). These additional 
     requirements provide (1) more rapid vesting for plan 
     participants who are non-key employers and (2) minimum 
     nonintegrated employer contributions or benefits for plan 
     participants who are non-key employees.
     Definition of top-heavy plan
       In general, a top-heavy plan is a plan under which more 
     than 60 percent of the contributions or benefits are provided 
     to key employees.
       For purposes of determining whether a plan is a top-heavy 
     plan, benefits derived both from employer and employee 
     contributions, including employee elective contributions, are 
     taken into account. In addition, the accrued benefit of a 
     participant in a defined benefit plan and the account balance 
     of a participant in a defined contribution plan includes any 
     amount distributed within the 5-year period ending on the 
     determination date.
       An individual's accrued benefit or account balance is not 
     taken into account in determining whether a plan is top-heavy 
     if the individual has not performed services for the employer 
     during the 5-year period ending on the determination date.
       SIMPLE plans are not subject to the top-heavy rules.
     Definition of key employee
       A key employee is an employee who, during the plan year 
     that ends on the determination date or any of the 4 preceding 
     plan years, is (1) an officer earning over one-half of the 
     defined benefit plan dollar limitation of section 415 
     ($65,000 for 1999), (2) a 5-percent owner of the employer, 
     (3) a 1-percent owner of the employer earning over $150,000, 
     or (4) one of the 10 employees earning more than the defined 
     contribution plan dollar limit ($30,000 for 1999) with the 
     largest ownership interests in the employer. A family 
     ownership attribution rule applies to the determination of 1-
     percent owner status, 5-percent owner status, and largest 
     ownership interest. Under this attribution rule, an 
     individual is treated as owning stock owned by the 
     individual's spouse, children, grandchildren, or parents.
     Minimum benefit for non-key employees
       A minimum benefit generally must be provided to all non-key 
     employees in a top-heavy plan. In general, a top-heavy 
     defined benefit plan must provide a minimum benefit equal to 
     the lesser of (1) 2 percent of compensation multiplied by the 
     employee's years of service, or (2) 20 percent of 
     compensation. A top-heavy defined contribution plan must 
     provide a minimum annual contribution equal to the lesser of 
     (1) 3 percent of compensation, or (2) the percentage of 
     compensation at which contributions were made for key 
     employees (including employee elective contributions made by 
     key employees and employer matching contributions).
       For purposes of the minimum benefit rules, only benefits 
     derived from employer contributions (other than amounts 
     employees have elected to defer) to the plan are taken into 
     account, and an employee's social security benefits are 
     disregarded (i.e., the minimum benefit is nonintegrated). 
     Employer matching contributions may be used to satisfy the 
     minimum contribution requirement; however, in such a case the 
     contributions are not treated as matching contributions for 
     purposes of applying the special nondiscrimination 
     requirements applicable to employee elective contributions 
     and matching contributions under sections 401(k) and (m). 
     Thus, such contributions would have to meet the general 
     nondiscrimination test of section 401(a)(4). \7\
---------------------------------------------------------------------------
     \7\ Tres. Reg. sec. 1.416-1 Q&A M-19.
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     Qualified cash or deferred arrangements
       Under a qualified cash or deferred arrangement (a ``section 
     401(k) plan''), an employee may elect to have the employer 
     make payments as contributions to a qualified plan on behalf 
     of the employee, or to the employee directly in cash. 
     Contributions made at the election of the employee are called 
     elective deferrals. A special nondiscrimination test applies 
     to elective deferrals under cash or deferred arrangements, 
     which compares the elective deferrals of highly compensated 
     employees with elective deferrals of nonhighly compensated 
     employees. (This test is called the actual deferral 
     percentage test or the ``ADP'' test). Employer matching 
     contributions under qualified defined contribution plans are 
     also subject to a similar nondiscrimination test. (This test 
     is called the actual contribution percentage test or the 
     ``ACP'' test.)
       Under a design-based safe harbor, a cash or deferred 
     arrangement is deemed to satisfy the ADP test if the plan 
     satisfies one of two contribution requirements and satisfies 
     a notice requirement.

                               House Bill

     Definition of top-heavy plan
       The House bill provides that a plan consisting of a cash-
     or-deferred arrangement that satisfies the design-based safe 
     harbor for such plans and matching contributions that satisfy 
     the safe harbor rule for such contributions is not a top-
     heavy plan. Matching or nonelective contributions provided 
     under such a plan may be taken into account in satisfying the 
     minimum contribution requirements applicable to top-heavy 
     plans. \8\
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     \8\ This provision is not intended to preclude the use of 
     nonelective contributions that are used to satisfy the safe 
     harbor rules from being used to satisfy other qualified 
     retirement plan nondiscrimination rules, including those 
     involving cross-testing.
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       In determining whether a plan is top-heavy, the House bill 
     provides that distributions during the year ending on the 
     date the top-heavy determination is being made are taken into 
     account. The present-law 5-year rule applies with respect to 
     in-service distributions. Similarly, the House bill provides 
     that an individual's accrued benefit or account balance is 
     not taken into account if the individual has not performed 
     services for the employer during the 1-year period ending on 
     the date the top-heavy determination is being made.
     Definition of key employee
       The House bill (1) provides that an employee is not 
     considered a key employee by reason of officer status unless 
     the employee earns more than $150,000 in compensation for the 
     year, and (2) repeals the top-10 owner key employee category.
       The House bill repeals the 4-year lookback rule for 
     determining key employee status and provides that an employee 
     is a key employee only if he or she is a key employee during 
     the current plan year.
     Minimum benefit for non-key employees
       Under the House bill, matching contributions are taken into 
     account in determining whether the minimum benefit 
     requirement has been satisfied. \9\
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     \9\ Thus, this provision overrides the provision in Treasury 
     regulations that, if matching contributions are used to 
     satisfy the minimum benefit requirement, then they are not 
     treated as matching contributions for purposes of the section 
     401(m) nondiscrimination rules.
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       The House bill provides that, in determining the minimum 
     benefit required under a defined benefit plan, a year of 
     service does not include any year in which no employee 
     benefits under the plan (as determined under sec. 410).
     Effective date
       The House bill is effective for years beginning after 
     December 31, 2000.

                            Senate Amendment

     Definition of top-heavy plan
       The Senate amendment provides that a plan consisting of a 
     cash-or-deferred arrangement that satisfies the design-based 
     safe harbor for such plans and matching contributions that 
     satisfy the safe harbor rule for such contributions is not a 
     top-heavy plan. Matching or nonelective contributions 
     provided under such a plan may be taken into account in 
     satisfying the minimum contribution requirements applicable 
     to top-heavy plans. \10\
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     \10\ This provision is not intended to preclude the use of 
     nonelective contributions that are used to satisfy the safe 
     harbor rules from being used to satisfy other qualified 
     retirement plan nondiscrimination rules, including those 
     involving cross-testing.
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     Definition of key employee
       The family ownership attribution rule no longer applies in 
     determining whether an individual is a 5-percent owner of the 
     employer for purposes of the top-heavy rules only.
     Minimum benefit for non-key employees
       Under the provision, matching contributions are taken into 
     account in determining whether the minimum benefit 
     requirement has been satisfied.\11\
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     \11\ Thus, this provision overrides the provision in Treasury 
     regulations that, if matching contributions are used to 
     satisfy the minium benefit requirement, then they are not 
     treated as matching contributions for purposes of the section 
     401(m) nondiscrimination rules.
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                             Effective date

       The Senate amendment provision is effective for years 
     beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment. As under the Senate amendment, the family 
     ownership attribution rule no longer applies in determining 
     whether an individual is a 5-percent owner of the employer 
     for purposes of the top-heavy rules only.
     4. Elective deferrals not taken into account for purposes of 
         deduction limits (sec. 1204 of the House bill, sec. 314 
         of the Senate amendment, and sec. 404 of the Code)

                              Present Law

       Employer contributions to one or more qualified retirement 
     plans are deductible

[[Page 19686]]

     subject to certain limits. In general, the deduction limit 
     depends on the kind of plan.
       In the case of a defined benefit pension plan or a money 
     purchase pension plan, the employer generally may deduct the 
     amount necessary to satisfy the minimum funding cost of the 
     plan for the year. If a defined benefit pension plan has more 
     than 100 participants, the maximum amount deductible is at 
     least equal to the plan's unfunded current liabilities.
       In the case of a profit-sharing or stock bonus plan, the 
     employer generally may deduct an amount equal to 15 percent 
     of compensation of the employees covered by the plan for the 
     year.
       If an employer sponsors both a defined benefit pension plan 
     and a defined contribution plan that covers some of the same 
     employees (or a money purchase pension plan and another kind 
     of defined contribution plan), the total deduction for all 
     plans for a plan year generally is limited to the greater of 
     (1) 25 percent of compensation or (2) the contribution 
     necessary to meet the minimum funding requirements of the 
     defined benefit pension plan for the year (or the amount of 
     the plan's unfunded current liabilities, in the case of a 
     plan with more than 100 participants).
       For purposes of the deduction limits, employee elective 
     deferral contributions to a section 401(k) plan are treated 
     as employer contributions and, thus, are subject to the 
     generally applicable deduction limits.
       Subject to certain exceptions, nondeductible contributions 
     are subject to a 10-percent excise tax.

                               House Bill

       Under the House bill, elective deferral contributions are 
     not subject to the deduction limits, and the application of a 
     deduction limitation to any other employer contribution to a 
     qualified retirement plan does not take into account elective 
     deferral contributions.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Repeal of coordination requirements for deferred 
         compensation plans of State and local governments and 
         tax-exempt organizations (sec. 1205 of the House bill and 
         sec. 457 of the Code)

                              Present Law

       Compensation deferred under an eligible deferred 
     compensation plan of a tax-exempt or State and local 
     government employer (a ``section 457 plan'') is not 
     includible in gross income until paid or made available. In 
     general, the maximum permitted annual deferral under such a 
     plan is the lesser of (1) $8,000 (in 1999) or (2) 33\1/3\ 
     percent of compensation. The $8,000 limit is increased for 
     inflation in $500 increments.
       The $8,000 limit (as modified under the catch-up rule), 
     applies to all deferrals under all section 457 plans in which 
     the individual participates. In addition, in applying the 
     $8,000 limit, contributions under a tax-sheltered annuity 
     (``section 403(b) annuity''), elective deferrals under a 
     qualified cash or deferred arrangement (``section 401(k) 
     plan''), salary reduction contributions under a simplified 
     employee pension plan (``SEP''), and contributions under a 
     SIMPLE plan are taken into account. Further, the amount 
     deferred under a section 457 plan is taken into account in 
     applying a special catch-up rule for section 403(b) 
     annuities.

                               House Bill

       The House bill repeals the rules coordinating the section 
     457 dollar limit with contributions under other types of 
     plans.\12\
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     \12\ The limits on deferrals under a section 457 plan are 
     modified under other provisions of the House bill.
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       Effective date.--The House bill is effective for years 
     beginning after December 31, 2000.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     6. Eliminate IRS user fees for certain requests regarding 
         employer plans (sec. 1206 of the House bill, sec. 317 of 
         the Senate amendment, and sec. 7527 of the Code)

                              Present Law

       An employer that maintains a retirement plan for the 
     benefit of its employees may request from the Internal 
     Revenue Service (``IRS'') a determination as to whether the 
     form of the plan satisfies the requirements applicable to 
     tax-qualified plans (sec. 401(a)). In order to obtain from 
     the IRS a determination letter on the qualified status of the 
     plan, the employer must pay a user fee. The user fee may 
     range from $125 to $1,250, depending upon the scope of the 
     request and the type and format of the plan.\13\
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     \13\ User fees are statutorily authorized; however, the IRS 
     sets the dollar amount of the fee applicable to any 
     particular type of request.
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                               House Bill

       Under the House bill, a small employer (100 or fewer 
     employees) is not required to pay a user fee for any 
     determination letter request with respect to the qualified 
     status of a retirement plan that the employer maintains. The 
     House bill applies only to requests by employers for 
     determination letters concerning the qualified retirement 
     plans they maintain. Therefore, a sponsor of a prototype plan 
     is required to pay a user fee for a request for a 
     notification letter, opinion letter, or similar ruling. A 
     small employer that adopts a prototype plan, however, is not 
     required to pay a user fee for a determination letter request 
     with respect to the employer's plan.
       Effective date.--The House bill is effective for 
     determination letter requests made after December 31, 2000.

                            Senate Amendment

       The Senate amendment provides that no user fee may be 
     required with respect to a request for a ruling, opinion 
     letter, determination letter, or similar request regarding 
     the qualified status of a new pension plan. A new pension 
     plan would be a plan of an employer which has not maintained 
     a qualified plan in the three most recent years ending before 
     the year in which the request is made.

                          Conference Agreement

       The conference agreement follows the House bill, with the 
     modification that the user fee is eliminated only for 
     determination letter requests made during the first 5 plan 
     years of the plan.
     7. Definition of compensation for purposes of deduction 
         limits (sec. 1207 of the House bill and sec. 404 of the 
         Code)

                              Present Law

       Employer contributions to one or more qualified retirement 
     plans are deductible subject to certain limits. In general, 
     the deduction limit depends on the kind of plan. Subject to 
     certain exceptions, nondeductible contributions are subject 
     to a 10-percent excise tax.
       In the case of a defined benefit pension plan or a money 
     purchase pension plan, the employer generally may deduct the 
     amount necessary to satisfy the minimum funding cost of the 
     plan for the year. If a defined benefit pension plan has more 
     than 100 participants, the maximum amount deductible is at 
     least equal to the plan's unfunded current liabilities.
       In some cases, the amount of deductible contributions is 
     limited by compensation. In the case of a profit-sharing or 
     stock bonus plan, the employer generally may deduct an amount 
     equal to 15 percent of compensation of the employees covered 
     by the plan for the year.
       If an employer sponsors both a defined benefit pension plan 
     and a defined contribution plan that covers some of the same 
     employees (or a money purchase pension plan and another kind 
     of defined contribution plan), the total deduction for all 
     plans for a plan year generally is limited to the greater of 
     (1) 25 percent of compensation or (2) the contribution 
     necessary to meet the minimum funding requirements of the 
     defined benefit pension plan for the year (or the amount of 
     the plan's unfunded current liabilities, in the case of a 
     plan with more than 100 participants).
       In the case of an employee stock ownership plan (``ESOP''), 
     principal payments on a loan used to acquire qualifying 
     employer securities are deductible up to 25 percent of 
     compensation.
       For purposes of the deduction limits, employee elective 
     deferral contributions to a qualified cash or deferred 
     arrangement (``section 401(k) plan'') are treated as employer 
     contributions and, thus, are subject to the generally 
     applicable deduction limits.\14\
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     \14\ Another provision in the House bill provides that 
     elective deferrals are not subject to the deduction limits.
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       For purposes of the deduction rules, compensation generally 
     includes only taxable compensation, and thus does not include 
     salary reduction amounts, such as elective deferrals under a 
     section 401(k) plan or a tax-sheltered annuity (``section 
     403(b) annuity''), elective contributions under a deferred 
     compensation plan of a tax-exempt organization or a State or 
     local government (``section 457 plan''), and salary reduction 
     contributions under a section 125 cafeteria plan. For 
     purposes of the contribution limits under section 415, 
     compensation does include such salary reduction amounts.

                               House Bill

       Under the House bill, the definition of compensation for 
     purposes of the deduction rules includes salary reduction 
     amounts treated as compensation under section 415.\15\
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     \15\ A technical correction in the House bill expands the 
     salary reduction amounts treated as compensation under 
     section 415 to include amounts used to purchase qualified 
     transportation benefits (under sec. 132(f)).
---------------------------------------------------------------------------
       Effective date.--The House bill provision is effective for 
     years beginning after December 31, 2000.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

[[Page 19687]]


     8. Option to treat elective deferrals as after-tax 
         contributions (sec. 1208 of the House bill, sec. 311 of 
         the Senate amendment, and new sec. 402A of the Code)

                              Present Law

       A qualified cash or deferred arrangement (``section 401(k) 
     plan'') or a tax-sheltered annuity (``section 403(b) 
     annuity'') may permit a participant to elect to have the 
     employer make payments as contributions to the plan or to the 
     participant directly in cash. Contributions made to the plan 
     at the election of a participant are elective deferrals. 
     Elective deferrals must be nonforfeitable and are subject to 
     an annual dollar limitation (sec. 402(g)) and distribution 
     restrictions. In addition, elective deferrals under a section 
     401(k) plan are subject to special nondiscrimination rules. 
     Elective deferrals (and earnings attributable thereto) are 
     not includible in a participant's gross income until 
     distributed from the plan.
       Individuals with adjusted gross income below certain levels 
     generally may make nondeductible contributions to a Roth IRA 
     and may convert a deductible or nondeductible IRA into a Roth 
     IRA. Amounts held in a Roth IRA that are withdrawn as a 
     qualified distribution are not includible in income, nor 
     subject to the additional 10-percent tax on early 
     withdrawals. A qualified distribution is a distribution that 
     (1) is made after the 5-taxable year period beginning with 
     the first taxable year for which the individual made a 
     contribution to a Roth IRA, and (2) is made after attainment 
     of age 59\1/2\, is made on account of death or disability, or 
     is a qualified special purpose distribution (i.e., for first-
     time homebuyer expenses of up to $10,000). A distribution 
     from a Roth IRA that is not a qualified distribution is 
     includible in income to the extent attributable to earnings, 
     and is subject to the 10-percent tax on early withdrawals 
     (unless an exception applies).\16\
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     \16\ Early distributions of converted amounts may also 
     accelerate income inclusion of converted amounts that are 
     taxable under the 4-year rule applicable to 1998 conversions.
---------------------------------------------------------------------------

                               House Bill

       A section 401(k) plan or a section 403(b) annuity is 
     permitted to include a ``qualified plus contribution 
     program'' that permits a participant to elect to have all or 
     a portion of the participant's elective deferrals under the 
     plan treated as designated plus contributions. Designated 
     plus contributions are elective deferrals that the 
     participant designates as not excludable from the 
     participant's gross income.
       The annual dollar limitation on a participant's designated 
     plus contributions is the section 402(g) annual limitation on 
     elective deferrals, reduced by the participant's elective 
     deferrals that the participant does not designate as 
     designated plus contributions. Designated plus contributions 
     are treated as any other elective deferral for purposes of 
     nonforfeitability requirements and distribution restrictions. 
     Under a section 401(k) plan, designated plus contributions 
     also are treated as any other elective deferral for purposes 
     of the special nondiscrimination requirements.
       The plan is required to establish a separate account, and 
     maintain separate recordkeeping, for a participant's 
     designated plus contributions (and earnings allocable 
     thereto). A qualified distribution from a participant's 
     designated plus contributions account is not includible in 
     the participant's gross income. A qualified distribution is a 
     distribution that is made after the end of a specified 
     nonexclusion period and that is (1) made on or after the date 
     on which the participant attains age 59\1/2\, (2) made to a 
     beneficiary (or to the estate of the participant) on or after 
     the death of the participant, or (3) attributable to the 
     participant's being disabled.\17\ The nonexclusion period is 
     the 5-year-taxable period beginning with the earlier of (1) 
     the first taxable year for which the participant made a 
     designated plus contribution to any designated plus 
     contribution account established for the participant under 
     the plan, or (2) if the participant has made a rollover 
     contribution to the designated plus contribution account that 
     is the source of the distribution from a designated plus 
     contribution account established for the participant under 
     another plan, the first taxable year for which the 
     participant made a designated plus contribution to the 
     previously established account.
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     \17\ A qualified special purpose distribution, as defined 
     under the rules relating to Roth IRAs, does not qualify as a 
     tax-free distribution from a designated plus contributions 
     account.
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       A distribution from a designated plus contributions account 
     that is a corrective distribution of an elective deferral 
     (and income allocable thereto) that exceeds the section 
     402(g) annual limit on elective deferrals is not a qualified 
     distribution.
       A participant is permitted to roll over a distribution from 
     a designated plus contributions account only to another 
     designated plus contributions account or a Roth IRA of the 
     participant.
       The Secretary of the Treasury is directed to require the 
     plan administrator of each section 401(k) plan or section 
     403(b) annuity that permits participants to make designated 
     plus contributions to make such returns and reports regarding 
     designated plus contributions to the Secretary, plan 
     participants and beneficiaries, and other persons that the 
     Secretary may designate.
       Effective date.--The House bill is effective for taxable 
     years beginning after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     9. Increase minimum benefit under defined benefit plans (sec. 
         1209 of the House bill and sec. 415 of the Code)

                              Present Law

       Under a defined benefit plan, the maximum annual benefit 
     payable at retirement is generally the lesser of (1) 100 
     percent of the participant's compensation, or (2) $130,000 
     (for 1999).\18\ Payment of a minimum annual benefit is 
     permitted even if the benefit exceeds the normally applicable 
     benefit limitations. Thus, the limits on benefits are deemed 
     to be satisfied if the aggregate annual retirement benefit of 
     a participant under all defined benefit pension plans of the 
     employer does not exceed $10,000 and the participant has not 
     participated in a defined contribution plan of the employer. 
     The $10,000 limit is reduced for participants with less than 
     10 years of service with the employer.
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     \18\ Another provision of the House bill increases the dollar 
     limit on the annual benefit payable under a defined benefit 
     plan.
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                               House Bill

       Under the House bill, beginning in 2001, the minimum annual 
     benefit permitted under a defined benefit plan is increased 
     in $10,000 annual increments until the minimum benefit amount 
     reaches $40,000 in 2003. The $40,000 amount is not indexed. 
     In addition, a participant is entitled to the minimum benefit 
     even if the participant had participated in a defined 
     contribution plan of the employer.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2000.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     10. Reduced PBGC premiums for small and new plans (secs. 315-
         316 of the Senate amendment and sec. 4006 of ERISA)

                              Present Law

       Under present law, the Pension Benefit Guaranty Corporation 
     (``PBGC'') provides insurance protection for participants and 
     beneficiaries under certain defined benefit pension plans by 
     guaranteeing certain basic benefits under the plan in the 
     event the plan is terminated with insufficient assets to pay 
     benefits promised under the plan. The PBGC guarantee is 
     phased in ratably in the case of plans that have been in 
     effect for less than 5 years, and with respect to benefit 
     increases from a plan amendment that was in effect for less 
     than 5 years before termination of the plan. The guaranteed 
     benefits are funded in part by premium payments from 
     employers who sponsor defined benefit plans. The amount of 
     the required annual PBGC premium for a single-employer plan 
     is generally a flat rate premium of $19 per participant and 
     an additional variable rate premium based on a charge of $9 
     per $1,000 of unfunded vested benefits. Unfunded vested 
     benefits under a plan generally means (1) the unfunded 
     current liability for vested benefits under the plan, over 
     (2) the value of the plan's assets, reduced by any credit 
     balance in the funding standard account. No variable rate 
     premium is imposed for a year if contributions to the plan 
     were at least equal to the full funding limit.

                               House Bill

       No provision.

                            Senate Amendment

     Reduced flat-rate premiums for new plans of small employers
       Under the Senate amendment, for the first five plan years 
     of a new single-employer plan of a small employer, the flat-
     rate PBGC premium is $5 per plan participant.
       A small employer is a contributing sponsor that, on the 
     first day of the plan year, has 100 or fewer employees. For 
     this purpose, all employees of the members of the controlled 
     group of the contributing sponsor are taken into account. In 
     the case of a plan to which more than one unrelated 
     contributing sponsor contributes, employees of all 
     contributing sponsors (and their controlled group members) 
     are taken into account in determining whether the plan is a 
     plan of a small employer.
     Reduced variable PBGC premium for new plans
       The Senate amendment provides that the variable premium is 
     phased in for new defined benefit plans over a six-year 
     period starting with the plan's first plan year. The amount 
     of the variable premium is a percentage of the variable 
     premium otherwise due, as follows: 0 percent of the otherwise 
     applicable variable premium in the first plan year; 20 
     percent in the second plan year; 40 percent in the third plan 
     year; 60 percent in the fourth plan year; 80 percent in the 
     fifth

[[Page 19688]]

     plan year; and 100 percent in the sixth plan year (and 
     thereafter).
       A new defined benefit plan is defined as under the flat-
     rate premium provision relating to new small employer plans.
     Effective date
       The Senate amendment provisions are effective for plans 
     established after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     a modification. In the case of any plan (not just a new plan) 
     of an employer with 25 or fewer employees, the variable- rate 
     premium is no more than $5 multiplied by the number of plan 
     participants in the plan at the close of the preceding year.
       Effective date.--The provision is generally effective for 
     plans established after December 31, 2000. The provision 
     regarding plans of employers with 25 or fewer employees is 
     effective for plan years beginning after December 31, 2000.
     11. SAFE annuities and trusts (sec. 318 of the Senate 
         amendment and new sec. 408B of the Code)

                              Present Law

       A small business may establish a simplified defined 
     contribution retirement plan called a savings incentive match 
     plan for employees (``SIMPLE'') retirement plan. An employer 
     is eligible to adopt a SIMPLE plan if the employer employs 
     100 or fewer employees who received at least $5,000 in 
     compensation during the preceding year and does not maintain 
     another retirement plan.
       A SIMPLE plan may be either an individual retirement 
     arrangement for each employee (``SIMPLE IRA'') or part of a 
     qualified cash or deferred arrangement (a ``SIMPLE 401(k)''). 
     A SIMPLE IRA is not subject to the nondiscrimination rules or 
     top-heavy rules generally applicable to qualified plans. 
     Similarly, a SIMPLE 401(k) is deemed to satisfy the special 
     nondiscrimination tests applicable to 401(k) plans and is not 
     subject to the top-heavy rules. The other qualified plan 
     rules apply to a SIMPLE 401(k), however.
       SIMPLE plans are subject to special contribution rules. 
     Employees may elect during the 60-day period preceding a plan 
     year to make elective contributions under a SIMPLE plan of up 
     to $6,000 during the plan year. The $6,000 dollar limit is 
     adjusted for cost-of-living increases in $500 increments.
       An employer that maintains a SIMPLE plan generally is 
     required to match each employee's elective contributions on a 
     dollar-for-dollar basis up to 3 percent of the employee's 
     compensation. As an alternative to a matching contribution 
     for any year, an employer may make a nonelective contribution 
     on behalf of each eligible employee equal to 2 percent of the 
     employee's compensation.
       Under a SIMPLE IRA, the compensation limit does not apply 
     for purposes of the required employer matching contribution. 
     If the employer satisfies the contribution requirement by 
     making a nonelective contribution, however, the amount of 
     compensation taken into account for each participant to 
     determine the amount of the required employer contribution 
     may not exceed the compensation limit.
       Under a SIMPLE 401(k), the compensation limit applies for 
     purposes of the matching contribution as well as the 
     nonelective contribution.
       No contributions other than employee elective contributions 
     and required employer contributions may be made to a SIMPLE 
     plan. All contributions under a SIMPLE plan must be fully 
     vested.
       Present law does not provide for a simplified defined 
     benefit plan similar to the SIMPLE plan.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, a small business may establish 
     a simplified retirement plan called the secure assets for 
     employees (``SAFE'') plan. The SAFE plan combines the 
     features of a defined benefit plan and a defined contribution 
     plan.
     Employer and employee eligibility and vesting
       An employer is eligible to adopt a SAFE plan if the 
     employer employs 100 or fewer employees who received at least 
     $5,000 in compensation during the preceding year and does not 
     maintain another retirement plan other than a plan that 
     provides only for elective deferrals or matching 
     contributions, an eligible deferred compensation plan of a 
     tax-exempt organization or a State or local government 
     (``section 457 plan''), or a collectively bargained plan.
       Each employee whose compensation was at least $5,000 in any 
     2 preceding consecutive years and in the current year 
     generally is eligible to participate. All benefits under a 
     SAFE plan are fully vested at all times.
     Benefits and funding
       A SAFE plan provides a fully funded minimum defined 
     benefit. For each year of participation, a participant 
     generally accrues a minimum annual benefit at retirement 
     equal to 3 percent of the participant's compensation for the 
     year. The employer may elect to provide a benefit of 2 
     percent, 1 percent, or 0 percent of compensation for any year 
     for all participants if the employer notifies the 
     participants of such lower percentage within a reasonable 
     period before the beginning of the year. Benefits under a 
     SAFE plan are subject to the annual limitation on 
     compensation that may be taken into account under a qualified 
     plan ($160,000 in 1999).
       An employer may count up to 10 years of service performed 
     by a participant before the adoption of a SAFE plan (``prior 
     service year'') if the same number of prior service years is 
     available to all employees eligible to participate in the 
     SAFE plan for the first plan year. Prior service years is 
     taken into account by doubling the amount of the contribution 
     the employer would otherwise make for each participant with 
     prior service years, beginning with the first year the SAFE 
     plan is in effect. A participant's prior service years do not 
     include any years in which a participant was an active 
     participant in any defined benefit plan maintained by the 
     employer or received less than $5,000 in compensation from 
     the employer.
       Each year the employer is required to contribute to the 
     SAFE plan on behalf of each participant an amount sufficient 
     to provide the annual benefit accrued for the year payable at 
     age 65, using specified actuarial assumptions (including an 
     interest rate not less than 3 percent and not greater than 5 
     percent per year). A SAFE plan may be funded either through 
     an individual retirement annuity for each employee (``SAFE 
     Annuity'') or through a trust (a ``SAFE Trust'').
       Under a SAFE Trust, each participant has an account to 
     which actual investment returns are credited. If a 
     participant's account balance is less than the total of past 
     employer contributions credited with a specified interest 
     rate (not less than 3 percent and not greater than 5 percent 
     per year), the employer is required to make up the shortfall. 
     If the investment returns in a participant's account exceed 
     the specified interest rate, the participant is entitled to 
     the larger account balance. Permissible investments of a SAFE 
     Trust are securities that are readily tradable on an 
     established securities market and insurance company products 
     that are regulated by State law.
       Under a SAFE Annuity, each year the employer is required to 
     contribute the amount necessary to purchase an annuity that 
     provides the benefit accrual for the year.
       The required contributions to a SAFE plan are deductible 
     under the rules applicable to qualified defined benefit 
     plans. An excise tax applies if the employer fails to make 
     the required contribution for the year.
       Benefits under a SAFE plan are not guaranteed by the 
     Pension Benefit Guaranty Corporation.
     Distributions
       A SAFE plan may provide for distributions at any time. 
     Distributions from a SAFE plan are subject to tax under the 
     present-law rules applicable to distributions from qualified 
     plans, except that a distribution prior to the participant's 
     attainment of age 59\1/2\ generally are subject to an 
     additional tax equal to 20 percent of the amount distributed.
       A SAFE plan must provide for payment of benefits in the 
     form of a single life annuity payable at age 65 or any 
     actuarially equivalent form of benefit. A SAFE plan is not 
     subject to the joint and survivor annuity requirements 
     applicable to other defined benefit pension plans.
     Nondiscrimination requirements and other rules
       A SAFE plan is not subject to the nondiscrimination rules, 
     the top-heavy plan rules, or the limitations on benefits or 
     contributions applicable to qualified retirement plans. A 
     SAFE plan is subject to the qualified plan requirement that a 
     participant's benefit accrual may not cease merely because 
     the participant has attained a specified age (sec. 
     411(b)(1)(H)). Simplified reporting and disclosure 
     requirements apply to SAFE plans.
     Effective date
       The Senate amendment provision is effective for years 
     beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

                    B. Enhancing Fairness for Women

     1. Additional catch-up contributions (sec. 1221 of the House 
         bill, sec. 321 of the Senate amendment, and secs. 219, 
         402(g), 408(p), and 457 of the Code)

                              Present Law

     Elective deferral limitations
       Under present law, under certain salary reduction 
     arrangements, an employee may elect to have the employer make 
     payments as contributions to a plan on behalf of the 
     employee, or to the employee directly in cash. Contributions 
     made at the election of the employee are called elective 
     deferrals.
       The maximum annual amount of elective deferrals that an 
     individual may make to a qualified cash or deferred 
     arrangement (a ``401(k) plan''), a tax-sheltered annuity 
     (``section 403(b) annuity'') or a salary reduction simplified 
     employee pension plan (``SEP'') is $10,000 (for 1999). The 
     maximum annual amount of elective deferrals that an 
     individual may make to a SIMPLE plan is $6,000. These limits 
     are indexed for inflation in $500 increments.

[[Page 19689]]


     Section 457 plans
       The maximum annual deferral under a deferred compensation 
     plan of a State or local government or a tax-exempt 
     organization (a ``section 457 plan'') is the lesser of (1) 
     $8,000 (for 1999) or (2) 33\1/3\ percent of compensation. The 
     $8,000 dollar limit is increased for inflation in $500 
     increments. Under a special catch-up rule, the section 457 
     plan may provide that, for one or more of the participant's 
     last 3 years before retirement, the otherwise applicable 
     limit is increased to the lesser of (1) $15,000 or (2) the 
     sum of the otherwise applicable limit for the year plus the 
     amount by which the limit applicable in preceding years of 
     participation exceeded the deferrals for that year.
     IRAs
       Under present law, the maximum annual contribution that can 
     be made to all an individuals IRAs is the lesser of $2,000 or 
     the individual's compensation for the year. Special rules 
     apply in the case of a married couple to allow up to the 
     maximum contribution for each spouse, provided that the 
     combined compensation of the spouses is at least equal to the 
     total IRA contributions.

                               House Bill

       The House bill provides that the otherwise applicable 
     dollar limit on elective deferrals under a section 401(k) 
     plan, section 403(b) annuity, or SIMPLE, or deferrals under a 
     section 457 plan are increased for individuals who have 
     attained age 50 by the end of the year.\19\ The otherwise 
     applicable dollar limit is increased by $1,000 in each year 
     beginning in 2001 until the amount of the increase is $5,000 
     in 2005. Thereafter, the $5,000 limit is indexed for 
     inflation in $500 increments. In the case of section 457 
     plans, this catch-up rule does not apply during the 
     participant's last 3 years before retirement (in those years, 
     the regularly applicable dollar limit is doubled).
---------------------------------------------------------------------------
     \19\ Another provision in the House bill increases the dollar 
     limit on elective deferrals under such arrangements.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2000.

                            Senate Amendment

       The Senate amendment provides that individuals who have 
     attained age 50 may make additional catch-up elective 
     contributions to employer-sponsored retirement plans and 
     additional catch-up IRA contributions.
       In the case of employer-sponsored retirement plans, the 
     provision applies to elective deferrals under a section 
     401(k) plan, section 403(b) annuity, SIMPLE, or section 457 
     plan. Additional contributions may be made by an individual 
     who has attained age 50 before the end of the plan year and 
     with respect to whom no other elective deferrals may 
     otherwise be made to the plan for the year because of the 
     application of any limitation of the Code (e.g., the annual 
     limit on elective deferrals) or of the plan. Under the 
     provision, the additional amount of elective contributions 
     that may be made by an eligible individual participating in 
     such a plan is the lesser of (1) the applicable percent of 
     the maximum dollar amount of elective deferrals otherwise 
     excludable from the gross income of the participant for the 
     year (under sec. 402(g)) or (2) the participant's 
     compensation for the year reduced by any other elective 
     deferrals of the participant for the year.\20\ The applicable 
     percent is 10 percent in 2001, and increases by 10 percentage 
     points until the applicable percent is 50 in 2005 and 
     thereafter.
---------------------------------------------------------------------------
     \20\ In the case of a section 457 plans, this catch-up rule 
     does not apply during the participant's last 3 years before 
     retirement (in those years, the regularly applicable dollar 
     limit is doubled).
---------------------------------------------------------------------------
       Catch-up contributions made under the provision are not 
     subject to any other contribution limits and are not taken 
     into account in applying other contribution limits. In 
     addition, such contributions are not subject to applicable 
     nondiscrimination rules.\21\
---------------------------------------------------------------------------
     \21\ Another provision in the Senate amendment provides that 
     elective contributions are deductible without regard to the 
     otherwise applicable deduction limits.
---------------------------------------------------------------------------
       An employer may make matching contributions with respect to 
     catch-up contributions. Any such matching contributions are 
     subject to the normally applicable rules.\22\
---------------------------------------------------------------------------
     \22\ The Senate amendment contains a similar catch-up rule 
     for IRAs, described earlier.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective for 
     years beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     2. Equitable treatment for contributions of employees to 
         defined contribution plans (sec. 1222 of the House bill, 
         sec. 322 of the Senate amendment, and secs. 403(b), 415, 
         and 457 of the Code)

                              Present Law

       Present law imposes limits on the contributions that may be 
     made to tax-favored retirement plans.
     Defined contribution plans
       In the case of a tax-qualified defined contribution plan, 
     the limit on annual additions that can be made to the plan on 
     behalf of an employee is the lesser of $30,000 (for 1999) or 
     25 percent of the employee's compensation (sec. 415(c)). 
     Annual additions include employer contributions, including 
     contributions made at the election of the employee (i.e., 
     employee elective deferrals), after-tax employee 
     contributions, and any forfeitures allocated to the employee. 
     For this purpose, compensation means taxable compensation of 
     the employee, plus elective deferrals, and similar salary 
     reduction contributions. A separate limit applies to benefits 
     under a defined benefit plan.
       For years beginning before January 1, 2000, an overall 
     limit applies if an employee is a participant in both a 
     defined contribution plan and a defined benefit plan of the 
     same employer.
     Tax-sheltered annuities
       In the case of a tax-sheltered annuity (a ``section 403(b) 
     annuity''), the annual contribution generally cannot exceed 
     the lesser of the exclusion allowance or the section 415(c) 
     defined contribution limit. The exclusion allowance for a 
     year is equal to 20 percent of the employee's includible 
     compensation, multiplied by the employee's years of service, 
     minus excludable contributions for prior years under 
     qualified plans, tax-sheltered annuities or section 457 plans 
     of the employer.
       For purposes of determining the contribution limits 
     applicable to section 403(b) annuities, includible 
     compensation means the amount of compensation received from 
     the employer for the most recent period which may be counted 
     as a year of service under the exclusion allowance. In 
     addition, includible compensation includes elective deferrals 
     and similar salary reduction amounts.
       Treasury regulations include provisions regarding 
     application of the exclusion allowance in cases where the 
     employee participates in a section 403(b) annuity and a 
     defined benefit plan. The Taxpayer Relief Act of 1997 
     directed the Secretary of the Treasury to revise these 
     regulations, effective for years beginning after December 31, 
     1999, to reflect the repeal of the overall limit on 
     contributions and benefits.
     Section 457 plans
       Compensation deferred under an eligible deferred 
     compensation plan of a tax-exempt or State and local 
     governmental employer (a ``section 457 plan'') is not 
     includible in gross income until paid or made available. In 
     general, the maximum permitted annual deferral under such a 
     plan is the lesser of (1) $8,000 (in 1999) or (2) 33\1/3\ 
     percent of compensation. The $8,000 limit is increased for 
     inflation in $500 increments.

                               House Bill

     Increase in defined contribution plan limit
       The House bill increases the 25 percent of compensation 
     limitation on annual additions under a defined contribution 
     plan to 100 percent.\23\
---------------------------------------------------------------------------
     \23\ Another provision of the House bill increases the 
     defined contribution plan dollar limit.
---------------------------------------------------------------------------
     Conforming limits on tax-sheltered annuities
       The House bill repeals the exclusion allowance applicable 
     to contributions to tax- sheltered annuities. Thus, such 
     annuities are subject to the limits applicable to tax-
     qualified plans.
     Section 457 plans
       The House bill increases the 33\1/3\ percent of 
     compensation limitation on deferrals under a section 457 plan 
     to 100 percent of compensation.
     Effective date
       The House bill is effective for years beginning after 
     December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with a modification. The conference 
     agreement directs the Secretary of the Treasury to revise the 
     regulations relating to the exclusion allowance under section 
     403(b)(2) to render void the requirement that contributions 
     to a defined benefit plan be treated as previously excluded 
     amounts for purposes of the exclusion allowance. For taxable 
     years beginning after December 31, 1999, the regulatory 
     provisions regarding the exclusion allowance are to be 
     applied as if the requirement that contributions to a defined 
     benefit plan be treated as previously excluded amounts for 
     purposes of the exclusion allowance were void.
       Effective date.--The provisions are generally effective for 
     years beginning after December 31, 2000. The provision 
     regarding the regulations under section 403(b)(2) is 
     effective on the date of enactment.
     3. Faster vesting of employer matching contributions (sec. 
         1223 of the bill, sec. 325 of the Senate amendment, and 
         sec. 411 of the Code)

                              Present Law

       Under present law, a plan is not a qualified plan unless a 
     participant's employer-provided benefit vests at least as 
     rapidly as under one of two alternative minimum vesting 
     schedules. A plan satisfies the first schedule if a 
     participant acquires a nonforfeitable right to 100 percent of 
     the participant's accrued benefit derived from employer 
     contributions upon the completion of 5 years

[[Page 19690]]

     of service. A plan satisfies the second schedule if a 
     participant has a nonforfeitable right to at least 20 percent 
     of the participant's accrued benefit derived from employer 
     contributions after 3 years of service, 40 percent after 4 
     years of service, 60 percent after 5 years of service, 80 
     percent after 6 years of service, and 100 percent after 7 
     years of service.\24\
---------------------------------------------------------------------------
     \24\ The minimum vesting requirements are also contained in 
     title I of the Employee Retirement Income Security Act of 
     1974, as amended (``ERISA'').
---------------------------------------------------------------------------

                               House Bill

       Under the House bill, employer matching contributions have 
     to vest at least as rapidly as under one of the following two 
     alternative minimum vesting schedules. A plan satisfies the 
     first schedule if a participant acquires a nonforfeitable 
     right to 100 percent of employer matching contributions upon 
     the completion of 3 years of service. A plan satisfies the 
     second schedule if a participant has a nonforfeitable right 
     to 20 percent of employer matching contributions for each 
     year of service beginning with the participant's second year 
     of service and ending with 100 percent after 6 years of 
     service.
       Effective date.--The provision is effective for plan years 
     beginning after December 31, 2000, with a delayed effective 
     date for plans maintained pursuant to a collective bargaining 
     agreement. The provision does not apply to any employee until 
     the employee has an hour of service after the effective date. 
     In applying the new vesting schedule, service before the 
     effective date is taken into account.

                            Senate Amendment

       The Senate amendment is the same as the House bill.\25\
---------------------------------------------------------------------------
     \25\ The Senate amendment makes corresponding changes to 
     title I of ERISA.
---------------------------------------------------------------------------

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     4. Simplify and update the minimum distribution rules (secs. 
         1224 and 1239 of the House bill and secs. 401(a)(9) and 
         457 of the Code)

                              Present Law

     In general
       Minimum distribution rules apply to all types of tax-
     favored retirement vehicles, including qualified plans, 
     individual retirement arrangements (``IRAs''), tax-sheltered 
     annuities (``section 403(b) annuities''), and eligible 
     deferred compensation plans of tax-exempt and State and local 
     government employers (``section 457 plans''). In general, 
     under these rules, distribution of minimum benefits must 
     begin no later than the required beginning date. Minimum 
     distribution rules also apply to benefits payable with 
     respect to a plan participant who has died. Failure to comply 
     with the minimum distribution rules results in an excise tax 
     imposed on the individual plan participant equal to 50 
     percent of the required minimum distribution not distributed 
     for the year. The excise tax can be waived if the individual 
     establishes to the satisfaction of the Secretary that the 
     shortfall in the amount distributed was due to reasonable 
     error and reasonable steps are being taken to remedy the 
     shortfall.
     Distributions prior to the death of the individual
       In the case of distributions prior to the death of the plan 
     participant, the minimum distribution rules are satisfied if 
     either (1) the participant's entire interest in the plan is 
     distributed by the required beginning date, or (2) the 
     participant's interest in the plan is to be distributed (in 
     accordance with regulations), beginning not later than the 
     required beginning date, over a permissible period. The 
     permissible periods are (1) the life of the participant, (2) 
     the lives of the participant and a designated beneficiary, 
     (3) the life expectancy of the participant, or (4) the joint 
     life and last survivor expectancy of the participant and a 
     designated beneficiary. In calculating minimum required 
     distributions, life expectancies of the participant and the 
     participant's spouse may be recomputed annually.
       In the case of qualified plans, tax-sheltered annuities, 
     and section 457 plans, the required beginning date is the 
     April 1 of the calendar year following the later of (1) the 
     calendar year in which the employee attains age 70\1/2\ or 
     (2) the calendar year in which the employee retires. However, 
     in the case of a 5-percent owner of the employer, 
     distributions are required to begin no later than the April 1 
     of the calendar year following the year in which the 5-
     percent owner attains age 70\1/2\. If commencement of 
     benefits is delayed beyond age 70\1/2\ from a defined benefit 
     plan, then the accrued benefit of the employee must be 
     actuarially increased to take into account the period after 
     age 70\1/2\ in which the employee was not receiving benefits 
     under the plan.\26\ In the case of distributions from an IRA 
     other than a Roth IRA, the required beginning date is the 
     April 1 following the calendar year in which the IRA owner 
     attains age 70\1/2\. The pre-death minimum distribution rules 
     do not apply to Roth IRAs.
---------------------------------------------------------------------------
     \26\ State and local government plans and church plans are 
     not required to actuarially increase benefits that begin 
     after age 70\1/2\
---------------------------------------------------------------------------
       In general, under proposed regulations, in order to satisfy 
     the minimum distribution rules, annuity payments under a 
     defined benefit plan must be paid in period payments made at 
     intervals not longer than one year over a permissible period, 
     and must be nonincreasing, or increase only as a result of 
     the following: (1) cost-of-living adjustments; (2) cash 
     refunds of employee contributions; (3) benefit increases 
     under the plan; or (4) an adjustment due to death of the 
     employee's beneficiary. In the case of a defined contribution 
     plan, the minimum required distribution is determined by 
     dividing the employee's benefit by the applicable life 
     expectancy.
     Distributions after the death of the plan participant
       The minimum distribution rules also apply to distributions 
     to beneficiaries of deceased participants. In general, if the 
     participant dies after minimum distributions have begun, the 
     remaining interest must be distributed at least as rapidly as 
     under the minimum distribution method being used as of the 
     date of death. If the participant dies before minimum 
     distributions have begun, then the entire remaining interest 
     must generally be distributed within 5 years of the 
     participant's death. The 5-year rule does not apply if 
     distributions begin within 1 year of the participant's death 
     and are payable over the life expectancy of a designated 
     beneficiary. A surviving spouse beneficiary is not required 
     to begin distribution until the date the deceased participant 
     would have attained age 70\1/2\.
     Special rules for section 457 plans
       Eligible deferred compensation plans of State and local and 
     tax-exempt employers (``section 457 plans'') are subject to 
     the minimum distribution rules described above. Such plans 
     are also subject to additional minimum distribution 
     requirements (sec. 457(d)(2)(b)).

                               House Bill

     Modification of post-death distribution rules
       The House bill applies the present-law rules applicable if 
     the participant dies before distribution of minimum benefits 
     has begun to all post-death distributions. Thus, in general, 
     if the employee dies before his or her entire interest has 
     been distributed, distribution of the remaining interest must 
     be made within 5 years of the date of death, or begin within 
     one year of the date of death and paid over the life or life 
     expectancy of a designated beneficiary. In the case of a 
     surviving spouse, distributions are not required to begin 
     until the surviving spouse attains age 70\1/2\. Minimum 
     distributions that have already begun may be recalculated 
     under the new rule.
     Reduction in excise tax
       The House bill reduces the excise tax on failures to 
     satisfy the minimum distribution rules to 10 percent of the 
     amount that was required to be distributed but was not 
     distributed.
     Treasury regulations
       The Treasury is directed to update, simplify and finalize 
     the regulations relating to the minimum distribution rules. 
     The Treasury is directed to reflect in the regulations 
     current life expectancies and to revise the required 
     distribution methods so that, under reasonable assumptions, 
     the amount of the required distribution does not decrease 
     over time. The regulations are to permit recalculation of 
     distributions for future years to reflect the change in the 
     regulations, and to permit the election of a new designated 
     beneficiary and method of calculating life expectancy. The 
     regulations are effective for years beginning after December 
     31, 2000.
     Section 457 plans
       The House bill repeals the special minimum distribution 
     rules applicable to section 457 plans. Thus, such plans are 
     subject to the same minimum distribution rules applicable to 
     other types of tax-favored arrangements.

                             Effective date

       In general, the provision is effective for years beginning 
     after December 31, 2000.
     Senate Amendment
       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     5. Clarification of tax treatment of division of section 457 
         plan benefits upon divorce (sec. 1225 of the House bill, 
         sec. 323 of the Senate amendment, and sec. 457 of the 
         Code)

                              Present Law

       Under present law, benefits provided under a qualified 
     retirement plan for a participant may not be assigned or 
     alienated to creditors of the participant, except in very 
     limited circumstances. One exception to the prohibition on 
     assignment or alienation rule is a qualified domestic 
     relations order (``QDRO''). A QDRO is a domestic relations 
     order that creates or recognizes a right of an alternate 
     payee to any plan benefit payable with respect to a 
     participant, and that meets certain procedural requirements.
       Under present law, a distribution from a governmental plan 
     or a church plan is treated as made pursuant to a QDRO if it 
     is made pursuant to a domestic relations order that

[[Page 19691]]

     creates or recognizes a right of an alternate payee to any 
     plan benefit payable with respect to a participant. Such 
     distributions are not required to meet the procedural 
     requirements that apply with respect to distributions from 
     qualified plans.
       Under present law, amounts distributed from a qualified 
     plan generally are taxable to the participant in the year of 
     distribution. However, if amounts are distributed to the 
     spouse (or former spouse) of the participant by reason of a 
     QDRO, the benefits are taxable to the spouse (or former 
     spouse). Amounts distributed pursuant to a QDRO to an 
     alternate payee other than the spouse (or former spouse) are 
     taxable to the plan participant.
       Section 457 of the Internal Revenue Code provides rules for 
     deferral of compensation by an individual participating in an 
     eligible deferred compensation plan (``section 457 plan'') of 
     a tax-exempt or State and local government employer. The QDRO 
     rules do not apply to section 457 plans.

                               House Bill

       The House bill applies the taxation rules for qualified 
     plan distributions pursuant to a QDRO to distributions made 
     pursuant to a domestic relations order from a section 457 
     plan. In addition, a section 457 plan is not treated as 
     violating the restrictions on distributions from such plans 
     due to payments to an alternate payee under a QDRO. The 
     special rule applicable to governmental plans and church 
     plans applies for purposes of determining whether a 
     distribution is pursuant to a QDRO.
       Effective date.--The provision is effective for transfers, 
     distributions and payments made after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     6. Modification of safe harbor relief for hardship 
         withdrawals from 401(k) plans (sec. 324 of the Senate 
         amendment)

                              Present Law

       Elective deferrals under a qualified cash or deferred 
     arrangement (a ``section 401(k) plan'') may not be 
     distributable prior to the occurrence of one or more 
     specified events. One event upon which distribution is 
     permitted is the financial hardship of the employee. 
     Applicable Treasury regulations \27\ provide that a 
     distribution is made on account of hardship only if the 
     distribution is made on account of an immediate and heavy 
     financial need of the employee and is necessary to satisfy 
     the heavy need.
---------------------------------------------------------------------------
     \27\ Treas. Reg. sec. 1.401(k)-1.
---------------------------------------------------------------------------
       The Treasury regulations provide a safe harbor under which 
     a distribution may be deemed necessary to satisfy an 
     immediate and heavy financial need. One requirement of this 
     safe harbor is that the employee be prohibited from making 
     elective contributions and employee contributions to the plan 
     and all other plans maintained by the employer for at least 
     12 months after receipt of the hardship distribution.

                               House Bill

       No provision.

                            Senate Amendment

       The Secretary of the Treasury is directed to revise the 
     applicable regulations to reduce from 12 months to 6 months 
     the period during which an employee must be prohibited from 
     making elective contributions and employee contributions in 
     order for a distribution to be deemed necessary to satisfy an 
     immediate and heavy financial need.
       Effective date.--The Senate amendment provision is 
     effective for years beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

               C. Increasing Portability for Participants

     1. Rollovers of retirement plan and IRA distributions (secs. 
         1231-1233 and 1239 of the House bill, secs. 331-333 and 
         339 of the Senate amendment, and secs. 401, 402, 403(b), 
         408, 457, and 3405 of the Code)

                              Present Law

     In general
       Present law permits the rollover of funds from a tax-
     favored retirement plan to another tax-favored retirement 
     plan. The rules that apply depend on the type of plan 
     involved. Similarly, the rules regarding the tax treatment of 
     amounts that are not rolled over depend on the type of plan 
     involved.
     Distributions from qualified plans
       Under present law, an ``eligible rollover distribution'' 
     from a tax-qualified employer-sponsored retirement plan may 
     be rolled over tax free to a traditional individual 
     retirement arrangement (``IRA'') \28\ or another qualified 
     plan.\29\ An ``eligible rollover distribution'' means any 
     distribution to an employee of all or any portion of the 
     balance to the credit of the employee in a qualified plan, 
     except the term does not include (1) any distribution which 
     is one of a series of substantially equal periodic payments 
     made (a) for the life (or life expectancy) of the employee or 
     the joint lives (or joint life expectancies) of the employee 
     and the employee's designated beneficiary, or (b) for a 
     specified period of 10 years or more, (2) any distribution to 
     the extent such distribution is required under the minimum 
     distribution rules, and (3) certain hardship distributions. 
     The maximum amount that can be rolled over is the amount of 
     the distribution includible in income, i.e., after-tax 
     employee contributions cannot be rolled over. Qualified plans 
     are not required to accept rollovers.
---------------------------------------------------------------------------
     \28\ A ``traditional'' IRA refers to IRAs other than Roth 
     IRAs or SIMPLE IRAs. All references to IRAs refers only to 
     traditional IRAs.
     \29\ An eligible rollover distribution may either be rolled 
     over by the distributee within 60 days of the date of the 
     distribution or, as described below, directly rolled over by 
     the distributing plan.
---------------------------------------------------------------------------
     Distributions from tax-sheltered annuities
       Eligible rollover distributions from a tax-sheltered 
     annuity (``section 403(b) annuity'') may be rolled over into 
     an IRA or another section 403(b) annuity. Distributions from 
     a section 403(b) annuity cannot be rolled over into a tax-
     qualified plan. Section 403(b) annuities are not required to 
     accept rollovers.
     IRA distributions
       Distributions from a traditional IRA, other than minimum 
     required distributions, can be rolled over into another IRA. 
     In general, distributions from an IRA cannot be rolled over 
     into a qualified plan or section 403(b) annuity. An exception 
     to this rule applies in the case of so-called ``conduit 
     IRAs.'' Under the conduit IRA rule, amounts can be rolled 
     from a qualified plan into an IRA and then subsequently 
     rolled back to another qualified plan if the amounts in the 
     IRA are attributable solely to rollovers from a qualified 
     plan. Similarly, an amount may be rolled over from a section 
     403(b) annuity to an IRA and subsequently rolled back into a 
     section 403(b) annuity if the amounts in the IRA are 
     attributable solely to rollovers from a section 403(b) 
     annuity.
     Distributions from section 457 plans
       A ``section 457 plan'' is an eligible deferred compensation 
     plan of a State or local government or tax-exempt employer 
     that meets certain requirements. In some cases, different 
     rules apply under section 457 to governmental plans and plans 
     of tax-exempt employers. For example, governmental section 
     457 plans are like qualified plans in that plan assets are 
     required to be held in a trust for the exclusive benefit of 
     plan participants and beneficiaries. In contrast, benefits 
     under a section 457 plan of a tax-exempt employer are 
     unfunded, like nonqualified deferred compensation plans of 
     private employers.
       Section 457 benefits can be transferred to another section 
     457 plan. Distributions from a section 457 plan cannot be 
     rolled over to another section 457 plan, a qualified plan, a 
     section 403(b) annuity, or an IRA.
     Rollovers by surviving spouses
       A surviving spouse that receives an eligible rollover 
     distribution may roll over the distribution into an IRA, but 
     not a qualified plan or section 403(b) annuity.
     Direct rollovers and withholding requirements
       Qualified plans and section 403(b) annuities are required 
     to provide that a plan participant has the right to elect 
     that an eligible rollover distribution be directly rolled 
     over to another eligible retirement plan. If the plan 
     participant does not elect the direct rollover option, then 
     withholding is required on the distribution at a 20-percent 
     rate.
     Notice of eligible rollover distribution
       The plan administrator of a qualified plan or a section 
     403(b) annuity is required to provide a written explanation 
     of rollover rules to individuals who receive a distribution 
     eligible for rollover. In general, the notice is to be 
     provided within a reasonable period of time before making the 
     distribution and is to include an explanation of (1) the 
     provisions under which the individual may have the 
     distribution directly rolled over to another eligible 
     retirement plan, (2) the provision that requires withholding 
     if the distribution is not directly rolled over, (3) the 
     provision under which the distribution may be rolled over 
     within 60 days of receipt, and (4) if applicable, certain 
     other rules that may apply to the distribution. The Treasury 
     Department has provided more specific guidance regarding 
     timing and content of the notice.
     Taxation of distributions
       As is the case with the rollover rules, different rules 
     regarding taxation of benefits apply to different types of 
     tax-favored arrangements. In general, distributions from a 
     qualified plan, section 403(b) annuity, or IRA are includible 
     in income in the year received. In certain cases, 
     distributions from qualified plans are eligible for capital 
     gains treatment and averaging. These rules do not apply to 
     distributions from another type of plan. Distributions from a 
     qualified plan, IRA, and section 403(b) annuity generally are 
     subject to an additional 10-percent early withdrawal tax if 
     made before age 59\1/2\. There are a number of exceptions to 
     the early withdrawal tax. Some of the exceptions apply to all 
     three types of plans, and others apply only to certain types 
     of plans. For example, the 10-percent early withdrawal tax 
     does not apply to IRA distributions for educational expenses, 
     but does apply to similar distributions from qualified plans 
     and section 403(b)

[[Page 19692]]

     annuities. Benefits under a section 457 plan are generally 
     includible in income when paid or made available. The 10-
     percent early withdrawal tax does not apply to section 457 
     plans.

                               House Bill

     In general
       The House bill provides that eligible rollover 
     distributions from qualified retirement plans, section 403(b) 
     annuities, and governmental section 457 plans generally may 
     be rolled over to any of such plans or arrangements.\30\ 
     Similarly, distributions from an IRA generally may be rolled 
     over into a qualified plan, section 403(b) annuity, or 
     governmental section 457 plan. The direct rollover and 
     withholding rules are extended to distributions from a 
     governmental section 457 plan, and such plans are required to 
     provide the written notification regarding eligible rollover 
     distributions. The rollover notice (with respect to all 
     plans) is required to include a description of the provisions 
     under which distributions from the plan to which the 
     distribution is rolled over may be subject to restrictions 
     and tax consequences different than those applicable to 
     distributions from the distributing plan. Qualified plans, 
     section 403(b) annuities, and section 457 plans are not 
     required to accept rollovers.
---------------------------------------------------------------------------
     \30\ Hardship distributions from governmental section 457 
     plans would be considered eligible rollover distributions.
---------------------------------------------------------------------------
       Some special rules apply in certain cases. A distribution 
     from a qualified plan is not eligible for capital gains or 
     averaging treatment if there was a rollover to the plan that 
     would not have been permitted under present law. Thus, in 
     order to preserve capital gains and averaging treatment for a 
     qualified plan distribution that is rolled over, the rollover 
     has to be made to a ``conduit IRA'' as under present law, and 
     then rolled back into a qualified plan. Amounts distributed 
     from a section 457 plan are subject to the early withdrawal 
     tax to the extent the distribution consists of amounts 
     attributable to rollovers from another type of plan. Section 
     457 plans are required to separately account for such 
     amounts.
       The provision also provides that benefits in governmental 
     section 457 plans are includible in income when paid.
     Rollover of after-tax contributions
       The provision provides that employee after-tax 
     contributions may be rolled over into another qualified plan 
     or a traditional IRA. In the case of a rollover from a 
     qualified plan to another qualified plan, the rollover may be 
     accomplished only through a direct rollover. In addition, a 
     qualified plan may not accept rollovers of after-tax 
     contributions unless the plan provides separate accounting 
     for such contributions (and earnings thereon). After-tax 
     contributions (including nondeductible contributions to an 
     IRA) may not be rolled over from an IRA into a qualified 
     plan, tax-sheltered annuity, or section 457 plan.
       In the case of a distribution from a traditional IRA that 
     is rolled over into an eligible rollover plan that is not an 
     IRA, the distribution is attributed first to amounts other 
     than after-tax contributions.
     Expansion of spousal rollovers
       The provision provides that surviving spouses may roll over 
     distributions to a qualified plan, section 403(b) annuity, or 
     governmental section 457 plan in which the spouse 
     participates.
     Treasury regulations
       The Secretary is directed to prescribe rules necessary to 
     carry out the provisions. Such rules may include, for 
     example, reporting requirements and mechanisms to address 
     mistakes relating to rollovers. It is anticipated that the 
     IRS will develop forms to assist individuals who roll over 
     after-tax contributions to an IRA in keeping track of such 
     contributions. Such forms could, for example, expand Form 
     8606--Nondeductible IRAs, to include information regarding 
     after-tax contributions.
     Effective date
       The provision is effective for distributions made after 
     December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Waiver of 60-day rule (sec. 1234 of the House bill, sec. 
         334 of the Senate amendment, and secs. 402 and 408 of the 
         Code)

                              Present Law

       Under present law, amounts received from an IRA or 
     qualified plan may be rolled over tax free if the rollover is 
     made within 60 days of the date of the distribution. The 
     Secretary does not have the authority to waive the 60-day 
     requirement.

                               House Bill

       The House bill provides that the Secretary may waive the 
     60-day rollover period if the failure to waive such 
     requirement would be against equity or good conscience, 
     including cases of casualty, disaster, or other events beyond 
     the reasonable control of the individual subject to such 
     requirement.
       Effective date.--The House bill provision applies to 
     distributions made after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Treatment of forms of distribution (sec. 1235 of the House 
         bill, sec. 335 of the Senate amendment, and sec. 
         411(d)(6) of the Code)

                              Present Law

       An amendment of a qualified retirement plan may not 
     decrease the accrued benefit of a plan participant. An 
     amendment is treated as reducing an accrued benefit if, with 
     respect to benefits accrued before the amendment is adopted, 
     the amendment has the effect of either (1) eliminating or 
     reducing an early retirement benefit or a retirement-type 
     subsidy, or (2) except as provided by Treasury regulations, 
     eliminating an optional form of benefit (sec. 411(d)(6)).\31\
---------------------------------------------------------------------------
     \31\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
       The prohibition against the elimination of an optional form 
     of benefit applies to plan mergers, spinoffs, transfers, and 
     transactions amending or having the effect of amending a plan 
     or plans to transfer plan benefits. For example, if Plan A, a 
     profit-sharing plan that provides for distribution of 
     benefits in annual installments over ten or twenty years, is 
     merged with Plan B, a profit-sharing plan that provides for 
     distribution of benefits in annual installments over life 
     expectancy at the time of retirement, the merged plan must 
     preserve the ten- or twenty-year installment option with 
     respect to benefits accrued under Plan A as of the date of 
     the merger and the installments over life expectancy with 
     respect to benefits accrued under Plan B as of the date of 
     the merger. Similarly, for example, if a participant's 
     benefit under a defined contribution plan is transferred to 
     another defined contribution plan maintained by the same or a 
     different employer, the optional forms of benefit available 
     with respect to the participant's accrued benefit under the 
     transferor plan must be preserved.\32\
---------------------------------------------------------------------------
     \32\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(a)(3)(i).
---------------------------------------------------------------------------

                               House Bill

       A defined contribution plan to which benefits are 
     transferred is not treated as reducing a participant's or 
     beneficiary's accrued benefit even though it does not provide 
     all of the forms of distribution previously available under 
     the transferor plan if (1) the plan receives from another 
     defined contribution plan a direct transfer of the 
     participant's or beneficiary's benefit accrued under the 
     transferor plan, or the plan results from a merger or other 
     transaction that has the effect of a direct transfer 
     (including consolidations of benefits attributable to 
     different employers within a multiple employer plan), (2) the 
     terms of both the transferor plan and the transferee plan 
     authorize the transfer, (3) the transfer occurs pursuant to a 
     voluntary election by the participant or beneficiary that is 
     made after the participant or beneficiary received a notice 
     describing the consequences of making the election, (4) if 
     the transferor plan provides for an annuity as the normal 
     form of distribution in accordance with the joint and 
     survivor annuity rules (sec. 417), the participant's spouse 
     (if any) consents to the transfer in a manner similar to the 
     consent required by section 417, and (5) the transferee plan 
     allows the participant or beneficiary to receive distribution 
     of his or her benefit under the transferee plan in the form 
     of a single sum distribution.
       In addition, except to the extent provided by the Secretary 
     of the Treasury in regulations, a defined contribution plan 
     is not treated as reducing a participant's accrued benefit if 
     (1) a plan amendment eliminates a form of distribution 
     previously available under the plan, (2) a single sum 
     distribution is available to the participant at the same time 
     or times as the form of distribution eliminated by the 
     amendment, and (3) the single sum distribution is based on 
     the same or greater portion of the participant's accrued 
     benefit as the form of distribution eliminated by the 
     amendment.
       The Secretary is directed to issue, not later than December 
     31, 2001, final regulations under section 411(d)(6) 
     implementing the provision.
       Furthermore, the provision authorizes the Secretary of the 
     Treasury to provide by regulations that the prohibitions 
     against eliminating or reducing an early retirement benefit, 
     a retirement-type subsidy, or an optional form of benefit not 
     apply to plan amendments that do not adversely affect the 
     rights of participants in a material manner but that do 
     eliminate or reduce early retirement benefits, retirement-
     type subsidies, and optional forms of benefit that create 
     significant burdens and complexities for a plan and its 
     participants.
       Effective date.--The provision is effective for years 
     beginning after December 31, 2000, except that the direction 
     to the Secretary regarding regulations is effective on the 
     date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

[[Page 19693]]



                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment, with the modification that the Secretary is 
     required to provide by regulations that the prohibitions 
     against eliminating or reducing an early retirement benefit, 
     a retirement-type subsidy, or an optional form of benefit not 
     apply to plan amendments that do not adversely affect the 
     rights of participants in a material manner but that do 
     eliminate or reduce early retirement benefits, retirement-
     type subsidies, and optional forms of benefit that create 
     significant burdens and complexities for a plan and its 
     participants. As under the House bill and the Senate 
     amendment, the conferees intend that the factors to be 
     considered in determining whether an amendment has a 
     materially adverse effect on a participant would include (1) 
     all of the participant's early retirement benefits, 
     retirement-type subsidies, and optional forms of benefits 
     that are reduced or eliminated by the amendment, (2) the 
     extent to which early retirement benefits, retirement-type 
     subsidies, and optional forms of benefit in effect with 
     respect to a participant after the amendment effective date 
     provide rights that are comparable to the rights that are 
     reduced or eliminated by the plan amendment, (3) the number 
     of years before the participant attains normal retirement age 
     under the plan (or early retirement age, as applicable), (4) 
     the size of the participant's benefit that is affected by the 
     plan amendment, in relation to the amount of the 
     participant's compensation, and (5) the number of years 
     before the plan amendment is effective.
       The conference agreement clarifies that the Secretary is to 
     issue final regulations under section 411(d)(6), including 
     regulations required under the provision, no later than 
     December 31, 2001.
       Effective date.--The provision is generally effective for 
     years beginning after December 31, 2001. The direction to the 
     Secretary regarding regulations is effective on the date of 
     enactment.
     4. Rationalization of restrictions on distributions (sec. 
         1236 of the House bill, sec. 336 of the Senate amendment, 
         and secs. 401(k), 403(b), and 457 of the Code)

                              Present Law

       Elective deferrals under a qualified cash or deferred 
     arrangement (``section 401(k) plan''), tax-sheltered annuity 
     (``section 403(b) annuity''), or an eligible deferred 
     compensation plan of a tax-exempt organization or State or 
     local government (``section 457 plan''), may not be 
     distributable prior to the occurrence of one or more 
     specified events. These permissible distributable events 
     include ``separation from service.''
       A separation from service occurs only upon a participant's 
     death, retirement, resignation or discharge, and not when the 
     employee continues on the same job for a different employer 
     as a result of the liquidation, merger, consolidation or 
     other similar corporate transaction. A severance from 
     employment occurs when a participant ceases to be employed by 
     the employer that maintains the plan. Under a so-called 
     ``same desk rule,'' a participant's severance from employment 
     does not necessarily result in a separation from service. 
     \33\
---------------------------------------------------------------------------
     \33\ Rev. Rul. 79-336, 1979-2 C.B. 187.
---------------------------------------------------------------------------
       In addition to separation from service and other events, a 
     section 401(k) plan that is maintained by a corporation may 
     permit distributions to certain employees who experience a 
     severance from employment with the corporation that maintains 
     the plan but does not experience a separation from service 
     because the employee continues on the same job for a 
     different employer as a result of a corporate transaction. If 
     the corporation disposes of substantially all of the assets 
     used by the corporation in a trade or business, a 
     distributable event occurs with respect to the accounts of 
     the employees who continue employment with the corporation 
     that acquires the assets. If the corporation disposes of its 
     interest in a subsidiary, a distributable event occurs with 
     respect to the accounts of the employees who continue 
     employment with the subsidiary.

                               House Bill

       The House bill modifies the distribution restrictions 
     applicable to section 401(k) plans, section 403(b) annuities, 
     and section 457 plans to provide that distribution may occur 
     upon severance from employment rather than separation from 
     service. In addition, the provisions for distribution from a 
     section 401(k) plan based upon a corporation's disposition of 
     its assets or a subsidiary are repealed; this special rule is 
     no longer necessary under the provision.
       Effective date.--The provision is effective for 
     distributions after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Purchase of service credit under governmental pension 
         plans (sec. 1237 of the House bill, sec. 337 of the 
         Senate amendment, and secs. 403(b) and 457 of the Code)

                              Present Law

       A qualified retirement plan maintained by a State or local 
     government employer may provide that a participant may make 
     after-tax employee contributions in order to purchase 
     permissive service credit, subject to certain limits (sec. 
     415). Permissive service credit means credit for a period of 
     service recognized by the governmental plan only if the 
     employee voluntarily contributes to the plan an amount (as 
     determined by the plan) that does not exceed the amount 
     necessary to fund the benefit attributable to the period of 
     service and that is in addition to the regular employee 
     contributions, if any, under the plan.
       In the case of any repayment of contributions and earnings 
     to a governmental plan with respect to an amount previously 
     refunded upon a forfeiture of service credit under the plan 
     (or another plan maintained by a State or local government 
     employer within the same State), any such repayment is not 
     taken into account for purposes of the section 415 limits on 
     contributions and benefits. Also, service credit obtained as 
     a result of such a repayment is not considered permissive 
     service credit for purposes of the section 415 limits.
       A participant may not use a rollover or direct transfer of 
     benefits from a tax-sheltered annuity (``section 403(b) 
     annuity'') or an eligible deferred compensation plan of a 
     tax-exempt organization of a State or local government 
     (``section 457 plan'') to purchase permissive service credits 
     or repay contributions and earnings with respect to a 
     forfeiture of service credit.

                               House Bill

       A participant in a State or local governmental plan is not 
     required to include in gross income a direct trustee-to-
     trustee transfer to a governmental defined benefit plan from 
     a section 403(b) annuity or a section 457 plan if the 
     transferred amount is used (1) to purchase permissive service 
     credits under the plan, or (2) to repay contributions and 
     earnings with respect to an amount previously refunded under 
     a forfeiture of service credit under the plan (or another 
     plan maintained by a State or local government employer 
     within the same State).
       Effective date.--The provision is effective for transfers 
     after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     6. Employers may disregard rollovers for purposes of cash-out 
         rules (sec. 1238 of the House bill, sec. 338 of the 
         Senate amendment, and sec. 411(a)(11) of the Code)

                              Present Law

       If a qualified retirement plan participant ceases to be 
     employed by the employer that maintains the plan, the plan 
     may distribute the participant's nonforfeitable accrued 
     benefit without the consent of the participant and, if 
     applicable, the participant's spouse, if the present value of 
     the benefit does not exceed $5,000. If such an involuntary 
     distribution occurs and the participant subsequently returns 
     to employment covered by the plan, then service taken into 
     account in computing benefits payable under the plan after 
     the return need not include service with respect to which a 
     benefit was involuntarily distributed unless the employee 
     repays the benefit. \34\
---------------------------------------------------------------------------
     \34\ A similar provision is cntained in Title I of ERISA.
---------------------------------------------------------------------------
       Generally, a participant may roll over an involuntary 
     distribution from a qualified plan to an IRA or to another 
     qualified plan. \35\
---------------------------------------------------------------------------
     \35\ Other provisions of the House bill expand the kinds of 
     plans to which benefits may be rolled over.
---------------------------------------------------------------------------

                               House Bill

       Under the House bill, a plan is permitted to provide that 
     the present value of a participant's nonforfeitable accrued 
     benefit is determined without regard to the portion of such 
     benefit that is attributable to rollover contributions (and 
     any earnings allocable thereto).
       Effective date.--The provision is effective for 
     distributions after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill. \36\
---------------------------------------------------------------------------
     \36\ The Senate amendment also makes changes to the 
     corresponding provisions of ERISA.
---------------------------------------------------------------------------

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

           D. Strengthening Pension Security And Enforcement

     1. Phase in repeal of 150 percent of current liability 
         funding limit; deduction for contributions to fund 
         termination liability (secs. 1241-1242 of the House bill, 
         secs. 341 and 347 of the Senate amendment, and secs. 
         404(a)(1), 412(c)(7), and 4972(c) of the Code)

                              Present Law

       Under present law, defined benefit pension plans are 
     subject to minimum funding requirements designed to ensure 
     that pension

[[Page 19694]]

     plans have sufficient assets to pay benefits. A defined 
     benefit pension plan is funded using one of a number of 
     acceptable actuarial cost methods.
       No contribution is required under the minimum funding rules 
     in excess of the full funding limit. The full funding limit 
     is generally defined as the excess, if any, of (1) the lesser 
     of (a) the accrued liability under the plan (including normal 
     cost) or (b) 155 percent of the plan's current liability, 
     over (2) the value of the plan's assets (sec. 412(c)(7)). 
     \37\ In general, current liability is all liabilities to plan 
     participants and beneficiaries accrued to date, whereas the 
     accrued liability full funding limit is based on projected 
     benefits. The current liability full funding limit is 
     scheduled to increase as follows: 160 percent for plan years 
     beginning in 2001 or 2002, 165 percent for plan years 
     beginning in 2003 and 2004, and 170 percent for plan years 
     beginning in 2005 and thereafter. \38\ In no event is a 
     plan's full funding limit less than 90 percent of the plan's 
     current liability over the value of the plan's assets.
---------------------------------------------------------------------------
     \37\ The minimum funding requirements, including the full 
     funding limit, are also contained in title I of ERISA.
     \38\ As originally enacted in the Pension Protection Act of 
     1997, the current liability full funding limit was 150 
     percent of current liability. The Taxpayer Relief Act of 1997 
     increased the current liability full funding limit to 155 
     percent in 1999 and 2000, and adopted the scheduled increases 
     described in the text.
---------------------------------------------------------------------------
       An employer sponsoring a defined benefit pension plan 
     generally may deduct amounts contributed to satisfy the 
     minimum funding standard for the plan year. Contributions in 
     excess of the full funding limit generally are not 
     deductible. Under a special rule, an employer that sponsors a 
     defined benefit pension plan (other than a multiemployer 
     plan) which has more than 100 participants for the plan year 
     may deduct amounts contributed of up to 100 percent of the 
     plan's unfunded current liability.

                               House Bill

     Current liability full funding limit
       The House bill gradually increases and then repeals the 
     current liability full funding limit. The current liability 
     full funding limit is 160 percent of current liability for 
     plan years beginning in 2001, 165 percent for plan years 
     beginning in 2002, and 170 percent for plan years beginning 
     in 2003. The current liability full funding limit is repealed 
     for plan years beginning in 2004 and thereafter.
     Deduction for contributions to fund termination liability
       The special rule allowing a deduction for unfunded current 
     liability generally is extended to all defined benefit 
     pension plans, i.e., the provision applies to multiemployer 
     plans and plans with 100 or fewer participants. The special 
     rule does not apply to plans not covered by the PBGC 
     termination insurance program.\39\
---------------------------------------------------------------------------
     \39\ The PBGC termination insurance program does not cover 
     plans of professional service employers that have fewer thatn 
     25 participants.
---------------------------------------------------------------------------
       The House bill also modifies the rule by providing that the 
     deduction is for up to 100 percent of unfunded termination 
     liability, determined as if the plan terminated at the end of 
     the plan year. In the case of a plan with less than 100 
     participants for the plan year, termination liability does 
     not include the liability attributable to benefit increases 
     for highly compensated employees resulting from a plan 
     amendment which was made or became effective, whichever is 
     later, within the last two years.
     Effective date
       The House bill is effective for plan years beginning after 
     December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.\40\
---------------------------------------------------------------------------
     \40\ The Sente amendment also amends the corresponding 
     provisions of ERISA.
---------------------------------------------------------------------------

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Excise tax relief for sound pension funding (sec. 1243 of 
         the House bill, sec. 343 of the Senate amendment, and 
         sec. 4972 of the Code)

                              Present Law

       Under present law, defined benefit pension plans are 
     subject to minimum funding requirements designed to ensure 
     that pension plans have sufficient assets to pay benefits. A 
     defined benefit pension plan is funded using one of a number 
     of acceptable actuarial cost methods.
       No contribution is required under the minimum funding rules 
     in excess of the full funding limit. The full funding limit 
     is generally defined as the excess, if any, of (1) the lesser 
     of (a) the accrued liability under the plan (including normal 
     cost) or (b) 155 percent of the plan's current liability, 
     over (2) the value of the plan's assets (sec. 412(c)(7)). In 
     general, current liability is all liabilities to plan 
     participants and beneficiaries accrued to date, whereas the 
     accrued liability full funding limit is based on projected 
     benefits. The current liability full funding limit is 
     scheduled to increase as follows: 160 percent for plan years 
     beginning in 2001 or 2002, 165 percent for plan years 
     beginning in 2003 and 2004, and 170 percent for plan years 
     beginning in 2005 and thereafter.\41\ In no event is a plan's 
     full funding limit less than 90 percent of the plan's current 
     liability over the value of the plan's assets.
---------------------------------------------------------------------------
     \41\ As originally enacted in the Pension Protection Act of 
     1997, the current liability full funding limit was 150 
     percent of current liability. The Texpayer Relief Act of 1997 
     increased the current liability full funding limit to 155 
     percent in 1999 and 2000, and adopted the scheduled increases 
     described int he text. Another provision in the bill 
     gradually increases and then repeals the current liability 
     full funding limit.
---------------------------------------------------------------------------
       An employer sponsoring a defined benefit pension plan 
     generally may deduct amounts contributed to satisfy the 
     minimum funding standard for the plan year. Contributions in 
     excess of the full funding limit generally are not 
     deductible. Under a special rule, an employer that sponsors a 
     defined benefit pension plan (other than a multiemployer 
     plan) which has more than 100 participants for the plan year 
     may deduct amounts contributed of up to 100 percent of the 
     plan's unfunded current liability.
       Present law also provides that contributions to defined 
     contribution plans are deductible, subject to certain 
     limitations.
       Subject to certain exceptions, an employer that makes 
     nondeductible contributions to a plan is subject to an excise 
     tax equal to 10 percent of the amount of the nondeductible 
     contributions for the year. The 10-percent excise tax does 
     not apply to contributions to certain terminating defined 
     benefit plans. The 10-percent excise tax also does not apply 
     to contributions of up to 6 percent of compensation to a 
     defined contribution plan for employer matching and employee 
     elective deferrals.

                               House Bill

       In determining the amount of nondeductible contributions, 
     the employer may elect not to take into account contributions 
     to a defined benefit pension plan except to the extent they 
     exceed the accrued liability full funding limit. Thus, if an 
     employer elects, contributions in excess of the current 
     liability full funding limit are not subject to the excise 
     tax on nondeductible contributions. An employer making such 
     an election for a year may not take advantage of the present-
     law exceptions for certain terminating plans and certain 
     contributions to defined contribution plans.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Notice of significant reduction in plan benefit accruals 
         (sec. 1244 of the House bill, sec. 344 of the Senate 
         amendment, new sec. 4980F of the Code, and sec. 204(h) of 
         ERISA)

                              Present Law

       Section 204(h) of Title I of ERISA provides that a defined 
     benefit pension plan or a money purchase pension plan may not 
     be amended so as to provide for a significant reduction in 
     the rate of future benefit accrual, unless, after adoption of 
     the plan amendment and not less than 15 days before the 
     effective date of the plan amendment, the plan administrator 
     provides a written notice (``section 204(h) notice''), 
     setting forth the plan amendment (or a summary of the 
     amendment written in a manner calculated to be understood by 
     the average plan participant) and its effective date. The 
     plan administrator must provide the section 204(h) notice to 
     each plan participant, each alternate payee under an 
     applicable qualified domestic relations order (``QDRO''), and 
     each employee organization representing participants in the 
     plan. The applicable Treasury regulations \42\ provide, 
     however, that a plan administrator need not provide the 
     section 204(h) notice to any participant or alternate payee 
     whose rate of future benefit accrual is reasonably expected 
     not to be reduced by the amendment, nor to an employee 
     organization that does not represent a participant to whom 
     the section 204(h) notice must be provided. In addition, the 
     regulations provide that the rate of future benefit accrual 
     is determined without regard to optional forms of benefit, 
     early retirement benefits, retirement-type subsidiaries, 
     ancillary benefits, and certain other rights and features.
---------------------------------------------------------------------------
     \42\ Treas. Reg. sec. 1.411(d)-6.
---------------------------------------------------------------------------
       A covered amendment generally will not become effective 
     with respect to any participants and alternate payees whose 
     rate of future benefit accrual is reasonably expected to be 
     reduced by the amendment but who do not receive a section 
     204(h) notice. An amendment will become effective with 
     respect to all participants and alternate payees to whom the 
     section 204(h) notice was required to be provided if the plan 
     administrator (1) has made a good faith effort to comply with 
     the section 204(h) notice requirements, (2) has provided a 
     section 204(h) notice to each employee organization that 
     represents any participant to whom a section 204(h) notice 
     was required to be provided, (3) has failed to provide a 
     section 204(h) notice to no more than a de minimis percentage 
     of participants and alternate payees to whom a section 204(h) 
     notice was required to be provided, and (4) promptly upon

[[Page 19695]]

     discovering the oversight, provides a section 204(h) notice 
     to each omitted participant and alternate payee.
       The Internal Revenue Code does not require any notice 
     concerning a plan amendment that provides for a significant 
     reduction in the rate of future benefit accrual.

                               House Bill

       The House bill adds to the Internal Revenue Code a 
     requirement that the plan administrator of a defined benefit 
     pension plan or a money purchase pension plan with more than 
     100 participants furnish a written notice concerning a plan 
     amendment that provides for a significant reduction in the 
     rate of future benefit accrual. The plan administrator is 
     required to provide in this notice, in a manner calculated to 
     be understood by the average plan participant, sufficient 
     information (as defined in Treasury regulations) to allow 
     participants to understand the effect of the amendment.
       The plan administrator is required to provide this notice 
     to each affected participant, each affected alternate payee, 
     and each employee organization representing affected 
     participants. For purposes of the House bill, an affected 
     participant or alternate payee is a participant or alternate 
     payee to whom the significant reduction in the rate of future 
     benefit accrual is reasonably expected to apply.
       Except to the extent provided by Treasury regulations, the 
     plan administrator is required to provide the notice within a 
     reasonable time before the effective date of the plan 
     amendment.
       The provision imposes on a plan administrator that fails to 
     comply with the notice requirement an excise tax equal to 
     $100 per day per omitted participant and alternate payee. For 
     failures due to reasonable cause and not to willful neglect, 
     the total excise tax imposed during a taxable year of the 
     employer will not exceed $500,000. Furthermore, in the case 
     of a failure due to reasonable cause and not to willful 
     neglect, the Secretary of the Treasury is authorized to waive 
     the excise tax to the extent that the payment of the tax 
     would be excessive relative to the failure involved.
       The legislative history indicates that it is anticipated 
     that the Secretary will issue the necessary regulations 
     within 90 days of enactment and that such guidance may be 
     relatively detailed because of the need to provide for 
     alternative disclosures rather than a single disclosure 
     methodology that may not fit all situations, and the need to 
     consider the complex actuarial calculations and assumptions 
     involved in providing necessary disclosures.
       Effective date.--The House bill is effective for plan 
     amendments taking effect on or after the date of enactment. 
     The period for providing any notice required under the House 
     bill will not end before the last day of the 3-month period 
     following the date of enactment. Prior to the issuance of 
     Treasury regulations, a plan will be treated as meeting the 
     requirements of the provision if the plan makes a good faith 
     effort to comply with such requirements.

                            Senate Amendment

       The Senate amendment adds to the Internal Revenue Code a 
     requirement that the plan administrator of a defined benefit 
     pension plan furnish a written notice concerning a plan 
     amendment that provides for a significant reduction in the 
     rate of future benefit accrual, including any elimination or 
     reduction of an early retirement benefit or retirement-type 
     subsidy. \43\ The notice must set forth the plan amendment 
     and its effective date and provide sufficient information (as 
     defined in Treasury regulations) to allow participants to 
     understand how the amendment generally will affect different 
     classes of employees. The plan administrator is required to 
     provide the notice not less than 30 days before the effective 
     date of the plan amendment.
---------------------------------------------------------------------------
     \43\ The provision also modifies the present-law notice 
     requirement contained in section 204(h) of Title I of ERISA 
     to provide that an applicable pension plan may not be amended 
     to provide for a significant reduction in the rate of future 
     benefit accrual unles the plan administrator complies with a 
     notice requirement similar to the notice requirement that the 
     provision adds to the Internal Revenue Code.
---------------------------------------------------------------------------
       The plan administrator must provide this generalized notice 
     to each participant and alternate payee to whom the amendment 
     applies, and to each employee organization representing such 
     individuals. The plan administrator is not required to 
     provide this notice to any participant who has less than 1 
     year of participation in the plan or who is entitled to 
     receive the greater of the participant's accrued benefit 
     under the amended plan formula or under the formula as in 
     effect immediately prior to the amendment effective date.
       If the amendment provides for a significant change in the 
     manner in which accrued benefits are determined under the 
     plan, or requires an affected participant or affected 
     alternate payee to choose between 2 or more benefit formulas, 
     the plan administrator is required to provide an additional 
     notice to each affected participant and affected alternate 
     payee within 6 months after the effective date of the 
     amendment. For purposes of the Senate amendment, an affected 
     participant or alternate payee generally is a participant or 
     alternate payee to whom the significant reduction in the rate 
     of future benefit accrual is reasonably expected to apply. A 
     participant who has less than 1 year of participation in the 
     plan, or who is entitled to receive the greater of the 
     participant's accrued benefit under the amended plan formula 
     or under the formula as in effect immediately prior to the 
     amendment effective date, is not an affected participant.
       The legislative history provides that an example of an 
     amendment that provides for a significant change in the 
     manner in which accrued benefits are determined is an 
     amendment that replaces a benefit formula that defines a 
     participant's normal retirement benefit as a percentage of 
     the participant's final average compensation with a benefit 
     formula that defines a participant's normal retirement 
     benefit in terms of a hypothetical account credited with 
     annual allocations of contributions and interest. The 
     legislative history also provides that examples of amendments 
     that do not provide for a significant change in the manner in 
     which accrued benefits are determined are (1) an amendment 
     that reduces the percentage of average compensation that the 
     plan provides as an annual benefit commencing at normal 
     retirement age from 60 percent to 50 percent, and (2) an 
     amendment that modifies the definition of compensation used 
     to determine average compensation by providing for the 
     exclusion of bonuses and overtime.
       The plan administrator is required to provide in this 
     additional notice (1) the individual's accrued benefit (and, 
     if the amendment adds the option of an immediate lump sum 
     distribution, the present value of the accrued benefit) as of 
     the amendment effective date, determined under the terms of 
     the plan in effect immediately before the effective date, (2) 
     the individual's accrued benefit as of the amendment 
     effective date, determined under the terms of the plan in 
     effect on the amendment effective date and without regard to 
     any minimum accrued benefit that may not be decreased by the 
     amendment (sec. 411(d)(6)), and (3) either (a) sufficient 
     information (as defined in Treasury regulations) for the 
     individual to compute his or her projected accrued benefit or 
     to acquire information necessary to compute such projected 
     accrued benefit, or (b) a determination of the individual's 
     projected accrued benefit with a disclosure of the 
     assumptions (which must be reasonable in the aggregate) used 
     by the plan in determining the projected accrued benefit. For 
     purposes of this additional notice, an individual's accrued 
     benefit and projected accrued benefit are computed as if the 
     accrued benefit were in the form of a single life annuity at 
     normal retirement age, taking into account any early 
     retirement subsidy.
       The legislative history provides that, with respect to the 
     description of the individual's accrued benefit as of the 
     amendment effective date, an example of determining such 
     benefit under the terms of the plan in effect on the 
     amendment effective date and without regard to the sec. 
     411(d)(6) protected benefit is a situation in which (1) an 
     amendment replaces a benefit formula that defines a 
     participant's normal retirement benefit as a percentage of 
     the participant's final average compensation with a benefit 
     formula that defines a participant's normal retirement 
     benefit in terms of a hypothetical account credited with 
     annual allocations of contributions and interest, (2) the 
     amendment adds the option of an immediate lump sum 
     distribution, (3) the present value of a participant's sec. 
     411(d)(6) protected benefit is $50,000, and (4) the beginning 
     balance of the participant's hypothetical account balance 
     under the terms of the plan in effect on the amendment 
     effective date is $25,000. In this example, the required 
     notice would inform the participant that, as of the amendment 
     effective date, the individual's accrued benefit determined 
     under the terms of the plan in effect immediately before the 
     effective date is $50,000, and the individual's accrued 
     benefit determined under the terms of the plan in effect on 
     the amendment effective date is $25,000.
       With respect to a plan amendment that requires an affected 
     participant or affected alternate payee to choose between 2 
     or more benefit formulas, the Secretary of the Treasury, 
     after consultation with the Secretary of Labor, is authorized 
     to require additional information to be provided in the 
     notices and to require either of the notices to be provided 
     at a different time. The legislative history states that this 
     authorization is not intended to result in a modification of 
     the present-law fiduciary requirements under Title I of 
     ERISA.
       Under the Senate amendment, the notice requirement does not 
     apply to governmental plans or church plans with respect to 
     which an election to have the qualified plan participation, 
     vesting, and funding rules apply has not been made (sec. 
     410(d)).
       The Senate amendment generally imposes on a plan 
     administrator that fails to comply with the notice 
     requirement an excise tax equal to $100 per day per omitted 
     participant and alternate payee. For failures due to 
     reasonable cause and not to willful neglect, the total excise 
     tax imposed during a taxable year of the employer will not 
     exceed $500,000. Furthermore, in the case of a failure due to 
     reasonable cause and not to willful neglect,

[[Page 19696]]

     the Secretary of the Treasury is authorized to waive the 
     excise tax to the extent that the payment of the tax would be 
     excessive relative to the failure involved. The legislative 
     history provides that an example of facts and circumstances 
     under which reasonable cause may exist for a failure to 
     comply with the notice requirement is a plan administrator's 
     inability to provide the required generalized notice 
     concerning a plan amendment if the amendment results from a 
     business merger or acquisition transaction and the timing of 
     the transaction prevents the plan administrator from 
     providing the notice at least 30 days prior to the effective 
     date of the amendment.
       Effective date.--The Senate amendment is effective for plan 
     amendments taking effect on or after the date of enactment. 
     The period for providing any notice required under the 
     provision will not end before the last day of the 3-month 
     period following the date of enactment. Prior to the issuance 
     of Treasury regulations, a plan will be treated as meeting 
     the requirements of the provision if the plan makes a good 
     faith effort to comply with such requirements. Pending the 
     issuance of regulations, the legislative history provides 
     that examples of good faith compliance in which the Senate 
     amendment would not require additional employee 
     communications include: (1) A plan amendment provides that 
     participants may choose to have their accrued benefits 
     determined under the amended plan formula or under the 
     formula as in effect immediately prior to the amendment 
     effective date, and the plan administrator provides 
     participants with comparison information, including clearly 
     stated assumptions, relative to the amended and prior 
     formulas so that participants are able to make an informed 
     decision; (2) A plan administrator provides to participants 
     estimates of accrued benefits at various career stages, 
     determined under the amended plan formula and under the 
     formula as in effect immediately prior to the amendment 
     effective date, including clearly stated assumptions, and 
     stated as annuities and/or lump sums (without regard to 
     section 417) as appropriate under the plan provisions; (3) An 
     employer informs certain employees before they are hired that 
     the employer's current plan benefit formula will be amended 
     at a specified future date, and these employees participate 
     in the plan under the formula as in effect immediately prior 
     to the amendment until such specified future date (good faith 
     compliance would be relevant for these employees only).

                          Conference Agreement

       The conference agreement follows the House bill, with 
     modifications. Under the conference agreement, the notice 
     requirement does not apply to governmental plans or church 
     plans with respect to which an election to have the qualified 
     plan participation, vesting, and funding rules apply has not 
     been made (sec. 410(d)). The provision also modifies the 
     present- law notice requirement contained in section 204(h) 
     of Title I of ERISA to provide that an applicable pension 
     plan may not be amended to provide for a significant 
     reduction in the rate of future benefit accrual unless the 
     plan administrator complies with a notice requirement similar 
     to the notice requirement that the provision adds to the 
     Internal Revenue Code.
       The conferees intend that in issuing regulations under the 
     provision, the Treasury Department generally will follow the 
     approach under the Senate amendment. Thus, the conferees 
     intend that Treasury regulations will provide for a notice 
     that describes how the amendment generally will affect 
     different classes of employees and that the regulations will 
     require the plan administrator to furnish this notice not 
     less than 30 days before the effective date of the amendment. 
     With respect to an amendment that provides for a significant 
     change in the manner in which accrued benefits are determined 
     under the plan, or requires an affected participant or 
     affected alternate payee to choose between 2 or more benefit 
     formulas, the conferees intend that the regulations will 
     require the plan administrator to provide an additional 
     notice to each affected participant and affected alternate 
     payee within 6 months after the effective date of the 
     amendment.
       An example of an amendment that provides for a significant 
     change in the manner in which accrued benefits are determined 
     is an amendment that replaces a benefit formula that defines 
     a participant's normal retirement benefit as a percentage of 
     the participant's final average compensation with a benefit 
     formula that defines a participant's normal retirement 
     benefit in terms of a hypothetical account credited with 
     annual allocations of contributions and interest. Examples of 
     amendments that do not provide for a significant change in 
     the manner in which accrued benefits are determined are (1) 
     an amendment that reduces the percentage of average 
     compensation that the plan provides as an annual benefit 
     commencing at normal retirement age from 60 percent to 50 
     percent, and (2) an amendment that modifies the definition of 
     compensation used to determine average compensation by 
     providing for the exclusion of bonuses and overtime.
       The conferees intend that the regulations will require the 
     plan administrator to provide in this additional notice (1) 
     the individual's accrued benefit (and, if the amendment adds 
     the option of an immediate lump sum distribution, the present 
     value of the accrued benefit) as of the amendment effective 
     date, determined under the terms of the plan in effect 
     immediately before the effective date, (2) the individual's 
     accrued benefit as of the amendment effective date, 
     determined under the terms of the plan in effect on the 
     amendment effective date and without regard to any minimum 
     accrued benefit that may not be decreased by the amendment 
     (sec. 411(d)(6)), and (3) either (a) sufficient information 
     for the individual to compute his or her projected accrued 
     benefit or to acquire information necessary to compute such 
     projected accrued benefit, or (b) a determination of the 
     individual's projected accrued benefit with a disclosure of 
     the assumptions (which must be reasonable in the aggregate) 
     used by the plan in determining the projected accrued 
     benefit. The conferees intend that the regulations will 
     provide that, for purposes of this additional notice, an 
     individual's accrued benefit and projected accrued benefit 
     are computed as if the accrued benefit were in the form of a 
     single life annuity at normal retirement age, taking into 
     account any early retirement subsidy.
       With respect to the description of the individual's accrued 
     benefit as of the amendment effective date, an example of 
     determining such benefit under the terms of the plan in 
     effect on the amendment effective date and without regard to 
     the sec. 411(d)(6) protected benefit is a situation in which 
     (1) an amendment replaces a benefit formula that defines a 
     participant's normal retirement benefit as a percentage of 
     the participant's final average compensation with a benefit 
     formula that defines a participant's normal retirement 
     benefit in terms of a hypothetical account credited with 
     annual allocations of contributions and interest, (2) the 
     amendment adds the option of an immediate lump sum 
     distribution, (3) the present value of a participant's sec. 
     411(d)(6) protected benefit is $50,000, and (4) the beginning 
     balance of the participant's hypothetical account balance 
     under the terms of the plan in effect on the amendment 
     effective date is $25,000. In this example, the conferees 
     intend that the regulations would provide that the required 
     notice would inform the participant that, as of the amendment 
     effective date, the individual's accrued benefit determined 
     under the terms of the plan in effect immediately before the 
     effective date is $50,000, and the individual's accrued 
     benefit determined under the terms of the plan in effect on 
     the amendment effective date is $25,000.
       With respect to a plan amendment that requires an affected 
     participant or affected alternate payee to choose between 2 
     or more benefit formulas, the conferees intend that the 
     Secretary of the Treasury, after consultation with the 
     Secretary of Labor, may require additional information to be 
     provided in the notices and to require either of the notices 
     to be provided at a different time. The conferees do not 
     intend this authorization to result in a modification of the 
     present-law fiduciary requirements under Title I of ERISA.
       An example of facts and circumstances under which 
     reasonable cause may exist for a failure to comply with the 
     notice requirement is a plan administrator's inability to 
     provide the required generalized notice concerning a plan 
     amendment if the amendment results from a business merger or 
     acquisition transaction and the timing of the transaction 
     prevents the plan administrator from providing the notice at 
     least 30 days prior to the effective date of the amendment.
       Effective date.--The conference agreement follows the House 
     bill and the Senate amendment. As under the Senate amendment, 
     pending the issuance of regulations, examples of good faith 
     compliance in which the provision would not require 
     additional employee communications include: (1) A plan 
     amendment provides that participants may choose to have their 
     accrued benefits determined under the amended plan formula or 
     under the formula as in effect immediately prior to the 
     amendment effective date, and the plan administrator provides 
     participants with comparison information, including clearly 
     stated assumptions, relative to the amended and prior 
     formulas so that participants are able to make an informed 
     decision; (2) A plan administrator provides to participants 
     estimates of accrued benefits at various career stages, 
     determined under the amended plan formula and under the 
     formula as in effect immediately prior to the amendment 
     effective date, including clearly stated assumptions, and 
     stated as annuities and/or lump sums (without regard to 
     section 417) as appropriate under the plan provisions; (3) An 
     employer informs certain employees before they are hired that 
     the employer's current plan benefit formula will be amended 
     at a specified future date, and these employees participate 
     in the plan under the formula as in effect immediately prior 
     to the amendment until such specified future date (good faith 
     compliance would be relevant for these employees only).
     4. Extension of PBGC missing participants program (sec. 342 
         of the Senate amendment, and secs. 206(f) and 4050 of 
         ERISA)

                              Present Law

       The plan administrator of a defined benefit pension plan 
     that is subject to Title IV of

[[Page 19697]]

     ERISA, is maintained by a single employer, and terminates 
     under a standard termination is required to distribute the 
     assets of the plan. With respect to a participant whom the 
     plan administrator cannot locate after a diligent search, the 
     plan administrator satisfies the distribution requirement 
     only by purchasing irrevocable commitments from an insurer to 
     provide all benefit liabilities under the plan or 
     transferring the participant's designated benefit to the 
     Pension Benefit Guaranty Corporation (``PBGC''), which holds 
     the benefit of the missing participant as trustee until the 
     PBGC locates the missing participant and distributes the 
     benefit.
       The PBGC missing participant program is not available to 
     multiemployer plans or defined contribution plans and other 
     plans not covered by Title IV of ERISA.

                               House Bill

       No provision.

                            Senate Amendment

       The PBGC is directed to prescribe for terminating 
     multiemployer plans rules similar to the present-law missing 
     participant rules applicable to terminating single employer 
     plans that are subject to Title IV of ERISA.
       Effective date.--The Senate amendment is effective for 
     distributions from terminating plans that occur after the 
     PBGC adopts final regulations implementing the Senate 
     amendment.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications. In addition to the extension of the missing 
     participant program to multiemployer plans, to the extent 
     provided in PBGC regulations, plan administrators of certain 
     types of plans that are not covered by the PBGC missing 
     participant program under present law are permitted, but not 
     required, to elect to transfer missing participants' benefits 
     to the PBGC upon plan termination. Specifically, the 
     provision extends the missing participants program to defined 
     contribution plans, defined benefit plans that do not have 
     more than 25 active participants and are maintained by 
     professional service employers, and the portions of defined 
     benefit plans that provide benefits based upon the separate 
     accounts of participants and therefore are treated as defined 
     contribution plans under ERISA.
       Effective date.--The conference agreement is effective with 
     respect to distributions made after the PBGC adopts final 
     regulations implementing the provision.
     5. Investment of employee contributions in 401(k) plans (sec. 
         345 of the Senate amendment)

                              Present Law

       The Employee Retirement Income Security Act of 1974, as 
     amended (``ERISA'') prohibits certain employee benefit plans 
     from acquiring securities or real property of the employer 
     who sponsors the plan if, after the acquisition, the fair 
     market value of such securities and property exceeds 10 
     percent of the fair market value of plan assets. The 10-
     percent limitation does not apply to any ``eligible 
     individual account plans'' that specifically authorize such 
     investments. Generally, eligible individual account plans are 
     defined contribution plans, including plans containing a cash 
     or deferred arrangement (``401(k) plans'').
       The term ``eligible individual account plan'' does not 
     include the portion of a plan that consists of elective 
     deferrals (and earnings on the elective deferrals) made under 
     section 401(k) if elective deferrals equal to more than 1 
     percent of any employee's eligible compensation are required 
     to be invested in employer securities and employer real 
     property. Eligible compensation is compensation that is 
     eligible to be deferred under the plan. The portion of the 
     plan that consists of elective deferrals (and earnings 
     thereon) is still treated as an individual account plan, and 
     the 10-percent limitation does not apply, as long as elective 
     deferrals (and earnings thereon) are not required to be 
     invested in employer securities or employer real property.
       The rule excluding elective deferrals (and earnings 
     thereon) from the definition of individual account plan does 
     not apply if individual account plans are a small part of the 
     employer's retirement plans. In particular, that rule does 
     not apply to an individual account plan for a plan year if 
     the value of the assets of all individual account plans 
     maintained by the employer do not exceed 10 percent of the 
     value of the assets of all pension plans maintained by the 
     employer (determined as of the last day of the preceding plan 
     year). Multiemployer plans are not taken into account in 
     determining whether the value of the assets of all individual 
     account plans maintained by the employer exceed 10 percent of 
     the value of the assets of all pension plans maintained by 
     the employer. The rule excluding elective deferrals (and 
     earnings thereon) from the definition of individual account 
     plan does not apply to an employee stock ownership plan as 
     defined in section 4975(e)(7) of the Internal Revenue Code.
       The rule excluding elective deferrals (and earnings 
     thereon) from the definition of individual account plan 
     applies to elective deferrals for plan years beginning after 
     December 31, 1998 (and earnings thereon). It does not apply 
     with respect to earnings on elective deferrals for plan years 
     beginning before January 1, 1999.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment modifies the effective date of the 
     rule excluding certain elective deferrals (and earnings 
     thereon) from the definition of individual account plan by 
     providing that the rule does not apply to any elective 
     deferral used to acquire an interest in the income or gain 
     from employer securities or employer real property acquired 
     (1) before January 1, 1999, or (2) after such date pursuant 
     to a written contract which was binding on such date and at 
     all times thereafter.
       Effective date.--The Senate amendment is effective as if 
     included in the section of the Taxpayer Relief Act of 1997 
     that contained the rule excluding certain elective deferrals 
     (and earnings thereon).

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     a modification to eliminate the exception for employer 
     securities or real property acquired pursuant to certain 
     binding contracts. Thus, under the conference agreement, the 
     rule excluding certain elective deferrals (and earnings 
     thereon) from the definition of individual account plan does 
     not apply to any elective deferral used to acquire an 
     interest in the income or gain from employer securities or 
     employer real property acquired before January 1, 1999.
       Effective date.--The conference agreement follows the 
     Senate amendment.
     6. Periodic pension benefit statements (sec. 351 of the 
         Senate amendment and sec. 105 of ERISA)

                              Present Law

       Title I of ERISA provides that a pension plan administrator 
     must furnish a benefit statement to any participant or 
     beneficiary who makes a written request for such a statement. 
     This statement must indicate, on the basis of the latest 
     available information, (1) the participant's or beneficiary's 
     total accrued benefit, and (2) the participant's or 
     beneficiary's vested accrued benefit or the earliest date on 
     which the accrued benefit will become vested. A participant 
     or beneficiary is not entitled to receive more than 1 benefit 
     statement during any 12-month period. The plan administrator 
     must furnish the benefit statement no later than 60 days 
     after receipt of the request or, if later, 120 days after the 
     close of the immediately preceding plan year.
       In addition, the plan administrator must furnish a benefit 
     statement to each participant whose employment terminates or 
     who has a 1-year break in service. For purposes of this 
     benefit statement requirement, a ``1-year break in service'' 
     is a calendar year, plan year, or other 12-month period 
     designated by the plan during which the participant does not 
     complete more than 500 hours of service for the employer. A 
     participant is not entitled to receive more than 1 benefit 
     statement with respect to consecutive breaks in service. The 
     plan administrator must provide a benefit statement required 
     upon termination of employment or a break in service no later 
     than 180 days after the end of the plan year in which the 
     termination of employment or break in service occurs.

                               House Bill

       No provision.

                            Senate Amendment

       A plan administrator of a defined contribution plan 
     generally must furnish a benefit statement to each 
     participant at least once annually and to a beneficiary upon 
     written request.
       In addition to providing a benefit statement to a 
     beneficiary upon written request, the plan administrator of a 
     defined benefit plan generally must either (1) furnish a 
     benefit statement at least once every 3 years to each 
     participant who has a vested accrued benefit and who is 
     employed by the employer at the time the plan administrator 
     furnishes the benefit statements to participants, or (2) 
     annually furnish written, electronic, telephonic, or other 
     appropriate notice to each participant of the availability of 
     and the manner in which the participant may obtain the 
     benefit statement.
       The plan administrator of a multiemployer plan or a 
     multiple employer plan is required to furnish a benefit 
     statement only upon written request of a participant or 
     beneficiary.\44\
---------------------------------------------------------------------------
     \44\ A multiple employer plan is a plan that is maintained by 
     2 or more unrelated employers but that is not maintained 
     pursuant to a collective bargaining (sec. 413(c)).
---------------------------------------------------------------------------
       The plan administrator is required to write the benefit 
     statement in a manner calculated to be understood by the 
     average plan participant and is permitted to furnish the 
     statement in written, electronic, telephonic, or other 
     appropriate form.
       Effective date.--The Senate amendment is effective for plan 
     years beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

[[Page 19698]]



                     E. Reducing Regulatory Burdens

     11. Repeal of the multiple use test (sec. 1251 of the House 
         bill and sec. 401(m) of the Code)

                              Present Law

       Elective deferrals under a qualified cash or deferred 
     arrangement (``section 401(k) plan'') are subject to a 
     special annual nondiscrimination test (``ADP test''). The ADP 
     test compares the actual deferral percentages (``ADPs'') of 
     the highly compensated employee group and the nonhighly 
     compensated employee group. The ADP for each group generally 
     is the average of the deferral percentages separately 
     calculated for the employees in the group who are eligible to 
     make elective deferrals for all or a portion of the relevant 
     plan year. Each eligible employee's deferral percentage 
     generally is the employee's elective deferrals for the year 
     divided by the employee's compensation for the year.
       The plan generally satisfies the ADP test if the ADP of the 
     highly compensated employee group for the current plan year 
     is either (1) not more than 125 percent of the ADP of the 
     nonhighly compensated employee group for the prior plan year, 
     or (2) not more than 200 percent of the ADP of the nonhighly 
     compensated employee group for the prior plan year and not 
     more than 2 percentage points greater than the ADP of the 
     nonhighly compensated employee group for the prior plan year.
       Employer matching contributions and after-tax employee 
     contributions under a defined contribution plan also are 
     subject to a special annual nondiscrimination test (``ACP 
     test''). The ACP test compares the actual deferral 
     percentages (``ACPs'') of the highly compensated employee 
     group and the nonhighly compensated employee group. The ACP 
     for each group generally is the average of the contribution 
     percentages separately calculated for the employees in the 
     group who are eligible to make after-tax employee 
     contributions or who are eligible for an allocation of 
     matching contributions for all or a portion of the relevant 
     plan year. Each eligible employee's contribution percentage 
     generally is the employee's aggregate after-tax employee 
     contributions and matching contributions for the year divided 
     by the employee's compensation for the year.
       The plan generally satisfies the ACP test if the ACP of the 
     highly compensated employee group for the current plan year 
     is either (1) not more than 125 percent of the ACP of the 
     nonhighly compensated employee group for the prior plan year, 
     or (2) not more than 200 percent of the ACP of the nonhighly 
     compensated employee group for the prior plan year and not 
     more than 2 percentage points greater than the ACP of the 
     nonhighly compensated employee group for the prior plan year.
       For any year in which (1) at least one highly compensated 
     employee is eligible to participate in an employer's plan or 
     plans that are subject to both the ADP test and the ACP test, 
     (2) the plan subject to the ADP test satisfies the ADP test 
     but the ADP of the highly compensated employee group exceeds 
     125 percent of the ADP of the nonhighly compensated employee 
     group, and (3) the plan subject to the ACP test satisfies the 
     ACP test but the ACP of the highly compensated employee group 
     exceeds 125 percent of the ACP of the nonhighly compensated 
     employee group, an additional special nondiscrimination test 
     (``Multiple Use test'') applies to the elective deferrals, 
     employer matching contributions, and after-tax employee 
     contributions. The plan or plans generally satisfy the 
     Multiple Use test if the sum of the ADP and the ACP of the 
     highly compensated employee group does not exceed the greater 
     of (1) the sum of (A) 1.25 times the greater of the ADP or 
     the ACP of the nonhighly compensated employee group, and (B) 
     2 percentage points plus (but not more than 2 times) the 
     lesser of the ADP or the ACP of the nonhighly compensated 
     employee group, or (2) the sum of (A) 1.25 times the lesser 
     of the ADP or the ACP of the nonhighly compensated employee 
     group, and (B) 2 percentage points plus (but not more than 2 
     times) the greater of the ADP or the ACP of the nonhighly 
     compensated employee group.

                               House Bill

       The House bill repeals the Multiple Use test.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2000.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     2. Modification of timing of plan valuations (sec. 1252 of 
         the House bill, sec. 362 of the Senate amendment, and 
         sec. 412 of the Code)

                              Present Law

       Under present law, in the case of plans subject to the 
     minimum funding rules, a plan valuation is generally required 
     annually. The Secretary may require that a valuation be made 
     more frequently in particular cases.
       Prior to the Retirement Protection Act of 1994, plan 
     valuations generally were required at least once every three 
     years.

                               House Bill

       The House bill allows an employer to elect to use the prior 
     year's plan valuation in certain cases. The election may be 
     made only with respect to a defined benefit plan with assets 
     of at least 125 percent of current liability (determined as 
     of the valuation date for the preceding year). If the prior 
     year's valuation is used, it must be adjusted, as provided in 
     regulations, to reflect significant differences in 
     participants. An election made under the House bill may be 
     revoked only with the consent of the Secretary. In any event, 
     a plan valuation is required once every three years.\45\
---------------------------------------------------------------------------
     \45\ As under present law, the Secretary could require that a 
     valuation be made more frequently in particular cases.
---------------------------------------------------------------------------
       Effective date.--The House bill is effective for plan years 
     beginning after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Flexibility in nondiscrimination and line of business 
         rules (sec. 1253 of the House bill, sec. 361 of the 
         Senate amendment, and secs. 401(a)(4), 410(b), and 414(r) 
         of the Code)

                              Present Law

       A plan is not a qualified retirement plan if the 
     contributions or benefits provided under the plan 
     discriminate in favor of highly compensated employees (sec. 
     401(a)(4)). The applicable Treasury regulations set forth the 
     exclusive rules for determining whether a plan satisfies the 
     nondiscrimination requirement. These regulations state that 
     the form of the plan and the effect of the plan in operation 
     determine whether the plan is nondiscriminatory and that 
     intent is irrelevant.
       Similarly, a plan is not a qualified retirement plan if the 
     plan does not benefit a minimum number of employees (sec. 
     410(b)). A plan satisfies this minimum coverage requirement 
     if and only if it satisfies one of the tests specified in the 
     applicable Treasury regulations. If an employer is treated as 
     operating separate lines of business, the employer may apply 
     the minimum coverage requirements to a plan separately with 
     respect to the employees in each separate line of business 
     (sec. 414(r)). Under a so-called ``gateway'' requirement, 
     however, the plan must benefit a classification of employees 
     that does not discriminate in favor of highly compensated 
     employees in order for the employer to apply the minimum 
     coverage requirements separately for the employees in each 
     separate line of business. A plan satisfies this gateway 
     requirement only if it satisfies one of the tests specified 
     in the applicable Treasury regulations.

                               House Bill

       The Secretary of the Treasury is directed to modify, on or 
     before December 31, 2000, the existing regulations issued 
     under section 401(a)(4) and section 414(r) in order to expand 
     (to the extent that the Secretary may determine to be 
     appropriate) the ability of a plan to demonstrate compliance 
     with the nondiscrimination and line of business requirements 
     based upon the facts and circumstances surrounding the design 
     and operation of the plan, even though the plan is unable to 
     satisfy the mechanical tests currently used to determine 
     compliance.
       Effective date.--The House bill is effective on the date of 
     enactment.

                            Senate Amendment

       The Secretary of the Treasury is directed to provide by 
     regulation applicable to years beginning after December 31, 
     2000, that a plan is deemed to satisfy the nondiscrimination 
     requirements of section 401(a)(4) if the plan satisfies the 
     pre-1994 facts and circumstances test, satisfies the 
     conditions prescribed by the Secretary to appropriately limit 
     the availability of such test, and is submitted to the 
     Secretary for a determination of whether it satisfies such 
     test (to the extent provided by the Secretary).
       Similarly, a plan complies with the minimum coverage 
     requirement of section 410(b) if the plan satisfies the pre-
     1989 coverage rules, is submitted to the Secretary for a 
     determination of whether it satisfies the pre-1989 coverage 
     rules (to the extent provided by the Secretary), and 
     satisfies conditions prescribed by the Secretary by 
     regulation that appropriately limit the availability of the 
     pre-1989 coverage rules.
       Effective date.--The Senate amendment is effective on the 
     date of enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     respect to coverage and nondiscrimination rules and the House 
     bill with respect to line of business rules.
     4. ESOP dividends may be reinvested without loss of dividend 
         deduction (sec. 1254 of the House bill, sec. 364 of the 
         Senate amendment, and sec. 404(k) of the Code)

                              Present Law

       An employer is entitled to deduct certain dividends paid in 
     cash during the employer's taxable year with respect to stock 
     of the employer that is held by an employee stock ownership 
     plan (``ESOP''). The deduction is

[[Page 19699]]

     allowed with respect to dividends that, in accordance with 
     plan provisions, are (1) paid in cash directly to the plan 
     participants or their beneficiaries, (2) paid to the plan and 
     subsequently distributed to the participants or beneficiaries 
     in cash no later than 90 days after the close of the plan 
     year in which the dividends are paid to the plan, or (3) used 
     to make payments on loans (including payments of interest as 
     well as principal) that were used to acquire the employer 
     securities (whether or not allocated to participants) with 
     respect to which the dividend is paid.

                               House Bill

       In addition to the deductions permitted under present law 
     for dividends paid with respect to employer securities that 
     are held by an ESOP, an employer is entitled to deduct 
     dividends that, at the election of plan participants or their 
     beneficiaries, are (1) payable in cash directly to plan 
     participants or beneficiaries, (2) paid to the plan and 
     subsequently distributed to the participants or beneficiaries 
     in cash no later than 90 days after the close of the plan 
     year in which the dividends are paid to the plan, or (3) paid 
     to the plan and reinvested in qualifying employer securities.
       Effective date.--The House bill is effective for taxable 
     years beginning after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Notice and consent period regarding distributions (sec. 
         1255 of the House bill, sec. 365 of the Senate amendment, 
         and sec. 417 of the Code)

                              Present Law

       Notice and consent requirements apply to certain 
     distributions from qualified retirement plans. These 
     requirements relate to the content and timing of information 
     that a plan must provide to a participant prior to a 
     distribution, and to whether the plan must obtain the 
     participant's consent and the consent of the participant's 
     spouse to the distribution. The nature and extent of the 
     notice and consent requirements applicable to a distribution 
     depend upon the value of the participant's vested accrued 
     benefit and whether the joint and survivor annuity 
     requirements (sec. 417) apply to the participant.\46\
---------------------------------------------------------------------------
     \46\ Similar provisions are contained in Title I of ERISA.
---------------------------------------------------------------------------
       If the present value of the participant's vested accrued 
     benefit exceeds $5,000, the plan may not distribute the 
     participant's benefit without the written consent of the 
     participant. The participant's consent to a distribution is 
     not valid unless the participant has received from the plan a 
     notice that contains a written explanation of (1) the 
     material features and the relative values of the optional 
     forms of benefit available under the plan, and (2) in certain 
     cases, the right, if any, to defer receipt of the 
     distribution. In addition, the plan must provide to the 
     participant notice of (1) the participant's right, if any, to 
     have the distribution directly transferred to another 
     retirement plan or IRA, and (2) the rules concerning the 
     taxation of a distribution. If the joint and survivor annuity 
     requirements apply to the participant, the plan must provide 
     to the participant a written explanation of (1) the terms and 
     conditions of the qualified joint and survivor annuity 
     (``QJSA''), (2) the participant's right to make, and the 
     effect of, an election to waive the QJSA, (3) the rights of 
     the participant's spouse with respect to a participant's 
     waiver of the QJSA, and (4) the right to make, and the effect 
     of, a revocation of a waiver of the QJSA. The plan generally 
     must provide these 3 notices to the participant no less than 
     30 and no more than 90 days before the date distribution 
     commences.
       If the participant's vested accrued benefit does not exceed 
     $5,000, the terms of the plan may provide for distribution 
     without the participant's consent. The plan generally is 
     required, however, to provide to the participant a notice 
     that contains a written explanation of (1) the participant's 
     right, if any, to have the distribution directly transferred 
     to another retirement plan or IRA, and (2) the rules 
     concerning the taxation of a distribution. The plan generally 
     must provide this notice to the participant no less than 30 
     and no more than 90 days before the date distribution 
     commences.

                               House Bill

       A qualified retirement plan is required to provide the 
     applicable distribution notice no less than 30 days and no 
     more than 6 months before the date distribution commences. 
     The Secretary of the Treasury is directed to modify the 
     applicable regulations to reflect the extension of the notice 
     period to 6 months and to provide that the description of a 
     participant's right, if any, to defer receipt of a 
     distribution shall also describe the consequences of failing 
     to defer such receipt.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2000.

                            Senate Amendment

       A qualified retirement plan is required to provide the 
     applicable distribution notice no less than 30 days and no 
     more than 12 months before the date distribution commences. 
     The Secretary of the Treasury is directed to modify the 
     applicable regulations to reflect the extension of the notice 
     period to 12 months and to provide that the description of a 
     participant's right, if any, to defer receipt of a 
     distribution shall also describe the consequences of failing 
     to defer such receipt.
       Effective date.--The Senate amendment is effective for 
     years beginning after December 31, 2000.

                          Conference Agreement

       No provision.
     6. Repeal transition rule relating to certain highly 
         compensated employees (sec. 1256 of the House bill, sec. 
         366 of the Senate amendment, and sec. 414(q) of the Code)

                              Present Law

       Under present law, for purposes of the rules relating to 
     qualified plans, a highly compensated employee is generally 
     defined as an employee \47\ who (1) was a 5-percent owner of 
     the employer at any time during the year or the preceding 
     year or (2) either (a) had compensation for the preceding 
     year in excess of $80,000 (for 1999) or (b) at the election 
     of the employer, had compensation in excess of $80,000 for 
     the preceding year and was in the top 20 percent of employees 
     by compensation for such year.
---------------------------------------------------------------------------
     \47\ An employee includes a self-employed individual.
---------------------------------------------------------------------------
       Under a rule enacted in the Tax Reform Act of 1986, a 
     special definition of highly compensated employee applies for 
     purposes of the nondiscrimination rules relating to qualified 
     cash or deferred arrangements (``section 401(k) plans'') and 
     matching contributions. This special definition applies to an 
     employer incorporated on December 15, 1924, that meets 
     certain specific requirements.

                               House Bill

       The House bill repeals the special definition of highly 
     compensated employee under the Tax Reform Act of 1986. Thus, 
     the present-law definition applies.
       Effective date.--The House bill is effective for plan years 
     beginning after December 31, 2000.

                            Senate Amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The Senate amendment is effective for plan 
     years beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     7. Employees of tax-exempt entities (sec. 1257 of the House 
         bill, sec. 367 of the Senate amendment, and sec. 410 of 
         the Code)

                              Present Law

       The Tax Reform Act of 1986 provided that nongovernmental 
     tax-exempt employers were not permitted to maintain a 
     qualified cash or deferred arrangement (``section 401(k) 
     plan''). This prohibition was repealed, effective for years 
     beginning after December 31, 1996, by the Small Business Job 
     Protection Act of 1996.
       Treasury regulations provide that, in applying the 
     nondiscrimination rules to a section 401(k) plan (or a 
     section 401(m) plan that is provided under the same general 
     arrangement as the section 401(k) plan), the employer may 
     treat as excludable those employees of a tax-exempt entity 
     who could not participate in the arrangement due to the 
     prohibition on maintenance of a section 401(k) plan by such 
     entities. Such employees may be disregarded only if more than 
     95 percent of the employees who could participate in the 
     section 401(k) plan benefit under the plan for the plan 
     year.\48\
---------------------------------------------------------------------------
     \48\ Treas. Reg. sec. 1.410(b)-6(g).
---------------------------------------------------------------------------
       Tax-exempt charitable organizations may maintain a tax-
     sheltered annuity (a ``section 403(b) annuity'') that allows 
     employees to make salary reduction contributions.

                               House Bill

       The Treasury Department is directed to revise its 
     regulations under section 410(b) to provide that employees of 
     a tax-exempt charitable organization who are eligible to make 
     salary reduction contributions under a section 403(b) annuity 
     may be treated as excludable employees for purposes of 
     testing a section 401(k) plan, or a section 401(m) plan that 
     is provided under the same general arrangement as the section 
     401(k) plan of the employer if (1) no employee of such tax-
     exempt entity is eligible to participate in the section 
     401(k) or 401(m) plan and (2) at least 95 percent of the 
     employees who are not employees of the charitable employer 
     are eligible to participate in such section 401(k) plan or 
     section 401(m) plan.
       The revised regulations will be effective for years 
     beginning after December 31, 1996.
       Effective date.--The House bill is effective on the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

[[Page 19700]]


     8. Treatment of employer-provided retirement advice (sec. 
         1258 of the House bill, sec. 352 of the Senate amendment, 
         and sec. 132 of the Code)

                              Present Law

       Under present law, certain employer-provided fringe 
     benefits are excludable from gross income (sec. 132) and 
     wages for employment tax purposes. These excludable fringe 
     benefits include working condition fringe benefits and de 
     minimis fringes. In general, a working condition fringe 
     benefit is any property or services provided by an employer 
     to an employee to the extent that, if the employee paid for 
     such property or services, such payment would be allowable as 
     a deduction as a business expense. A de minimis fringe 
     benefit is any property or services provided by the employer 
     the value of which, after taking into account the frequency 
     with which similar fringes are provided, is so small as to 
     make accounting for it unreasonable or administratively 
     impracticable.
       In addition, if certain requirements are satisfied, up to 
     $5,250 annually of employer- provided educational assistance 
     is excludable from gross income (sec. 127) and wages. This 
     exclusion expires with respect to courses beginning after May 
     31, 2000.\49\ Education not excludable under section 127 may 
     be excludable as a working condition fringe.
---------------------------------------------------------------------------
     \49\ The exclusion does not apply with respect to gradulate-
     level courses.
---------------------------------------------------------------------------
       There is no specific exclusion under present law for 
     employer-provided retirement planning services. However, such 
     services may be excludable as employer-provided educational 
     assistance or a fringe benefit.

                               House Bill

       Qualified retirement planning services provided to an 
     employee and his or her spouse are excludable from income and 
     wages. The exclusion does not apply with respect to highly 
     compensated employees unless the services are available on 
     substantially the same terms to each member of the group of 
     employees normally provided education and information 
     regarding the employer's pension plan. The exclusion is not 
     limited to information regarding the plan but includes, for 
     example, information regarding how the plan relates to 
     retirement income planning as a whole.
       Effective date.--The House bill is effective with respect 
     to taxable years beginning after December 31, 2000.

                            Senate Amendment

       Under the Senate amendment, qualified retirement planning 
     services provided to an employee and his or her spouse by an 
     employer maintaining a qualified plan are excludable from 
     income and wages. The exclusion does not apply with respect 
     to highly compensated employees unless the services are 
     available on substantially the same terms to each member of 
     the group of employees normally provided education and 
     information regarding the employer's qualified plan. The 
     exclusion is intended to allow employers to provide advice 
     and information regarding retirement planning. The exclusion 
     is not limited to information regarding the qualified plan, 
     and, thus, for example, applies to advice and information 
     regarding retirement income planning for an individual and 
     his or her spouse and how the employer's plan fits into the 
     individual's overall retirement income plan. On the other 
     hand, the exclusion is not intended to apply to services that 
     may be related to retirement planning, such as tax 
     preparation, accounting, legal or brokerage services.
       Effective date.--The Senate amendment is effective with 
     respect to taxable years beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment. As 
     under the Senate amendment, the exclusion is intended to 
     allow employers to provide advice and information regarding 
     retirement planning. The exclusion is not limited to 
     information regarding the qualified plan, and, thus, for 
     example, applies to advice and information regarding 
     retirement income planning for an individual and his or her 
     spouse and how the employer's plan fits into the individual's 
     overall retirement income plan. On the other hand, the 
     exclusion is not intended to apply to services that may be 
     related to retirement planning, such as tax preparation, 
     accounting, legal or brokerage services. The conferees also 
     intend that the provision is not to be interpreted as 
     narrowing present law.
     9. Provisions relating to plan amendments (sec. 1259 of the 
         House bill and sec. 371 of the Senate amendment)

                              Present Law

       Plan amendments to reflect amendments to the law generally 
     must be made by the time prescribed by law for filing the 
     income tax return of the employer for the employer's taxable 
     year in which the change in law occurs.

                               House Bill

       Any amendments to a plan or annuity contract required to be 
     made by the House bill are not required to be made before the 
     last day of the first plan year beginning on or after January 
     1, 2003. In the case of a governmental plan, the date for 
     amendments is extended to the last day of the first plan year 
     beginning on or after January 1, 2005.
       Effective date.--The House bill is effective on the date of 
     enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     10. Model plans for small businesses (sec. 1260 of the House 
         bill)

                              Present Law

       The Internal Revenue Service (``IRS'') previously has 
     established uniform plan \50\ and prototype plan \51\ 
     programs that were designed, in part, to simplify the 
     preparation of qualified retirement plan documents and the 
     determination letter application process. Neither the IRS nor 
     the Secretary of the Treasury previously have issued model 
     plan documents.
---------------------------------------------------------------------------
     \50\ Rev. Proc. 84-46, 1984-2 C.B. 787.
     \51\ Rev. Proc. 84-23, 1984-1 C.B. 457; Rev. Proc. 89-9, 
     1989-1 C.B. 780; Rev. Proc. 89-13, 1989-1 C.B. 801.
---------------------------------------------------------------------------

                               House Bill

       The Secretary of the Treasury is directed to issue, not 
     later than December 31, 2000, at least one model defined 
     contribution plan document and at least one model defined 
     benefit plan document that fit the needs of small businesses 
     and that is treated as meeting the requirements of section 
     401(a) with respect to the form of the plan. To the extent 
     that the requirements of section 401(a) are modified after 
     the issuance of the model plans, the Secretary is directed to 
     issue, in a timely manner, model amendments that, if adopted 
     in a timely manner by an employer that adopts a model plan, 
     will cause the model plan to be treated as meeting the 
     requirements of section 401(a), as modified, with respect to 
     the form of the plan.
       Alternatively, the Secretary is permitted, in its 
     discretion, to enhance and simplify the existing prototype 
     plan programs in a manner that achieves the purposes of the 
     model plans.
       Effective date.--The House bill is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     11. Reporting simplification (sec. 1261 of the House bill and 
         sec. 371 of the Senate amendment)

                              Present Law

       A plan administrator of a pension, annuity, stock bonus, 
     profit-sharing or other funded plan of deferred compensation 
     generally must file with the Secretary of the Treasury an 
     annual return for each plan year containing certain 
     information with respect to the qualification, financial 
     condition, and operation of the plan. Title I of ERISA also 
     may require the plan administrator to file annual reports 
     concerning the plan with the Department of Labor and the 
     Pension Benefit Guaranty Corporation (``PBGC''). The plan 
     administrator must use the Form 5500 series as the format for 
     the required annual return. \52\ The Form 5500 series annual 
     return/report, which consists of a primary form and various 
     schedules, includes the information required to be filed with 
     all three agencies. The plan administrator satisfies the 
     reporting requirement with respect to each agency by filing 
     the Form 5500 series annual return/report with the Internal 
     Revenue Service (``IRS''), which forwards the form to the 
     Department of Labor and the PBGC.
---------------------------------------------------------------------------
     \52\ Treas. Reg. sec. 301.6058-1(a).
---------------------------------------------------------------------------
       The Form 5500 series consists of 3 different forms: Form 
     5500, Form 5500-C/R, and Form 5500-EZ. Form 5500 is the most 
     comprehensive of the forms and requires the most detailed 
     financial information. Form 5500-C/R requires less 
     information than Form 5500, and Form 5500-EZ, which consists 
     of only 1 page, is the simplest of the forms.
       The size of the plan determines which form a plan 
     administrator must file. If the plan has more than 100 
     participants at the beginning of the plan year, the plan 
     administrator generally must file Form 5500. If the plan has 
     fewer than 100 participants at the beginning of the plan 
     year, the plan administrator generally may file Form 5500-C/
     R. A plan administrator generally may file Form 5500-EZ if 
     (1) the only participants in the plan are the sole owner of a 
     business that maintains the plan (and such owner's spouse), 
     or partners in a partnership that maintains the plan (and 
     such partners' spouses), (2) the plan is not aggregated with 
     another plan in order to satisfy the minimum coverage 
     requirements of section 410(b), (3) the employer is not a 
     member of a related group of employers, and (4) the employer 
     does not receive the services of leased employees. If the 
     plan satisfies the eligibility requirements for Form 5500-EZ 
     and the total value of the plan year and all prior plan years 
     does not exceed $100,000, the plan administrator is not 
     required to file a return.

                               House Bill

       The Secretary of the Treasury is directed to provide for 
     the filing of a simplified annual return substantially 
     similar to the

[[Page 19701]]

     Form 5500-EZ by a plan that (1) covers less than 25 employees 
     on the first day of the plan year, (2) is not aggregated with 
     another plan in order to satisfy the minimum coverage 
     requirements of section 410(b), (3) is maintained by an 
     employer that is not a member of a related group of 
     employers, and (4) is maintained by an employer that does not 
     receive the services of leased employees.
       Effective date.--The House bill is effective on the date of 
     enactment.

                            Senate Amendment

       The Secretary of the Treasury is directed to modify the 
     annual return filing requirements with respect to plans that 
     satisfy the eligibility requirements for Form 5500-EZ to 
     provide that if the total value of the plan assets of such a 
     plan as of the end of the plan year and all prior plan years 
     does not exceed $500,000, the plan administrator is not 
     required to file a return.
       In addition, the Secretary of the Treasury is directed to 
     provide for the filing of a simplified annual return 
     substantially similar to the Form 5500-EZ by a plan that (1) 
     covers less than 25 employees on the first day of the plan 
     year, (2) is not aggregated with another plan in order to 
     satisfy the minimum coverage requirements of section 410(b), 
     (3) is maintained by an employer that is not a member of a 
     related group of employers, and (4) is maintained by an 
     employer that does not receive the services of leased 
     employees.
       Effective date.--The provision is effective on January 1, 
     2001.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     a modification. The Secretary of the Treasury is directed to 
     modify the annual return filing requirements with respect to 
     plans that satisfy the eligibility requirements for Form 
     5500-EZ to provide that if the total value of the plan assets 
     of such a plan as of the end of the plan year and all prior 
     plan years does not exceed $250,000, the plan administrator 
     is not required to file a return.
       Effective date.--The provision is effective on January 1, 
     2001.
     12. Improvement to Employee Plans Compliance Resolution 
         System (sec. 1262 of the House bill)

                              Present Law

       A retirement plan that is intended to be a tax-qualified 
     plan provides retirement benefits on a tax-favored basis if 
     the plan satisfies all of the requirements of section 401(a). 
     Similarly, an annuity that is intended to be a tax-sheltered 
     annuity provides retirement benefits on a tax- favored basis 
     if the program satisfies all of the requirements of section 
     403(b). Failure to satisfy all of the applicable requirements 
     of section 401(a) or section 403(b) may disqualify a plan or 
     annuity for the intended tax-favored treatment.
       The Internal Revenue Service (``IRS'') has established the 
     Employee Plans Compliance Resolution System (``EPCRS''), 
     which is a comprehensive system of correction programs for 
     sponsors of retirement plans and annuities that are intended, 
     but have failed, to satisfy the requirements of section 
     401(a) and section 403(b), as applicable. \53\ EPCRS permits 
     employers to correct compliance failures and continue to 
     provide their employees with retirement benefits on a tax-
     favored basis.
---------------------------------------------------------------------------
     \53\ Rev. Proc. 98-22, 1998-12 I.R.B. 11, as modified by Rev. 
     Proc. 99-13, 1999-5, I.R.B. 52.
---------------------------------------------------------------------------
       The IRS has designed EPCRS to (1) encourage operational and 
     formal compliance, (2) promote voluntary and timely 
     correction of compliance failures, (3) provide sanctions for 
     compliance failures identified on audit that are reasonable 
     in light of the nature, extent, and severity of the 
     violation, (4) provide consistent and uniform administration 
     of the correction programs, and (5) permit employers to rely 
     on the availability of EPCRS in taking corrective actions to 
     maintain the tax-favored status of their retirement plans and 
     annuities.
       The basic elements of the programs that comprise EPCRS are 
     self-correction, voluntary correction with IRS approval, and 
     correction on audit. The Administrative Policy Regarding 
     Self-Correction (``APRSC'') permits a plan sponsor that has 
     established compliance practices to correct certain 
     insignificant failures at any time (including during an 
     audit), and certain significant failures within a 2-year 
     period, without payment of any fee or sanction. The Voluntary 
     Compliance Resolution (``VCR'') program, the Walk-In Closing 
     Agreement Program (``Walk-In CAP''), and the Tax-Sheltered 
     Annuity Voluntary Correction (``TVC'') program permit an 
     employer, at any time before an audit, to pay a limited fee 
     and receive IRS approval of a correction. For a failure that 
     is discovered on audit and corrected, the Audit Closing 
     Agreement Program (``Audit CAP'') provides for a sanction 
     that bears a reasonable relationship to the nature, extent, 
     and severity of the failure and that takes into account the 
     extent to which correction occurred before audit.
       The IRS has expressed its intent that EPCRS will be updated 
     and improved periodically in light of experience and comments 
     from those who use it.

                               House Bill

       The Secretary of the Treasury is directed to continue to 
     update and improve EPCRS, giving special attention to (1) 
     increasing the awareness and knowledge of small employers 
     concerning the availability and use of EPCRS, (2) taking into 
     account special concerns and circumstances that small 
     employers face with respect to compliance and correction of 
     compliance failures, (3) extending the duration of the self-
     correction period under APRSC for significant compliance 
     failures, (4) expanding the availability to correct 
     insignificant compliance failures under APRSC during audit, 
     and (5) assuring that any tax, penalty, or sanction that is 
     imposed by reason of a compliance failure is not excessive 
     and bears a reasonable relationship to the nature, extent, 
     and severity of the failure.
       Effective date.--The House bill is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     13. Modifications to section 415 limits for multiemployer and 
         governmental plans (sec. 1263 of the House bill, secs. 
         346 and 348 of the Senate amendment, and sec. 415 of the 
         Code)

                              Present Law

       Under present law, limits apply to contributions and 
     benefits under qualified plans (sec. 415). The limits on 
     contributions and benefits under qualified plans are based on 
     the type of plan.
       Under a defined benefit plan, the maximum annual benefit 
     payable at retirement is generally the lesser of (1) 100 
     percent of average compensation for the highest three years, 
     or (2) $130,000 (for 1999). The dollar limit is adjusted for 
     cost-of-living increases in $5,000 increments. The dollar 
     limit is reduced in the case of retirement before the social 
     security retirement age and increases in the case of 
     retirement after the social security retirement age.
       A special rule applies to governmental, tax-exempt 
     organization, and qualified merchant marine defined benefit 
     plans. In the case of such plans, the defined benefit dollar 
     limit is reduced in the case of retirement before age 62 and 
     increased in the case of retirement after age 65. In 
     addition, there is a floor on early retirement benefits. 
     Pursuant to this floor, the minimum benefit payable at age 55 
     is $75,000.
       In the case of a defined contribution plan, the limit on 
     annual is additions if the lesser of (1) 25 percent of 
     compensation \54\ or (2) $30,000 (for 1999). In applying the 
     limits on contributions and benefits, plans of the same 
     employer are aggregated.
---------------------------------------------------------------------------
     \54\ Another provision of the Senate amendment increases this 
     limit to 100 percent of compensation.
---------------------------------------------------------------------------

                               House Bill

       The 100 percent of compensation defined benefit plan limit 
     does not apply to multiemployer plans.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2000.

                            Senate Amendment

     Treatment of multiemployer plans
       The 100 percent of compensation defined benefit plan limit 
     does not apply to multiemployer plans. In addition, except in 
     applying the defined benefit plan dollar limitation, 
     multiemployer plans are not aggregated with other plans 
     maintained by an employer contributing to the multiemployer 
     plan in applying the limits on contributions and benefits.
       The Senate amendment also applies the special rules for 
     defined benefit plans of governmental employers, tax-exempt 
     organizations, and qualified merchant marines to 
     multiemployer plans.
     Increase in early retirement floor for governmental, 
         multiemployer, and other plans
       The floor for reductions of the dollar limit prior to age 
     62 for defined benefit plans of governmental employers and 
     tax-exempt organizations, qualified merchant marine plans and 
     multiemployer plans is increased from $75,000 to 80 percent 
     of the defined benefit dollar limit.
     Effective date
       The Senate amendment is effective for years beginning after 
     December 31, 1999.

                          Conference Agreement

       The conference agreement follows the House bill.
     14. Rules for substantial owner benefits in terminated plans 
         (sec. 363 of the Senate amendment and sec. 4022 of ERISA)

                              Present Law

       Under present law, the Pension Benefit Guaranty Corporation 
     (``PBGC'') provides participants and beneficiaries in a 
     defined benefit pension plan with certain minimal guarantees 
     as to the receipt of benefits under the plan in case of plan 
     termination. The employer sponsoring the defined benefit 
     pension plan is required to pay premiums to the PBGC to 
     provide insurance for the guaranteed benefits. In general, 
     the PBGC will guarantee all basic benefits which are payable 
     in periodic installments for the life (or lives) of the 
     participant and his or her beneficiaries and are non-
     forfeitable at the time of plan termination. The amount of 
     the guaranteed benefit is subject to certain limitations. One 
     limitation is that the plan (or an

[[Page 19702]]

     amendment to the plan which increases benefits) must be in 
     effect for 60 months before termination for the PBGC to 
     guarantee the full amount of basic benefits for a plan 
     participant, other than a substantial owner. In the case of a 
     substantial owner, the guaranteed basic benefit is phased in 
     over 30 years beginning with participation in the plan. A 
     substantial owner is one who owns, directly or indirectly, 
     more than 10 percent of the voting stock of a corporation or 
     all the stock of a corporation. Special rules restricting the 
     amount of benefit guaranteed and the allocation of assets 
     also apply to substantial owners.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that the 60 month phase-in of 
     guaranteed benefits applies to a substantial owner with less 
     than 50 percent ownership interest. For a substantial owner 
     with a 50 percent or more ownership interest (``majority 
     owner''), the phase-in depends on the number of years the 
     plan has been in effect. The majority owner's guaranteed 
     benefit is limited so that it may not be more than the amount 
     phased in over 60 months for other participants. The rules 
     regarding allocation of assets apply to substantial owners, 
     other than majority owners, in the same manner as other 
     participants.
       Effective date.--The Senate amendment is effective for plan 
     terminations with respect to which notices of intent to 
     terminate are provided, or for which proceedings for 
     termination are instituted by the PBGC after December 31, 
     2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     15. Extension to international organizations of moratorium on 
         application of certain nondiscrimination rules applicable 
         to State and local government plans (sec. 368 of the 
         Senate amendment, sec. 1505 of the Taxpayer Relief Act of 
         1997, and secs. 401(a) and 401(k) of the Code)

                              Present Law

       A qualified retirement plan maintained by a State or local 
     government is exempt from the rules concerning 
     nondiscrimination (sec. 401(a)(4)) and minimum participation 
     (sec. 401(a)(26)). A governmental plan maintained by an 
     international organization that is exempt from taxation by 
     reason of the International Organizations Immunities Act is 
     not exempt from the nondiscrimination and minimum 
     participation rules.

                               House Bill

       No provision.

                            Senate Amendment

       A governmental plan maintained by a tax-exempt 
     international organization is exempt from the 
     nondiscrimination and minimum participation rules.
       Effective date.--The Senate amendment is effective for plan 
     years beginning after December 31, 2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
     16. Annual report dissemination (sec. 369 of the Senate 
         amendment and sec. 104 of ERISA)

                              Present Law

       Title I of ERISA generally requires the plan administrator 
     of each employee pension benefit plan and each employee 
     welfare benefit plan to file an annual report concerning the 
     plan with the Secretary of Labor within 7 months after the 
     end of the plan year. Within 9 months after the end of the 
     plan year, the plan administrator generally must provide to 
     each participant, and to each beneficiary receiving benefits 
     under the plan, a summary of the annual report filed with the 
     Secretary of Labor for the plan year.

                               House Bill

       No provision.

                            Senate Amendment

       Within 9 months after the end of each plan year, the plan 
     administrator is required to make available for examination a 
     summary of the annual report filed with the Secretary of 
     Labor for the plan year. In addition, the plan administrator 
     is required to furnish the summary to a participant, or to a 
     beneficiary receiving benefits under the plan, upon request.
       Effective date.--The Senate amendment is effective for 
     reports for years beginning after December 31, 1998.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
     17. Clarification of exclusion for employer-provided transit 
         passes (sec. 370 of the Senate amendment and sec. 132 of 
         the Code)

                              Present Law

       Qualified transportation fringe benefits provided by an 
     employer are excluded from an employee's gross income and 
     wages. Qualified transportation fringe benefits include 
     parking, transit passes, and vanpool benefits. Up to $175 per 
     month (for 1999) of employer-provided parking is excludable 
     from income and up to $65 (for 1999) per month of employer-
     provided transit and vanpool benefits are excludable from 
     income.
       Qualified transportation benefits generally include a cash 
     reimbursement by an employer to an employee. However, in the 
     case of transit passes, a cash reimbursement is considered a 
     qualified transportation fringe benefit only if a voucher or 
     similar item which may be exchanged only for a transit pass 
     is not readily available for direct distribution by the 
     employer to the employee.
       No amount is includible in the gross income of an employee 
     merely because the employee is offered a choice between cash 
     and any qualified transportation benefit (or a choice among 
     such benefits).

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment repeals the rule providing that cash 
     reimbursements for transit benefits are excludable from 
     income only if a voucher or similar item which may be 
     exchanged only for a transit pass is not readily available 
     for direct distribution by the employer.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

                     XIII. MISCELLANEOUS PROVISIONS

 A. Expand Employer Reporting on Annual Wage and Tax Statements (sec. 
           1303 of the House bill and sec. 6051 of the Code)

                              Present Law

       An employer must provide certain information annually to 
     each employee in the form of a wage and tax statement (``Form 
     W-2''). The information required to be included on such form 
     includes the individual's name, address, social security 
     number and a statement of total wages, tips, and other 
     compensation for the year. The form must also include the 
     amount of federal income tax withheld as well as the 
     employee's share of social security and medicare taxes 
     withheld for the year by the employer. There is no 
     requirement that the form include a statement of the 
     employer's share of social security and medicare taxes paid 
     by the employer with respect to that individual.

                               House Bill

       The House bill requires the Form W-2 to include a statement 
     of social security and medicare taxes paid by the employer on 
     behalf of each employee.
       Effective date.--The House bill provision is effective with 
     respect to Form W-2's with respect to remuneration paid after 
     December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision. However, the conferees intend that the Internal 
     Revenue Service provide the employer's share of social 
     security and medicare taxes to each employee, no less 
     frequently than annually.

 B. Survivor Benefits of Public Safety Officers Killed in The Line of 
      Duty (sec. 1304 of the House bill and sec. 101 of the Code)

                              Present Law

       The Taxpayer Relief Act of 1997 included a provision 
     providing that an amount paid as a survivor annuity on 
     account of the death of a public safety officer who is killed 
     in the line of duty is excludable from income to the extent 
     the survivor annuity is attributable to the officer's service 
     as a law enforcement officer. The survivor annuity must be 
     provided under a governmental plan to the surviving spouse 
     (or former spouse) of the public safety officer or to a child 
     of the officer. Public safety officers include law 
     enforcement officers, firefighters, rescue squad or ambulance 
     crew. The provision does not apply with respect to the death 
     of a public safety officer if it is determined by the 
     appropriate supervising authority that (1) the death was 
     caused by the intentional misconduct of the officer or by the 
     officer's intention to bring about the death, (2) the officer 
     was voluntarily intoxicated at the time of death, (3) the 
     officer was performing his or her duties in a grossly 
     negligent manner at the time of death, or (4) the actions of 
     the individual to whom payment is to be made were a 
     substantial contributing factor to the death of the officer.
       The provision applies to amounts received in taxable years 
     beginning after December 31, 1996, with respect to 
     individuals dying after that date.

                               House Bill

       The provision extends the present-law treatment of survivor 
     annuities with respect to public safety officers killed in 
     the line of duty to payments received in taxable years 
     beginning after December 31, 1999, with respect to 
     individuals dying on or before December 31, 1996.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
  


[[Page 19703]]



   C. Income from Publicly Traded Partnerships Treated as Qualifying 
 Income of Regulated Investment Companies (secs. 1311 and 1312 of the 
          House bill and secs. 851(b) and 469(k) of the Code)

                              Present Law

       A regulated investment company (``RIC'') generally is 
     treated as a conduit for Federal income tax purposes. In 
     computing its taxable income, a RIC deducts dividends paid to 
     its shareholders to achieve conduit treatment (sec. 852(b)). 
     In order to qualify for conduit treatment, a RIC must be a 
     domestic corporation that, at all times during the taxable 
     year, is registered under the Investment Company Act of 1940 
     as a management company or as a unit investment trust, or has 
     elected to be treated as a business development company under 
     that Act (sec. 851(a)). In addition, the corporation must 
     elect RIC status, and must satisfy certain other requirements 
     (sec. 851(b)).
       One of the requirements is that at least 90 percent of its 
     gross income is derived from dividends, interest, payments 
     with respect to securities loans, and gains from the sale or 
     other disposition of stock or securities or foreign 
     currencies, or other income (including but not limited to 
     gains from options, futures, or forward contracts) derived 
     with respect to its business of investing in such stock, 
     securities, or currencies. Income derived from a partnership 
     is treated as meeting this requirement only to the extent 
     such income is attributable to items of income of the 
     partnership that would meet the requirement if realized by 
     the RIC in the same manner as realized by the partnership 
     (the ``look-through'' rule for partnership income). Under 
     present law, no distinction is made under this rule between a 
     publicly traded partnership and any other partnership.
       Present law provides that a publicly traded partnership 
     means a partnership, interests in which are traded on an 
     established securities market, or are readily tradable on a 
     secondary market (or the substantial equivalent thereof). In 
     general, a publicly traded partnership is treated as a 
     corporation (sec. 7704(a)), but an exception to corporate 
     treatment is provided if 90 percent or more of its gross 
     income is interest, dividends, real property rents, or 
     certain other types of qualifying income (sec. 7704(c) and 
     (d)).
       A special rule for publicly traded partnerships applies 
     under the passive loss rules. The passive loss rules limit 
     deductions and credits from passive trade or business 
     activities (sec. 469). Deductions attributable to passive 
     activities, to the extent they exceed income from passive 
     activities, generally may not be deducted against other 
     income. Deductions and credits that are suspended under these 
     rules are carried forward and treated as deductions and 
     credits from passive activities in the next year. The 
     suspended losses from a passive activity are allowed in full 
     when a taxpayer disposes of his entire interest in the 
     passive activity to an unrelated person. The special rule for 
     publicly traded partnerships provides that the passive loss 
     rules are applied separately with respect to items 
     attributable to each publicly traded partnership (sec. 
     469(k)). Thus, income or loss from the publicly traded 
     partnership is treated as separate from income or loss from 
     other passive activities.

                               House Bill

       The House bill modifies the 90 percent test with respect to 
     income of a RIC to include income derived from an interest in 
     a publicly traded partnership. The provision also modifies 
     the lookthrough rule for partnership income of a RIC so that 
     it applies only to income from a partnership other than a 
     publicly traded partnership.
       The provision provides that the special rule for publicly 
     traded partnerships under the passive loss rules (requiring 
     separate treatment) applies to a RIC holding an interest in a 
     publicly traded partnership, with respect to items 
     attributable to the interest in the publicly traded 
     partnership.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2000.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

D. Equalize the Tax Treatment of Oversized ``Clean Fuel'' Vehicles and 
Electric Vehicles (sec. 1313 of the House bill and sec. 30 and 179A of 
                               the Code)

                              Present Law

       Taxpayers may claim a credit of 10 percent of the cost of 
     an electric vehicle up to a maximum credit of $4,000 (sec. 
     30). Taxpayers may claim an immediate deduction (expensing) 
     for up to $50,000 of the cost of a qualified clean-fuel 
     vehicle which is a truck or van with a gross vehicle weight 
     greater than 13 tons or a bus with a seating capacity of at 
     least 20 adults (sec. 179A). For the purposes of the 
     deduction permitted under section 179A, electric trucks, 
     vans, or buses are not qualified clean fuel vehicles.

                               House bill

       The House bill provides that an electric truck or van with 
     a gross vehicle weight rating greater than 13 tons or an 
     electric bus which has seating capacity of at least 20 adults 
     is a qualified clean fuel vehicle for which the taxpayer may 
     expense up to $50,000 of cost and that such vehicles are not 
     eligible for the electric vehicle credit.
       Effective date.--The provision is effective for vehicles 
     placed in service after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
       Effective date.--The provision is effective for vehicles 
     placed in service after December 31, 1999.

E. Nuclear Decommissioning Costs (sec. 1314 of the House bill and sec. 
                           468A of the Code)

                              Present Law

       Special rules dealing with nuclear decommissioning reserve 
     funds were adopted by Congress in the Deficit Reduction Act 
     of 1984 (``1984 Act'') when tax issues regarding the time 
     value of money were addressed generally. Under general tax 
     accounting rules, a deduction for accrual basis taxpayers 
     generally is deferred until there is economic performance for 
     the item for which the deduction is claimed. However, the 
     1984 Act contains an exception to those rules under which a 
     taxpayer responsible for nuclear power plant decommissioning 
     may elect to deduct contributions made to a qualified nuclear 
     decommissioning fund for future payment costs. Taxpayers who 
     do not elect this provision are subject to the general rules 
     in the 1984 Act.
       A qualified decommissioning fund is a segregated fund 
     established by the taxpayer that is used exclusively for the 
     payment of decommissioning costs, taxes on fund income, 
     payment of management costs of the fund, and making 
     investments. The fund is prohibited from dealing with the 
     taxpayer that established the fund. The income of the fund is 
     taxed at a reduced rate of 20 percent \55\ for taxable years 
     beginning after December 31, 1995.
---------------------------------------------------------------------------
     \55\ As originally enacted in 1984, the fund paid tax on its 
     earnings at the top corporate rate. Also, as originally 
     enacted, the funds in the trust could be invested only in 
     certain low risk investments. Subsequent amendments to the 
     provision have reduced the rate of tax on the fund to 20 
     percent, and removed the restrictions on the types of 
     permitted investments that the fund can make.
---------------------------------------------------------------------------
       Contributions to the fund are deductible in the year made 
     to the extent that these amounts were collected as part of 
     the cost of service to ratepayers. Withdrawal of funds by the 
     taxpayer to pay for decommissioning expenses are included in 
     income at that time, but the taxpayer also is entitled to a 
     deduction at that time for decommissioning expenses as 
     economic performance for those costs occurs.
       A taxpayer's contributions to the fund may not exceed the 
     amount of nuclear decommissioning costs included in the 
     taxpayer's cost of service for ratemaking purposes for the 
     taxable year. Additionally, in order to prevent accumulations 
     of funds over the remaining life of a nuclear power plant in 
     excess of those required to pay future decommissioning costs 
     and to ensure that contributions to the funds are not 
     deducted more rapidly than level funding, taxpayers must 
     obtain a ruling from the IRS to establish the maximum 
     contribution that may be made to the fund.
       If the decommissioning fund fails to comply with the 
     qualification requirements or when the decommissioning is 
     substantially completed, the fund's qualification may be 
     terminated, in which case the amounts in the fund must be 
     included in income of the taxpayer.
       A qualified decommissioning fund may be transferred in 
     connection with the sale, exchange or other transfer of the 
     nuclear power plant to which it relates. If the transferee is 
     a regulated public utility and meets certain other 
     requirements, the transfer will be treated as a nontaxable 
     transaction. No gain or loss will be recognized on the 
     transfer of the qualified decommissioning fund and the 
     transferee will take the transferor's basis in the fund. \56\ 
     The transferee is required to obtain a new ruling amount from 
     the IRS, or accept a discretionary determination by the IRS. 
     \57\ However, if the transferee does not qualify to continue 
     the qualified decommissioning fund, the balance in the fund 
     will be treated as distributed (and thus taxable) at the time 
     of the transfer.
---------------------------------------------------------------------------
     \56\  Treas. Regs. sec. 1.468A-6.
     \57\  Treas. Regs. sec. 1.468A-6(f).
---------------------------------------------------------------------------
       State and Federal regulators may require utilities to set 
     aside funds for nuclear decommissioning purposes in excess of 
     the amount allowed as a deductible contribution to a 
     qualified decommissioning fund. In addition, the taxpayer may 
     have set aside funds prior to the effective date of the 
     qualified decommissioning fund rules. In some cases, a 
     deduction may have been taken for such amounts at the time 
     they were set aside. \58\

[[Page 19704]]

     These nonqualified funds are not eligible for the special 
     rules that apply to qualified decommissioning funds. Since 
     1984, no deduction has been allowed with respect to the 
     contribution or segregation of nonqualified funds, and the 
     income on nonqualified funds is taxed to the taxpayer at the 
     taxpayer's marginal rate.
---------------------------------------------------------------------------
     \58\ Prior to July 17, 1984 (the date of enactment of the 
     Deficit Reduction Act of 1984), accrual basis taxpayers could 
     deduct items without regard to the time the items were 
     economically performed. Some taxpayers may have taken the 
     position that amounts for nuclear decommissioning were 
     deductible prior to July 17, 1984.
---------------------------------------------------------------------------
  


                               House Bill

       The cost of service requirement for deductible 
     contributions to nuclear decommissioning funds is repealed. 
     Taxpayers, including unregulated taxpayers, are allowed a 
     deduction for amounts contributed to a qualified nuclear 
     decommissioning fund. As under current law, however, the 
     maximum contribution and deduction for a taxable year can not 
     exceed the IRS ruling amount for that year.
       The provision also clarifies the Federal income tax 
     treatment of the transfer of qualified nuclear 
     decommissioning funds. No gain or loss is recognized to the 
     transferor or the transferee as a result of the transfer of a 
     qualified fund in connection with the transfer of the power 
     plant with respect to which the fund was established.
       The provision provides an election to transfer the balance 
     of certain nonqualified funds to qualified fund. Any portion 
     of the amount transferred that has not previously been 
     deducted is allowed as a deduction over the remainder of the 
     useful life of the nuclear power plant (as determined for the 
     purpose of the ruling amount) beginning with the first 
     taxable year that begins after 2001. If a qualified fund that 
     has received a transfer from a nonqualified fund is 
     transferred to another person, that person will be entitled 
     to the deduction at the same time and in the same manner as 
     the transferor. Thus, if the transferor was not subject to 
     tax at the time and thus would have been unable to utilize 
     the deduction, the transferee will similarly not be able to 
     utilize the deduction. A taxpayer is not considered to have a 
     basis in any qualified nuclear decommissioning fund.
       Nonqualified funds eligible to be transferred to a 
     qualified fund are funds that have been irrevocably set aside 
     pursuant to the requirements of a state of Federal agency 
     exclusively for the purpose of funding the decommissioning of 
     the taxpayer's nuclear power plant. Funds that constitute a 
     ``prepaid decommissioning fund'' or ``external sinking trust 
     fund'' that would qualify for the purpose of providing 
     financial assurance that funds will be available for the 
     decommisioning process under 10 CFR 50.75 are expected to 
     meet the definition of nonqualified funds for this purpose.
       A new ruling amount must be obtained following the transfer 
     of nonqualified funds to a qualified fund.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

 F. Permit Consolidation of Life and Nonlife Insurance Companies (sec. 
 1315 of the House bill, sec. 1113 of the Senate amendment, and secs. 
                  1504(b)(2) and 1504(c) of the Code)

                              Present Law

       Under present law, an affiliated group of corporations 
     means one or more chains of includible corporations connected 
     through stock ownership with a common parent corporation 
     (sec. 1504(a)(1)). The stock ownership requirement consists 
     of an 80-percent voting and value test. In general, an 
     affiliated group of corporations may file a consolidated tax 
     return for Federal income tax purposes.
       Life insurance companies (subject to tax under section 801) 
     generally are not treated as includible corporations, and 
     therefore may not be included in a consolidated return of an 
     affiliated group including nonlife-insurance companies, 
     unless the common parent of the group elects to treat the 
     life insurance companies as includible corporations (sec. 
     1504(c)(2)).
       Under the election to treat life insurance companies as 
     includible corporations of an affiliated group, two special 
     5-year limitation rules apply. The first 5-year rule provides 
     that a life insurance company may not be treated as an 
     includible corporation until it has been a member of the 
     group for the 5 taxable years immediately preceding the 
     taxable year for which the consolidated return is filed (sec. 
     1504(c)(2)). The second 5-year rule provides that any net 
     operating loss of a nonlife-insurance member of the group may 
     not offset the taxable income of a life insurance member for 
     any of the first 5 years the life and nonlife-insurance 
     corporations have been members of the same affiliated group 
     (sec. 1503(c)(2)). This rule applies to nonlife losses for 
     the current taxable year or as a carryover or carryback.
       A separate 35-percent limitation also applies under the 
     election to treat life insurance companies as includible 
     corporations of an affiliated group (sec. 1503(c)(1)). This 
     rule provides that if the non-life-insurance members of the 
     group have a net operating loss, then the amount of the loss 
     that is not absorbed by carrybacks against the nonlife-
     insurance members' income may offset the life insurance 
     members' income only to the extent of the lesser of: (1) 35 
     percent of the amount of the loss; or (2) 35 percent of the 
     life insurance members' taxable income. The unused portion of 
     the loss is available as a carryover and is added to 
     subsequent-year losses, subject to the same 35-percent 
     limitation.

                               House Bill

       The House bill repeals the two 5-year limitation rules 
     under the election to treat life insurance companies as 
     includible corporations of an affiliated group. The provision 
     also repeals the rule that a life insurance corporation is 
     not an includible corporation unless the common parent makes 
     an election to treat life insurance companies as includible 
     corporations. Thus, under the provision, a life insurance 
     company is treated as an includible corporation starting with 
     the first taxable year for which it becomes a member of the 
     affiliated group and otherwise meets the definition of an 
     includible corporation. In addition, any net operating loss 
     of a nonlife- insurance member of the group can offset the 
     taxable income of a life insurance member starting with the 
     first taxable year for which it becomes a member of the 
     affiliated group and otherwise meets the definition of an 
     includible corporation. The provision retains the 35-percent 
     limitation of present law with respect to any life insurance 
     company that is an includible corporation of an affiliated 
     group.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2004. To the extent that a 
     consolidated net operating loss is created or increased by 
     the provision, the loss may not be carried back to a taxable 
     year beginning before January 1, 2005. In addition, no 
     affiliated group terminates solely by reason of the 
     provision. The provision waives the 5-year waiting period for 
     reconsolidation under section 1504(a)(3), in the case of any 
     corporation that was previously an includible corporation, 
     but was subsequently deemed not to be an includible 
     corporation as a result of becoming a subsidiary of a 
     corporation that was not an includible corporation by reason 
     of the 5-year rule of section 1504(c)(2) (providing that a 
     life insurance company may not be treated as an includible 
     corporation until it has been a member of the group for the 5 
     taxable years immediately preceding the taxable year for 
     which the consolidated return is filed).

                            Senate Amendment

       The Senate amendment repeals the 5-year limitation rule 
     relating to consolidation under the election to treat life 
     insurance companies as includible corporations of an 
     affiliated group. The provision also repeals the rule that a 
     life insurance corporation is not an includible corporation 
     unless the common parent makes an election to treat life 
     insurance companies as includible corporations. Thus, under 
     the provision, a life insurance company is treated as an 
     includible corporation starting with the first taxable year 
     for which it becomes a member of the affiliated group and 
     otherwise meets the definition of an includible corporation. 
     However, as under present law, any net operating loss of a 
     nonlife-insurance member of the group may not offset the 
     taxable income of a life insurance member for any of the 
     first five years the life and nonlife-insurance corporations 
     have been members of the same affiliated group. The provision 
     retains the 35-percent limitation of present law with respect 
     to any life insurance company that is an includible 
     corporation of an affiliated group.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2000. To the extent that a 
     consolidated net operating loss is created or increased by 
     the provision, the loss may not be carried back to a taxable 
     year beginning before January 1, 2001. In addition, no 
     affiliated group terminates solely by reason of the 
     provision. The provision waives the 5-year waiting period for 
     reconsolidation under section 1504(a)(3), in the case of any 
     corporation that was previously an includible corporation, 
     but was subsequently deemed not to be an includible 
     corporation as a result of becoming a subsidiary of a 
     corporation that was not an includible corporation by reason 
     of the 5-year rule of section 1504(c)(2) (providing that a 
     life insurance company may not be treated as an includible 
     corporation until it has been a member of the group for the 5 
     taxable years immediately preceding the taxable year for 
     which the consolidated return is filed).

                          Conference Agreement

       The conference agreement follows the Senate amendment. The 
     conference agreement also follows the House bill with respect 
     to repeal of the second 5-year rule (which provides that any 
     net operating loss of a nonlife-insurance member of the group 
     may not offset the taxable income of a life insurance member 
     for any of the first 5 years the life and nonlife-insurance 
     corporations have been members of the same affiliated group 
     (sec. 1503(c)(2)), with a modification as to the effective 
     date of repeal of the second 5-year rule. Under the 
     conference agreement, repeal of the second 5-year rule is 
     effective for taxable years beginning after December 31, 
     2005.
       Effective date.--The repeal of the first 5-year rule and 
     the repeal of the election to

[[Page 19705]]

     treat a life insurance company as an includible corporation 
     are effective for taxable years beginning after December 31, 
     2000. The repeal of the second 5-year rule (sec. 1503(c)(2)) 
     is effective for taxable years beginning after December 31, 
     2005. To the extent that a consolidated net operating loss is 
     created or increased by the provision, the loss may not be 
     carried back to a taxable year beginning before January 1, 
     2006. In addition, no affiliated group terminates solely by 
     reason of the provision. The provision waives the 5-year 
     waiting period for reconsolidation under section 1504(a)(3), 
     in the case of any corporation that was previously an 
     includible corporation, but was subsequently deemed not to be 
     an includible corporation as a result of becoming a 
     subsidiary of a corporation that was not an includible 
     corporation by reason of the 5-year rule of section 
     1504(c)(2) (providing that a life insurance company may not 
     be treated as an includible corporation until it has been a 
     member of the group for the 5 taxable years immediately 
     preceding the taxable year for which the consolidated return 
     is filed).

   G. Consolidate Code Provisions Governing the Hazardous Substance 
  Superfund and the Leaking Underground Storage Tank Trust Fund (sec. 
      1321 of the House bill and secs. 9507 and 9508 of the Code)

                              Present Law

       Present law includes two separate Trust Funds to finance 
     similar ground and water cleanup programs related to 
     hazardous substances. These funds are the Hazardous Substance 
     Superfund (the ``Superfund'') and the Leaking Underground 
     Storage Tank Trust Fund (the ``LUST Trust Fund''). Amounts in 
     both Trust Funds are available as provided in cross-
     referenced authorization and appropriations Acts.

                               House Bill

       The Code provisions governing the Superfund and the LUST 
     Trust Fund are consolidated into a single Environmental 
     Remediation Trust Fund (the ``Environmental Trust Fund''). 
     Amounts in the consolidated Trust Fund (i.e., all amounts in 
     both of the present-law Trust Funds) are available for 
     expenditure, as provided in appropriations Acts, for the 
     combined purposes of the two present-law Trust Funds, as of 
     July 12, 1999.
       Provisions similar to those currently included in the 
     Highway Trust Fund, the Aquatic Resources Trust Fund, and the 
     Vaccine Injury Compensation Trust Fund clarifying that 
     expenditures from the Environmental Trust Fund may occur only 
     as provided in the Code are incorporated into the new Trust 
     Fund statute, notwithstanding provisions of any other Act 
     (including subsequently enacted non-revenue Act legislation).
       Effective date.--The provision is effective on October 1, 
     1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with a 
     modification providing that the LUST and Superfund provisions 
     of the new Environmental Remediation Trust Fund will be 
     divided into separate accounts upon future enactment of 
     Superfund authorizing legislation. Upon enactment of such 
     authorizing legislation, the LUST Account will be reimbursed 
     from the Superfund Account for any amounts attributable to 
     the LUST excise tax (and interest thereon) used to finance 
     Superfund programs.

H. Repeal Certain Excise Taxes on Rail Diesel Fuel and Inland Waterway 
   Barge Fuels (sec. 1322 of the House bill, sec. 1101 of the Senate 
            amendment, and secs. 4041 and 4042 of the Code)

                              Present Law

       Under present law, diesel fuel used in trains is subject to 
     a 4.4-cents-per gallon excise tax. Revenues from 4.3 cents 
     per gallon of this excise tax are retained in the General 
     Fund of the Treasury. The remaining 0.1 cent per gallon is 
     deposited in the Leaking Underground Storage Tank (``LUST'') 
     Trust Fund.
       Similarly, fuels used in barges operating on the designated 
     inland waterways system is subject to a 4.3-cents-per-gallon 
     General Fund excise tax. This tax is in addition to the 20.1- 
     cents-per-gallon tax rates that are imposed on fuels used in 
     these barges to fund the Inland Waterways Trust Fund and the 
     Leaking Underground Storage Tank Trust Fund.
       In both cases, the 4.3-cents-per-gallon excise tax rates 
     are permanent. The LUST tax is scheduled to expire after 
     March 31, 2005.

                               House Bill

       The 0.1-cent-per-gallon LUST tax on diesel fuel used in 
     trains is repealed. In addition, the 4.3-cents-per-gallon 
     General Fund excise tax rates on diesel fuel used in trains 
     and fuels used in barges operating on the designated inland 
     waterways system is repealed.
       Effective date.--The repeal of the 0.1-cent-per-gallon LUST 
     tax on diesel fuel used in trains is effective on October 1, 
     1999. The repeal of the 4.3-cents-per-gallon excise taxes on 
     train diesel and inland waterway barge fuels is effective 
     after September 30, 2003.
       Repeal of these taxes is contingent upon enactment as part 
     of the bill of a separate provision that consolidates the 
     Code provisions governing the Hazardous Substance Superfund 
     and the Leaking Underground Storage Tank Trust Fund into an 
     Environmental Remediation Trust Fund.

                            Senate Amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The provision of the Senate amendment is 
     effective on October 1, 2000.

                          Conference Agreement

       The conference agreement follows the House bill.

 I. Repeal Excise Tax on Fishing Tackle Boxes (sec. 1323 of the House 
                    bill and sec. 4162 of the Code)

                              Present Law

       Under present law, a 10-percent manufacturer's excise tax 
     is imposed on specified sport fishing equipment. Examples of 
     taxable equipment include fishing rods and poles, fishing 
     reels, artificial bait, fishing lures, line and hooks, and 
     fishing tackle boxes. Revenues from the excise tax on sport 
     fishing equipment are deposited in the Sport Fishing Account 
     of the Aquatic Resources Trust Fund. Monies in the fund are 
     spent, subject to an existing permanent appropriation, to 
     support Federal-State sport fish enhancement and safety 
     programs.
       In addition to the revenues from the sport fishing 
     equipment excise tax, the Sport Fishing Account also receives 
     revenues from excise taxes imposed on motorboat gasoline and 
     special fuels. These motorboat fuels are subject to an excise 
     tax totaling 18.4 cents per gallon. Of this amount, 11.5 
     cents per gallon is dedicated to the Sport Fishing Account. 
     This amount is scheduled to increase to 13 cents per gallon 
     (October 1, 2001-September 30, 2003) and to 13.5 cents per 
     gallon (beginning October 1, 2003). The balance of these 
     motorboat fuels taxes (other than 0.1 cent per gallon which 
     is dedicated to the Leaking Underground Storage Tank Trust 
     Fund) is retained in the General Fund.

                               House Bill

       The excise tax on fishing tackle boxes is repealed.
       Effective date.--The provision is effective beginning 30 
     days after the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill, with a 
     modification increasing by 0.2 cent per gallon the amount of 
     the motorboat gasoline and special motor fuels taxes that are 
     dedicated to the Sport Fishing Account of the Aquatic 
     Resources Trust Fund. Thus, the amount transferred to that 
     Account will be 11.7 cents per gallon (through September 30, 
     2001), 13.2 cents per gallon (October 1, 2001-September 30, 
     2003), and 13.7 cents per gallon thereafter.
       Effective date.--The conference agreement follows the House 
     bill with regard to repeal of the fishing tackle excise tax; 
     the modification relating to transfer of the motorboat fuels 
     taxes is effective for taxes received beginning 30 days after 
     the date of enactment.

J. Modify Excise Tax on Arrow Components and Accessories (sec. 1324 of 
the House bill, sec. 1109 of the Senate amendment, and sec. 4161 of the 
                                 Code)

                              Present Law

       An 12.4 percent excise tax is imposed on the sale by a 
     manufacturer or importer of any shaft, point, nock, or vane 
     designed for use as part of an arrow which (1) is over 18 
     inches long, or (2) is designed for use with a taxable bow 
     (if shorter than 18 inches). An 11-percent tax is imposed on 
     certain bows and on certain accessories for taxable bows and 
     arrows.

                               House Bill

       The House bill makes two modifications to the excise tax on 
     arrows and arrow accessories. First, the bill extends the 
     12.4-percent tax on arrow components to inserts and outserts 
     designed for use with taxable arrows. Inserts and outserts 
     are defined as articles used to attach a point to an arrow 
     shaft. Second, the bill reclassifies ``broadheads,'' or arrow 
     points designed for hunting fish or large animals, as arrow 
     accessories subject to the 11-percent tax rather than arrow 
     points subject to the 12.4-percent tax (as under present 
     law).
       Effective date.--The provisions apply to sales by 
     manufacturers beginning on the first day of the first 
     calendar quarter that begins more than 30 days after the 
     bill's enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 K. Entrepreneurial Equity Capital Formation (``SSBICS'') (secs. 1341-
    1347 of the House bill and secs. 851, 1044 and 1202 of the Code)

                              Present Law

       Under present law, a taxpayer may elect to roll over 
     without payment of tax any capital gain realized upon the 
     sale of publicly-traded securities where the taxpayer uses 
     the proceeds from the sale to purchase common

[[Page 19706]]

     stock in a specialized small business investment company 
     (``SSBIC'') within 60 days of the sale of the securities. The 
     maximum amount of gain that an individual may roll over under 
     this provision for a taxable year is limited to the lesser of 
     (1) $50,000 or (2) $500,000 reduced by any gain previously 
     excluded under this provision. For corporations, these limits 
     are $250,000 and $1 million.
       In addition, under present law, an individual may exclude 
     50 percent of the gain \59\ from the sale of qualifying small 
     business stock held more than five years. An SSBIC is 
     automatically deemed to satisfy the active business 
     requirement which a corporation must satisfy to qualify its 
     stock for the exclusion.
---------------------------------------------------------------------------
     \59\ The portion of the capital gain included in income is 
     subject to a maximum regular tax rate of 28 percent, and 42 
     percent of the excluded gain is a minimum tax preference.
---------------------------------------------------------------------------
       Regulated investment companies (``RICs'') are entitled to 
     deduct dividends paid to shareholders. To qualify for the 
     deduction, 90 percent of the company's income must be derived 
     from dividends, interest and other specified passive income, 
     the company must distribute 90 percent of its investment 
     income, and at least 50 percent of the value of its assets 
     must be invested in certain diversified investments.
       For purposes of these provisions, an SSBIC means any 
     partnership or corporation that is licensed by the Small 
     Business Administration under section 301(d) of the Small 
     Business Investment Act of 1958 (as in effect on May 13, 
     1993). SSBICs make long-term loans to, or equity investments 
     in, small businesses owned by persons who are socially or 
     economically disadvantaged.

                               House Bill

       Under the House the tax-free rollover provision is expanded 
     by (1) extending the 60-day period to 180 days, (2) making 
     preferred stock (as well as common stock) in an SSBIC an 
     eligible investment, and (3) increasing the lifetime caps to 
     $750,000 in the case of an individual and to $2 million in 
     the case of a corporation, and repealing the annual caps.
       The House also provides that an SSBIC that is organized as 
     a corporation may convert to a partnership without imposition 
     of a tax to either the corporation or its shareholders, by 
     transferring its assets to a partnership in which it holds at 
     least an 80-percent interest and then liquidating. The 
     corporation is required to distribute all its earnings and 
     profits before liquidating. The transaction must take place 
     within 180 days of enactment of the bill. The partnership 
     will be liable for a tax on any ``built-in'' gain in the 
     assets transferred by the corporation at the time of the 
     conversion.
       The 50-percent exclusion for gain on the sale of qualifying 
     small business stock is increased to 60 percent where the 
     taxpayer, or a pass-through entity in which the taxpayer 
     holds an interest, sells qualifying stock of an SSBIC.
       For purposes of determining status as a RIC eligible for 
     the dividends received deduction, the proposal would treat 
     income derived by a SSBIC from its limited partner interest 
     in a partnership whose business operations the SSBIC does not 
     actively manage as income qualifying for the 90-percent test; 
     would deem the SSBIC to satisfy the 90-percent distribution 
     requirement if it distributes all its income that it is 
     permitted to distribute under the Small Business Investment 
     Act of 1958; and would deem the RIC diversification of assets 
     requirement to be met to the extent the SSBIC's investments 
     are permitted under that Act.
       Effective date.--The rollover and small business stock 
     provisions of the proposal are effective for sales after date 
     of enactment. The RIC provisions are effective for taxable 
     years beginning after date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

 L. Tax Treatment of Alaska Native Settlement Trusts (sec. 1352 of the 
House bill, sec. 1102 of the Senate amendment, and new sec. 646 of the 
                                 Code)

                              Present Law

       An Alaska Native Settlement Corporation (``ANC'') may 
     establish a Settlement Trust (``Trust'') under section 39 of 
     the Alaska Native Claims Settlement Act (``ANCSA'') \60\ and 
     transfer money or other property to such Trust for the 
     benefit of beneficiaries who constitute all or a class of the 
     shareholders of the ANC, to promote the health, education and 
     welfare of the beneficiaries and preserve the heritage and 
     culture of Alaska Natives.
---------------------------------------------------------------------------
     \60\ 43 U.S.C. 1601 et. seq.
---------------------------------------------------------------------------
       With certain exceptions, once an ANC has made a conveyance 
     to a Trust, the assets conveyed shall not be subject to 
     attachment, distraint, or sale or execution of judgement, 
     except with respect to the lawful debts and obligations of 
     the Trust.
       The Internal Revenue Service has indicated that 
     contributions to a Trust constitute distributions to the 
     beneficiary-shareholders at the time of the contribution and 
     are treated as dividends to the extent of earnings and 
     profits as provided under section 301 of the Code. The Trust 
     and its beneficiaries are taxed according to the rules of 
     Subchapter J of the Code.

                               House Bill

       An Alaska Native Corporation may establish a Trust under 
     section 39 of ANCSA and if the Trust makes an election for 
     its first taxable year ending after December 31, 1999, no 
     amount will be includible in the gross income of a 
     beneficiary of such Trust by reason of a contribution to the 
     Trust . The earnings and profits of the ANC are not reduced 
     at the time of a conveyance to the Trust, but only after all 
     earnings of the Trust have been distributed, and subsequent 
     distributions to beneficiaries are made from the original 
     principal conveyed.
       Qualification of the Trust for tax-free conveyances 
     terminates if interests in the Trust or in the ANC may 
     transferred or exchanged to a person in a manner that would 
     not be permitted under ANCSA if the trust interests were 
     Settlement Common Stock (generally, to anyone other than an 
     Alaska Native).
       The final distributions of principal, which reduce earnings 
     and profits of the ANC, are treated as ordinary income to the 
     beneficiaries and may be reported on Form 1099 rather than 
     form K-1. If annualized distributions exceed the sum of the 
     standard deduction plus the personal exemption, withholding 
     is required. All other Trust earnings and distributions are 
     treated under present law.
       Effective date.--The provision is effective for 
     contributions after, and taxable years of Trusts ending 
     after, December 31,1999.

                            Senate Amendment

       The Senate amendment follows the House bill, with additions 
     and modifications. Under the Senate amendment, unless the 
     Trust fails to meet the other requirements of the provision, 
     the Trust will be permitted to accumulate up to 45 percent of 
     its income each year without tax to the Trust or the 
     beneficiaries on that income. To qualify for this treatment, 
     an electing Trust must distribute at least 55 percent of its 
     adjusted taxable income for the year. If the Trust fails to 
     meet this distribution requirement, tax at trust rates is 
     imposed on the amount of the failure.
       Every distribution by the Trust to beneficiaries is taxable 
     as ordinary income to the beneficiaries. Reporting to 
     beneficiaries for the future could be made on form 1099 
     rather than on form K-1. Distributions to beneficiaries would 
     be subject to withholding to the extent such distributions, 
     on an annualized basis, exceed the sum of the standard 
     deduction and the personal exemption.
       Certain additional restrictions apply. If the beneficial 
     interests in the Trust may be sold or exchanged to a person 
     in a manner that would not be permitted under ANCSA if the 
     interests were Settlement Common Stock (generally, to a 
     person other than an Alaska Native), then the value of all 
     assets of the Trust that have not been distributed at the end 
     of the taxable year of the Trust is subject to a tax at the 
     highest individual tax rate; thereafter all amounts retained 
     that were subject to that tax are treated as corpus under 
     subchapter J. Also, if the shares of the ANC may be sold or 
     exchanged to a person in such a manner, the Trust may 
     continue in existence without an excise tax only if no new 
     contributions are made to the Trust and the beneficial 
     interests in the Trust cannot be sold or exchanged in such a 
     manner.
       Apart from these rules, the Trust and its beneficiaries 
     would be taxed according to the provisions of subchapter J of 
     the Code.
       Effective date.-- The effective date is the same as the 
     House bill.

                          Conference Agreement

       The conference agreement follows the House bill.

 M. Increase Joint Committee on Taxation Refund Review Threshold to $2 
     Million (sec. 1353 of the House bill, sec. 1110 of the Senate 
                 amendment, and sec. 6405 of the Code)

                              Present Law

       No refund or credit in excess of $1,000,000 of any income 
     tax, estate or gift tax, or certain other specified taxes, 
     may be made until 30 days after the date a report on the 
     refund is provided to the Joint Committee on Taxation (sec. 
     6405). A report is also required in the case of certain 
     tentative refunds. Additionally, the staff of the Joint 
     Committee on Taxation conducts post-audit reviews of large 
     deficiency cases and other select issues.

                               House Bill

       The provision increases the threshold above which refunds 
     must be submitted to the Joint Committee on Taxation for 
     review from $1,000,000 to $2,000,000. The staff of the Joint 
     Committee on Taxation would continue to exercise its existing 
     statutory authority to conduct a program of expanded post-
     audit reviews of large deficiency cases and other select 
     issues, and the IRS is expected to cooperate fully in this 
     expanded program.
       Effective date.--The provision is effective on the date of 
     enactment, except that the higher threshold does not apply to 
     a refund or credit with respect to which a report was made 
     before the date of enactment.

                            Senate Amendment

       Same as House bill.

[[Page 19707]]



                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

  N. Clarification of Depreciation Study (sec. 1354 of the House bill)

                              Present Law

       The Secretary of the Treasury (or his delegate) is directed 
     to conduct a comprehensive study of the recovery periods and 
     depreciation methods under section 168 of the Code, and to 
     provide recommendations for determining such periods and 
     methods in a more rational manner. The Secretary of the 
     Treasury (or his delegate) is directed to submit the results 
     of the study and recommendations to the House Ways and Means 
     and Senate Finance Committees by March 31, 2000.

                               House Bill

       The Secretary of the Treasury (or his delegate) is directed 
     to include a study of such periods and methods applicable to 
     section 1250 property used in connection with a franchise 
     (within the meaning of section 1253) and owned by the 
     franchisee in the study of recovery periods and depreciation 
     methods under section 168 of the Code that is due to be 
     submitted to the House Ways and Means and Senate Finance 
     Committees by March 31, 2000.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the provision of 
     the House bill. Nonetheless, the conferees expect that the 
     study will include an examination of the depreciation issues 
     raised in the House bill and the Senate amendment, including 
     leasehold improvements and section 1250 property used in 
     connection with a franchise.

                        O. Tax Court Provisions

     1. Tax Court filing fee (sec. 1361 of the House bill and sec. 
         7451 of the Code)

                              Present Law

       Section 7451 authorizes the Tax Court to impose a fee of up 
     to $60 for the filing of any petition ``for the 
     redetermination of a deficiency or for a declaratory judgment 
     under part IV of this subchapter or under section 7428 or for 
     judicial review under section 6226 or section 6228(a).'' The 
     statute does not specifically authorize the Tax Court to 
     impose a filing fee for the filing of a petition for review 
     of the IRS's failure to abate interest under section 6404 or 
     for administrative costs under section 7430. The practice of 
     the Tax Court is to impose a $60 filing fee in all cases 
     commenced by petition.\61\
---------------------------------------------------------------------------
     \61\ See Rule 20(a) of the Tax Court Rules of Practice and 
     Procedure.
---------------------------------------------------------------------------

                               House Bill

       Under the House bill, section 7451 is amended to provide 
     that the Tax Court is authorized to charge a filing fee of up 
     to $60 in all cases commenced by the filing of a petition.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     2. Use of practitioner fee (sec. 1362 of the House bill and 
         sec. 7475 of the code)

                              Present Law

       Section 7475 authorizes the Tax Court to impose on 
     practitioners a fee of up to $30 per year and permits these 
     fees to be used to employ independent counsel to pursue 
     disciplinary matters.

                               House Bill

       The House bill provides that Tax Court fees imposed on 
     practitioners also are available to provide services to pro 
     se taxpayers.
       Effective date.--The provision is effective on the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.
     3. Tax Court authority to apply equitable recoupment (sec. 
         1363 of the House bill and sec. 6214 of the code)

                              Present Law

       Equitable recoupment is a common-law equitable principle 
     which permits the defensive use of an otherwise time-barred 
     claim to reduce or defeat an opponent's claim if both claims 
     arise from the same transaction. U.S. District Courts and the 
     U.S. Court of Federal Claims, the two Federal tax refund 
     forums, may apply equitable recoupment in deciding tax refund 
     cases.\62\ In Estate of Mueller v. Commissioner,\63\ the Tax 
     Court held that it may apply equitable recoupment in deciding 
     cases over which it has jurisdiction. However, the Court of 
     Appeals for the Sixth Circuit recently held that the Tax 
     Court may not apply the doctrine of equitable recoupment.\64\
---------------------------------------------------------------------------
     \62\ See Stone v. White, 301 U.S. 532 (1937); Bull v. United 
     States, 295 U.S. 247 (1935).
     \63\ 101 T.C. 551 (1993).
     \64\ See Estate of Mueller v. Commission, 153 F.3d 302 (6th 
     Cir. 1998), cert. denied, 67 U.S.L.W. 3525 (U.S. Feb. 22, 
     1999) (No. 98-794). In an earlier case, the Supreme Court 
     specifically reserved ruling on whether the Tax Court may 
     apply equitable recoupment in a case over which it otherwise 
     has jurisdiction. United States v. Dalm, 494 U.S. 596, 611 
     n.8 (1990).
---------------------------------------------------------------------------

                               House Bill

       Under the House bill, section 6214(b) is amended to provide 
     that the Tax Court may apply the principle of equitable 
     recoupment to the same extent that it may be applied in 
     Federal civil tax cases by the U.S. District Courts of U.S. 
     Court of Federal Claims.\65\
---------------------------------------------------------------------------
     \65\ No implication is intended with respect to whether the 
     Tax court has the authority to continue to apply other 
     equitable principles in deciding matters over which it has 
     jurisdiction.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for any action 
     or proceeding in the Tax Court with respect to which a 
     decision has not become final as of the date of enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the House bill.

 P. Allow Certain Wholesale Distributors and Control State Entities to 
 Elect To Be Treated as Distilled Spirits Plants Operators (sec. 1371-
 1377 of the House bill and secs. 5002, 5005, 5011, 5113, 5171, 5178, 
       5212, 5214, 5232, 5551, 5601, 5602, and 5684 of the Code)

                              Present Law

       Distilled spirits produced or imported (or brought) into 
     the United States are subject to a $13.50 per proof gallon 
     excise tax. A proof gallon is a U.S. gallon consisting of 50 
     percent alcohol. The tax is imposed on removal of the 
     distilled spirits from the distillery where produced in the 
     case of domestically produced spirits. In the case of 
     distilled spirits imported in bulk and transferred to a U.S. 
     distillery, the tax is imposed upon removal from the 
     distillery. In the case of bottled distilled spirits imported 
     into the United States, the tax is imposed on removal of the 
     spirits from customs custody or the first customs bonded 
     warehouse in the United States (or in a foreign trade zone) 
     to which the spirits are transferred.

                               House Bill

       The House bill allows certain wholesale dealers and certain 
     control State entities \66\ (collectively, ``bonded 
     dealers'') to elect to become distilled spirits taxpayers. 
     Code regulations relating to operation of distilled spirits 
     plants, other than requirements directly related to 
     production and bottling of distilled spirits, are extended to 
     qualified bonded dealers. As under present law, excise tax 
     will be determined in all cases upon removal from the 
     distilled spirits plant or upon importation; however, in the 
     case of distilled spirits transferred to a bonded dealer, 
     payment of the tax will be delayed until the distilled 
     spirits are removed from the bonded dealer's premises. All 
     removals (including removals to other bonded dealers) of non-
     tax-paid distilled spirits by bonded dealers are subject to 
     tax.
---------------------------------------------------------------------------
     \66\ A control state entity is a State or political 
     subdivision of a State in which only the state or political 
     subdivision is allowed by law to perform distilled spirits 
     operations.
---------------------------------------------------------------------------
       Operators of distilled spirits plants and importers will be 
     required to certify to bonded dealers the amount of tax due 
     with respect to all distilled spirits transferred without 
     payment of tax. Bonded dealers are liable for the full amount 
     of tax reflected in the certification supplied by the 
     operator of distilled spirits plant from which the spirits 
     are transferred without payment of tax. Distilled spirits 
     plant operators remain liable for any understatement of tax 
     on the certifications.
       Only wholesale distributors or control State entities 
     having gross receipts from the sale of distilled spirits 
     within the United States in the 12-month period preceding the 
     date on which the election is made equal to or exceeding $10 
     million may qualify as bonded dealers. Additionally, except 
     in the case of control State entities, bonded dealers qualify 
     only if they sell distilled spirits exclusively to other 
     wholesale distributors (including other bonded dealers) or to 
     independent retail dealers. Retail dealers, other than 
     control State entities, are not permitted to be bonded 
     dealers. For purposes of this rule, a wholesale distributor 
     is treated as a retail dealer if the dealer directly, or 
     indirectly through common ownership by or of a third party, 
     more than 10 percent of a retail dealer.
       As a condition of being granted and retaining bonded 
     dealers status, electing wholesale distributors and control 
     State entities are subject to a new Federal excise surtax 
     equal to 1.5 percent of their liability for distilled spirits 
     tax. The surtax is imposed in the same manner as the present-
     law distilled spirits tax; payment of the tax must be made in 
     the same manner as the underlying distilled spirits excise 
     tax. The surtax will expire after December 31, 2010.
       Studies.--The House bill directs the Treasury Department to 
     study and report to the House Committee on Ways and Means and 
     the Senate Committee on Finance whether administrative 
     efficiencies could result from cooperative tax collection 
     agreements between the Federal Government and States. This 
     report is due no later than the date which is one year after 
     the bill's enactment.

[[Page 19708]]

     The House bill further directs the Treasury Department to 
     study and report to these two Committees, the effect allowing 
     bonded dealers to receive non-tax-paid distilled spirits on 
     taxpayer compliance with the provisions of Code section 5010 
     (the ``wine and flavors credits''). This report is due no 
     later than June 1, 2002.
       Effective date.--The provision is effective beginning on 
     the first day of the first calendar quarter that begins at 
     least 120 days after the bill's enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

Q. Simplify the Active Trade or Business Requirement for Tax-Free Spin-
   offs (sec. 1107 of the Senate amendment and sec. 355 of the Code)

                              Present Law

       A corporation generally is required to recognize gain on 
     the distribution of property (including stock of a 
     subsidiary) to its shareholders as if such property had been 
     sold for its fair market value. An exception to this rule is 
     where the distribution of the stock of a controlled 
     corporation satisfies the requirements of section 355. Among 
     the requirements that must be satisfied in order to qualify 
     for tax-free treatment under section 355 is that, immediately 
     after the distribution, both the distributing corporation and 
     the controlled corporation must be engaged in the active 
     conduct of a trade or business (sec. 355(b)(1)).\67\ For this 
     purpose, a corporation is engaged in the active conduct of a 
     trade or business only if (1) the corporation is directly 
     engaged in the active conduct of a trade or business, or (2) 
     if the corporation is not directly engaged in an active trade 
     or business, then substantially all of its assets consist of 
     stock and securities of a corporation it controls that is 
     engaged in the active conduct of a trade or business (sec. 
     355(b)(2)(A)).
---------------------------------------------------------------------------
     \67\ If immediately before the distribution, the distributing 
     corporation had no assets other than stock or securities in 
     the controlled corporations, then each of the controlled 
     corporations must be engaged immediately after the 
     distribution in the active conduct of a trade or busnesss.
---------------------------------------------------------------------------
       In determining whether a corporation satisfies the active 
     trade or business requirement, the Internal Revenue Service's 
     position for advance ruling purposes is that the value of the 
     gross assets of the trade or business being relied on must 
     constitute at least five percent of the total fair market 
     value of the gross assets of the corporation directly 
     conducting the trade or business.\68\ However, if the 
     corporation is not directly engaged in an active trade or 
     business, then the ``substantially all'' test requires that 
     at least 90 percent of the value of the corporation's gross 
     assets consist of stock and securities of a controlled 
     corporation that is engaged in the active conduct of a trade 
     or business.\69\
---------------------------------------------------------------------------
     \68\ Rev. Proc. 99-3, sec. 4.01(33), 1999-1 I.R.B. 111.
     \69\ Rev. Proc. 86-41, sec. 4.03(4), 1986-2 C.B. 716; Rev. 
     Proc. 77-37, sec. 3.04, 1977-2 C.B. 568.
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment eliminates the ``substantially all'' 
     test, and instead, applies the active trade or business 
     requirement on an affiliated group basis. In applying the 
     active trade or business test to an affiliated group, each 
     separate affiliated group (immediately after the 
     distribution) must satisfy the requirement. For the 
     distributing corporation, the separate affiliated group 
     consists of the distributing corporation as the common parent 
     and all corporations connected with the distributing 
     corporation through stock ownership described in section 
     1504(a)(1)(B) (regardless of whether the corporations are 
     includible corporations under section 1504(b)). The separate 
     affiliated group for a controlled corporation is determined 
     in a similar manner (with the controlled corporation as the 
     common parent).
       Effective date.--The provision is effective for 
     distributions after the date of enactment. Transition relief 
     is provided for any distribution that is (1) made pursuant to 
     an agreement which is binding on the date of enactment and at 
     all times thereafter; (2) described in a ruling request 
     submitted to the Internal Revenue Service on or before such 
     date; or (3) described on or before such date in a public 
     announcement or in a filing with the Securities and Exchange 
     Commission. A corporation can make an irrevocable election to 
     have the transition relief not apply (so that the provision 
     would apply to all distributions after the date of 
     enactment).

                          Conference Agreement

       The conference agreement follows the Senate amendment.

  R. Modify the Definition of Rural Airport Eligible for Reduced Air 
 Passenger Ticket Tax Rate (sec. 1111 of the Senate amendment and sec. 
                           4261 of the Code)

                              Present Law

       Air passenger transportation is subject to an excise tax 
     equal to 8 percent of the amount paid plus $2 per flight 
     segment. After September 30, 1999, the ad valorem portion of 
     this tax will decrease to 7.5 percent and the flight segment 
     portion will increase to $2.25. Additional increases in the 
     flight segment tax are scheduled until that rate equals $3 
     per flight segment (with indexing of the $3 amount one year 
     after it is reached).
       Flight segments to or from qualified rural airports are 
     eligible for a reduced air passenger tax of 7.5 percent, with 
     no segment tax being imposed on those segments. A qualified 
     rural airport is defined as an airport that enplaned fewer 
     than 100,000 passengers in the second preceding calendar year 
     and either (1) is not located within 75 miles of a larger 
     airport that is not qualified for the reduced tax rate or (2) 
     was receiving essential air service subsidy payments as of 
     August 5, 1997.

                               House Bill

       No provision.

                            Senate Amendment

       The definition of qualified rural airport is expanded to 
     include otherwise qualified airports that are located within 
     75 miles of an unqualified, larger airports if the smaller 
     airports are not connected by road to the larger airports 
     (e.g., an airport on an island not connected by bridge to the 
     mainland).
       Effective date.--The provision is effective for amounts 
     paid after December 31, 1999, for air transportation 
     beginning after that date.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

 S. Dividends Paid by Cooperatives (sec. 1112 of the Senate amendment 
                     and sec. 1388(a) of the Code)

                              Present Law

       Cooperatives, including tax-exempt farmers' cooperatives, 
     are treated like a conduit for Federal income tax purposes 
     since a cooperative may deduct patronage dividends paid from 
     its taxable income. In general, patronage dividends are 
     amounts paid to patrons (1) on the basis of the quantity or 
     value of business done with or for its patrons, (2) under a 
     valid enforceable written obligation to the patron to pay 
     such amount, which obligation existed before the cooperative 
     received such amounts, and (3) which is determined by 
     reference to the net earnings of the cooperative from 
     business done with or for its patrons.
       Treasury Regulations provide that net earnings are shall be 
     reduced by dividends paid on capital stock or other 
     proprietary capital interests. The effect of this rule is to 
     reduce the amount of earnings that the cooperative can treat 
     as patronage earnings which reduces the amount that 
     cooperative can deduct as patronage dividends.

                               House Bill

       No provision.

                            Senate Amendment

       Under the amendment, patronage-sourced income is not 
     reduced to the extent that the organizational documents 
     (articles of incorporation, bylaws, or contract with patrons) 
     provide that dividends on capital stock (or other proprietary 
     capital interests) are ``in addition'' to amounts otherwise 
     payable as patronage dividends.
       Effective date.--The Senate amendment is effective for 
     distributions made in taxable years beginning after the date 
     of enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

  T. Modify Personal Holding Company ``Lending or Finance Business'' 
       Exception (sec. 1114 of the bill and sec. 542 of the Code)

       Personal holding companies (PHC's) are subject to a 39.6% 
     tax on undistributed PHC income. This tax can be avoided by 
     distributing the income to shareholders, who then pay 
     shareholder level tax. PHC's are closely held companies with 
     at least 60% ``personal holding company income'' (PHCI). This 
     is generally passive income, including interest, dividends, 
     and rents. Certain rent is excluded from the definition, if 
     rent is at least 50 percent of the adjusted ordinary gross 
     income of the company and other undistributed PHCI does not 
     exceed 10 percent of the adjusted ordinary gross income.
       In the case of a group of corporations filing a 
     consolidated return, with certain exceptions, the application 
     of the PHC tax to the group and any member thereof is 
     generally determined on the basis of consolidated income and 
     consolidated PHCI. If any member of the group is excluded 
     from the definition of a PHC under certain provisions 
     (including one for certain lending or finance businesses), 
     then each other member of the group is tested separately for 
     PHC status.
       A special rule of present law excludes a lending or finance 
     business from the definition of a PHC if certain requirements 
     are met. At least 60% of its income must come from the active 
     conduct of a lending or finance business, and no more than 
     20% of its adjusted gross income may be from certain other 
     PHCI. A lending or finance business does not include a 
     business of making loans longer than 144 months (12 years). 
     Also, the deductions attributable to this active lending or 
     finance business (but not including interest expense) must be 
     at least 5 percent of income over $500,000 (plus 15 percent 
     of income under that amount).

                               House Bill

       No provision.

[[Page 19709]]



                            Senate Amendment

       The Senate amendment modifies the personal holding company 
     exclusion for lending or finance companies to provide that, 
     in determining whether a member of an affiliated group (as 
     defined in section 1504(a)(1)) filing a consolidated return 
     is a lending or finance company, only corporations engaged in 
     a lending or finance business are taken into account, and all 
     such companies are aggregated for purposes of this 
     determination. The effect of this rule is to treat a 
     corporation as a lending or finance company if all companies 
     engaged in a lending or finance business in the affiliated 
     group, in the aggregate, satisfy the requirements of the 
     exclusion.
       The provision also repeals the business expense requirement 
     and the limitation on the maturity of loans made by a lending 
     or finance business.
       The provision also broadens the definition of a lending or 
     finance business to include providing financial or investment 
     advisory services, as well as engaging in leasing, including 
     entering into leases and/or purchasing. servicing, and/or 
     disposing of leases and leased assets.
       Rents that are not derived from the active and regular 
     conduct of a lending or finance business would continue to be 
     treated under the present law personal holding company income 
     rules.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

U. Tax Credit for Modifications to Inter-City Buses Required Under the 
   Americans with Disabilities Act of 1990 (sec. 1115 of the Senate 
                   amendment and sec. 44 of the Code)

                              Present Law

       Present law provides a tax credit (``the disabled access 
     credit'') for eligible access expenditures paid or incurred 
     by an eligible small business so that such business may 
     comply with the Americans with Disabilities Act of 1990, 
     (the''ADA''). The amount of the credit for any taxable year 
     is equal to 50 percent of the eligible access expenditures 
     for the taxable year that exceed $250 but do not exceed 
     $10,250. Therefore the maximum annual credit is $5,000. An 
     eligible small business is defined for any taxable year as a 
     person that had gross receipts for the preceding taxable year 
     that did not exceed $1 million or had no more than 30 full-
     time employees during the preceding taxable year.
       Eligible access expenditures are defined as amounts paid or 
     incurred by an eligible small business for the purpose of 
     enabling such eligible small business to comply with 
     applicable requirements of the ADA, as in effect on the date 
     of enactment of the credit. Eligible access expenditures 
     generally include amounts paid or incurred (1) for the 
     purpose of removing architectural, communication, physical, 
     or transportation barriers which prevent a business from 
     being accessible to, or usable by, individuals with 
     disabilities; (2) to provide qualified interpreters or other 
     effective methods of making aurally delivered materials 
     available to individuals with hearing impairments; (3) to 
     provide qualified readers, taped texts, hearing impairments; 
     (3) to provide qualified readers, taped texts and other 
     effective methods of making visually delivered materials 
     available to individuals with visual impairments; (4) to 
     acquire or modify equipment or devices for individuals with 
     disabilities; or (5) to provide other similar services, 
     modifications, materials, or equipment. The expenditures must 
     be reasonable and necessary to accomplish these purposes.
       The disabled access credit is a general business credit and 
     is subject to the present-law limitations on the amount of 
     the general business credit that may be used for any taxable 
     year. However, the portion of the unused business credit for 
     any taxable year that is attributable to the disabled access 
     credit may not to be carried back to any taxable year ending 
     before the date of enactment of the credit.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment extends the disabled access credit to 
     a business without regard to the eligible small business 
     limitation generally applicable under the credit for the cost 
     of making certain inter-city buses comply with the ADA under 
     the Department of Transportation's (``DOT's'') final rule 
     making on September 28, 1998, (49 CFR Part 37). Specifically, 
     the definition of eligible access expenditure under the 
     credit is expanded to include the incremental capital cost 
     paid or incurred by the taxpayer so that certain inter-city 
     buses satisfy the DOT's rule making under the ADA. For 
     purposes of this provision, the allowable credit is 50 
     percent of the eligible access expenditures, per bus, for the 
     taxable year that exceed $250 but do not exceed $30,250. 
     Therefore the maximum credit is $15,000, per bus. The 
     otherwise allowable eligible access expenditures are reduced 
     by any Federal or State grant monies received by the taxpayer 
     to subsidize such expenditures relating to such intercity 
     buses. For these purposes, inter-city buses are buses 
     eligible for the reduced diesel fuel tax rate of 7.4 cents 
     per gallon.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 1999 
     and before January 1, 2012.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

         V. Provisions Relating to Deduction for Business Meals

     1. Increase deduction for business meals (sec. 804 of the 
         House bill and sec. 274(n) of the Code)

                              Present Law

       Ordinary and necessary business expenses, as well as 
     expenses incurred for the production of income, are generally 
     deductible, subject to a number of restrictions and 
     limitations. Generally, the amount allowable as a deduction 
     for business meal and entertainment expenses is limited to 50 
     percent of the otherwise deductible amount. Exceptions to 
     this 50 percent rule are provided for food and beverages 
     provided to crew members of certain vessels and offshore oil 
     or gas platforms or drilling rigs, as well as to individuals 
     subject to the hours of service limitations of the Department 
     of Transportation.

                               House Bill

       The provision phases in an increase from 50 percent to 80 
     percent in the deductible percentage of business meal (food 
     and beverage) expenses.175 The increase in the deductible 
     percentage is phased in according to the following schedule:

Taxable years beginning in--                      Deductible percentage
2005.................................................................55
2006.................................................................60
2007.................................................................65
2008.................................................................70
2009.................................................................75
2010 and thereafter 80.................................................

       Effective date.--The provision is effective for taxable 
     years beginning after 1999.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement increases the deductible 
     percentage for business meal (food and beverage) expenses as 
     follows:

Taxable years beginning in--                      Deductible percentage
2006.................................................................55
2007 and thereafter..................................................60

       Effective date.--The provision is effective for taxable 
     years beginning after 1999.
     2. Increased deduction for business meals while operating 
         under Department of Transportation hours of service 
         limitations (sec. 1116 of the Senate amendment and sec. 
         274 of the Code)

                              Present Law

       Ordinary and necessary business expenses, as well as 
     expenses incurred for the production of income, are generally 
     deductible, subject to a number of restrictions and 
     limitations. Generally, the amount allowable as a deduction 
     for food and beverage is limited to 50 percent of the 
     otherwise deductible amount. Exceptions to the 50 percent 
     rule are provided for food and beverages provided to crew 
     members of certain vessels and offshore oil or gas platforms 
     or drilling rigs.
       The 1997 Act increased to 80 percent the deductible 
     percentage of the cost of food and beverages consumed while 
     away from home by an individual during, or incident to, a 
     period of duty subject to the hours of service limitations of 
     the Department of Transportation.
       Individuals subject to the hours of service limitations of 
     the Department of Transportation include:
       (1) certain air transportation employees such as pilots, 
     crew, dispatchers, mechanics, and control tower operators 
     pursuant to Federal Aviation Administration regulations,
       (2) interstate truck operators and interstate bus drivers 
     pursuant to Department of Transportation regulations,
       (3) certain railroad employees such as engineers, 
     conductors, train crews, dispatchers and control operations 
     personnel pursuant to Federal Railroad Administration 
     regulations, and
       (4) certain merchant mariners pursuant to Coast Guard 
     regulations.
       The increase in the deductible percentage is phased in 
     according to the following schedule.

Taxable years beginning in--                      Deductible percentage
1998, 1999...........................................................55
2000, 2001...........................................................60
2002, 2003...........................................................65
2004, 2005...........................................................70
2006, 2007...........................................................75
2008 and thereafter..................................................80

                               House Bill

       No provision.

                            Senate Amendment

       The bill accelerates to taxable years beginning after 2006 
     the full 80 percent deduction for business meals while 
     operating under Department of Transportation hours of service 
     limitations.
       Effective date.--The provision is effective for taxable 
     years beginning after 2006.

[[Page 19710]]



                          Conference Agreement

       The conference agreement follows the Senate amendment.
     W. Authorize Limited Private Activity Tax-Exempt Financing 
         for Highway Construction (sec. 1117 of the Senate 
         amendment)

                              Present Law

       Present law exempts interest on State or local government 
     bonds from the regular income tax if the proceeds of the 
     bonds are used to finance governmental activities of those 
     units and the bonds are repaid with governmental revenues. 
     Interest on bonds issued by States or local governments 
     acting as conduits to provide financing for private persons 
     is taxable unless a specific exception is provided in the 
     Code. No such exception is provided for bonds issued to 
     provide conduit financing for privately constructed and/or 
     privately operated highways (e.g. toll roads).

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment authorizes issuance of up to $15 
     billion of private activity tax-exempt bonds to finance the 
     construction of up the 15 private highway pilot projects. 
     Bonds for these projects generally will be subject to all 
     Code provisions governing issuance of tax-exempt private 
     activity bonds except (1) the annual State private activity 
     bond volume limits and (2) no proceeds of these bonds may be 
     used to finance land.
       Effective date.--The provision applies to bonds issued 
     after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     a modification deleting the statutorily required report to 
     Congress on the pilot program. The conferees intend that the 
     Secretary of the Treasury and the Secretary of Transportation 
     will prepare and submit to the Congress a report evaluating 
     the overall effects of the program, including a description 
     of each project receiving tax-exempt financing, the extent to 
     which new technologies or construction techniques are used in 
     the projects, information regarding any cost savings to the 
     projects from the use of the new technologies or construction 
     techniques, and the use and efficiency of the Federal subsidy 
     provided by the tax-exempt financing.

 X. Provisions Relating to Tax Incentives for the District of Columbia

     1. Extend Tax Credit for First-time D.C. Homebuyers (sec. 
         1118 of the Senate amendment and sec. 1400C of the Code)

                              Present Law

       First-time homebuyers of a principal residence in the 
     District of Columbia are eligible for a nonrefundable tax 
     credit of up to $5,000 of the amount of the purchase price. 
     The $5,000 maximum credit applies both to individuals and 
     married couples. Married individuals filing separately can 
     claim a maximum credit of $2,500 each. The credit phases out 
     for individual taxpayers with adjusted gross income between 
     $70,000 and $90,000 ($110,000-$130,000 for joint filers). For 
     purposes of eligibility, ``first-time homebuyer'' means any 
     individual if such individual did not have a present 
     ownership interest in a principal residence in the District 
     of Columbia in the one year period ending on the date of the 
     purchase of the residence to which the credit applies. The 
     credit is scheduled to expire for residences purchased after 
     December 31, 2000.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment extends the D.C. first-time homebuyer 
     tax credit for 1 year, through December 31, 2001. In 
     addition, the Senate amendment increases the phase-out range 
     for married individuals filing a joint return so that it is 
     twice that of unmarried individuals (i.e., the credit phases 
     out for joint filers with adjusted gross income between 
     $140,000 and $180,000).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement includes the provision in the 
     Senate amendment increasing the phase-out range for married 
     individuals filing a joint return so that it is twice that of 
     unmarried individuals (i.e., the credit phases out for joint 
     filers with adjusted gross income between $140,000 and 
     $180,000). The increase in the phase-out range is effective 
     with respect to property purchased on or after the date of 
     enactment.
       The conference agreement does not include the Senate 
     amendment provision extending the homebuyer credit.
     2. Expand the Zero-percent Capital Gains Rate for DC Zone 
         Assets (sec. 1119 of the Senate amendment and sec. 1400B 
         of the Code)

                              Present Law

       Present law provides a zero-percent capital gains rate for 
     capital gains from the sale of certain qualified DC Zone 
     assets held for more than five years . In general, a ``DC 
     Zone asset'' means stock or partnership interests held in, or 
     tangible assets held by, a DC Zone business. A DC Zone 
     business generally refers to certain enterprise zone 
     businesses within the DC Zone.\71\ For purposes of the zero-
     percent capital gains rate, the D.C. Zone is defined to 
     include all census tracts within the District of Columbia 
     where the poverty rate is not less than 10 percent as 
     determined on the basis of the 1990 Census (sec. 1400B(d)).
---------------------------------------------------------------------------
     \71\ For purposes of the zero-percent capital gains rate, a 
     DC Zone business is defined by reference to the definition of 
     an enterprise zone business in section 1397B, except that (1) 
     the requirement that 35 percent of the employees of the 
     business must be residents of the DC Zone does not apply, and 
     (2) the DC Zone business must derive at least 80 percent (as 
     opposed to 50 percent) of its total gross income from the 
     active conduct of a qualified business within the DC Zone 
     (sec. 1400B(c)).
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment eliminates the 10-percent poverty rate 
     limitation for purposes of the zero-percent capital gains 
     rate. Thus, the zero-percent capital gains rate applies to 
     capital gains from the sale of assets held more than five 
     years attributable to certain qualifying businesses located 
     in the District of Columbia.
       Effective date.--The provision is effective for DC Zone 
     business stock and partnership interests originally issued 
     after, and DC Zone business property assets originally 
     acquired by the taxpayer after, December 31, 1999.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

  Y. Establish a Seven-year Recovery Period for Natural Gas Gathering 
   Lines (sec. 1120 of the Senate amendment and sec. 168 of the Code)

                              Present Law

       The applicable recovery period for assets placed in service 
     under the Modified Accelerated Cost Recovery System is based 
     on the ``class life of the property.'' The class lives of 
     assets placed in service after 1986 are set forth in Revenue 
     Procedure 87-56.\72\ Revenue Procedure 87-56 includes two 
     asset classes that could describe natural gas gathering lines 
     owned by nonproducers of natural gas. Asset class 13.2, 
     describing assets used in the exploration for and production 
     of petroleum and natural gas deposits, provides a class life 
     of 14 years and a depreciation recovery period of seven 
     years. Asset class 46.0, describing pipeline transportation, 
     provides a class life of 22 years and a recovery period of 15 
     years. The uncertainty regarding the appropriate recovery 
     period has resulted in litigation between taxpayers and the 
     IRS. Recently, the 10th Circuit Court of Appeals held that 
     natural gas gathering lines owned by nonproducers fall within 
     the scope of Asset class 13.2 (i.e., 7-year recovery 
     period).\73\
---------------------------------------------------------------------------
     \72\ 1987-2 C.B. 674.
     \73\ Duke Energy v. Commissioner, 172 F. 3d 1255 (10th Cir. 
     1999), Rev'g 109 T.C. 416 (1997). See also True v. United 
     States, 97-2 U.S. Tax Cas. (CCH) par. 50.946 (D. Wyo. 1997).
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment establishes a statutory 7-year 
     recovery period for all natural gas gathering lines. A 
     natural gas gathering line is defined to include pipe, 
     equipment, and appurtenances that is (1) determined to be a 
     gathering line by the Federal Energy Regulatory Commission, 
     or (2) used to deliver natural gas from the wellhead or a 
     common point to the point at which such gas first reaches (a) 
     a gas processing plant, (b) an interconnection with an 
     interstate transmission line, (c) an interconnection with an 
     intrastate transmission line, or (d) a direct interconnection 
     with a local distribution company, a gas storage facility, or 
     an industrial consumer.
       Effective date.--The provision is effective for property 
     placed in service on or after the date of enactment. No 
     inference is intended as to the proper treatment of such 
     property placed in service before the date of enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

  Z. Reclassify Air Transportation on Certain Small Seaplanes As Non-
 Commercial Aviation for Excise Tax Purposes (sec. 1121 of the Senate 
                  amendment and sec. 4261 of the Code)

                              Present Law

       Commercial air passenger transportation is subject to an 
     excise tax equal to 8 percent of the amount paid plus $2 per 
     flight segment. After September 30, 1999, the ad valorem 
     portion of this tax will decrease to 7.5 percent and the 
     flight segment portion will increase to $2.25. Additional 
     increases in the flight segment tax are scheduled until that 
     rate equals $3 per flight segment (with indexing of the $3 
     amount one year after it is reached). In addition, fuel used 
     in commercial aviation is subject to a 4.3-cents-per-gallon 
     excise tax on fuels used in the aircraft.

[[Page 19711]]

       In lieu of the ticket taxes imposed on commercial air 
     passenger transportation, non-commercial transportation is 
     subject to excise taxes on the fuels used in the aircraft. 
     Non-commercial air transportation is defined as 
     transportation which is not for hire. The fuels excise tax 
     rates are 19.3 cents per gallon (aviation gasoline) and 21.8 
     cents per gallon (jet fuel).
       Revenues from all of these excise taxes are deposited in 
     the Airport and Airway Trust Fund to finance Federal Aviation 
     Administration programs.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment re-classifies passenger transportation 
     for hire on certain small seaplanes as non-commercial 
     aviation. As such, the transportation will be subject to the 
     full 19.3 cents-per-gallon and 21.8-cents-per-gallon Airport 
     and Airway Trust Fund excise taxes rather than the passenger 
     ticket tax. Transportation is eligible for this provision 
     only it occurs on seaplanes (planes that both take off from 
     and land on water) and that have a maximum certificated 
     takeoff weight of 6,000 pounds or less with respect to any 
     flight segment.
       Effective date.--The provision is effective for 
     transportation beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

                XIV. ADDITIONAL MISCELLANEOUS PROVISIONS

A. Exemption from Federal Income Tax for Amounts Received by Holocaust 
      Victims and Their Heirs (sec. 1122 of the Senate Amendment)

                              Present Law

       Under the Code, gross income means ``income from whatever 
     source derived'' except for certain items specifically exempt 
     or excluded by statute (sec. 61). There is no explicit 
     statutory exception from gross income provided for amounts 
     received by Holocaust victims or their heirs.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides an exclusion from gross 
     income for any amount received by an individual or any heir 
     of the individual: (1) from the Swiss Humanitarian Fund 
     established by the government of Switzerland or from any 
     similar fund established in any foreign country; (2) as a 
     result of the settlement of the action entitled, ``In re 
     Holocaust Victims'' Asset Litigation'', (E.D. NY), C.A. No. 
     96-4849, or as a result of any similar action; and (3) the 
     value of land (including structures thereon) recovered by an 
     individual (or any heir of the individual) from a government 
     of a foreign country as a result of a settlement of a claim 
     arising out of the confiscation of such land in connection 
     with the Holocaust.
       Effective date.--The provision is effective with regard to 
     any amounts received before, on, or after the date of 
     enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment 
     provision but only on a prospective basis.
       Effective date.--The provision is effective with regard to 
     any amounts received on or after the date of enactment. No 
     inference is intended as to the proper treatment of payments 
     made before the date of enactment.

B. Medical Innovation Tax Credit (section 1137 of the Senate amendment 
                    and new section 41A of the Code)

                              Present Law

       Section 41 provides for a research tax credit equal to 20 
     percent of the amount by which a taxpayer's qualified 
     research expenditures for a taxable year exceeds its base 
     amount for that year. In the case of contract research 
     expenditures, generally only 65 percent of such expenditures 
     are included in the calculation of a taxpayer's total 
     qualified research expenditures. The research tax credit 
     expired and generally does not apply to amounts paid or 
     incurred after June 30, 1998.

                               House bill

       No provision.

                            Senate Amendment

       The Senate amendment permits a taxpayer to claim a 40-
     percent credit for qualified medical research expenditures 
     made with respect to certain human clinical testing of any 
     drug, biologic, or medical device. The credit would apply to 
     qualified medical research expenditures in excess of a base 
     period amount. Qualified medical research expenditures are 
     only those amounts paid to certain academic institutions.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1998.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

   C. Capital Gain Holding Period for Horses (sec. 812 of the Senate 
                  amendment and sec. 1231 of the Code)

                              Present Law

       Under present law, cattle and horses held by the taxpayer 
     for draft, breeding, dairy, or sporting purposes and held 24 
     months or more are eligible for capital gain treatment. Other 
     livestock held for these purposes are eligible for capital 
     gain treatment if held for 12 months or more.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment reduces the 24-month capital gain 
     holding period for horses to 12 months.
       Effective date.--The provision is effective for 
     dispositions after December 31, 2000.

                          Conference Agreement

       The conference agreement does not include the provision in 
     the Senate amendment.

  D. Disclosure of Tax Return Information for Combined Employment Tax 
 Reporting (sec. 1131 of the Senate amendment and sec. 6103(d) of the 
                                 Code)

                              Present Law

       Traditionally, Federal tax forms are filed with the Federal 
     government and State tax forms are filed with individual 
     States. This necessitates duplication of items common to both 
     returns. Some States have recently been working with the IRS 
     to implement combined State and Federal reporting of certain 
     types of items on one form as a way of reducing the burdens 
     on taxpayers.
       The State of Montana and the IRS have cooperatively 
     developed a system to combine State and Federal employment 
     tax reporting on one form. The one form contains exclusively 
     Federal data, exclusively State data, and information common 
     to both: the taxpayer's name, address, TIN, and signature.
       The Code permits implementation of a demonstration project 
     to assess the feasibility and desirability of expanding 
     combined reporting in the future. There are several 
     limitations on the demonstration project. First, it is 
     limited to the State of Montana and the IRS. Second, it is 
     limited to employment tax reporting. Third, it is limited to 
     disclosure of the name, address, TIN, and signature of the 
     taxpayer, which is information common to both the Montana and 
     Federal portions of the combined form. Fourth, it is limited 
     to a period of five years. The provision will expire on 
     August 5, 2002.
       The Internal Revenue Code prohibits disclosure of tax 
     returns and return information, except to the extent 
     specifically authorized by the Internal Revenue Code (sec. 
     6103). Unauthorized disclosure is a felony punishable by a 
     fine not exceeding $5,000 or imprisonment of not more than 
     five years, or both (sec. 7213). An action for civil damages 
     also may be brought for unauthorized disclosure (sec. 7431). 
     No tax information may be furnished by the Internal Revenue 
     Service (``IRS'') to another agency unless the other agency 
     establishes procedures satisfactory to the IRS for 
     safeguarding the tax information it receives (sec. 6103(p)).

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment permits the Secretary to disclose 
     taxpayer identity information and signatures to any State for 
     purposes of carrying out a combined Federal and State 
     employment tax reporting program.
       Effective date.--The provision is effective on the date of 
     enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

  E. Tax Rates for Trusts with Disabled Beneficiary (sec. 211 of the 
              Senate amendment and section 1 of the Code)

                              Present Law

     Taxation of trusts
       Trusts are treated as conduits where income distributed to 
     beneficiaries is taxed to the beneficiaries and not the 
     trust. Income which the trust accumulates and does not 
     distribute to beneficiaries in the year earned is taxed to 
     the trust.
     Income tax rate structure
       To determine regular income tax liability, a taxpayer 
     generally must apply the tax rate schedules (or the tax 
     tables) to his or her taxable income. The rate schedules are 
     broken into several ranges of income, known as income 
     brackets, and the marginal tax rate increases as a taxpayer's 
     income increases. The income bracket amounts are indexed for 
     inflation. Separate rate schedules apply based on an 
     individual's filing status, including estates and trusts. For 
     1999, the individual regular income tax rate schedules are 
     shown below.

         Table 1.--Federal Individual Income Tax Rates for 1999

Then income tax equals:

                           Single individuals

15 percent of taxable income...........................................
$3,862.50, plus 28% of the amount over $25,750.........................
$14,138.50 plus 31% of the amount over $62,450.........................
$35,156.50 plus 36% of the amount over $130,250........................
$90,200.50 plus 39.6% of the amount over $283,150

                           Estates and trusts

15 percent of taxable income...........................................

[[Page 19712]]

$262.50 plus 28% of the excess over $1,750.............................
$906.50 plus 31% of the amount over $4,050.............................
$1,573 plus 36% of the amount over $6,200..............................
$2,383 plus 39.6% of the amount over $8,450............................
$87,548 plus 39.6% of the amount over $283,150.........................

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that the tax rates applicable 
     to a single individual will also apply to a trust whose 
     exclusive purpose is to provide reasonable amounts for the 
     support and maintenance of its sole beneficiary who is 
     totally and permanently disabled (within the meaning of sec. 
     22(e)(3)) for the trust's entire taxable year.
       Effective date.--The Senate amendment provision is 
     effective for taxable years beginning after December 31, 
     2006.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

   F. Taxation of Flights on Noncommercial Aircraft (sec. 370 of the 
               Senate amendment and sec. 132 of the Code)

     Present Law
       In general under present law, the value of personal use of 
     an employer-provided aircraft is includible in the gross 
     income and wages of the employee. Under one exception to this 
     rule, if 50 percent or more of the regular seating capacity 
     of an aircraft is occupied by individuals whose flights are 
     primarily for the employer's business, the value of a flight 
     on that aircraft by any employee who is not flying primarily 
     for the employer's business is deemed to be zero.\74\ Thus, 
     no amount is includible in the income of the employee by 
     reason of such a flight.
---------------------------------------------------------------------------
     \74\ Treas. reg. sec. 1.61-21(g)(12).
---------------------------------------------------------------------------
       Present law also provides an exclusion from gross income 
     and wages for no-additional-cost-services. In general, a no-
     additional-cost-service is any service provided by an 
     employer to an employee if such service if offered for sale 
     to customers in the ordinary course of the line of business 
     of the employer in which the employee is performing services, 
     and the employer incurs no substantial additional cost 
     (including forgone revenue) in providing such service to the 
     employee (determined without regard to any amount paid for 
     the employee for such service). Under this rule, services 
     provided to the spouse or dependent child of the employee are 
     treated as if provided to the employee. In addition, the term 
     ``employee'' includes former employees who separated from 
     service from the employer by reason of retirement or 
     disability and surviving spouses of employees. The exclusion 
     does not apply with respect to a no-additional-cost service 
     provided to a highly compensated employee unless the service 
     is available on a nondiscriminatory basis.
       Except as described above, these exclusions are generally 
     not available with respect to individuals who are not 
     employees, e.g., independent contractors.

                               House Bill

       No provision.

                            Senate Amendment

       Under the provision, the value of certain transportation 
     provided to an employee on a noncommercially operated 
     aircraft is treated as a no-additional-cost-service. The 
     provision applies to transportation provided to an employee 
     by an employer on a noncommercially operated aircraft if (1) 
     the transportation is provided on a flight made in the 
     ordinary course of the trade or business of the employer 
     owning or leasing such aircraft for use in such trade or 
     business, (2) the flight would have been made even if the 
     employee were not being transported, and (3) and no 
     substantial additional cost is incurred in providing the 
     transportation.
       As under the present-law rule relating to no-additional-
     cost-services, services provided to the spouse or dependent 
     child of the employee are treated as if provided to the 
     employee. In addition, the term ``employee'' includes former 
     employees who separated from service from the employer by 
     reason of retirement or disability and surviving spouses of 
     employees. Also, the exclusion does not apply with respect to 
     a no-additional-cost service provided to a highly compensated 
     employee unless the service is available on a 
     nondiscriminatory basis.
       In addition, under the provision, use of noncommercial 
     aircraft by any individual is treated as use by an employee 
     if no regularly scheduled commercial flight is available on 
     the day of the flight from the air facility at the 
     individual's location to the area surrounding the air 
     facility where the noncommercial flight ends.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 G. Exclusion for Certain Severance Payments (sec. 1135 of the Senate 
                amendment and new sec. 139 of the Code)

                              Present Law

       Under present law, severance payments are includible in 
     gross income.

                               House Bill

       No provision.

                            Senate Amendment

       Under the provision, up to $2,000 of qualified severance 
     payments received with respect to a separation from 
     employment are excludable from the gross income of the 
     recipient. Qualified severance payments are payments received 
     by an individual on account of separation from employment in 
     connection with a reduction in the employer's work force. The 
     exclusion is not available if the individual becomes employed 
     within 6 months of the separation from employment at a 
     compensation level that is at least 95 percent of the 
     compensation the individual received before the separation. 
     The exclusion does not apply if the total severance payments 
     received by the individual in connection with the separation 
     from employment exceed $75,000.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2000, and before January 
     1, 2002.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

   H. FUTA Treatment of Maple Syrup Workers (sec. 1132 of the Senate 
                    amendment and sec. of the Code)

                              Present Law

     In general
       For purposes of the FUTA tax, a person is considered an 
     employer, if the person pays wages of $1,500 or more in any 
     calendar quarter in the calendar year or the immediately 
     prior calendar year and employs at least one individual for 
     one day (or portion thereof) on at least 20 days during the 
     calender year or immediately prior calender year. For these 
     purposes, each day must occur in a different calendar week. 
     Generally, qualifying as an employer results in the 
     obligation to pay FUTA taxes.
     Agricultural labor
       In the case of agricultural labor, a person is considered 
     an employer, if the person pays wages of $20,000 or more of 
     agricultural labor in any calendar quarter in the calendar 
     year or the immediately prior calendar year and employs at 
     least ten individuals for one day (or portion thereof) on at 
     least 20 days during the calender year or immediately prior 
     calender year. For these purposes, each day must occur in a 
     different calendar week. Generally, qualifying as an employer 
     results in the obligation to pay FUTA taxes.
       The production or harvesting of maple syrup generally 
     constitutes agricultural labor only if such services are 
     performed on a farm.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides that, for purposes of FUTA 
     tax, agricultural labor includes any labor connected to the 
     harvesting or production of maple sap into maple syrup or 
     sugar, regardless of the location of the labor.
       Effective date.--The Senate amendment provision is 
     effective on the date of enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

   I. Modify Rules Governing Tax-Exempt Bonds for Section 501(c)(3) 
      Organizations as Applied to Organizations Engaged in Timber 
Conservation Activities (sec. 1133 of the Senate amendment and sec. 145 
                              of the Code)

                              Present Law

       Interest on State or local government bonds is tax-exempt 
     when the proceeds of the bonds are used to finance activities 
     carried out by or paid for by those governmental units. 
     Interest on bonds issued by State or local governments acting 
     as conduit borrowers for private businesses is taxable unless 
     a specific exception is included in the Code. One such 
     exemption allows tax-exempt bonds to be issued to finance 
     activities of non-profit organizations described in Code 
     section 501(c)(3) (``qualified 501(c)(3) bonds'').
       Qualified 501(c)(3) bonds may be issued only to finance 
     exempt, as opposed to unrelated business, activities of these 
     organizations. However, if the bonds are issued to finance 
     property which is intended to be, or is in fact, sold to a 
     private business while the bonds are outstanding, bond 
     interest may be taxable. An example of such an issue would be 
     qualified 501(c)(3) bonds issued to finance purchase of land 
     and standing timber, when the timber was to be sold.
       As is true of other private activities receiving tax-exempt 
     financing, beneficiaries of qualified 501(c)(3) bonds are 
     restricted in the arrangements they may have with private 
     businesses relating to control and use of bond-financed 
     property.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment modifies the rules governing issuance 
     of qualified 501(c)(3) bonds to permit issuance of long-term 
     bonds

[[Page 19713]]

     for the acquisition of timber land by organizations a 
     principal purpose of which is conservation of that land as 
     timber land. Under these rules, the bonds will not have to be 
     repaid (to avoid loss of tax-exemption on interest) when the 
     timber is harvested and sold. In addition, the Senate 
     amendment provision allows these section 501(c)(3) 
     organizations to enter into certain otherwise prohibited 
     timber management arrangements with private businesses 
     without losing tax-exemption on bonds used to finance the 
     property and timber.
       Effective date.--The provision is effective for bonds 
     issued after the date of enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                XV. EXTENSION OF EXPIRING TAX PROVISIONS

A. Extension of Research and Experimentation Tax Credit and Increase in 
the Rates for the Alternative Incremental Research Credit (sec. 1401 of 
 the House bill, sec. 1201 of the Senate amendment, and sec. 41 of the 
                                 Code)

                              Present Law

       Section 41 provides for a research tax credit equal to 20 
     percent of the amount by which a taxpayer's qualified 
     research expenditures for a taxable year exceeded its base 
     amount for that year. The research tax credit expired and 
     generally does not apply to amounts paid or incurred after 
     June 30, 1998.
       Except for certain university basic research payments made 
     by corporations, the research tax credit applies only to the 
     extent that the taxpayer's qualified research expenditures 
     for the current taxable year exceed its base amount. The base 
     amount for the current year generally is computed by 
     multiplying the taxpayer's ``fixed-base percentage'' by the 
     average amount of the taxpayer's gross receipts for the four 
     preceding years. If a taxpayer both incurred qualified 
     research expenditures and had gross receipts during each of 
     at least three years from 1984 through 1988, then its 
     ``fixed-base percentage'' is the ratio that its total 
     qualified research expenditures for the 1984-1988 period 
     bears to its total gross receipts for that period (subject to 
     a maximum ratio of .16). All other taxpayers (so-called 
     ``start-up firms'') are assigned a fixed-base percentage of 3 
     percent.
       Taxpayers are allowed to elect an alternative incremental 
     research credit regime. If a taxpayer elects to be subject to 
     this alternative regime, the taxpayer is assigned a three-
     tiered fixed-base percentage (that is lower than the fixed-
     base percentage otherwise applicable under present law) and 
     the credit rate likewise is reduced. Under the alternative 
     credit regime, a credit rate of 1.65 percent applies to the 
     extent that a taxpayer's current-year research expenses 
     exceed a base amount computed by using a fixed-base 
     percentage of 1 percent (i.e., the base amount equals 1 
     percent of the taxpayer's average gross receipts for the four 
     preceding years) but do not exceed a base amount computed by 
     using a fixed-base percentage of 1.5 percent. A credit rate 
     of 2.2 percent applies to the extent that a taxpayer's 
     current-year research expenses exceed a base amount computed 
     by using a fixed-base percentage of 1.5 percent but do not 
     exceed a base amount computed by using a fixed-base 
     percentage of 2 percent. A credit rate of 2.75 percent 
     applies to the extent that a taxpayer's current-year research 
     expenses exceed a base amount computed by using a fixed-base 
     percentage of 2 percent. An election to be subject to this 
     alternative incremental credit regime may be made for any 
     taxable year beginning after June 30, 1996, and such an 
     election applies to that taxable year and all subsequent 
     years (in the event that the credit subsequently is extended 
     by Congress) unless revoked with the consent of the Secretary 
     of the Treasury.

                               House Bill

       The House bill extends the research tax credit for five 
     years--i.e., generally, for the period July 1, 1999, through 
     June 30, 2004.
       In addition, the House bill increases the credit rate 
     applicable under the alternative incremental research credit 
     one percentage point per step, that is from 1.65 percent to 
     2.65 percent when a taxpayer's current-year research expenses 
     exceed a base amount of 1 percent but do not exceed a base 
     amount of 1.5 percent; from 2.2 percent to 3.2 percent when a 
     taxpayer's current-year research expenses exceed a base 
     amount of 1.5 percent but do not exceed a base amount of 2 
     percent; and from 2.75 percent to 3.75 percent when a 
     taxpayer's current-year research expenses exceed a base 
     amount of 2 percent.
       Effective date.--The extension of the research credit is 
     effective for qualified research expenditures paid or 
     incurred during the period July 1, 1999, through June 30, 
     2004. The increase in the credit rate under the alternative 
     incremental research credit is effective for taxable years 
     beginning after June 30, 1999.

                            Senate Amendment

       The Senate amendment extends the research tax credit 
     permanently.
       In addition, the Senate amendment increases the credit rate 
     applicable under the alternative incremental research credit 
     one percentage point per step, that is, identical to the 
     House bill.
       Effective date.--The extension of the research credit is 
     effective for qualified research expenditures paid or 
     incurred after June 30, 1999. The increase in the credit rate 
     under the alternative incremental research credit is 
     effective for taxable years beginning after June 30, 1999.

                          Conference Agreement

       The conference agreement follows the House bill by 
     extending the research credit through June 30, 2004.
       In addition, the conference agreement follows the House 
     bill and the Senate amendment by increasing the credit rate 
     applicable under the alternative incremental research credit 
     by one percentage point per step.
       Effective date.--The extension of the research credit is 
     effective for qualified research expenditures paid or 
     incurred during the period July 1, 1999, through June 30, 
     2004. The increase in the credit rate under the alternative 
     incremental research credit is effective for taxable years 
     beginning after June 30, 1999.

B. Extend Exceptions under Subpart F for Active Financing Income (sec. 
 1402 of the House bill, sec. 1202 of the Senate amendment, and secs. 
                        953 and 954 of the Code)

                              Present Law

       Under the subpart F rules, 10-percent U.S. shareholders of 
     a controlled foreign corporation (``CFC'') are subject to 
     U.S. tax currently on certain income earned by the CFC, 
     whether or not such income is distributed to the 
     shareholders. The income subject to current inclusion under 
     the subpart F rules includes, among other things, foreign 
     personal holding company income and insurance income. In 
     addition, 10-percent U.S. shareholders of a CFC are subject 
     to current inclusion with respect to their shares of the 
     CFC's foreign base company services income (i.e., income 
     derived from services performed for a related person outside 
     the country in which the CFC is organized).
       Foreign personal holding company income generally consists 
     of the following: (1) dividends, interest, royalties, rents, 
     and annuities; (2) net gains from the sale or exchange of (a) 
     property that gives rise to the preceding types of income, 
     (b) property that does not give rise to income, and (c) 
     interests in trusts, partnerships, and REMICs; (3) net gains 
     from commodities transactions; (4) net gains from foreign 
     currency transactions; (5) income that is equivalent to 
     interest; (6) income from notional principal contracts; and 
     (7) payments in lieu of dividends.
       Insurance income subject to current inclusion under the 
     subpart F rules includes any income of a CFC attributable to 
     the issuing or reinsuring of any insurance or annuity 
     contract in connection with risks located in a country other 
     than the CFC's country of organization. Subpart F insurance 
     income also includes income attributable to an insurance 
     contract in connection with risks located within the CFC's 
     country of organization, as the result of an arrangement 
     under which another corporation receives a substantially 
     equal amount of consideration for insurance of other-country 
     risks. Investment income of a CFC that is allocable to any 
     insurance or annuity contract related to risks located 
     outside the CFC's country of organization is taxable as 
     subpart F insurance income (Prop. Treas. Reg. sec. 1.953-
     1(a)).
       Temporary exceptions from foreign personal holding company 
     income, foreign base company services income, and insurance 
     income apply for subpart F purposes for certain income that 
     is derived in the active conduct of a banking, financing, or 
     similar business, or in the conduct of an insurance business 
     (so-called ``active financing income''). These exceptions are 
     applicable only for taxable years beginning in 1999.\75\
---------------------------------------------------------------------------
     \75\ Temporary exceptions from the subpart F provisions for 
     certain active financing income applied only for taxable 
     years beginning in 1998. Those exceptions were extended and 
     modified as part of the present-law provisions.
---------------------------------------------------------------------------
       With respect to income derived in the active conduct of a 
     banking, financing, or similar business, a CFC is required to 
     be predominantly engaged in such business and to conduct 
     substantial activity with respect to such business in order 
     to qualify for the exceptions. In addition, certain nexus 
     requirements apply, which provide that income derived by a 
     CFC or a qualified business unit (``QBU'') of a CFC from 
     transactions with customers is eligible for the exceptions 
     if, among other things, substantially all of the activities 
     in connection with such transactions are conducted directly 
     by the CFC or QBU in its home country, and such income is 
     treated as earned by the CFC or QBU in its home country for 
     purposes of such country's tax laws. Moreover, the exceptions 
     apply to income derived from certain cross border 
     transactions, provided that certain requirements are met. 
     Additional exceptions from foreign personal holding company 
     income apply for certain income derived by a securities 
     dealer within the meaning of section 475 and for gain from 
     the sale of active financing assets.
       In the case of insurance, in addition to a temporary 
     exception from foreign personal holding company income for 
     certain income

[[Page 19714]]

     of a qualifying insurance company with respect to risks 
     located within the CFC's country of creation or organization, 
     certain temporary exceptions from insurance income and from 
     foreign personal holding company income apply for certain 
     income of a qualifying branch of a qualifying insurance 
     company with respect to risks located within the home country 
     of the branch, provided certain requirements are met under 
     each of the exceptions. Further, additional temporary 
     exceptions from insurance income and from foreign personal 
     holding company income apply for certain income of certain 
     CFCs or branches with respect to risks located in a country 
     other than the United States, provided that the requirements 
     for these exceptions are met.

                               House Bill

       The House bill extends for five years the present-law 
     temporary exceptions from subpart F foreign personal holding 
     company income, foreign base company services income, and 
     insurance income for certain income that is derived in the 
     active conduct of a banking, financing, or similar business, 
     or in the conduct of an insurance business.
       Effective date.--The provision is effective for taxable 
     years of a foreign corporation beginning after December 31, 
     1999, and before January 1, 2005, and for taxable years of 
     U.S. shareholders with or within which such taxable years of 
     such foreign corporation end.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 C. Extend Suspension of Net Income Limitation on Percentage Depletion 
from Marginal Oil and Gas Wells (sec. 1403 of the House bill, sec. 1203 
          of the Senate amendment, and sec. 613A of the Code)

                              Present Law

       The Code permits taxpayers to recover their investments in 
     oil and gas wells through depletion deductions. In the case 
     of certain properties, the deductions may be determined using 
     the percentage depletion method. Among the limitations that 
     apply in calculating percentage depletion deductions is a 
     restriction that, for oil and gas properties, the amount 
     deducted may not exceed 100 percent of the net income from 
     that property in any year (sec. 613(a)).
       Special percentage depletion rules apply to oil and gas 
     production from ``marginal'' properties (sec. 613A(c)(6)). 
     Marginal production is defined as domestic crude oil and 
     natural gas production from stripper well property or from 
     property substantially all of the production from which 
     during the calendar year is heavy oil. Stripper well property 
     is property from which the average daily production is 15 
     barrel equivalents or less, determined by dividing the 
     average daily production of domestic crude oil and domestic 
     natural gas from producing wells on the property for the 
     calendar year by the number of wells. Heavy oil is domestic 
     crude oil with a weighted average gravity of 20 degrees API 
     or less (corrected to 60 degrees Fahrenheit). Under one such 
     special rule, the 100-percent-of-net-income limitation does 
     not apply to domestic oil and gas production from marginal 
     properties during taxable years beginning after December 31, 
     1997, and before January 1, 2000.

                               House Bill

       The House bill extends the present-law suspension of the 
     100-percent-of-net-income limitation with respect to oil and 
     gas production from marginal wells to include taxable years 
     beginning after December 31, 1999, and before January 1, 
     2005.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 1999.

                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 D. Extend of the Work Opportunity Tax Credit (sec. 1404 of the House 
   bill, sec. 1204 of the Senate amendment, and sec. 51 of the Code)

                              Present Law

     In general
       The work opportunity tax credit (``WOTC''), which expired 
     on June 30, 1999, was available on an elective basis for 
     employers hiring individuals from one or more of eight 
     targeted groups. The credit equals 40 percent (25 percent for 
     employment of 400 hours or less) of qualified wages. 
     Generally, qualified wages are wages attributable to service 
     rendered by a member of a targeted group during the one-year 
     period beginning with the day the individual began work for 
     the employer.
       The maximum credit per employee is $2,400 (40% of the first 
     $6,000 of qualified first-year wages). With respect to 
     qualified summer youth employees, the maximum credit is 
     $1,200 (40 percent of the first $3,000 of qualified first-
     year wages).
       The employer's deduction for wages is reduced by the amount 
     of the credit.
     Targeted groups eligible for the credit
       The eight targeted groups are: (1) families eligible to 
     receive benefits under the Temporary Assistance for Needy 
     Families (TANF) Program; (2) high-risk youth; (3) qualified 
     ex-felons; (4) vocational rehabilitation referrals; (5) 
     qualified summer youth employees; (6) qualified veterans; (7) 
     families receiving food stamps; and (8) persons receiving 
     certain Supplemental Security Income (SSI) benefits.
     Minimum employment period
       No credit is allowed for wages paid to employees who work 
     less than 120 hours in the first year of employment.
     Expiration date
       The credit is effective for wages paid or incurred to a 
     qualified individual who began work for an employer before 
     July 1, 1999.
     House Bill
       The House bill extends the work opportunity tax credit for 
     30 months (through December 31, 2001). The House bill also 
     directs the Secretary of the Treasury to expedite procedures 
     to allow taxpayers to satisfy their WOTC filing requirements 
     (e.g., Form 8850) by electronic means.
       Effective date.--The House bill provision is effective for 
     wages paid or incurred to qualified individuals who begin 
     work for the employer on or after July 1, 1999, and before 
     January 1, 2002.

                            Senate Amendment

       The Senate amendment extends the work opportunity tax 
     credit for five years (through June 30, 2004).
       Effective date.--The Senate amendment provision is 
     effective for wages paid or incurred to qualified individuals 
     who begin work for the employer on or after July 1, 1999, and 
     before July 1, 2004.

                          Conference Agreement

       The conference agreement provides for a 30-month extension 
     of the work opportunity tax credit. The conferees also direct 
     the Secretary of the Treasury to expedite the use of 
     electronic filing of requests for certification under the 
     credit. They believe that participation in the program by 
     businesses should not be discouraged by the requirement that 
     such forms (i.e., the Form 8850) be submitted in paper form.
       Effective date.--The provision is effective for wages paid 
     or incurred to qualified individuals who begin work for the 
     employer on or after July 1, 1999, and before January 1, 
     2002.

  E. Extend of the Welfare-To-Work Tax Credit (sec. 1404 of the House 
   bill, sec. 1204 of the Senate amendment, and sec. 51A of the Code)

                              Present Law

       The Code provides to employers a tax credit on the first 
     $20,000 of eligible wages paid to qualified long-term family 
     assistance (AFDC or its successor program) recipients during 
     the first two years of employment. The credit is 35 percent 
     of the first $10,000 of eligible wages in the first year of 
     employment and 50 percent of the first $10,000 of eligible 
     wages in the second year of employment. The maximum credit is 
     $8,500 per qualified employee.
       Qualified long-term family assistance recipients are: (1) 
     members of a family that has received family assistance for 
     at least 18 consecutive months ending on the hiring date; (2) 
     members of a family that has received family assistance for a 
     total of at least 18 months (whether or not consecutive) 
     after the date of enactment of this credit if they are hired 
     within 2 years after the date that the 18-month total is 
     reached; and (3) members of a family who are no longer 
     eligible for family assistance because of either Federal or 
     State time limits, if they are hired within 2 years after the 
     Federal or State time limits made the family ineligible for 
     family assistance.
       Eligible wages include cash wages paid to an employee plus 
     amounts paid by the employer for the following: (1) 
     educational assistance excludable under a section 127 program 
     (or that would be excludable but for the expiration of sec. 
     127); (2) health plan coverage for the employee, but not more 
     than the applicable premium defined under section 
     4980B(f)(4); and (3) dependent care assistance excludable 
     under section 129.
       The welfare to work credit is effective for wages paid or 
     incurred to a qualified individual who begins work for an 
     employer on or after January 1, 1998, and before July 1, 
     1999.

                               House Bill

       The House bill extends the welfare-to-work tax credit for 
     30 months.
       Effective date.--The House bill provision extends the 
     welfare-to-work credit effective for wages paid or incurred 
     to a qualified individual who begins work for an employer on 
     or after July 1, 1999, and before January 1, 2002.

                            Senate Amendment

       The Senate amendment extends the welfare-to-work tax credit 
     five years.
       Effective date.--The Senate amendment provision extends the 
     welfare-to-work credit effective for wages paid or incurred 
     to a qualified individual who begins work for an employer on 
     or after July 1, 1999, and before July 1, 2004.

                          Conference Agreement

       The conference agreement provides for a 30-month extension 
     of the welfare-to-work tax credit.

[[Page 19715]]

       Effective date.--The provision is effective for wages paid 
     or incurred to a qualified individual who begins work for an 
     employer on or after July 1, 1999, and before January 1, 
     2002.

 F. Extend and Modify Tax Credit for Electricity Produced by Wind and 
 Closed-Loop Biomass Facilities (sec. 1205 of the Senate amendment and 
                          sec. 45 of the Code)

                              Present Law

       An income tax credit is allowed for the production of 
     electricity from either qualified wind energy or qualified 
     ``closed-loop'' biomass facilities (sec. 45). The credit 
     applies to electricity produced by a qualified wind energy 
     facility placed in service after December 31, 1993, and 
     before July 1, 1999, and to electricity produced by a 
     qualified closed-loop biomass facility placed in service 
     after December 31, 1992, and before July 1, 1999. The credit 
     is allowable for production during the 10-year period after a 
     facility is originally placed in service.
       Closed-loop biomass is the use of plant matter, where the 
     plants are grown for the sole purpose of being used to 
     generate electricity. It does not include the use of waste 
     materials (including, but not limited to, scrap wood, manure, 
     and municipal or agricultural waste). The credit also is not 
     available to taxpayers who use standing timber to produce 
     electricity. In order to claim the credit, a taxpayer must 
     own the facility and sell the electricity produced by the 
     facility to an unrelated party.

                               House Bill

       No provision.

                            Senate Amendment

       The present-law tax credit for electricity produced by wind 
     and closed-loop biomass is extended for five years, for 
     facilities placed in service after June 30, 1999, and before 
     July 1, 2004. The provision also modifies the tax credit to 
     include electricity produced from poultry litter, for 
     facilities placed in service after December 31, 1999, and 
     before July 1, 2004. The credit for electricity produced from 
     poultry litter is available to the lessor/operator of a 
     qualified facility that is owned by a governmental entity. 
     The credit further is expanded to include electricity 
     produced from landfill gas by the owner of the gas collection 
     facility, for electricity produced from facilities placed in 
     service after December 31, 1999, and before June 30, 2004.
       Finally, the credit is expanded to include electricity 
     produced from certain other biomass (in addition to closed-
     loop biomass and poultry waste). This additional biomass is 
     defined as solid, nonhazardous, cellulose waste material 
     which is segregated from other waste materials and which is 
     derived from forest resources, but not including old-growth 
     timber. The term also includes urban sources such as waste 
     pallets, crates, manufacturing and construction wood waste, 
     and tree trimmings, or agricultural sources (including grain, 
     orchard tree crops, vineyard legumes, sugar, and other crop 
     by-products or residues. The term does not include 
     unsegregated municipal solid waste or paper that commonly is 
     recycled. In the case of this additional biomass, the credit 
     applies to electricity produced after December 31, 1999 from 
     facilities that are placed in service before January 1, 2003 
     (including facilities placed in service before the date of 
     enactment of this provision). The credit is allowed for 
     production attributable to biomass produced at facilities 
     that are co-fired with coal.
       Effective date.--The extension of the tax credit for 
     electricity produced from wind and closed-loop biomass is 
     effective for facilities placed in service after June 30, 
     1999. The modification to include electricity produced from 
     poultry waste and landfill gas is effective for facilities 
     placed in service after December 31, 1999. The modification 
     to include other types of biomass is effective for facilities 
     placed in service before January 1, 2003, but no credits may 
     be claimed for production before January 1, 2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     a modification limiting the extension to facilities producing 
     electricity from wind, closed-loop biomass, and poultry waste 
     (i.e., the conference agreement does not include landfill 
     gas, closed-loop biomass, or other biomass as qualified 
     sources of electricity). The provision applies to facilities 
     placed in service after June 30, 1999 and before July 1, 2003 
     (wind and closed-loop biomass) and after December 31, 1999 
     and before July 1, 2003 (poultry waste).

G. Extend Exemption From Diesel Dyeing Requirement for Certain Areas in 
  Alaska (sec. 1206 of the Senate amendment and sec. 4082 of the Code)

                              Present Law

       An excise tax totaling 24.4 cents per gallon is imposed on 
     diesel fuel. The diesel fuel tax is imposed on removal of the 
     fuel from a pipeline or barge terminal facility (i.e., at the 
     ``terminal rack''). Present law provides that tax is imposed 
     on all diesel fuel removed from terminal facilities unless 
     the fuel is destined for a nontaxable use and is indelibly 
     dyed pursuant to Treasury Department regulations.
       In general, the diesel fuel tax does not apply to non-
     transportation uses of the fuel. Off-highway business uses 
     are included within this non-transportation use exemption. 
     This exemption includes use on a farm for farming purposes 
     and as fuel powering off-highway equipment (e.g., oil 
     drilling equipment). Use as heating oil also is exempt. (Most 
     fuel commonly referred to as heating oil is diesel fuel.) The 
     tax also does not apply to fuel used by State and local 
     governments, to exported fuels, and to fuels used in 
     commercial shipping. Fuel used by intercity buses and trains 
     is partially exempt from the diesel fuel tax.
       A similar dyeing regime exists for diesel fuel under the 
     Clean Air Act. That Act prohibits the use on highways of 
     diesel fuel with a sulphur content exceeding prescribed 
     levels. This ``high sulphur'' diesel fuel is required to be 
     dyed by the EPA.
       The State of Alaska generally is exempt from the Clean Air 
     Act dyeing regime for a period established by the U.S. 
     Environmental Protection Agency (urban areas) or permanently 
     (remote areas). Diesel fuel used in Alaska is exempt from the 
     excise tax dyeing requirements for periods when the EPA 
     requirements do not apply.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment makes the excise tax exemption for 
     Alaska urban areas permanent (i.e., independent of the EPA 
     rules).
       Effective date.--The provision is effective on the date of 
     enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

H. Expensing of Environmental Remediation Expenditures and Expansion of 
Qualifying Sites (sec. 1207 of the Senate amendment and sec. 198 of the 
                                 Code)

                              Present Law

       Taxpayers can elect to treat certain environmental 
     remediation expenditures that would otherwise be chargeable 
     to capital account as deductible in the year paid or incurred 
     (sec. 198). The deduction applies for both regular and 
     alternative minimum tax purposes. The expenditure must be 
     incurred in connection with the abatement or control of 
     hazardous substances at a qualified contaminated site.
       A ``qualified contaminated site'' generally is any property 
     that (1) is held for use in a trade or business, for the 
     production of income, or as inventory; (2) is certified by 
     the appropriate State environmental agency to be located 
     within a targeted area; and (3) contains (or potentially 
     contains) a hazardous substance (so-called ``brownfields''). 
     Targeted areas are defined as: (1) empowerment zones and 
     enterprise communities as designated under present law; (2) 
     sites announced before February, 1997, as being subject to 
     one of the 76 Environmental Protection Agency (``EPA'') 
     Brownfields Pilots; (3) any population census tract with a 
     poverty rate of 20 percent or more; and (4) certain 
     industrial and commercial areas that are adjacent to tracts 
     described in (3) above. However, sites that are identified on 
     the national priorities list under the Comprehensive 
     Environmental Response, Compensation, and Liability Act of 
     1980 cannot qualify as targeted areas.
       Eligible expenditures are those paid or incurred before 
     January 1, 2001.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment extends the expiration date for 
     eligible expenditures to include those paid or incurred 
     before July 1, 2004.
       In addition, the bill eliminates the targeted area 
     requirement, thereby expanding eligible sites to include any 
     site containing (or potentially containing) a hazardous 
     substance that is certified by the appropriate State 
     environmental agency, but not those sites that are identified 
     on the national priorities list under the Comprehensive 
     Environmental Response, Compensation, and Liability Act of 
     1980.
       Effective date.--The provision to extend the expiration 
     date is effective upon the date of enactment. The provision 
     to expand the class of eligible sites is effective for 
     expenditures paid or incurred after December 31, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment by 
     expanding eligible sites to include any site containing (or 
     potentially containing) a hazardous substance that is 
     certified by the appropriate State environmental agency, but 
     not those sites that are identified on the national 
     priorities list under the Comprehensive Environmental 
     Response, Compensation, and Liability Act of 1980.
       The conference agreement does not include an extension of 
     the present-law expiration date for section 198.
       Effective date.--The provision to expand the class of 
     eligible sites is effective for expenditures paid or incurred 
     after December 31, 1999.

[[Page 19716]]



                     XVI. REVENUE OFFSET PROVISIONS

 A. Expand Reporting of Cancellation of Indebtedness Income (sec. 1501 
of the House bill, sec. 1302 of the Senate amendment, and sec. 6050P of 
                               the Code)

                              Present Law

       Under section 61(a)(12), a taxpayer's gross income includes 
     income from the discharge of indebtedness. Section 6050P 
     requires ``applicable entities'' to file information returns 
     with the Internal Revenue Service (IRS) regarding any 
     discharge of indebtedness of $600 or more.
       The information return must set forth the name, address, 
     and taxpayer identification number of the person whose debt 
     was discharged, the amount of debt discharged, the date on 
     which the debt was discharged, and any other information that 
     the IRS requires to be provided. The information return must 
     be filed in the manner and at the time specified by the IRS. 
     The same information also must be provided to the person 
     whose debt is discharged by January 31 of the year following 
     the discharge.
       ``Applicable entities'' include: (1) the Federal Deposit 
     Insurance Corporation (FDIC), the Resolution Trust 
     Corporation (RTC), the National Credit Union Administration, 
     and any successor or subunit of any of them; (2) any 
     financial institution (as described in sec. 581 (relating to 
     banks) or sec. 591(a) (relating to savings institutions)); 
     (3) any credit union; (4) any corporation that is a direct or 
     indirect subsidiary of an entity described in (2) or (3) 
     which, by virtue of being affiliated with such entity, is 
     subject to supervision and examination by a Federal or State 
     agency regulating such entities; and (5) an executive, 
     judicial, or legislative agency (as defined in 31 U.S.C. sec. 
     3701(a)(4)).
       Failures to file correct information returns with the IRS 
     or to furnish statements to taxpayers with respect to these 
     discharges of indebtedness are subject to the same general 
     penalty that is imposed with respect to failures to provide 
     other types of information returns. Accordingly, the penalty 
     for failure to furnish statements to taxpayers is generally 
     $50 per failure, subject to a maximum of $100,000 for any 
     calendar year. These penalties are not applicable if the 
     failure is due to reasonable cause and not to willful 
     neglect.

                               House Bill

       The bill requires information reporting on indebtedness 
     discharged by any organization a significant trade or 
     business of which is the lending of money (such as finance 
     companies and credit card companies whether or not affiliated 
     with financial institutions).
       Effective date.--The provision is effective with respect to 
     discharges of indebtedness after December 31, 1999.

                            Senate Amendment

       Same as House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 B. Extension of IRS User Fees (sec. 1502 of the House bill, sec. 1304 
        of the Senate amendment, and new sec. 7527 of the Code)

                              Present Law

       The IRS provides written responses to questions of 
     individuals, corporations, and organizations relating to 
     their tax status or the effects of particular transactions 
     for tax purposes. The IRS generally charges a fee for 
     requests for a letter ruling, determination letter, opinion 
     letter, or other similar ruling or determination. Public Law 
     104-117 \76\ extended the statutory authorization for these 
     user fees \77\ through September 30, 2003.
---------------------------------------------------------------------------
     \76\ An Act to provide that members of the Armed Froces 
     performing services for the peacekeeping efforts in Bosnia 
     and Herzegovina, Croatia, and Macedonia shall be entitled to 
     tax benefits in the same manner as if such services were 
     performed in a combat zone, and for other purposes (March 20, 
     1996).
     \77\ These user fees were originally enacted in section 10511 
     of the Revenue Act of 1987 (Public Law 100-203, December 22, 
     1987).
---------------------------------------------------------------------------

                               House Bill

       The bill extends the statutory authorization for these user 
     fees through September 30, 2009. The bill also moves the 
     statutory authorization for these fees into the Internal 
     Revenue Code.
       Effective date.--The provision, including moving the 
     statutory authorization for these fees into the Code and 
     repealing the off-Code statutory authorization for these 
     fees, is effective for requests made after the date of 
     enactment.

                            Senate Amendment

       Same as House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 C. Impose Limitation on Prefunding of Certain Employee Benefits (sec. 
 1503 of the House bill, sec. 1312 of the Senate amendment, and secs. 
                       419A and 4976 of the Code)

                              Present Law

       Under present law, contributions to a welfare benefit fund 
     generally are deductible when paid, but only to the extent 
     permitted under the rules of sections 419 and 419A. The 
     amount of an employer's deduction in any year for 
     contributions to a welfare benefit fund cannot exceed the 
     fund's qualified cost for the year minus the fund's after-tax 
     income for the year. With certain exceptions, the term 
     qualified cost means the sum of (1) the amount that would be 
     deductible for benefits provided during the year if the 
     employer paid them directly and was on the cash method of 
     accounting, and (2) within limits, the amount of any addition 
     to a qualified asset account for the year. A qualified asset 
     account includes any account consisting of assets set aside 
     for the payment of disability benefits, medical benefits, 
     supplemental unemployment compensation or severance pay 
     benefits, or life insurance benefits. The account limit for a 
     qualified asset account for a taxable year is generally the 
     amount reasonably and actuarially necessary to fund claims 
     incurred but unpaid (as of the close of the taxable year) for 
     benefits with respect to which the account is maintained and 
     the administrative costs incurred with respect to those 
     claims. Specific additional reserves are allowed for future 
     provision of post-retirement medical and life insurance 
     benefits.
       The deduction limits of sections 419 and 419A for 
     contributions to welfare benefit funds do not apply in the 
     case of certain 10-or-more employer plans. A plan is a 10-or-
     more employer plan if (1) more than one employer contributes 
     to it, and (2) no employer is normally required to contribute 
     more than 10 percent of the total contributions contributed 
     under the plan by all employers. The exception is not 
     available if the plan maintains experience-rating 
     arrangements with respect to individual employers.
       If any portion of a welfare benefit fund reverts to the 
     benefit of an employer, an excise tax equal to 100 percent of 
     the reversion is imposed on the employer.

                               House Bill

       The present-law exception to the deduction limit for 10-or-
     more employer plans is limited to plans that provide only 
     medical benefits, disability benefits, and qualifying group-
     term life insurance benefits to plan beneficiaries. The 
     legislative history provides that qualifying group-term life 
     insurance benefits do not include any arrangements that 
     permit a plan beneficiary to directly or indirectly access 
     all or part of the account value of any life insurance 
     contract, whether through a policy loan, a partial or 
     complete surrender of the policy, or otherwise. Also, the 
     legislative history provides that it is intended that 
     qualifying group-term life insurance benefits do not include 
     any arrangement whereby a plan beneficiary may receive a 
     policy without a stated account value that has the potential 
     to give rise to an account value whether through the exchange 
     of such policy for another policy that would have an account 
     value or otherwise. The 10-or-more employer plan exception is 
     no longer available with respect to plans that provide 
     supplemental unemployment compensation, severance pay, or 
     life insurance (other than qualifying group-term life 
     insurance) benefits. Thus, the generally applicable deduction 
     limits (sections 419 and 419A) apply to plans providing these 
     benefits.
       In addition, if any portion of a welfare benefit fund 
     attributable to contributions that are deductible pursuant to 
     the 10-or-more employer exception (and earnings thereon) is 
     used for a purpose other than for providing medical benefits, 
     disability benefits, or qualifying group-term life insurance 
     benefits to plan beneficiaries, such portion is treated as 
     reverting to the benefit of the employers maintaining the 
     fund and is subject to the imposition of the 100-percent 
     excise tax. Thus, for example, cash payments to employees 
     upon termination of the fund, and loans or other 
     distributions to the employee or employer, would be treated 
     as giving rise to a reversion that is subject to the excise 
     tax.
       The legislative history indicates that no inference is 
     intended with respect to the validity of any 10-or-more 
     employer arrangement under the provisions of present law.
       Effective date.--The House bill is effective with respect 
     to contributions paid or accrued on or after June 9, 1999, in 
     taxable years ending after such date.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     the Senate amendment states that group-term life insurance 
     benefits that qualify for the 10-or-more employer exception 
     are group-term life insurance benefits that 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. In addition, the legislative history 
     indicates that it is intended that group-term life insurance 
     benefits do not fail to be qualifying group-term life 
     insurance benefits solely as a result of the inclusion of de 
     minimis ancillary benefits, as described in Treasury 
     regulations.
       Effective date.--The effective date of the Senate amendment 
     is the same as the effective date of the House bill.

                          Conference Agreement

       The conference agreement follows the Senate amendment. It 
     is intended that group-term life insurance benefits do not 
     fail to be qualifying group-term life insurance benefits 
     solely as a result of the inclusion of de minimis ancillary 
     benefits, as described in Treasury regulations under the 
     provision.

[[Page 19717]]



  D. Increase Elective Withholding Rate for Nonperiodic Distributions 
 from Deferred Compensation Plans (sec. 1504 of the bill and sec. 3405 
                              of the Code)

                              Present Law

       Present law provides that income tax withholding is 
     required on designated distributions from employer 
     compensation plans (whether or not such plans are tax 
     qualified), individual retirement arrangements (``IRAs''), 
     and commercial annuities unless the payee elects not to have 
     withholding apply. A designated distribution does not include 
     any payment (1) that is wages, (2) the portion of which it is 
     reasonable to believe is not includible in gross income,\78\ 
     (3) that is subject to withholding of tax on nonresident 
     aliens and foreign corporations (or would be subject to such 
     withholding but for a tax treaty), or (4) that is a dividend 
     paid on certain employer securities (as defined in sec. 
     404(k)(2)).
---------------------------------------------------------------------------
     \78\ All IRA distributions are treated as if includible in 
     income for purposes of this rule. A technical correction 
     contained in the bill modifies this rule in the case of Roth 
     IRAs.
---------------------------------------------------------------------------
       Tax is generally withheld on the taxable portion of any 
     periodic payment as if the payment is wages to the payee. A 
     periodic payment is a designated distribution that is an 
     annuity or similar periodic payment.
       In the case of a nonperiodic distribution, tax generally is 
     withheld at a flat 10-percent rate unless the payee makes an 
     election not to have withholding apply. A nonperiodic 
     distribution is any distribution that is not a periodic 
     distribution. Under current administrative rules, an 
     individual receiving a nonperiodic distribution can designate 
     an amount to be withheld in addition to the 10-percent 
     otherwise required to be withheld.
       Under present law, in the case of a nonperiodic 
     distribution that is an eligible rollover distribution, tax 
     is withheld at a 20-percent rate unless the payee elects to 
     have the distribution rolled directly over to an eligible 
     retirement plan (i.e., an IRA, a qualified plan (sec. 401(a)) 
     that is a defined contribution plan permitting direct 
     deposits of rollover contributions, or a qualified annuity 
     plan (sec. 403(a)). In general, an eligible rollover 
     distribution includes any distribution to an employee of all 
     or any portion of the balance to the credit of the employee 
     in a qualified plan or qualified annuity plan. An eligible 
     rollover distribution does not include any distribution that 
     is part of a series of substantially equal periodic payments 
     made (1) for the life (or life expectancy) of the employee or 
     for the joint lives (or joint life expectancies) of the 
     employee and the employee's designated beneficiary, or (2) 
     over a specified period of 10 years or more. An eligible 
     rollover distribution also does not include any distribution 
     required under the minimum distribution rules of section 
     401(a)(9), hardship distributions from section 401(k) plans, 
     or the portion of a distribution that is not includible in 
     income. The payee of an eligible rollover distribution can 
     only elect not to have withholding apply by making the direct 
     rollover election.

                               House Bill

       Under the bill, the withholding rate for nonperiodic 
     distributions would be increased from 10 percent to 15 
     percent. As under present law, unless the distribution is an 
     eligible rollover distribution, the payee could elect not to 
     have withholding apply. The bill does not modify the 20-
     percent withholding rate that applies to any distribution 
     that is an eligible rollover distribution.
       Effective date.--The provision is effective for 
     distributions made after December 31, 1999.

                            Senate Amendment

       The provision is the same as the House bill.
       Effective date.--Distributions made after December 31, 
     2000.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

E. Modify Treatment of Closely-Held REITs (sec. 1505 of the House bill, 
      sec. 1320 of the Senate amendment, and sec. 856 of the Code)

                              Present Law

       In general, a real estate investment trust (``REIT'') is an 
     entity that receives most of its income from passive real 
     estate related investments and that receives pass-through 
     treatment for income that is distributed to shareholders. If 
     an electing entity meets the qualifications for REIT status, 
     the portion of its income that is distributed to the 
     investors each year generally is taxed to the investors 
     without being subjected to tax at the REIT level.
       A REIT must satisfy a number of tests on a year-by-year 
     basis that relate to the entity's: (1) organizational 
     structure; (2) source of income; (3) nature of assets; and 
     (4) distribution of income.
       Under the organizational structure test, except for the 
     first taxable year for which an entity elects to be a REIT, 
     the beneficial ownership of the entity must be held by 100 or 
     more persons. Generally, no more than 50 percent of the value 
     of the REIT's stock can be owned by five or fewer individuals 
     during the last half of the taxable year. Certain attribution 
     rules apply in making this determination. No similar rule 
     applies to corporate ownership of a REIT. Certain 
     transactions have been structured to attempt to achieve 
     special tax benefits for an entity that controls a REIT.

                               House Bill

       The House bill provision imposes as an additional 
     requirement for REIT qualification that, except for the first 
     taxable year for which an entity elects to be a REIT, no one 
     person can own stock of a REIT possessing 50 percent or more 
     of the combined voting power of all classes of voting stock 
     or 50 percent or more of the total value of shares of all 
     classes of stock of the REIT. For purposes of determining a 
     person's stock ownership, rules similar to attribution rules 
     for REIT independent contractor qualification under present 
     law apply (secs. 856(d)(5) and 856(h)(3)). The provision does 
     not apply to ownership by a REIT of 50 percent or more of the 
     stock (vote or value) of another REIT.
       An exception applies for a limited period to certain 
     ``incubator REITs''. An incubator REIT is a corporation that 
     elects to be treated as an incubator REIT and that meets all 
     the following other requirements. (1) it has only voting 
     common stock outstanding, (2) not more than 50 percent of the 
     corporation's real estate assets consist of mortgages, (3) 
     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, (4) the 
     directors of the corporation must adopt a resolution setting 
     forth an intent to engage in a going public transaction, and 
     (5) no predecessor entity (including any entity from which 
     the electing incubator REIT acquired assets in a transaction 
     in which gain or loss was not recognized in whole or in part) 
     had elected incubator REIT status.
       The new ownership requirement does not apply to an electing 
     incubator REIT until the end of the REIT's third taxable 
     year; and can be extended for an additional two taxable years 
     if the REIT so elects. However, a REIT cannot elect the 
     additional two year extension unless the REIT agrees 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 two years of the extended period as if 
     it had not made an incubator REIT election and had ceased to 
     qualify as a REIT for those two taxable years. In such case, 
     the corporation shall file appropriate amended returns within 
     3 months of the close of the extended eligibility period. 
     Interest would be payable, but no substantial underpayment 
     penalties would apply except in cases where there is a 
     finding that incubator REIT status was elected for a 
     principal purpose other than as part of a reasonable plan to 
     engage in a going public transaction. Notification of 
     shareholders and any other person whose tax position would 
     reasonably be expected to be affected is also required.
       If an electing incubator REIT does not elect to extend its 
     initial 2-year extended eligibility period and has not 
     engaged in a going public transaction by the end of such 
     period, it must satisfy the new control requirements as of 
     the beginning of its fourth taxable year (i.e., immediately 
     after the close of the last taxable year of the two-year 
     initial extension period) or it will be required to notify 
     its shareholders and other persons that may be affected by 
     its tax status, and pay Federal income tax as a corporation 
     that has ceased to qualify as a REIT at that time.
       If the Secretary of the Treasury 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 is imposed on 
     each of the corporation's directors for each taxable year for 
     which the election was in effect.
       A going public transaction is defined as either (1) a 
     public offering of shares of stock of the incubator REIT, (2) 
     a transaction, or series of transactions, that result in the 
     incubator REIT stock being regularly traded on an established 
     securities market (as defined in section 897) and being held 
     by shareholders unrelated to persons who held such stock 
     before it began to be so regularly traded, or (3) any 
     transaction resulting in ownership of the REIT by 200 or more 
     persons (excluding the largest single shareholder) who in the 
     aggregate own least 50 percent of the stock of the REIT. 
     Attribution rules apply in determining ownership of stock.
       Effective date.--The provision is effective for taxable 
     years ending after July 12, 1999. Any entity that elects (or 
     has elected) REIT status for a taxable year including July 
     12, 1999, and which is both a controlled entity and has 
     significant business assets or activities on such date, will 
     not be subject to the proposal. Under this rule, a controlled 
     entity with significant business assets or activities on July 
     14, 1999, can be grandfathered even if it makes its first 
     REIT election after that date with its return for the taxable 
     year including that date.
       For purposes of the transition rules, the significant 
     business assets or activities in place on July 12, 1999, must 
     be real estate assets and activities of a type that would be 
     qualified real estate assets and would

[[Page 19718]]

     produce qualified real estate related income for a REIT.

                            Senate Amendment

       The Senate amendment is the same as the House bill except 
     that the Senate amendment contains an additional 
     qualification for incubator REIT status, namely, that the 
     corporation must annually increase the value of real estate 
     assets by at least 10 percent,
       For purposes of determining whether a corporation has met 
     the requirement that it annually increase the value of its 
     real estate assets by 10 percent, the following rules shall 
     apply. First, values shall be based on cost and properly 
     capitalizable expenditures with no adjustment for 
     depreciation. Second, the test shall be applied by comparing 
     the value of assets at the end of the first taxable year with 
     those at the end of the second taxable year and by similar 
     successive taxable year comparisons during the eligibility 
     period. Third, if a corporation fails the 10 percent 
     comparison test for one taxable year, it may remedy the 
     failure by increasing the value of real estate assets by 25 
     percent in the following taxable year, provided it meets all 
     the other eligibility period requirements in that following 
     taxable year.
       Effective date.--The effective date of the Senate amendment 
     is the same as the House bill except that the Senate 
     amendment substitutes the date July 14, 1999 for the date 
     July 12, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     a modification in the attribution rules so that once stock is 
     deemed owned by a qualified entity (a REIT or a partnership 
     of which a REIT is at least a 50 percent partner) it will not 
     be reattributed under section 318(a)(3)(C).
       Effective date.--The effective date is the same as that of 
     the Senate amendment.

F. Limit Conversion of Character of Income from Constructive Ownership 
  Transactions (sec. 1506 of the House bill, sec. 1314 of the Senate 
               amendment, and new sec. 1260 of the Code)

                              Present Law

       The maximum individual income tax rate on ordinary income 
     and short-term capital gain is 39.6 percent, while the 
     maximum individual income tax rate on long-term capital gain 
     generally is 20 percent. Long-term capital gain means gain 
     from the sale or exchange of a capital asset held more than 
     one year. For this purpose, gain from the termination of a 
     right with respect to property that would be a capital asset 
     in the hands of the taxpayer is treated as capital gain.\79\
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     \79\ Section 1234A, as amended by the Taxpayer Relief Act of 
     1997.
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       A pass-thru entity (such as a partnership) generally is not 
     subject to Federal income tax. Rather, each owner includes 
     its share of a pass-thru entity's income, gain, loss, 
     deduction or credit in its taxable income. Generally, the 
     character of the item is determined at the entity level and 
     flows through to the owners. Thus, for example, the treatment 
     of an item of income by a partnership as ordinary income, 
     short-term capital gain, or long-term capital gain retains 
     its character when reported by each of the partners.
       Investors may enter into forward contracts, notional 
     principal contracts, and other similar arrangements with 
     respect to property that provides the investor with the same 
     or similar economic benefits as owning the property directly 
     but with potentially different tax consequences (as to the 
     character and timing of any gain).

                               House Bill

       The House bill limits the amount of long-term capital gain 
     a taxpayer could recognize from certain derivative contracts 
     (``constructive ownership transaction'') with respect to 
     certain financial assets. The amount of long-term capital 
     gain is limited to the amount of such gain the taxpayer would 
     have had if the taxpayer held the asset directly during the 
     term of the derivative contract. Any gain in excess of this 
     amount is treated as ordinary income. An interest charge is 
     imposed on the amount of gain that is treated as ordinary 
     income. The House bill does not alter the tax treatment of 
     the long-term capital gain that is not treated as ordinary 
     income.
       A taxpayer is treated as having entered into a constructive 
     ownership transaction if the taxpayer (1) holds a long 
     position under a notional principal contract with respect to 
     the financial asset, (2) enters into a forward contract to 
     acquire the financial asset, (3) is the holder of a call 
     option, and the grantor of a put option, with respect to a 
     financial asset, and the options have substantially equal 
     strike prices and substantially contemporaneous maturity 
     dates, or (4) to the extent provided in regulations, enters 
     into one or more transactions, or acquires one or more other 
     positions, that have substantially the same effect as any of 
     the transactions described. The House bill anticipates that 
     Treasury regulations, when issued, will provide specific 
     standards for determining when other types of financial 
     transactions, like those specified in the provision, have the 
     effect of replicating the economic benefits of direct 
     ownership of a financial asset (and will be treated as a 
     constructive ownership transaction).
       A ``financial asset'' is defined as (1) any equity interest 
     in a pass-thru entity, and (2) to the extent provided in 
     regulations, any debt instrument and any stock in a 
     corporation that is not a pass-thru entity. A ``pass-thru 
     entity'' refers to (1) a regulated investment company, (2) a 
     real estate investment trust, (3) an S corporation, (4) a 
     partnership, (5) a trust, (6) a common trust fund, (7) a 
     passive foreign investment company, (8) a foreign personal 
     holding company, and (9) a foreign investment company.
       The amount of recharacterized gain is calculated as the 
     excess of the amount of long-term gain the taxpayer would 
     have had absent this provision over the ``net underlying 
     long-term capital gain'' attributable to the financial asset. 
     The net underlying long-term capital gain is the amount of 
     net capital gain the taxpayer would have realized if it had 
     acquired the financial asset for its fair market value on the 
     date the constructive ownership transaction was opened and 
     sold the financial asset on the date the transaction was 
     closed (only taking into account gains and losses that would 
     have resulted from the constructive ownership of the 
     financial asset).\80\ The long-term capital gains rate on the 
     net underlying long-term capital gain is determined by 
     reference to the individual capital gains rates in section 
     1(h).
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     \80\ A taxpayer must establish the amount of the net 
     underlying long-term capital gain with clear and convincing 
     evidence; otherwise, the amount is deemed to be zero.
---------------------------------------------------------------------------
       An interest charge is imposed on the underpayment of tax 
     for each year that the constructive ownership transaction was 
     open. The interest charge is the amount of interest that 
     would be imposed under section 6601 had the recharacterized 
     gain been included in the taxpayer's gross income during the 
     term of the constructive ownership transaction. The 
     recharacterized gain is treated as having accrued such that 
     the gain in each successive year is equal to the gain in the 
     prior year increased by a constant growth rate \81\ during 
     the term of the constructive ownership transaction.
---------------------------------------------------------------------------
     \81\ The accrual rate is the applicable Federal rate on the 
     day the transaction closed.
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       A taxpayer is treated as holding a long position under a 
     notional principal contract with respect to a financial asset 
     if the person (1) has the right to be paid (or receive credit 
     for) all or substantially all of the investment yield 
     (including appreciation) on the financial asset for a 
     specified period, and (2) is obligated to reimburse (or 
     provide credit) for all or substantially all of any decline 
     in the value of the financial asset. A forward contract is a 
     contract to acquire in the future (or provide or receive 
     credit for the future value of) any financial asset.
       If the constructive ownership transaction is closed by 
     reason of taking delivery of the underlying financial asset, 
     the taxpayer is treated as having sold the contracts, 
     options, or other positions that are part of the transaction 
     for its fair market value on the closing date. However, the 
     amount of gain that is recognized as a result of having taken 
     delivery is limited to the amount of gain that is treated as 
     ordinary income by reason of this provision (with appropriate 
     basis adjustments for such gain).
       The provision does not apply to any constructive ownership 
     transaction if all of the positions that are part of the 
     transaction are marked to market under the Code or 
     regulations. The provision also does not apply to 
     transactions entered into by tax-exempt organizations and 
     foreign taxpayers.
       The Treasury Department is authorized to prescribe 
     regulations as necessary to carry out the purposes of the 
     provision, including to (1) permit taxpayers to mark to 
     market constructive ownership transactions in lieu of the 
     provision, and (2) exclude certain forward contracts that do 
     not convey substantially all of the economic return with 
     respect to a financial asset.
       Effective date.--The provision applies to transactions 
     entered into on or after July 12, 1999.

                            Senate Amendment

       The Senate amendment is the same as the House bill with 
     some modifications. The Senate amendment modifies the 
     definition of a ``pass-thru entity'' to include (1) a real 
     estate mortgage investment conduit and (2) a passive foreign 
     investment company that is also a controlled foreign 
     corporation. The Committee report clarifies (1) the types of 
     financial transactions that, under Treasury regulations, are 
     expected to have substantially the same effect as those 
     specified in the provision, and (2) the determination of the 
     amount of any net underlying long-term capital gain. The 
     Committee report further provides that no inference is 
     intended as to the proper treatment of a constructive 
     ownership transaction entered into prior to the effective 
     date of the provision.
       Effective date.--The provision applies to transactions 
     entered into on or after July 12, 1999. It is intended that a 
     contract, option or any other arrangement that is entered 
     into or exercised on or after July 12, 1999 which extends or 
     otherwise modifies the terms of a transaction entered into 
     prior to such date is treated as a transaction entered into 
     on or after July 12, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

[[Page 19719]]


     G. Treatment of Excess Pension Assets Used for Retiree Health 
         Benefits (sec. 1507 of the House bill, sec. 1305 of the 
         Senate amendment, sec. 420 of the Code, and secs. 101, 
         403, and 408 of ERISA)
     Present Law
       Defined benefit pension plan assets generally may not 
     revert to an employer prior to the termination of the plan 
     and the satisfaction of all plan liabilities. A reversion 
     prior to plan termination may constitute a prohibited 
     transaction and may result in disqualification of the plan. 
     Certain limitations and procedural requirements apply to a 
     reversion upon plan termination. Any assets that revert to 
     the employer upon plan termination are includible in the 
     gross income of the employer and subject to an excise tax. 
     The excise tax rate, which may be as high as 50 percent of 
     the reversion, varies depending upon whether or not the 
     employer maintains a replacement plan or makes certain 
     benefit increases. Upon plan termination, the accrued 
     benefits of all plan participants are required to be 100-
     percent vested.
       A pension plan may provide medical benefits to retired 
     employees through a section 401(h) account that is a part of 
     such plan. A qualified transfer of excess assets of a defined 
     benefit pension plan (other than a multiemployer plan) into a 
     section 401(h) account that is a part of such plan does not 
     result in plan disqualification and is not treated as a 
     reversion to the employer or a prohibited transaction. 
     Therefore, the transferred assets are not includible in the 
     gross income of the employer and are not subject to the 
     excise tax on reversions.
       Qualified transfers are subject to amount and frequency 
     limitations, use requirements, deduction limitations, vesting 
     requirements and minimum benefit requirements. Excess assets 
     transferred in a qualified transfer may not exceed the amount 
     reasonably estimated to be the amount that the employer will 
     pay out of such account during the taxable year of the 
     transfer for qualified current retiree health liabilities. No 
     more than one qualified transfer with respect to any plan may 
     occur in any taxable year.
       The transferred assets (and any income thereon) must be 
     used to pay qualified current retiree health liabilities 
     (either directly or through reimbursement) for the taxable 
     year of the transfer. Transferred amounts generally must 
     benefit all pension plan participants, other than key 
     employees, who are entitled upon retirement to receive 
     retiree medical benefits through the section 401(h) account. 
     Retiree health benefits of key employees may not be paid 
     (directly or indirectly) out of transferred assets. Amounts 
     not used to pay qualified current retiree health liabilities 
     for the taxable year of the transfer are to be returned at 
     the end of the taxable year to the general assets of the 
     plan. These amounts are not includible in the gross income of 
     the employer, but are treated as an employer reversion and 
     are subject to a 20-percent excise tax.
       No deduction is allowed for (1) a qualified transfer of 
     excess pension assets into a section 401(h) account, (2) the 
     payment of qualified current retiree health liabilities out 
     of transferred assets (and any income thereon) or (3) a 
     return of amounts not used to pay qualified current retiree 
     health liabilities to the general assets of the pension plan.
       In order for the transfer to be qualified, accrued 
     retirement benefits under the pension plan generally must be 
     100-percent vested as if the plan terminated immediately 
     before the transfer.
       The minimum benefit requirement requires each group health 
     plan under which applicable heath benefits are provided to 
     provide substantially the same level of applicable health 
     benefits for the taxable year of the transfer and the 
     following 4 taxable years. The level of benefits that must be 
     maintained is based on benefits provided in the year 
     immediately preceding the taxable year of the transfer. 
     Applicable health benefits are health benefits or coverage 
     that are provided to (1) retirees who, immediately before the 
     transfer, are entitled to receive such benefits upon 
     retirement and who are entitled to pension benefits under the 
     plan and (2) the spouses and dependents of such retirees.
       The provision permitting a qualified transfer of excess 
     pension assets to pay qualified current retiree health 
     liabilities expires for taxable years beginning after 
     December 31, 2000.\87\
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     \82\ Title I of the Employee Retirement Income Security Act 
     of 1974, as amended (``ERISA''), provides that plan 
     participants, the Secretaries of Treasury and the Department 
     of Labor, the plan administrator, and each employee 
     organization representing plan participants must be notified 
     60 days before a qualified transfer of excess assets to a 
     retiree health benefits account occurs (ERISA sec. 103(e)). 
     ERISA also provides that a qualified transfer is not a 
     prohibited transaction under ERISA (ERISA sec. 408(b)(13)) or 
     a prohibited reversion of assets to the employer (ERISA sec. 
     403(c)(1)). For purposes of these provisions, a qualified 
     transfer is generally defined as a transfer pursuant to 
     section 420 of the Internal Revenue Code, as in effect on 
     January 1, 1995.
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     House Bill
       The present-law provision permitting qualified transfers of 
     excess defined benefit pension plan assets to provide retiree 
     health benefits under a section 401(h) account is extended 
     through September 30, 2009. In addition, the present-law 
     minimum benefit requirement is replaced by the minimum cost 
     requirement that applied to qualified transfers before 
     December 9, 1994, to section 401(h) accounts. Therefore, each 
     group health plan or arrangement under which applicable 
     health benefits are provided is required to provide a minimum 
     dollar level of retiree health expenditures for the taxable 
     year of the transfer and the following 4 taxable years. The 
     minimum dollar level is the higher of the applicable employer 
     costs for each of the 2 taxable years immediately preceding 
     the taxable year of the transfer. The applicable employer 
     cost for a taxable year is determined by dividing the 
     employer's qualified current retiree health liabilities by 
     the number of individuals to whom coverage for applicable 
     health benefits was provided during the taxable year.
       Effective date.--The House bill is effective with respect 
     to qualified transfers of excess defined benefit pension plan 
     assets to section 401(h) accounts after December 31, 2000, 
     and before October 1, 2009. The modification of the minimum 
     benefit requirement is effective with respect to transfers 
     after the date of enactment.

                            Senate Amendment

       The Senate amendment is the same as the House bill.\88\
---------------------------------------------------------------------------
     \83\ The Senate amendment modifies the corresponding 
     provisions of ERISA.
---------------------------------------------------------------------------
       Effective date.--Same as the House bill, except that the 
     modification of the minimum benefit requirement is effective 
     with respect to transfers after the date of enactment. In 
     addition, the Senate amendment contains a transition rule 
     regarding the minimum cost requirement. Under this rule, an 
     employer must satisfy the minimum benefit requirement with 
     respect to a qualified transfer that occurs after the date of 
     enactment during the portion of the cost maintenance period 
     of such transfer that overlaps the benefit maintenance period 
     of a qualified transfer that occurs on or before the date of 
     enactment. For example, suppose an employer (with a calendar 
     year taxable year) made a qualified transfer in 1998. The 
     minimum benefit requirement must be satisfied for calendar 
     years 1998, 1999, 2000, 2001, and 2002. Suppose the employer 
     also makes a qualified transfer in 2000. Then, the employer 
     is required to satisfy the minimum benefit requirement in 
     2000, 2001, and 2002, and is required to satisfy the minimum 
     cost requirement in 2003 and 2004.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

  H. Modify Installment Method and Prohibit its Use by Accrual Method 
    Taxpayers (sec. 1508 of the House bill, sec. 1313 of the Senate 
             amendment, and secs. 453 and 453A of the Code)

                              Present Law

       An accrual method taxpayer is generally required to 
     recognize income when all the events have occurred that fix 
     the right to the receipt of the income and the amount of the 
     income can be determined with reasonable accuracy. The 
     installment method of accounting provides an exception to 
     this general principle of income recognition by allowing a 
     taxpayer to defer the recognition of income from the 
     disposition of certain property until payment is received. 
     Sales to customers in the ordinary course of business are not 
     eligible for the installment method, except for sales of 
     property that is used or produced in the trade or business of 
     farming and sales of timeshares and residential lots if an 
     election to pay interest under section 453(l)(2)(B)) is made.
       A pledge rule provides that if an installment obligation is 
     pledged as security for any indebtedness, the net proceeds 
     \89\ of such indebtedness are treated as a payment on the 
     obligation, triggering the recognition of income. Actual 
     payments received on the installment obligation subsequent to 
     the receipt of the loan proceeds are not taken into account 
     until such subsequent payments exceed the loan proceeds that 
     were treated as payments. The pledge rule does not apply to 
     sales of property used or produced in the trade or business 
     of farming, to sales of timeshares and residential lots where 
     the taxpayer elects to pay interest under section 
     453(l)(2)(B), or to dispositions where the sales price does 
     not exceed $150,000.
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     \84\ The net proceeds equal the gross loan proceeds less the 
     direct expenses of obtaining the loan.
---------------------------------------------------------------------------
       An additional rule requires the payment of interest on the 
     deferred tax that is attributable to most large installment 
     sales.

                               House Bill

     Prohibition on the use of the installment method for accrual 
         method dispositions
       The provision generally prohibits the use of the 
     installment method of accounting for dispositions of property 
     that would otherwise be reported for Federal income tax 
     purposes using an accrual method of accounting. The provision 
     does not change present law regarding the availability of the 
     installment method for dispositions of property used or 
     produced in the trade or business of farming. The provision 
     also does not change present law regarding the availability 
     of the installment method for dispositions of timeshares or 
     residential lots if the taxpayer elects to pay interest under 
     section 453(l).

[[Page 19720]]

       The provision does not change the ability of a cash method 
     taxpayer to use the installment method. For example, a cash 
     method individual owns all of the stock of a closely held 
     accrual method corporation. This individual sells his stock 
     for cash, a ten year note, and a percentage of the gross 
     revenues of the company for next ten years. The provision 
     would not change the ability of this individual to use the 
     installment method in reporting the gain on the sale of the 
     stock.
     Modifications to the pledge rule
       The provision modifies the pledge rule to provide that 
     entering into any arrangement that gives the taxpayer the 
     right to satisfy an obligation with an installment note will 
     be treated in the same manner as the direct pledge of the 
     installment note. For example, a taxpayer disposes of 
     property for an installment note. The disposition is properly 
     reported using the installment method. The taxpayer only 
     recognizes gain as it receives the deferred payment. However, 
     were the taxpayer to pledge the installment note as security 
     for a loan, it would be required to treat the proceeds of 
     such loan as a payment on the installment note, and recognize 
     the appropriate amount of gain. Under the provision, the 
     taxpayer would also be required to treat the proceeds of a 
     loan as payment on the installment note to the extent the 
     taxpayer had the right to ``put'' or repay the loan by 
     transferring the installment note to the taxpayer's creditor. 
     Other arrangements that have a similar effect would be 
     treated in the same manner.
       The modification of the pledge rule applies only to 
     installment sales where the pledge rule of present law 
     applies. Accordingly, the provision does not apply to 
     installment method sales made by a dealer in timeshares and 
     residential lots where the taxpayer elects to pay interest 
     under section 453(l)(2)(B), to sales of property used or 
     produced in the trade or business of farming, or to 
     dispositions where the sales price does not exceed $150,000, 
     since such sales are not subject to the pledge rule under 
     present law.
       Effective Date.--The provision of the House bill is 
     effective for sales or other dispositions entered into on or 
     after the date of enactment.

                            Senate Amendment

       Same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     I. Limitation on the Use of Non-accrual Experience Method of 
         Accounting (sec. 1509 of the House bill, sec. 1311 of the 
         Senate amendment, and sec. 448 of the Code)

                              Present Law

       An accrual method taxpayer generally must recognize income 
     when all the events have occurred that fix the right to 
     receive the income and the amount of the income can be 
     determined with reasonable accuracy. An accrual method 
     taxpayer may deduct the amount of any receivable that was 
     previously included in income that becomes worthless during 
     the year.
       Accrual method taxpayers are not required to include in 
     income amounts to be received for the performance of services 
     which, on the basis of experience, will not be collected (the 
     ``non-accrual experience method''). The availability of this 
     method is conditioned on the taxpayer not charging interest 
     or a penalty for failure to timely pay the amount charged.
       A cash method taxpayer is not required to include an amount 
     in income until it is received. A taxpayer generally may not 
     use the cash method if purchase, production, or sale of 
     merchandise is an income producing factor. Such taxpayers 
     generally are required to keep inventories and use an accrual 
     method of accounting. In addition, corporations (and 
     partnerships with corporate partners) generally may not use 
     the cash method of accounting if their average annual gross 
     receipts exceed $5 million. An exception to this $5 million 
     rule is provided for qualified personal service corporations. 
     A qualified personal service corporation is a corporation (1) 
     substantially all of whose activities involve the performance 
     of services in the fields of health, law, engineering, 
     architecture, accounting, actuarial science, performing arts 
     or consulting and (2) substantially all of the stock of which 
     is owned by current or former employees performing such 
     services, their estates or heirs. Qualified personal service 
     corporations are allowed to use the cash method without 
     regard to whether their average annual gross receipts exceed 
     $5 million.

                               House Bill

       The House bill provides that the non-accrual experience 
     method will be available only for amounts to be received for 
     the performance of qualified personal services. Amounts to be 
     received for the performance of all other services will be 
     subject to the general rule regarding inclusion in income. 
     Qualified personal services are personal services in the 
     fields of health, law, engineering, architecture, accounting, 
     actuarial science, performing arts or consulting. As under 
     present law, the availability of the method is conditioned on 
     the taxpayer not charging interest or a penalty for failure 
     to timely pay the amount.
       Effective date.--The provision of the House bill is 
     effective for taxable years ending after the date of 
     enactment. Any change in the taxpayer's method of accounting 
     necessitated as a result of the proposal will be treated as a 
     voluntary change initiated by the taxpayer with the consent 
     of the Secretary of the Treasury. Any required section 481(a) 
     adjustment is to be taken into account over a period not to 
     exceed four years under principles consistent with those in 
     Rev. Proc. 98-60.\85\
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     \85\ 1998-51 I.R.B. 16.
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                            Senate Amendment

       The Senate amendment is the same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

    J. Exclusion of Like-Kind Exchange Property from Nonrecognition 
 Treatment on the Sale or Exchange of a Principal Residence (sec. 1510 
              of the House bill and sec. 121 of the Code)

                              Present Law

       Under present law, a taxpayer may exclude up to $250,000 
     ($500,000 if married filing a joint return) of gain realized 
     on the sale or exchange of a principal residence. To be 
     eligible for the exclusion, the taxpayer must have owned and 
     used the residence as a principal residence for at least two 
     of the five years prior to the sale or exchange. A taxpayer 
     who fails to meet these requirements by reason of a change of 
     place of employment, health, or, to the extent provided under 
     regulations, unforeseen circumstances is able to exclude an 
     amount equal to the fraction of the $250,000 ($500,000 if 
     married filing a joint return) that is equal to the fraction 
     of the two years that the ownership and use requirements are 
     met. There are no special rules relating to the sale or 
     exchange of a principal residence that was acquired in a 
     like-kind exchange within the prior five years.

                               House Bill

       The House bill denies the principal residence exclusion 
     (sec. 121) for gain on the sale or exchange of a principal 
     residence if such principal residence was acquired in a like-
     kind exchange in which any gain was not recognized within the 
     prior five years.
       Effective date.--The House bill provision is effective for 
     sales or exchanges of principal residences after the date of 
     enactment.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

K. Denial of Charitable Contribution Deduction for Transfers Associated 
with Split-Dollar Insurance Arrangements (sec. 1003 of the House bill, 
sec. 1315 of the Senate amendment, and new sec. 501(c)(28) of the Code)

                              Present Law

       Under present law, in computing taxable income, a taxpayer 
     who itemizes deductions generally is allowed to deduct 
     charitable contributions paid during the taxable year. The 
     amount of the deduction allowable for a taxable year with 
     respect to any charitable contribution depends on the type of 
     property contributed, the type of organization to which the 
     property is contributed, and the income of the taxpayer 
     (secs. 170(b) and 170(e)). A charitable contribution is 
     defined to mean a contribution or gift to or for the use of a 
     charitable organization or certain other entities (sec. 
     170(c)). The term ``contribution or gift'' is not defined by 
     statute, but generally is interpreted to mean a voluntary 
     transfer of money or other property without receipt of 
     adequate consideration and with donative intent. If a 
     taxpayer receives or expects to receive a quid pro quo in 
     exchange for a transfer to charity, the taxpayer may be able 
     to deduct the excess of the amount transferred over the fair 
     market value of any benefit received in return, provided the 
     excess payment is made with the intention of making a 
     gift.\86\
---------------------------------------------------------------------------
     \86\ United States v. American Bar Endowment, 477 U.S. 105 
     (1986). Treas. Reg. sec. 1.170A-1(h).
---------------------------------------------------------------------------
       In general, no charitable contribution deduction is allowed 
     for a transfer to charity of less than the taxpayer's entire 
     interest (i.e., a partial interest) in any property (sec. 
     170(f)(3)). In addition, no deduction is allowed for any 
     contribution of $250 or more unless the taxpayer obtains a 
     contemporaneous written acknowledgment from the donee 
     organization that includes a description and good faith 
     estimate of the value of any goods or services provided by 
     the donee organization to the taxpayer in consideration, 
     whole or part, for the taxpayer's contribution (sec. 
     170(f)(8)).

                               House Bill

     Deduction denial
       The House bill provision \87\ restates present law to 
     provide that no charitable contribution deduction is allowed 
     for purposes of Federal tax, for a transfer to or for the use 
     of an organization described in section 170(c) of the 
     Internal Revenue Code, if in connection with the transfer (1) 
     the organization directly or indirectly pays, or has 
     previously

[[Page 19721]]

     paid, any premium on any ``personal benefit contract'' with 
     respect to the transferor, or (2) 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. It is intended that an 
     organization be considered as indirectly paying premiums if, 
     for example, another person pays premiums on its behalf.
---------------------------------------------------------------------------
     \87\ The provision is similar to H.R. 630, introduced by Mr. 
     Archer and Mr. Rangel (106th Cong., 1st Sess.).
---------------------------------------------------------------------------
       A personal benefit contract with respect to the transferor 
     is any life insurance, annuity, or endowment contract, if any 
     direct or indirect beneficiary under the contract is the 
     transferor, any member of the transferor's family, or any 
     other person (other than a section 170(c) organization) 
     designated by the transferor. For example, such a beneficiary 
     would include a trust having a direct or indirect beneficiary 
     who is the transferor or any member of the transferor's 
     family, and would include an entity that is controlled by the 
     transferor or any member of the transferor's family. It is 
     intended that a beneficiary under the contract include any 
     beneficiary under any side agreement relating to the 
     contract. If a transferor contributes a life insurance 
     contract to a section 170(c) organization and designates one 
     or more section 170(c) organizations as the sole 
     beneficiaries under the contract, generally, it is not 
     intended that the deduction denial rule under the provision 
     apply. If, however, there is an outstanding loan under the 
     contract upon the transfer of the contract, then the 
     transferor is considered as a beneficiary. The fact that a 
     contract also has other direct or indirect beneficiaries 
     (persons who are not the transferor or a family member, or 
     designated by the transferor) does not prevent it from being 
     a personal benefit contract. The provision is not intended to 
     affect situations in which an organization pays premiums 
     under a legitimate fringe benefit plan for employees.
       It is intended that a person be considered as an indirect 
     beneficiary under a contract if, for example, the person 
     receives or will receive any economic benefit as a result of 
     amounts paid under or with respect to the contract. For this 
     purpose, as described below, an indirect beneficiary is not 
     intended to include a person that benefits exclusively under 
     a bona fide charitable gift annuity (within the meaning of 
     sec. 501(m)).
       In the case of a charitable gift annuity, if the charitable 
     organization purchases an annuity contract issued by an 
     insurance company to fund its obligation to pay the 
     charitable gift annuity, a person receiving payments under 
     the charitable gift annuity is not treated as an indirect 
     beneficiary, provided certain requirements are met. The 
     requirements are that (1) the charitable organization possess 
     all of the incidents of ownership (within the meaning of 
     Treas. Reg. sec. 20.2042-1(c)) under the annuity contract 
     purchased by the charitable organization; (2) the charitable 
     organization be entitled to all the payments under the 
     contract; and (3) the timing and amount of payments under the 
     contract be substantially the same as the timing and amount 
     of payments to each person under the organization's 
     obligation under the charitable gift annuity (as in effect at 
     the time of the transfer to the charitable organization).
       Under the provision, an individual's family consists of the 
     individual's grandparents, the grandparents of the 
     individual's spouse, the lineal descendants of such 
     grandparents, and any spouse of such a lineal descendant.
       In the case of a charitable gift annuity obligation that is 
     issued under the laws of a State that requires, in order for 
     the charitable gift annuity to be exempt from insurance 
     regulation by that 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 that State, then the foregoing 
     requirements (1) and (2) are treated as if they are met, 
     provided that certain additional requirements are met. The 
     additional requirements are that the State law requirement 
     was in effect on February 8, 1999, each beneficiary under the 
     charitable gift annuity is a bona fide resident of the State 
     at the time the charitable gift annuity was issued, the only 
     persons entitled to payments under the annuity contract 
     issued by the insurance company are persons entitled to 
     payments under the charitable gift annuity when it was 
     issued, and (as required by clause (iii) of subparagraph (D) 
     of the provision) the timing and amount of payments under the 
     annuity contract to each person are substantially the same as 
     the timing and amount of payments to the person under the 
     charitable organization's obligation under the charitable 
     gift annuity (as in effect at the time of the transfer to the 
     charitable organization).
       In the case of a charitable remainder annuity trust or 
     charitable remainder unitrust (as defined in section 664(d)) 
     that holds a life insurance, endowment or annuity contract 
     issued by an insurance company, a person is not treated as an 
     indirect beneficiary under the contract held by the trust, 
     solely by reason of being a recipient of an annuity or 
     unitrust amount paid by the trust, provided that the trust 
     possesses all of the incidents of ownership under the 
     contract and is entitled to all the payments under such 
     contract. No inference is intended as to the applicability of 
     other provisions of the Code with respect to the acquisition 
     by the trust of a life insurance, endowment or annuity 
     contract, or the appropriateness of such an investment by a 
     charitable remainder trust.
       Nothing in the provision is intended to suggest that a life 
     insurance, endowment, or annuity contract would be a personal 
     benefit contract, solely because an individual who is a 
     recipient of an annuity or unitrust amount paid by a 
     charitable remainder annuity trust or charitable remainder 
     unitrust uses such a payment to purchase a life insurance, 
     endowment or annuity contract, and a beneficiary under the 
     contract is the recipient, a member of his or her family, or 
     another person he or she designates.
     Excise tax
       The provision imposes on any organization described in 
     section 170(c) of the Code an excise tax, equal to the amount 
     of the premiums paid by the organization on any life 
     insurance, annuity, or endowment contract, if the premiums 
     are paid in connection with a transfer for which a deduction 
     is not allowable under the deduction denial rule of the 
     provision (without regard to when the transfer to the 
     charitable organization was made). The excise tax does not 
     apply if all of the direct and indirect beneficiaries under 
     the contract (including any related side agreement) are 
     organizations described in section 170(c). Under the 
     provision, payments are treated as made by the organization, 
     if they are made by any other person pursuant to an 
     understanding or expectation of payment. The excise tax is to 
     be applied taking into account rules ordinarily applicable to 
     excise taxes in chapter 41 or 42 of the Code (e.g., statute 
     of limitation rules).
     Reporting
       The provision requires that the charitable organization 
     annually report the amount of premiums that is paid during 
     the year and that is subject to the excise tax imposed under 
     the provision, and the name and taxpayer identification 
     number of each beneficiary under the life insurance, annuity 
     or endowment contract to which the premiums relate, as well 
     as other information required by the Secretary of the 
     Treasury. For this purpose, it is intended that a beneficiary 
     include any beneficiary under any side agreement to which the 
     section 170(c) organization is a party (or of which it is 
     otherwise aware). Penalties applicable to returns required 
     under Code section 6033 apply to returns under this reporting 
     requirement. Returns required under this provision are to be 
     furnished at such time and in such manner as the Secretary 
     shall by forms or regulations require.
     Regulations
       The provision provides for the promulgation of regulations 
     necessary or appropriate to carry out the purposes of the 
     provisions, including regulations to prevent the avoidance of 
     the purposes of the provision. For example, it is intended 
     that regulations prevent avoidance of the purposes of the 
     provision by inappropriate or improper reliance on the 
     limited exceptions provided for certain beneficiaries under 
     bona fide charitable gift annuities and for certain 
     noncharitable recipients of an annuity or unitrust amount 
     paid by a charitable remainder trust.
     Effective date
       The deduction denial provision applies to transfers after 
     February 8, 1999 (as provided in H.R. 630). The excise tax 
     provision applies to premiums paid after the date of 
     enactment. The reporting provision applies to premiums paid 
     after February 8, 1999 (determined as if the excise tax 
     imposed under the provision applied to premiums paid after 
     that date).
       No inference is intended that a charitable contribution 
     deduction is allowed under present law with respect to a 
     charitable split-dollar insurance arrangement. The provision 
     does not change the rules with respect to fraud or criminal 
     or civil penalties under present law; thus, actions 
     constituting fraud or that are subject to penalties under 
     present law would still constitute fraud or be subject to the 
     penalties after enactment of the provision.

                            Senate Amendment

       Same as House bill.

                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.

 L. Modify Foreign Tax Credit Carryover Rules (sec. 1301 of the Senate 
                  amendment and sec. 904 of the Code)

                              Present Law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign-source income. The amount of foreign tax credits that 
     can be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S.-source income. Separate foreign tax credit 
     limitations are applied to specific categories of income.
       The amount of creditable taxes paid or accrued (or deemed 
     paid) in any taxable year which exceeds the foreign tax 
     credit limitation is permitted to be carried back two years 
     and forward five years. The amount carried over may be used 
     as a credit in a carryover year to the extent the taxpayer 
     otherwise has excess foreign tax credit limitation for such 
     year. The separate foreign tax credit limitations apply for 
     purposes of the carryover rules.

[[Page 19722]]



                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment reduces the carryback period for 
     excess foreign tax credits from two years to one year. The 
     Senate amendment also extends the excess foreign tax credit 
     carryforward period from five years to seven years.
       Effective date.--The provision applies to foreign tax 
     credits arising in taxable years beginning after December 31, 
     1999.

                          Conference Agreement

       The conference agreement does not include the provision in 
     the Senate amendment.

  M. Modify Estimated Tax Rules for Closely Held Reit Dividends (sec. 
        1316 of the Senate amendment and sec. 6655 of the Code)

                              Present Law

       If a person has a direct interest or a partnership interest 
     in income-producing assets (such as securities generally, or 
     mortgages) that produce income throughout the year, that 
     person's estimated tax payments must reflect the quarterly 
     amounts expected from the asset.
       However, a dividend distribution of earnings from a REIT is 
     considered for estimated tax purposes when the dividend is 
     paid. Some corporations have established closely held REITS 
     that hold property (e.g. mortgages) that if held directly by 
     the controlling entity would produce income throughout the 
     year. The REIT may make a single distribution for the year, 
     timed such that it need not be taken into account under the 
     estimated tax rules as early as would be the case if the 
     assets were directly held by the controlling entity. The 
     controlling entity thus defers the payment of estimated 
     taxes.

                               House Bill

       No provision.

                            Senate Amendment

       In the case of a REIT that is closely held, any person 
     owning at least 10 percent of the vote or value of the REIT 
     is required to accelerate the recognition of year-end 
     dividends attributable to the closely held REIT, for purposes 
     of such person's estimated tax payments. A closely held REIT 
     is defined as one in which at least 50 percent of the vote or 
     value is owed by five or fewer persons. Attribution rules 
     apply to determine ownership.
       No inference is intended regarding the treatment of any 
     transaction prior to the effective date.
       Effective date.--The provision is effective for estimated 
     tax payments due on or after September 15, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

N. Prohibited Allocations of Stock in an S Corporation ESOP (sec. 1317 
      of the Senate amendment and secs. 409 and 4979A of the Code)

                              Present Law

       The Small Business Job Protection Act of 1996 allowed 
     qualified retirement plan trusts described in section 401(a) 
     to own stock in an S corporation. That Act treated the plan's 
     share of the S corporation's income (and gain on the 
     disposition of the stock) as includible in full in the 
     trust's unrelated business taxable income (``UBTI'').
       The Tax Relief Act of 1997 repealed the provision treating 
     items of income or loss of an S corporation as UBTI in the 
     case of an employee stock ownership plan (``ESOP''). Thus, 
     the income of an S corporation allocable to an ESOP is not 
     subject to current taxation.
       Present law provides a deferral of income on the sales of 
     certain employer securities to an ESOP (sec. 1042). A 50-
     percent excise tax is imposed on certain prohibited 
     allocations of securities acquired by an ESOP in a 
     transaction to which section 1042 applies. In addition, such 
     allocations are currently includible in the gross income of 
     the individual receiving the prohibited allocation.

                               House Bill

       No provision.

                            Senate Amendment

       Under the provision, if there is a prohibited allocation of 
     stock to a disqualified person under an ESOP sponsored by an 
     S corporation (a ``Sub S ESOP'') for a nonallocation year: 
     (1) an excise tax is imposed on the employer equal to 50 
     percent of the amount involved in the prohibited allocation; 
     and (2) the stock allocated in the prohibited allocation is 
     treated as distributed to the disqualified individual.
       A nonallocation year means any plan year of a Sub S ESOP 
     if, at any time during the plan year, disqualified 
     individuals own at least 50 percent of the number of 
     outstanding shares of the S corporation.
       An individual is a disqualified person if the individual is 
     either (1) a member of a ``deemed 20-percent shareholder 
     group'' or (2) a ``deemed 10-percent shareholder''. An 
     individual is a member of a ``deemed 20-percent shareholder 
     group'' if the number of deemed-owned shares of the 
     individual and his or her family members is at least 20 
     percent of the number of outstanding shares of the 
     corporation. An individual is a deemed 10-percent shareholder 
     if the individual is not a member of a deemed 20-percent 
     shareholder group and the number of the individual's deemed-
     owned shares is at least 10 percent of the number of 
     outstanding shares of stock of the corporation.
       ``Deemed-owned shares'' mean: (1) stock allocated to the 
     account of the individual under the ESOP, and (2) the 
     individual's share of unallocated stock held by the ESOP. An 
     individual's share of unallocated stock held by an ESOP is 
     determined in the same manner as the most recent allocation 
     of stock under the terms of the plan.
       For purposes of determining whether disqualified 
     individuals own 50 percent or more of the outstanding stock 
     of the corporation, deemed-owned shares and shares owned 
     directly by an individual are taken into account. The family 
     attribution rules of section 318 would apply, modified to 
     include certain other family members, as described below.
       Under the provision, family members of an individual 
     include (1) the spouse of the individual, (2) an ancestor or 
     lineal descendant of the individual or his or her spouse, (3) 
     a sibling of the individual (or the individual's spouse) and 
     any lineal descendant of the brother or sister, and (4) the 
     spouse of any person described in (2) or (3).
       The Secretary is directed to prescribe rules under which 
     holders of options, restricted stock and similar interests 
     are or are not treated as owning stock attributable to such 
     interests as appropriate to carry out the purposes of the 
     provision. For example, it is intended that such interests 
     would be taken into account if so doing would result in 
     disqualified individuals owning at least 50 percent of the 
     stock of the corporation and that such interests would not be 
     taken into account if so doing would result in disqualified 
     individuals owning less than 50 percent of the stock of the 
     corporation.
       Effective date.--The provision is generally effective with 
     respect to years beginning after December 31, 2000. In the 
     case of an ESOP established after July 14, 1999, or an ESOP 
     established on or before such date if the employer 
     maintaining the plan was not an S corporation on such date, 
     the provision is effective with respect to plan years ending 
     after July 14, 1999.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
       The conferees remain concerned that ESOPs of S corporations 
     may continue to be used to avoid or inappropriately defer 
     taxes. Thus, the conferees view the provision as a first step 
     in addressing possible tax avoidance issues relating to the 
     use of S corporation ESOPs and believe that further study of 
     these issues, and further legislation, may be appropriate.

 O. Modify Anti-abuse Rules Related to Assumption of Liabilities (sec. 
         1318 of the Senate amendment and sec. 357 of the Code)

                              Present Law

       Generally, no gain or loss is recognized if property is 
     exchanged for stock of a controlled corporation. The 
     transferor may recognize gain to the extent other property 
     (``boot'') is received by the transferor. The assumption of 
     liabilities by the transferee generally is not treated as 
     boot received by the transferor. The assumption of a 
     liability is treated as boot to the transferor, however, 
     ``[i]f, taking into consideration the nature of the liability 
     and the circumstances in the light of which the arrangement 
     for the assumption or acquisition was made, it appears that 
     the principal purpose of the taxpayer . . . was a purpose to 
     avoid Federal income tax on the exchange, or . . . if not 
     such purpose, was not a bona fide business purpose.'' Sec. 
     357(b). Thus, this exception requires that the principal 
     purpose of having the transferee assume the liability was the 
     avoidance of tax on the exchange.
       The transferor's basis in the stock of the transferee 
     received in the exchange is the basis of the property 
     contributed, reduced by the amount of any liability assumed, 
     but generally increased in the amount of any gain recognized 
     by the transferor on the exchange. If the transferee assumes 
     liabilities in excess of the basis of assets transferred, the 
     transferor recognizes gain in the amount of the excess. 
     However, this gain recognition rule does not apply if the 
     assumption of a liability is treated as boot under the tax 
     avoidance rule. Stock basis is reduced, however, for such an 
     assumption.\88\ For other liabilities (where the assumption 
     is not treated as boot under the tax avoidance rule), no gain 
     recognition or basis reduction is required for the assumption 
     of a liability that would give rise to a deduction.
---------------------------------------------------------------------------
     \88\ Pursuant to section 357(c)92)(A), liabilities that are 
     treated as assumed in a tax avoidance transaction under 
     section 357(b)(1) are not within the scope of section 
     357(c)(3) or section 358(d)(2) under present law. Thus, the 
     transferee's assumption of a liability that is treated as a 
     tax avoidance transaction under section 357(b)(1) is treated 
     as the transferor's receipt of money for purposes of 358 and 
     related provisions, regardless of whether the liability would 
     give rise to a deduction.
---------------------------------------------------------------------------
       Similar rules apply in connection with certain tax-free 
     reorganizations.
       A different set of rules applies with respect to 
     partnerships. However, generally a partner's basis in its 
     partnership interest is the

[[Page 19723]]

     basis of property contributed. Liabilities affect that basis 
     by causing a decrease in basis of the partnership interest to 
     the extent the partnership has assumed the partner's 
     liabilities, and an increase in basis to the extent the 
     partner has assumed liabilities of the partnership. 
     Similarly, there is an increase (or decrease) in basis for an 
     increase (or decrease) in the partner's share of partnership 
     liabilities.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment deletes the limitation that the 
     assumption of liabilities anti-abuse rule only applies to tax 
     avoidance on the exchange itself, and changes ``the principal 
     purpose'' standard to ``a principal purpose.'' The provision 
     also affects the basis rule that requires a decrease in the 
     transferor's basis in the transferee's stock when a 
     liability, the payment of which would give rise to a 
     deduction, is treated as boot under the tax avoidance rule. 
     The committee report refers to a specific type of transaction 
     involving certain contingent liabilities as one example of a 
     transaction that is of concern under present law.
       Effective date.--The provision is effective for assumptions 
     of liabilities on or after July 15, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment.
       It is also expected that the Treasury Department will 
     promptly examine the use of partnerships and apply similar 
     rules (for example, with respect to adjustments to the basis 
     of a partnership interest with respect to certain contingent 
     liabilities) where there is a principal purpose of avoiding 
     Federal income tax through the use of a transaction that 
     includes the assumption of liabilities by a partnership. The 
     conferees note that pursuant to section 7805(b)(3), if 
     necessary to prevent abuse, the Secretary could determine 
     that any regulations applying such rules should be effective 
     on the same date as this provision, i.e., July 15, 1999.
       No inference is intended regarding the proper treatment of 
     any transaction under present law.
       Effective date.--The effective date is the same as that of 
     the Senate amendment.

P. Require Consistent Treatment and Provide Basis Allocation Rules for 
 Transfers of Intangibles in Certain Nonrecognition Transactions (sec. 
    1319 of the Senate amendment and secs. 351 and 721 of the Code)

                              Present Law

       Generally, no gain or loss is recognized if one or more 
     persons transfer property to a corporation solely in exchange 
     for stock in the corporation and, immediately after the 
     exchange such person or persons are in control of the 
     corporation. Similarly, no gain or loss is recognized in the 
     case of a contribution of property in exchange for a 
     partnership interest. Neither the Internal Revenue Code nor 
     the regulations provide the meaning of the requirement that a 
     person ``transfer property'' in exchange for stock (or a 
     partnership interest). The Internal Revenue Service 
     interprets the requirement consistent with the ``sale or 
     other disposition of property'' language in the context of a 
     taxable disposition of property. See, e.g., Rev. Rul. 69-156, 
     1969-1 C.B. 101. Thus, a transfer of less than ``all 
     substantial rights'' to use property will not qualify as a 
     tax-free exchange and stock received will be treated as 
     payments for the use of property rather than for the property 
     itself. These amounts are characterized as ordinary income. 
     However, the Claims Court has rejected the Service's position 
     and held that the transfer of a nonexclusive license to use a 
     patent (or any transfer of ``something of value'') could be a 
     ``transfer'' of ``property'' for purposes of the 
     nonrecognition provision. See E.I. DuPont de Nemours & Co. v. 
     U.S., 471 F.2d 1211 (Ct. Cl. 1973).

                               House Bill

       No provision.

                            Senate Amendment

       The provision treats a transfer of an interest in 
     intangible property constituting less than all of the 
     substantial rights of the transferor in the property as a 
     transfer of property for purposes of the nonrecognition 
     provisions regarding transfers of property to controlled 
     corporations and partnerships. In the case of a transfer of 
     less than all of the substantial rights, the transferor is 
     required to allocate the basis of the intangible between the 
     retained rights and the transferred rights based upon their 
     respective fair market values.
       No inference is intended as to the treatment of these or 
     similar transactions prior to the effective date.
       Effective date.--The provision is effective for transfers 
     on or after the date of enactment.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

 Q. Distributions by a Partnership to a Corporate Partner of Stock in 
Another Corporation (sec. 1321 of the Senate amendment and sec. 732 of 
                               the Code)

                              Present Law

       Present law generally provides that no gain or loss is 
     recognized on the receipt by a corporation of property 
     distributed in complete liquidation of another corporation in 
     which it holds 80 percent of the stock (by vote and value) 
     (sec. 332). The basis of property received by a corporate 
     distributee in the distribution in complete liquidation of 
     the 80-percent-owned subsidiary is a carryover basis, i.e., 
     the same as the basis in the hands of the subsidiary 
     (provided no gain or loss is recognized by the liquidating 
     corporation with respect to the distributed property) (sec. 
     334(b)).
       Present law provides two different rules for determining a 
     partner's basis in distributed property, depending on whether 
     or not the distribution is in liquidation of the partner's 
     interest in the partnership. Generally, a substituted basis 
     rule applies to property distributed to a partner in 
     liquidation. Thus, the basis of property distributed in 
     liquidation of a partner's interest is equal to the partner's 
     adjusted basis in its partnership interest (reduced by any 
     money distributed in the same transaction) (sec. 732(b)).
       By contrast, generally, a carryover basis rule applies to 
     property distributed to a partner other than in liquidation 
     of its partnership interest, subject to a cap (sec. 732(a)). 
     Thus, in a non-liquidating distribution, the distributee 
     partner's basis in the property is equal to the partnership's 
     adjusted basis in the property immediately before the 
     distribution, but not to exceed the partner's adjusted basis 
     in its partnership interest (reduced by any money distributed 
     in the same transaction). In a non-liquidating distribution, 
     the partner's basis in its partnership interest is reduced by 
     the amount of the basis to the distributee partner of the 
     property distributed and is reduced by the amount of any 
     money distributed (sec. 733).
       If corporate stock is distributed by a partnership to a 
     corporate partner with a low basis in its partnership 
     interest, the basis of the stock is reduced in the hands of 
     the partner so that the stock basis equals the distributee 
     partner's adjusted basis in its partnership interest. No 
     comparable reduction is made in the basis of the 
     corporation's assets, however. The effect of reducing the 
     stock basis can be negated by a subsequent liquidation of the 
     corporation under section 332.\89\
---------------------------------------------------------------------------
     \89\ In a similar situation involving the purchase of stock 
     of a subsidiary corporation as replacement property following 
     an involuntary conversion, the Code generally requires the 
     basis of the assets held by the subsidiary to be reduced to 
     the extent that the basis of the stock in the replacement 
     corporation itself is reduced (sec. 1033).
---------------------------------------------------------------------------

                               House Bill

       No provision.

                            Senate Amendment

     In general
       The provision provides for a basis reduction to assets of a 
     corporation, if stock in that corporation is distributed by a 
     partnership to a corporate partner. The reduction applies if, 
     after the distribution, the corporate partner controls the 
     distributed corporation.
     Amount of the basis reduction
       Under the provision, the amount of the reduction in basis 
     of property of the distributed corporation generally equals 
     the amount of the excess of (1) the partnership's adjusted 
     basis in the stock of the distributed corporation immediately 
     before the distribution, over (2) the corporate partner's 
     basis in that stock immediately after the distribution.
       The provision limits the amount of the basis reduction in 
     two respects. First, the amount of the basis reduction may 
     not exceed the amount by which (1) the sum of the aggregate 
     adjusted bases of the property and the amount of money of the 
     distributed corporation exceeds (2) the corporate partner's 
     adjusted basis in the stock of the distributed corporation. 
     Thus, for example, if the distributed corporation has cash of 
     $300 and other property with a basis of $600 and the 
     corporate partner's basis in the stock of the distributed 
     corporation is $400, then the amount of the basis reduction 
     could not exceed $500 (i.e., ($300+$600)-$400 = $500).
       Second, the amount of the basis reduction may not exceed 
     the adjusted basis of the property of the distributed 
     corporation. Thus, the basis of property (other than money) 
     of the distributed corporation may not be reduced below zero 
     under the provision, even though the total amount of the 
     basis reduction would otherwise be greater.
       The provision provides that the corporate partner 
     recognizes long-term capital gain to the extent the amount of 
     the basis reduction does exceed the basis of the property 
     (other than money) of the distributed corporation. In 
     addition, the corporate partner's adjusted basis in the stock 
     of the distribution is increased in the same amount. For 
     example, if the amount of the basis reduction were $400, and 
     the distributed corporation has money of $200 and other 
     property with an adjusted basis of $300, then the corporate 
     partner would recognize a $100 capital gain under the 
     provision. The corporate partner's basis in the stock of the 
     distributed corporation would also be increased by $100 in 
     this example, under the provision.
       The basis reduction is to be allocated among assets of the 
     controlled corporation in accordance with the rules provided 
     under section 732(c).

[[Page 19724]]


     Partnership distributions resulting in control
       The basis reduction generally applies with respect to a 
     partnership distribution of stock if the corporate partner 
     controls the distributed corporation immediately after the 
     distribution or at any time thereafter. For this purpose, the 
     term control means ownership of stock meeting the 
     requirements of section 1504(a)(2) (generally, an 80-percent 
     vote and value requirement).
       The provision applies to reduce the basis of any property 
     held by the distributed corporation immediately after the 
     distribution, or, if the corporate partner does not control 
     the distributed corporation at that time, then at the time 
     the corporate partner first has such control. The provision 
     does not apply to any distribution if the corporate partner 
     does not have control of the distributed corporation 
     immediately after the distribution and establishes that the 
     distribution was not part of a plan or arrangement to acquire 
     control.
       Under the provision, a corporation is treated as receiving 
     a distribution of stock from a partnership, if the 
     corporation acquires stock other than in a distribution from 
     a partnership and the basis of the stock is determined in 
     whole or in part by reference to the partnership rules 
     limiting the basis of the stock to a partner's basis in his 
     partnership interest (secs. 732(a)(2) or 732(b)).
       In the case of tiered corporations, a special rule provides 
     that if the property held by a distributed corporation is 
     stock in a corporation that the distributed corporation 
     controls, then the provision is applied to reduce the basis 
     of the property of that controlled corporation. The provision 
     is also reapplied to any property of any controlled 
     corporation that is stock in a corporation that it controls. 
     Thus, for example, if stock of a controlled corporation is 
     distributed to a corporate partner, and the controlled 
     corporation has a subsidiary, the amount of the basis 
     reduction allocable to stock of the subsidiary is applied 
     again to reduce the basis of the assets of the subsidiary, 
     under the special rule.
     Effective date
       The provision is effective for distributions made after 
     July 14, 1999.

                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     clarifications and with a modification to the effective date.
       The conference agreement clarifies the rule relating to 
     stock acquired other than in a distribution from a 
     partnership when the basis of the stock is determined in 
     whole or in part by reference to the partnership rules 
     limiting the basis of the stock to a partner's basis in his 
     partnership interest (secs. 732(a)(2) or 732(b)). As 
     clarified, the rule provides that, for purposes of the 
     provision, if a corporation acquires (other than in a 
     distribution from a partnership) stock the basis of which is 
     determined (by reason of being distributed from a 
     partnership) in whole or in part by reference to section 
     732(a)(2) or (b), then the corporation is treated as 
     receiving a distribution of stock from a partnership. For 
     example, if a partnership distributes property other than 
     stock (such as real estate) to a corporate partner, and that 
     corporate partner contributes the real estate to another 
     corporation in a section 351 transaction, then the stock 
     received in the section 351 transaction is not treated as 
     distributed by a partnership, and the basis reduction under 
     this provision does not apply. As another example, if a 
     partnership distributes stock to two corporate partners, 
     neither of which have control of the distributed corporation, 
     and the two corporate partners merge and the survivor obtains 
     control of the distributed corporation, the stock of the 
     distributed corporation that is acquired as a result of the 
     merger is treated as received in a partnership distribution; 
     the basis reduction rule of the provision applies.
       The conference agreement also provides additional 
     clarification with respect to the regulations under the 
     provision (which include regulations to avoid double counting 
     and to prevent the abuse of the purposes of the provision). 
     The conferees intend that regulations prevent the avoidance 
     of the purposes of the provision through the use of tiered 
     partnerships.
       Effective date.--The provision is effective for 
     distributions made after July 14, 1999, except that in the 
     case of a corporation that is a partner in a partnership on 
     July 14, 1999, the provision is effective for distributions 
     by that partnership to the corporation after the date of 
     enactment.

XVII. TAX TECHNICAL CORRECTIONS (secs. 1601--1605 of the House bill and 
          secs. 504(c) and 1401--1405 of the Senate amendment)

                               House Bill

       The House bill contains technical, clerical and conforming 
     amendments to the Tax and Trade Relief Extension Act of 1998 
     and other recently enacted legislation. The provisions 
     generally are effective as if enacted in the original 
     legislation to which each provision relates.\90\
---------------------------------------------------------------------------
     \90\ For a description of the House provisions, see H. Rept. 
     106-238 (H.R. 2488), July 16, 1999.
---------------------------------------------------------------------------

                            Senate Amendment

       Same as House bill.

                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provisions.

             XIX. SENSE OF THE SENATE AND OTHER PROVISIONS

A. Sense of the Congress Regarding Empowerment Zones (sec. 1128 of the 
                           Senate amendment)

                              Present Law

       Pursuant to the Omnibus Budget Reconciliation Act of 1993 
     (``OBRA 1993'') and the Taxpayer Relief Act of 1997 (``1997 
     Act''), the Secretaries of the Department of Housing and 
     Urban Development and the Department of Agriculture have 
     designated a number of areas as empowerment zones and 
     enterprise communities. In general, businesses located in 
     empowerment zones and enterprise communities qualify for 
     certain tax incentives (though the empowerment zones 
     designated in the 1997 Act are not necessarily entitled to 
     all of the tax incentives as those designated in OBRA 1993).
       The Agriculture, Rural Development, Food and Drug 
     Administration, and Related Agencies Appropriations Act for 
     Fiscal Year 1999 appropriated funds for 20 new rural 
     enterprise communities that meet the designation and 
     eligibility requirements set out the Code (but are not 
     designated as enterprise communities for Federal tax 
     purposes).

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment provides a Sense of the Congress 
     resolution that if Congress and the President agree to a 
     substantial tax relief measure, it should ensure that such 
     tax relief measure includes full funding for the empowerment 
     zones and enterprise communities authorized in 1997 and 1998, 
     as well as those areas currently designated as rural economic 
     area partnerships by the Department of Agriculture. In 
     addition, all such designated areas should equally share at 
     least the same aggregate level of funding, tax incentives, 
     and other Federal support that Congress provided to urban and 
     rural empowerment zones and enterprise communities authorized 
     by OBRA 1993.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

 B. Sense of the Senate Regarding Savings Incentives (sec. 1127 of the 
                           Senate amendment)

                              Present Law

       The Code states that, except as otherwise provided, ``gross 
     income means all income from whatever source derived'' (sec. 
     61). Because there is no exclusion for interest and 
     dividends, interest and dividends received by individuals are 
     includible in gross income and subject to tax.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment states that, before December 31,1999, 
     Congress should pass legislation that creates savings 
     incentives by providing a partial Federal income tax 
     exclusion for income derived from interest and dividends of 
     no less than $400 for married taxpayers and $200 for single 
     taxpayers.
       Effective date.--The provision is effective upon enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

C. Sense of the Congress Regarding Small Business Incentives (sec. 1129 
                        of the Senate amendment)

                              Present Law

       Present law provides that, in lieu of depreciation, a 
     taxpayer with a sufficiently small amount of annual 
     investment may elect to deduct up to $19,000 (for taxable 
     years beginning in 1999) of the cost of qualifying property 
     placed in service for the taxable year (sec. 179). In 
     general, qualifying property is defined as depreciable 
     tangible personal property that is purchased for use in the 
     active conduct of a trade or business. The $19,000 amount is 
     reduced (but not below zero) by the amount by which the cost 
     of qualifying property placed in service during the taxable 
     year exceeds $200,000. In addition, the amount eligible to be 
     expensed for a taxable year may not exceed the taxable income 
     for a taxable year that is derived from the active conduct of 
     a trade or business (determined without regard to this 
     provision). Any amount that is not allowed as a deduction 
     because of the taxable income limitation may be carried 
     forward to succeeding taxable years (subject to similar 
     limitations).
       The $19,000 amount is increased to $25,000 for taxable 
     years beginning in 2003 and thereafter. The increase is 
     phased in as follows: for taxable years beginning in 2000, 
     the amount is $20,000; for taxable years beginning in 2001 or 
     2002, the amount is $24,000; and for taxable years beginning 
     in 2003 and thereafter, the amount is $25,000.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment states that it is the sense of the 
     Congress that many small businesses would benefit from the 
     expansion

[[Page 19725]]

     of present-law expensing provisions to cover investments in 
     depreciable real property, and that Congress should consider 
     such expansion in any reform legislation that follows the 
     depreciation study that the Treasury Department is currently 
     undertaking.
       Effective date.--The provision is effective upon enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

 D. Direct Expenditure Block Grant (sec. 1126 of the Senate amendment 
                and sec. 418 of the Social Security Act)

                              Present Law

       Section 418 of the Social Security Act provides grants to 
     the States for the purpose of providing child care 
     assistance. At least 70 percent of the amounts received by 
     the States must be used to provide child care assistance to 
     families who are receiving assistance under a State program 
     of Temporary Assistance for Needy Families (Title IV, part A 
     of the Social Security Act), to families who are attempting 
     through work activities to transition off of such assistance 
     program, or to families who are at risk of becoming dependent 
     on such assistance program.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment increases appropriations for grants 
     under Section 418 of the Social Security Act from $2,717 
     million to $3,918 million for fiscal year 2002, and provides 
     appropriations of $3,979 million for fiscal year 2003, $4,010 
     million for fiscal year 2004, $3,860 million for fiscal year 
     2005, $3,954 million for fiscal year 2006, $4,004 million for 
     fiscal year 2007, $4,073 million for fiscal year 2008, and 
     $4,075 million for fiscal year 2009.
       Effective date.--The provision is effective upon enactment.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

XVIII. CONTINGENCY FOR RATE REDUCTIONS AND COMMITMENT TO DEBT REDUCTION 
                 (secs. 101 and 1701 of the House bill)

                              Present Law

       No provision.

                               House Bill

       The House-passed version contained a 10-percent across-the-
     board rate reduction. The trigger attached to these 
     provisions would delay the scheduled reductions in these 
     rates depending on the level of gross interest costs. Gross 
     interest expenses accrue from debt held publically as well as 
     debt held by all government trust funds.
       In order for a rate reduction to occur on January 1, the 
     government's gross interest expense during the 12 month 
     period ending on July 31 of the previous year must not 
     increase. This measurement is referred to in the bill as the 
     debt reduction calendar year. If the gross interest expense 
     increased, the tax rate reduction was delayed one year but 
     previous rate reductions were not rescinded.
       The across the board rate reduction scheduled to take place 
     in 2001 was not subject to the trigger.
       The House bill contained a provision reflecting the sense 
     of the Congress that the national debt held by the public 
     shall be reduced from $3.619 trillion to a level below $1.61 
     trillion by fiscal year 2009.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference report contains the same trigger mechanism 
     as in the House passed bill. The trigger mechanism is based 
     on gross debt interest expenses which must not increase from 
     the previous year through July 31 of the year before the 
     scheduled increase.
       The conference report, however, contains a different 
     structure for reducing tax rates and expanding certain tax 
     brackets. In three instances, the trigger may delay one or 
     more of these provisions. The following items are subject to 
     the trigger mechanism:
       --In 2003, the 14.5 percent marginal tax rate will be 
     reduced to 14.0 percent.
       --In 2005, the top four marginal tax rates will each be 
     reduced by 1 percentage point.
       --In 2006, the width of the 14 percent tax bracket will be 
     increased by $5,000.
       The first rate reduction from 15 percent to 14.5 percent is 
     permanent and not subject to the trigger.
       In addition, the conferees express the sense of the 
     Congress that: (1) the national debt of the United States 
     held by the public is $3.619 trillion as of fiscal year 1999; 
     (2) the Federal budget is projected to produce a surplus each 
     year in the next 10 fiscal years; (3) refunding taxes and 
     reducing the national debt held by the public will assure 
     continued economic growth and financial freedom for future 
     generations; and (4) The provision reflects the sense of the 
     Congress that: (1) the national debt of the United States 
     held by the public is $3.619 trillion as of fiscal year 1999; 
     (2) the Federal budget is projected to produce a surplus each 
     year in the next 10 fiscal years; (3) refunding taxes and 
     reducing the national debt held by the public will assure 
     continued economic growth and financial freedom for future 
     generations; and (4) the national debt held by the public 
     shall be reduced from $3.619 trillion to a level below $1.61 
     trillion by fiscal year 2009.

   XIX. EXCLUSION FROM PAYGO SCORECARD (sec. 1801 of the House bill)

     Present Law
       Under the Balanced Budget and Emergency Deficit Control Act 
     of 1985, as amended, tax reduction legislation is subject to 
     a ``pay-as-you-go'' (PAYGO) requirement. The PAYGO system 
     tracks legislation that may increase budget deficits using a 
     ``scorecard'' (estimated by the Office of Management and 
     Budget). Any revenue loss would have to be offset by other 
     revenue increases, reductions in direct spending or a 
     combination of the two.

                               House Bill

       The House bill provides that, upon enactment of the Act, 
     the Director of the Office of Management and Budget shall not 
     make any estimate of the changes in direct spending outlays 
     and receipts under section 252(d) of the Balanced Budget and 
     Emergency Deficit Control Act of 1985 resulting from the 
     enactment of the Act.

                            Senate Amendment

       No provision.

                          Conference Agreement

       The conference agreement follows the Senate amendment due 
     to the Senate's procedural requirements under the Byrd rule. 
     The conferees note that the reduction in revenues from the 
     conference agreement is fully accommodated under the 
     Congressional budget resolution from the on-budget non-social 
     security surplus, leaving greater amounts set aside for 
     Social Security, Medicare and debt relief greater than under 
     the President's budget. The conferees further believe that 
     the application of current PAYGO rules to the conference 
     report is anachronistic in an era of sustained projected 
     surpluses. Therefore, the conferees intend that, upon 
     enactment of the Act, the Director of OMB should be directed 
     to not make any estimate of the changes in direct spending, 
     outlays, and receipts under section 252(d) of the Balanced 
     Budget and Emergency Deficit Control Act of 1985 resulting 
     from the enactment of the Act.

 XX. COMPLIANCE WITH CONGRESSIONAL BUDGET ACT (sec. 1501 of the Senate 
                               amendment)

                              Present Law

       Reconciliation is a procedure under the Congressional 
     Budget Act of 1974 (``the Budget Act'') by which Congress 
     implements spending and tax policies contained in a budget 
     resolution. The Budget Act contains numerous rules enforcing 
     the scope of items permitted to be considered under budget 
     reconciliation process. One such rule, the so-called ``Byrd 
     rule,'' was incorporated into the Budget Act in 1990. The 
     Byrd rule, named after its principal sponsor, Senator Robert 
     C. Byrd, is contained in section 313 of the Budget Act. The 
     Byrd rule is generally interpreted to permit members to make 
     a motion to strike extraneous provisions (those which are 
     unrelated to the deficit reduction goals of the 
     reconciliation process) from either a budget reconciliation 
     bill or a conference report on such bill.
       Under the Byrd rule, a provision is considered to be 
     extraneous if it falls under one or more of the following six 
     definitions:
       (1) It does not produce a change in outlays or revenues;
       (2) It produces an outlay increase or revenue decrease when 
     the instructed committee is not in compliance with its 
     instructions;
       (3) It is outside of the jurisdiction of the committee that 
     submitted the title or provision for inclusion in the 
     reconciliation measure;
       (4) It produces a change in outlays or revenues which is 
     merely incidental to the non-budgetary components of the 
     provision;
       (5) It would increase the deficit for a fiscal year beyond 
     those covered by the reconciliation measure; and
       (6) it recommends changes in Social Security.

                               House Bill

       No provision.

                            Senate Amendment

       To ensure compliance with the Budget Act, the provision 
     provides that all provisions of, and amendments made by, this 
     Senate amendment, which are in effect on September 30, 2009, 
     shall cease to apply as of such date, and shall begin to 
     apply again as of October 1, 2009.

                          Conference Agreement

       The conference agreement follows the Senate amendment, but 
     provides that certain provisions of the bill sunset on 
     December 31, 2008.

                      XXI. TAX COMPLEXITY ANALYSIS

       The following tax complexity analysis is provided pursuant 
     to section 4022(b) of the Internal Revenue Service Reform and 
     Restructuring Act of 1998, which requires the staff of the 
     Joint Committee on Taxation (in consultation with the 
     Internal Revenue Service (``IRS'') and the Treasury 
     Department) to provide a complexity analysis of tax 
     legislation reported by the House Committee on Ways and 
     Means, the Senate Committee on Finance, or a Conference 
     Report containing tax provisions. The complexity

[[Page 19726]]

     analysis is required to report on the complexity and 
     administrative issues raised by provisions that directly or 
     indirectly amend the Internal Revenue Code and that have 
     widespread applicability to individuals or small businesses. 
     For each such provision identified by the staff of the Joint 
     Committee on Taxation, a summary description of the provision 
     is provided, along with an estimate of the number and the 
     type of affected taxpayers, and a discussion regarding the 
     relevant complexity and administrative issues.
       Following the analysis of the staff of the Joint Committee 
     on Taxation are the comments of the IRS regarding each of the 
     provisions included in the complexity analysis, including a 
     discussion of the likely effect on IRS forms and any expected 
     impact on the IRS.
     1. Reduce the income tax rates (sec. 101 of the conference 
         agreement)
     Summary description of provision
       The provision reduces the individual regular income tax 
     rates as follows: (1) from 15 percent to 14 percent; (2) from 
     28 percent to 27 percent; (3) from 31 percent to 30 percent; 
     (4) from 36 percent to 35 percent; and (5) from 39.6 percent 
     to 38.6 percent. The reduction of the 15-percent rate to a 
     14-percent rate is phased-in over three years; (1) 14.5 
     percent in 2001 and 2002; and (2) 14 percent in 2003 and 
     thereafter. The reductions in the other rates are effective 
     for taxable years beginning after 2004. The provision also 
     widens the lowest regular income tax bracket for singles and 
     head of households by $3,000 for taxable years beginning 
     after 2005. For years after 2006, the $3,000 amount is 
     indexed for inflation.
     Number of affected taxpayers
       It is estimated that the reduction of the regular income 
     tax rates will affect approximately 112 million individual 
     income tax returns.
     Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to this provision. The information 
     necessary to implement the provision will be readily 
     available to taxpayers (in the form of new tax tables and tax 
     rate schedules). The rate reduction should not result in an 
     increase in disputes with the IRS, nor will regulatory 
     guidance be necessary to implement this provision.
       Because the provision includes corresponding reductions in 
     the individual alternative minimum tax rates, the provision 
     should not result in taxpayers having to calculate their tax 
     liability under the alternative minimum tax (AMT).
     2. Marriage penalty relief (sec. 111 of the conference 
         agreement)
     Summary description of provision
       The provision increases the basic standard deduction for a 
     married couple filing a joint return to twice the basic 
     standard deduction for an unmarried individual. This increase 
     is phased-in over five years (2001-2005) and is fully 
     effective in 2005. The provision also increases the size of 
     the lowest regular income tax rate bracket to twice the size 
     of the rate bracket for an unmarried individual. This 
     increase in the rate bracket is phased-in over four years 
     (2005-2008) and is fully effective in 2008.
     Number of affected taxpayers
       It is estimated that this provision will affect 
     approximately 36 million individual income tax returns.
     Discussion
       The provision is not expected to result in an increase in 
     disputes with the IRS, nor should regulatory guidance be 
     necessary to implement this provision. In addition, the 
     provision should not increase individuals' tax preparation 
     costs. Some taxpayers who currently itemize deductions may 
     respond to the provision by claiming the increased standard 
     deduction in lieu of itemizing. Such taxpayers will no longer 
     have to file Schedule A or need to engage in the record 
     keeping inherent in itemizing below-the-line deductions. This 
     reduction in complexity and record keeping may also result in 
     a decline in the number of individuals using a tax 
     preparation service (or a decline in the cost of using such a 
     service). It may also reduce the number of disputes between 
     taxpayers and the IRS regarding substantiation of itemized 
     deductions.
     3. Individual capital gains rates (secs. 201 and 202 of the 
         conference agreement)
     Summary description of provision
       The provision reduces the present-law individual capital 
     gain rates of 10, 20, and 25 percent to 8, 18, and 23 percent 
     respectively, effective for transactions on or after January 
     1, 1999. The provision also provides for the indexation of 
     capital gains beginning in 2000 (with mark-to-market 
     treatment with respect to assets held on January 1, 2000).
     Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 20 million individual income tax returns.
     Discussion
       The capital gains rate reductions are not expected to cause 
     taxpayers to keep additional records. The repeal of the 
     reduced rates for five-year property after 2000 will simplify 
     the forms and recordkeeping for years after 2000. In 
     addition, since the provision applies with respect to capital 
     gains realized for all of 1999, it obviates the need for 
     multiple rate schedules for 1999.
       Indexing of assets for inflation beginning in 2000 is 
     expected to cause taxpayers to keep additional records 
     because, in the case of the disposition of capital assets 
     held more than one year, it will be necessary to establish 
     the calendar quarter in which the asset was purchased. The 
     taxpayer will have the additional complexity of computing the 
     basis adjustments on the sale of the assets by multiplying 
     the basis by the inflation adjustment. This will be 
     particular complex where assets are purchased periodically, 
     such as in the case of common stock acquired pursuant to 
     dividend reinvestment plans.
       The indexing of assets will result in additional 
     computations by the taxpayer, and guidance will be necessary 
     to implement the provision. For example, guidance will be 
     necessary with respect to assets that are held on January 1, 
     2000 that are marked-to-market, as well as the application of 
     the indexing provision with respect to pass-through entities.
       The indexing of assets may result in an increase in 
     disputes with the IRS. The provision can be expected to 
     increase the tax preparation cost of individuals using a tax 
     preparation service, depending on the type of assets that are 
     indexed and the extent to which a taxpayer maintains adequate 
     records.
     4. Increase in IRA contribution limit (sec. 211 of the 
         conference agreement)
     Summary description of provision
       The provision increases the $2,000 IRA contribution limit 
     to $3,000 for 2001-03, to $4,000 in 2004-05, to $5,000 in 
     2006-08.
     Number of affected taxpayers
       It is estimated that the provision will affect 15 million 
     individual tax returns.
     Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to the provision. It is not 
     anticipated that the provision will result in increased 
     disputes with the IRS. It is not anticipated that the 
     provision will increase tax return preparation costs. 
     Regulatory guidance will not be needed to implement the 
     provision. Because the maximum contribution limit will 
     change, some taxpayers may be confused as to how much they 
     can contribute to an IRA. It is expected that IRS Forms and 
     publications will contain the limit applicable for each year.
     5. Accelerate 100-percent self-employed health insurance 
         deduction (sec. 801 of the conference agreement)
     Summary description of provision
       The provision accelerates the increase in the deduction for 
     health insurance expenses of self-employed individuals so 
     that the deduction is 100 percent in years beginning after 
     December 31, 1999.
     Number of affected taxpayers
       It is estimated that the provision will affect three 
     million small businesses.
     Discussion
       It is not anticipated that individuals or small businesses 
     will need to keep additional records due to the provision. It 
     is not anticipated that the provision will result in an 
     increase in disputes with the IRS, or increase tax return 
     preparation costs. It is not anticipated that regulatory 
     guidance will be needed to implement the provision. 
     Accelerating the 100-percent deduction may simplify the 
     preparation of tax returns for self-employed individuals, 
     because they will no longer need to keep track of the percent 
     of health insurance expenses that are deductible, and will 
     need to perform one less calculation.
     6. Repeal of the temporary federal unemployment ``FUTA'' 
         surtax (sec. 803 of the conference agreement)
     Summary description of provision
       Under present law, in addition to the regular FUTA tax of 
     0.6 percent of taxable wages, a temporary surtax of 0.2 
     percent of taxable wages applies through 2007. The provision 
     repeals the temporary FUTA surtax (of 0.2 percent of taxable 
     wages) after December 31, 2004.
     Number of affected taxpayers
       It is estimated that the repeal of the FUTA surtax will 
     affect over six million small businesses.
     Discussion
       It is not anticipated that small businesses will need to 
     keep additional records due to this provision, nor is it 
     anticipated that this provision will result in an increase in 
     disputes with the IRS. Additional regulatory guidance should 
     not be necessary to implement this provision. The provision 
     should not increase the tax preparation cost of small 
     businesses using a tax preparation service.
     7. Increase deduction for business meals (sec. 804 of the 
         conference agreement)
     Summary description of provision
       The provision phases in an increase in the deductible 
     percentage of business meal (food and beverage) expenses. The 
     increase in the deductible percentage is phased in as 
     follows: 55 percent in 2006; and 60 percent in 2007 and 
     thereafter.
     Number of affected taxpayers
       It is estimated that almost all small businesses will be 
     affected by the provision.
     Discussion
       Because the provision increases the percentage deduction 
     only with respect to meals

[[Page 19727]]

     and not entertainment, small businesses may have to keep 
     additional records to distinguish between the two types of 
     expenditures. The provision may lead to additional disputes 
     between small businesses and the IRS regarding the nature of 
     an expenditure, particularly in business situations where the 
     meal and entertainment is provided as a package for a single 
     price. No new regulatory changes would be needed to implement 
     the provision (although a conforming change to regulations to 
     reflect the increasing percentage would be appropriate). The 
     provision may increase complexity because the percentage of 
     the deduction is phased in.
     8. Sunset the provisions of the act (sec. 1602 of the 
         conference agreement)
     Summary description of provision
       The provision sunsets the provisions and amendments made by 
     this Act on the close of September 30, 2009. Certain 
     enumerated provisions of the bill sunset on December 31, 
     2008.
     Number of affected taxpayers
       It is estimated that the provision would affect almost all 
     individuals and small businesses.
     Discussion
       The provision will result in additional complexity and 
     record keeping requirements for individuals and small 
     businesses. Additional forms will be necessary to the extent 
     the sunset causes a provision that had been eliminated to 
     once again become effective. Similarly, additional regulatory 
     guidance may be necessary to provide rules regarding 
     transition issues that may arise as a result of this 
     provision. The provision also can be expected to result in an 
     increase in the tax preparation cost of individuals and small 
     businesses using a tax preparation service.
                                       Department of the Treasury,


                                     Internal Revenue Service,

                                   Washington, DC, August 4, 1999.
     Ms. Lindy L. Paull,
     Chief of Staff, Joint Committee on Taxation,
     Washington, DC.
       Dear Ms. Paull: Attached are the Internal Revenue Service's 
     comments on the eight provisions of the conference agreement 
     to H.R. 2488 that you identified for complexity analysis in 
     your letter of August 4, 1999. We have reiterated your 
     description of those provisions in the attachment to this 
     letter. Our comments are based on the information provided in 
     the attachment to your letter, as well as language from the 
     House and Senate versions of the bill.
       Due to the short turnaround time, and the fact that we did 
     not have the exact language of the conference report, our 
     comments are provisional and subject to change upon a more 
     complete and in-depth analysis of the provisions.
           Sincerely,
                                              Charles O. Rossotti,
                                                     Commissioner.
       Attachment.

  Complexity Analysis of Provisions From Conference Agreement on H.R. 
                                  2488


                             rate reduction

       Provision: A reduction in the individual regular income tax 
     rates as follows: (1) from 15 percent to 14 percent; (2) from 
     28 percent to 27 percent; (3) from 31 percent to 30 percent; 
     (4) from 36 percent to 35 percent; and (5) from 39.6 percent 
     to 38.6 percent. The reduction of the 15-percent rate to a 
     14-percent rate is phased-in over three years: (1) 14.5 
     percent in 2001 and 2002; and (2) 14 percent in 2003 and 
     thereafter. The reductions in the other rates are effective 
     for taxable years beginning after 2004. The provision also 
     widens the lowest regular income tax bracket for singles and 
     heads of household by $3,000 for taxable years beginning 
     after 2005. For years after 2006, the $3,000 amount is 
     indexed for inflation.
       IRS Comments: The tax rate changes and the increase in the 
     width of the 14 percent bracket mandated by the provision 
     would be incorporated in the tax tables and tax rate 
     schedules during IRS' annual update of these items. Changes 
     would be required to the tax tables and tax rate schedules 
     shown in the instructions for Forms 1040, 1040A, 1040EZ, 
     1040NR, 1040NR-EZ, and 1041, and on Forms 1040-ES, W-4V, and 
     8814 for 2001, 2003, 2005, and later years. Other forms 
     (e.g., Form 8752) would also be affected. No new forms would 
     be required. Programming changes would be required to reflect 
     the new rates and wider 14 percent rate bracket.


                        marriage penalty relief

       Provision: An increase in the basic standard deduction for 
     a married couple filing a joint return to twice the basic 
     standard deduction for an unmarried individual. This increase 
     is phased-in over five years (2001-2005) and is fully 
     effective in 2005. The provision also increases the size of 
     the lowest regular income tax rate bracket to twice the size 
     of the rate bracket for an unmarried individual. This 
     increase in the rate bracket is phased-in over four years 
     (2005-2008) and is fully effective in 2008.
       IRS Comments: The increase in the basic standard deduction 
     for married taxpayers filing jointly would be incorporated in 
     the instructions for Forms 1040, 1040A, 1040EZ, 1040NR, and 
     1040NR-EZ, and on Forms 1040, 1040A, 1040EZ, and 1040-ES for 
     each year during the phase-in period (2001-2005). The 
     increase in the width of the 14 percent bracket would be 
     incorporated in the tax tables and tax rate schedules in the 
     instructions for Forms 1040, 1040A, 1040EZ, 1040NR, and 
     1040NR-EZ for each year during the phase-in period (2005-
     2008). No new forms would be required. Programming changes 
     would be required to reflect the increased standard deduction 
     and wider 14 percent rate bracket for married taxpayers 
     filing jointly.


                Reduced capital gains rate and indexing

       Provision: A reduction of the individual capital gain rates 
     of 10, 20, and 25 percent to 8, 18, and 23 percent, 
     respectively, effective for transactions on or after january 
     1, 1999. The provision also provides for the indexation of 
     capital gains beginning in 2000 (with mark-to-market 
     treatment with respect to assets held on january 1, 2000).
       IRS Comments: The provision would require revision of the 
     following 1999 forms to reflect the reduced capital gains tax 
     rates. Schedule D (Form 1040). Schedule D (Form 1041), Form 
     6251, and Schedule I of Form 1041. no additional lines or 
     worksheets would be necessary, provided that section 
     1(h)(13)(C) of the Code, relating to special rules for pass-
     through entities, is repealed. No new forms would be 
     required. Programming changes would be required to reflect 
     the new rates. Programming changes would be required to 
     reflect the reduced capital gain rates.
       The indexing provision would result in an increase in 
     taxpayer burden. The IRS would need to develop a 6-column 
     worksheet and a table of indexing factors beginning with the 
     2000 (or 2001) instructions for Schedules D of Forms 1040, 
     1041, 1065, 1065-B, and 1120-S, to help taxpayers figure the 
     increase in the basis of each asset they sell. Indexing would 
     be especially burdensome for taxpayers who have dividend 
     reinvestment plans or who periodically add small amounts to 
     their mutual funds. Each dividend reinvestment and/or 
     periodic addition would be viewed as a separate asset 
     purchase that would have to be indexed based on when the 
     reinvestment or addition was made. Most capital improvements 
     would be similarly treated as separate asset acquisitions. 
     Assuming corporations are ineligible for indexing, the 
     provision would also require two separate basis calculations 
     for assets held by partnerships that have corporate partners. 
     No new forms or programming changes would be required.
       Indexing would lead to increased taxpayer error. Errors 
     detected on the face of the return during processing would be 
     sent to Error Resolution for correction, which would result 
     in additional taxpayer contacts as well as delays in issuing 
     refunds. Such errors would increase the IRS' processing 
     costs. Most indexing errors would only be detectable through 
     an examination of the return.
       Taxpayers would have to maintain proof (i.e., a copy of 
     their return) of their mark-to-market election well into the 
     future in order to establish their asset basis. Failure to 
     maintain this proof could lead to disputes with the IRS when 
     the asset is eventually sold or disposed of.
       Complications from indexing would likely cause an increase 
     in the number of taxpayers who use a paid preparer and 
     discourage the use by taxpayers of the electronic On-Line 
     Filing program. The indexing and the mark-to-market 
     provisions would result in increased taxpayer inquiries over 
     the toll-free telephone lines, which might be beyond the 
     capacity of the IRS to handle.


                   increased ira contribution limits

       Provision: An increase in the $2,000 IRA contribution limit 
     to $3,000 for 2001-03, to $4,000 in 2004-05, and to $5,000 in 
     2006-08.
       IRS Comments: This provision would require a change to the 
     dollar limit specified in the Form 1040, Form 1040A, Form 
     8606, and Form 5329 instructions for 2001, 2004, and 2006. 
     The change would also be reflected in the Form 1040-ES for 
     all applicable years. No new forms or additional lines would 
     be required. Programming changes would be needed to reflect 
     the increased contribution limits.
       IRS would need to provide guidance to financial 
     institutions that sponsor IRAs on how to take into account 
     the higher contribution limits (currently all sponsors 
     utilize IRS approved documents). In addition, the following 
     model IRA and Roth IRA documents that are issued by the 
     Assistant Commissioner (EPEO) would need to be modified to 
     take into account the increased contribution limits:
       Form 5305, Individual Retirement Trust Account
       Form 5305-A, Individual Retirement Custodial Account
       Form 5305-R, Roth Individual Retirement Account
       Form 5305-RA, Roth individual Retirement Custodial Account
       Form 5305-RB, Roth Individual Retirement Annuity 
     Endorsement
       Increase Health Insurance Deduction for Self-Employed to 
     100 Percent.
       Provision: An acceleration of the increase in the deduction 
     of health insurance expenses of self-employed individuals so 
     that the deduction is 100 percent in years beginning after 
     December 31, 1999.
       IRS Comments: This provision would enable IRS to eliminate 
     one line from the self-employed health insurance deduction 
     worksheet contained in the 2000 instructions for Forms 1040 
     and 1040NR. This worksheet is currently four lines. The Form 
     1040-ES for 2000 would

[[Page 19728]]

     also reflect the provision. No new forms would be required.


               repeal futa surtax after December 31, 2004

       Provision: A repeal of the temporary FUTA surtax (0.2 
     percent of wages) after December 31, 2004.
       IRS Comments: The provision would require a change to the 
     FUTA tax rate on forms 940, 940-EZ, 940-PR and Schedule H of 
     form 1040 for 2005. The rate would be reduced from 6.2 
     percent to 6.0 percent. No new forms would be required. 
     Programming changes would be necessary to reflect the reduced 
     FUTA rate.


         restoration of 80 percent deduction for meal expenses

       Provision: An increase from 50 percent to 80 percent in the 
     deductible percentage of business meal (food and beverage) 
     expenses. The increase in the deductible percentage is 
     phased-in according to the following schedule: 55 percent in 
     2005; 60 percent in 2006; 65 percent in 2007; 70 percent in 
     2008; 75 percent in 2009; and 80 percent in 2010 and 
     thereafter.
       IRS Comments: This provision would require the addition of 
     a new 5-line column on Form 2106 and a new line on form 2106-
     EZ to account for the different limits on meal expenses and 
     entertainment expenses. Currently, the same 50 percent limit 
     generally applies both types of expenses. Minor changes to 
     the instructions for Schedules, C, C-EZ, E, and F of Form 
     1040; form 1065; and the Form 1120 series would also be 
     required. No new forms would be required.


                                 sunset

       Provision: A sunset of all the provisions in the Act, as of 
     the close of September 30, 2009.
       IRS Comments: Sunsetting all of the Act provisions at the 
     same time would result in massive changes to tax forms and 
     instructions (and related programming) for the sunset year. 
     For taxpayers, the changes would be both burdensome and 
     confusing. The ``mid-year'' sunset (i.e., September 30 as 
     opposed to December 31) would greatly complicate matters and 
     exacerbate the burden and confusion for taxpayers.

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     For consideration of the House bill, and the Senate 
     amendment, and modifications committed to conference:
     Wm. Archer.
     Dick Armey.
     Philip M. Crane.
     Wm. Thomas.
                                Managers on the Part of the House.
     As additional conferees for consideration of sections 313, 
     315-316, 318, 325, 335, 338, 341-42, 344-45, 351, 362-63, 
     365, 371, 381, 1261, 1305, and 1406 of the Senate amendment, 
     and modifications committed to conference:
     Bill Goodling.
     John Boehner.
                                Managers on the Part of the House.

     Wm. V. Roth, Jr.
     Trent Lott.
                               Managers on the Part of the Senate.






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