[Congressional Record (Bound Edition), Volume 147 (2001), Part 7]
[House]
[Pages 9623-9724]
[From the U.S. Government Publishing Office, www.gpo.gov]



    CONFERENCE REPORT ON H.R. 1836, ECONOMIC GROWTH AND TAX RELIEF 
                       RECONCILIATION ACT OF 2001

  Mr. THOMAS submitted the following conference report and statement on 
the bill (H.R. 1836) to provide for reconciliation pursuant to section 
104 of the concurrent resolution on the budget for fiscal year 2002:

                  Conference Report (H. Rept. 107-84)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the Senate to the bill (H.R. 
     1836), to provide for reconciliation pursuant to section 104 
     of the concurrent resolution on the budget for fiscal year 
     2002, 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 State 
     amendment, insert the following:

     SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

       (a) Short Title.--This Act may be cited as the ``Economic 
     Growth and Tax Relief Reconciliation Act of 2001''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Table of Contents.--The table of contents of this Act 
     is as follows:
Sec. 1. Short title; references; table of contents.

             TITLE I--INDIVIDUAL INCOME TAX RATE REDUCTIONS

Sec. 101. Reduction in income tax rates for individuals.
Sec. 102. Repeal of phaseout of personal exemptions.
Sec. 103. Phaseout of overall limitation on itemized deductions.

              TITLE II--TAX BENEFITS RELATING TO CHILDREN

Sec. 201. Modifications to child tax credit.
Sec. 202. Expansion of adoption credit and adoption assistance 
              programs.
Sec. 203. Refunds disregarded in the administration of Federal programs 
              and federally assisted programs.
Sec. 204. Dependent care credit.
Sec. 205. Allowance of credit for employer expenses for child care 
              assistance.

                   TITLE III--MARRIAGE PENALTY RELIEF

Sec. 301. Elimination of marriage penalty in standard deduction.
Sec. 302. Phaseout of marriage penalty in 15-percent bracket.
Sec. 303. Marriage penalty relief for earned income credit; earned 
              income to include only amounts includible in gross 
              income; simplification of earned income credit.

               TITLE IV--AFFORDABLE EDUCATION PROVISIONS

                Subtitle A--Education Savings Incentives

Sec. 401. Modifications to education individual retirement accounts.
Sec. 402. Modifications to qualified tuition programs.

                   Subtitle B--Educational Assistance

Sec. 411. Extension of exclusion for employer-provided educational 
              assistance.
Sec. 412. Elimination of 60-month limit and increase in income 
              limitation on student loan interest deduction.
Sec. 413. Exclusion of certain amounts received under the National 
              Health Service Corps Scholarship Program and the F. 
              Edward Hebert Armed Forces Health Professions Scholarship 
              and Financial Assistance Program.

  Subtitle C--Liberalization of Tax-Exempt Financing Rules for Public 
                          School Construction

Sec. 421. Additional increase in arbitrage rebate exception for 
              governmental bonds used to finance educational 
              facilities.
Sec. 422. Treatment of qualified public educational facility bonds as 
              exempt facility bonds.

                      Subtitle D--Other Provisions

Sec. 431. Deduction for higher education expenses.

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

  Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes

Sec. 501. Repeal of estate and generation-skipping transfer taxes.

          Subtitle B--Reductions of Estate and Gift Tax Rates

Sec. 511. Additional reductions of estate and gift tax rates.

               Subtitle C--Increase in Exemption Amounts

Sec. 521. Increase in exemption equivalent of unified credit, lifetime 
              gifts exemption, and GST exemption amounts.

                Subtitle D--Credit for State Death Taxes

Sec. 531. Reduction of credit for State death taxes.
Sec. 532. Credit for State death taxes replaced with deduction for such 
              taxes.

Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With 
                                 Repeal

Sec. 541. Termination of step-up in basis at death.
Sec. 542. Treatment of property acquired from a decedent dying after 
              December 31, 2009.

                   Subtitle F--Conservation Easements

Sec. 551. Expansion of estate tax rule for conservation easements.

     Subtitle G--Modifications of Generation-Skipping Transfer Tax

Sec. 561. Deemed allocation of GST exemption to lifetime transfers to 
              trusts; retroactive allocations.
Sec. 562. Severing of trusts.
Sec. 563. Modification of certain valuation rules.
Sec. 564. Relief provisions.

        Subtitle H--Extension of Time for Payment of Estate Tax

Sec. 571. Increase in number of allowable partners and shareholders in 
              closely held businesses.
Sec. 572. Expansion of availability of installment payment for estates 
              with interests qualifying lending and finance businesses.
Sec. 572. Clarification of availability of installment payment.

                      Subtitle I--Other Provisions

Sec. 581. Waiver of statute of limitation for taxes on certain farm 
              valuations.

   TITLE VI--PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS

               Subtitle A--Individual Retirement Accounts

Sec. 601. Modification of IRA contribution limits.
Sec. 602. Deemed IRAs under employer plans.

                     Subtitle B--Expanding Coverage

Sec. 611. Increase in benefit and contribution limits.
Sec. 612. Plan loans for subchapter S owners, partners, and sole 
              proprietors.
Sec. 613. Modification of top-heavy rules.
Sec. 614. Elective deferrals not taken into account for purposes of 
              deduction limits.
Sec. 615. Repeal of coordination requirements for deferred compensation 
              plans of State and local governments and tax-exempt 
              organizations.
Sec. 616. Deduction limits.
Sec. 617. Option to treat elective deferrals as after-tax Roth 
              contributions.
Sec. 618. Nonrefundable credit to certain individuals for elective 
              deferrals and IRA contributions.
Sec. 619. Credit for pension plan startup costs of small employers.
Sec. 620. Elimination of user fee for requests to IRS regarding pension 
              plans.
Sec. 621. Treatment of nonresident aliens engaged in international 
              transportation services.

                Subtitle C--Enhancing Fairness for Women

Sec. 631. Catch-up contributions for individuals age 50 or over.
Sec. 632. Equitable treatment for contributions of employees to defined 
              contribution plans.
Sec. 633. Faster vesting of certain employer matching contributions.
Sec. 634. Modification to minimum distribution rules.
Sec. 635. Clarification of tax treatment of division of section 457 
              plan benefits upon divorce.
Sec. 636. Provisions relating to hardship distributions.
Sec. 637. Waiver of tax on nondeductible contributions for domestic or 
              similar workers.

          Subtitle D--Increasing Portability for Participants

Sec. 641. Rollovers allowed among various types of plans.
Sec. 642. Rollovers of IRAs into workplace retirement plans.
Sec. 643. Rollovers of after-tax contributions.
Sec. 644. Hardship exception to 60-day rule.
Sec. 645. Treatment of forms of distribution.
Sec. 646. Rationalization of restrictions on distributions.
Sec. 647. Purchase of service credit in governmental defined benefit 
              plans.

[[Page 9624]]

Sec. 648. Employers may disregard rollovers for purposes of cash-out 
              amounts.
Sec. 649. Minimum distribution and inclusion requirements for section 
              457 plans.

       Subtitle E--Strengthening Pension Security and Enforcement

                       Part I--General Provisions

Sec. 651. Repeal of 160 percent of current liability funding limit.
Sec. 652. Maximum contribution deduction rules modified and applied to 
              all defined benefit plans.
Sec. 653. Excise tax relief for sound pension funding.
Sec. 654. Treatment of multiemployer plans under section 415.
Sec. 655. Protection of investment of employee contributions to 401(k) 
              plans.
Sec. 656. Prohibited allocations of stock in S corporation ESOP.
Sec. 657. Automatic rollovers of certain mandatory distributions.
Sec. 658. Clarification of treatment of contributions to multiemployer 
              plan.

 Part II--Treatment of Plan Amendments Reducing Future Benefit Accruals

Sec. 659. Excise tax on failure to provide notice by defined benefit 
              plans significantly reducing future benefit accruals.

                Subtitle F--Reducing Regulatory Burdens

Sec. 661. Modification of timing of plan valuations.
Sec. 662. ESOP dividends may be reinvested without loss of dividend 
              deduction.
Sec. 663. Repeal of transition rule relating to certain highly 
              compensated employees.
Sec. 664. Employees of tax-exempt entities.
Sec. 665. Clarification of treatment of employer-provided retirement 
              advice.
Sec. 666. Repeal of the multiple use test.

                  Subtitle G--Miscellaneous Provisions

Sec. 671. Tax treatment and information requirements of Alaska Native 
              Settlement Trusts.

                   TITLE VII--ALTERNATIVE MINIMUM TAX

Sec. 701. Increase in alternative minimum tax exemption.

                      TITLE VIII--OTHER PROVISIONS

Sec. 801. Time for payment of corporate estimated taxes.
Sec. 802. Expansion of authority to postpone certain tax-related 
              deadlines by reason of Presidentially declared disaster.
Sec. 803. No Federal income tax on restitution received by victims of 
              the Nazi regime or their heirs or estates.

           TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

Sec. 901. Sunset of provisions of Act.

             TITLE I--INDIVIDUAL INCOME TAX RATE REDUCTIONS

     SEC. 101. REDUCTION IN INCOME TAX RATES FOR INDIVIDUALS.

       (a) In General.--Section 1 (relating to tax imposed) is 
     amended by adding at the end the following new subsection:
       ``(i) Rate Reductions After 2000.--
       ``(1) 10-percent rate bracket.--
       ``(A) In general.--In the case of taxable years beginning 
     after December 31, 2000--
       ``(i) the rate of tax under subsections (a), (b), (c), and 
     (d) on taxable income not over the initial bracket amount 
     shall be 10 percent, and
       ``(ii) the 15 percent rate of tax shall apply only to 
     taxable income over the initial bracket amount but not over 
     the maximum dollar amount for the 15-percent rate bracket.
       ``(B) Initial bracket amount.--For purposes of this 
     paragraph, the initial bracket amount is--
       ``(i) $14,000 ($12,000 in the case of taxable years 
     beginning before January 1, 2008) in the case of subsection 
     (a),
       ``(ii) $10,000 in the case of subsection (b), and
       ``(iii) \1/2\ the amount applicable under clause (i) (after 
     adjustment, if any, under subparagraph (C)) in the case of 
     subsections (c) and (d).
       ``(C) Inflation adjustment.--In prescribing the tables 
     under subsection (f) which apply with respect to taxable 
     years beginning in calendar years after 2000--
       ``(i) the Secretary shall make no adjustment to the initial 
     bracket amount for any taxable year beginning before January 
     1, 2009,
       ``(ii) the cost-of-living adjustment used in making 
     adjustments to the initial bracket amount for any taxable 
     year beginning after December 31, 2008, shall be determined 
     under subsection (f)(3) by substituting `2007' for `1992' in 
     subparagraph (B) thereof, and
       ``(iii) such adjustment shall not apply to the amount 
     referred to in subparagraph (B)(iii).

     If any amount after adjustment under the preceding sentence 
     is not a multiple of $50, such amount shall be rounded to the 
     next lowest multiple of $50.
       ``(D) Coordination with acceleration of 10 percent rate 
     bracket benefit for 2001.--This paragraph shall not apply to 
     any taxable year to which section 6428 applies.
       ``(2) Reductions in rates after june 30, 2001.--In the case 
     of taxable years beginning in a calendar year after 2000, the 
     corresponding percentage specified for such calendar year in 
     the following table shall be substituted for the otherwise 
     applicable tax rate in the tables under subsections (a), (b), 
     (c), (d), and (e).

------------------------------------------------------------------------
                                         The corresponding percentages
                                         shall be substituted for the
    In the case of taxable years            following percentages:
   beginning during calendar year:   -----------------------------------
                                        28%      31%      36%     39.6%
------------------------------------------------------------------------
2001................................   27.5%    30.5%    35.5%    39.1%
2002 and 2003.......................   27.0%    30.0%    35.0%    38.6%
2004 and 2005.......................   26.0%    29.0%    34.0%    37.6%
2006 and thereafter.................   25.0%    28.0%    33.0%    35.0%
------------------------------------------------------------------------

       ``(3) Adjustment of tables.--The Secretary shall adjust the 
     tables prescribed under subsection (f) to carry out this 
     subsection.''.
       (b) Acceleration of 10 Percent Rate Bracket Benefit for 
     2001.--
       (1) In general.--Subchapter B of chapter 65 (relating to 
     abatements, credits, and refunds) is amended by adding at the 
     end the following new section:

     ``SEC. 6428. ACCELERATION OF 10 PERCENT INCOME TAX RATE 
                   BRACKET BENEFIT FOR 2001.

       ``(a) In General.--In the case of an eligible individual, 
     there shall be allowed as a credit against the tax imposed by 
     chapter 1 for the taxpayer's first taxable year beginning in 
     2001 an amount equal to 5 percent of so much of the 
     taxpayer's taxable income as does not exceed the initial 
     bracket amount (as defined in section 1(i)(1)(B)).
       ``(b) Limitation Based on Amount of Tax.--The credit 
     allowed by subsection (a) shall not exceed the excess (if 
     any) of--
       ``(1) the sum of the regular tax liability (as defined in 
     section 26(b)) plus the tax imposed by section 55, over
       ``(2) the sum of the credits allowable under part IV of 
     subchapter A of chapter 1 (other than the credits allowable 
     under subpart C thereof, relating to refundable credits).
       ``(c) Eligible Individual.--For purposes of this section, 
     the term `eligible individual' means any individual other 
     than--
       ``(1) any estate or trust,
       ``(2) any nonresident alien individual, and
       ``(3) any individual with respect to whom a deduction under 
     section 151 is allowable to another taxpayer for a taxable 
     year beginning in the calendar year in which the individual's 
     taxable year begins.
       ``(d) Special Rules.--
       ``(1) Coordination with advance refunds of credit.--
       ``(A) In general.--The amount of credit which would (but 
     for this paragraph) be allowable under this section shall be 
     reduced (but not below zero) by the aggregate refunds and 
     credits made or allowed to the taxpayer under subsection (e). 
     Any failure to so reduce the credit shall be treated as 
     arising out of a mathematical or clerical error and assessed 
     according to section 6213(b)(1).
       ``(B) Joint returns.--In the case of a refund or credit 
     made or allowed under subsection (e) with respect to a joint 
     return, half of such refund or credit shall be treated as 
     having been made or allowed to each individual filing such 
     return.
       ``(2) Coordination with estimated tax.--The credit under 
     this section shall be treated for purposes of section 6654(f) 
     in the same manner as a credit under subpart A of part IV of 
     subchapter A of chapter 1.
       ``(e) Advance Refunds of Credit Based on Prior Year Data.--
       ``(1) In general.--Each individual who was an eligible 
     individual for such individual's first taxable year beginning 
     in 2000 shall be treated as having made a payment against the 
     tax imposed by chapter 1 for such first taxable year in an 
     amount equal to the advance refund amount for such taxable 
     year.
       ``(2) Advance refund amount.--For purposes of paragraph 
     (1), the advance refund amount is the amount that would have 
     been allowed as a credit under this section for such first 
     taxable year if this section (other than subsection (d) and 
     this subsection) had applied to such taxable year.
       ``(3) Timing of payments.--In the case of any overpayment 
     attributable to this subsection, the Secretary shall, subject 
     to the provisions of this title, refund or credit such 
     overpayment as rapidly as possible and, to the extent 
     practicable, before October 1, 2001. No refund or credit 
     shall be made or allowed under this subsection after December 
     31, 2001.
       ``(4) No interest.--No interest shall be allowed on any 
     overpayment attributable to this subsection.''.
       (2) Clerical amendment.--The table of sections for 
     subchapter B of chapter 65 is amended by adding at the end 
     the following new item:

``Sec. 6428. Acceleration of 10 percent income tax rate bracket benefit 
              for 2001.''.

       (c) Conforming Amendments.--
       (1) Subparagraph (B) of section 1(g)(7) is amended by 
     striking ``15 percent'' in clause (ii)(II) and inserting ``10 
     percent.''.
       (2) Section 1(h) is amended--
       (A) by striking ``28 percent'' both places it appears in 
     paragraphs (1)(A)(ii)(I) and (1)(B)(i) and inserting ``25 
     percent'', and
       (B) by striking paragraph (13).
       (3) Section 15 is amended by adding at the end the 
     following new subsection:
       ``(f) Rate Reductions Enacted by Economic Growth and Tax 
     Relief Reconciliation Act of 2001.--This section shall not 
     apply to any change in rates under subsection (i) of section 
     1 (relating to rate reductions after 2000).''.
       (4) Section 531 is amended by striking ``equal to'' and all 
     that follows and inserting ``equal to the product of the 
     highest rate of tax under section 1(c) and the accumulated 
     taxable income.''.
       (5) Section 541 is amended by striking ``equal to'' and all 
     that follows and inserting ``equal to the product of the 
     highest rate of tax under section 1(c) and the undistributed 
     personal holding company income.''.

[[Page 9625]]

       (6) Section 3402(p)(1)(B) is amended by striking ``7, 15, 
     28, or 31 percent'' and inserting ``7 percent, any percentage 
     applicable to any of the 3 lowest income brackets in the 
     table under section 1(c),''.
       (7) Section 3402(p)(2) is amended by striking ``15 
     percent'' and inserting ``10 percent''.
       (8) Section 3402(q)(1) is amended by striking ``equal to 28 
     percent of such payment'' and inserting ``equal to the 
     product of the third lowest rate of tax applicable under 
     section 1(c) and such payment''.
       (9) Section 3402(r)(3) is amended by striking ``31 
     percent'' and inserting ``the fourth lowest rate of tax 
     applicable under section 1(c)''.
       (10) Section 3406(a)(1) is amended by striking ``equal to 
     31 percent of such payment'' and inserting ``equal to the 
     product of the fourth lowest rate of tax applicable under 
     section 1(c) and such payment''.
       (11) Section 13273 of the Revenue Reconciliation Act of 
     1993 is amended by striking ``28 percent'' and inserting 
     ``the third lowest rate of tax applicable under section 1(c) 
     of the Internal Revenue Code of 1986''.
       (d) 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) Amendments to withholding provisions.--The amendments 
     made by paragraphs (6), (7), (8), (9), (10), and (11) of 
     subsection (c) shall apply to amounts paid after the 60th day 
     after the date of the enactment of this Act. References to 
     income brackets and rates of tax in such paragraphs shall be 
     applied without regard to section 1(i)(1)(D) of the Internal 
     Revenue Code of 1986.

     SEC. 102. REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.

       (a) In General.--Paragraph (3) of section 151(d) (relating 
     to exemption amount) is amended by adding at the end the 
     following new subparagraphs:
       ``(E) Reduction of phaseout.--
       ``(i) In general.--In the case of taxable years beginning 
     after December 31, 2005, and before January 1, 2010, the 
     reduction under subparagraph (A) shall be equal to the 
     applicable fraction of the amount which would (but for this 
     subparagraph) be the amount of such reduction.
       ``(ii) Applicable fraction.--For purposes of clause (i), 
     the applicable fraction shall be determined in accordance 
     with the following table:

``For taxable years beginning in calendar yThe applicable fraction is--
      2006 and 2007..............................................\2/3\ 
      2008 and 2009..............................................\1/3\.

       ``(F) Termination.--This paragraph shall not apply to any 
     taxable year beginning after December 31, 2009.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.

     SEC. 103. PHASEOUT OF OVERALL LIMITATION ON ITEMIZED 
                   DEDUCTIONS.

       (a) In General.--Section 68 is amended by adding at the end 
     the following new subsections:
       ``(f) Phaseout of Limitation.--
       ``(1) In general.--In the case of taxable years beginning 
     after December 31, 2005, and before January 1, 2010, the 
     reduction under subsection (a) shall be equal to the 
     applicable fraction of the amount which would (but for this 
     subsection) be the amount of such reduction.
       ``(2) Applicable fraction.--For purposes of paragraph (1), 
     the applicable fraction shall be determined in accordance 
     with the following table:

``For taxable years beginning in calendar yThe applicable fraction is--
      2006 and 2007..............................................\2/3\ 
      2008 and 2009..............................................\1/3\.

       ``(g) Termination.--This section shall not apply to any 
     taxable year beginning after December 31, 2009.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.

              TITLE II--TAX BENEFITS RELATING TO CHILDREN

     SEC. 201. MODIFICATIONS TO CHILD TAX CREDIT.

       (a) Increase in Per Child Amount.--Subsection (a) of 
     section 24 (relating to child tax credit) is amended to read 
     as follows:
       ``(a) Allowance of Credit.--
       ``(1) In general.--There shall be allowed as a credit 
     against the tax imposed by this chapter for the taxable year 
     with respect to each qualifying child of the taxpayer an 
     amount equal to the per child amount.
       ``(2) Per child amount.--For purposes of paragraph (1), the 
     per child amount shall be determined as follows:

``In the case of any taxable year beginning   The per child amount is--
    2001, 2002, 2003, or 2004...................................$  600 
    2005, 2006, 2007, or 2008....................................  700 
    2009.........................................................  800 
    2010 or thereafter..............................................

                                                              1,000.''.
       (b) Credit Allowed Against Alternative Minimum Tax.--
       (1) In general.--Subsection (b) of section 24 (relating to 
     child tax credit) is amended by adding at the end the 
     following new paragraph:
       ``(3) Limitation based on amount of tax.--The credit 
     allowed under subsection (a) for any taxable year shall not 
     exceed the excess of--
       ``(A) the sum of the regular tax liability (as defined in 
     section 26(b)) plus the tax imposed by section 55, over
       ``(B) the sum of the credits allowable under this subpart 
     (other than this section) and section 27 for the taxable 
     year.''.
       (2) Conforming amendments.--
       (A) The heading for section 24(b) is amended to read as 
     follows: ``Limitations.--''.
       (B) The heading for section 24(b)(1) is amended to read as 
     follows: ``Limitation based on adjusted gross income.--''.
       (C) Section 24(d), as amended by subsection (c), is 
     amended--
       (i) by striking ``section 26(a)'' each place it appears and 
     inserting ``subsection (b)(3)'', and
       (ii) in paragraph (1)(B) by striking ``aggregate amount of 
     credits allowed by this subpart'' and inserting ``amount of 
     credit allowed by this section''.
       (D) Paragraph (1) of section 26(a) is amended by inserting 
     ``(other than section 24)'' after ``this subpart''.
       (E) Subsection (c) of section 23 is amended by striking 
     ``and section 1400C'' and inserting ``and sections 24 and 
     1400C''.
       (F) Subparagraph (C) of section 25(e)(1) is amended by 
     inserting ``, 24,'' after ``sections 23''.
       (G) Section 904(h) is amended by inserting ``(other than 
     section 24)'' after ``chapter''.
       (H) Subsection (d) of section 1400C is amended by inserting 
     ``and section 24'' after ``this section''.
       (c) Refundable Child Credit.--
       (1) In general.--So much of section 24(d) (relating to 
     additional credit for families with 3 or more children) as 
     precedes paragraph (2) is amended to read as follows:
       ``(d) Portion of Credit Refundable.--
       ``(1) In general.--The aggregate credits allowed to a 
     taxpayer under subpart C shall be increased by the lesser 
     of--
       ``(A) the credit which would be allowed under this section 
     without regard to this subsection and the limitation under 
     section 26(a), or
       ``(B) the amount by which the amount of credit allowed by 
     this section (determined without regard to this subsection) 
     would increase if the limitation imposed by section 26(a) 
     were increased by the greater of--
       ``(i) 15 percent (10 percent in the case of taxable years 
     beginning before January 1, 2005) of so much of the 
     taxpayer's earned income (within the meaning of section 32) 
     which is taken into account in computing taxable income for 
     the taxable year as exceeds $10,000, or
       ``(ii) in the case of a taxpayer with 3 or more qualifying 
     children, the excess (if any) of--

       ``(I) the taxpayer's social security taxes for the taxable 
     year, over
       ``(II) the credit allowed under section 32 for the taxable 
     year.

     The amount of the credit allowed under this subsection shall 
     not be treated as a credit allowed under this subpart and 
     shall reduce the amount of credit otherwise allowable under 
     subsection (a) without regard to section 26(a).''.
       (2) Inflation adjustment.--Subsection (d) of section 24 is 
     amended by adding at the end the following new paragraph:
       ``(4) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2001, the $10,000 
     amount contained in paragraph (1)(B) shall be increased by an 
     amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2000' 
     for `calendar year 1992' in subparagraph (B) thereof.

     Any increase determined under the preceding sentence shall be 
     rounded to the nearest multiple of $50.''
       (3) Conforming amendment.--Section 32 is amended by 
     striking subsection (n).
       (d) Elimination of Reduction of Credit to Taxpayer Subject 
     to Alternative Minimum Tax Provision.--Section 24(d) is 
     amended--
       (1) by striking paragraph (2), and
       (2) by redesignating paragraphs (3) and (4) as paragraphs 
     (2) and (3), respectively.
       (e) 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 (b).--The amendments made by subsection (b) 
     shall apply to taxable years beginning after December 31, 
     2001.

     SEC. 202. EXPANSION OF ADOPTION CREDIT AND ADOPTION 
                   ASSISTANCE PROGRAMS.

       (a) In General.--
       (1) Adoption credit.--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.''.
       (2) Adoption assistance programs.--Section 137(a) (relating 
     to adoption assistance programs) is amended to read as 
     follows:
       ``(a) In General.--Gross income of an employee does not 
     include amounts paid or expenses incurred by the employer for 
     adoption expenses in connection with the adoption of a child 
     by an employee if such amounts are furnished pursuant to an 
     adoption assistance program. The amount of the exclusion 
     shall be--
       ``(1) in the case of an adoption of a child other than a 
     child with special needs, the

[[Page 9626]]

     amount of the qualified adoption expenses paid or incurred by 
     the taxpayer, and
       ``(2) in the case of an adoption of a child with special 
     needs, $10,000.''.
       (b) Dollar Limitations.--
       (1) Dollar amount of allowed expenses.--
       (A) Adoption expenses.--Section 23(b)(1) (relating to 
     allowance of credit) is amended--
       (i) by striking ``$5,000'' and inserting ``$10,000'',
       (ii) by striking ``($6,000, in the case of a child with 
     special needs)'', and
       (iii) by striking ``subsection (a)'' and inserting 
     ``subsection (a)(1)(A)''.
       (B) Adoption assistance programs.--Section 137(b)(1) 
     (relating to dollar limitations for adoption assistance 
     programs) is amended--
       (i) by striking ``$5,000'' and inserting ``$10,000'', and
       (ii) by striking ``($6,000, in the case of a child with 
     special needs)'', and
       (iii) by striking ``subsection (a)'' and inserting 
     ``subsection (a)(1)''.
       (2) Phase-out limitation.--
       (A) Adoption expenses.--Clause (i) of section 23(b)(2)(A) 
     (relating to income limitation) is amended by striking 
     ``$75,000'' and inserting ``$150,000''.
       (B) Adoption assistance programs.--Section 137(b)(2)(A) 
     (relating to income limitation) is amended by striking 
     ``$75,000'' and inserting ``$150,000''.
       (c) Year Credit Allowed.--Section 23(a)(2) (relating to 
     year credit allowed) 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) Repeal of Terminations.--
       (1) Children without special needs.--Paragraph (2) of 
     section 23(d) (relating to definition of eligible child) 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) Adoption Assistance Programs.--Section 137 (relating to 
     adoption assistance programs) is amended by striking 
     subsection (f).
       (e) Adjustment of Dollar and Income Limitations for 
     Inflation.--
       (1) Adoption credit.--Section 23 (relating to adoption 
     expenses) is amended by redesignating subsection (h) as 
     subsection (i) and by inserting after subsection (g) the 
     following new subsection:
       ``(h) Adjustments for Inflation.--In the case of a taxable 
     year beginning after December 31, 2002, each of the dollar 
     amounts in subsection (a)(1)(B) and paragraphs (1) and 
     (2)(A)(i) of subsection (b) shall be increased by an amount 
     equal to--
       ``(1) such dollar amount, multiplied by
       ``(2) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2001' 
     for `calendar year 1992' in subparagraph (B) thereof.''.
       (2) Adoption assistance programs.--Section 137 (relating to 
     adoption assistance programs), as amended by subsection (d), 
     is amended by adding at the end the following new subsection:
       ``(f) Adjustments for Inflation.--In the case of a taxable 
     year beginning after December 31, 2002, each of the dollar 
     amounts in subsection (a)(2) and paragraphs (1) and (2)(A) of 
     subsection (b) shall be increased by an amount equal to--
       ``(1) such dollar amount, multiplied by
       ``(2) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2001' 
     for `calendar year 1992' in subparagraph (B) thereof.''.
       (f) Credit Allowed Against Alternative Minimum Tax.--
       (1) In general.--Subsection (b) of section 23 is amended by 
     adding at the end the following new paragraph:
       ``(4) Limitation based on amount of tax.--The credit 
     allowed under subsection (a) for any taxable year shall not 
     exceed the excess of--
       ``(A) the sum of the regular tax liability (as defined in 
     section 26(b)) plus the tax imposed by section 55, over
       ``(B) the sum of the credits allowable under this subpart 
     (other than this section) and section 27 for the taxable 
     year.''
       (2) Conforming amendments.--
       (A) Section 23(c), as amended by section 201(b), is 
     amended--
       (i) by striking ``section 26(a)'' and inserting 
     ``subsection (b)(4)'', and
       (ii) by striking ``reduced by the sum of the credits 
     allowable under this subpart (other than this section and 
     sections 24 and 1400C)''.
       (B) Section 24(b)(3)(B), as added by section 201(b), is 
     amended by striking ``this section'' and inserting ``this 
     section and section 23''.
       (C) Sections 26(a)(1), 904(h), and 1400C(d), as amended by 
     section 201(b), are each amended by striking ``section 24'' 
     and inserting ``sections 23 and 24''.
       (g) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2001.
       (2) Subsection (a).--The amendments made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 203. REFUNDS DISREGARDED IN THE ADMINISTRATION OF 
                   FEDERAL PROGRAMS AND FEDERALLY ASSISTED 
                   PROGRAMS.

       Any payment considered to have been made to any individual 
     by reason of section 24 of the Internal Revenue Code of 1986, 
     as amended by section 201, shall not be taken into account as 
     income and shall not be taken into account as resources for 
     the month of receipt and the following month, for purposes of 
     determining the eligibility of such individual or any other 
     individual for benefits or assistance, or the amount or 
     extent of benefits or assistance, under any Federal program 
     or under any State or local program financed in whole or in 
     part with Federal funds.

     SEC. 204. DEPENDENT CARE CREDIT.

       (a) Increase in Dollar Limit.--Subsection (c) of section 21 
     (relating to expenses for household and dependent care 
     services necessary for gainful employment) is amended--
       (1) by striking ``$2,400'' in paragraph (1) and inserting 
     ``$3,000'', and
       (2) by striking ``$4,800'' in paragraph (2) and inserting 
     ``$6,000''.
       (b) Increase in Applicable Percentage.--Section 21(a)(2) 
     (defining applicable percentage) is amended--
       (1) by striking ``30 percent'' and inserting ``35 
     percent'', and
       (2) by striking ``$10,000'' and inserting ``$15,000''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2002.

     SEC. 205. ALLOWANCE OF CREDIT FOR EMPLOYER EXPENSES FOR CHILD 
                   CARE ASSISTANCE.

       (a) In General.--Subpart D of part IV of subchapter A of 
     chapter 1 (relating to business related credits), as amended 
     by section 619, is further amended by adding at the end the 
     following:

     ``SEC. 45F. EMPLOYER-PROVIDED CHILD CARE CREDIT.

       ``(a) In General.--For purposes of section 38, the 
     employer-provided child care credit determined under this 
     section for the taxable year is an amount equal to the sum 
     of--
       ``(1) 25 percent of the qualified child care expenditures, 
     and
       ``(2) 10 percent of the qualified child care resource and 
     referral expenditures,
     of the taxpayer for such taxable year.
       ``(b) Dollar Limitation.--The credit allowable under 
     subsection (a) for any taxable year shall not exceed 
     $150,000.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Qualified child care expenditure.--
       ``(A) In general.--The term `qualified child care 
     expenditure' means any amount paid or incurred--
       ``(i) to acquire, construct, rehabilitate, or expand 
     property--

       ``(I) which is to be used as part of a qualified child care 
     facility of the taxpayer,
       ``(II) with respect to which a deduction for depreciation 
     (or amortization in lieu of depreciation) is allowable, and
       ``(III) which does not constitute part of the principal 
     residence (within the meaning of section 121) of the taxpayer 
     or any employee of the taxpayer,

       ``(ii) for the operating costs of a qualified child care 
     facility of the taxpayer, including costs related to the 
     training of employees, to scholarship programs, and to the 
     providing of increased compensation to employees with higher 
     levels of child care training, or
       ``(iii) under a contract with a qualified child care 
     facility to provide child care services to employees of the 
     taxpayer.
       ``(B) Fair market value.--The term `qualified child care 
     expenditures' shall not include expenses in excess of the 
     fair market value of such care.
       ``(2) Qualified child care facility.--
       ``(A) In general.--The term `qualified child care facility' 
     means a facility--
       ``(i) the principal use of which is to provide child care 
     assistance, and
       ``(ii) which meets the requirements of all applicable laws 
     and regulations of the State or local government in which it 
     is located, including the licensing of the facility as a 
     child care facility.

     Clause (i) shall not apply to a facility which is the 
     principal residence (within the meaning of section 121) of 
     the operator of the facility.
       ``(B) Special rules with respect to a taxpayer.--A facility 
     shall not be treated as a qualified child care facility with 
     respect to a taxpayer unless--
       ``(i) enrollment in the facility is open to employees of 
     the taxpayer during the taxable year,
       ``(ii) if the facility is the principal trade or business 
     of the taxpayer, at least 30 percent of the enrollees of such 
     facility are dependents of employees of the taxpayer, and
       ``(iii) the use of such facility (or the eligibility to use 
     such facility) does not discriminate in favor of employees of 
     the taxpayer who are highly compensated employees (within the 
     meaning of section 414(q)).
       ``(3) Qualified child care resource and referral 
     expenditure.--
       ``(A) In general.--The term `qualified child care resource 
     and referral expenditure' means any amount paid or incurred 
     under a contract to provide child care resource and referral 
     services to an employee of the taxpayer.
       ``(B) Nondiscrimination.--The services shall not be treated 
     as qualified unless the provision of such services (or the 
     eligibility to use such services) does not discriminate in 
     favor of employees of the taxpayer who are highly compensated 
     employees (within the meaning of section 414(q)).

[[Page 9627]]

       ``(d) Recapture of Acquisition and Construction Credit.--
       ``(1) In general.--If, as of the close of any taxable year, 
     there is a recapture event with respect to any qualified 
     child care facility of the taxpayer, then the tax of the 
     taxpayer under this chapter for such taxable year shall be 
     increased by an amount equal to the product of--
       ``(A) the applicable recapture percentage, and
       ``(B) the aggregate decrease in the credits allowed under 
     section 38 for all prior taxable years which would have 
     resulted if the qualified child care expenditures of the 
     taxpayer described in subsection (c)(1)(A) with respect to 
     such facility had been zero.
       ``(2) Applicable recapture percentage.--
       ``(A) In general.--For purposes of this subsection, the 
     applicable recapture percentage shall be determined from the 
     following table:

The applicable recapture percentag  ``If the recapture event occurs in:
    Years 1-3....................................................100   
    Year 4........................................................85   
    Year 5........................................................70   
    Year 6........................................................55   
    Year 7........................................................40   
    Year 8........................................................25   
    Years 9 and 10................................................10   
    Years 11 and thereafter........................................0.  

       ``(B) Years.--For purposes of subparagraph (A), year 1 
     shall begin on the first day of the taxable year in which the 
     qualified child care facility is placed in service by the 
     taxpayer.
       ``(3) Recapture event defined.--For purposes of this 
     subsection, the term `recapture event' means--
       ``(A) Cessation of operation.--The cessation of the 
     operation of the facility as a qualified child care facility.
       ``(B) Change in ownership.--
       ``(i) In general.--Except as provided in clause (ii), the 
     disposition of a taxpayer's interest in a qualified child 
     care facility with respect to which the credit described in 
     subsection (a) was allowable.
       ``(ii) Agreement to assume recapture liability.--Clause (i) 
     shall not apply if the person acquiring such interest in the 
     facility agrees in writing to assume the recapture liability 
     of the person disposing of such interest in effect 
     immediately before such disposition. In the event of such an 
     assumption, the person acquiring the interest in the facility 
     shall be treated as the taxpayer for purposes of assessing 
     any recapture liability (computed as if there had been no 
     change in ownership).
       ``(4) Special rules.--
       ``(A) Tax benefit rule.--The tax for the taxable year shall 
     be increased under paragraph (1) only with respect to credits 
     allowed by reason of this section which were used to reduce 
     tax liability. In the case of credits not so used to reduce 
     tax liability, the carryforwards and carrybacks under section 
     39 shall be appropriately adjusted.
       ``(B) No credits against tax.--Any increase in tax under 
     this subsection shall not be treated as a tax imposed by this 
     chapter for purposes of determining the amount of any credit 
     under subpart A, B, or D of this part.
       ``(C) No recapture by reason of casualty loss.--The 
     increase in tax under this subsection shall not apply to a 
     cessation of operation of the facility as a qualified child 
     care facility by reason of a casualty loss to the extent such 
     loss is restored by reconstruction or replacement within a 
     reasonable period established by the Secretary.
       ``(e) Special Rules.--For purposes of this section--
       ``(1) Aggregation rules.--All persons which are treated as 
     a single employer under subsections (a) and (b) of section 52 
     shall be treated as a single taxpayer.
       ``(2) Pass-thru in the case of estates and trusts.--Under 
     regulations prescribed by the Secretary, rules similar to the 
     rules of subsection (d) of section 52 shall apply.
       ``(3) Allocation in the case of partnerships.--In the case 
     of partnerships, the credit shall be allocated among partners 
     under regulations prescribed by the Secretary.
       ``(f) No Double Benefit.--
       ``(1) Reduction in basis.--For purposes of this subtitle--
       ``(A) In general.--If a credit is determined under this 
     section with respect to any property by reason of 
     expenditures described in subsection (c)(1)(A), the basis of 
     such property shall be reduced by the amount of the credit so 
     determined.
       ``(B) Certain dispositions.--If, during any taxable year, 
     there is a recapture amount determined with respect to any 
     property the basis of which was reduced under subparagraph 
     (A), the basis of such property (immediately before the event 
     resulting in such recapture) shall be increased by an amount 
     equal to such recapture amount. For purposes of the preceding 
     sentence, the term `recapture amount' means any increase in 
     tax (or adjustment in carrybacks or carryovers) determined 
     under subsection (d).
       ``(2) Other deductions and credits.--No deduction or credit 
     shall be allowed under any other provision of this chapter 
     with respect to the amount of the credit determined under 
     this section.''.
       (b) Conforming Amendments.--
       (1) Section 38(b), as amended by section 619, is amended by 
     striking ``plus'' at the end of paragraph (13), by striking 
     the period at the end of paragraph (14) and inserting ``, 
     plus'', and by adding at the end the following:
       ``(15) the employer-provided child care credit determined 
     under section 45F.''.
       (2) The table of sections for subpart D of part IV of 
     subchapter A of chapter 1 is amended by adding at the end the 
     following:

``Sec. 45F. Employer-provided child care credit.''

       (3) Section 1016(a) 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) in the case of a facility with respect to which a 
     credit was allowed under section 45F, to the extent provided 
     in section 45F(f)(1).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

                   TITLE III--MARRIAGE PENALTY RELIEF

     SEC. 301. 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 ``the applicable percentage 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) Applicable Percentage.--Section 63(c) (relating to 
     standard deduction) is amended by adding at the end the 
     following new paragraph:
       ``(7) Applicable percentage.--For purposes of paragraph 
     (2), the applicable percentage shall be determined in 
     accordance with the following table:

``For taxable years beginning in calendarThe applicable percentage is--
      2005.........................................................174 
      2006.........................................................184 
      2007.........................................................187 
      2008.........................................................190 
      2009 and thereafter.......................................200.''.

       (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, 
     2004.

     SEC. 302. PHASEOUT OF MARRIAGE PENALTY IN 15-PERCENT BRACKET.

       (a) In General.--Section 1(f) (relating to adjustments in 
     tax tables so that inflation will not result in tax 
     increases) is amended by adding at the end the following new 
     paragraph:
       ``(8) Phaseout of marriage penalty in 15-percent bracket.--
       ``(A) In general.--With respect to taxable years beginning 
     after December 31, 2004, in prescribing the tables under 
     paragraph (1)--
       ``(i) the maximum taxable income in the 15-percent 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 15-percent 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 clause (i).
       ``(B) Applicable percentage.--For purposes of subparagraph 
     (A), the applicable percentage shall be determined in 
     accordance with the following table:

``For taxable years beginning in calendarThe applicable percentage is--
      2005.........................................................180 
      2006.........................................................187 
      2007.........................................................193 
      2008 and thereafter..........................................200.

       ``(C) Rounding.--If any amount determined under 
     subparagraph (A)(i) is not a multiple of $50, such amount 
     shall be rounded to the next lowest multiple of $50.''.
       (b) Technical Amendments.--
       (1) Subparagraph (A) of section 1(f)(2) is amended by 
     inserting ``except as provided in paragraph (8),'' before 
     ``by increasing''.
       (2) The heading for subsection (f) of section 1 is amended 
     by inserting ``Phaseout of Marriage Penalty in 15-Percent 
     Bracket;'' before ``Adjustments''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 303. MARRIAGE PENALTY RELIEF FOR EARNED INCOME CREDIT; 
                   EARNED INCOME TO INCLUDE ONLY AMOUNTS 
                   INCLUDIBLE IN GROSS INCOME; SIMPLIFICATION OF 
                   EARNED INCOME CREDIT.

       (a) Increased Phaseout Amount.--
       (1) In general.--Section 32(b)(2) (relating to amounts) is 
     amended--
       (A) by striking ``Amounts.--The earned'' and inserting 
     ``Amounts.--
       ``(A) In general.--Subject to subparagraph (B), the 
     earned'', and
       (B) by adding at the end the following new subparagraph:

[[Page 9628]]

       ``(B) Joint returns.--In the case of a joint return filed 
     by an eligible individual and such individual's spouse, the 
     phaseout amount determined under subparagraph (A) shall be 
     increased by--
       ``(i) $1,000 in the case of taxable years beginning in 
     2002, 2003, and 2004,
       ``(ii) $2,000 in the case of taxable years beginning in 
     2005, 2006, and 2007, and
       ``(iii) $3,000 in the case of taxable years beginning after 
     2007.''.
       (2) 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)(2)(A) and 
     (i)(1), by substituting `calendar year 1995' for `calendar 
     year 1992' in subparagraph (B) thereof, and
       ``(ii) in the case of the $3,000 amount in subsection 
     (b)(2)(B)(iii), by substituting `calendar year 2007' for 
     `calendar year 1992' in subparagraph (B) of such section 
     1.''.
       (3) 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)''.
       (b) Earned Income To Include Only Amounts Includible in 
     Gross Income.--Clause (i) of section 32(c)(2)(A) (defining 
     earned income) is amended by inserting ``, but only if such 
     amounts are includible in gross income for the taxable year'' 
     after ``other employee compensation''.
       (c) Repeal of Reduction of Credit to Taxpayers Subject to 
     Alternative Minimum Tax.--Section 32(h) is repealed.
       (d) Replacement of Modified Adjusted Gross Income With 
     Adjusted Gross Income.--
       (1) In general.--Section 32(a)(2)(B) is amended by striking 
     ``modified''.
       (2) Conforming amendments.--
       (A) Section 32(c) is amended by striking paragraph (5).
       (B) Section 32(f)(2)(B) is amended by striking ``modified'' 
     each place it appears.
       (e) Relationship Test.--
       (1) In general.--Clause (i) of section 32(c)(3)(B) 
     (relating to relationship test) is amended to read as 
     follows:
       ``(i) In general.--An individual bears a relationship to 
     the taxpayer described in this subparagraph if such 
     individual is--

       ``(I) a son, daughter, stepson, or stepdaughter, or a 
     descendant of any such individual,
       ``(II) a brother, sister, stepbrother, or stepsister, or a 
     descendant of any such individual, who the taxpayer cares for 
     as the taxpayer's own child, or
       ``(III) an eligible foster child of the taxpayer.''.

       (2) Eligible foster child.--
       (A) In general.--Clause (iii) of section 32(c)(3)(B) is 
     amended to read as follows:
       ``(iii) Eligible foster child.--For purposes of clause (i), 
     the term `eligible foster child' means an individual not 
     described in subclause (I) or (II) of clause (i) who--

       ``(I) is placed with the taxpayer by an authorized 
     placement agency, and
       ``(II) the taxpayer cares for as the taxpayer's own 
     child.''.

       (B) Conforming amendment.--Section 32(c)(3)(A)(ii) is 
     amended by striking ``except as provided in subparagraph 
     (B)(iii),''.
       (f) 2 or More Claiming Qualifying Child.--Section 
     32(c)(1)(C) is amended to read as follows:
       ``(C) 2 or more claiming qualifying child.--
       ``(i) In general.--Except as provided in clause (ii), if 
     (but for this paragraph) an individual may be claimed, and is 
     claimed, as a qualifying child by 2 or more taxpayers for a 
     taxable year beginning in the same calendar year, such 
     individual shall be treated as the qualifying child of the 
     taxpayer who is--

       ``(I) a parent of the individual, or
       ``(II) if subclause (I) does not apply, the taxpayer with 
     the highest adjusted gross income for such taxable year.

       ``(ii) More than 1 claiming credit.--If the parents 
     claiming the credit with respect to any qualifying child do 
     not file a joint return together, such child shall be treated 
     as the qualifying child of--

       ``(I) the parent with whom the child resided for the 
     longest period of time during the taxable year, or
       ``(II) if the child resides with both parents for the same 
     amount of time during such taxable year, the parent with the 
     highest adjusted gross income.''.

       (g) Expansion of Mathematical Error Authority.--Paragraph 
     (2) of section 6213(g) is amended by striking ``and'' at the 
     end of subparagraph (K), by striking the period at the end of 
     subparagraph (L) and inserting ``, and'', and by inserting 
     after subparagraph (L) the following new subparagraph:
       ``(M) the entry on the return claiming the credit under 
     section 32 with respect to a child if, according to the 
     Federal Case Registry of Child Support Orders established 
     under section 453(h) of the Social Security Act, the taxpayer 
     is a noncustodial parent of such child.''
       (h) Clerical Amendment.--Subparagraph (E) of section 
     32(c)(3) is amended by striking ``subparagraphs (A)(ii) and 
     (B)(iii)(II)'' and inserting ``subparagraph (A)(ii)''.
       (i) 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, 2001.
       (2) Subsection (g).--The amendment made by subsection (g) 
     shall take effect on January 1, 2004.

               TITLE IV--AFFORDABLE EDUCATION PROVISIONS

                Subtitle A--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) Modification of AGI Limits To Remove Marriage 
     Penalty.--Section 530(c)(1) (relating to reduction in 
     permitted contributions based on adjusted gross income) is 
     amended--
       (1) by striking ``$150,000'' in subparagraph (A)(ii) and 
     inserting ``$190,000'', and
       (2) by striking ``$10,000'' in subparagraph (B) and 
     inserting ``$30,000''.
       (c) 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 in the case of a special needs 
     beneficiary, books, supplies, 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,
       ``(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, and
       ``(iii) expenses for the purchase of any computer 
     technology or equipment (as defined in section 
     170(e)(6)(F)(i)) or Internet access and related services, if 
     such technology, equipment, or services are to be used by the 
     beneficiary and the beneficiary's family during any of the 
     years the beneficiary is in school.

     Clause (iii) shall not include expenses for computer software 
     designed for sports, games, or hobbies unless the software is 
     predominantly educational in nature.
       ``(B) 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).
       (d) 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).''.
       (e) 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''.
       (f) Time When Contributions Deemed Made.--
       (1) In general.--Section 530(b) (relating to definitions 
     and special rules), as amended by subsection (c)(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).''.

[[Page 9629]]

       (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 first day of the 
     sixth 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''.
       (g) 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 inserting ``, credit, or 
     exclusion'', and
       (ii) by striking ``credit or deduction'' in the heading and 
     inserting ``deduction, credit, or exclusion''.
       (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).
       (h) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

     SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

       (a) Eligible Educational Institutions Permitted To Maintain 
     Qualified Tuition Programs.--
       (1) In general.--Section 529(b)(1) (defining qualified 
     State tuition program) is amended--
       (A) by inserting ``or by 1 or more eligible educational 
     institutions'' after ``maintained by a State or agency or 
     instrumentality thereof '' in the matter preceding 
     subparagraph (A), and
       (B) by adding at the end the following new flush sentence:
     ``Except to the extent provided in regulations, a program 
     established and maintained by 1 or more eligible educational 
     institutions shall not be treated as a qualified tuition 
     program unless such program provides that amounts are held in 
     a qualified trust and such program has received a ruling or 
     determination that such program meets the applicable 
     requirements for a qualified tuition program. For purposes of 
     the preceding sentence, the term `qualified trust' means a 
     trust which is created or organized in the United States for 
     the exclusive benefit of designated beneficiaries and with 
     respect to which the requirements of paragraphs (2) and (5) 
     of section 408(a) are met.''.
       (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) Additional tax on nonqualified withdrawals.--Section 
     529 is amended--
       (A) by striking paragraph (3) of subsection (b) and by 
     redesignating paragraphs (4), (5), (6), and (7) of such 
     subsection as paragraphs (3), (4), (5), and (6), 
     respectively, and
       (B) by adding at the end of subsection (c) the following 
     new paragraph:
       ``(6) Additional tax.--The tax imposed by section 530(d)(4) 
     shall apply to any payment or distribution from a qualified 
     tuition program in the same manner as such tax applies to a 
     payment or distribution from an education individual 
     retirement account. This paragraph shall not apply to any 
     payment or distribution in any taxable year beginning before 
     January 1, 2004, which is includible in gross income but used 
     for qualified higher education expenses of the designated 
     beneficiary.''.
       (4) 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 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 
     amended by striking ``qualified state tuition'' each place it 
     appears and inserting ``qualified tuition''.
       (C) The headings for sections 529(b) and 530(b)(2)(B) are 
     amended by striking ``Qualified state tuition'' each place it 
     appears 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''.
       (b) 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) and 530(d)(2)''.
       (B) Section 221(e)(2)(A) is amended by inserting ``529,'' 
     after ``135,''.
       (c) 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 transfer if such transfer occurs 
     within 12 months from the date of a previous transfer to any 
     qualified tuition program for the benefit of the designated 
     beneficiary.'', and
       (3) by inserting ``or programs'' after ``beneficiaries'' in 
     the heading.
       (d) 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.''.
       (e) Adjustment of Limitation on Room and Board 
     Distributions.--Section 529(e)(3)(B)(ii) is amended to read 
     as follows:
       ``(ii) Limitation.--The amount treated as qualified higher 
     education expenses by reason of clause (i) shall not exceed--

       ``(I) the allowance (applicable to the student) for room 
     and board 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 the enactment of the 
     Economic Growth and Tax Relief Reconciliation Act of 2001) as 
     determined by the eligible educational institution for such 
     period, or
       ``(II) if greater, the actual invoice amount the student 
     residing in housing owned or operated by the eligible 
     educational institution is charged by such institution for 
     room and board costs for such period.''.

[[Page 9630]]

       (f) Special Needs Services.--Subparagraph (A) of section 
     529(e)(3) (defining qualified higher education expenses) is 
     amended to read as follows:
       ``(A) In general.--The term `qualified higher education 
     expenses' means--
       ``(i) tuition, fees, books, supplies, and equipment 
     required for the enrollment or attendance of a designated 
     beneficiary at an eligible educational institution; and
       ``(ii) expenses for special needs services in the case of a 
     special needs beneficiary which are incurred in connection 
     with such enrollment or attendance.''.
       (g) Technical Amendments.--Section 529(c)(3)(D) is 
     amended--
       (1) by inserting ``except to the extent provided by the 
     Secretary,'' before ``all distributions'' in clause (ii), and
       (2) by inserting ``except to the extent provided by the 
     Secretary,'' before ``the value'' in clause (iii).
       (h) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

                   Subtitle B--Educational Assistance

     SEC. 411. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED 
                   EDUCATIONAL ASSISTANCE.

       (a) In General.--Section 127 (relating to exclusion for 
     educational assistance programs) is amended by striking 
     subsection (d) and by redesignating subsection (e) as 
     subsection (d).
       (b) Repeal of Limitation on Graduate Education.--The last 
     sentence of section 127(c)(1) is amended by striking ``, and 
     such term also does not include any payment for, or the 
     provision of any benefits with respect to, any graduate level 
     course of a kind normally taken by an individual pursuing a 
     program leading to a law, business, medical, or other 
     advanced academic or professional degree''.
       (c) Conforming Amendment.--Section 51A(b)(5)(B)(iii) is 
     amended by striking ``or would be so excludable but for 
     section 127(d)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply with respect to expenses relating to courses 
     beginning after December 31, 2001.

     SEC. 412. 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), as amended by section 402(b)(2)(B), 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, 2001, 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) $50,000 ($100,000 in the case of a joint return), 
     bears to

       ``(ii) $15,000 ($30,000 in the case of a joint return).''.
       (2) Conforming amendment.--Section 221(g)(1) is amended by 
     striking ``$40,000 and $60,000 amounts'' and inserting 
     ``$50,000 and $100,000 amounts''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to taxable years ending after December 31, 2001.

     SEC. 413. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE 
                   NATIONAL HEALTH SERVICE CORPS SCHOLARSHIP 
                   PROGRAM AND THE F. EDWARD HEBERT ARMED FORCES 
                   HEALTH PROFESSIONS SCHOLARSHIP AND FINANCIAL 
                   ASSISTANCE PROGRAM.

       (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, 
     or
       ``(B) the Armed Forces Health Professions Scholarship and 
     Financial Assistance program under subchapter I of chapter 
     105 of title 10, United States Code.''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to amounts received in taxable years beginning 
     after December 31, 2001.

  Subtitle C--Liberalization of Tax-Exempt Financing Rules for Public 
                          School Construction

     SEC. 421. 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, 2001.

     SEC. 422. TREATMENT OF QUALIFIED PUBLIC EDUCATIONAL FACILITY 
                   BONDS AS EXEMPT FACILITY BONDS.

       (a) Treatment as Exempt Facility Bond.--Subsection (a) of 
     section 142 (relating to exempt facility bond) is amended by 
     striking ``or'' at the end of paragraph (11), by striking the 
     period at the end of paragraph (12) and inserting ``, or'', 
     and by adding at the end the following new paragraph:
       ``(13) qualified public educational facilities.''.
       (b) Qualified Public Educational Facilities.--Section 142 
     (relating to exempt facility bond) is amended by adding at 
     the end the following new subsection:
       ``(k) Qualified Public Educational Facilities.--
       ``(1) In general.--For purposes of subsection (a)(13), the 
     term `qualified public educational facility' means any school 
     facility which is--
       ``(A) part of a public elementary school or a public 
     secondary school, and
       ``(B) owned by a private, for-profit corporation pursuant 
     to a public-private partnership agreement with a State or 
     local educational agency described in paragraph (2).
       ``(2) Public-private partnership agreement described.--A 
     public-private partnership agreement is described in this 
     paragraph if it is an agreement--
       ``(A) under which the corporation agrees--
       ``(i) to do 1 or more of the following: construct, 
     rehabilitate, refurbish, or equip a school facility, and
       ``(ii) at the end of the term of the agreement, to transfer 
     the school facility to such agency for no additional 
     consideration, and
       ``(B) the term of which does not exceed the term of the 
     issue to be used to provide the school facility.
       ``(3) School facility.--For purposes of this subsection, 
     the term `school facility' means--
       ``(A) any school building,
       ``(B) any functionally related and subordinate facility and 
     land with respect to such building, including any stadium or 
     other facility primarily used for school events, and
       ``(C) any property, to which section 168 applies (or would 
     apply but for section 179), for use in a facility described 
     in subparagraph (A) or (B).
       ``(4) Public schools.--For purposes of this subsection, 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 in 
     effect on the date of the enactment of this subsection.
       ``(5) Annual aggregate face amount of tax-exempt 
     financing.--
       ``(A) In general.--An issue shall not be treated as an 
     issue described in subsection (a)(13) if the aggregate face 
     amount of bonds issued by the State pursuant thereto (when 
     added to the aggregate face amount of bonds previously so 
     issued during the calendar year) exceeds an amount equal to 
     the greater of--
       ``(i) $10 multiplied by the State population, or
       ``(ii) $5,000,000.
       ``(B) Allocation rules.--
       ``(i) In general.--Except as otherwise provided in this 
     subparagraph, the State may allocate the amount described in 
     subparagraph (A) for any calendar year in such manner as the 
     State determines appropriate.
       ``(ii) Rules for carryforward of unused limitation.--A 
     State may elect to carry forward an unused limitation for any 
     calendar year for 3 calendar years following the calendar 
     year in which the unused limitation arose under rules similar 
     to the rules of section 146(f), except that the only purpose 
     for which the carryforward may be elected is the issuance of 
     exempt facility bonds described in subsection (a)(13).''.
       (c) Exemption From General State Volume Caps.--Paragraph 
     (3) of section 146(g) (relating to exception for certain 
     bonds) is amended--
       (1) by striking ``or (12)'' and inserting ``(12), or 
     (13)'', and
       (2) by striking ``and environmental enhancements of 
     hydroelectric generating facilities'' and inserting 
     ``environmental enhancements of hydroelectric generating 
     facilities, and qualified public educational facilities''.
       (d) Exemption From Limitation on Use for Land 
     Acquisition.--Section 147(h) (relating to certain rules not 
     to apply to mortgage revenue bonds, qualified student loan 
     bonds, and qualified 501(c)(3) bonds) is amended by adding at 
     the end the following new paragraph:
       ``(3) Exempt facility bonds for qualified public-private 
     schools.--Subsection (c) shall not apply to any exempt 
     facility bond issued as part of an issue described in section 
     142(a)(13) (relating to qualified public educational 
     facilities).''.
       (e) Conforming Amendment.--The heading for section 147(h) 
     is amended by striking ``Mortgage Revenue Bonds, Qualified 
     Student Loan Bonds, and Qualified 501(c)(3) Bonds'' and 
     inserting ``Certain Bonds''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to bonds issued after December 31, 2001.

                      Subtitle D--Other Provisions

     SEC. 431. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

       (a) Deduction Allowed.--Part VII of subchapter B of chapter 
     1 (relating to additional itemized deductions for 
     individuals) is amended by redesignating section 222 as 
     section 223 and by inserting after section 221 the following:

[[Page 9631]]



     ``SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES.

       ``(a) Allowance of Deduction.--In the case of an 
     individual, there shall be allowed as a deduction an amount 
     equal to the qualified tuition and related expenses paid by 
     the taxpayer during the taxable year.
       ``(b) Dollar limitations.--
       ``(1) In general.--The amount allowed as a deduction under 
     subsection (a) with respect to the taxpayer for any taxable 
     year shall not exceed the applicable dollar limit.
       ``(2) Applicable dollar limit.--
       ``(A) 2002 and 2003.--In the case of a taxable year 
     beginning in 2002 or 2003, the applicable dollar limit shall 
     be equal to--
       ``(i) in the case of a taxpayer whose adjusted gross income 
     for the taxable year does not exceed $65,000 ($130,000 in the 
     case of a joint return), $3,000, and--
       ``(ii) in the case of any other taxpayer, zero.
       ``(B) 2004 and 2005.--In the case of a taxable year 
     beginning in 2004 or 2005, the applicable dollar amount shall 
     be equal to--
       ``(i) in the case of a taxpayer whose adjusted gross income 
     for the taxable year does not exceed $65,000 ($130,000 in the 
     case of a joint return), $4,000,
       ``(ii) in the case of a taxpayer not described in clause 
     (i) whose adjusted gross income for the taxable year does not 
     exceed $80,000 ($160,000 in the case of a joint return), 
     $2,000, and
       ``(iii) in the case of any other taxpayer, zero.
       ``(C) Adjusted gross income.--For purposes of this 
     paragraph, adjusted gross income shall be determined--
       ``(i) without regard to this section and sections 911, 931, 
     and 933, and
       ``(ii) after application of sections 86, 135, 137, 219, 
     221, and 469.
       ``(c) No Double Benefit.--
       ``(1) In general.--No deduction shall be allowed under 
     subsection (a) for any expense for which a deduction is 
     allowed to the taxpayer under any other provision of this 
     chapter.
       ``(2) Coordination with other education incentives.--
       ``(A) Denial of deduction if credit elected.--No deduction 
     shall be allowed under subsection (a) for a taxable year with 
     respect to the qualified tuition and related expenses with 
     respect to an individual if the taxpayer or any other person 
     elects to have section 25A apply with respect to such 
     individual for such year.
       ``(B) Coordination with exclusions.--The total amount of 
     qualified tuition and related expenses shall be reduced by 
     the amount of such expenses taken into account in determining 
     any amount excluded under section 135, 529(c)(1), or 
     530(d)(2). For purposes of the preceding sentence, the amount 
     taken into account in determining the amount excluded under 
     section 529(c)(1) shall not include that portion of the 
     distribution which represents a return of any contributions 
     to the plan.
       ``(3) Dependents.--No deduction shall be allowed under 
     subsection (a) to any individual with respect to whom a 
     deduction under section 151 is allowable to another taxpayer 
     for a taxable year beginning in the calendar year in which 
     such individual's taxable year begins.
       ``(d) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Qualified tuition and related expenses.--The term 
     `qualified tuition and related expenses' has the meaning 
     given such term by section 25A(f). Such expenses shall be 
     reduced in the same manner as under section 25A(g)(2).
       ``(2) Identification requirement.--No deduction shall be 
     allowed under subsection (a) to a taxpayer with respect to 
     the qualified tuition and related expenses of an individual 
     unless the taxpayer includes the name and taxpayer 
     identification number of the individual on the return of tax 
     for the taxable year.
       ``(3) Limitation on taxable year of deduction.--
       ``(A) In general.--A deduction shall be allowed under 
     subsection (a) for qualified tuition and related expenses for 
     any taxable year only to the extent such expenses are in 
     connection with enrollment at an institution of higher 
     education during the taxable year.
       ``(B) Certain prepayments allowed.--Subparagraph (A) shall 
     not apply to qualified tuition and related expenses paid 
     during a taxable year if such expenses are in connection with 
     an academic term beginning during such taxable year or during 
     the first 3 months of the next taxable year.
       ``(4) No deduction for married individuals filing separate 
     returns.--If the taxpayer is a married individual (within the 
     meaning of section 7703), this section shall apply only if 
     the taxpayer and the taxpayer's spouse file a joint return 
     for the taxable year.
       ``(5) Nonresident aliens.--If the taxpayer is a nonresident 
     alien individual for any portion of the taxable year, this 
     section shall apply only if such individual is treated as a 
     resident alien of the United States for purposes of this 
     chapter by reason of an election under subsection (g) or (h) 
     of section 6013.
       ``(6) Regulations.--The Secretary may prescribe such 
     regulations as may be necessary or appropriate to carry out 
     this section, including regulations requiring recordkeeping 
     and information reporting.
       ``(e) Termination.--This section shall not apply to taxable 
     years beginning after December 31, 2005.''.
       (b) Deduction Allowed in Computing Adjusted Gross Income.--
     Section 62(a) is amended by inserting after paragraph (17) 
     the following:
       ``(18) Higher education expenses.--The deduction allowed by 
     section 222.''.
       (c) Conforming Amendments.--
       (1) Sections 86(b)(2), 135(c)(4), 137(b)(3), and 219(g)(3) 
     are each amended by inserting ``222,'' after ``221,''.
       (2) Section 221(b)(2)(C) is amended by inserting ``222,'' 
     before ``911''.
       (3) Section 469(i)(3)(F) is amended by striking ``and 221'' 
     and inserting ``, 221, and 222''.
       (4) The table of sections for part VII of subchapter B of 
     chapter 1 is amended by striking the item relating to section 
     222 and inserting the following:

``Sec. 222. Qualified tuition and related expenses.
``Sec. 223. Cross reference.''.

       (d) Effective Date.--The amendments made by this section 
     shall apply to payments made in taxable years beginning after 
     December 31, 2001.

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

  Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes

     SEC. 501. REPEAL OF ESTATE AND GENERATION-SKIPPING TRANSFER 
                   TAXES.

       (a) Estate Tax Repeal.--Subchapter C of chapter 11 of 
     subtitle B (relating to miscellaneous) is amended by adding 
     at the end the following new section:

     ``SEC. 2210. TERMINATION.

       ``(a) In General.--Except as provided in subsection (b), 
     this chapter shall not apply to the estates of decedents 
     dying after December 31, 2009.
       ``(b) Certain Distributions From Qualified Domestic 
     Trusts.--In applying section 2056A with respect to the 
     surviving spouse of a decedent dying before January 1, 2010--
       ``(1) section 2056A(b)(1)(A) shall not apply to 
     distributions made after December 31, 2020, and
       ``(2) section 2056A(b)(1)(B) shall not apply after December 
     31, 2009.''.
       (b) Generation-Skipping Transfer Tax Repeal.--Subchapter G 
     of chapter 13 of subtitle B (relating to administration) is 
     amended by adding at the end the following new section:

     ``SEC. 2664. TERMINATION.

       ``This chapter shall not apply to generation-skipping 
     transfers after December 31, 2009.''.
       (c) Conforming Amendments.--
       (1) The table of sections for subchapter C of chapter 11 is 
     amended by adding at the end the following new item:

``Sec. 2210. Termination.''.

       (2) The table of sections for subchapter G of chapter 13 is 
     amended by adding at the end the following new item:

``Sec. 2664. Termination.''.

       (d) Effective Date.--The amendments made by this section 
     shall apply to the estates of decedents dying, and 
     generation-skipping transfers, after December 31, 2009.

          Subtitle B--Reductions of Estate and Gift Tax Rates

     SEC. 511. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.

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

$1,025,800, plus 50% of the excess over $2,500,000.''..................

       (b) Repeal of Phaseout of Graduated Rates.--Subsection (c) 
     of section 2001 is amended by striking paragraph (2).
       (c) Additional Reductions of Maximum Rate of Tax.--
     Subsection (c) of section 2001, as amended by subsection (b), 
     is amended by adding at the end the following new paragraph:
       ``(2) Phasedown of maximum rate of tax.--
       ``(A) In general.--In the case of estates of decedents 
     dying, and gifts made, in calendar years after 2002 and 
     before 2010, 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) the maximum rate of tax for any calendar year shall 
     be determined in the table under subparagraph (B), and
       ``(ii) the brackets and the amounts setting forth the tax 
     shall be adjusted to the extent necessary to reflect the 
     adjustments under subparagraph (A).
       ``(B) Maximum rate.--

``In calendar year:                                The maximum rate is:
    2003....................................................49 percent 
    2004....................................................48 percent 
    2005....................................................47 percent 
    2006....................................................46 percent 
    2007, 2008, and 2009.................................45 percent.''.

       (d) Maximum Gift Tax Rate Reduced to Maximum Individual 
     Rate After 2009.--Subsection (a) of section 2502 (relating to 
     rate of tax) is amended to read as follows:
       ``(a) Computation of Tax.--
       ``(1) In general.--The tax imposed by section 2501 for each 
     calendar year shall be an amount equal to the excess of--
       ``(A) a tentative tax, computed under paragraph (2), on the 
     aggregate sum of the taxable gifts for such calendar year and 
     for each of the preceding calendar periods, over
       ``(B) a tentative tax, computed under paragraph (2), on the 
     aggregate sum of the taxable gifts for each of the preceding 
     calendar periods.
       ``(2) Rate schedule.--

``If the amount with respect to which the tentative tax to be computed 
  is:                                             The tentative tax is:
18% of such amount.....................................................

[[Page 9632]]

$1,800, plus 20% of the excess over $10,000............................
$3,800, plus 22% of the excess over $20,000............................
$8,200, plus 24% of the excess over $40,000............................
$13,000, plus 26% of the excess over $60,000...........................
$18,200, plus 28% of the excess over $80,000...........................
$23,800, plus 30% of the excess over $100,000..........................
$38,800, plus 32% of the excess over $150,000..........................
$70,800, plus 34% of the excess over $250,000..........................
$155,800, plus 35% of the excess over $500,000.''......................

       (e) Treatment of Certain Transfers in Trust.--Section 2511 
     (relating to transfers in general) is amended by adding at 
     the end the following new subsection:
       ``(c) Treatment of Certain Transfers in Trust.--
     Notwithstanding any other provision of this section and 
     except as provided in regulations, a transfer in trust shall 
     be treated as a taxable gift under section 2503, unless the 
     trust is treated as wholly owned by the donor or the donor's 
     spouse under subpart E of part I of subchapter J of chapter 
     1.''.
       (f) 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, 2001.
       (2) Subsection (c).--The amendment made by subsection (c) 
     shall apply to estates of decedents dying, and gifts made, 
     after December 31, 2002.
       (3) Subsections (d) and (e).--The amendments made by 
     subsections (d) and (e) shall apply to gifts made after 
     December 31, 2009.

               Subtitle C--Increase in Exemption Amounts

     SEC. 521. INCREASE IN EXEMPTION EQUIVALENT OF UNIFIED CREDIT, 
                   LIFETIME GIFTS EXEMPTION, AND GST EXEMPTION 
                   AMOUNTS.

       (a) In General.--Subsection (c) of section 2010 (relating 
     to applicable credit amount) is amended by striking the table 
     and inserting the following new table:

``In the case of estates of decedentThe applicable exclusion amount is:
      2002 and 2003.........................................$1,000,000 
      2004 and 2005.........................................$1,500,000 
      2006, 2007, and 2008..................................$2,000,000 
      2009...............................................$3,500,000.''.

       (b) Lifetime Gift Exemption Increased to $1,000,000.--
       (1) For periods before estate tax repeal.--Paragraph (1) of 
     section 2505(a) (relating to unified credit against gift tax) 
     is amended by inserting ``(determined as if the applicable 
     exclusion amount were $1,000,000)'' after ``calendar year''.
       (2) For periods after estate tax repeal.--Paragraph (1) of 
     section 2505(a) (relating to unified credit against gift 
     tax), as amended by paragraph (1), is amended to read as 
     follows:
       ``(1) the amount of the tentative tax which would be 
     determined under the rate schedule set forth in section 
     2502(a)(2) if the amount with respect to which such tentative 
     tax is to be computed were $1,000,000, reduced by''.
       (c) GST Exemption.--
       (1) In general.--Subsection (a) of 2631 (relating to GST 
     exemption) is amended by striking ``of $1,000,000'' and 
     inserting ``amount''.
       (2) Exemption amount.--Subsection (c) of section 2631 is 
     amended to read as follows:
       ``(c) GST Exemption Amount.--For purposes of subsection 
     (a), the GST exemption amount for any calendar year shall be 
     equal to the applicable exclusion amount under section 
     2010(c) for such calendar year.''.
       (d) Repeal of Special Benefit for Family-Owned Business 
     Interests.--Section 2057 (relating to family-owned business 
     interests) is amended by adding at the end the following new 
     subsection:
       ``(j) Termination.--This section shall not apply to the 
     estates of decedents dying after December 31, 2003.''.
       (e) Effective Dates.--
       (1) In general.--Except as provided in paragraphs (2) and 
     (3), the amendments made by this section shall apply to 
     estates of decedents dying, and gifts made, after December 
     31, 2001.
       (2) Subsection (b)(2).--The amendments made by subsection 
     (b)(2) shall apply to gifts made after December 31, 2009.
       (3) Subsections (c) and (d).--The amendments made by 
     subsections (c) and (d) shall apply to estates of decedents 
     dying, and generation-skipping transfers, after December 31, 
     2003.

                Subtitle D--Credit for State Death Taxes

     SEC. 531. REDUCTION OF CREDIT FOR STATE DEATH TAXES.

       (a) In General.--Section 2011(b) (relating to amount of 
     credit) is amended--
       (1) by striking ``Credit.--The credit allowed'' and 
     inserting ``Credit.--
       ``(1) In general.--Except as provided in paragraph (2), the 
     credit allowed'',
       (2) by striking ``For purposes'' and inserting the 
     following:
       ``(3) Adjusted taxable estate.--For purposes'', and
       (3) by inserting after paragraph (1) the following new 
     paragraph:
       ``(2) Reduction of maximum credit.--
       ``(A) In general.--In the case of estates of decedents 
     dying after December 31, 2001, the credit allowed by this 
     section shall not exceed the applicable percentage of the 
     credit otherwise determined under paragraph (1).
       ``(B) Applicable percentage.--

``In the case of estates of decedents dyinThe applicable percentage is:
      2002..................................................75 percent 
      2003..................................................50 percent 
      2004...............................................25 percent.''.

       (b) Effective Date.--The amendments made by this subsection 
     shall apply to estates of decedents dying after December 31, 
     2001.

     SEC. 532. CREDIT FOR STATE DEATH TAXES REPLACED WITH 
                   DEDUCTION FOR SUCH TAXES.

       (a) Repeal of Credit.--Section 2011 (relating to credit for 
     State death taxes) is amended by adding at the end the 
     following new subsection:
       ``(g) Termination.--This section shall not apply to the 
     estates of decedents dying after December 31, 2004.''.
       (b) Deduction for State Death Taxes.--Part IV of subchapter 
     A of chapter 11 is amended by adding at the end the following 
     new section:

     ``SEC. 2058. STATE DEATH TAXES.

       ``(a) Allowance of Deduction.--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 the amount of any estate, inheritance, legacy, or 
     succession taxes actually paid to any State or the District 
     of Columbia, in respect of any property included in the gross 
     estate (not including any such taxes paid with respect to the 
     estate of a person other than the decedent).
       ``(b) Period of Limitations.--The deduction allowed by this 
     section shall include only such taxes as were actually paid 
     and deduction therefor claimed before the later of--
       ``(1) 4 years after the filing of the return required by 
     section 6018, or
       ``(2) if--
       ``(A) a petition for redetermination of a deficiency has 
     been filed with the Tax Court within the time prescribed in 
     section 6213(a), the expiration of 60 days after the decision 
     of the Tax Court becomes final,
       ``(B) an extension of time has been granted under section 
     6161 or 6166 for payment of the tax shown on the return, or 
     of a deficiency, the date of the expiration of the period of 
     the extension, or
       ``(C) a claim for refund or credit of an overpayment of tax 
     imposed by this chapter has been filed within the time 
     prescribed in section 6511, the latest of the expiration of--
       ``(i) 60 days from the date of mailing by certified mail or 
     registered mail by the Secretary to the taxpayer of a notice 
     of the disallowance of any part of such claim,
       ``(ii) 60 days after a decision by any court of competent 
     jurisdiction becomes final with respect to a timely suit 
     instituted upon such claim, or
       ``(iii) 2 years after a notice of the waiver of 
     disallowance is filed under section 6532(a)(3).

     Notwithstanding sections 6511 and 6512, refund based on the 
     deduction may be made if the claim for refund is filed within 
     the period provided in the preceding sentence. Any such 
     refund shall be made without interest.''.
       (c) Conforming Amendments.--
       (1) Subsection (a) of section 2012 is amended by striking 
     ``the credit for State death taxes provided by section 2011 
     and''.
       (2) Subparagraph (A) of section 2013(c)(1) is amended by 
     striking ``2011,''.
       (3) Paragraph (2) of section 2014(b) is amended by striking 
     ``, 2011,''.
       (4) Sections 2015 and 2016 are each amended by striking 
     ``2011 or''.
       (5) Subsection (d) of section 2053 is amended to read as 
     follows:
       ``(d) Certain Foreign Death Taxes.--
       ``(1) In general.--Notwithstanding the provisions of 
     subsection (c)(1)(B), for purposes of the tax imposed by 
     section 2001, the value of the taxable estate may be 
     determined, if the executor so elects before the expiration 
     of the period of limitation for assessment provided in 
     section 6501, by deducting from the value of the gross estate 
     the amount (as determined in accordance with regulations 
     prescribed by the Secretary) of any estate, succession, 
     legacy, or inheritance tax imposed by and actually paid to 
     any foreign country, in respect of any property situated 
     within such foreign country and included in the gross estate 
     of a citizen or resident of the United States, upon a 
     transfer by the decedent for public, charitable, or religious 
     uses described in section 2055. The determination under this 
     paragraph of the country within which property is situated 
     shall be made in accordance with the rules applicable under 
     subchapter B (sec. 2101 and following) in determining whether 
     property is situated within or without the United States. Any 
     election under this paragraph shall be exercised in 
     accordance with regulations prescribed by the Secretary.
       ``(2) Condition for allowance of deduction.--No deduction 
     shall be allowed under paragraph (1) for a foreign death tax 
     specified therein unless the decrease in the tax imposed by 
     section 2001 which results from the deduction provided in 
     paragraph (1) will inure solely for the benefit of the 
     public, charitable, or religious transferees described in 
     section 2055 or section 2106(a)(2). In any case where the tax 
     imposed by section 2001 is equitably apportioned among all 
     the transferees of property included in the gross estate, 
     including those described in sections 2055 and 2106(a)(2) 
     (taking into account any exemptions, credits, or deductions 
     allowed by this chapter), in determining such decrease, there 
     shall be disregarded any decrease in the Federal

[[Page 9633]]

     estate tax which any transferees other than those described 
     in sections 2055 and 2106(a)(2) are required to pay.
       ``(3) Effect on credit for foreign death taxes of deduction 
     under this subsection.--
       ``(A) Election.--An election under this subsection shall be 
     deemed a waiver of the right to claim a credit, against the 
     Federal estate tax, under a death tax convention with any 
     foreign country for any tax or portion thereof in respect of 
     which a deduction is taken under this subsection.
       ``(B) Cross reference.--
  ``See section 2014(f) for the effect of a deduction taken under this 
paragraph on the credit for foreign death taxes.''.

       (6) Subparagraph (A) of section 2056A(b)(10) is amended--
       (A) by striking ``2011,'', and
       (B) by inserting ``2058,'' after ``2056,''.
       (7)(A) Subsection (a) of section 2102 is amended to read as 
     follows:
       ``(a) In General.--The tax imposed by section 2101 shall be 
     credited with the amounts determined in accordance with 
     sections 2012 and 2013 (relating to gift tax and tax on prior 
     transfers).''.
       (B) Section 2102 is amended by striking subsection (b) and 
     by redesignating subsection (c) as subsection (b).
       (C) Section 2102(b)(5) (as redesignated by subparagraph 
     (B)) and section 2107(c)(3) are each amended by striking 
     ``2011 to 2013, inclusive,'' and inserting ``2012 and 2013''.
       (8) Subsection (a) of section 2106 is amended by adding at 
     the end the following new paragraph:
       ``(4) State death taxes.--The amount which bears the same 
     ratio to the State death taxes as the value of the property, 
     as determined for purposes of this chapter, upon which State 
     death taxes were paid and which is included in the gross 
     estate under section 2103 bears to the value of the total 
     gross estate under section 2103. For purposes of this 
     paragraph, the term `State death taxes' means the taxes 
     described in section 2011(a).''.
       (9) Section 2201 is amended--
       (A) by striking ``as defined in section 2011(d)'', and
       (B) by adding at the end the following new flush sentence:

     ``For purposes of this section, the additional estate tax is 
     the difference between the tax imposed by section 2001 or 
     2101 and the amount equal to 125 percent of the maximum 
     credit provided by section 2011(b), as in effect before its 
     repeal by the Economic Growth and Tax Relief Reconciliation 
     Act of 2001.''.
       (10) Section 2604 (relating to credit for certain State 
     taxes) is amended by adding at the end the following new 
     subsection:
       ``(c) Termination.--This section shall not apply to the 
     generation-skipping transfers after December 31, 2004.''.
       (11) Paragraph (2) of section 6511(i) is amended by 
     striking ``2011(c), 2014(b),'' and inserting ``2014(b)''.
       (12) Subsection (c) of section 6612 is amended by striking 
     ``section 2011(c) (relating to refunds due to credit for 
     State taxes),''.
       (13) The table of sections for part II of subchapter A of 
     chapter 11 is amended by striking the item relating to 
     section 2011.
       (14) The table of sections for part IV of subchapter A of 
     chapter 11 is amended by adding at the end the following new 
     item:

``Sec. 2058. State death taxes.''.

       (15) The table of sections for subchapter A of chapter 13 
     is amended by striking the item relating to section 2604.
       (d) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying, and generation-
     skipping transfers, after December 31, 2004.

Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With 
                                 Repeal

     SEC. 541. TERMINATION OF STEP-UP IN BASIS AT DEATH.

       Section 1014 (relating to basis of property acquired from a 
     decedent) is amended by adding at the end the following new 
     subsection:
       ``(f) Termination.--This section shall not apply with 
     respect to decedents dying after December 31, 2009.''.

     SEC. 542. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT 
                   DYING AFTER DECEMBER 31, 2009.

       (a) General Rule.--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. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT 
                   DYING AFTER DECEMBER 31, 2009.

       ``(a) In General.--Except as otherwise provided in this 
     section--
       ``(1) property acquired from a decedent dying after 
     December 31, 2009, shall be treated for purposes of this 
     subtitle as transferred by gift, and
       ``(2) the basis of the person acquiring property from such 
     a decedent shall be the lesser of--
       ``(A) the adjusted basis of the decedent, or
       ``(B) the fair market value of the property at the date of 
     the decedent's death.
       ``(b) Basis Increase for Certain Property.--
       ``(1) In general.--In the case of property to which this 
     subsection applies, the basis of such property under 
     subsection (a) shall be increased by its basis increase under 
     this subsection.
       ``(2) Basis increase.--For purposes of this subsection--
       ``(A) In general.--The basis increase under this subsection 
     for any property is the portion of the aggregate basis 
     increase which is allocated to the property pursuant to this 
     section.
       ``(B) Aggregate basis increase.--In the case of any estate, 
     the aggregate basis increase under this subsection is 
     $1,300,000.
       ``(C) Limit increased by unused built-in losses and loss 
     carryovers.--The limitation under subparagraph (B) shall be 
     increased by--
       ``(i) the sum of the amount of any capital loss carryover 
     under section 1212(b), and the amount of any net operating 
     loss carryover under section 172, which would (but for the 
     decedent's death) be carried from the decedent's last taxable 
     year to a later taxable year of the decedent, plus
       ``(ii) the sum of the amount of any losses that would have 
     been allowable under section 165 if the property acquired 
     from the decedent had been sold at fair market value 
     immediately before the decedent's death.
       ``(3) Decedent nonresidents who are not citizens of the 
     united states.--In the case of a decedent nonresident not a 
     citizen of the United States--
       ``(A) paragraph (2)(B) shall be applied by substituting 
     `$60,000' for `$1,300,000', and
       ``(B) paragraph (2)(C) shall not apply.
       ``(c) Additional Basis Increase for Property Acquired by 
     Surviving Spouse.--
       ``(1) In general.--In the case of property to which this 
     subsection applies and which is qualified spousal property, 
     the basis of such property under subsection (a) (as increased 
     under subsection (b)) shall be increased by its spousal 
     property basis increase.
       ``(2) Spousal property basis increase.--For purposes of 
     this subsection--
       ``(A) In general.--The spousal property basis increase for 
     property referred to in paragraph (1) is the portion of the 
     aggregate spousal property basis increase which is allocated 
     to the property pursuant to this section.
       ``(B) Aggregate spousal property basis increase.--In the 
     case of any estate, the aggregate spousal property basis 
     increase is $3,000,000.
       ``(3) Qualified spousal property.--For purposes of this 
     subsection, the term `qualified spousal property' means--
       ``(A) outright transfer property, and
       ``(B) qualified terminable interest property.
       ``(4) Outright transfer property.--For purposes of this 
     subsection--
       ``(A) In general.--The term `outright transfer property' 
     means any interest in property acquired from the decedent by 
     the decedent's surviving spouse.
       ``(B) Exception.--Subparagraph (A) shall not apply where, 
     on the lapse of time, on the occurrence of an event or 
     contingency, or on the failure of an event or contingency to 
     occur, an interest passing to the surviving spouse will 
     terminate or fail--
       ``(i)(I) if an interest in such property passes or has 
     passed (for less than an adequate and full consideration in 
     money or money's worth) from the decedent to any person other 
     than such surviving spouse (or the estate of such spouse), 
     and
       ``(II) if by reason of such passing such person (or his 
     heirs or assigns) may possess or enjoy any part of such 
     property after such termination or failure of the interest so 
     passing to the surviving spouse, or
       ``(ii) if such interest is to be acquired for the surviving 
     spouse, pursuant to directions of the decedent, by his 
     executor or by the trustee of a trust.

     For purposes of this subparagraph, an interest shall not be 
     considered as an interest which will terminate or fail merely 
     because it is the ownership of a bond, note, or similar 
     contractual obligation, the discharge of which would not have 
     the effect of an annuity for life or for a term.
       ``(C) Interest of spouse conditional on survival for 
     limited period.--For purposes of this paragraph, an interest 
     passing to the surviving spouse shall not be considered as an 
     interest which will terminate or fail on the death of such 
     spouse if--
       ``(i) such death will cause a termination or failure of 
     such interest only if it occurs within a period not exceeding 
     6 months after the decedent's death, or only if it occurs as 
     a result of a common disaster resulting in the death of the 
     decedent and the surviving spouse, or only if it occurs in 
     the case of either such event, and
       ``(ii) such termination or failure does not in fact occur.
       ``(5) Qualified terminable interest property.--For purposes 
     of this subsection--
       ``(A) In general.--The term `qualified terminable interest 
     property' means property--
       ``(i) which passes from the decedent, and
       ``(ii) in which the surviving spouse has a qualifying 
     income interest for life.
       ``(B) Qualifying income interest for life.--The surviving 
     spouse has a qualifying income interest for life if--
       ``(i) the surviving spouse is entitled to all the income 
     from the property, payable annually or at more frequent 
     intervals, or has a usufruct interest for life in the 
     property, and
       ``(ii) no person has a power to appoint any part of the 
     property to any person other than the surviving spouse.

     Clause (ii) shall not apply to a power exercisable only at or 
     after the death of the surviving spouse. To the extent 
     provided in regulations, an annuity shall be treated in a 
     manner similar to an income interest in property (regardless 
     of whether the property from which the annuity is payable can 
     be separately identified).
       ``(C) Property includes interest therein.--The term 
     `property' includes an interest in property.
       ``(D) Specific portion treated as separate property.--A 
     specific portion of property shall

[[Page 9634]]

     be treated as separate property. For purposes of the 
     preceding sentence, the term `specific portion' only includes 
     a portion determined on a fractional or percentage basis.
       ``(d) Definitions and Special Rules for Application of 
     Subsections (b) and (c).--
       ``(1) Property to which subsections (b) and (c) apply.--
       ``(A) In general.--The basis of property acquired from a 
     decedent may be increased under subsection (b) or (c) only if 
     the property was owned by the decedent at the time of death.
       ``(B) Rules relating to ownership.--
       ``(i) Jointly held property.--In the case of property which 
     was owned by the decedent and another person as joint tenants 
     with right of survivorship or tenants by the entirety--

       ``(I) if the only such other person is the surviving 
     spouse, the decedent shall be treated as the owner of only 50 
     percent of the property,
       ``(II) in any case (to which subclause (I) does not apply) 
     in which the decedent furnished consideration for the 
     acquisition of the property, the decedent shall be treated as 
     the owner to the extent of the portion of the property which 
     is proportionate to such consideration, and
       ``(III) in any case (to which subclause (I) does not apply) 
     in which the property has been acquired by gift, bequest, 
     devise, or inheritance by the decedent and any other person 
     as joint tenants with right of survivorship and their 
     interests are not otherwise specified or fixed by law, the 
     decedent shall be treated as the owner to the extent of the 
     value of a fractional part to be determined by dividing the 
     value of the property by the number of joint tenants with 
     right of survivorship.

       ``(ii) Revocable trusts.--The decedent shall be treated as 
     owning property transferred by the decedent during life to a 
     qualified revocable trust (as defined in section 645(b)(1)).
       ``(iii) Powers of appointment.--The decedent shall not be 
     treated as owning any property by reason of holding a power 
     of appointment with respect to such property.
       ``(iv) Community property.--Property which represents the 
     surviving spouse's one-half share of community property held 
     by the decedent and the surviving spouse under the community 
     property laws of any State or possession of the United States 
     or any foreign country shall be treated for purposes of this 
     section as owned by, and acquired from, the decedent if at 
     least one-half of the whole of the community interest in such 
     property is treated as owned by, and acquired from, the 
     decedent without regard to this clause.
       ``(C) Property acquired by decedent by gift within 3 years 
     of death.--
       ``(i) In general.--Subsections (b) and (c) shall not apply 
     to property acquired by the decedent by gift or by inter 
     vivos transfer for less than adequate and full consideration 
     in money or money's worth during the 3-year period ending on 
     the date of the decedent's death.
       ``(ii) Exception for certain gifts from spouse.--Clause (i) 
     shall not apply to property acquired by the decedent from the 
     decedent's spouse unless, during such 3-year period, such 
     spouse acquired the property in whole or in part by gift or 
     by inter vivos transfer for less than adequate and full 
     consideration in money or money's worth.
       ``(D) Stock of certain entities.--Subsections (b) and (c) 
     shall not apply to--
       ``(i) stock or securities of a foreign personal holding 
     company,
       ``(ii) stock of a DISC or former DISC,
       ``(iii) stock of a foreign investment company, or
       ``(iv) stock of a passive foreign investment company unless 
     such company is a qualified electing fund (as defined in 
     section 1295) with respect to the decedent.
       ``(2) Fair market value limitation.--The adjustments under 
     subsections (b) and (c) shall not increase the basis of any 
     interest in property acquired from the decedent above its 
     fair market value in the hands of the decedent as of the date 
     of the decedent's death.
       ``(3) Allocation rules.--
       ``(A) In general.--The executor shall allocate the 
     adjustments under subsections (b) and (c) on the return 
     required by section 6018.
       ``(B) Changes in allocation.--Any allocation made pursuant 
     to subparagraph (A) may be changed only as provided by the 
     Secretary.
       ``(4) Inflation adjustment of basis adjustment amounts.--
       ``(A) In general.--In the case of decedents dying in a 
     calendar year after 2010, the $1,300,000, $60,000, and 
     $3,000,000 dollar amounts in subsections (b) and (c)(2)(B) 
     shall each be increased by an amount equal to the product 
     of--
       ``(i) such dollar amount, and
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year, determined by 
     substituting `2009' for `1992' in subparagraph (B) thereof.
       ``(B) Rounding.--If any increase determined under 
     subparagraph (A) is not a multiple of--
       ``(i) $100,000 in the case of the $1,300,000 amount,
       ``(ii) $5,000 in the case of the $60,000 amount, and
       ``(iii) $250,000 in the case of the $3,000,000 amount,
     such increase shall be rounded to the next lowest multiple 
     thereof.
       ``(e) Property Acquired From the Decedent.--For purposes of 
     this section, the following property shall be considered to 
     have been acquired from the decedent:
       ``(1) Property acquired by bequest, devise, or inheritance, 
     or by the decedent's estate from the decedent.
       ``(2) Property transferred by the decedent during his 
     lifetime--
       ``(A) to a qualified revocable trust (as defined in section 
     645(b)(1)), or
       ``(B) to any other trust with respect to which the decedent 
     reserved the right to make any change in the enjoyment 
     thereof through the exercise of a power to alter, amend, or 
     terminate the trust.
       ``(3) Any other property passing from the decedent by 
     reason of death to the extent that such property passed 
     without consideration.
       ``(f) Coordination With Section 691.--This section shall 
     not apply to property which constitutes a right to receive an 
     item of income in respect of a decedent under section 691.
       ``(g) Certain Liabilities Disregarded.--
       ``(1) In general.--In determining whether gain is 
     recognized on the acquisition of property--
       ``(A) from a decedent by a decedent's estate or any 
     beneficiary other than a tax-exempt beneficiary, and
       ``(B) from the decedent's estate by any beneficiary other 
     than a tax-exempt beneficiary,
     and in determining the adjusted basis of such property, 
     liabilities in excess of basis shall be disregarded.
       ``(2) Tax-exempt beneficiary.--For purposes of paragraph 
     (1), the term `tax-exempt beneficiary' means--
       ``(A) the United States, any State or political subdivision 
     thereof, any possession of the United States, any Indian 
     tribal government (within the meaning of section 7871), or 
     any agency or instrumentality of any of the foregoing,
       ``(B) an organization (other than a cooperative described 
     in section 521) which is exempt from tax imposed by chapter 
     1,
       ``(C) any foreign person or entity (within the meaning of 
     section 168(h)(2)), and
       ``(D) to the extent provided in regulations, any person to 
     whom property is transferred for the principal purpose of tax 
     avoidance.
       ``(h) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this section.''.
       (b) Information Returns, Etc.--
       (1) Large transfers at death.--So much of subpart C of part 
     II of subchapter A of chapter 61 as precedes section 6019 is 
     amended to read as follows:

   ``Subpart C--Returns Relating to Transfers During Life or at Death

``Sec. 6018. Returns relating to large transfers at death.
``Sec. 6019. Gift tax returns.

     ``SEC. 6018. RETURNS RELATING TO LARGE TRANSFERS AT DEATH.

       ``(a) In General.--If this section applies to property 
     acquired from a decedent, the executor of the estate of such 
     decedent shall make a return containing the information 
     specified in subsection (c) with respect to such property.
       ``(b) Property to Which Section Applies.--
       ``(1) Large transfers.--This section shall apply to all 
     property (other than cash) acquired from a decedent if the 
     fair market value of such property acquired from the decedent 
     exceeds the dollar amount applicable under section 
     1022(b)(2)(B) (without regard to section 1022(b)(2)(C)).
       ``(2) Transfers of certain gifts received by decedent 
     within 3 years of death.--This section shall apply to any 
     appreciated property acquired from the decedent if--
       ``(A) subsections (b) and (c) of section 1022 do not apply 
     to such property by reason of section 1022(d)(1)(C), and
       ``(B) such property was required to be included on a return 
     required to be filed under section 6019.
       ``(3) Nonresidents not citizens of the united states.--In 
     the case of a decedent who is a nonresident not a citizen of 
     the United States, paragraphs (1) and (2) shall be applied--
       ``(A) by taking into account only--
       ``(i) tangible property situated in the United States, and
       ``(ii) other property acquired from the decedent by a 
     United States person, and
       ``(B) by substituting the dollar amount applicable under 
     section 1022(b)(3) for the dollar amount referred to in 
     paragraph (1).
       ``(4) Returns by trustees or beneficiaries.--If the 
     executor is unable to make a complete return as to any 
     property acquired from or passing from the decedent, the 
     executor shall include in the return a description of such 
     property and the name of every person holding a legal or 
     beneficial interest therein. Upon notice from the Secretary, 
     such person shall in like manner make a return as to such 
     property.
       ``(c) Information Required To Be Furnished.--The 
     information specified in this subsection with respect to any 
     property acquired from the decedent is--
       ``(1) the name and TIN of the recipient of such property,
       ``(2) an accurate description of such property,
       ``(3) the adjusted basis of such property in the hands of 
     the decedent and its fair market value at the time of death,
       ``(4) the decedent's holding period for such property,
       ``(5) sufficient information to determine whether any gain 
     on the sale of the property would be treated as ordinary 
     income,
       ``(6) the amount of basis increase allocated to the 
     property under subsection (b) or (c) of section 1022, and
       ``(7) such other information as the Secretary may by 
     regulations prescribe.
       ``(d) Property Acquired From Decedent.--For purposes of 
     this section, section 1022 shall

[[Page 9635]]

     apply for purposes of determining the property acquired from 
     a decedent.
       ``(e) Statements To Be Furnished to Certain Persons.--Every 
     person required to make a return under subsection (a) shall 
     furnish to each person whose name is required to be set forth 
     in such return (other than the person required to make such 
     return) a written statement showing--
       ``(1) the name, address, and phone number of the person 
     required to make such return, and
       ``(2) the information specified in subsection (c) with 
     respect to property acquired from, or passing from, the 
     decedent to the person required to receive such statement.

     The written statement required under the preceding sentence 
     shall be furnished not later than 30 days after the date that 
     the return required by subsection (a) is filed.''.
       (2) Gifts.--Section 6019 (relating to gift tax returns) is 
     amended--
       (A) by striking ``Any individual'' and inserting ``(a) In 
     General.--Any individual'', and
       (B) by adding at the end the following new subsection:
       ``(b) Statements To Be Furnished to Certain Persons.--Every 
     person required to make a return under subsection (a) shall 
     furnish to each person whose name is required to be set forth 
     in such return (other than the person required to make such 
     return) a written statement showing--
       ``(1) the name, address, and phone number of the person 
     required to make such return, and
       ``(2) the information specified in such return with respect 
     to property received by the person required to receive such 
     statement.

     The written statement required under the preceding sentence 
     shall be furnished not later than 30 days after the date that 
     the return required by subsection (a) is filed.''.
       (3) Time for filing section 6018 returns.--
       (A) Returns relating to large transfers at death.--
     Subsection (a) of section 6075 is amended to read as follows:
       ``(a) Returns Relating to Large Transfers at Death.--The 
     return required by section 6018 with respect to a decedent 
     shall be filed with the return of the tax imposed by chapter 
     1 for the decedent's last taxable year or such later date 
     specified in regulations prescribed by the Secretary.''.
       (B) Conforming amendments.--Paragraph (3) of section 
     6075(b) is amended--
       (i) by striking ``estate tax return'' in the heading and 
     inserting ``section 6018 return'', and
       (ii) by striking ``(relating to estate tax returns)'' and 
     inserting ``(relating to returns relating to large transfers 
     at death)''.
       (4) Penalties.--Part I of subchapter B of chapter 68 
     (relating to assessable penalties) is amended by adding at 
     the end the following new section:

     ``SEC. 6716. FAILURE TO FILE INFORMATION WITH RESPECT TO 
                   CERTAIN TRANSFERS AT DEATH AND GIFTS.

       ``(a) Information Required To Be Furnished to the 
     Secretary.--Any person required to furnish any information 
     under section 6018 who fails to furnish such information on 
     the date prescribed therefor (determined with regard to any 
     extension of time for filing) shall pay a penalty of $10,000 
     ($500 in the case of information required to be furnished 
     under section 6018(b)(2)) for each such failure.
       ``(b) Information Required To Be Furnished to 
     Beneficiaries.--Any person required to furnish in writing to 
     each person described in section 6018(e) or 6019(b) the 
     information required under such section who fails to furnish 
     such information shall pay a penalty of $50 for each such 
     failure.
       ``(c) Reasonable Cause Exception.--No penalty shall be 
     imposed under subsection (a) or (b) with respect to any 
     failure if it is shown that such failure is due to reasonable 
     cause.
       ``(d) Intentional Disregard.--If any failure under 
     subsection (a) or (b) is due to intentional disregard of the 
     requirements under sections 6018 and 6019(b), the penalty 
     under such subsection shall be 5 percent of the fair market 
     value (as of the date of death or, in the case of section 
     6019(b), the date of the gift) of the property with respect 
     to which the information is required.
       ``(e) Deficiency Procedures Not To Apply.--Subchapter B of 
     chapter 63 (relating to deficiency procedures for income, 
     estate, gift, and certain excise taxes) shall not apply in 
     respect of the assessment or collection of any penalty 
     imposed by this section.''.
       (5) Clerical amendments.--
       (A) The table of sections for part I of subchapter B of 
     chapter 68 is amended by adding at the end the following new 
     item:

``Sec. 6716. Failure to file information with respect to certain 
              transfers at death and gifts.''.

       (B) The item relating to subpart C in the table of subparts 
     for part II of subchapter A of chapter 61 is amended to read 
     as follows:

``Subpart C. Returns relating to transfers during life or at death.''.

       (c) Exclusion of Gain on Sale of Principal Residence Made 
     Available to Heir of Decedent in Certain Cases.--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 paragraph:
       ``(9) Property acquired from a decedent.--The exclusion 
     under this section shall apply to property sold by--
       ``(A) the estate of a decedent,
       ``(B) any individual who acquired such property from the 
     decedent (within the meaning of section 1022), and
       ``(C) a trust which, immediately before the death of the 
     decedent, was a qualified revocable trust (as defined in 
     section 645(b)(1)) established by the decedent,
     determined by taking into account the ownership and use by 
     the decedent.''.
       (d) Transfers of Appreciated Carryover Basis Property To 
     Satisfy Pecuniary Bequest.--
       (1) In general.--Section 1040 (relating to transfer of 
     certain farm, etc., real property) is amended to read as 
     follows:

     ``SEC. 1040. USE OF APPRECIATED CARRYOVER BASIS PROPERTY TO 
                   SATISFY PECUNIARY BEQUEST.

       ``(a) In General.--If the executor of the estate of any 
     decedent satisfies the right of any person to receive a 
     pecuniary bequest with appreciated property, then gain on 
     such exchange shall be recognized to the estate only to the 
     extent that, on the date of such exchange, the fair market 
     value of such property exceeds such value on the date of 
     death.
       ``(b) Similar Rule for Certain Trusts.--To the extent 
     provided in regulations prescribed by the Secretary, a rule 
     similar to the rule provided in subsection (a) shall apply 
     where--
       ``(1) by reason of the death of the decedent, a person has 
     a right to receive from a trust a specific dollar amount 
     which is the equivalent of a pecuniary bequest, and
       ``(2) the trustee of a trust satisfies such right with 
     property.
       ``(c) Basis of Property Acquired in Exchange Described in 
     Subsection (a) or (b).--The basis of property acquired in an 
     exchange with respect to which gain realized is not 
     recognized by reason of subsection (a) or (b) shall be the 
     basis of such property immediately before the exchange 
     increased by the amount of the gain recognized to the estate 
     or trust on the exchange.''.
       (2) The item relating to section 1040 in the table of 
     sections for part III of subchapter O of chapter 1 is amended 
     to read as follows:

``Sec. 1040. Use of appreciated carryover basis property to satisfy 
              pecuniary bequest.''.

       (e) Amendments Related to Carryover Basis.--
       (1) Recognition of gain on transfers to nonresidents.--
       (A) Subsection (a) of section 684 is amended by inserting 
     ``or to a nonresident alien'' after ``or trust''.
       (B) Subsection (b) of section 684 is amended to read as 
     follows:
       ``(b) Exceptions.--
       ``(1) Transfers to certain trusts.--Subsection (a) shall 
     not apply to a transfer to a trust by a United States person 
     to the extent that any United States person is treated as the 
     owner of such trust under section 671.
       ``(2) Lifetime transfers to nonresident aliens.--Subsection 
     (a) shall not apply to a lifetime transfer to a nonresident 
     alien.''.
       (C) The section heading for section 684 is amended by 
     inserting ``AND NONRESIDENT ALIENS'' after ``ESTATES''.
       (D) The item relating to section 684 in the table of 
     sections for subpart F of part I of subchapter J of chapter 1 
     is amended by inserting ``and nonresident aliens'' after 
     ``estates''.
       (2) Capital gain treatment for inherited art work or 
     similar property.--
       (A) In general.--Subparagraph (C) of section 1221(a)(3) 
     (defining capital asset) is amended by inserting ``(other 
     than by reason of section 1022)'' 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(a)(3)(C) for basis determined under section 1022.''.
       (3) 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.''.
       (4) Certain trusts.--Subparagraph (A) of section 4947(a)(2) 
     is amended by inserting ``642(c),'' after ``170(f)(2)(B),''.
       (5) Other amendments.--
       (A) Section 1246 is amended by striking subsection (e).
       (B) Subsection (e) of section 1291 is amended--
       (i) by striking ``(e),''; and
       (ii) by striking ``; except that'' and all that follows and 
     inserting a period.
       (C) Section 1296 is amended by striking subsection (i).
       (6) 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. Treatment of property acquired from a decedent dying after 
              December 31, 2009.''.

       (f) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to estates of 
     decedents dying after December 31, 2009.
       (2) Transfers to nonresidents.--The amendments made by 
     subsection (e)(1) shall apply to transfers after December 31, 
     2009.

[[Page 9636]]

       (3) Section 4947.--The amendment made by subsection (e)(4) 
     shall apply to deductions for taxable years beginning after 
     December 31, 2009.

                   Subtitle F--Conservation Easements

     SEC. 551. EXPANSION OF ESTATE TAX RULE FOR CONSERVATION 
                   EASEMENTS.

       (a) Repeal of Certain Restrictions on Where Land Is 
     Located.--Clause (i) of section 2031(c)(8)(A) (defining land 
     subject to a qualified conservation easement) is amended to 
     read as follows:
       ``(i) which is located in the United States or any 
     possession of the United States,''.
       (b) Clarification of Date for Determining Value of Land and 
     Easement.--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).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying after December 31, 
     2000.

     Subtitle G--Modifications of Generation-Skipping Transfer Tax

     SEC. 561. 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 one or more individuals who are non-skip 
     persons--

       ``(I) before the date that the individual attains age 46,

       ``(II) on or before one 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 one 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 one 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 one or more of such individuals or is 
     subject to a general power of appointment exercisable by one 
     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 prior direct 
     skip'' and inserting ``or subsection (c)(1)''.
       (c) Effective Dates.--
       (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, 2000, and 
     to estate tax inclusion periods ending after December 31, 
     2000.
       (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 
     December 31, 2000.

     SEC. 562. 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 two 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 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 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

[[Page 9637]]

     qualified severance shall be reported to the Secretary.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to severances after December 31, 2000.

     SEC. 563. 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 apply to transfers subject to chapter 11 or 12 of the 
     Internal Revenue Code of 1986 made after December 31, 2000.

     SEC. 564. RELIEF PROVISIONS.

       (a) In General.--Section 2642 is amended by adding at the 
     end the following new subsection:
       ``(g) Relief Provisions.--
       ``(1) Relief from 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 from 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, December 
     31, 2000.
       (2) Substantial compliance.--Section 2642(g)(2) of such 
     Code (as so added) shall apply to transfers subject to 
     chapter 11 or 12 of the Internal Revenue Code of 1986 made 
     after December 31, 2000. No implication is intended with 
     respect to the availability of relief from late elections or 
     the application of a rule of substantial compliance on or 
     before such date.

        Subtitle H--Extension of Time for Payment of Estate Tax

     SEC. 571. INCREASE IN NUMBER OF ALLOWABLE PARTNERS AND 
                   SHAREHOLDERS IN CLOSELY HELD BUSINESSES.

       (a) In General.--Paragraphs (1)(B)(ii), (1)(C)(ii), and 
     (9)(B)(iii)(I) of section 6166(b) (relating to definitions 
     and special rules) are each amended by striking ``15'' and 
     inserting ``45''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying after December 31, 
     2001.

     SEC. 572. EXPANSION OF AVAILABILITY OF INSTALLMENT PAYMENT 
                   FOR ESTATES WITH INTERESTS QUALIFYING LENDING 
                   AND FINANCE BUSINESSES.

       (a) In General.--Section 6166(b) (relating to definitions 
     and special rules) is amended by adding at the end the 
     following new paragraph:
       ``(10) Stock in qualifying lending and finance business 
     treated as stock in an active trade or business company.--
       ``(A) In general.--If the executor elects the benefits of 
     this paragraph, then--
       ``(i) Stock in qualifying lending and finance business 
     treated as stock in an active trade or business company.--For 
     purposes of this section, any asset used in a qualifying 
     lending and finance business shall be treated as an asset 
     which is used in carrying on a trade or business.
       ``(ii) 5-year deferral for principal not to apply.--The 
     executor shall be treated as having selected under subsection 
     (a)(3) the date prescribed by section 6151(a).
       ``(iii) 5 equal installments allowed.--For purposes of 
     applying subsection (a)(1), `5' shall be substituted for 
     `10'.
       ``(B) Definitions.--For purposes of this paragraph--
       ``(i) Qualifying lending and finance business.--The term 
     `qualifying lending and finance business' means a lending and 
     finance business, if--

       ``(I) based on all the facts and circumstances immediately 
     before the date of the decedent's death, there was 
     substantial activity with respect to the lending and finance 
     business, or
       ``(II) during at least 3 of the 5 taxable years ending 
     before the date of the decedent's death, such business had at 
     least 1 full-time employee substantially all of whose 
     services were the active management of such business, 10 
     full-time, nonowner employees substantially all of whose 
     services were directly related to such business, and 
     $5,000,000 in gross receipts from activities described in 
     clause (ii).

       ``(ii) Lending and finance business.--The term `lending and 
     finance business' means a trade or business of--

       ``(I) making loans,
       ``(II) purchasing or discounting accounts receivable, 
     notes, or installment obligations,
       ``(III) engaging in rental and leasing of real and tangible 
     personal property, including entering into leases and 
     purchasing, servicing, and disposing of leases and leased 
     assets,
       ``(IV) rendering services or making facilities available in 
     the ordinary course of a lending or finance business, and
       ``(V) rendering services or making facilities available in 
     connection with activities described in subclauses (I) 
     through (IV) carried on by the corporation rendering services 
     or making facilities available, or another corporation which 
     is a member of the same affiliated group (as defined in 
     section 1504 without regard to section 1504(b)(3)).

       ``(iii) Limitation.--The term `qualifying lending and 
     finance business' shall not include any interest in an 
     entity, if the stock or debt of such entity or a controlled 
     group (as defined in section 267(f)(1)) of which such entity 
     was a member was readily tradable on an established 
     securities market or secondary market (as defined by the 
     Secretary) at any time within 3 years before the date of the 
     decedent's death.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to estates of decedents dying after December 31, 
     2001.

     SEC. 572. CLARIFICATION OF AVAILABILITY OF INSTALLMENT 
                   PAYMENT.

       (a) In General.--Subparagraph (B) of section 6166(b)(8) 
     (relating to all stock must be non-readily-tradable stock) is 
     amended to read as follows:
       ``(B) All stock must be non-readily-tradable stock.--
       ``(i) In general.--No stock shall be taken into account for 
     purposes of applying this paragraph unless it is non-readily-
     tradable stock (within the meaning of paragraph (7)(B)).
       ``(ii) Special application where only holding company stock 
     is non-readily-tradable stock.--If the requirements of clause 
     (i) are not met, but all of the stock of each holding company 
     taken into account is non-readily-tradable, then this 
     paragraph shall apply, but subsection (a)(1) shall be applied 
     by substituting `5' for `10'.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to estates of decedents dying after December 31, 
     2001.

                      Subtitle I--Other Provisions

     SEC. 581. WAIVER OF STATUTE OF LIMITATION FOR TAXES ON 
                   CERTAIN FARM VALUATIONS.

       If on the date of the enactment of this Act (or at any time 
     within 1 year after the date of the enactment) a refund or 
     credit of any overpayment of tax resulting from the 
     application of section 2032A(c)(7)(E) of the Internal Revenue 
     Code of 1986 is barred by any law or rule of law, the refund 
     or credit of such overpayment shall, nevertheless, be made or 
     allowed if claim therefor is filed before the date 1 year 
     after the date of the enactment of this Act.

   TITLE VI--PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS

               Subtitle A--Individual Retirement Accounts

     SEC. 601. MODIFICATION OF IRA CONTRIBUTION LIMITS.

       (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:
      2002 through 2004.........................................$3,000 

[[Page 9638]]

      2005 through 2007.........................................$4,000 
      2008 and thereafter.......................................$5,000.

       ``(B) Catch-up contributions for individuals 50 or older.--
       ``(i) In general.--In the case of an individual who has 
     attained the age of 50 before the close of the taxable year, 
     the deductible amount for such taxable year shall be 
     increased by the applicable amount.
       ``(ii) Applicable amount.--For purposes of clause (i), the 
     applicable amount shall be the amount determined in 
     accordance with the following table:

``For taxable years beginning in:             The applicable amount is:
      2002 through 2005...........................................$500 
      2006 and thereafter.......................................$1,000.

       ``(C) Cost-of-living adjustment.--
       ``(i) In general.--In the case of any taxable year 
     beginning in a calendar year after 2008, 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 2007' 
     for `calendar year 1992' in subparagraph (B) thereof.

       ``(ii) Rounding rules.--If any amount after adjustment 
     under clause (i) is not a multiple of $500, such amount shall 
     be rounded to the next lower multiple of $500.''.
       (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, 
     2001.

     SEC. 602. 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 not as a qualified employer plan (and contributions 
     to such account or annuity as contributions to an individual 
     retirement plan and not to the qualified employer 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 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).
       ``(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); except such term shall not include a government 
     plan which is not a qualified plan unless the plan is an 
     eligible deferred compensation plan (as defined in section 
     457(b)).
       ``(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, 2002.

                     Subtitle B--Expanding Coverage

     SEC. 611. 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 in the headings and the text, by striking ``$90,000'' 
     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'' and by 
     striking the second sentence.
       (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, 2001''.
       (5) Conforming amendments.--
       (A) Section 415(b)(2) is amended by striking subparagraph 
     (F).
       (B) Section 415(b)(9) is amended to read as follows:
       ``(9) Special rule for commercial airline pilots.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     in the case of any participant who is a commercial airline 
     pilot, if, as of the time of the participant's retirement, 
     regulations prescribed by the Federal Aviation Administration 
     require an individual to separate from service as a 
     commercial airline pilot after attaining any age occurring on 
     or after age 60 and before age 62, paragraph (2)(C) shall be 
     applied by substituting such age for age 62.
       ``(B) Individuals who separate from service before age 
     60.--If a participant described in subparagraph (A) separates 
     from service before age 60, the rules of paragraph (2)(C) 
     shall apply.''.
       (C) Section 415(b)(10)(C)(i) is amended by striking 
     ``applied without regard to paragraph (2)(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, 2001''.
       (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, 
     2001''; 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 beginning in calendar The applicable dollar amount:
      2002.....................................................$11,000 
      2003.....................................................$12,000 
      2004.....................................................$13,000 
      2005.....................................................$14,000 
      2006 or thereafter....................................$15,000.''.

       (2) Cost-of-living adjustment.--Paragraph (5) of section 
     402(g) is amended to read as follows:

[[Page 9639]]

       ``(5) Cost-of-living adjustment.--In the case of taxable 
     years beginning after December 31, 2006, 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, 2005, 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 beginning in calendar The applicable dollar amount:
      2002.....................................................$11,000 
      2003.....................................................$12,000 
      2004.....................................................$13,000 
      2005.....................................................$14,000 
      2006 or thereafter.......................................$15,000.

       ``(B) Cost-of-living adjustments.--In the case of taxable 
     years beginning after December 31, 2006, the Secretary shall 
     adjust the $15,000 amount under 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, 2005, 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 years beginning in calendar year:   The applicable dollar amount:
      2002......................................................$7,000 
      2003......................................................$8,000 
      2004......................................................$9,000 
      2005 or thereafter.......................................$10,000.

       ``(ii) Cost-of-living adjustment.--In the case of a year 
     beginning after December 31, 2005, the Secretary shall adjust 
     the $10,000 amount under clause (i) at the same time 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, 2004, 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) Subclause (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) Certain Compensation Limits.--
       (1) In general.--Subparagraph (A) of section 401(c)(2) 
     (defining earned income) is amended by adding at the end 
     thereof the following new sentence: ``For purposes of this 
     part only (other than sections 419 and 419A), this 
     subparagraph shall be applied as if the term `trade or 
     business' for purposes of section 1402 included service 
     described in section 1402(c)(6).''.
       (2) Simple retirement accounts.--Clause (ii) of section 
     408(p)(6)(A) (defining self-employed) is amended by adding at 
     the end the following new sentence: ``The preceding sentence 
     shall be applied as if the term `trade or business' for 
     purposes of section 1402 included service described in 
     section 1402(c)(6).''.
       (h) 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.''.
       (i) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to years beginning after December 31, 2001.
       (2) Defined benefit plans.--The amendments made by 
     subsection (a) shall apply to years ending after December 31, 
     2001.

     SEC. 612. PLAN LOANS FOR SUBCHAPTER S OWNERS, PARTNERS, AND 
                   SOLE PROPRIETORS.

       (a) In General.--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 of 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 amendment made by this section 
     shall apply to years beginning after December 31, 2001.

     SEC. 613. 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 $130,000,'';
       (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), and by 
     inserting the following: ``in the case of plan years 
     beginning after December 31, 2002, the $130,000 amount in 
     clause (i) shall be adjusted 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, 2001, and any 
     increase under this sentence which is not a multiple of 
     $5,000 shall be rounded to the next lower multiple of 
     $5,000.''.
       (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 (and any reduction under this 
     sentence shall not be taken into account in determining 
     whether section 401(k)(4)(A) applies).''.
       (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--

[[Page 9640]]

       (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 key 
     employee or former key employee.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 2001.

     SEC. 614. 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, 2001.

     SEC. 615. 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 611, 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, 2001.

     SEC. 616. DEDUCTION LIMITS.

       (a) Modification of Limits.--
       (1) Stock bonus and profit sharing trusts.--
       (A) In general.--Subclause (I) of section 404(a)(3)(A)(i) 
     (relating to stock bonus and profit sharing trusts) is 
     amended by striking ``15 percent'' and inserting ``25 
     percent''.
       (B) Conforming amendment.--Subparagraph (C) of section 
     404(h)(1) is amended by striking ``15 percent'' each place it 
     appears and inserting ``25 percent''.
       (2) Defined contribution plans.--
       (A) In general.--Clause (v) of section 404(a)(3)(A) 
     (relating to stock bonus and profit sharing trusts) is 
     amended to read as follows:
       ``(v) Defined contribution plans subject to the funding 
     standards.--Except as provided by the Secretary, a defined 
     contribution plan which is subject to the funding standards 
     of section 412 shall be treated in the same manner as a stock 
     bonus or profit-sharing plan for purposes of this 
     subparagraph.''
       (B) Conforming amendments.--
       (i) Section 404(a)(1)(A) is amended by inserting ``(other 
     than a trust to which paragraph (3) applies)'' after 
     ``pension trust''.
       (ii) Section 404(h)(2) is amended by striking ``stock bonus 
     or profit-sharing trust'' and inserting ``trust subject to 
     subsection (a)(3)(A)''.
       (iii) The heading of section 404(h)(2) is amended by 
     striking ``stock bonus and profit-sharing trust'' and 
     inserting ``certain trusts''.
       (b) Compensation.--
       (1) In general.--Section 404(a) (relating to general rule) 
     is amended by adding at the end the following:
       ``(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).''.
       (2) Conforming amendments.--
       (A) Subparagraph (B) of section 404(a)(3) is amended by 
     striking the last sentence thereof.
       (B) Clause (i) of section 4972(c)(6)(B) is amended by 
     striking ``(within the meaning of section 404(a))'' and 
     inserting ``(within the meaning of section 404(a) and as 
     adjusted under section 404(a)(12))''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 2001.

     SEC. 617. OPTION TO TREAT ELECTIVE DEFERRALS AS AFTER-TAX 
                   ROTH 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 ROTH 
                   CONTRIBUTIONS.

       ``(a) General Rule.--If an applicable retirement plan 
     includes a qualified Roth contribution program--
       ``(1) any designated Roth 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 Roth Contribution Program.--For purposes of 
     this section--
       ``(1) In general.--The term `qualified Roth contribution 
     program' means a program under which an employee may elect to 
     make designated Roth 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 Roth contribution program unless the 
     applicable retirement plan--
       ``(A) establishes separate accounts (`designated Roth 
     accounts') for the designated Roth 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 Roth 
     Contributions.--For purposes of this section--
       ``(1) Designated roth contribution.--The term `designated 
     Roth 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 Roth account which is 
     otherwise allowable under this chapter may be made only if 
     the contribution is to--
       ``(i) another designated Roth 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 Roth 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 Roth 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 Roth 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 first taxable year for which the individual made 
     a designated Roth contribution to any designated Roth account 
     established for such individual under the same applicable 
     retirement plan, or
       ``(ii) if a rollover contribution was made to such 
     designated Roth account from a designated Roth account 
     previously established for such individual under another 
     applicable retirement plan, the first taxable year for which 
     the individual made a designated Roth contribution to such 
     previously established account.
       ``(C) Distributions of excess deferrals and contributions 
     and earnings thereon.--The term `qualified distribution' 
     shall not include any distribution of any excess deferral 
     under section 402(g)(2) or any excess contribution under 
     section 401(k)(8), and any income on the excess deferral or 
     contribution.
       ``(3) Treatment of distributions of certain excess 
     deferrals.--Notwithstanding section 72, if any excess 
     deferral under section 402(g)(2) attributable to a designated 
     Roth contribution is not distributed on or before the 1st 
     April 15 following the close of the taxable year in which 
     such excess deferral is made, the amount of such excess 
     deferral shall--
       ``(A) not be treated as investment in the contract, and
       ``(B) be included in gross income for the taxable year in 
     which such excess is distributed.
       ``(4) Aggregation rules.--Section 72 shall be applied 
     separately with respect to distributions and payments from a 
     designated Roth 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--

[[Page 9641]]

       (1) by adding at the end of paragraph (1)(A) (as added by 
     section 201(c)(1)) the following new sentence: ``The 
     preceding sentence shall not apply the portion of such excess 
     as does not exceed the designated Roth 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 
     Roth account (as defined in section 402A), an eligible 
     retirement plan with respect to such portion shall include 
     only another designated Roth 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 Roth 
     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 Roth 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 Roth contributions (as defined 
     in section 402A) 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 Roth 
              contributions.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2005.

     SEC. 618. NONREFUNDABLE CREDIT TO CERTAIN INDIVIDUALS FOR 
                   ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS.

       (a) In General.--Subpart A of part IV of subchapter A of 
     chapter 1 (relating to nonrefundable personal credits) is 
     amended by inserting after section 25A the following new 
     section:

     ``SEC. 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY 
                   CERTAIN INDIVIDUALS.

       ``(a) Allowance of Credit.--In the case of an eligible 
     individual, there shall be allowed as a credit against the 
     tax imposed by this subtitle for the taxable year an amount 
     equal to the applicable percentage of so much of the 
     qualified retirement savings contributions of the eligible 
     individual for the taxable year as do not exceed $2,000.
       ``(b) Applicable Percentage.--For purposes of this section, 
     the applicable percentage is the percentage determined in 
     accordance with the following table:


------------------------------------------------------------------------
                    Adjusted Gross Income
-------------------------------------------------------------
    Joint return     Head of a household    All other cases   Applicable
------------------------------------------------------------- percentage
  Over     Not over     Over    Not over    Over    Not over
------------------------------------------------------------------------
          $30,000    .........  $22,500   ........  $15,000          50
  30,000   32,500     22,500     24,375    15,000    16,250          20
  32,500   50,000     24,375     37,500    16,250    25,000          10
  50,000  .........   37,500    ........   25,000   ........          0
------------------------------------------------------------------------


       ``(c) Eligible Individual.--For purposes of this section--
       ``(1) In general.--The term `eligible individual' means any 
     individual if such individual has attained the age of 18 as 
     of the close of the taxable year.
       ``(2) Dependents and full-time students not eligible.--The 
     term `eligible individual' shall not include--
       ``(A) any individual with respect to whom a deduction under 
     section 151 is allowed to another taxpayer for a taxable year 
     beginning in the calendar year in which such individual's 
     taxable year begins, and
       ``(B) any individual who is a student (as defined in 
     section 151(c)(4)).
       ``(d) Qualified Retirement Savings Contributions.--For 
     purposes of this section--
       ``(1) In general.--The term `qualified retirement savings 
     contributions' means, with respect to any taxable year, the 
     sum of--
       ``(A) the amount of the qualified retirement contributions 
     (as defined in section 219(e)) made by the eligible 
     individual,
       ``(B) the amount of--
       ``(i) any elective deferrals (as defined in section 
     402(g)(3)) of such individual, and
       ``(ii) any elective deferral of compensation by such 
     individual under an eligible deferred compensation plan (as 
     defined in section 457(b)) of an eligible employer described 
     in section 457(e)(1)(A), and
       ``(C) the amount of voluntary employee contributions by 
     such individual to any qualified retirement plan (as defined 
     in section 4974(c)).
       ``(2) Reduction for certain distributions.--
       ``(A) In general.--The qualified retirement savings 
     contributions determined under paragraph (1) shall be reduced 
     (but not below zero) by the sum of--
       ``(i) any distribution from a qualified retirement plan (as 
     defined in section 4974(c)), or from an eligible deferred 
     compensation plan (as defined in section 457(b)), received by 
     the individual during the testing period which is includible 
     in gross income, and
       ``(ii) any distribution from a Roth IRA or a Roth account 
     received by the individual during the testing period which is 
     not a qualified rollover contribution (as defined in section 
     408A(e)) to a Roth IRA or a rollover under section 
     402(c)(8)(B) to a Roth account.
       ``(B) Testing period.--For purposes of subparagraph (A), 
     the testing period, with respect to a taxable year, is the 
     period which includes--
       ``(i) such taxable year,
       ``(ii) the 2 preceding taxable years, and
       ``(iii) the period after such taxable year and before the 
     due date (including extensions) for filing the return of tax 
     for such taxable year.
       ``(C) Excepted distributions.--There shall not be taken 
     into account under subparagraph (A)--
       ``(i) any distribution referred to in section 72(p), 
     401(k)(8), 401(m)(6), 402(g)(2), 404(k), or 408(d)(4), and
       ``(ii) any distribution to which section 408A(d)(3) 
     applies.
       ``(D) Treatment of distributions received by spouse of 
     individual.--For purposes of determining distributions 
     received by an individual under subparagraph (A) for any 
     taxable year, any distribution received by the spouse of such 
     individual shall be treated as received by such individual if 
     such individual and spouse file a joint return for such 
     taxable year and for the taxable year during which the spouse 
     receives the distribution.
       ``(e) Adjusted Gross Income.--For purposes of this section, 
     adjusted gross income shall be determined without regard to 
     sections 911, 931, and 933.
       ``(f) Investment in the Contract.--Notwithstanding any 
     other provision of law, a qualified retirement savings 
     contribution shall not fail to be included in determining the 
     investment in the contract for purposes of section 72 by 
     reason of the credit under this section.
       ``(g) Termination.--This section shall not apply to taxable 
     years beginning after December 31, 2006.''.
       (b) Credit Allowed Against Regular Tax and Alternative 
     Minimum Tax.--
       (1) In general.--Section 25B, as added by subsection (a), 
     is amended by inserting after subsection (f) the following 
     new subsection:
       ``(g) Limitation Based on Amount of Tax.--The credit 
     allowed under subsection (a) for the taxable year shall not 
     exceed the excess of--
       ``(1) the sum of the regular tax liability (as defined in 
     section 26(b)) plus the tax imposed by section 55, over
       ``(2) the sum of the credits allowable under this subpart 
     (other than this section and section 23) and section 27 for 
     the taxable year.''
       (2) Conforming amendments.--
       (A) Section 24(b)(3)(B), as amended by sections 201(b) and 
     203(d), is amended by striking ``section 23'' and inserting 
     ``sections 23 and 25B''.
       (B) Section 25(e)(1)(C), as amended by section 201(b), is 
     amended by inserting ``25B,'' after ``24,''.
       (C) Section 26(a)(1), as amended by sections 201(b) and 
     203, is amended by striking ``and 24'' and inserting ``, 24, 
     and 25B''.
       (D) Section 904(h), as amended by sections 201(b) and 203, 
     is amended by striking ``and 24'' and inserting ``, 24, and 
     25B''.
       (E) Section 1400C(d), as amended by sections 201(b) and 
     203, is amended by striking ``and 24'' and inserting ``, 24, 
     and 25B''.
       (c) Conforming Amendment.--The table of sections for 
     subpart A of part IV of subchapter A of chapter 1, as amended 
     by section 432, is amended by inserting after the item 
     relating to section 25A the following new item:

``Sec. 25B. Elective deferrals and IRA contributions by certain 
              individuals.''

       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

     SEC. 619. CREDIT FOR PENSION PLAN STARTUP COSTS OF SMALL 
                   EMPLOYERS.

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

     ``SEC. 45E. SMALL EMPLOYER PENSION PLAN STARTUP COSTS.

       ``(a) General Rule.--For purposes of section 38, in the 
     case of an eligible employer, the small employer pension plan 
     startup cost credit determined under this section for any 
     taxable year is an amount equal to 50 percent of the 
     qualified startup costs paid or incurred by the taxpayer 
     during the taxable year.
       ``(b) Dollar Limitation.--The amount of the credit 
     determined under this section for any taxable year shall not 
     exceed--
       ``(1) $500 for the first credit year and each of the 2 
     taxable years immediately following the first credit year, 
     and
       ``(2) zero for any other taxable year.
       ``(c) Eligible Employer.--For purposes of this section--
       ``(1) In general.--The term `eligible employer' has the 
     meaning given such term by section 408(p)(2)(C)(i).
       ``(2) Requirement for new qualified employer plans.--Such 
     term shall not include an employer if, during the 3-taxable 
     year period immediately preceding the 1st taxable year for 
     which the credit under this section is otherwise allowable 
     for a qualified employer plan of the employer, the employer 
     or any member of any controlled group including the employer 
     (or any predecessor of either) established or maintained

[[Page 9642]]

     a qualified employer plan with respect to which contributions 
     were made, or benefits were accrued, for substantially the 
     same employees as are in the qualified employer plan.
       ``(d) Other Definitions.--For purposes of this section--
       ``(1) Qualified startup costs.--
       ``(A) In general.--The term `qualified startup costs' means 
     any ordinary and necessary expenses of an eligible employer 
     which are paid or incurred in connection with--
       ``(i) the establishment or administration of an eligible 
     employer plan, or
       ``(ii) the retirement-related education of employees with 
     respect to such plan.
       ``(B) Plan must have at least 1 participant.--Such term 
     shall not include any expense in connection with a plan that 
     does not have at least 1 employee eligible to participate who 
     is not a highly compensated employee.
       ``(2) Eligible employer plan.--The term `eligible employer 
     plan' means a qualified employer plan within the meaning of 
     section 4972(d).
       ``(3) First credit year.--The term `first credit year' 
     means--
       ``(A) the taxable year which includes the date that the 
     eligible employer plan to which such costs relate becomes 
     effective, or
       ``(B) at the election of the eligible employer, the taxable 
     year preceding the taxable year referred to in subparagraph 
     (A).
       ``(e) Special Rules.--For purposes of this section--
       ``(1) Aggregation rules.--All persons treated as a single 
     employer under subsection (a) or (b) of section 52, or 
     subsection (n) or (o) of section 414, shall be treated as one 
     person. All eligible employer plans shall be treated as 1 
     eligible employer plan.
       ``(2) Disallowance of deduction.--No deduction shall be 
     allowed for that portion of the qualified startup costs paid 
     or incurred for the taxable year which is equal to the credit 
     determined under subsection (a).
       ``(3) Election not to claim credit.--This section shall not 
     apply to a taxpayer for any taxable year if such taxpayer 
     elects to have this section not apply for such taxable 
     year.''
       (b) Credit Allowed as Part of General Business Credit.--
     Section 38(b) (defining current year business credit) is 
     amended by striking ``plus'' at the end of paragraph (12), by 
     striking the period at the end of paragraph (13) and 
     inserting ``, plus'', and by adding at the end the following 
     new paragraph:
       ``(14) in the case of an eligible employer (as defined in 
     section 45E(c)), the small employer pension plan startup cost 
     credit determined under section 45E(a).''
       (c) Conforming Amendments.--
       (1) Section 39(d) is amended by adding at the end the 
     following new paragraph:
       ``(10) No carryback of small employer pension plan startup 
     cost credit before january 1, 2002.--No portion of the unused 
     business credit for any taxable year which is attributable to 
     the small employer pension plan startup cost credit 
     determined under section 45E may be carried back to a taxable 
     year beginning before January 1, 2002.''
       (2) Subsection (c) of section 196 is amended by striking 
     ``and'' at the end of paragraph (8), by striking the period 
     at the end of paragraph (9) and inserting ``, and'', and by 
     adding at the end the following new paragraph:
       ``(10) the small employer pension plan startup cost credit 
     determined under section 45E(a).''
       (3) The table of sections for subpart D of part IV of 
     subchapter A of chapter 1 is amended by adding at the end the 
     following new item:

``Sec. 45E. Small employer pension plan startup costs.''

       (d) Effective Date.--The amendments made by this section 
     shall apply to costs paid or incurred in taxable years 
     beginning after December 31, 2001, with respect to qualified 
     employer plans established after such date.

     SEC. 620. 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 10511 of the Revenue Act of 1987 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 later of--
       (A) the fifth plan year the pension benefit plan is in 
     existence; or
       (B) the end of any remedial amendment period with respect 
     to the plan beginning within the first 5 plan years; 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'' means an eligible employer (as 
     defined in section 408(p)(2)(C)(i)(I) of the Internal Revenue 
     Code of 1986) which has at least one employee who is not a 
     highly compensated employee (as defined in section 414(q)) 
     and is participating in the plan. 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) Determination of Average Fees Charged.--For purposes of 
     any determination of average fees charged, any request to 
     which subsection (a) applies shall not be taken into account.
       (e) Effective Date.--The provisions of this section shall 
     apply with respect to requests made after December 31, 2001.

     SEC. 621. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN 
                   INTERNATIONAL TRANSPORTATION SERVICES.

       (a) Exclusion From Income Sourcing Rules.--The second 
     sentence of section 861(a)(3) (relating to gross income from 
     sources within the United States) is amended by striking 
     ``except for purposes of sections 79 and 105 and subchapter 
     D,''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to remuneration for services performed in plan 
     years beginning after December 31, 2001.

                Subtitle C--Enhancing Fairness for Women

     SEC. 631. CATCH-UP 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) Catch-up 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 dollar amount, or
       ``(ii) the excess (if any) of--

       ``(I) the participant's compensation (as defined in section 
     415(c)(3)) 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 dollar amount.--For purposes of this 
     paragraph--
       ``(i) In the case of an applicable employer plan other than 
     a plan described in section 401(k)(11) or 408(p), the 
     applicable dollar amount shall be determined in accordance 
     with the following table:

``For taxable years                                      The applicable
beginning in:                                         dollar amount is:
  2002......................................................$1,000 ....

  2003......................................................$2,000 ....

  2004......................................................$3,000 ....

  2005......................................................$4,000 ....

  2006 and thereafter.......................................$5,000.....

       ``(ii) In the case of an applicable employer plan described 
     in section 401(k)(11) or 408(p), the applicable dollar amount 
     shall be determined in accordance with the following table:

``For taxable years beginning in:      The applicable dollar amount is:
    2002..........................................................$500 
    2003........................................................$1,000 
    2004........................................................$1,500 
    2005........................................................$2,000 
    2006 and thereafter.........................................$2,500.

       ``(C) Cost-of-living adjustment.--In the case of a year 
     beginning after December 31, 2006, the Secretary shall adjust 
     annually the $5,000 amount in subparagraph (B)(i) and the 
     $2,500 amount in subparagraph (B)(ii) for increases in the 
     cost-of-living at the same time and in the same manner as 
     adjustments under section 415(d); except that the base period 
     taken into account shall be the calendar quarter beginning 
     July 1, 2005, and any increase under this subparagraph which 
     is not a multiple of $500 shall be rounded to the next lower 
     multiple of $500.''.
       ``(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(k), 408(p), 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) except as provided in paragraph (4), 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), 
     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) Application of nondiscrimination rules.--
       ``(A) In general.--An applicable employer plan shall be 
     treated as failing to meet the nondiscrimination requirements 
     under section 401(a)(4) with respect to benefits, rights, and 
     features unless the plan allows all eligible participants to 
     make the same election with respect to the additional 
     elective deferrals under this subsection.
       ``(B) Aggregation.--For purposes of subparagraph (A), all 
     plans maintained by employers who are treated as a single 
     employer under subsection (b), (c), (m), or (o) of section 
     414 shall be treated as 1 plan.
       ``(5) 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

[[Page 9643]]

     by reason of the application of any limitation or other 
     restriction described in paragraph (3) or comparable 
     limitation or restriction contained in the terms of the plan.
       ``(6) Other definitions and rules.--For purposes of this 
     subsection--
       ``(A) 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 described in section 
     457(e)(1)(A), and
       ``(iv) an arrangement meeting the requirements of section 
     408 (k) or (p).
       ``(B) Elective deferral.--The term `elective deferral' has 
     the meaning given such term by subsection (u)(2)(C).
       ``(C) Exception for section 457 plans.--This subsection 
     shall not apply to an applicable employer plan described in 
     subparagraph (A)(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, 2001.

     SEC. 632. 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 fifth 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 
     Economic Growth and Tax Relief Reconciliation Act of 2001''.
       (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' has the meaning given such term by 
     paragraph (2).''.
       (G) Subparagraph (B) of section 402(g)(7) (as redesignated 
     by section 611(c)(3)) is amended by inserting before the 
     period at the end the following: ``(as in effect before the 
     enactment of the Economic Growth and Tax Relief 
     Reconciliation Act of 2001''.
       (H) Section 664(g) is amended--
       (i) in paragraph (3)(E) by striking ``limitations under 
     section 415(c)'' and inserting ``applicable limitation under 
     paragraph (7)'', and
       (ii) by adding at the end the following new paragraph:
       ``(7) Applicable limitation.--
       ``(A) In general.--For purposes of paragraph (3)(E), the 
     applicable limitation under this paragraph with respect to a 
     participant is an amount equal to the lesser of--
       ``(i) $30,000, or
       ``(ii) 25 percent of the participant's compensation (as 
     defined in section 415(c)(3)).
       ``(B) Cost-of-living adjustment.--The Secretary shall 
     adjust annually the $30,000 amount under subparagraph (A)(i) 
     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 October 1, 1993, and any increase under 
     this subparagraph which is not a multiple of $5,000 shall be 
     rounded to the next lowest multiple of $5,000.''.
       (4) Effective date.--The amendments made by this subsection 
     shall apply to years beginning after December 31, 2001.
       (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) Election to modify section 403(b) exclusion allowance 
     to conform to section 415 modification.--In the case of 
     taxable years beginning after December 31, 1999, and before 
     January 1, 2002, a plan may disregard the requirement in the 
     regulations regarding the exclusion allowance under section 
     403(b)(2) of the Internal Revenue Code of 1986 that 
     contributions to a defined benefit pension plan be treated as 
     previously excluded amounts for purposes of the exclusion 
     allowance.
       (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, 2001.

     SEC. 633. FASTER VESTING OF CERTAIN EMPLOYER MATCHING 
                   CONTRIBUTIONS.

       (a) In General.--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) Amendment of 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) 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, 2001.
       (2) Collective bargaining agreements.--In the case of a 
     plan maintained pursuant to one or more collective bargaining 
     agreements between employee representatives and one or more 
     employers ratified by the date of the 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 the 
     enactment); or
       (ii) January 1, 2002; or
       (B) January 1, 2006.
       (3) Service required.--With respect to any plan, the 
     amendments made by this section shall not apply to any 
     employee before the date that

[[Page 9644]]

     such employee has 1 hour of service under such plan in any 
     plan year to which the amendments made by this section apply.

     SEC. 634. MODIFICATION TO MINIMUM DISTRIBUTION RULES.

       The Secretary of the Treasury shall modify the life 
     expectancy tables under 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 to reflect current life expectancy.

     SEC. 635. 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.''.
       (d) Effective Date.--The amendment made by this section 
     shall apply to transfers, distributions, and payments made 
     after December 31, 2001.

     SEC. 636. PROVISIONS RELATING TO HARDSHIP DISTRIBUTIONS.

       (a) Safe Harbor Relief.--
       (1) 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.
       (2) Effective date.--The revised regulations under this 
     subsection shall apply to years beginning after December 31, 
     2001.
       (b) Hardship Distributions Not Treated as Eligible Rollover 
     Distributions.--
       (1) Modification of definition of eligible rollover.--
     Subparagraph (C) of section 402(c)(4) (relating to eligible 
     rollover distribution) is amended to read as follows:
       ``(C) any distribution which is made upon hardship of the 
     employee.''.
       (2) Effective date.--The amendment made by this subsection 
     shall apply to distributions made after December 31, 2001.

     SEC. 637. WAIVER OF TAX ON NONDEDUCTIBLE CONTRIBUTIONS FOR 
                   DOMESTIC OR SIMILAR WORKERS.

       (a) In General.--Section 4972(c)(6) (relating to exceptions 
     to nondeductible contributions), as amended by section 616, 
     is amended by striking ``and'' at the end of subparagraph 
     (A), by striking the period and inserting ``, or'' at the end 
     of subparagraph (B), and by inserting after subparagraph (B) 
     the following new subparagraph:
       ``(C) so much of the contributions to a simple retirement 
     account (within the meaning of section 408(p)) or a simple 
     plan (within the meaning of section 401(k)(11)) which are not 
     deductible when contributed solely because such contributions 
     are not made in connection with a trade or business of the 
     employer.''
       (b) Exclusion of Certain Contributions.--Section 
     4972(c)(6), as amended by subsection (a), is amended by 
     adding at the end the following new sentence: ``Subparagraph 
     (C) shall not apply to contributions made on behalf of the 
     employer or a member of the employer's family (as defined in 
     section 447(e)(1)).''.
       (c) No Inference.--Nothing in the amendments made by this 
     section shall be construed to infer the proper treatment of 
     nondeductible contributions under the laws in effect before 
     such amendments.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

          Subtitle D--Increasing Portability for Participants

     SEC. 641. 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)),
       ``(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) 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) which is maintained by an eligible 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) and which is maintained by an 
     eligible employer described in section 457(e)(1)(A).''.
       (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) which is maintained by an eligible 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:
       ``(10) 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 eligible 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.

[[Page 9645]]

       (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, 2001.
       (2) Reasonable notice.--No penalty shall be imposed on a 
     plan for the failure to provide the information required by 
     the amendment made by subsection (c) with respect to any 
     distribution made before the date that is 90 days after the 
     date on which the Secretary of the Treasury issues a safe 
     harbor rollover notice after the date of the enactment of 
     this Act, if the administrator of such plan makes a 
     reasonable attempt to comply with such requirement.
       (3) 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. 642. 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 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, 2001.
       (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. 643. 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, 2001.

     SEC. 644. 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 643, 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, 2001.

     SEC. 645. TREATMENT OF FORMS OF DISTRIBUTION.

       (a) Plan Transfers.--
       (1) Amendment of internal revenue code.--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) In general.--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,

[[Page 9646]]

       ``(IV) the election described in subclause (III) was made 
     after the participant or beneficiary received a notice 
     describing the consequences of making the election, and
       ``(V) the transferee plan allows the participant or 
     beneficiary described in subclause (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) Special rule for mergers, etc.--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 of 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 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; and
       ``(v) 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) Except to the extent provided in regulations 
     promulgated by the Secretary of the Treasury, a defined 
     contribution plan shall not be treated as failing to meet the 
     requirements of this subsection 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, 2001.
       (b) Regulations.--
       (1) Amendment of internal revenue code.--Paragraph (6)(B) 
     of section 411(d) (relating to accrued benefit not to be 
     decreased by amendment) is amended by inserting after the 
     second sentence the following: ``The Secretary shall by 
     regulations provide that this subparagraph shall not apply to 
     any plan amendment which reduces or eliminates benefits or 
     subsidies which create significant burdens or complexities 
     for the plan and plan participants, unless such amendment 
     adversely affects the rights of any participant in a more 
     than de minimis manner.''.
       (2) Amendment of erisa.--Section 204(g)(2) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1054(g)(2)) 
     is amended by inserting after the second sentence the 
     following: ``The Secretary of the Treasury shall by 
     regulations provide that this paragraph shall not apply to 
     any plan amendment which reduces or eliminates benefits or 
     subsidies which create significant burdens or complexities 
     for the plan and plan participants, unless such amendment 
     adversely affects the rights of any participant in a more 
     than de minimis manner.''.
       (3) Secretary directed.--Not later than December 31, 2003, 
     the Secretary of the Treasury is directed to issue 
     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 amendment made by this subsection. Such 
     regulations shall apply to plan years beginning after 
     December 31, 2003, or such earlier date as is specified by 
     the Secretary of the Treasury.

     SEC. 646. 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, 2001.

     SEC. 647. PURCHASE OF SERVICE CREDIT IN GOVERNMENTAL DEFINED 
                   BENEFIT PLANS.

       (a) Section 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) Section 457 Plans.--Subsection (e) of section 457, as 
     amended by section 641, 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.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to trustee-to-trustee transfers after December 
     31, 2001.

     SEC. 648. EMPLOYERS MAY DISREGARD ROLLOVERS FOR PURPOSES OF 
                   CASH-OUT AMOUNTS.

       (a) Qualified Plans.--
       (1) Amendment of internal revenue code.--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 of 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, 2001.

[[Page 9647]]



     SEC. 649. 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.--
       (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 subsections (a) 
     and (b) shall apply to distributions after December 31, 2001.

       Subtitle E--Strengthening Pension Security and Enforcement

                       PART I--GENERAL PROVISIONS

     SEC. 651. REPEAL OF 160 PERCENT OF CURRENT LIABILITY FUNDING 
                   LIMIT.

       (a) Amendments to Internal Revenue Code.--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--
      2002........................................................165  
      2003......................................................170.''.
       (b) Amendment of 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--
      2002.........................................................165 
      2003......................................................170.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 2001.

     SEC. 652. 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 current liability determined under 
     section 412(l).
       ``(ii) Plans with 100 or less participants.--For purposes 
     of this subparagraph, in the case of a plan which has 100 or 
     less participants for the plan year, unfunded current 
     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.
       ``(iii) Rule for determining number of participants.--For 
     purposes of determining the number of plan 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 one 
     plan, but only employees of such member or employer shall be 
     taken into account.
       ``(iv) Plans maintained by professional service 
     employers.--In the case of a plan which, subject to section 
     4041 of the Employee Retirement Income Security Act of 1974, 
     terminates during the plan year, clause (i) shall be applied 
     by substituting for unfunded current liability the amount 
     required to make the plan sufficient for benefit liabilities 
     (within the meaning of section 4041(d) of such Act).''.
       (b) Conforming Amendment.--Paragraph (6) of section 
     4972(c), as amended by sections 616 and 637, is amended--
       (1) by striking subparagraph (A) and redesignating 
     subparagraphs (B) and (C) as subparagraphs (A) and (B), 
     respectively,
       (2) by striking the first sentence following subparagraph 
     (B) (as so redesignated),
       (3) by striking ``subparagraph (B)'' in the next to last 
     sentence and inserting ``subparagraph (A)'', and
       (4) by striking ``Subparagraph (C)'' in the last sentence 
     and inserting ``Subparagraph (B)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 2001.

     SEC. 653. 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 amendment made by this section 
     shall apply to years beginning after December 31, 2001.

     SEC. 654. TREATMENT OF MULTIEMPLOYER PLANS UNDER SECTION 415.

       (a) Compensation Limit.--
       (1) In general.--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.''.
       (2) Conforming amendment.--Section 415(b)(7) (relating to 
     benefits under certain collectively bargained plans) is 
     amended by inserting ``(other than a multiemployer plan)'' 
     after ``defined benefit plan'' in the matter preceding 
     subparagraph (A).
       (b) Combining and Aggregation of Plans.--
       (1) Combining of plans.--Subsection (f) of section 415 
     (relating to combining of plans) is amended by adding at the 
     end the following:
       ``(3) Exception for multiemployer plans.--Notwithstanding 
     paragraph (1) and subsection (g), a multiemployer plan (as 
     defined in section 414(f)) shall not be combined or 
     aggregated--
       ``(A) with any other plan which is not a multiemployer plan 
     for purposes of applying subsection (b)(1)(B) to such other 
     plan, or
       ``(B) with any other multiemployer plan for purposes of 
     applying the limitations established in this section.''.
       (2) Conforming amendment for aggregation of plans.--
     Subsection (g) of section 415 (relating to aggregation of 
     plans) is amended by striking ``The Secretary'' and inserting 
     ``Except as provided in subsection (f)(3), the Secretary''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to years beginning after December 31, 2001.

     SEC. 655. 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. 656. PROHIBITED ALLOCATIONS OF STOCK IN S CORPORATION 
                   ESOP.

       (a) In General.--Section 409 (relating to qualifications 
     for tax credit employee stock ownership plans) is amended by 
     redesignating subsection (p) as subsection (q) and by 
     inserting after subsection (o) the following new subsection:
       ``(p) Prohibited Allocations of Securities in an S 
     Corporation.--

[[Page 9648]]

       ``(1) In general.--An employee stock ownership plan holding 
     employer securities consisting of stock in an S corporation 
     shall provide that no portion of the assets of the plan 
     attributable to (or allocable in lieu of) such employer 
     securities may, during a nonallocation year, accrue (or be 
     allocated directly or indirectly under any plan of the 
     employer meeting the requirements of section 401(a)) for the 
     benefit of any disqualified person.
       ``(2) Failure to meet requirements.--
       ``(A) In general.--If a plan fails to meet the requirements 
     of paragraph (1), the plan shall be treated as having 
     distributed to any disqualified person the amount allocated 
     to the account of such person in violation of paragraph (1) 
     at the time of such allocation.
       ``(B) Cross reference.--
  ``For excise tax relating to violations of paragraph (1) and 
ownership of synthetic equity, see section 4979A.

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

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

       ``(ii) Deemed-owned shares.--Notwithstanding the employee 
     trust exception in section 318(a)(2)(B)(i), an individual 
     shall be treated as owning deemed-owned shares of the 
     individual.

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

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

       ``(ii) Person's share of unallocated stock.--For purposes 
     of clause (i)(II), a person's share of unallocated S 
     corporation stock held by such plan is the amount of the 
     unallocated stock which would be allocated to such person if 
     the unallocated stock were allocated to all participants in 
     the same proportions as the most recent stock allocation 
     under the plan.
       ``(D) Member of family.--For purposes of this paragraph, 
     the term `member of the family' means, with respect to any 
     individual--
       ``(i) the spouse of the individual,
       ``(ii) an ancestor or lineal descendant of the individual 
     or the individual's spouse,
       ``(iii) a brother or sister of the individual or the 
     individual's spouse and any lineal descendant of the brother 
     or sister, and
       ``(iv) the spouse of any individual described in clause 
     (ii) or (iii).

     A spouse of an individual who is legally separated from such 
     individual under a decree of divorce or separate maintenance 
     shall not be treated as such individual's spouse for purposes 
     of this subparagraph.
       ``(5) Treatment of synthetic equity.--For purposes of 
     paragraphs (3) and (4), in the case of a person who owns 
     synthetic equity in the S corporation, except to the extent 
     provided in regulations, the shares of stock in such 
     corporation on which such synthetic equity is based shall be 
     treated as outstanding stock in such corporation and deemed-
     owned shares of such person if such treatment of synthetic 
     equity of 1 or more such persons results in--
       ``(A) the treatment of any person as a disqualified person, 
     or
       ``(B) the treatment of any year as a nonallocation year.

     For purposes of this paragraph, synthetic equity shall be 
     treated as owned by a person in the same manner as stock is 
     treated as owned by a person under the rules of paragraphs 
     (2) and (3) of section 318(a). If, without regard to this 
     paragraph, a person is treated as a disqualified person or a 
     year is treated as a nonallocation year, this paragraph shall 
     not be construed to result in the person or year not being so 
     treated.
       ``(6) Definitions.--For purposes of this subsection--
       ``(A) Employee stock ownership plan.--The term `employee 
     stock ownership plan' has the meaning given such term by 
     section 4975(e)(7).
       ``(B) Employer securities.--The term `employer security' 
     has the meaning given such term by section 409(l).
       ``(C) Synthetic equity.--The term `synthetic equity' means 
     any stock option, warrant, restricted stock, deferred 
     issuance stock right, or similar interest or right that gives 
     the holder the right to acquire or receive stock of the S 
     corporation in the future. Except to the extent provided in 
     regulations, synthetic equity also includes a stock 
     appreciation right, phantom stock unit, or similar right to a 
     future cash payment based on the value of such stock or 
     appreciation in such value.
       ``(7) Regulations and guidance.--
       ``(A) In general.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     this subsection.
       ``(B) Avoidance or evasion.--The Secretary may, by 
     regulation or other guidance of general applicability, 
     provide that a nonallocation year occurs in any case in which 
     the principal purpose of the ownership structure of an S 
     corporation constitutes an avoidance or evasion of this 
     subsection.''.
       (b) Coordination With Section 4975(e)(7).--The last 
     sentence of section 4975(e)(7) (defining employee stock 
     ownership plan) is amended by inserting ``, section 409(p),'' 
     after ``409(n)''.
       (c) Excise Tax.--
       (1) Application of tax.--Subsection (a) of section 4979A 
     (relating to tax on certain prohibited allocations of 
     employer securities) is amended--
       (A) by striking ``or'' at the end of paragraph (1), and
       (B) by striking all that follows paragraph (2) and 
     inserting the following:
       ``(3) there is any allocation of employer securities which 
     violates the provisions of section 409(p), or a nonallocation 
     year described in subsection (e)(2)(C) with respect to an 
     employee stock ownership plan, or
       ``(4) any synthetic equity is owned by a disqualified 
     person in any nonallocation year,
     there is hereby imposed a tax on such allocation or ownership 
     equal to 50 percent of the amount involved.''.
       (2) Liability.--Section 4979A(c) (defining liability for 
     tax) is amended to read as follows:
       ``(c) Liability for Tax.--The tax imposed by this section 
     shall be paid--
       ``(1) in the case of an allocation referred to in paragraph 
     (1) or (2) of subsection (a), by--
       ``(A) the employer sponsoring such plan, or
       ``(B) the eligible worker-owned cooperative,
     which made the written statement described in section 
     664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may 
     be), and
       ``(2) in the case of an allocation or ownership referred to 
     in paragraph (3) or (4) of subsection (a), by the S 
     corporation the stock in which was so allocated or owned.''.
       (3) Definitions.--Section 4979A(e) (relating to 
     definitions) is amended to read as follows:
       ``(e) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Definitions.--Except as provided in paragraph (2), 
     terms used in this section have the same respective meanings 
     as when used in sections 409 and 4978.
       ``(2) Special rules relating to tax imposed by reason of 
     paragraph (3) or (4) of subsection (a).--
       ``(A) Prohibited allocations.--The amount involved with 
     respect to any tax imposed by reason of subsection (a)(3) is 
     the amount allocated to the account of any person in 
     violation of section 409(p)(1).
       ``(B) Synthetic equity.--The amount involved with respect 
     to any tax imposed by reason of subsection (a)(4) is the 
     value of the shares on which the synthetic equity is based.
       ``(C) Special rule during first nonallocation year.--For 
     purposes of subparagraph (A), the amount involved for the 
     first nonallocation year of any employee stock ownership plan 
     shall be determined by taking into account the total value of 
     all the deemed-owned shares of all disqualified persons with 
     respect to such plan.
       ``(D) Statute of limitations.--The statutory period for the 
     assessment of any tax imposed by this section by reason of 
     paragraph (3) or (4) of subsection (a) shall not expire 
     before the date which is 3 years from the later of--
       ``(i) the allocation or ownership referred to in such 
     paragraph giving rise to such tax, or
       ``(ii) the date on which the Secretary is notified of such 
     allocation or ownership.''.
       (d) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to plan years beginning after December 31, 2004.
       (2) Exception for certain plans.--In the case of any--
       (A) employee stock ownership plan established after March 
     14, 2001, 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 March 14, 2001.

     SEC. 657. AUTOMATIC ROLLOVERS OF CERTAIN MANDATORY 
                   DISTRIBUTIONS.

       (a) Direct Transfers of Mandatory Distributions.--

[[Page 9649]]

       (1) In general.--Section 401(a)(31) (relating to optional 
     direct transfer of eligible rollover distributions), as 
     amended by section 643, is amended by redesignating 
     subparagraphs (B), (C), and (D) as subparagraphs (C), (D), 
     and (E), respectively, and by inserting after subparagraph 
     (A) the following new subparagraph:
       ``(B) Certain mandatory distributions.--
       ``(i) In general.--In case of a trust which is part of an 
     eligible plan, such trust shall not constitute a qualified 
     trust under this section unless the plan of which such trust 
     is a part provides that if--

       ``(I) a distribution described in clause (ii) in excess of 
     $1,000 is made, and
       ``(II) the distributee does not make an election under 
     subparagraph (A) and does not elect to receive the 
     distribution directly,

     the plan administrator shall make such transfer to an 
     individual retirement plan of a designated trustee or issuer 
     and shall notify the distributee in writing (either 
     separately or as part of the notice under section 402(f)) 
     that the distribution may be transferred to another 
     individual retirement plan.
       ``(ii) Eligible plan.--For purposes of clause (i), the term 
     `eligible plan' means a plan which provides that any 
     nonforfeitable accrued benefit for which the present value 
     (as determined under section 411(a)(11)) does not exceed 
     $5,000 shall be immediately distributed to the 
     participant.''.
       (2) Conforming amendments.--
       (A) The heading of section 401(a)(31) is amended by 
     striking ``Optional direct'' and inserting ``Direct''.
       (B) Section 401(a)(31)(C), as redesignated by paragraph 
     (1), is amended by striking ``Subparagraph (A)'' and 
     inserting ``Subparagraphs (A) and (B)''.
       (b) Notice Requirement.--Subparagraph (A) of section 
     402(f)(1) is amended by inserting before the comma at the end 
     the following: ``and that the automatic distribution by 
     direct transfer applies to certain distributions in 
     accordance with section 401(a)(31)(B)''.
       (c) Fiduciary Rules.--
       (1) In general.--Section 404(c) of the Employee Retirement 
     Income Security Act of 1974 (29 U.S.C. 1104(c)) is amended by 
     adding at the end the following new paragraph:
       ``(3) In the case of a pension plan which makes a transfer 
     to an individual retirement account or annuity of a 
     designated trustee or issuer under section 401(a)(31)(B) of 
     the Internal Revenue Code of 1986, the participant or 
     beneficiary shall, for purposes of paragraph (1), be treated 
     as exercising control over the assets in the account or 
     annuity upon--
       ``(A) the earlier of the earlier of--
       ``(i) a rollover of all or a portion of the amount to 
     another individual retirement account or annuity; or
       ``(ii) one year after the transfer is made; or
       ``(B) if the transfer is made in a manner consistent with 
     guidance provided by the Secretary.''.
       (2) Regulations.--
       (A) Automatic rollover safe harbor.--Not later than 3 years 
     after the date of enactment of this Act, the Secretary of 
     Labor shall prescribe regulations providing for safe harbors 
     under which the designation of an institution and investment 
     of funds in accordance with section 401(a)(31)(B) of the 
     Internal Revenue Code of 1986 is deemed to satisfy the 
     fiduciary requirements of section 404(a) of the Employee 
     Retirement Income Security Act of 1974 (29 U.S.C. 1104(a)).
       (B) Use of low-cost individual retirement plans.--The 
     Secretary of the Treasury and the Secretary of Labor may 
     provide, and shall give consideration to providing, special 
     relief with respect to the use of low-cost individual 
     retirement plans for purposes of transfers under section 
     401(a)(31)(B) of the Internal Revenue Code of 1986 and for 
     other uses that promote the preservation of assets for 
     retirement income purposes.
       (d) Effective Date.--The amendments made by this section 
     shall apply to distributions made after final regulations 
     implementing subsection (c)(2)(A) are prescribed.

     SEC. 658. CLARIFICATION OF TREATMENT OF CONTRIBUTIONS TO 
                   MULTIEMPLOYER PLAN.

       (a) Not Considered Method of Accounting.--For purposes of 
     section 446 of the Internal Revenue Code of 1986, a 
     determination under section 404(a)(6) of such Code regarding 
     the taxable year with respect to which a contribution to a 
     multiemployer pension plan is deemed made shall not be 
     treated as a method of accounting of the taxpayer. No 
     deduction shall be allowed for any taxable year for any 
     contribution to a multiemployer pension plan with respect to 
     which a deduction was previously allowed.
       (b) Regulations.--The Secretary of the Treasury shall 
     promulgate such regulations as necessary to clarify that a 
     taxpayer shall not be allowed an aggregate amount of 
     deductions for contributions to a multiemployer pension plan 
     which exceeds the amount of such contributions made or deemed 
     made under section 404(a)(6) of the Internal Revenue Code of 
     1986 to such plan.
       (c) Effective Date.--Subsection (a), and any regulations 
     promulgated under subsection (b), shall be effective for 
     years ending after the date of the enactment of this Act.

 PART II--TREATMENT OF PLAN AMENDMENTS REDUCING FUTURE BENEFIT ACCRUALS

     SEC. 659. EXCISE TAX ON FAILURE TO PROVIDE NOTICE BY DEFINED 
                   BENEFIT PLANS SIGNIFICANTLY REDUCING FUTURE 
                   BENEFIT ACCRUALS.

       (a) Amendment of Internal Revenue Code.--
       (1) In general.--Chapter 43 (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.
       ``(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 notice to which the failure 
     relates is provided or the failure is otherwise corrected.
       ``(c) Limitations on Amount of Tax.--
       ``(1) Tax not to apply where failure not discovered and 
     reasonable diligence exercised.--No tax shall be imposed by 
     subsection (a) on any failure during any period for which it 
     is established to the satisfaction of the Secretary that any 
     person subject to liability for the tax under subsection (d) 
     did not know that the failure existed and exercised 
     reasonable diligence to meet the requirements of subsection 
     (e).
       ``(2) Tax not to apply to failures corrected within 30 
     days.--No tax shall be imposed by subsection (a) on any 
     failure if--
       ``(A) any person subject to liability for the tax under 
     subsection (d) exercised reasonable diligence to meet the 
     requirements of subsection (e), and
       ``(B) such person provides the notice described in 
     subsection (e) during the 30-day period beginning on the 
     first date such person knew, or exercising reasonable 
     diligence would have known, that such failure existed.
       ``(3) Overall limitation for unintentional failures.--
       ``(A) In general.--If the person subject to liability for 
     tax under subsection (d) exercised reasonable diligence to 
     meet the requirements of subsection (e), 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.
       ``(B) Taxable years in the case of certain controlled 
     groups.--For purposes of this paragraph, if all persons who 
     are treated as a single employer for purposes of this section 
     do not have the same taxable year, the taxable years taken 
     into account shall be determined under principles similar to 
     the principles of section 1561.
       ``(4) 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 or otherwise inequitable 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. The Secretary 
     may provide a simplified form of notice for, or exempt from 
     any notice requirement, a plan--
       ``(A) which has fewer than 100 participants who have 
     accrued a benefit under the plan, or
       ``(B) which offers participants the option to choose 
     between the new benefit formula and the old benefit formula.
       ``(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) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Applicable individual.--The term `applicable 
     individual' means, with respect to any plan amendment--
       ``(A) each participant in the plan, and

[[Page 9650]]

       ``(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)),

     whose rate of future benefit accrual under the plan may 
     reasonably be expected to be significantly reduced 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.

     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.
       ``(3) Early retirement.--A plan amendment which eliminates 
     or significantly reduces any early retirement benefit or 
     retirement-type subsidy (within the meaning of section 
     411(d)(6)(B)(i)) shall be treated as having the effect of 
     significantly reducing the rate of future benefit accrual.
       ``(g) New Technologies.--The Secretary may by regulations 
     allow any notice under subsection (e) to be provided by using 
     new technologies.''.
       (2) Clerical amendment.--The table of sections for chapter 
     43 is amended by adding at the end the following new item:
 ``Sec. 4980F. Failure of applicable plans reducing benefit accruals to 
              satisfy notice requirements.''.

       (b) Amendment of ERISA.--Subsection (h) of section 204 of 
     the Employee Retirement Income Security Act of 1974 (29 
     U.S.C. 1054) is amended to read as follows:
       ``(h)(1) An applicable pension plan may not be amended so 
     as to provide for a significant reduction in the rate of 
     future benefit accrual unless the plan administrator provides 
     the notice described in paragraph (2) to each applicable 
     individual (and to each employee organization representing 
     applicable individuals).
       ``(2) 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 of the Treasury) to allow applicable individuals to 
     understand the effect of the plan amendment. The Secretary of 
     the Treasury may provide a simplified form of notice for, or 
     exempt from any notice requirement, a plan--
       ``(A) which has fewer than 100 participants who have 
     accrued a benefit under the plan, or
       ``(B) which offers participants the option to choose 
     between the new benefit formula and the old benefit formula.
       ``(3) Except as provided in regulations prescribed by the 
     Secretary of the Treasury, the notice required by paragraph 
     (1) shall be provided within a reasonable time before the 
     effective date of the plan amendment.
       ``(4) 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) 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.
       ``(6)(A) In the case of any egregious failure to meet any 
     requirement of this subsection with respect to any plan 
     amendment, the provisions of the applicable pension plan 
     shall be applied as if such plan amendment entitled all 
     applicable individuals to the greater of--
       ``(i) the benefits to which they would have been entitled 
     without regard to such amendment, or
       ``(ii) the benefits under the plan with regard to such 
     amendment.
       ``(B) For purposes of subparagraph (A), there is an 
     egregious failure to meet the requirements of this subsection 
     if such failure is within the control of the plan sponsor and 
     is--
       ``(i) an intentional failure (including any failure to 
     promptly provide the required notice or information after the 
     plan administrator discovers an unintentional failure to meet 
     the requirements of this subsection),
       ``(ii) a failure to provide most of the individuals with 
     most of the information they are entitled to receive under 
     this subsection, or
       ``(iii) a failure which is determined to be egregious under 
     regulations prescribed by the Secretary of the Treasury.
       ``(7) The Secretary of the Treasury may by regulations 
     allow any notice under this subsection to be provided by 
     using new technologies.
       ``(8) For purposes of this subsection--
       ``(A) The term `applicable individual' means, with respect 
     to any plan amendment--
       ``(i) each participant in the plan; and
       ``(ii) any beneficiary who is an alternate payee (within 
     the meaning of section 206(d)(3)(K)) under an applicable 
     qualified domestic relations order (within the meaning of 
     section 206(d)(3)(B)(i)),

     whose rate of future benefit accrual under the plan may 
     reasonably be expected to be significantly reduced by such 
     plan amendment.
       ``(B) The term `applicable pension plan' means--
       ``(i) any defined benefit plan; or
       ``(ii) an individual account plan which is subject to the 
     funding standards of section 412 of the Internal Revenue Code 
     of 1986.
       ``(9) For purposes of this subsection, a plan amendment 
     which eliminates or significantly reduces any early 
     retirement benefit or retirement-type subsidy (within the 
     meaning of subsection (g)(2)(A)) shall be treated as having 
     the effect of significantly reducing the rate of future 
     benefit accrual.''.
       (c) 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) 
     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 notice rule.--
       (A) In general.--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.
       (B) Reasonable notice.--The amendments made by this section 
     shall not apply to any plan amendment taking effect on or 
     after the date of the enactment of this Act if, before April 
     25, 2001, notice was provided to participants and 
     beneficiaries adversely affected by the plan amendment (or 
     their representatives) which was reasonably expected to 
     notify them of the nature and effective date of the plan 
     amendment.

                Subtitle F--Reducing Regulatory Burdens

     SEC. 661. MODIFICATION OF TIMING OF PLAN VALUATIONS.

       (a) In General.--Paragraph (9) of section 412(c) (relating 
     to annual valuation) is amended to read as follows:
       ``(9) Annual valuation.--
       ``(A) In general.--For purposes of this section, a 
     determination of experience gains and losses and a valuation 
     of the plan's liability shall be made not less frequently 
     than once every year, except that such determination shall be 
     made more frequently to the extent required in particular 
     cases under regulations prescribed by the Secretary.
       ``(B) Valuation date.--
       ``(i) Current year.--Except as provided in clause (ii), the 
     valuation referred to in subparagraph (A) shall be made as of 
     a date within the plan year to which the valuation refers or 
     within one month prior to the beginning of such year.
       ``(ii) Use of prior year valuation.--The valuation referred 
     to in subparagraph (A) may be made as of a date within the 
     plan year prior to the year to which the valuation refers if, 
     as of such date, the value of the assets of the plan are not 
     less than 125 percent of the plan's current liability (as 
     defined in paragraph (7)(B)).
       ``(iii) Adjustments.--Information under clause (ii) shall, 
     in accordance with regulations, be actuarially adjusted to 
     reflect significant differences in participants.''.
       (b) Amendment of ERISA.--Paragraph (9) of section 302(c) of 
     the Employee Retirement Income Security Act of 1974 (29 
     U.S.C. 1053(c)) is amended--
       (1) by inserting ``(A)'' after ``(9)'', and
       (2) by adding at the end the following:
       ``(B)(i) Except as provided in clause (ii), the valuation 
     referred to in subparagraph (A) shall be made as of a date 
     within the plan year to which the valuation refers or within 
     one month prior to the beginning of such year.
       ``(ii) The valuation referred to in subparagraph (A) may be 
     made as of a date within the plan year prior to the year to 
     which the valuation refers if, as of such date, the value of 
     the assets of the plan are not less than 125 percent of the 
     plan's current liability (as defined in paragraph (7)(B)).
       ``(iii) Information under clause (ii) shall, in accordance 
     with regulations, be actuarially adjusted to reflect 
     significant differences in participants.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan years beginning after December 31, 2001.

     SEC. 662. 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) Standards for Disallowance.--Section 404(k)(5)(A) 
     (relating to disallowance of deduction) is amended by 
     inserting ``avoidance or'' before ``evasion''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2001.

     SEC. 663. 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, 2001.

     SEC. 664. 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

[[Page 9651]]

     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. 665. 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 advice or information 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, 2001.

     SEC. 666. 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, 2001.

                  Subtitle G--Miscellaneous Provisions

     SEC. 671. TAX TREATMENT AND INFORMATION REQUIREMENTS OF 
                   ALASKA NATIVE SETTLEMENT TRUSTS.

       (a) Treatment of Alaska Native Settlement Trusts.--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. TAX TREATMENT OF ELECTING ALASKA NATIVE 
                   SETTLEMENT TRUSTS.

       ``(a) In General.--If an election under this section is in 
     effect with respect to any Settlement Trust, the provisions 
     of this section shall apply in determining the income tax 
     treatment of the Settlement Trust and its beneficiaries with 
     respect to the Settlement Trust.
       ``(b) Taxation of Income of Trust.--Except as provided in 
     subsection (f)(1)(B)(ii)--
       ``(1) In general.--There is hereby imposed on the taxable 
     income of an electing Settlement Trust, other than its net 
     capital gain, a tax at the lowest rate specified in section 
     1(c).

       ``(2) Capital gain.--In the case of an electing Settlement 
     Trust with a net capital gain for the taxable year, a tax is 
     hereby imposed on such gain at the rate of tax which would 
     apply to such gain if the taxpayer were subject to a tax on 
     its other taxable income at only the lowest rate specified in 
     section 1(c).
     Any such tax shall be in lieu of the income tax otherwise 
     imposed by this chapter on such income or gain.
       ``(c) One-Time Election.--
       ``(1) In general.--A Settlement Trust may elect to have the 
     provisions of this section apply to the trust and its 
     beneficiaries.
       ``(2) Time and method of election.--An election under 
     paragraph (1) shall be made by the trustee of such trust--
       ``(A) on or before the due date (including extensions) for 
     filing the Settlement Trust's return of tax for the first 
     taxable year of such trust ending after the date of the 
     enactment of this section, and
       ``(B) by attaching to such return of tax a statement 
     specifically providing for such election.
       ``(3) Period election in effect.--Except as provided in 
     subsection (f), an election under this subsection--
       ``(A) shall apply to the first taxable year described in 
     paragraph (2)(A) and all subsequent taxable years, and
       ``(B) may not be revoked once it is made.
       ``(d) Contributions to Trust.--
       ``(1) Beneficiaries of electing trust not taxed on 
     contributions.--In the case of an electing Settlement Trust, 
     no amount shall be includible in the gross income of a 
     beneficiary of such trust by reason of a contribution to such 
     trust.
       ``(2) Earnings and profits.--The earnings and profits of 
     the sponsoring Native Corporation shall not be reduced on 
     account of any contribution to such Settlement Trust.
       ``(e) Tax Treatment of Distributions to Beneficiaries.--
     Amounts distributed by an electing Settlement Trust during 
     any taxable year shall be considered as having the following 
     characteristics in the hands of the recipient beneficiary:
       ``(1) First, as amounts excludable from gross income for 
     the taxable year to the extent of the taxable income of such 
     trust for such taxable year (decreased by any income tax paid 
     by the trust with respect to the income) plus any amount 
     excluded from gross income of the trust under section 103.
       ``(2) Second, as amounts excludable from gross income to 
     the extent of the amount described in paragraph (1) for all 
     taxable years for which an election is in effect under 
     subsection (c) with respect to the trust, and not previously 
     taken into account under paragraph (1).
       ``(3) Third, as amounts distributed by the sponsoring 
     Native Corporation with respect to its stock (within the 
     meaning of section 301(a)) during such taxable year and 
     taxable to the recipient beneficiary as amounts described in 
     section 301(c)(1), to the extent of current or accumulated 
     earnings and profits of the sponsoring Native Corporation as 
     of the close of such taxable year after proper adjustment is 
     made for all distributions made by the sponsoring Native 
     Corporation during such taxable year.
       ``(4) Fourth, as amounts distributed by the trust in excess 
     of the distributable net income of such trust for such 
     taxable year.

     Amounts distributed to which paragraph (3) applies shall not 
     be treated as a corporate distribution subject to section 
     311(b), and for purposes of determining the amount of a 
     distribution for purposes of paragraph (3) and the basis to 
     the recipients, section 643(e) and not section 301 (b) or (d) 
     shall apply.
       ``(f) Special Rules Where Transfer Restrictions Modified.--
       ``(1) Transfer of beneficial interests.--If, at any time, a 
     beneficial interest in an electing 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 such interest were 
     Settlement Common Stock--
       ``(A) no election may be made under subsection (c) with 
     respect to such trust, and
       ``(B) if such an election is in effect as of such time--
       ``(i) such election shall cease to apply as of the first 
     day of the taxable year in which such disposition is first 
     permitted,
       ``(ii) the provisions of this section shall not apply to 
     such trust for such taxable year and all taxable years 
     thereafter, and
       ``(iii) the distributable net income of such trust shall be 
     increased by the current or accumulated earnings and profits 
     of the sponsoring Native Corporation as of the close of such 
     taxable year after proper adjustment is made for all 
     distributions made by the sponsoring Native Corporation 
     during such taxable year.

     In no event shall the increase under clause (iii) exceed the 
     fair market value of the trust's assets as of the date the 
     beneficial interest of the trust first becomes so disposable. 
     The earnings and profits of the sponsoring Native Corporation 
     shall be adjusted as of the last day of such taxable year by 
     the amount of earnings and profits so included in the 
     distributable net income of the trust.
       ``(2) Stock in corporation.--If--
       ``(A) stock in the sponsoring Native Corporation 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 such stock were 
     Settlement Common Stock, and
       ``(B) at any time after such disposition of stock is first 
     permitted, such corporation transfers assets to a Settlement 
     Trust,

     paragraph (1)(B) 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).
       ``(3) Certain distributions.--For purposes of this section, 
     the surrender of an interest in a Native Corporation or an 
     electing Settlement Trust in order to accomplish the whole or 
     partial redemption of the interest of a shareholder or 
     beneficiary in such corporation or trust, or to accomplish 
     the whole or partial liquidation of such corporation or 
     trust, shall be deemed to be a transfer permitted by section 
     7(h) of the Alaska Native Claims Settlement Act.
       ``(g) Taxable Income.--For purposes of this title, the 
     taxable income of an electing Settlement Trust shall be 
     determined under section 641(b) without regard to any 
     deduction under section 651 or 661.
       ``(h) Definitions.--For purposes of this section--
       ``(1) Electing settlement trust.--The term `electing 
     Settlement Trust' means a Settlement Trust which has made the 
     election, effective for a taxable year, described in 
     subsection (c).
       ``(2) 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)).
       ``(3) Settlement common stock.--The term `Settlement Common 
     Stock' has the meaning

[[Page 9652]]

     given such term by section 3(p) of the Alaska Native Claims 
     Settlement Act (43 U.S.C. 1602(p)).
       ``(4) Settlement trust.--The term `Settlement Trust' means 
     a trust that constitutes a settlement trust under section 
     3(t) of the Alaska Native Claims Settlement Act (43 U.S.C. 
     1602(t)).
       ``(5) Sponsoring native corporation.--The term `sponsoring 
     Native Corporation' means the Native Corporation which 
     transfers assets to an electing Settlement Trust.
       ``(i) Special Loss Disallowance Rule.--Any loss that would 
     otherwise be recognized by a shareholder upon a disposition 
     of a share of stock of a sponsoring Native Corporation shall 
     be reduced (but not below zero) by the per share loss 
     adjustment factor. The per share loss adjustment factor shall 
     be the aggregate of all contributions to all electing 
     Settlement Trusts sponsored by such Native Corporation made 
     on or after the first day each trust is treated as an 
     electing Settlement Trust expressed on a per share basis and 
     determined as of the day of each such contribution.
       ``(j) Cross Reference.--

  ``For information required with respect to electing Settlement Trusts 
and sponsoring Native Corporations, see section 6039H.''.

       (b) Reporting.--Subpart A of part III of subchapter A of 
     chapter 61 of subtitle F (relating to information concerning 
     persons subject to special provisions) is amended by 
     inserting after section 6039G the following new section:

     ``SEC. 6039H. INFORMATION WITH RESPECT TO ALASKA NATIVE 
                   SETTLEMENT TRUSTS AND SPONSORING NATIVE 
                   CORPORATIONS.

       ``(a) Requirement.--The fiduciary of an electing Settlement 
     Trust (as defined in section 646(h)(1)) shall include with 
     the return of income of the trust a statement containing the 
     information required under subsection (c).
       ``(b) Application With Other Requirements.--The filing of 
     any statement under this section shall be in lieu of the 
     reporting requirements under section 6034A to furnish any 
     statement to a beneficiary regarding amounts distributed to 
     such beneficiary (and such other reporting rules as the 
     Secretary deems appropriate).
       ``(c) Required Information.--The information required under 
     this subsection shall include--
       ``(1) the amount of distributions made during the taxable 
     year to each beneficiary,
       ``(2) the treatment of such distribution under the 
     applicable provision of section 646, including the amount 
     that is excludable from the recipient beneficiary's gross 
     income under section 646, and
       ``(3) the amount (if any) of any distribution during such 
     year that is deemed to have been made by the sponsoring 
     Native Corporation (as defined in section 646(h)(5)).
       ``(d) Sponsoring Native Corporation.--
       ``(1) In general.--The electing Settlement Trust shall, on 
     or before the date on which the statement under subsection 
     (a) is required to be filed, furnish such statement to the 
     sponsoring Native Corporation (as so defined).
       ``(2) Distributees.--The sponsoring Native Corporation 
     shall furnish each recipient of a distribution described in 
     section 646(e)(3) a statement containing the amount deemed to 
     have been distributed to such recipient by such corporation 
     for the taxable year.''.
       (c) Clerical Amendment.--
       (1) The table of sections for subpart A of part I of 
     subchapter J of chapter 1 of such Code is amended by adding 
     at the end the following new item:

``Sec. 646. Tax treatment of electing Alaska Native Settlement 
              Trusts.''.

       (2) The table of sections for subpart A of part III of 
     subchapter A of chapter 61 of subtitle F of such Code is 
     amended by inserting after the item relating to section 6039G 
     the following new item:

``Sec. 6039H. Information with respect to Alaska Native Settlement 
              Trusts and sponsoring Native Corporations.''.

       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act and to contributions made to electing 
     Settlement Trusts for such year or any subsequent year.

                   TITLE VII--ALTERNATIVE MINIMUM TAX

     SEC. 701. INCREASE IN ALTERNATIVE MINIMUM TAX EXEMPTION.

       (a) In General.--
       (1) Subparagraph (A) of section 55(d)(1) (relating to 
     exemption amount for taxpayers other than corporations) is 
     amended by striking ``$45,000'' and inserting ``$45,000 
     ($49,000 in the case of taxable years beginning in 2001, 
     2002, 2003, and 2004)''.
       (2) Subparagraph (B) of section 55(d)(1) (relating to 
     exemption amount for taxpayers other than corporations) is 
     amended by striking ``$33,750'' and inserting ``$33,750 
     ($35,750 in the case of taxable years beginning in 2001, 
     2002, 2003, and 2004)''.
       (b) Conforming Amendments.--
       (1) Paragraph (1) of section 55(d) is amended by striking 
     ``and'' at the end of subparagraph (B), by striking 
     subparagraph (C), and by inserting after subparagraph (B) the 
     following new subparagraphs:
       ``(C) 50 percent of the dollar amount applicable under 
     paragraph (1)(A) in the case of a married individual who 
     files a separate return, and
       ``(D) $22,500 in the case of an estate or trust.''.
       (2) Subparagraph (C) of section 55(d)(3) is amended by 
     striking ``paragraph (1)(C)'' and inserting ``subparagraph 
     (C) or (D) of paragraph (1)''.
       (3) The last sentence of section 55(d)(3) is amended--
       (A) by striking ``paragraph (1)(C)(i)'' and inserting 
     ``paragraph (1)(C)''; and
       (B) by striking ``$165,000 or (ii) $22,500'' and inserting 
     ``the minimum amount of such income (as so determined) for 
     which the exemption amount under paragraph (1)(C) is zero, or 
     (ii) such exemption amount (determined without regard to this 
     paragraph)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2000.

                      TITLE VIII--OTHER PROVISIONS

     SEC. 801. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

       Notwithstanding section 6655 of the Internal Revenue Code 
     of 1986--
       (1) 100 percent of the amount of any required installment 
     of corporate estimated tax which is otherwise due in 
     September 2001 shall not be due until October 1, 2001; and
       (2) 20 percent of the amount of any required installment of 
     corporate estimated tax which is otherwise due in September 
     2004 shall not be due until October 1, 2004.

     SEC. 802. EXPANSION OF AUTHORITY TO POSTPONE CERTAIN TAX-
                   RELATED DEADLINES BY REASON OF PRESIDENTIALLY 
                   DECLARED DISASTER.

       (a) In General.--Section 7508A(a) (relating to authority to 
     postpone certain tax-related deadlines by reason of 
     presidentially declared disaster) is amended by striking ``90 
     days'' and inserting ``120 days''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on the date of enactment of this Act.

     SEC. 803. NO FEDERAL INCOME TAX ON RESTITUTION RECEIVED BY 
                   VICTIMS OF THE NAZI REGIME OR THEIR HEIRS OR 
                   ESTATES.

       (a) In General.--For purposes of the Internal Revenue Code 
     of 1986, any excludable restitution payments received by an 
     eligible individual (or the individual's heirs or estate) and 
     any excludable interest--
       (1) shall not be included in gross income; and
       (2) shall not be taken into account for purposes of 
     applying any provision of such Code which takes into account 
     excludable income in computing adjusted gross income, 
     including section 86 of such Code (relating to taxation of 
     Social Security benefits).

     For purposes of such Code, the basis of any property received 
     by an eligible individual (or the individual's heirs or 
     estate) as part of an excludable restitution payment shall be 
     the fair market value of such property as of the time of the 
     receipt.
       (b) Eligible Individual.--For purposes of this section, the 
     term ``eligible individual'' means a person who was 
     persecuted on the basis of race, religion, physical or mental 
     disability, or sexual orientation by Nazi Germany, any other 
     Axis regime, or any other Nazi-controlled or Nazi-allied 
     country.
       (c) Excludable Restitution Payment.--For purposes of this 
     section, the term ``excludable restitution payment'' means 
     any payment or distribution to an individual (or the 
     individual's heirs or estate) which--
       (1) is payable by reason of the individual's status as an 
     eligible individual, including any amount payable by any 
     foreign country, the United States of America, or any other 
     foreign or domestic entity, or a fund established by any such 
     country or entity, any amount payable as a result of a final 
     resolution of a legal action, and any amount payable under a 
     law providing for payments or restitution of property;
       (2) constitutes the direct or indirect return of, or 
     compensation or reparation for, assets stolen or hidden from, 
     or otherwise lost to, the individual before, during, or 
     immediately after World War II by reason of the individual's 
     status as an eligible individual, including any proceeds of 
     insurance under policies issued on eligible individuals by 
     European insurance companies immediately before and during 
     World War II; or
       (3) consists of interest which is payable as part of any 
     payment or distribution described in paragraph (1) or (2).
       (d) Excludable Interest.--For purposes of this section, the 
     term ``excludable interest'' means any interest earned by--
       (1) escrow accounts or settlement funds established 
     pursuant to the settlement of the action entitled ``In re: 
     Holocaust Victim Assets Litigation,'' (E.D.N.Y.) C.A. No. 96-
     4849,
       (2) funds to benefit eligible individuals or their heirs 
     created by the International Commission on Holocaust 
     Insurance Claims as a result of the Agreement between the 
     Government of the United States of America and the Government 
     of the Federal Republic of Germany concerning the Foundation 
     ``Remembrance, Responsibility, and Future,'' dated July 17, 
     2000, or
       (3) similar funds subject to the administration of the 
     United States courts created to provide excludable 
     restitution payments to eligible individuals (or eligible 
     individuals' heirs or estates).
       (e) Effective Date.--
       (1) In general.--This section shall apply to any amount 
     received on or after January 1, 2000.
       (2) No inference.--Nothing in this Act shall be construed 
     to create any inference with respect to the proper tax 
     treatment of any amount received before January 1, 2000.

           TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

     SEC. 901. SUNSET OF PROVISIONS OF ACT.

       (a) In General.--All provisions of, and amendments made by, 
     this Act shall not apply--
       (1) to taxable, plan, or limitation years beginning after 
     December 31, 2010, or

[[Page 9653]]

       (2) in the case of title V, to estates of decedents dying, 
     gifts made, or generation skipping transfers, after December 
     31, 2010.
       (b) Application of Certain Laws.--The Internal Revenue Code 
     of 1986 and the Employee Retirement Income Security Act of 
     1974 shall be applied and administered to years, estates, 
     gifts, and transfers described in subsection (a) as if the 
     provisions and amendments described in subsection (a) had 
     never been enacted.
       And the Senate agree to the same.

     William Thomas,
     Dick Armey,
                                Managers on the Part of the House.

     Chuck Grassley,
     Orrin Hatch,
     Frank H. Murkowski,
     Don Nickles,
     Phil Gramm,
     Max Baucus,
     John Breaux,
                               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. 1836), to provide 
     for reconciliation pursuant to section 104 of the concurrent 
     resolution on the budget for fiscal year 2002, 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. MARGINAL TAX RATE REDUCTION

  A. Individual Income Tax Rate Structure (secs. 2 and 3 of the House 
     bill, Sec. 101 of the Senate Amendment and Sec. 1 of the Code)


                              present law

       Under the Federal individual income tax system, an 
     individual who is a citizen or a resident of the United 
     States generally is subject to tax on worldwide taxable 
     income. Taxable income is total gross income less certain 
     exclusions, exemptions, and deductions. An individual may 
     claim either a standard deduction or itemized deductions.
       An individual's income tax liability is determined by 
     computing his or her regular income tax liability and, if 
     applicable, alternative minimum tax liability.
     Regular income tax liability
       Regular income tax liability is determined by applying the 
     regular income tax rate schedules (or tax tables) to the 
     individual's taxable income. This tax liability is then 
     reduced by any applicable tax credits. The regular income tax 
     rate schedules are divided into several ranges of income, 
     known as income brackets, and the marginal tax rate increases 
     as the individual's income increases. The income bracket 
     amounts are adjusted annually for inflation. Separate rate 
     schedules apply based on filing status: single individuals 
     (other than heads of households and surviving spouses), heads 
     of households, married individuals filing joint returns 
     (including surviving spouses), married individuals filing 
     separate returns, and estates and trusts. Lower rates may 
     apply to capital gains.
       For 2001, the regular income tax rate schedules for 
     individuals are shown in Table 1, below. The rate bracket 
     breakpoints for married individuals filing separate returns 
     are exactly one-half of the rate brackets for married 
     individuals filing joint returns. A separate, compressed rate 
     schedule applies to estates and trusts.

         TABLE 1.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2001
------------------------------------------------------------------------
                                       But not   Then regular income tax
     If taxable income is over:         over:            equals:
------------------------------------------------------------------------
                           Single individuals
 
$0..................................    $27,050  15% of taxable income
$27,050.............................    $65,550  $4,057.50, plus 28% of
                                                  the amount over
                                                  $27,050
$65,550.............................   $136,750  $14,837.50, plus 31% of
                                                  the amount over
                                                  $65,550
$136,750............................   $297,350  $36,909.50, plus 36% of
                                                  the amount over
                                                  $136,750
Over $297,350.......................  .........  $94,725.50, plus 39.6%
                                                  of the amount over
                                                  $297,350
 
                           Heads of households
 
$0..................................    $36,250  15% of taxable income
$36,250.............................    $93,650  $5,437.50, plus 28% of
                                                  the amount over
                                                  $36,250
$93,650.............................   $151,650  $21,509.50, plus 31% of
                                                  the amount over
                                                  $93,650
$151,650............................   $297,350  $39,489.50, plus 36% of
                                                  the amount over
                                                  $151,650
Over $297,350.......................  .........  $91,941.50, plus 39.6%
                                                  of the amount over
                                                  $297,350
 
                Married individuals filing joint returns
 
$0..................................    $45,200  15% of taxable income
$45,200.............................   $109,250  $6,780.00, plus 28% of
                                                  the amount over
                                                  $45,200
$109,250............................   $166,500  $24,714.50, plus 31% of
                                                  the amount over
                                                  $109,250
$166,500............................   $297,350  $42,461.50, plus 36% of
                                                  the amount over
                                                  $166,500
Over $297,350.......................  .........  $89,567.50, plus 39.6%
                                                  of the amount over
                                                  $297,350
------------------------------------------------------------------------

                               House Bill

     In general
       The House bill creates a new low-rate regular income tax 
     bracket for a portion of taxable income that is currently 
     taxed at 15 percent. The bill reduces the other regular 
     income tax rates and consolidates rate brackets. By 2006, the 
     present-law structure of five regular income tax rates (15 
     percent, 28 percent, 31 percent, 36 percent and 39.6 percent) 
     will be reduced to four rates of 10 percent, 15 percent, 25 
     percent, and 33 percent.
     New low-rate bracket
       The bill establishes a new regular income tax rate bracket 
     for a portion of taxable income that is currently taxed at 15 
     percent, as shown in Table 2, below. The taxable income 
     levels for the new low-rate bracket will be adjusted annually 
     for inflation for taxable years beginning after December 31, 
     2006.

                                     TABLE 2.--PROPOSED NEW LOW-RATE BRACKET
----------------------------------------------------------------------------------------------------------------
                                                                  Taxable income
                                                 ------------------------------------------------  Proposed new
                  Calendar Year                       Single         Heads of     Married filing       rate
                                                    individuals      household     joint returns
----------------------------------------------------------------------------------------------------------------
2001-2002.......................................        0-$6,000       0-$10,000       0-$12,000             12%
2003-2005                                               0-$6,000       0-$10,000       0-$12,000             11%
2006............................................        0-$6,000       0-$10,000       0-$12,000             10%
2007 and later..................................         Adjust annually for inflation \1\                  10%
----------------------------------------------------------------------------------------------------------------
\1\ The new low-rate bracket for joint returns and head of household returns will be rounded down to the nearest
  $50. The bracket for single individuals and married individuals filing separately will be one-half the bracket
  for joint returns (after adjustment of that bracket for inflation).

     Modification of 15-percent bracket
       The 15-percent regular income tax bracket is modified to 
     begin at the end of the new low-rate regular income tax 
     bracket. The 15-percent regular income tax bracket ends at 
     the same level as under present law. H.R. 6 also makes other 
     changes to the 15-percent rate bracket.\1\
---------------------------------------------------------------------------
     \1\ See discussion of the marriage penalty relief in the 15-
     percent bracket.
---------------------------------------------------------------------------
     Reduction of other rates and consolidation of rate brackets
       The present-law regular income tax rates of 28 percent and 
     31 percent are phased down to 25 percent over five years, 
     effective for taxable years beginning after December 31, 
     2001. The taxable income level for the new 25-percent rate 
     bracket begins at the level at which the 28-percent rate 
     bracket begins under present law and ends at the level at 
     which the 31-percent rate bracket ends under present law.
       The present-law regular income tax rates of 36 percent and 
     39.6 percent are phased down to 33 percent over five years, 
     effective for taxable years beginning after December 31, 
     2001. The taxable income level for the new 33-percent rate 
     bracket begins at the level at which the 36-percent rate 
     bracket begins under present law.
       Table 3, below, shows the schedule of proposed regular 
     income tax rate reductions.

[[Page 9654]]



                              TABLE 3.--PROPOSED REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
                                                     28% rate        31% rate        36% rate       39.6% rate
                  Calendar Year                     reduced to:     reduced to:     reduced to:     reduced to:
----------------------------------------------------------------------------------------------------------------
2002............................................             27%             30%             35%             38%
2003............................................             27%             29%             35%             37%
2004............................................             26%             28%             34%             36%
2005............................................             26%             27%             34%             35%
2006 and later..................................             25%             25%             33%             33%
----------------------------------------------------------------------------------------------------------------

     Projected regular income tax rate schedules under the 
         proposal
       Table 4, below, shows the projected individual regular 
     income tax rate schedules when the rate reductions are fully 
     phased in (i.e., for 2006). As under present law, the rate 
     brackets for married taxpayers filing separate returns under 
     the bill are one half the rate brackets for married 
     individuals filing joint returns. In addition, appropriate 
     adjustments are made to the separate, compressed rate 
     schedule for estate and trusts.

   TABLE 4.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2006 (PROJECTED)
------------------------------------------------------------------------
                                               Then regular income tax
           If taxable income is:                       equals:
------------------------------------------------------------------------
                           Single individuals
 
$0-6,000..................................  10% of taxable income
$6,000-30,950.............................  $600, plus 15 percent of the
                                             amount over $6,000
$30,950-$156,300..........................  $4,342.50, plus 25% of the
                                             amount over $30,950
Over $156,300.............................  $35,680, plus 33% of the
                                             amount over $156,300
 
                           Heads of households
 
$0-$10,000................................  10% of taxable income
$10,000-$41,450...........................  $1,000, plus 15% of the
                                             amount over $10,000
$41,450-$173,300..........................  $5,717.50, plus 25% of the
                                             amount over $41,450
Over $173,300.............................  $38,680, plus 33% of the
                                             amount over $173,300
 
                Married individuals filing joint returns
 
$0-$12,000................................  10% of taxable income
$12,000-$51,700...........................  $1,200, plus 15% of the
                                             amount over $12,000
$51,700-$190,300..........................  $7,155, plus 25% of the
                                             amount over $51,700
$190,300..................................  $41,805, plus 33% of the
                                             amount over $190,300
------------------------------------------------------------------------

     Revised wage withholding for 2001
       Under present law, the Secretary of the Treasury is 
     authorized to prescribe appropriate income tax withholding 
     tables or computational procedures for the withholding of 
     income taxes from wages paid by employers. The Secretary is 
     expected to make appropriate revisions to the wage 
     withholding tables to reflect the proposed rate reduction for 
     calendar year 2001 as expeditiously as possible.
     Transfer to Social Security and Medicare trust funds
       The House bill provides that the amounts transferred to the 
     Social Security and Medicare trust funds are determined as if 
     the rate reductions in the bill were not enacted. Thus, there 
     will be no reduction in transfers to these funds as a result 
     of the bill.
     Effective date
       The provisions of the House bill generally apply to taxable 
     years beginning after December 31, 2000, except that the 
     conforming amendments to certain withholding provisions under 
     the bill are effective for amounts paid more than 60 days 
     after the date of enactment.


                            Senate Amendment

     In general
       The Senate amendment creates a new 10-percent regular 
     income tax bracket for a portion of taxable income that is 
     currently taxed at 15 percent, effective for taxable years 
     beginning after December 31, 2000. The Senate amendment also 
     reduces other regular income tax rates. By 2007, the present-
     law individual income tax rates of 28 percent, 31 percent, 36 
     percent and 39.6 percent will be lowered to 25 percent, 28 
     percent, 33 percent, and 36 percent, respectively.
     New low-rate bracket
       The Senate amendment establishes a new 10-percent regular 
     income tax rate bracket for a portion of taxable income that 
     is currently taxed at 15 percent, as shown in Table 3, below. 
     The taxable income levels for the new 10-percent rate bracket 
     will be adjusted annually for inflation for taxable years 
     beginning after December 31, 2006. The new low-rate bracket 
     for joint returns and head of household returns will be 
     rounded down to the nearest $50. The bracket for single 
     individuals and married individuals filing separately will be 
     one-half the bracket for joint returns (after adjustment for 
     inflation).
       The 10-percent rate bracket applies to the first $6,000 of 
     taxable income for single individuals, $10,000 of taxable 
     income for heads of households, and $12,000 for married 
     couples filing joint returns.
     Modification of 15-percent bracket
       The 15-percent regular income tax bracket is modified to 
     begin at the end of the new low-rate regular income tax 
     bracket. The 15-percent regular income tax bracket ends at 
     the same level as under present law. The Senate amendment 
     also makes other changes to the 15-percent rate bracket.\2\
---------------------------------------------------------------------------
     \2\ See the discussion of marriage penalty relief in sec. 302 
     of the Senate amendment.
---------------------------------------------------------------------------
     Reduction of other rates
       The present-law regular income tax rates of 28 percent, 31 
     percent, 36 percent, and 39.6 percent are phased-down over 
     six years to 25 percent, 28 percent, 33 percent, and 36 
     percent, effective for taxable years beginning after December 
     31, 2001. The taxable income levels for the new rates are the 
     same as the taxable income levels that apply under the 
     present-law rates.
       Table 5, below, shows the schedule of regular income tax 
     rate reductions.

                                  TABLE 5.--REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
                                                     28% rate        31% rate        36% rate       39.6% rate
                  Calendar year                     reduced to:     reduced to:     reduced to:     reduced to:
----------------------------------------------------------------------------------------------------------------
2002-2004.......................................             27%             30%             35%           38.6%
2005-2006.......................................             26%             29%             34%           37.6%
2007 and later..................................             25%             28%             33%             36%
----------------------------------------------------------------------------------------------------------------

     Projected regular income tax rate schedules under the Senate 
         amendment
       Table 6, below, shows the projected individual regular 
     income tax rate schedules when the rate reductions are fully 
     phased-in (i.e., for 2007). As under present law, the rate 
     brackets for married taxpayers filing separate returns will 
     be one half the rate brackets for married individuals filing 
     joint returns. In addition, appropriate adjustments will be 
     made to the separate, compressed rate schedule for estate and 
     trusts.

   TABLE 6.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2007 (PROJECTED)
------------------------------------------------------------------------
                                       But not   Then regular income tax
        If taxable income is:           over:            equals:
------------------------------------------------------------------------
                           Single individuals
 
$0..................................     $6,150  10% of taxable income
$6,150..............................    $31,700  $615, plus 15% of the
                                                  amount over $6,150
$31,700.............................    $76,800  $4,447.50, plus 25% of
                                                  the amount over
                                                  $31,700
$76,800.............................   $160,250  $15,722.50 plus 28% of
                                                  the amount over
                                                  $76,800
$160,250............................   $348,350  $39,088.50 plus 33% of
                                                  the amount over
                                                  $160,250
Over $348,350.......................             $101,161.50, plus 36%
                                                  of the amount over
                                                  $348,350
 
                           Heads of households
 
$0..................................    $10,250  10% of taxable income
$10,250.............................    $42,500  $1,025, plus 15% of the
                                                  amount over $10,250
$42,500.............................   $109,700  $5,862.50, plus 25% of
                                                  the amount over
                                                  $42,500
$109,700............................   $177,650  $22,662.50, plus 28% of
                                                  the amount over
                                                  $109,700
$177,650............................   $348,350  $41,688.50, plus 33% of
                                                  the amount over
                                                  $177,650
Over $348,350.......................             $98,019.50, plus 36% of
                                                  the amount over
                                                  $348,350
 
                Married individuals filing joint returns
 
$0..................................    $12,300  10% of taxable income
$12,300.............................  $59,250 \  $1,230, plus 15% of the
                                             3\   amount over $12,300
$59,250.............................   $128,000  $8,272.50, plus 25% of
                                                  the amount over
                                                  $59,250
$128,000............................   $195,050  $25,460, plus 28% of
                                                  the amount over
                                                  $128,000
$195,050............................   $348,350  $44,234, plus 33% of
                                                  the amount over
                                                  $195,050
Over $348,350.......................             $94,823, plus 36% of
                                                  the amount over
                                                  $348,350
------------------------------------------------------------------------


[[Page 9655]]

     Revised wage withholding for 2001
       Under present law, the Secretary of the Treasury is 
     authorized to prescribe appropriate income tax withholding 
     tables or computational procedures for the withholding of 
     income taxes from wages paid by employers. The Secretary is 
     expected to make appropriate revisions to the wage 
     withholding tables to reflect the rate reduction for calendar 
     year 2001 as expeditiously as possible.
---------------------------------------------------------------------------
     \3\ The end point of the 15-percent rate bracket for married 
     individuals filing joint returns also reflects the phase-in 
     of the increase in the size of the 15-percent bracket in 
     section 302 of the Senate amendment.
---------------------------------------------------------------------------
     Effective date
       The new 10-percent rate bracket is effective for taxable 
     years beginning after December 31, 2000. The reduction in the 
     28 percent, 31 percent, 36 percent, and 39.6 percent rates is 
     phased-in beginning in taxable years beginning after December 
     31, 2001.


                          Conference Agreement

     In general
       The conference agreement creates a new 10-percent regular 
     income tax bracket for a portion of taxable income that is 
     currently taxed at 15 percent, effective for taxable years 
     beginning after December 31, 2000. The conference agreement 
     also reduces the other regular income tax rates, effective 
     July 1, 2001. By 2006, the present-law regular income tax 
     rates (28 percent, 31 percent, 36 percent and 39.6 percent) 
     will be lowered to 25 percent, 28 percent, 33 percent, and 35 
     percent, respectively.
     New low-rate bracket
       The conference agreement establishes a new 10-percent 
     income tax rate bracket for a portion of taxable income that 
     is currently taxed at 15 percent. The 10-percent rate bracket 
     applies to the first $6,000 of taxable income for single 
     individuals, $10,000 of taxable income for heads of 
     households, and $12,000 for married couples filing joint 
     returns. This $6,000 increases to $7,000 and this $12,000 
     increases to $14,000 for 2008 and thereafter.
       The taxable income levels for the new low-rate bracket will 
     be adjusted annually for inflation for taxable years 
     beginning after December 31, 2008. The new low-rate bracket 
     for joint returns and head of household returns will be 
     rounded down to the nearest $50. The bracket for single 
     individuals and married individuals filing separately will be 
     one-half for joint returns (after adjustment of that bracket 
     for inflation).
     Rate reduction credit for 2001
       The conference agreement includes a rate reduction credit 
     for 2001 to more immediately achieve one of the purposes 
     behind the new bottom rate bracket for 2001 that was included 
     in both the House bill and the Senate amendment. The 
     conferees have chosen to utilize this credit mechanism (and 
     the issuance of checks described below) because it will 
     deliver economic stimulus to the economy more rapidly than 
     would implementation of a new 10-percent rate bracket, even 
     if that were accompanied by an immediate implementation of 
     new wage withholding tables. Accordingly, this rate reduction 
     credit operates in lieu of the new 10-percent income tax rate 
     bracket for 2001.
       This credit is computed in the following manner. Taxpayers 
     would be entitled to a credit in tax year 2001 of 5 percent 
     (the difference between the 15-percent rate and the 10-
     percent rate) of the amount of income that would have been 
     eligible for the new 10-percent rate. Taxpayers may not 
     receive a credit in excess of their income tax liability 
     (determined after nonrefundable credits).
       Most taxpayers will receive this credit in the form of a 
     check issued by the Department of the Treasury. The amount of 
     the check would be computed in the same manner as the credit, 
     except that it will be done on the basis of tax returns filed 
     for 2000 (instead of 2001). The conferees anticipate that the 
     Department of the Treasury will make every effort to issue 
     all checks before October 1, 2001, to taxpayers who timely 
     filed their 2000 tax returns. Taxpayers who filed late or 
     pursuant to extensions will receive their checks later in the 
     fall.
       Taxpayers would reconcile the amount of the credit with the 
     check they receive in the following manner. They would 
     complete a worksheet calculating the amount of the credit 
     based on their 2001 tax return. They would then subtract from 
     the credit the amount of the check they received. For many 
     taxpayers, these two amounts would be the same. If, however, 
     the result is a positive number (because, for example, the 
     taxpayer paid no tax in 2000 but is paying tax in 2001), the 
     taxpayer may claim that amount as a credit against 2001 tax 
     liability. If, however, the result is negative (because, for 
     example, the taxpayer paid tax in 2000 but owes no tax for 
     2001), the taxpayer is not required to repay that amount to 
     the Treasury. Otherwise, the checks have no effect on tax 
     returns filed in 2001; the amount is not includible in gross 
     income and it does not otherwise reduce the amount of 
     withholding. In no event may the Department of the Treasury 
     issue checks after December 31, 2001.\4\ This is designed to 
     prevent errors by taxpayers who might claim the full amount 
     of the credit on their 2001 tax returns and file those 
     returns early in 2002, at the same time the Treasury check 
     might be mailed to them. Payment of the credit (or the check) 
     is treated, for all purposes of the Code,\5\ as a payment of 
     tax. As such, the credit or the check is subject to the 
     refund offset provisions, such as those applicable to past-
     due child support under section 6402 of the Code.
---------------------------------------------------------------------------
     \4\ For administrative reasons, the Department of the 
     Treasury may need to establish an earlier termination date in 
     order to fully implement the intent of this provision.
     \5\ A special rule provides that no interest will be paid 
     with respect to the checks.
---------------------------------------------------------------------------
       In general, taxpayers eligible for the credit (and the 
     check) are individuals other than estates or trusts, 
     nonresident aliens, or dependents. The determination of this 
     status for the relevant year is made on the basis of the 
     information filed on the tax return.
       The conferees understand that, in light of the large number 
     of checks that are being issued, the issuance of checks will 
     take several months.\6\ Accordingly, no interest will be paid 
     with respect to these checks. The conferees understand that 
     checks will be issued in the order of the last two digits of 
     the taxpayer identification number (which is generally a 
     taxpayer's social security number), from lowest to highest. 
     Payment by check is the only mechanism for receiving the 
     payment prior to filing the 2001 tax return; taxpayers may 
     not file either amended returns or claims for tentative 
     refunds for tax year 2000 to claim these amounts.
---------------------------------------------------------------------------
     \6\ The conferees investigated the possibility of utilizing 
     electronic means, instead of paper checks, to deliver these 
     amounts even more rapidly, but doing so was not possible 
     because of limitations on available data on individual's 
     banking accounts.
---------------------------------------------------------------------------
       The conferees anticipate that the IRS will send notices to 
     most taxpayers approximately one month after enactment. The 
     notices will inform taxpayers of the computation of their 
     checks and the approximate date by which they can expect to 
     receive their check. This information should decrease the 
     number of telephone calls made by taxpayers to the IRS 
     inquiring when their check will be issued.
     Modification of 15-percent bracket
       The 15-percent regular income tax bracket is modified to 
     begin at the end of the new low-rate regular income tax 
     bracket. The 15-percent regular income tax bracket ends at 
     the same level as under present law. The conference agreement 
     also makes other changes to the 15-percent rate bracket.\7\
---------------------------------------------------------------------------
     \7\ See discussion of the conference agreement regarding 
     marriage penalty relief in the 15-percent bracket.
---------------------------------------------------------------------------
     Reduction of other rates and consolidation of rate brackets
       The present-law regular income tax rates of 28 percent, 31 
     percent, 36 percent, and 39.6 percent are phased down over 
     six years to 25 percent, 28 percent, 33 percent, and 35 
     percent, effective after June 30, 2001. Accordingly, for 
     taxable years beginning during 2001, the rate reduction will 
     come in the form of a blended tax rate. The taxable income 
     levels for the new rates in all taxable years are the same as 
     the taxable income levels that apply under the present-law 
     rates.
       Table 7, below, shows the schedule of regular income tax 
     rate reductions.

                                  TABLE 7.--REGULAR INCOME TAX RATE REDUCTIONS
----------------------------------------------------------------------------------------------------------------
                                                     28% rate        31% rate        36% rate       39.6% rate
                  Calendar year                     reduced to:     reduced to:     reduced to:     reduced to:
----------------------------------------------------------------------------------------------------------------
2001\1\-2003....................................             27%             30%             35%           38.6%
2004-2005.......................................             26%             29%             34%           37.6%
2006 and later..................................             25%             28%             33%             35%
----------------------------------------------------------------------------------------------------------------
\1\ Effective July 1, 2001.

     Projected regular income tax rate schedules under the 
         proposal
       Table 8, below, shows the projected individual regular 
     income tax rate schedules when the rate reductions are fully 
     phased in (i.e., for 2006). As under present law, the rate 
     brackets for married taxpayers filing separate returns under 
     the bill are one half the rate brackets for married 
     individuals filing joint returns. In addition, appropriate 
     adjustments are made to the separate, compressed rate 
     schedule for estates and trusts.

[[Page 9656]]



   TABLE 8.--INDIVIDUAL REGULAR INCOME TAX RATES FOR 2006 (PROJECTED)
------------------------------------------------------------------------
                                       But not   Then regular income tax
        If taxable income is:           over:            equals:
------------------------------------------------------------------------
                           Single individuals
 
$0..................................     $6,000  10% of taxable income
$6,000..............................    $30,950  $600, plus 15% of the
                                                  amount over $6,000
$30,950.............................    $74,950  $4,342.50, plus 25% of
                                                  the amount over
                                                  $30,950
$74,950.............................   $156,300  $15,342.50, plus 28% of
                                                  the amount over
                                                  $74,950
$156,300............................   $339,850  $38,120.50, plus 33% of
                                                  the amount over
                                                  $156,300
Over $339,850.......................  .........  $98,692, plus 35% of
                                                  the amount over
                                                  $339,850
 
                           Heads of households
 
$0..................................    $10,000  10% of taxable income
$10,000.............................    $41,450  $1,000, plus 15% of the
                                                  amount over $10,000
$41,450.............................   $107,000  $5,717.50, plus 25% of
                                                  the amount over
                                                  $41,450
$107,000............................   $173,300  $22,105, plus 28% of
                                                  the amount over
                                                  $107,000
$173,300............................   $339,850  $40,669, plus 33% of
                                                  the amount over
                                                  $173,300
Over $339,850.......................  .........  $95,630.50, plus 35% of
                                                  the amount over
                                                  $339,850
 
                Married individuals filing joint returns
 
$0..................................    $12,000  10% of taxable income
$12,000.............................  \8\ $57,8  $1,200, plus 15% of the
                                             50   amount over $12,000
$57,850.............................   $124,900  $8,077.50, plus 25% of
                                                  the amount over
                                                  $57,850
$124,900............................   $190,300  $24,840, plus 28% of
                                                  the amount over
                                                  $124,900
$190,300............................   $339,850  $43,152, plus 33% of
                                                  the amount over
                                                  $190,300
Over $339,850.......................  .........  $92,503.50, plus 35% of
                                                  the amount over
                                                  $339,850
------------------------------------------------------------------------

     Revised wage withholding for 2001
       Under present law, the Secretary of the Treasury is 
     authorized to prescribe appropriate income tax withholding 
     tables or computational procedures for the withholding of 
     income taxes from wages paid by employers. The Secretary is 
     expected to make appropriate revisions to the wage 
     withholding tables to reflect the rate reduction that will be 
     effective beginning July 1, 2001, as expeditiously as 
     possible.
---------------------------------------------------------------------------
     \8\ The end point of the 15-percent rate bracket for married 
     individuals filing joint returns also reflects the phase-in 
     of the increase in the size of the 15-percent bracket in 
     section 302 of the bill, below.
---------------------------------------------------------------------------
     Transfer to Social Security and Medicare trust funds
       The conference agreement does not follow the House bill.
     Effective date
       The provisions of the conference agreement generally apply 
     to taxable years beginning after December 31, 2000. The 
     reductions in the tax rates, other than the new 10-percent 
     rate, are effective after June 30, 2001. The conforming 
     amendments to certain withholding provisions under the bill 
     are effective for amounts paid more than 60 days after the 
     date of enactment.

 B. Increase Starting Point for Phase-Out of Itemized Deductions (sec. 
          102 of the Senate amendment and sec. 68 of the Code)


                              Present Law

     Itemized deductions
       Taxpayers may choose to claim either the basic standard 
     deduction (and additional standard deductions, if applicable) 
     or itemized deductions (subject to certain limitations) for 
     certain expenses incurred during the taxable year. Among 
     these deductible expenses are unreimbursed medical expenses, 
     investment interest, casualty and theft losses, wagering 
     losses, charitable contributions, qualified residence 
     interest, State and local income and property taxes, 
     unreimbursed employee business expenses, and certain other 
     miscellaneous expenses.
     Overall limitation on itemized deductions (``Pease'' 
         limitation)
       Under present law, the total amount of otherwise allowable 
     itemized deductions (other than medical expenses, investment 
     interest, and casualty, theft, or wagering losses) is reduced 
     by three percent of the amount of the taxpayer's adjusted 
     gross income in excess of $132,950 in 2001 ($66,475 for 
     married couples filing separate returns). These amounts are 
     adjusted annually for inflation. In computing this reduction 
     of total itemized deductions, all present-law limitations 
     applicable to such deductions (such as the separate floors) 
     are first applied and, then, the otherwise allowable total 
     amount of itemized deductions is reduced in accordance with 
     this provision. Under this provision, the otherwise allowable 
     itemized deductions may not be reduced by more than 80 
     percent.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the starting point of the 
     overall limitation on itemized deductions for all taxpayers 
     (other than married couples filing separate returns) to the 
     starting point of the personal exemption phase-out for 
     married couples filing a joint return. This amount is 
     projected under present law to be $245,500 in 2009. The 
     starting point of the overall limitation on itemized 
     deductions for married couples filing separate returns would 
     continue to be one-half of the amount for other taxpayers.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2008.


                          Conference Agreement

       The conference agreement repeals the overall limitation on 
     itemized deductions for all taxpayers. The repeal is phased-
     in over five years, as follows. The otherwise applicable 
     overall limitation on itemized deductions is reduced by one-
     third in taxable years beginning in 2006 and 2007, and by 
     two-thirds in taxable years beginning in 2008 and 2009. The 
     overall limitation is repealed for taxable years beginning 
     after December 31, 2009.
       Effective date.--The conference agreement is effective for 
     taxable years beginning after December 31, 2005.

C. Phase-out of Special Rules for Personal Exemptions (sec. 103 of the 
            Senate amendment and sec. 151(d)(3) of the Code)


                              Present Law

       In order to determine taxable income, an individual reduces 
     adjusted gross income by any personal exemptions, deductions, 
     and either the applicable standard deduction or itemized 
     deductions. Personal exemptions generally are allowed for the 
     taxpayer, his or her spouse, and any dependents. For 2001, 
     the amount deductible for each personal exemption is $2,900. 
     This amount is adjusted annually for inflation.
       Under present law, the deduction for personal exemptions is 
     phased-out ratably for taxpayers with adjusted gross income 
     over certain thresholds. The applicable thresholds for 2001 
     are $132,950 for single individuals, $199,450 for married 
     individuals filing a joint return, $166,200 for heads of 
     households, and $99,725 for married individuals filing 
     separate returns. These thresholds are adjusted annually for 
     inflation.
       The total amount of exemptions that may be claimed by a 
     taxpayer is reduced by two percent for each $2,500 (or 
     portion thereof) by which the taxpayer's adjusted gross 
     income exceeds the applicable threshold. The phase-out rate 
     is two percent for each $1,250 for married taxpayers filing 
     separate returns. Thus, the personal exemptions claimed are 
     phased-out over a $122,500 range ($61,250 for married 
     taxpayers filing separate returns), beginning at the 
     applicable threshold. The size of these phase-out ranges 
     ($122,500/$61,250) is not adjusted for inflation. For 2001, 
     the point at which a taxpayer's personal exemptions are 
     completely phased-out is $255,450 for single individuals, 
     $321,950 for married individuals filing a joint return, 
     $288,700 for heads of households, and $160,975 for married 
     individuals filing separate returns.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment repeals the personal exemption phase-
     out.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2008.


                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     a modification. The modification provides for a five-year 
     phase-in of the repeal of the personal exemption phase-out. 
     Under the five-year phase-in, the otherwise applicable 
     personal exemption phase-out is reduced by one-third in 
     taxable years beginning in 2006 and 2007, and is reduced by 
     two-thirds in taxable years beginning in 2008 and 2009. The 
     repeal is fully effective for taxable years beginning after 
     December 31, 2009.

                 II. TAX BENEFITS RELATING TO CHILDREN

A. Increase and Expand the Child Tax Credit (sec. 2 of the House bill, 
   secs. 201 and 204 of the Senate amendment and sec. 24 of the Code)


                              Present Law

     In general
       Under present law, an individual may claim a $500 tax 
     credit for each qualifying child under the age of 17. In 
     general, a qualifying child is an individual for whom the 
     taxpayer can claim a dependency exemption and who is the 
     taxpayer's son or daughter (or descendent of either), stepson 
     or stepdaughter, or eligible foster child.
       The child tax credit is phased-out for individuals with 
     income over certain thresholds. Specifically, the otherwise 
     allowable child tax credit is reduced by $50 for each $1,000 
     (or fraction thereof) of modified adjusted gross income over 
     $75,000 for single individuals or heads of households, 
     $110,000 for married individuals filing joint returns, and 
     $55,000 for married individuals filing separate returns. 
     Modified adjusted gross income is the taxpayer's total gross 
     income plus certain amounts excluded from gross income (i.e., 
     excluded income of U.S. citizens or residents living abroad 
     (sec. 911); residents of Guam, American Samoa, and the 
     Northern Mariana Islands (sec. 931); and residents of Puerto 
     Rico (sec. 933)). The length of the phase-out range depends 
     on the number of qualifying children. For example, the phase-
     out range for a single individual with one qualifying child 
     is between $75,000 and $85,000 of modified adjusted gross 
     income. The phase-out range for a single individual with two 
     qualifying children is between $75,000 and $95,000.
       The child tax credit is not adjusted annually for 
     inflation.
     Refundability
       In general, the child tax credit is nonrefundable. However, 
     for families with three

[[Page 9657]]

     or more qualifying children, the child tax credit is 
     refundable up to the amount by which the taxpayer's social 
     security taxes exceed the taxpayer's earned income credit.
     Alternative minimum tax liability
       An individual's alternative minimum tax liability reduces 
     the amount of the refundable earned income credit and, for 
     taxable years beginning after December 31, 2001, the amount 
     of the refundable child credit for families with three or 
     more children. This is known as the alternative minimum tax 
     offset of refundable credits.
       Through 2001, an individual generally may reduce his or her 
     tentative alternative minimum tax liability by nonrefundable 
     personal tax credits (such as the $500 child tax credit and 
     the adoption tax credit). For taxable years beginning after 
     December 31, 2001, nonrefundable personal tax credits may not 
     reduce an individual's income tax liability below his or her 
     tentative alternative minimum tax.


                               House Bill

     In general
       No provision. However, H.R. 6, as passed by the House, 
     contains a provision that increases the child tax credit to 
     $1,000, phased in over six years, beginning in 2001. Table 
     10, below, shows the proposed increase in the amount of the 
     child tax credit under the provision.


              Table 10.--Increase of the Child Tax Credit


                                                          Credit amount
        Taxable year                                          per child
2001...............................................................$600
2002...............................................................$600
2003...............................................................$700
2004...............................................................$800
2005...............................................................$900
2006 and thereafter..............................................$1,000
     Refundability
       No provision. However, H.R. 6 extends the present-law 
     refundability of the child tax credit to families with fewer 
     than three children.
     Alternative minimum tax
       No provision. However, H.R. 6 provides that the refundable 
     child tax credit will no longer be reduced by the amount of 
     the alternative minimum tax. In addition, H.R. 6 allows the 
     child tax credit to the extent of the full amount of the 
     individual's regular income tax and alternative minimum tax.
     Effective date
       No provision. However, the provisions of H.R. 6 generally 
     are effective for taxable years beginning after December 31, 
     2000.


                            Senate Amendment

     In general
       The Senate amendment increases the child tax credit to 
     $1,000, phased-in over eleven years, effective for taxable 
     years beginning after December 31, 2000.
       Table 11, below, shows the increase of the child tax 
     credit.


              Table 11.--Increase of the Child Tax Credit


          
        Calendar year                                     Credit amount
                                                              per child
2001-2003..........................................................$600
2004-2006..........................................................$700
2007-2009..........................................................$800
2010...............................................................$900
2011 and later...................................................$1,000
     Refundability
       The Senate amendment makes the child credit refundable to 
     the extent of 15 percent of the taxpayer's earned income in 
     excess of $10,000. \9\ Thus, in 2001, families with earned 
     income of at least $14,000 and one child will get a 
     refundable credit of $600. Families with three or more 
     children are allowed a refundable credit for the amount by 
     which the taxpayer's social security taxes exceed the 
     taxpayer's earned income credit (the present-law rule), if 
     that amount is greater than 15 percent of the taxpayer's 
     earned income in excess of $10,000. The Senate amendment also 
     provides that the refundable portion of the child credit does 
     not constitute income and shall not be treated as resources 
     for purposes of determining eligibility or the amount or 
     nature of benefits or assistance under any Federal program or 
     any State or local program financed with Federal funds.
---------------------------------------------------------------------------
     \9\ For these purposes, earned income is defined as under 
     section 32, as amended by this bill.
---------------------------------------------------------------------------
     Alternative minimum tax
       Same as H.R. 6.
     Effective date
       The provision is effective for taxable years beginning 
     after December 31, 2000.


                          Conference Agreement

     In general
       The conference agreement increases the child tax credit to 
     $1,000, phased-in over ten years, effective for taxable years 
     beginning after December 31, 2000.
       Table 12, below, shows the increase of the child tax 
     credit.


              Table 12.--Increase of the Child Tax Credit


                                                          Credit amount
        Calendar year                                         per child
2001-2004..........................................................$600
2005-2008..........................................................$700
2009...............................................................$800
2010 and later...................................................$1,000
     Refundability
       The conference agreement makes the child credit refundable 
     to the extent of 10 percent of the taxpayer's earned income 
     in excess of $10,000 for calendar years 2001-2004. The 
     percentage is increased to 15 percent for calendar years 2005 
     and thereafter. The $10,000 amount is indexed for inflation 
     beginning in 2002. Families with three or more children are 
     allowed a refundable credit for the amount by which the 
     taxpayer's social security taxes exceed the taxpayer's earned 
     income credit (the present-law rule), if that amount is 
     greater than the refundable credit based on the taxpayer's 
     earned income in excess of $10,000. The conference agreement 
     also provides that the refundable portion of the child credit 
     does not constitute income and shall not be treated as 
     resources for purposes of determining eligibility or the 
     amount or nature of benefits or assistance under any Federal 
     program or any State or local program financed with Federal 
     funds.
     Alternative minimum tax
       The conference agreement follows H.R. 6 and the Senate 
     amendment.
     Effective date
       The provision generally is effective for taxable years 
     beginning after December 31, 2000. The provision relating to 
     allowing the child tax credit against alternative minimum tax 
     is effective for taxable years beginning after December 31, 
     2001.

 B. Sense of the Senate Regarding Child Credit Expansion (Sec. 202 of 
                         the Senate Amendment)


                              Present Law

       Under present law, an individual may claim a $500 tax 
     credit for each qualifying child under the age of 17. In 
     general, a qualifying child is an individual for whom the 
     taxpayer can claim a dependency exemption and who is the 
     taxpayer's son or daughter (or descendent of either), stepson 
     or stepdaughter, or eligible foster child.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a Sense of the Senate 
     resolution that the expansion of the child credit included in 
     the Senate amendment be retained in the conference agreement.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

  C. Extension and Expansion of Adoption Tax Benefits (Sec. 2 of H.R. 
  622, Sec. 203 of the Senate Amendment, and Secs. 23 and 137 of the 
                                 Code)


                              Present Law

     Tax credit
       In general
       A tax credit is allowed for qualified adoption expenses 
     paid or incurred by a taxpayer. The maximum credit is $5,000 
     per eligible child ($6,000 for a special needs child). An 
     eligible child is an individual (1) who has not attained age 
     18 or (2) is physically or mentally incapable of caring for 
     himself or herself. A special needs child is an eligible 
     child who is a citizen or resident of the United States who a 
     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 (such as the child's ethnic background, age, or 
     membership in a minority or sibling group, or the presence of 
     factors such as medical conditions, or physical, mental, or 
     emotional handicaps) because of which the child cannot be 
     placed with adoptive parents without adoption assistance.
       Qualified adoption expenses are reasonable and necessary 
     adoption fees, court costs, attorneys fees, and other 
     expenses that are: (1) directly related to, and the principal 
     purpose of which is for, the legal adoption of an eligible 
     child by the taxpayer; (2) not incurred in violation of State 
     or Federal law, or in carrying out any surrogate parenting 
     arrangement; (3) not for the adoption of the child of the 
     taxpayer's spouse; and (4) not reimbursed (e.g., by an 
     employer).
       Qualified adoption expenses may be incurred in one or more 
     taxable years, but the credit may not exceed $5,000 per 
     adoption ($6,000 for a special needs child). The adoption 
     credit is phased out ratably for taxpayers with modified 
     adjusted gross income between $75,000 and $115,000. Modified 
     adjusted gross income is the sum of the taxpayer's adjusted 
     gross income plus amounts excluded from income under Code 
     sections 911, 931, and 933 (relating to the exclusion of 
     income of U.S. citizens or residents living abroad; residents 
     of Guam, American Samoa, and the Northern Mariana Islands; 
     and residents of Puerto Rico, respectively).
       The adoption credit for special needs children is 
     permanent. The adoption credit with respect to other children 
     does not apply to expenses paid or incurred after December 
     31, 2001.
       Alternative minimum tax
       Through 2001, the adoption credit generally reduces the 
     individual's regular income tax and alternative minimum tax. 
     For taxable years beginning after December 31, 2001, the 
     otherwise allowable adoption credit is allowed only to the 
     extent that the individual's regular income tax liability 
     exceeds the

[[Page 9658]]

     individual's tentative minimum tax, determined without regard 
     to the minimum tax foreign tax credit.
     Exclusion from income
       A maximum $5,000 exclusion from the gross income of an 
     employee is allowed for qualified adoption expenses paid or 
     reimbursed by an employer under an adoption assistance 
     program. The maximum excludible amount is $6,000 for special 
     needs adoptions. The exclusion is phased out ratably for 
     taxpayers with modified adjusted gross income between $75,000 
     and $115,000. Modified adjusted gross income is the sum of 
     the taxpayer's adjusted gross income plus amounts excluded 
     from income under Code sections 911, 931, and 933 (relating 
     to the exclusion of income of U.S. citizens or residents 
     living abroad; residents of Guam, American Samoa, and the 
     Northern Mariana Islands; and residents of Puerto Rico, 
     respectively). For purposes of this exclusion, modified 
     adjusted gross income also includes all employer payments and 
     reimbursements for adoption expenses whether or not they are 
     taxable to the employee. The exclusion does not apply for 
     purposes of payroll taxes. Adoption expenses paid or 
     reimbursed by the employer under an adoption assistance 
     program are not eligible for the adoption credit. A taxpayer 
     may be eligible for the adoption credit (with respect to 
     qualified adoption expenses he or she incurs) and also for 
     the exclusion (with respect to different qualified adoption 
     expenses paid or reimbursed by his or her employer).
       The exclusion from income does not apply to amounts paid or 
     expenses incurred after December 31, 2001.


                               House Bill

     Tax credit
       No provision. However, H.R. 622, the ``Hope for Children 
     Act,'' as passed by the House, permanently extends the 
     adoption credit for children other than special needs 
     children. The maximum credit is increased to $10,000 per 
     eligible child, including special needs children. The 
     beginning point of the income phase-out range is increased to 
     $150,000 of modified adjusted gross income. Therefore, the 
     adoption credit is phased-out for taxpayers with modified 
     adjusted gross income of $190,000 or more. Finally, the 
     adoption credit is allowed against the alternative minimum 
     tax permanently.
     Exclusion from income
       No provision. However, H.R. 622 permanently extends the 
     exclusion from income for employer-provided adoption 
     assistance. The maximum exclusion is increased to $10,000 per 
     eligible child, including special needs children. The 
     beginning point of the income phase-out range is increased to 
     $150,000 of modified adjusted gross income. Therefore, the 
     exclusion is not available to taxpayers with modified 
     adjusted gross income of $190,000 or more.
     Effective date
       Generally, the provision of H.R. 622 is effective for 
     taxable years beginning after December 31, 2001. Qualified 
     expenses paid or incurred in taxable years beginning on or 
     before December 31, 2001, remain subject to the present-law 
     dollar limits.


                            Senate Amendment

     Tax credit
       Same as H.R. 622, with one modification. The Senate 
     amendment provides a $10,000 credit in the year a special 
     needs adoption is finalized regardless of whether the 
     taxpayer has qualified adoption expenses. No credit is 
     allowed with respect to the adoption of a special needs child 
     if the adoption is not finalized.
     Exclusion from income
       Same as H.R. 622, with one modification. The Senate 
     amendment provides a $10,000 exclusion in the case of a 
     special needs adoption regardless of whether the taxpayer has 
     qualified adoption expenses.
     Effective date
       The provision is effective for taxable years beginning 
     after December 31, 2001.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     one modification. The provisions of the Senate amendment that 
     extend the tax credit and exclusion from income for special 
     needs adoptions regardless of whether the taxpayer has 
     qualified adoption expenses are effective for taxable years 
     beginning after December 31, 2002.

   D. Expansion of Dependent Care Tax Credit (sec. 205 of the Senate 
                   amendment and sec. 21 of the Code)


                              present law

     Dependent care tax credit
       A taxpayer who maintains a household that 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 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. Thus, the maximum credit is $720 if 
     there is one qualifying individual and $1,440 if there are 
     two or more qualifying individuals. The applicable dollar 
     limit ($2,400/$4,800) of otherwise eligible employment-
     related expenses is reduced by any amount excluded from 
     income under an employer-provided dependent care assistance 
     program. For example, a taxpayer with one qualifying 
     individual who has $2,400 of otherwise eligible employment-
     related expenses but who excludes $1,000 of dependent care 
     assistance must reduce the dollar limit of eligible 
     employment-related expenses for the dependent care tax credit 
     by the amount of the exclusion to $1,400 ($2,400-$1,000 = 
     $1,400).
       A qualifying individual is (1) a dependent of the taxpayer 
     under the age of 13 for whom the taxpayer is eligible to 
     claim a dependency exemption, (2) a dependent of the taxpayer 
     who is physically or mentally incapable of caring for himself 
     or herself, or (3) the spouse of the taxpayer; if the spouse 
     is physically or mentally incapable of caring for himself or 
     herself.
       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 above $10,000. The credit 
     is not available to married taxpayers unless they file a 
     joint return.
     Exclusion for employer-provided dependent care
       Amounts paid or incurred by an employer for dependent care 
     assistance provided to an employee generally are excluded 
     from the employee's gross income and wages if the assistance 
     is furnished under a program meeting certain requirements. 
     These requirements include that the program be described in 
     writing, satisfy certain nondiscrimination rules, and provide 
     for notification to all eligible employees. Dependent care 
     assistance expenses eligible for the exclusion are defined 
     the same as employment-related expenses with respect to a 
     qualifying individual under the dependent care tax credit.
       The dependent care exclusion is limited to $5,000 per year, 
     except that a married taxpayer filing a separate return may 
     exclude only $2,500. Dependent care expenses excluded from 
     income are not eligible for the dependent care tax credit 
     (sec. 21(c)).


                               house bill

       No provision.


                            senate amendment

       The Senate amendment increases the maximum amount of 
     eligible employment-related expenses from $2,400 to $3,000, 
     if there is one qualifying individual (from $4,800 to $6,000, 
     if there are two or more qualifying individuals). The Senate 
     amendment also increases the maximum credit from 30 percent 
     to 40 percent. Thus, the maximum credit is $1,200, if there 
     is one qualifying individual and $2,400, if there are two or 
     more qualifying individuals. Finally, the Senate amendment 
     modifies the phase-down of the credit. Under the Senate 
     amendment, the 40-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 above $20,000. 
     Therefore, the credit percentage is reduced to 20 percent for 
     taxpayers with adjusted gross income over $58,000.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001.


                          conference agreement

       The conference agreement follows the Senate amendment, with 
     modifications. Under the conference agreement, the maximum 
     credit is 35 percent. Further, the conference agreement 
     provides that the phase-down of the credit applies with 
     respect to adjusted gross income above $15,000. Therefore, 
     the credit percentage is reduced to 20 percent for taxpayers 
     with adjusted gross income over $43,000.
       Effective date.--The conference agreement provision is 
     effective for taxable years beginning after December 31, 
     2002.

 E. Tax Credit for Employer-Provided Child Care Facilities (secs. 206 
     and 207 of the Senate amendment and new sec. 45D of the Code)


                              present law

       Present law does not provide a tax credit to employers for 
     supporting child care or child care resource and referral 
     services. An employer, however, may be able to deduct such 
     expenses as ordinary and necessary business expenses. 
     Alternatively, the employer may be required to capitalize the 
     expenses and claim depreciation deductions over time.


                               house bill

       No provision.


                            senate amendment

       Under the Senate amendment, taxpayers receive a tax credit 
     equal to 25 percent of qualified expenses for employee child 
     care and 10 percent of qualified expenses for child care 
     resource and referral services. The maximum total credit that 
     may be claimed by a taxpayer cannot exceed $150,000 per 
     taxable year.
       Qualified child care expenses include costs paid or 
     incurred: (1) to acquire, construct, rehabilitate or expand 
     property that is to be used as part of the taxpayer's 
     qualified child care facility;\10\ (2) for the operation of 
     the taxpayer's qualified child care facility, including the 
     costs of training and certain

[[Page 9659]]

     compensation for employees of the child care facility, and 
     scholarship programs; 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 (unless it is the principal residence of the taxpayer), 
     and the facility must meet all applicable State and local 
     laws and regulations, including any licensing laws. A 
     facility is not treated as a qualified child care facility 
     with respect to a taxpayer unless: (1) it has open enrollment 
     to the employees of the taxpayer; (2) use of the facility (or 
     eligibility to use such facility) does not discriminate in 
     favor of highly compensated employees of the taxpayer (within 
     the meaning of section 414(q); and (3) at least 30 percent of 
     the children enrolled in the center are dependents of the 
     taxpayer's employees, if the facility is the principal trade 
     or business of the taxpayer. Qualified child care resource 
     and referral expenses are amounts paid or incurred under a 
     contract to provide child care resource and referral services 
     to the employees of the taxpayer. Qualified child care 
     services and qualified child care resource and referral 
     expenditures must be provided (or be eligible for use) in a 
     way that does not discriminate in favor of highly compensated 
     employees of the taxpayer (within the meaning of section 
     414(q).
---------------------------------------------------------------------------
     \10\ In addition, a depreciation deduction (or amortization 
     in lieu of depreciation) must be allowable with respect to 
     the property and the property must not be part of the 
     principal residence of the taxpayer or any employee of the 
     taxpayer.
---------------------------------------------------------------------------
       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.
       Credits taken for the expenses of acquiring, constructing, 
     rehabilitating, or expanding a qualified facility are subject 
     to recapture for the first ten years after the qualified 
     child care facility is placed in service. The amount of 
     recapture is reduced as a percentage of the applicable credit 
     over the ten-year recapture period. Recapture takes effect if 
     the taxpayer either ceases operation of the qualified child 
     care facility or transfers its interest in the qualified 
     child care facility without securing an agreement to assume 
     recapture liability for the transferee. Other rules apply.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001.


                          conference Agreement

       The conference agreement follows the Senate amendment.

                III. MARRIAGE PENALTY RELIEF PROVISIONS

 A. Standard Deduction Marriage Penalty Relief (Sec. 2 of H.R. 6, Sec. 
          301 of the Senate amendment and Sec. 63 of the Code)


                              present law

     Marriage penalty
       A married couple generally is treated as one tax unit that 
     must pay tax on the couple's total taxable income. Although 
     married couples may elect to file separate returns, the rate 
     schedules and other 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 combined tax 
     liability of a married couple filing a joint return is 
     greater than the sum of the tax liabilities of each 
     individual computed as if they were not married. A ``marriage 
     bonus'' exists when the combined tax liability of a married 
     couple filing a joint return is less than the sum of the tax 
     liabilities of each individual computed as if they were not 
     married.
     Basic standard deduction
       Taxpayers who do not itemize deductions may choose the 
     basic standard deduction (and additional standard deductions, 
     if applicable),\11\ which is subtracted from adjusted gross 
     income (``AGI'') in arriving at taxable income. The size of 
     the basic standard deduction varies according to filing 
     status and is adjusted annually for inflation. For 2001, the 
     basic standard deduction amount for single filers is 60 
     percent of the basic standard deduction amount for married 
     couples filing joint returns. Thus, two unmarried individuals 
     have standard deductions whose sum exceeds the standard 
     deduction for a married couple filing a joint return.
---------------------------------------------------------------------------
     \11\ Additional standard deductions are allowed with respect 
     to any individual who is elderly (age 65 or over) or blind.
---------------------------------------------------------------------------


                               house bill

       No provision. However, H.R. 6, as passed by the House, 
     contains a provision that increases the basic standard 
     deduction for a married couple filing a joint return to twice 
     the basic standard deduction for an unmarried individual 
     filing a single return. The basic standard deduction for a 
     married taxpayer filing separately will continue to equal 
     one-half of the basic standard deduction for a married couple 
     filing jointly; thus, the basic standard deduction for 
     unmarried individuals filing a single return and for married 
     couples filing separately will be the same.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001.


                            Senate Amendment

       The Senate amendment is the same as H.R. 6 except that the 
     increase in the standard deduction is phased-in over five 
     years beginning in 2005 and would be fully phased-in for 2009 
     and thereafter. Table 13, below, shows the standard deduction 
     for married couples filing a joint return as a percentage of 
     the standard deduction for single individuals during the 
     phase-in period.


   Table 13.--Phase-In of Increase of Standard Deduction for Married 
                      Couples Filing Joint Returns

Standard Deduction for Joint Returns as Percentage of Standard 
    Deduction for Single Returns
    2005...........................................................174%
    2006...........................................................184%
    2007...........................................................187%
    2008...........................................................190%
    2009 and later.................................................200%

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


                          conference agreement

       The conference agreement follows the Senate amendment.

B. Expansion of the 15-Percent Rate Bracket For Married Couples Filing 
 Joint Returns (Sec. 3 of H.R. 6, Sec. 302 of the Senate Amendment and 
                          Sec. 1 of the Code)


                              present law

     In general
       Under the Federal individual income tax system, an 
     individual who is a citizen or resident of the United States 
     generally is subject to tax on worldwide taxable income. 
     Taxable income is total gross income less certain exclusions, 
     exemptions, and deductions. An individual may claim either a 
     standard deduction or itemized deductions.
       An individual's income tax liability is determined by 
     computing his or her regular income tax liability and, if 
     applicable, alternative minimum tax liability.
     Regular income tax liability
       Regular income tax liability is determined by applying the 
     regular income tax rate schedules (or tax tables) to the 
     individual's taxable income and then is reduced by any 
     applicable tax credits. The regular income tax rate schedules 
     are divided into several ranges of income, known as income 
     brackets, and the marginal tax rate increases as the 
     individual's income increases. The income bracket amounts are 
     adjusted annually for inflation. Separate rate schedules 
     apply based on filing status: single individuals (other than 
     heads of households and surviving spouses), heads of 
     households, married individuals filing joint returns 
     (including surviving spouses), married individuals filing 
     separate returns, and estates and trusts. Lower rates may 
     apply to capital gains.
       In general, the bracket breakpoints for single individuals 
     are approximately 60 percent of the rate bracket breakpoints 
     for married couples filing joint returns.\12\ The rate 
     bracket breakpoints for married individuals filing separate 
     returns are exactly one-half of the rate brackets for married 
     individuals filing joint returns. A separate, compressed rate 
     schedule applies to estates and trusts.
---------------------------------------------------------------------------
     \12\ The rate bracket breakpoint for the 39.6 percent 
     marginal tax rate is the same for single individuals and 
     married couples filing joint returns.
---------------------------------------------------------------------------


                               House Bill

       No provision. However, H.R. 6, as passed by the House, 
     contains a provision that increases the size of the 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 filing a single 
     return. This increase is phased in over six years as shown in 
     Table 15, below. 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 is twice the size 
     of the lowest regular income tax rate bracket for an 
     unmarried individual filing a single return) for taxable 
     years beginning after December 31, 2008.


  Table 15.--Increase in Size of 15-Percent Rate Bracket for Married 
                     Couples Filing a Joint Return

Size of 15-percent rate bracket for married couple filing joint return 
    as percentage of rate bracket for unmarried individuals
    2004...........................................................172%
    2005...........................................................178%
    2006...........................................................183%
    2007...........................................................189%
    2008...........................................................195%
    2009 and thereafter............................................200%
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2003.


                            senate amendment

       The Senate amendment increases the size of the 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 filing a single return. 
     The increase is phased-in

[[Page 9660]]

     over five years, beginning in 2005. Therefore, this provision 
     is fully effective (i.e., the size of the 15-percent regular 
     income tax rate bracket for a married couple filing a joint 
     return would be twice the size of the 15-percent regular 
     income tax rate bracket for an unmarried individual filing a 
     single return) for taxable years beginning after December 31, 
     2008. Table 16, below, shows the increase in the size of the 
     15-percent bracket during the phase-in period.


  Table 16.--Increase in Size of 15-Percent Rate Bracket for Married 
                     Couples Filing a Joint Return

End point of 15-percent rate bracket for married couple filing joint 
    return as percentage of end point of 15-percent rate bracket for 
    unmarried individuals
    2005...........................................................174%
    2006...........................................................184%
    2007...........................................................187%
    2008...........................................................190%
    2009 and thereafter............................................200%

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


                          conference agreement

       The conference agreement increases the size of the 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 filing a single 
     return. The increase is phased-in over four years, beginning 
     in 2005. Therefore, this provision is fully effective (i.e., 
     the size of the 15-percent regular income tax rate bracket 
     for a married couple filing a joint return would be twice the 
     size of the 15-percent regular income tax rate bracket for an 
     unmarried individual filing a single return) for taxable 
     years beginning after December 31, 2007. Table 17, below, 
     shows the increase in the size of the 15-percent bracket 
     during the phase-in period.


  Table 17.--Increase in Size of 15-Percent Rate Bracket for Married 
                     Couples Filing a Joint Return

End point of 15-percent rate bracket for married couple filing joint 
    return as percentage of end point of 15-percent rate bracket for 
    unmarried individuals
    2005...........................................................180%
    2006...........................................................187%
    2007...........................................................193%
    2008 and thereafter............................................200%

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

 C. Marriage Penalty Relief and Simplification Relating to the Earned 
 Income Credit (Sec. 2(b)(2) of the House bill, Sec. 4 of H.R. 6, Sec. 
         303 of the Senate Amendment, and Sec. 32 of the Code)


                              Present Law

     In general
       Eligible low-income workers are able to claim a refundable 
     earned income credit. The amount of the credit an eligible 
     taxpayer may claim depends upon the taxpayer's income and 
     whether the taxpayer has one, more than one, or no qualifying 
     children.
       The earned income credit is not available to married 
     individuals who file separate returns. No earned income 
     credit is allowed if the taxpayer has disqualified income in 
     excess of $2,450 (for 2001) for the taxable year.\13\ In 
     addition, no earned income credit is allowed if an eligible 
     individual is the qualifying child of another taxpayer.\14\
---------------------------------------------------------------------------
     \13\ Sec. 32(i). Disqualified income is the sum of: (1) 
     interest and dividends includible in gross income for the 
     taxable year; (2) tax-exempt income received or accrued in 
     the taxable year; (3) net income from rents and royalties for 
     the taxable year not derived in the ordinary course of 
     business; (4) capital gain net income for the taxpayer year; 
     and (5) net passive income for the taxable year. Sec. 
     32(i)(2).
     \14\ Sec. 32(c)(1)(B).
---------------------------------------------------------------------------
     Definition of qualifying child and tie-breaker rules
       To claim the earned income credit, a taxpayer must either 
     (1) have a qualifying child or (2) meet the requirements for 
     childless adults. A qualifying child must meet a relationship 
     test, an age test, and a residence test. First, the 
     qualifying child must be the taxpayer's child, stepchild, 
     adopted child, grandchild, or foster child. Second, the child 
     must be under age 19 (or under age 24 if a full-time student) 
     or permanently and totally disabled regardless of age. Third, 
     the child must live with the taxpayer in the United States 
     for more than half the year (a full year for foster 
     children).
       An individual satisfies the relationship test under the 
     earned income credit if the individual is the taxpayer's: (1) 
     son or daughter or a descendant of either;\15\ (2) stepson or 
     stepdaughter; or (3) eligible foster child. An eligible 
     foster child is an individual (1) who is a brother, sister, 
     stepbrother, or stepsister of the taxpayer (or a descendant 
     of any such relative), or who is placed with the taxpayer by 
     an authorized placement agency, and (2) who the taxpayer 
     cares for as her or his own child. A married child of the 
     taxpayer is not treated as meeting the relationship test 
     unless the taxpayer is entitled to a dependency exemption 
     with respect to the married child (e.g., the support test is 
     satisfied) or would be entitled to the exemption if the 
     taxpayer had not waived the exemption to the noncustodial 
     parent.\16\
---------------------------------------------------------------------------
     \15\ A child who is legally adopted or placed with the 
     taxpayer for adoption by an authorized adoption agency is 
     treated as the taxpayer's own child. Sec. 32(c)(3)(B)(iv).
     \16\ Sec. 32(c)(3)(B)(ii).
---------------------------------------------------------------------------
       If a child otherwise qualifies with respect to more than 
     one person, the child is treated as a qualifying child only 
     of the person with the highest modified adjusted gross 
     income.
       ``Modified adjusted gross income'' means adjusted gross 
     income determined without regard to certain losses and 
     increased by certain amounts not includible in gross 
     income.\17\ The losses disregarded are: (1) net capital 
     losses (up to $3,000); (2) net losses from estates and 
     trusts; (3) net losses from nonbusiness rents and royalties; 
     (4) 75 percent of the net losses from businesses, computed 
     separately with respect to sole proprietorships (other than 
     farming), farming sole proprietorships, and other businesses. 
     The amounts added to adjusted gross income to arrive at 
     modified adjusted gross income include: (1) tax-exempt 
     interest; and (2) nontaxable distributions from pensions, 
     annuities, and individual retirement plans (but not 
     nontaxable rollover distributions or trustee-to-trustee 
     transfers).
---------------------------------------------------------------------------
     \17\ Sec. 32(c)(5).
---------------------------------------------------------------------------
     Definition of earned income
       To claim the earned income credit, the taxpayer must have 
     earned income. Earned income consists of wages, salaries, 
     other employee compensation, and net earnings from self 
     employment.\18\ Employee compensation includes anything of 
     value received by the taxpayer from the employer in return 
     for services of the employee, including nontaxable earned 
     income. Nontaxable forms of compensation treated as earned 
     income include the following: (1) elective deferrals under a 
     cash or deferred arrangement or section 403(b) annuity (sec. 
     402(g)); (2) employer contributions for nontaxable fringe 
     benefits, including contributions for accident and health 
     insurance (sec. 106), dependent care (sec. 129), adoption 
     assistance (sec. 137), educational assistance (sec. 127), and 
     miscellaneous fringe benefits (sec. 132); (3) salary 
     reduction contributions under a cafeteria plan (sec. 125); 
     (4) meals and lodging provided for the convenience of the 
     employer (sec. 119), and (5) housing allowance or rental 
     value of a parsonage for the clergy (sec. 107). Some of these 
     items are not required to be reported on the Wage and Tax 
     Statement (Form W-2).
---------------------------------------------------------------------------
     \18\ Sec. 32(c)(2)(A).
---------------------------------------------------------------------------
     Calculation of the credit
       The maximum earned income credit is phased in as an 
     individual's earned income increases. The credit phases out 
     for individuals with earned income (or if greater, modified 
     adjusted gross income) over certain levels. In the case of a 
     married individual who files a joint return, the earned 
     income credit both for the phase-in and phase-out is 
     calculated based on the couples' combined income.
       The credit is determined by multiplying the credit rate by 
     the taxpayer's earned income up to a specified earned income 
     amount. The maximum amount of the credit is the product of 
     the credit rate and the earned income amount. The maximum 
     credit amount applies to taxpayers with (1) earnings at or 
     above the earned income amount and (2) modified adjusted 
     gross income (or earnings, if greater) at or below the phase-
     out threshold level.
       For taxpayers with modified adjusted gross income (or 
     earned income, if greater) in excess of the phase-out 
     threshold, the credit amount is reduced by the phase-out rate 
     multiplied by the amount of earned income (or modified 
     adjusted gross income, if greater) in excess of the phase-out 
     threshold. In other words, the credit amount is reduced, 
     falling to $0 at the ``breakeven'' income level, the point 
     where a specified percentage of ``excess'' income above the 
     phase-out threshold offsets exactly the maximum amount of the 
     credit. The earned income amount and the phase-out threshold 
     are adjusted annually for inflation. Table 18, below, shows 
     the earned income credit parameters for taxable year 
     2001.\19\
---------------------------------------------------------------------------
     \19\ The table is based on Rev. Proc. 2001-13.

            TABLE 18.--EARNED INCOME CREDIT PARAMETERS (2001)
------------------------------------------------------------------------
                                   Two or more      One           No
                                    qualifying   qualifying   qualifying
                                     children      child      children.
------------------------------------------------------------------------
Credit rate (percent)............       40.00%       34.00%        7.65%
Earned income amount.............      $10,020       $7,140       $4,760
Maximum credit...................       $4,008       $2,428         $364
Phase-out begins.................      $13,090      $13,090       $5,950
Phase-out rate (percent).........       21.06%       15.98%        7.65%
Phase-out ends...................      $32,121      $28,281      $10,710
------------------------------------------------------------------------

       An individual's alternative minimum tax liability reduces 
     the amount of the refundable earned income credit.\20\
---------------------------------------------------------------------------
     \20\ Sec. 32(h).
---------------------------------------------------------------------------


                               house bill

       The House bill provides that the earned income credit will 
     no longer be reduced by the amount of the alternative minimum 
     tax. The same provision is included in H.R. 6, as passed by 
     the House.
       In addition, H.R. 6 increases the earned income amount used 
     to calculate the earned

[[Page 9661]]

     income credit for married taxpayers who file a joint return 
     to 110 percent of the earned income amount for all other 
     taxpayers eligible for the earned income credit.
       H.R. 6 also simplifies the definition of earned income by 
     excluding nontaxable earned income amounts from the 
     definition of earned income for earned income credit 
     purposes. Thus, under H.R. 6, earned income includes wages, 
     salaries, tips, and other employee compensation, if 
     includible in gross income for the taxable year, plus net 
     earnings from self-employment.
       Effective date.--The House bill is effective for taxable 
     years beginning after December 31, 2000.


                            senate amendment

       For married taxpayers who file a joint return, the Senate 
     amendment increases the beginning and ending of the earned 
     income credit phase-out by $3,000. These beginning and ending 
     points are to be adjusted annually for inflation after 2002.
       The Senate amendment simplifies the definition of earned 
     income by excluding nontaxable employee compensation from the 
     definition of earned income for earned income credit 
     purposes. Thus, under the Senate amendment, earned income 
     includes wages, salaries, tips, and other employee 
     compensation, if includible in gross income for the taxable 
     year, plus net earnings from self employment.
       The Senate amendment repeals the present-law provision that 
     reduces the earned income credit by the amount of an 
     individual's alternative minimum tax.
       The Senate amendment simplifies the calculation of the 
     earned income credit by replacing modified adjusted gross 
     income with adjusted gross income.
       The Senate amendment provides that the relationship test is 
     met if the individual is the taxpayer's son, daughter, 
     stepson, stepdaughter, or a descendant of any such 
     individuals.\21\ A brother, sister, stepbrother, stepsister, 
     or a descendant of such individuals, also qualifies if the 
     taxpayer cares for such individual as his or her own child. A 
     foster child satisfies the relationship test as well. A 
     foster child is defined as an individual who is placed with 
     the taxpayer by an authorized placement agency and who the 
     taxpayer cares for as his or her own child. In order to be a 
     qualifying child, in all cases the child must have the same 
     principal place of abode as the taxpayer for over one-half of 
     the taxable year.
---------------------------------------------------------------------------
     \21\ As under present law, an adopted child is treated as a 
     child of the taxpayer by blood.
---------------------------------------------------------------------------
       The Senate amendment changes the present-law tie-breaking 
     rule. Under the Senate amendment, if an individual would be a 
     qualifying child with respect to more than one taxpayer, and 
     more than one taxpayer claims the earned income credit with 
     respect to that child, then the following tie-breaking rules 
     apply. First, if one of the individuals claiming the child is 
     the child's parent (or parents who file a joint return), then 
     the child is considered the qualifying child of the parent 
     (or parents). Second, if both parents claim the child and the 
     parents do not file a joint return together, then the child 
     is considered a qualifying child first of the parent with 
     whom the child resided for the longest period of time during 
     the year, and second of the parent with the highest adjusted 
     gross income. Finally, if none of the taxpayers claiming the 
     child as a qualifying child is the child's parent, the child 
     is considered a qualifying child with respect to the taxpayer 
     with the highest adjusted gross income.
       The Senate amendment authorizes the IRS, beginning in 2004, 
     to use math error authority to deny the earned income credit 
     if the Federal Case Registry of Child Support Orders 
     indicates that the taxpayer is the noncustodial parent of the 
     child with respect to whom the credit is claimed.
       It is the intent of the Senate that by September 2002, the 
     Department of the Treasury, in consultation with the National 
     Taxpayer Advocate, deliver to the Senate Committee on Finance 
     and the House Committee on Ways and Means a study of the 
     Federal Case Registry database. The study is to cover (1) the 
     accuracy and timeliness of the data in the Federal Case 
     Registry, (2) the efficacy of using math error authority in 
     this instance in reducing costs due to erroneous or 
     fraudulent claims, and (3) the implications of using math 
     error authority in this instance, given the findings on the 
     accuracy and timeliness of the data.
       Effective date.--The Senate amendment generally is 
     effective for taxable years beginning after December 31, 
     2001. The Senate amendment to authorize the IRS to use math 
     error authority if the Federal Case Registry of Child Support 
     Orders indicates the taxpayer is the noncustodial parent is 
     effective beginning in 2004.


                          conference agreement

       The conference agreement follows the Senate amendment, 
     except under the conference agreement, for married taxpayers 
     filing a joint return, the earned income credit phase-out 
     amount is increased as follows: by $1,000 in the case of 
     taxable years beginning in 2002, 2003, and 2004; by $2,000 in 
     the case of taxable years beginning in 2005, 2006, and 2007; 
     and by $3,000 in the case of taxable years beginning after 
     2007. The $3,000 amount is to be adjusted annually for 
     inflation after 2008.
       The conferees realize that the expansion of the earned 
     income credit may create a financial hardship on U.S. 
     possessions with mirror codes and that further study of such 
     effects is necessary.

                        IV. EDUCATION INCENTIVES

  A. Modifications to Education IRAs (Sec. 401 and 414 of the Senate 
              amendment and Secs. 530 and 127 of the Code)


                              present law

     In general
       Section 530 of the Code 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 designated beneficiary. Contributions to education IRAs 
     may be made only in cash.\22\ Annual contributions to 
     education IRAs may not exceed $500 per beneficiary (except in 
     cases involving certain tax-free rollovers, as described 
     below) and may not be made after the designated beneficiary 
     reaches age 18.
---------------------------------------------------------------------------
     \22\ Special estate and gift tax rules apply to contributions 
     made to and distributions made from education IRAs.
---------------------------------------------------------------------------
     Phase-out of contribution limit
       The $500 annual contribution limit for education IRAs is 
     generally phased-out ratably for contributors with modified 
     adjusted gross income (between $95,000 and $110,000). The 
     phase-out range for married taxpayers filing a joint return 
     is $150,000 to $160,000 of modified adjusted gross income. 
     Individuals with modified adjusted gross income above the 
     phase-out range are not allowed to make contributions to an 
     education IRA established on behalf of any individual.
     Treatment of distributions
       Earnings on contributions to an education IRA generally are 
     subject to tax when withdrawn. However, distributions from an 
     education IRA are excludable from the gross income of the 
     beneficiary to the extent that the total distribution does 
     not exceed the ``qualified higher education expenses'' 
     incurred by the beneficiary during the year the distribution 
     is made.
       If the qualified higher education expenses of the 
     beneficiary for the year are less than the total amount of 
     the distribution (i.e., contributions and earnings combined) 
     from an education 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., the 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 beneficiary's 
     gross income.
       The earnings portion of a distribution from an education 
     IRA that is includible in income is also subject to an 
     additional 10-percent tax. The 10-percent additional tax does 
     not apply if a distribution is made on account of the death 
     or disability of the designated beneficiary, or on account of 
     a 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 benefiting one 
     beneficiary to another education IRA benefiting another 
     beneficiary (as well as redesignations of the named 
     beneficiary), provided that the new beneficiary is a member 
     of the family of the old beneficiary and is under age 30.
       Any balance remaining in an education IRA is deemed to be 
     distributed within 30 days after the date that the 
     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. 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.
       Moreover, qualified higher education expenses include, 
     within limits, room and board expenses for any academic 
     period during which the beneficiary is at least a half-

[[Page 9662]]

     time student. Room and board expenses that may be treated as 
     qualified higher education expenses are limited to the 
     minimum room and board allowance applicable to the student in 
     calculating costs of attendance for Federal financial aid 
     programs under section 472 of the Higher Education Act of 
     1965, as in effect on the date of enactment of the Small 
     Business Job Protection Act of 1996 (August 20, 1996). Thus, 
     room and board expenses cannot exceed the following amounts: 
     (1) for a student living at home with parents or guardians, 
     $1,500 per academic year; (2) for a student living in housing 
     owned or operated by the eligible education institution, the 
     institution's ``normal'' room and board charge; and (3) for 
     all other students, $2,500 per academic year.
       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.
       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), exclusion (e.g., for interest on education savings 
     bonds) or credit is allowed with respect to such expenses.
       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.
     Time for making contributions
       Contributions to an education IRA for a taxable year are 
     taken into account in the taxable year in which they are 
     made.
     Coordination with HOPE and Lifetime Learning credits
       If an exclusion from gross income is allowed for 
     distributions from an education IRA with respect to an 
     individual, then neither the HOPE nor Lifetime Learning 
     credit may be claimed in the same taxable year with respect 
     to the same individual. However, an individual may elect to 
     waive the exclusion with respect to distributions from an 
     education IRA. If such a waiver is made, then the HOPE or 
     Lifetime Learning credit may be claimed with respect to the 
     individual for the taxable year.
     Coordination with qualified tuition programs
       An excise tax is imposed on contributions to an education 
     IRA for a year if contributions are made by anyone to a 
     qualified State tuition program on behalf of the same 
     beneficiary in the same year. The excise tax is equal to 6 
     percent of the contributions to the education IRA. The excise 
     tax is imposed each year after the contribution is made, 
     unless the contributions are withdrawn.


                               House Bill

       No provision.


                            Senate Amendment

     Annual contribution limit
       The Senate amendment increases the annual limit on 
     contributions to education IRAs from $500 to $2,000. Thus, 
     aggregate contributions that may be made by all contributors 
     to one (or more) education IRAs established on behalf of any 
     particular beneficiary is limited to $2,000 for each year.
     Qualified education expenses
       The Senate amendment expands the definition of qualified 
     education expenses that may be paid tax-free from an 
     education IRA to include ``qualified elementary and secondary 
     school expenses,'' meaning expenses for (1) tuition, fees, 
     academic tutoring, special need services, books, supplies, 
     and other equipment incurred in connection with the 
     enrollment or attendance of the beneficiary at a public, 
     private, or religious school providing elementary or 
     secondary education (kindergarten through grade 12) as 
     determined under State law, (2) room and board, uniforms, 
     transportation, and supplementary items or services 
     (including extended day programs) required or provided by 
     such a school in connection with such enrollment or 
     attendance of the beneficiary, and (3) the purchase of any 
     computer technology or equipment (as defined in sec. 
     170(e)(6)(F)(i)) or Internet access and related services, if 
     such technology, equipment, or services are to be used by the 
     beneficiary and the beneficiary's family during any of the 
     years the beneficiary is in school. Computer software 
     primarily involving sports, games, or hobbies is not 
     considered a qualified elementary and secondary school 
     expense unless the software is educational in nature.
     Phase-out of contribution limit
       The Senate amendment increases the phase-out range for 
     married taxpayers filing a joint return so that it is twice 
     the range for single taxpayers. Thus, the phase-out range for 
     married taxpayers filing a joint return is $190,000 to 
     $220,000 of modified adjusted gross income.
     Special needs beneficiaries
       The Senate amendment provides that the rule prohibiting 
     contributions to an education IRA after the beneficiary 
     attains 18 does not apply in the case of a special needs 
     beneficiary (as defined by Treasury Department regulations). 
     In addition, a deemed distribution of any balance in an 
     education IRA does not occur when a special needs beneficiary 
     reaches age 30. Finally, the age 30 limitation does not apply 
     in the case of a rollover contribution for the benefit of a 
     special needs beneficiary or a change in beneficiaries to a 
     special needs beneficiary.
     Contributions by persons other than individuals
       The Senate amendment 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.
     Exclusion for employer contributions
       The Senate amendment provides an exclusion from gross 
     income for certain employer contributions to an education IRA 
     for the employee, the employee's spouse, or a lineal 
     descendent of the employee or his or her spouse (provided 
     such individual otherwise meets the eligibility requirements 
     for education IRAs). The maximum amount excludable is $500 
     per year per each beneficiary. Thus, for example, if an 
     employee has two children under age 18, the employer could 
     contribute $500 each year to an education IRA for each child. 
     The exclusion does not apply to self-employed individuals. 
     The employer is required to report the amount of any 
     education IRA contributions on the employee's W-2 for the 
     year.
       In order to be excludable from gross income, the 
     contribution must be made pursuant to a plan that meets the 
     requirements of an educational assistance program under 
     section 127.\23\ Thus, for example, the plan must be in 
     writing and must satisfy nondiscrimination rules.
---------------------------------------------------------------------------
     \23\ Contributions to education IRAs are not subject to the 
     $5,250 annual limit on the exclusion for employer-provided 
     educational assistance, and are not taken into account for 
     purposes of applying that limit to other education 
     assistance. Rather, such contributions are subject to the 
     $500 per beneficiary limit described above.
---------------------------------------------------------------------------
       Education IRA contributions that are excludable from gross 
     income are treated as earnings for purposes of determining 
     the amount includible in gross income, if any, due to a 
     withdrawal from the education IRA.
       The exclusion does not apply for Social Security tax 
     purposes.
     Contributions permitted until April 15
       Under the Senate amendment, 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 individual's 
     Federal income tax return for such taxable year (not 
     including extensions). Thus, individual contributors 
     generally may make contributions for a year until April 15 of 
     the following year.
     Qualified room and board expenses
       The Senate amendment modifies the definition of room and 
     board expenses considered to be qualified higher education 
     expenses. This modification is described with the provisions 
     relating to qualified tuition programs, below.
     Coordination with HOPE and Lifetime Learning credits
       The Senate amendment 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 
     contributions and the earnings portions) from an education 
     IRA on behalf of the same student 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 Senate amendment 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.
       If distributions from education IRAs and qualified tuition 
     programs exceed the beneficiary's qualified higher education 
     expenses for the year (after reduction by amounts used in 
     claiming the HOPE or Lifetime Learning credit), the 
     beneficiary is required to allocate the expenses between the 
     distributions to determine the amount includible in income.
     Effective date
       The provisions modifying education IRAs are effective for 
     taxable years beginning after December 31, 2001.


                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that the conference

[[Page 9663]]

     agreement does not include the exclusion for employer 
     contributions. As under the Senate amendment, the conference 
     agreement provides that certain age limitations do not apply 
     in the case of special needs beneficiaries. The conferees 
     intend that Treasury regulations will define a special needs 
     beneficiary to include an individual who because of a 
     physical, mental, or emotional condition (including learning 
     disability) requires additional time to complete his or her 
     education. The conference agreement clarifies the rule 
     relating to computer software by providing that computer 
     software involving sports, games, or hobbies is not 
     considered a qualified elementary and secondary school 
     expense unless the software is predominantly educational in 
     nature.
       Effective date.--The conference agreement follows the 
     Senate amendment.

  B. Private Prepaid Tuition Programs; Exclusion From Gross Income of 
 Education Distributions From Qualified Tuition Programs (Sec. 402 of 
             the Senate amendment and sec. 529 of the Code)


                              Present Law

       Section 529 of the Code 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,\24\ as 
     well as certain room and board expenses for any period during 
     which the student is at least a half-time student.
---------------------------------------------------------------------------
     \24\ An ``eligible education institution'' is defined the 
     same for purposes of education IRAs (described above) and 
     qualified State tuition programs.
---------------------------------------------------------------------------
       No amount is included in the gross income of a contributor 
     to, or a 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 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.\25\
---------------------------------------------------------------------------
     \25\ Distributions from qualified State tuition programs are 
     treated as representing a pro-rata share of the contributions 
     and earnings in the account.
---------------------------------------------------------------------------
       A qualified State tuition program is required to provide 
     that purchases or contributions only be made in cash.\26\ 
     Contributors and beneficiaries are not allowed to 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.
---------------------------------------------------------------------------
     \26\ Special estate and gift tax rules apply to contributions 
     made to and distributions made from qualified State tuition 
     programs.
---------------------------------------------------------------------------
       A transfer of credits (or other amounts) from one account 
     benefiting one designated beneficiary to another account 
     benefiting 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: (1) the 
     spouse of the beneficiary; (2) a son or daughter of the 
     beneficiary or a descendent of either; (3) a stepson or 
     stepdaughter of the beneficiary; (4) a brother, sister, 
     stepbrother or stepsister of the beneficiary; (5) the father 
     or mother of the beneficiary or an ancestor of either; (6) a 
     stepfather or stepmother of the beneficiary; (7) a son or 
     daughter of a brother or sister of the beneficiary; (8) a 
     brother or sister of the father or mother of the beneficiary; 
     (9) a son-in-law, daughter-in-law, father-in-law, mother-in-
     law, brother-in-law, or sister-in-law of the beneficiary; or 
     (10) the spouse of any person described in (2)-(9).
       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, (3) made on account of a scholarship 
     received by the beneficiary, or (4) a rollover distribution.
       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 
     beneficiary (or another taxpayer claiming the beneficiary as 
     a dependent) may claim the HOPE credit or Lifetime Learning 
     credit 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 phase-out for those credits does not apply).


                               House Bill

       No provision.


                            Senate Amendment

     Qualified tuition program
       The Senate amendment 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 
     eligible educational institutions, persons are able to 
     purchase tuition credits or certificates on behalf of a 
     designated beneficiary (as set forth in sec. 
     529(b)(1)(A)(i)), but would not be able to make contributions 
     to a savings account plan (as described in sec. 
     529(b)(1)(A)(ii)). Except to the extent provided in 
     regulations, a tuition program maintained by a private 
     institution is not treated as qualified unless it has 
     received a ruling or determination from the IRS that the 
     program satisfies applicable requirements.
     Exclusion from gross income
       Under the Senate amendment, an exclusion from gross income 
     is provided for distributions made in taxable years beginning 
     after December 31, 2001, 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.
     Qualified higher education expenses
       The Senate amendment provides that, for purposes of the 
     exclusion for distributions from qualified tuition plans, the 
     maximum room and board allowance is the amount applicable to 
     the student in calculating costs of attendance for Federal 
     financial aid programs under section 472 of the Higher 
     Education Act of 1965, as in effect on the date of enactment, 
     or, in the case of a student living in housing owned or 
     operated by an eligible educational institution, the actual 
     amount charged the student by the educational institution for 
     room and board.\27\
---------------------------------------------------------------------------
     \27\ This definition also applies to distributions from 
     education IRAs.
---------------------------------------------------------------------------
     Coordination with HOPE and Lifetime Learning credits
       The Senate amendment 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.
     Rollovers for benefit of same beneficiary
       The Senate amendment 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 is 
     not considered a distribution. This rollover treatment does 
     not apply to more than one transfer within any 12-month 
     period with respect to the same beneficiary.
     Member of family
       The Senate amendment provides that, for purposes of tax-
     free rollovers and changes of designated beneficiaries, a 
     ``member of the family'' includes first cousins of the 
     original beneficiary.
     Effective date
       The provisions are effective for taxable years beginning 
     after December 31, 2001, except that the exclusion from gross 
     income for certain distributions from a qualified tuition 
     program established and maintained by an entity other than a 
     State (or agency or instrumentality thereof) is effective for 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications. The conference agreement modifies the 
     definition of qualified higher education expenses to include 
     expenses of a special needs beneficiary which are necessary 
     in connection with his

[[Page 9664]]

     or her enrollment or attendance at the eligible education 
     institution.\28\ A special needs beneficiary would be defined 
     as under the provisions relating to education IRAs, described 
     above.
---------------------------------------------------------------------------
     \28\ This definition also applies to distributions from 
     education IRAs.
---------------------------------------------------------------------------
       The conference agreement repeals the present-law rule that 
     a qualified State tuition program must impose a more than de 
     minimis monetary penalty on any refund of earnings not used 
     for qualified higher education expenses of the beneficiary 
     (except in certain circumstances). Instead, the conference 
     agreement imposes an additional 10-percent tax on the amount 
     of a distribution from a qualified tuition plan that is 
     includible in gross income (like the additional tax that 
     applies to such distributions from education IRAs). The same 
     exceptions that apply to the 10-percent additional tax with 
     respect to education IRAs apply. A special rule applies 
     because the exclusion for earnings on distributions used for 
     qualified higher education expenses does not apply to 
     qualified tuition programs of private institutions until 
     2004. Under the special rule, the additional 10-percent tax 
     does not apply to any payment in a taxable year beginning 
     before January 1, 2004, which is includible in gross income 
     but used for qualified higher education expenses. Thus, for 
     example, the earnings portion of a distribution from a 
     qualified tuition program of a private institution that is 
     made in 2003 and that is used for qualified higher education 
     expenses is not subject to the additional tax, even though 
     the earnings portion is includible in gross income. 
     Conforming the penalty to the education IRA provisions will 
     make it easier for taxpayers to allocate expenses between the 
     various education tax incentives.\29\ For example, under the 
     conference agreement, a taxpayer who receives distributions 
     from an education IRA and a qualified tuition program in the 
     same year is required to allocate qualified expenses in order 
     to determine the amount excludable from income. Other 
     interactions between the various provisions also arise under 
     the conference agreement. For example, a taxpayer may need to 
     know the amount excludable from income due to a distribution 
     from a qualified tuition program in order to determine the 
     amount of expenses eligible for the tuition deduction. The 
     conferees expect that the Secretary will exercise the 
     existing authority under sections 529(d) and 530(h) to 
     require appropriate reporting, e.g., the amount of 
     distributions and the earnings portions of distributions 
     (taxable and nontaxable), to facilitate the provisions of the 
     conference agreement.
---------------------------------------------------------------------------
     \29\ The conferees also believe that this change is 
     appropriate in light of the expansion of qualified tuition 
     programs to include programs maintained by private 
     institutions.
---------------------------------------------------------------------------
       The conference agreement provides that, in order for a 
     tuition program of a private eligible education institution 
     to be a qualified tuition program, assets of the program must 
     be held in a trust created or organized in the United States 
     for the exclusive benefit of designated beneficiaries that 
     complies with the requirements under section 408(a)(2) and 
     (5). Under these rules, the trustee must be a bank or other 
     person who demonstrates that it will administer the trust in 
     accordance with applicable requirements and the assets of the 
     trust may not be commingled with other property except in a 
     common trust fund or common investment fund.
       As under the Senate amendment, the conference agreement 
     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 is not considered a 
     distribution. This rollover treatment does not apply to more 
     than one transfer within any 12-month period with respect to 
     the same beneficiary. The conferees intend that this 
     provision will allow, for example, transfers between a 
     prepaid tuition program and a savings program maintained by 
     the same State and between a State plan and a private prepaid 
     tuition program.

C. Exclusion for Employer-Provided Educational Assistance (sec. 411 of 
             the Senate amendment and sec. 127 of the Code)


                              Present Law

       Educational expenses paid by an employer for its employees 
     are generally deductible by 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 beginning after June 30, 1996. 
     The exclusion for employer-provided educational assistance 
     for undergraduate courses expires with respect to courses 
     beginning after December 31, 2001.
       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 five 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 five 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.\30\ 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 enables a taxpayer to begin working in a new 
     trade or business.\31\
---------------------------------------------------------------------------
     \30\ These rules also apply in the event that section 127 
     expires.
     \31\ 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 expenses, exceed two percent of the taxpayer's 
     AGI. An individual's total deductions may also be reduced by 
     the overall limitation on itemized deductions under section 
     68. These limitations do not apply in determining whether an 
     item is excludable from income as a working condition fringe 
     benefit.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision extends the exclusion for employer-provided 
     educational assistance to graduate education and makes the 
     exclusion (as applied to both undergraduate and graduate 
     education) permanent.
       Effective date.--The provision is effective with respect to 
     courses beginning after December 31, 2001.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

 D. Modifications to Student Loan Interest Deduction (sec. 412 of the 
               Senate amendment and sec. 221 of the Code)


                              Present Law

       Certain individuals may claim an above-the-line deduction 
     for interest paid on qualified education loans, subject to a 
     maximum annual deduction limit. 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 voluntary 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 annual deduction is $2,500. The 
     deduction is phased-out ratably for single taxpayers with 
     modified adjusted gross income between $40,000 and $55,000 
     and for married taxpayers filing joint returns with modified 
     adjusted gross income between $60,000 and $75,000. The income 
     ranges will be adjusted for inflation after 2002.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the income phase-out ranges 
     for eligibility for the student loan interest deduction to 
     $50,000 to $65,000 for single taxpayers and to $100,000 to 
     $130,000 for married taxpayers filing joint returns. These 
     income phase-out ranges are adjusted annually for inflation 
     after 2002.
       The Senate amendment repeals both the limit on the number 
     of months during which interest paid on a qualified education 
     loan is deductible and the restriction that voluntary 
     payments of interest are not deductible.
       Effective date.--The provision is effective for interest 
     paid on qualified education loans after December 31, 2001.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

[[Page 9665]]



  E. Eliminate Tax on Awards Under the National Health Service Corps 
   Scholarship Program and the F. Edward Hebert Armed Forces Health 
 Professions Scholarship and Financial Assistance Program (Sec. 413 of 
             the Senate Amendment and Sec. 117 of the Code)


                              Present Law

       Section 117 excludes from gross income amounts received as 
     a qualified scholarship by an individual who is a candidate 
     for a degree and used for tuition and fees required for the 
     enrollment or attendance (or for fees, books, supplies, and 
     equipment required for courses of instruction) at a primary, 
     secondary, or post-secondary educational institution. The 
     tax-free treatment provided by section 117 does not extend to 
     scholarship amounts covering regular living expenses, such as 
     room and board. 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.
       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'') and the F. Edward Hebert Armed 
     Forces Health Professions Scholarship and Financial 
     Assistance Program (the ``Armed Forces Scholarship Program'') 
     provide education awards to participants on the 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. Because 
     the recipients 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

       No provision.


                            Senate Amendment

       The Senate amendment provides that amounts received by an 
     individual under the NHSC Scholarship Program or the Armed 
     Forces Scholarship Program 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 provision is effective for education 
     awards received after December 31, 2001.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

 F. Tax Benefits for Certain Types of Bonds for Educational Facilities 
and Activities (Secs. 421-422 of the Senate Amendment and Secs. 142 and 
                          146-148 of the Code)


                              Present Law

     Tax-exempt bonds
       In general
       Interest on debt \32\ 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). \33\ Like other activities carried out or 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.
---------------------------------------------------------------------------
     \32\ Hereinafter referred to as ``State or local government 
     bonds.''
     \33\ Interest on this debt is included in calculating the 
     ``adjusted current earnings'' preference of the corporate 
     alternative minimum tax.
---------------------------------------------------------------------------
       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.'' \34\ The term ``private person'' includes the 
     Federal Government and all other individuals and entities 
     other than States or local governments.
---------------------------------------------------------------------------
     \34\ Interest on private activity bonds (other than qualified 
     501(c)(3) bonds) is a preference item in calculating the 
     alternative minimum tax.
---------------------------------------------------------------------------
       Private activities eligible for financing with tax-exempt 
           private activity bonds
       Present law 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'').
       States or local governments may issue tax-exempt ``exempt-
     facility bonds'' to finance property for certain private 
     businesses. Business facilities eligible for this financing 
     include transportation (airports, ports, local mass 
     commuting, and high speed intercity rail facilities); 
     privately owned and/or privately operated public works 
     facilities (sewage, solid waste disposal, local district 
     heating or cooling, and hazardous waste disposal facilities); 
     privately-owned and/or operated low-income rental housing; 
     and certain private facilities for the local furnishing of 
     electricity or gas. A further provision allows tax-exempt 
     financing for ``environmental enhancements of hydro-electric 
     generating facilities.'' Tax-exempt financing also is 
     authorized for capital expenditures for small manufacturing 
     facilities and land and equipment for first-time farmers 
     (``qualified small-issue bonds''), local redevelopment 
     activities (``qualified redevelopment bonds''), and eligible 
     empowerment zone and enterprise community businesses. Tax-
     exempt private activity bonds also may be issued to finance 
     limited non-business purposes: certain student loans and 
     mortgage loans for owner-occupied housing (``qualified 
     mortgage bonds'' and ``qualified veterans' mortgage bonds'').
       Private activity tax-exempt bonds may not be issued to 
     finance schools for private, for-profit businesses.
       In most cases, the aggregate volume of private activity 
     tax-exempt bonds is restricted by annual aggregate volume 
     limits imposed on bonds issued by issuers within each State. 
     These annual volume limits are equal to $62.50 per resident 
     of the State, or $187.5 million if greater. The volume limits 
     are scheduled to increase to the greater of $75 per resident 
     of the State or $225 million in calendar year 2002. After 
     2002, the volume limits will be indexed annually for 
     inflation.
       Arbitrage restrictions on tax-exempt bonds
       The Federal income tax does not apply to the 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 needed for the purpose of the borrowing, 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, profits that are earned during these periods or 
     on such investments must be rebated to the Federal 
     Government.
       Present law includes three exceptions to the arbitrage 
     rebate requirements 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. \35\
---------------------------------------------------------------------------
     \35\ 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. 
     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. \36\ Issuers qualifying for this 
     ``construction bond'' exception may elect to be subject to a 
     fixed penalty payment regime in lieu of rebate if they fail 
     to satisfy the spending requirements.
---------------------------------------------------------------------------
     \36\ Retainage amounts are limited to no more than five 
     percent of the bond proceeds, and these amounts must be spent 
     for the purpose of the borrowing no later than 36 months 
     after the bonds are issued.
---------------------------------------------------------------------------
       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.
     Qualified zone academy bonds
       As an alternative to traditional tax-exempt bonds, 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

[[Page 9666]]

     through 2001. 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 for up to two years (three years for 
     authority arising before 2000).
       Certain financial institutions (i.e., banks, insurance 
     companies, and corporations actively engaged in the business 
     of lending money) that hold qualified zone academy bonds are 
     entitled to a nonrefundable tax credit in an amount equal to 
     a credit rate multiplied by the face amount of the bond. An 
     eligible financial institution holding a qualified zone 
     academy bond on the credit allowance date (i.e., each one-
     year anniversary of the issuance of the bond) is entitled to 
     a credit. The credit amount is includible in gross income (as 
     if it were a taxable interest payment on the bond), and the 
     credit may be claimed against regular income tax and 
     alternative minimum tax liability.
       The Treasury Department sets the credit rate daily at a 
     rate estimated to allow issuance of qualified zone academy 
     bonds without discount and without interest cost to the 
     issuer. The maximum term of the bonds also is determined by 
     the Treasury Department, so that the present value of the 
     obligation to repay the bond is 50 percent of the face value 
     of the bond. Present value is determined using as a discount 
     rate the average annual interest rate of tax-exempt 
     obligations with a term of 10 years or more issued during the 
     month.
       ``Qualified zone academy bonds'' are defined as bonds 
     issued by a State or local government, provided that: (1) at 
     least 95 percent of the proceeds is used for the purpose of 
     renovating, providing equipment to, developing course 
     materials for use at, or training teachers and other school 
     personnel in a ``qualified zone academy'' and (2) private 
     entities have promised to contribute to the qualified zone 
     academy certain equipment, technical assistance or training, 
     employee services, or other property or services with a value 
     equal to at least 10 percent of the bond proceeds.
       A school is a ``qualified zone academy'' if (1) the school 
     is a public school that provides education and training below 
     the college level, (2) the school operates a special academic 
     program in cooperation with businesses to enhance the 
     academic curriculum and increase graduation and employment 
     rates, and (3) either (a) the school is located in a 
     designated empowerment zone or a designated enterprise 
     community, or (b) it is reasonably expected that at least 35 
     percent of the students at the school will be eligible for 
     free or reduced-cost lunches under the school lunch program 
     established under the National School Lunch Act.


                               House Bill

       No provision.


                            Senate Amendment

     Increase amount of governmental bonds that may be issued by 
         governments qualifying for the ``small governmental 
         unit'' arbitrage rebate exception
       The additional amount of governmental bonds for public 
     schools that small governmental units may issue without being 
     subject to the arbitrage rebate requirements 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.
     Allow issuance of tax-exempt private activity bonds for 
         public school facilities
       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) \37\ 
     and depreciable personal property used in the school 
     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.
---------------------------------------------------------------------------
     \37\ The present-law limit on the amount of the proceeds of a 
     private activity bond issue that may be used to finance land 
     acquisition does not apply to these bonds.
---------------------------------------------------------------------------
       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 for a public school agency (typically pursuant to a 
     lease arrangement). 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 private activity bond volume limit equal to $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 
     can 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 provisions are effective for bonds issued after 
     December 31, 2001.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

   G. Modify Rules Governing Tax-Exempt Bonds for Section 501(c)(3) 
      Organizations as Applied to Organizations Engaged in Timber 
Conservation Activities (Sec. 423 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 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 December 31, 2001, and before January 1, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 H. Deduction for Qualified Higher Education Expenses (Sec. 431 of the 
             Senate Amendment and new Sec. 222 of the Code)


                              present law

     Deduction for education expenses
       Under present law, an individual taxpayer generally may not 
     deduct the education and training expenses of the taxpayer or 
     the taxpayer's dependents. However, a deduction for education 
     expenses generally is allowed under Internal Revenue Code 
     (``the Code'') section 162 if the education or training (1) 
     maintains or improves a skill required in a trade or business 
     currently engaged in by the taxpayer, or (2) meets the 
     express requirements of the taxpayer's employer, or 
     requirements of applicable law or regulations, imposed as a 
     condition of continued employment (Treas. Reg. sec. 1.162-5). 
     Education expenses are not deductible if they relate to 
     certain minimum educational requirements or to education or 
     training that enables a taxpayer to begin working in a new 
     trade or business. In the case of an employee, education 
     expenses (if not reimbursed by the employer) may be claimed 
     as an itemized deduction only if such expenses meet the above 
     described criteria for deductibility under section 162 and 
     only to the extent that the expenses, along with other 
     miscellaneous deductions, exceed two percent of the 
     taxpayer's adjusted gross income.
     HOPE and Lifetime Learning credits
       HOPE credit
       Under present law, individual taxpayers are allowed to 
     claim a nonrefundable credit, the ``HOPE'' credit, against 
     Federal income taxes of up to $1,500 per student per year for 
     qualified tuition and related expenses paid for the first two 
     years of the student's post secondary education in a degree 
     or certificate program. The HOPE credit rate is 100 percent 
     on the first $1,000 of qualified tuition and related 
     expenses, and 50 percent on the next $1,000 of qualified 
     tuition and related expenses.\38\ The qualified tuition and 
     related

[[Page 9667]]

     expenses must be incurred on behalf of the taxpayer, the 
     taxpayer's spouse, or a dependent of the taxpayer. The HOPE 
     credit is available with respect to an individual student for 
     two taxable years, provided that the student has not 
     completed the first two years of post-secondary education 
     before the beginning of the second taxable year.\39\ The HOPE 
     credit that a taxpayer may otherwise claim is phased-out 
     ratably for taxpayers with modified AGI between $40,000 and 
     $50,000 ($80,000 and $100,000 for joint returns). For taxable 
     years beginning after 2001, the $1,500 maximum HOPE credit 
     amount and the AGI phase-out ranges are indexed for 
     inflation.
---------------------------------------------------------------------------
     \38\ Thus, an eligible student who incurs $1,000 of qualified 
     tuition and related expenses is eligible (subject to the AGI 
     phase-out) for a $1,000 HOPE credit. If an eligible student 
     incurs $2,000 of qualified tuition and related expenses, then 
     he or she is eligible for a $1,500 HOPE credit.
     \39\ The HOPE credit may not be claimed against a taxpayer's 
     alternative minimum tax liability.
---------------------------------------------------------------------------
       The HOPE credit is available for ``qualified tuition and 
     related expenses,'' which include tuition and fees required 
     to be paid to an eligible educational institution as a 
     condition of enrollment or attendance of an eligible student 
     at the institution. Charges and fees associated with meals, 
     lodging, insurance, transportation, and similar personal, 
     living, or family expenses are not eligible for the credit. 
     The expenses of education involving sports, games, or hobbies 
     are not qualified tuition and related expenses unless this 
     education is part of the student's degree program.
       Qualified tuition and related expenses generally include 
     only out-of-pocket expenses. Qualified tuition and related 
     expenses do not include expenses covered by employer-provided 
     educational assistance and scholarships that are not required 
     to be included in the gross income of either the student or 
     the taxpayer claiming the credit. Thus, total qualified 
     tuition and related expenses are reduced by any scholarship 
     or fellowship grants excludable from gross income under 
     section 117 and any other tax free educational benefits 
     received by the student (or the taxpayer claiming the credit) 
     during the taxable year.
       Lifetime Learning credit
       Individual taxpayers are allowed to claim a nonrefundable 
     credit, the Lifetime Learning credit, against Federal income 
     taxes equal to 20 percent of qualified tuition and related 
     expenses incurred during the taxable year on behalf of the 
     taxpayer, the taxpayer's spouse, or any dependents. For 
     expenses paid after June 30, 1998, and prior to January 1, 
     2003, up to $5,000 of qualified tuition and related expenses 
     per taxpayer return are eligible for the Lifetime Learning 
     credit (i.e., the maximum credit per taxpayer return is 
     $1,000). For expenses paid after December 31, 2002, up to 
     $10,000 of qualified tuition and related expenses per 
     taxpayer return will be eligible for the Lifetime Learning 
     credit (i.e., the maximum credit per taxpayer return will be 
     $2,000).
       In contrast to the HOPE credit, a taxpayer may claim the 
     Lifetime Learning credit for an unlimited number of taxable 
     years. Also in contrast to the HOPE credit, the maximum 
     amount of the Lifetime Learning credit that may be claimed on 
     a taxpayer's return will not vary based on the number of 
     students in the taxpayer's family--that is, the HOPE credit 
     is computed on a per student basis, while the Lifetime 
     Learning credit is computed on a family wide basis. The 
     Lifetime Learning credit amount that a taxpayer may otherwise 
     claim is phased-out ratably for taxpayers with modified AGI 
     between $40,000 and $50,000 ($80,000 and $100,000 for joint 
     returns).


                               house bill

       No provision.


                            senate amendment

       The Senate amendment permits taxpayers an above-the-line 
     deduction for qualified higher education expenses paid by the 
     taxpayer during a taxable year. Qualified higher education 
     expenses are defined in the same manner as for purposes of 
     the HOPE credit.
       In 2002 and 2003, taxpayers with adjusted gross income \40\ 
     that does not exceed $65,000 ($130,000 in the case of married 
     couples filing joint returns) are entitled to a maximum 
     deduction of $3,000 per year. Taxpayers with adjusted gross 
     income above these thresholds would not be entitled to a 
     deduction. In 2004 and 2005, taxpayers with adjusted gross 
     income that does not exceed $65,000 ($130,000 in the case of 
     married taxpayers filing joint returns) are entitled to a 
     maximum deduction of $5,000 and taxpayers with adjusted gross 
     income that does not exceed $80,000 ($160,000 in the case of 
     married taxpayers filing joint returns) are entitled to a 
     maximum deduction of $2,000.
---------------------------------------------------------------------------
     \40\ The provision contains ordering rules for use in 
     determining adjusted gross income for purposes of the 
     deduction.
---------------------------------------------------------------------------
       Taxpayers are not eligible to claim the deduction and a 
     HOPE or Lifetime Learning Credit in the same year with 
     respect to the same student. A taxpayer may not claim a 
     deduction for amounts taken into account in determining the 
     amount excludable due to a distribution (i.e., the earnings 
     and contribution portion of a distribution) from an education 
     IRA or the amount of interest excludable with respect to 
     education savings bonds. A taxpayer may not claim a deduction 
     for the amount of a distribution from a qualified tuition 
     plan that is excludable from income; however, a taxpayer may 
     claim a deduction for the amount of a distribution from a 
     qualified tuition plan that is not attributable to earnings. 
     Thus, for example, if a taxpayer receives a distribution of 
     $100 from a qualified tuition plan which is used for tuition, 
     $10 of which represents earnings, the taxpayer would be 
     entitled to claim the deduction with respect to the $90 
     representing a return of contributions. On the other hand, if 
     the distribution were from an education IRA, the $90 would 
     not be eligible for the deduction.
       Effective date.--The provision is effective for payments 
     made in taxable years beginning after December 31, 2001, and 
     before January 1, 2006.


                          conference agreement

       The conference agreement follows the Senate amendment with 
     the modification that the maximum deduction in 2004 and 2005 
     is $4,000 for taxpayers with adjusted gross income that does 
     not exceed $65,000 ($130,000 in the case of married taxpayers 
     filing joint returns).

I. Credit for Interest on Qualified Higher Education Loans (Sec. 432 of 
           the Senate Amendment and new Sec. 25B of the Code)


                              present law

       An above-the-line deduction for interest paid on qualified 
     education loans is permitted during the first 60 months in 
     which interest payments are required. Required payments of 
     interest generally do not include voluntary 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.
       The maximum allowable annual deduction is $2,500. The 
     deduction is phased-out ratably for single taxpayers with 
     modified adjusted gross income between $40,000 and $55,000 
     and for married taxpayers filing joint returns with modified 
     adjusted gross income between $60,000 and $75,000. The income 
     ranges will be adjusted for inflation after 2002.\41\
---------------------------------------------------------------------------
     \41\ Another section of the Senate amendment makes certain 
     modifications to present law.
---------------------------------------------------------------------------
       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.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment permits taxpayers a nonrefundable 
     personal credit for interest paid on qualified education 
     loans during the first 60 months in which interest payments 
     are required. The maximum annual credit available would be 
     $500.
       The credit is phased-out for single taxpayers with modified 
     adjusted gross income between $35,000 and $45,000 and for 
     married taxpayers filing joint returns with modified adjusted 
     gross income between $70,000 and $90,000. These income phase-
     out ranges would be adjusted annually for inflation after 
     2009.
       A taxpayer taking the credit in a taxable year for payment 
     of interest on a qualified education loan would not be 
     allowed a student loan interest deduction in such taxable 
     year. Similarly, if the taxpayer took a deduction, the 
     taxpayer would not qualify for the credit.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2008.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

  J. Deduction for Qualified Emergency Response Expenses of Eligible 
Emergency Response Professionals (Sec. 433 of the Senate Amendment and 
                       new Sec. 224 of the Code)


                              present law

       Employee business expenses are deductible only as an 
     itemized deduction and only to the extent that the expenses, 
     along with the taxpayer's other allowable miscellaneous 
     itemized deductions, exceed two percent of the taxpayer's 
     adjusted gross income. Itemized deductions may be further 
     reduced by the overall limitation on itemized deductions, 
     which generally applies to taxpayers with adjusted gross 
     income in excess of $132,950 (for 2001).


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides an above-the-line deduction 
     for qualified expenses paid

[[Page 9668]]

     or incurred during the taxable year by an eligible emergency 
     response professional.
       An eligible emergency response professional is (1) a full-
     time employee of a police or fire department organized and 
     operated by a government to provide police protection or 
     firefighting or emergency medical services within its 
     jurisdiction, (2) a licensed emergency medical technician 
     employed by a State or nonprofit agency to provide emergency 
     medical services, or (3) a member of a volunteer fire 
     department organized to provide firefighting or emergency 
     medical services within an area that is not provided with 
     other firefighting services. Qualified expenses means 
     unreimbursed expenses for police and firefighter activities 
     (as determined by the Secretary of Treasury).
       No other deduction or credit is allowed with respect to the 
     amount taken into account under this provision. A deduction 
     is allowed for qualified expenses under the provision only to 
     the extent the amount of such expenses exceeds the amount 
     excludable under the provisions relating to education savings 
     bonds, education IRAs, and qualified tuition plans.
       Effective date.-- The Senate amendment applies to taxable 
     years beginning after December 31, 2001, and before January 
     1, 2007.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

K. Enhanced Deduction for Charitable Contribution of Book Inventory for 
Educational Purposes (Sec. 434 of the Senate Amendment and Sec. 170 of 
                               the Code)


                              present law

       In the case of a charitable contribution of inventory or 
     other ordinary-income or short-term capital gain property, 
     the amount of the deduction is limited to the taxpayer's 
     basis in the property. In the case of a charitable 
     contribution of tangible personal property, the deduction is 
     limited to the taxpayer's basis in such property if the use 
     by the recipient charitable organization is unrelated to the 
     organization's tax-exempt purpose. In cases involving 
     contributions to a private foundation (other than certain 
     private operating foundations), the amount of the deduction 
     is limited to the taxpayer's basis in the property.
       Under present law, a taxpayer's deduction for charitable 
     contributions of book inventory generally is limited to the 
     taxpayer's basis (typically, cost) in the inventory. However, 
     certain corporations may claim a deduction in excess of basis 
     for certain charitable contributions to charitable 
     organizations other than private non-operating foundations. 
     This enhanced deduction is equal to the lesser of (1) basis 
     plus one-half of the item's appreciated value (i.e., basis 
     plus one half of fair market value minus basis) or (2) two 
     times basis. To be eligible for an enhanced deduction, (1) 
     the use of the property by the donee must be related to the 
     donee's exempt purpose and be used by the donee solely for 
     the care of the ill, the needy, or infants; (2) the property 
     must not be transferred by the donee in exchange for money, 
     other property, or services; and (3) the taxpayer must 
     receive a written statement from the donee agreeing to such 
     conditions on use of the contributed property. The taxpayer 
     also must establish that the fair market value of the donated 
     item exceeds basis.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that contributions of book 
     inventory to certain educational organizations are entitled 
     to the present-law enhanced deduction. Eligible educational 
     organizations are (1) educational organizations that normally 
     maintain a regular faculty and curriculum and normally have a 
     regularly enrolled body of pupils or students in attendance 
     at the place where its educational activities are regularly 
     carried on; (2) charities organized primarily for purposes of 
     supporting elementary and secondary education; and (3) 
     charities organized primarily to make books available to the 
     general public at no cost or to operate a literacy program. 
     Present-law requirements relating to use of the property by 
     the donee and provision of a written statement by the donee 
     apply.
       Effective date.--The deduction for contributions of book 
     inventory for educational purposes applies to contributions 
     made after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

    L. Deduction for Qualified Professional Development Expenses of 
   Elementary and Secondary School Teachers (Sec. 442 of the Senate 
                Amendment and new Sec. 223 of the Code)


                              present law

     Deduction for education expenses
       Under present law, an individual taxpayer generally may not 
     deduct the education and training expenses of the taxpayer or 
     the taxpayer's dependents. However, a deduction for education 
     expenses generally is allowed under Internal Revenue Code 
     (``the Code'') section 162 if the education or training (1) 
     maintains or improves a skill required in a trade or business 
     currently engaged in by the taxpayer, or (2) meets the 
     express requirements of the taxpayer's employer, or 
     requirements of applicable law or regulations, imposed as a 
     condition of continued employment (Treas. Reg. sec. 1.162-5). 
     Education expenses are not deductible if they relate to 
     certain minimum educational requirements or to education or 
     training that enables a taxpayer to begin working in a new 
     trade or business. In the case of an employee, education 
     expenses (if not reimbursed by the employer) may be claimed 
     as an itemized deduction only if such expenses meet the above 
     described criteria for deductibility under section 162 and 
     only to the extent that the expenses, along with other 
     miscellaneous deductions, exceed two percent of the 
     taxpayer's adjusted gross income.
     HOPE and Lifetime Learning credits
       HOPE credit
       Under present law, individual taxpayers are allowed to 
     claim a nonrefundable credit, the ``HOPE'' credit, against 
     Federal income taxes of up to $1,500 per student per year for 
     qualified tuition and related expenses paid for the first two 
     years of the student's post secondary education in a degree 
     or certificate program. The HOPE credit rate is 100 percent 
     on the first $1,000 of qualified tuition and related 
     expenses, and 50 percent on the next $1,000 of qualified 
     tuition and related expenses.\42\ The qualified tuition and 
     related expenses must be incurred on behalf of the taxpayer, 
     the taxpayer's spouse, or a dependent of the taxpayer. The 
     HOPE credit is available with respect to an individual 
     student for two taxable years, provided that the student has 
     not completed the first two years of post-secondary education 
     before the beginning of the second taxable year.\43\ The HOPE 
     credit that a taxpayer may otherwise claim is phased-out 
     ratably for taxpayers with modified AGI between $40,000 and 
     $50,000 ($80,000 and $100,000 for joint returns). For taxable 
     years beginning after 2001, the $1,500 maximum HOPE credit 
     amount and the AGI phase-out ranges are indexed for 
     inflation.
---------------------------------------------------------------------------
     \42\ Thus, an eligible student who incurs $1,000 of qualified 
     tuition and related expenses is eligible (subject to the AGI 
     phase-out) for a $1,000 HOPE credit. If an eligible student 
     incurs $2,000 of qualified tuition and related expenses, then 
     he or she is eligible for a $1,500 HOPE credit.
     \43\ The HOPE credit may not be claimed against a taxpayer's 
     alternative minimum tax liability.
---------------------------------------------------------------------------
       The HOPE credit is available for ``qualified tuition and 
     related expenses,'' which include tuition and fees required 
     to be paid to an eligible educational institution as a 
     condition of enrollment or attendance of an eligible student 
     at the institution. Charges and fees associated with meals, 
     lodging, insurance, transportation, and similar personal, 
     living, or family expenses are not eligible for the credit. 
     The expenses of education involving sports, games, or hobbies 
     are not qualified tuition and related expenses unless this 
     education is part of the student's degree program.
       Qualified tuition and related expenses generally include 
     only out-of-pocket expenses. Qualified tuition and related 
     expenses do not include expenses covered by employer-provided 
     educational assistance and scholarships that are not required 
     to be included in the gross income of either the student or 
     the taxpayer claiming the credit. Thus, total qualified 
     tuition and related expenses are reduced by any scholarship 
     or fellowship grants excludable from gross income under 
     section 117 and any other tax free educational benefits 
     received by the student (or the taxpayer claiming the credit) 
     during the taxable year.
       Lifetime Learning credit
       Individual taxpayers are allowed to claim a nonrefundable 
     credit, the Lifetime Learning credit, against Federal income 
     taxes equal to 20 percent of qualified tuition and related 
     expenses incurred during the taxable year on behalf of the 
     taxpayer, the taxpayer's spouse, or any dependents. For 
     expenses paid after June 30, 1998, and prior to January 1, 
     2003, up to $5,000 of qualified tuition and related expenses 
     per taxpayer return are eligible for the Lifetime Learning 
     credit (i.e., the maximum credit per taxpayer return is 
     $1,000). For expenses paid after December 31, 2002, up to 
     $10,000 of qualified tuition and related expenses per 
     taxpayer return will be eligible for the Lifetime Learning 
     credit (i.e., the maximum credit per taxpayer return will be 
     $2,000).
       In contrast to the HOPE credit, a taxpayer may claim the 
     Lifetime Learning credit for an unlimited number of taxable 
     years. Also in contrast to the HOPE credit, the maximum 
     amount of the Lifetime Learning credit that may be claimed on 
     a taxpayer's return will not vary based on the number of 
     students in the taxpayer's family--that is, the HOPE credit 
     is computed on a per student basis, while the Lifetime 
     Learning credit is computed on a family wide basis. The 
     Lifetime Learning credit amount that a taxpayer may otherwise 
     claim is phased-out ratably for taxpayers with modified AGI 
     between $40,000 and $50,000 ($80,000 and $100,000 for joint 
     returns).


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides an above-the-line deduction 
     for up to $500 of qualified

[[Page 9669]]

     professional development expenses paid or incurred during the 
     taxable year. The deduction is available to kindergarten 
     through 12th grade teachers, instructors, counselors, 
     principals, or aides who work in an elementary or secondary 
     school \44\ for at least 900 hours during the school year.
---------------------------------------------------------------------------
     \44\ Elementary and secondary schools are defined by 
     reference to section 14101 of the Elementary and Secondary 
     Education Act of 1965.
---------------------------------------------------------------------------
       Qualified professional development expenses are tuition, 
     fees, books, supplies, equipment, and transportation required 
     for the enrollment or attendance in a qualified course of 
     instruction. A qualified course of instruction is a course 
     which: (1) is (a) directly related to the curriculum and 
     academic subjects in which the individual provides 
     instruction, (b) designed to enhance the ability of the 
     individual to understand and use State standards for the 
     academic subjects in which the individual provides 
     instruction, (c) designed to provide instruction in how to 
     teach children with different learning styles, particularly 
     children with disabilities and children with special learning 
     needs (including children who are gifted and talented), or 
     (d) designed to provide instruction in how to best discipline 
     children in the classroom and identify early and appropriate 
     interventions to help children described in (c) learn; (2) is 
     tied to (a) challenging State or local content standards and 
     student performance standards or (b) strategies and programs 
     that demonstrate effectiveness in increasing student academic 
     achievement and student performance, or substantially 
     increasing the knowledge and teaching skills of the 
     individual; (3) is of sufficient intensity and duration to 
     have a positive and lasting impact on the performance of the 
     individual in the classroom \45\ (which does not include one-
     day or short-term workshops and conferences); and (3) is part 
     of a program of professional development approved and 
     certified by the appropriate local educational agency \46\ as 
     furthering the goals described in (1) and (2).
---------------------------------------------------------------------------
     \45\ One-day or short-term workshops and conferences do not 
     satisfy this requirement. This requirement does not apply to 
     an activity that is one component described in a long-term 
     comprehensive professional development plan established by 
     the individual and his or her supervisor based on an 
     assessment of the needs of the individual, the individual's 
     students, and the local educational agency involved.
     \46\ Local education agency is as defined in section 14101 of 
     the Elementary and Secondary Education Act of 1965, as in 
     effect on the date of enactment.
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       No other deduction or credit is allowed with respect to the 
     amount taken into account under this provision. A deduction 
     is allowed for qualified professional development expenses 
     under the provision only to the extent the amount of such 
     expenses exceeds the amount excludable under the provisions 
     relating to education savings bonds, education IRAs, and 
     qualified tuition plans.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2000, and expires on 
     December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

 Credit for Classroom Materials (Sec. 443 of the Senate Amendment and 
                       new Sec. 30B of the Code)


                              Present Law

       Unreimbursed employee business expenses are deductible only 
     as an itemized deduction and only to the extent that the 
     individual's total miscellaneous itemized deductions 
     (including employee business expenses) exceed two percent of 
     adjusted gross income.
       Taxpayers who itemize deductions may claim a deduction for 
     contributions to qualified charitable organizations. Total 
     deductible contributions may not exceed 50 percent of 
     adjusted gross income. Other limits apply in the case of 
     contributions to certain organizations and certain property.
       An individual's otherwise allowable itemized deductions may 
     be further limited by the overall limitation on itemized 
     deductions, which reduces itemized deductions for taxpayers 
     with adjusted gross income in excess of $132,950 (for 2001).
       Depending on the particular facts and circumstances, a 
     contribution by a teacher to the school and which he or she 
     is employed may be deductible as an unreimbursed employee 
     business expenses or as a charitable contribution.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a nonrefundable personal 
     credit equal to 50 percent of the qualified elementary and 
     secondary education expenses paid or incurred by an eligible 
     educator during the taxable year. The maximum credit cannot 
     exceed $250 in any year. An eligible educators are 
     kindergarten through 12th grade teachers, instructors, 
     counselors, principals, or aides who work in an elementary or 
     secondary school \47\ for at least 900 hours during the 
     school year. Qualified elementary and secondary education 
     expenses are expenses for books, supplies (other than 
     nonathletic supplies for courses of instruction in health or 
     physical education), computer equipment (including related 
     software and services) and other equipment, and supplementary 
     materials used by an eligible educator in the classroom.
---------------------------------------------------------------------------
     \47\ Elementary and secondary schools are defined by 
     reference to section 14101 of the Elementary and Secondary 
     Education Act of 1965.
---------------------------------------------------------------------------
       The credit may not exceed the excess (if any) of (1) the 
     taxpayer's regular tax for the taxable year, reduced by the 
     sum of certain other allowable credits over (2) the 
     taxpayer's tentative minimum tax for the taxable year.
       No deduction is allowed for any expense for which a credit 
     is allowed under the provision.
       A taxpayer may elect not to have the credit apply.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001, and expires on 
     December 31, 2005.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

    V. ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS

   A. Phaseout and Repeal of Estate and Generation-Skipping Transfer 
 Taxes; Increase in Gift Tax Unified Credit Effective Exemption (Secs. 
   101, 201, 301, and 401-402 of H.R. 8, Secs. 501-542 of the Senate 
  Amendment, Secs. 121, 684, 1014, 1040, 1221, 2001-2210, 2501, 2502, 
 2503, 2505, 2511, 2601-2663, 4947, 6018, 6019, and 7701 of the Code, 
      and new Secs. 1022, 2058, 2210, 2664, and 6716 of the Code)


                              Present Law

     Estate and gift tax rules
       In general
       Under 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 of cumulative taxable transfers 
     and reach 55 percent on cumulative taxable transfers over $3 
     million. In addition, a 5-percent surtax is imposed on 
     cumulative taxable transfers between $10 million and 
     $17,184,000, which has the effect of phasing out the benefit 
     of the graduated rates. Thus, these estates are subject to a 
     top marginal rate of 60 percent. Estates over $17,184,000 are 
     subject to a flat rate of 55 percent on all amounts exceeding 
     the unified credit effective exemption amount, as the benefit 
     of the graduated rates has been phased out.
       Gift tax annual exclusion
       Donors of lifetime gifts are provided an annual exclusion 
     of $10,000 (indexed for inflation occurring after 1997; the 
     inflation-adjusted amount for 2001 remains at $10,000) of 
     transfers of present interests in property to any one donee 
     during the taxable year. If the non-donor spouse consents to 
     split the gift with the donor spouse, then the annual 
     exclusion is $20,000. Unlimited transfers between spouses are 
     permitted without imposition of a gift tax.
       Unified credit
       A unified credit is available with respect to taxable 
     transfers by gift and at death. The unified credit amount 
     effectively exempts from tax transfers totaling $675,000 in 
     2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 
     in 2005, and $1 million in 2006 and thereafter. The benefit 
     of the unified credit applies at the lowest estate and gift 
     tax rates. For example, in 2001, the unified credit applies 
     between the 18-percent and 37-percent estate and gift tax 
     rates. Thus, in 2001, taxable transfers, after application of 
     the unified credit, are effectively subject to estate and 
     gift tax rates beginning at 37 percent.
       Transfers to a surviving spouse
       In general.--A 100-percent marital deduction generally is 
     permitted for the value of property transferred between 
     spouses. In addition, transfers of a ``qualified terminable 
     interest'' also are eligible for the marital deduction. A 
     ``qualified terminable interest'' is property: (1) which 
     passes from the decedent, (2) in which the surviving spouse 
     has a ``qualifying income interest for life,'' and (3) to 
     which an election under these rules applies. A ``qualifying 
     income interest for life'' exists if: (1) the surviving 
     spouse is entitled to all the income from the property 
     (payable annually or at more frequent intervals) or the right 
     to use property during the spouse's life, and (2) no person 
     has the power to appoint any part of the property to any 
     person other than the surviving spouse.
       Transfers to surviving spouses who are not U.S. citizens.--
     A marital deduction generally is denied for property passing 
     to a surviving spouse who is not a citizen of the United 
     States. A marital deduction is permitted, however, for 
     property passing to a qualified domestic trust of which the 
     noncitizen surviving spouse is a beneficiary. A qualified 
     domestic trust is a trust that has as its trustee at least 
     one U.S. citizen or U.S. corporation. No corpus may be 
     distributed from a qualified domestic trust unless the U.S. 
     trustee has the right to withhold any estate tax imposed on 
     the distribution.
       There is an estate tax imposed on (1) any distribution from 
     a qualified domestic trust before the date of the death of 
     the noncitizen surviving spouse and (2) the value of the

[[Page 9670]]

     property remaining in a qualified domestic trust on the date 
     of death of the noncitizen surviving spouse. The tax is 
     computed as an additional estate tax on the estate of the 
     first spouse to die.
       Expenses, indebtedness, and taxes
       An estate tax deduction is allowed for funeral expenses and 
     administration expenses of an estate. An estate tax deduction 
     also is allowed for claims against the estate and unpaid 
     mortgages on, or any indebtedness in respect of, property for 
     which the value of the decedent's interest therein, 
     undiminished by the debt, is included in the value of the 
     gross estate.
       If the total amount of claims and debts against the estate 
     exceeds the value of the property to which the claims relate, 
     an estate tax deduction for the excess is allowed, provided 
     such excess is paid before the due date of the estate tax 
     return. A deduction for claims against the estate generally 
     is permitted only if the claim is allowable by the law of the 
     jurisdiction under which the estate is being administered.
       A deduction also is allowed for the full unpaid amount of 
     any mortgage upon, or of any other indebtedness in respect 
     of, any property included in the gross estate (including 
     interest which has accrued thereon to the date of the 
     decedent's death), provided that the full value of the 
     underlying property is included in the decedent's gross 
     estate.
       Basis of property received
       In general.-- Gain or loss, if any, on the disposition of 
     the property is measured by the taxpayer's amount realized 
     (e.g., gross proceeds received) on the disposition, less the 
     taxpayer's basis in such property. Basis generally represents 
     a taxpayer's investment in property with certain adjustments 
     required after acquisition. For example, basis is increased 
     by the cost of capital improvements made to the property and 
     decreased by depreciation deductions taken with respect to 
     the property.
       Property received from a donor of a lifetime gift takes a 
     carryover basis. ``Carryover basis'' means that the basis in 
     the hands of the donee is the same as it was in the hands of 
     the donor. The basis of property transferred by lifetime gift 
     also is increased, but not above fair market value, by any 
     gift tax paid by the donor. The basis of a lifetime gift, 
     however, generally cannot exceed the property's fair market 
     value on the date of the gift. If the basis of the property 
     is greater than the fair market value of the property on the 
     date of gift, then, for purposes of determining loss, the 
     basis is the property's fair market value on the date of 
     gift.
       Property passing from a decedent's estate generally takes a 
     stepped-up basis. ``Stepped-up basis'' for estate tax 
     purposes means that the basis of property passing from a 
     decedent's estate generally is the fair market value on the 
     date of the decedent's death (or, if the alternate valuation 
     date is elected, the earlier of six months after the 
     decedent's 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 income on any 
     appreciation of the property that occurred prior to the 
     decedent's death, and has the effect of eliminating the tax 
     benefit from any unrealized loss.
       Special rule for community property.--In community property 
     states, a surviving spouse's one-half share of community 
     property held by the decedent and the surviving spouse (under 
     the community property laws of any State, U.S. possession, or 
     foreign country) generally is treated as having passed from 
     the decedent, and thus is eligible for stepped-up basis. This 
     rule applies if at least one-half of the whole of the 
     community interest is includible in the decedent's gross 
     estate.
       Special rules for interests in certain foreign entities.--
     Stepped-up basis treatment generally is denied to certain 
     interests in foreign entities. Under present law, stock or 
     securities in a foreign personal holding company take a 
     carryover basis. Stock in a foreign investment company takes 
     a stepped up basis reduced by the decedent's ratable share of 
     the company's accumulated earnings and profits. In addition, 
     stock in a passive foreign investment company (including 
     those for which a mark-to-market election has been made) 
     generally takes a carryover basis, except that a passive 
     foreign investment company for which a decedent shareholder 
     had made a qualified electing fund election is allowed a 
     stepped-up basis. Stock owned by a decedent in a domestic 
     international sales corporation (or former domestic 
     international sales corporation) takes a stepped-up basis 
     reduced by the amount (if any) which would have been included 
     in gross income under section 995(c) as a dividend if the 
     decedent had lived and sold the stock at its fair market 
     value on the estate tax valuation date (i.e., generally the 
     date of the decedent's death unless an alternate valuation 
     date is elected).
       Provisions affecting small and family-owned businesses and 
           farms
       Special-use valuation.--An executor can elect to value for 
     estate tax purposes certain ``qualified real property'' used 
     in farming or another qualifying closely-held trade or 
     business at its current-use value, rather than its fair 
     market value. The maximum reduction in value for such real 
     property is $750,000 (adjusted for inflation occurring after 
     1997; the inflation-adjusted amount for 2001 is $800,000). 
     Real property generally can qualify for special-use valuation 
     if at least 50 percent of the adjusted value of the 
     decedent's gross estate consists of a farm or closely-held 
     business assets in the decedent's estate (including both real 
     and personal property) and at least 25 percent of the 
     adjusted value of the gross estate consists of farm or 
     closely-held business property. In addition, the property 
     must be used in a qualified use (e.g., farming) by the 
     decedent or a member of the decedent's family for five of the 
     eight years before the decedent's death.
       If, after a special-use valuation election is made, the 
     heir who acquired the real property ceases to use it in its 
     qualified use within 10 years of the decedent's death, an 
     additional estate tax is imposed in order to recapture the 
     entire estate-tax benefit of the special-use valuation.
       Family-owned business deduction.--An estate is permitted to 
     deduct the adjusted value of a qualified-family owned 
     business interest of the decedent, up to $675,000.\48\ 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 the decedent's 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. 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.
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     \48\ The qualified family-owned business deduction and the 
     unified credit effective exemption amount are coordinated. If 
     the maximum deduction amount of $675,000 is elected, then the 
     unified credit effective exemption amount is $625,000, for a 
     total of $1.3 million. If the qualified family-owned business 
     deduction is less than $675,000, then the unified credit 
     effective exemption amount is equal to $625,000, increased by 
     the difference between $675,000 and the amount of the 
     qualified family-owned business deduction. However, the 
     unified credit effective exemption amount cannot be increased 
     above such amount in effect for the taxable year.
---------------------------------------------------------------------------
       To qualify for the exclusion, the decedent (or a member of 
     the decedent's family) must have owned and materially 
     participated in the trade or business for at least five of 
     the eight years preceding the decedent's date of death. In 
     addition, at least one qualified heir (or member of the 
     qualified heir's family) is required to materially 
     participate in the trade or business for at least 10 years 
     following the decedent's death.
       The qualified family-owned business rules provide a 
     graduated recapture based on the number of years after the 
     decedent's death in which the disqualifying event occurred. 
     Under the provision, if the disqualifying event occurred 
     within six years of the decedent's death, then 100 percent of 
     the tax is recaptured. The remaining percentage of recapture 
     based on the year after the decedent's death in which a 
     disqualifying event occurs is as follows: the disqualifying 
     event occurs during the seventh year after the decedent's 
     death, 80 percent; during the eighth year after the 
     decedent's death, 60 percent; during the ninth year after the 
     decedent's death, 40 percent; and during the tenth year after 
     the decedent's death, 20 percent. For purposes of the 
     qualified family-owned business deduction, the contribution 
     of a qualified conservation easement is not considered a 
     disposition that would trigger recapture of estate tax.
       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. However, the 10-year recapture period 
     can 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.
       An estate can claim the benefits of both the qualified 
     family-owned business deduction and special-use valuation. 
     For purposes of determining whether the value of the trade or 
     business exceeds 50 percent of the decedent's gross estate, 
     then the property's special-use value is used if the estate 
     claimed special-use valuation.
       State death tax credit
       A credit is allowed against the Federal estate tax for any 
     estate, inheritance, legacy, or succession taxes actually 
     paid to any State or the District of Columbia with respect to 
     any property included in the decedent's gross estate. The 
     maximum amount of credit allowable for State death taxes is 
     determined under a graduated rate table, the top rate of 
     which is 16 percent, based on the size of the decedent's 
     adjusted taxable estate. Most States impose a ``pick-up'' or

[[Page 9671]]

     ``soak-up'' estate tax, which serves to impose a State tax 
     equal to the maximum Federal credit allowed.
       Estate and gift taxation of nonresident noncitizens
       Nonresident noncitizens are subject to gift tax with 
     respect to certain transfers by gift of U.S.-situated 
     property. Such property includes real estate and tangible 
     property located within the United States. Nonresident 
     noncitizens generally are not subject to U.S. gift tax on the 
     transfer of intangibles, such as stock or securities, 
     regardless of where such property is situated.
       Estates of nonresident noncitizens generally are taxed at 
     the same estate tax rates applicable to U.S. citizens, but 
     the taxable estate includes only property situated within the 
     United States that is owned by the decedent at death. This 
     includes the value at death of all property, real or 
     personal, tangible or intangible, situated in the United 
     States. Special rules apply which treat certain property as 
     being situated within and without the United States for these 
     purposes.
       Unless modified by a treaty, a nonresident who is not a 
     U.S. citizen generally is allowed a unified credit of 
     $13,000, which effectively exempts $60,000 in assets from 
     estate tax.
     Generation-skipping transfer tax
       A generation-skipping transfer 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 generation-skipping 
     transfer tax include direct skips, taxable terminations, and 
     taxable distributions. The generation-skipping transfer tax 
     is imposed at a flat rate of 55 percent (i.e., the top estate 
     and gift tax rate) on cumulative generation-skipping 
     transfers in excess of $1 million (indexed for inflation 
     occurring after 1997; the inflation-adjusted amount for 2001 
     is $1,060,000).
     Selected income tax provisions
       Transfers to certain foreign trusts and estates
       A transfer (during life or at death) by a U.S. person to a 
     foreign trust or estate generally is treated as a sale or 
     exchange of the property for an amount equal to the fair 
     market value of the transferred property. The amount of gain 
     that must be recognized by the transferor is equal to the 
     excess of the fair market value of the property transferred 
     over the adjusted basis (for purposes of determining gain) of 
     such property in the hands of the transferor.
       Net operating loss and capital loss carryovers
       Under present law, a capital loss and net operating loss 
     from business operations sustained by a decedent during his 
     last taxable year are deductible only on the final return 
     filed in his or her behalf. Such losses are not deductible by 
     his or her estate.
       Transfers of property in satisfaction of a pecuniary 
           bequest
       Under present law, gain or loss is recognized on the 
     transfer of property in satisfaction of a pecuniary bequest 
     (i.e., a bequest of a specific dollar amount) to the extent 
     that the fair market value of the property at the time of the 
     transfer exceeds the basis of the property, which generally 
     is the basis stepped up to fair market value on the date of 
     the decedent's death.
       Income tax exclusion for the gain on the sale of a 
           principal residence
       A taxpayer generally can exclude up to $250,000 ($500,000 
     if married filing a joint return) of gain realized on the 
     sale or exchange of a principal residence. The exclusion is 
     allowed each time a taxpayer sells or exchanges a principal 
     residence that meets the eligibility requirements, but 
     generally no more frequently than once every two years.
       To be eligible, a taxpayer must have owned the residence 
     and occupied it as a principal residence for at least two of 
     the five years prior to the sale or exchange. A taxpayer who 
     fails to meet these requirements by reason of a change of 
     place of employment, health, or other unforeseen 
     circumstances is able to exclude the fraction of the $250,000 
     ($500,000 if married filing a joint return) equal to the 
     fraction of two years that these requirements are met.
     Excise tax on non-exempt trusts
       Under present law, non-exempt split-interest trusts are 
     subject to certain restrictions that are applicable to 
     private foundations if an income, estate, or gift tax 
     charitable deduction was allowed with respect to the trust. A 
     non-exempt split-interest trust subject to these rules would 
     be prohibited from engaging in self-dealing, retaining any 
     excess business holdings, and from making certain investments 
     or taxable expenditures. Failure to comply with these 
     restrictions would subject the trust to certain excise taxes 
     imposed on private foundations, which include excise taxes on 
     self-dealing, excess business holdings, investments which 
     jeopardize charitable purposes, and certain taxable 
     expenditures.


                               house bill

       No provision. However, H.R. 8, as passed by the House, 
     provides as follows:
     Overview of H.R. 8
       Beginning in 2011, the estate, gift, and generation-
     skipping transfers taxes are repealed. After repeal, the 
     basis of assets received from a decedent generally will equal 
     the basis of the decedent (i.e., carryover basis) at death. 
     However, a decedent's estate is permitted to increase the 
     basis of appreciated assets transferred by up to a total of 
     $1.3 million. The basis of appreciated property transferred 
     to a surviving spouse can be increased (i.e., stepped up) by 
     an additional $3 million. Thus, the basis of property 
     transferred to a surviving spouse can be increased (i.e., 
     stepped up) by a total of $4.3 million. In no case can the 
     basis of an asset be adjusted above its fair market value. 
     For these purposes, the executor will determine which assets 
     and to what extent each asset receives a basis increase. The 
     $1.3 million and $3 million amounts are adjusted annually for 
     inflation occurring after 2010.
       In 2002, the unified credit is replaced with a unified 
     exemption, and the 5-percent surtax (which phases out the 
     benefit of the graduated rates) and the rates in excess of 53 
     percent are repealed. Beginning in 2003, the estate, gift, 
     and generation-skipping transfer tax rates are further 
     reduced each year until the estate, gift, and generation-
     skipping transfer taxes are repealed in 2011.
     Phaseout and repeal of estate, gift, and generation-skipping 
         transfer taxes
       In general
       In 2002, the top estate and gift tax rates above 53 percent 
     are repealed, as is the 5-percent surtax, which phases out 
     the benefit of the graduated rates. In 2003, all rates in 
     excess of 50 percent are repealed. In each year 2004 through 
     2006, each of the rates of tax is reduced by one percentage 
     point. In each year 2007 through 2010, each of the rates of 
     tax is reduced by two percentage points. The generation-
     skipping transfer tax rate in effect for a given year is the 
     highest estate and gift tax rate in effect for that year. The 
     reduction in estate and gift tax rates is coordinated with 
     the income tax rates such that the highest estate and gift 
     tax rate (and, thus, the generation-skipping transfer tax 
     rate) will not be reduced below the top individual rate, and 
     the lower estate and gift tax rates will not be reduced below 
     the lowest individual tax rate. For each year 2002 through 
     2010, the State death tax credit rates are reduced in 
     proportion to the reduction in the estate and gift tax rates.
       Beginning in 2011, the estate, gift, and generation-
     skipping transfer taxes are repealed.
       Replace unified credit with unified exemption
       Beginning in 2002, the unified credit is replaced with a 
     unified exemption amount. The unified exemption amount, which 
     will follow the dollar amounts of the present-law unified 
     credit effective exemption amounts, will be determined as 
     follows: in 2002 and 2003, $700,000; in 2004, $850,000; in 
     2005, $950,000; and in 2006 and thereafter (until repeal in 
     2011), $1 million. For decedents who are not residents and 
     not citizens of the United States, the exemption is $60,000.
     Basis of property acquired from a decedent
       In general
       Beginning in 2011, after the estate, gift, and generation-
     skipping transfer taxes have been repealed, the present-law 
     rules providing for a fair market value basis for property 
     acquired from a decedent are repealed. Instead, a modified 
     carryover basis regime generally takes effect. Recipients of 
     property transferred at the decedent's death will receive a 
     basis equal the lesser of the adjusted basis of the decedent 
     or the fair market value of the property on the date of the 
     decedent's death.
       The modified carryover basis rules apply to property 
     acquired by bequest, devise, or inheritance, or by the 
     decedent's estate from the decedent, property passing from 
     the decedent to the extent such property passed without 
     consideration, and certain other property to which the 
     present law rules apply.\49\
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     \49\ Sec. 1014(b)(2) and (3).
---------------------------------------------------------------------------
       Property acquired from a decedent is treated as if the 
     property had been acquired by gift. Thus, the character of 
     gain on the sale of property received from a decedent's 
     estate is carried over to the heir. For example, real estate 
     that has been depreciated and would be subject to recapture 
     if sold by the decedent will be subject to recapture if sold 
     by the heir.
       Property to which the modified carryover basis rules apply
       The modified carryover basis rules apply to property 
     acquired from the decedent. Property acquired from the 
     decedent is (1) property acquired by bequest, devise, or 
     inheritance, (2) property acquired by the decedent's estate 
     from the decedent, (3) property transferred by the decedent 
     during his or her lifetime in trust to pay the income for 
     life to or on the order or direction of the decedent, with 
     the right reserved to the decedent at all times before his 
     death to revoke the trust,\50\ (4) property transferred by 
     the decedent during his lifetime in trust to pay the income 
     for life to or on the order or direction of the decedent with 
     the right reserved to the decedent at all times before his 
     death to make any change to the enjoyment thereof through the 
     exercise of a power to alter,

[[Page 9672]]

     amend, or terminate the trust,\51\ (5) property passing from 
     the decedent by reason of the decedent's death to the extent 
     such property passed without consideration (e.g., property 
     held as joint tenants with right of survivorship or as 
     tenants by the entireties), and (6) the surviving spouse's 
     one-half share of certain community property held by the 
     decedent and the surviving spouse as community property.
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     \50\ This is the same property the basis of which is stepped 
     up to date of death fair market value under present law sec. 
     1014(b)(2).
     \51\ This is the same property the basis of which is stepped 
     up to date of death fair market value under present law sec. 
     1014(b)(3).
---------------------------------------------------------------------------
       Basis increase for certain property
       Amount of basis increase.--The bill allows an executor to 
     increase (i.e., step up) the basis in assets owned by the 
     decedent and acquired by the beneficiaries at death. Under 
     this rule, each decedent's estate generally is permitted to 
     increase (i.e., step up) the basis of assets transferred by 
     up to a total of $1.3 million. The $1.3 million is increased 
     by the amount of unused capital losses, net operating losses, 
     and certain ``built-in'' losses of the decedent. In addition, 
     the basis of property transferred to a surviving spouse can 
     be increased by an additional $3 million. Thus, the basis of 
     property transferred to surviving spouses can be increased by 
     a total of $4.3 million. Nonresidents who are not U.S. 
     citizens will be allowed to increase the basis of property by 
     up to $60,000. The $60,000, $1.3 million, and $3 million 
     amounts are adjusted annually for inflation occurring after 
     2010.
       Property eligible for basis increase.--In general, the 
     basis of property may be increased above the decedent's 
     adjusted basis in that property only if the property is 
     owned, or is treated as owned, by the decedent at the time of 
     the decedent's death. In the case of property held as joint 
     tenants or tenants by the entireties with the surviving 
     spouse, one-half of the property is treated having been owned 
     by the decedent and is thus eligible for the basis increase. 
     In the case of property held jointly with a person other than 
     the surviving spouse, the portion of the property 
     attributable to the decedent's consideration furnished is 
     treated as having been owned by the decedent and will be 
     eligible for a basis increase. The decedent also is treated 
     as the owner of property (which will be eligible for a basis 
     increase) if the property was transferred by the decedent 
     during his lifetime to a revocable trust that pays all of its 
     income during the decedent's life to the decedent or at the 
     direction of the decedent. The decedent also is treated as 
     having owned the surviving spouse's one-half share of 
     community property (which will be eligible for a basis 
     increase) if at least one-half of the property was owned by, 
     and acquired from, the decedent.\52\ The decedent shall not, 
     however, be treated as owning any property solely by reason 
     of holding a power of appointment with respect to such 
     property.
---------------------------------------------------------------------------
     \52\ Thus, similar to the present law rule in sec. 
     1014(b)(6), both the decedent's and the surviving spouse's 
     share of community property could be eligible for a basis 
     increase.
---------------------------------------------------------------------------
       Property not eligible for a basis increase includes: (1) 
     property that was acquired by the decedent by gift (other 
     than from his or her spouse) during the three-year period 
     ending on the date of the decedent's death; (2) property that 
     constitutes a right to receive income in respect of a 
     decedent; (3) stock or securities of a foreign personal 
     holding company; (4) stock of a domestic international sales 
     corporation (or former domestic international sales 
     corporation); (5) stock of a foreign investment company; and 
     (6) stock of a passive foreign investment company (except for 
     which a decedent shareholder had made a qualified electing 
     fund election).
       Rules applicable to basis increase.--Basis increase will be 
     allocable on an asset-by-asset basis (e.g., basis increase 
     can be allocated to a share of stock or a block of stock). 
     However, in no case can the basis of an asset be adjusted 
     above its fair market value. If the amount of basis increase 
     is less than the fair market value of assets whose bases are 
     eligible to be increased under these rules, the executor will 
     determine which assets and to what extent each asset receives 
     a basis increase.
     Reporting requirements
       Lifetime gifts
       A donor is required to report to the Internal Revenue 
     Service (``IRS'') the basis and character of any non-cash 
     property transferred by gift with a value in excess of 
     $25,000 (except for gifts to charitable organizations). The 
     donor is required to report to the IRS:
       The name and taxpayer identification number of the donee,
       An accurate description of the property,
       The adjusted basis of the property in the hands of the 
     donor at the time of gift,
       The donor's holding period for such property,
       Sufficient information to determine whether any gain on the 
     sale of the property would be treated as ordinary income,
       And any other information as the Treasury Secretary may 
     prescribe.
       Similar information (including the name, address, and phone 
     number of the person making the return) is required to be 
     provided to recipients of such property.
       Transfers at death
       For transfers at death of non-cash assets in excess of $1.3 
     million and for appreciated property the value of which 
     exceeds $25,000 received by a decedent within three years of 
     death, the executor of the estate (or the trustee of a 
     revocable trust) would report to the IRS:
       The name and taxpayer identification number of the 
     recipient of the property,
       An accurate description of the property,
       The adjusted basis of the property in the hands of the 
     decedent and its fair market value at the time of death,
       The decedent's holding period for the property,
       Sufficient information to determine whether any gain on the 
     sale of the property would be treated as ordinary income,
       The amount of basis increase allocated to the property, and
       Any other information as the Treasury Secretary may 
     prescribe.
       Penalties for failure to file required information
       Any donor required to report the basis and character of any 
     non-cash property with a value in excess of $25,000 who fails 
     to do so is liable for a penalty of $500 for each failure to 
     report such information to the IRS and $50 for each failure 
     to report such information to a beneficiary.
       Any person required to report to the IRS transfers at death 
     of non-cash assets in excess of $1.3 million in value who 
     fails to do so is liable for a penalty of $10,000 for the 
     failure to report such information. Any person required to 
     report to the IRS the receipt by a decedent of appreciated 
     property valued in excess of $25,000 within three years of 
     death who fails to do so is liable for a penalty of $500 for 
     the failure to report such information to the IRS. There also 
     is a penalty of $50 for each failure to report such 
     information to a beneficiary.
       No penalty is imposed with respect to any failure that is 
     due to reasonable cause. If any failure to report to the IRS 
     or a beneficiary under the bill is due to intentional 
     disregard of the rules, then the penalty is five percent of 
     the fair market value of the property for which reporting was 
     required, determined at the date of the decedent's death (for 
     property passing at death) or determined at the time of gift 
     (for a lifetime gift).
     Certain tax benefits extending past the date for repeal of 
         the estate tax
       Prior to repeal of the estate tax, many estates may have 
     claimed certain estate tax benefits which, upon certain 
     events, may trigger a recapture tax. Because repeal of the 
     estate tax is effective for decedents dying after December 
     31, 2010, these estate tax recapture provisions will continue 
     to apply to estates of decedents dying before January 1, 
     2011.
       Qualified conservation easements
       A donor may have retained a development right in the 
     conveyance of a conservation easement that qualified for the 
     estate tax exclusion. Those with an interest in the land may 
     later execute an agreement to extinguish the right. If an 
     agreement to extinguish development rights is not entered 
     into within the earlier of (1) two years after the date of 
     the decedent's death or (2) the date of the sale of such land 
     subject to the conservation easement, then those with an 
     interest in the land are personally liable for an additional 
     tax. This provision is retained after repeal of the estate 
     tax, which will ensure that those persons with an interest in 
     the land who fail to execute the agreement remain liable for 
     any additional tax which may be due after repeal.
       Special-use valuation
       Property may have qualified for special-use valuation prior 
     to repeal of the estate tax. If such property ceases to 
     qualify for special-use valuation, for example, because an 
     heir ceases to use the property in its qualified use within 
     10 years of the decedent's death, then the estate tax benefit 
     is required to be recaptured. The recapture provision is 
     retained after repeal of the estate tax, which will ensure 
     that those estates that claimed this benefit prior to repeal 
     of the estate tax will be subject to recapture if a 
     disqualifying event occurs after repeal.
       Qualified family-owned business deduction
       Property may have qualified for the family-owned business 
     deduction prior to repeal of the estate tax. If such property 
     ceases to qualify for the family-owned business deduction, 
     for example, because an heir ceases to use the property in 
     its qualified use within 10 years of the decedent's death, 
     then the estate-tax benefit is required to be recaptured. The 
     recapture provision is retained after repeal of the estate 
     tax, which will ensure that those estates that claimed this 
     benefit prior to repeal of the estate tax would be subject to 
     recapture if a disqualifying event occurs after repeal.
       Installment payment of estate tax for estates with an 
           interest in a closely-held business
       The present-law installment payment rules are retained so 
     that those estates that entered into an installment payment 
     arrangement prior to repeal of the estate tax will continue 
     to make their payments past the date for repeal.
       If more than 50 percent of the value of the closely-held 
     business is distributed, sold, exchanged, or otherwise 
     disposed of, the unpaid portion of the tax payable in 
     installments must be paid upon notice and demand from

[[Page 9673]]

     the Treasury Secretary. This rule is retained after repeal of 
     the estate tax, which will ensure that such dispositions that 
     occur after repeal of the estate tax will continue to subject 
     the estate to the unpaid portion of the tax upon notice and 
     demand.
     Transfers to foreign trusts, estates, and nonresidents who 
         are not U.S. citizens
       The present-law rule providing that transfers by a U.S. 
     person to a foreign trust or estate generally is treated as a 
     sale or exchange is expanded. Under the bill, transfers by a 
     U.S. person to a nonresident who is not a U.S. citizen is 
     treated as a sale or exchange of the property for an amount 
     equal to the fair market value of the transferred property. 
     The amount of gain that must be recognized by the transferor 
     is equal to the excess of the fair market value of the 
     property transferred over the adjusted basis of such property 
     in the hands of the transferor.
     Transfers of property in satisfaction of a pecuniary bequest
       Under the bill, gain or loss on the transfer of property in 
     satisfaction of a pecuniary bequest is recognized only to the 
     extent that the fair market value of the property at the time 
     of the transfer exceeds the fair market value of the property 
     on the date of the decedent's death (not the property's 
     carryover basis).
     Transfer of property subject to a liability
       The bill clarifies that gain is not recognized at the time 
     of death when the estate or heir acquires from the decedent 
     property subject to a liability that is greater than the 
     decedent's basis in the property. Similarly, no gain is 
     recognized by the estate on the distribution of such property 
     to a beneficiary of the estate by reason of the liability.
     Income tax exclusion for the gain on the sale of a principal 
         residence
       The income tax exclusion of up to $250,000 of gain on the 
     sale of a principal residence is extended to estates and 
     heirs. Under the bill, if the decedent's estate or an heir 
     sells the decedent's principal residence, $250,000 of gain 
     can be excluded on the sale of the residence, provided the 
     decedent used the property as a principal residence for two 
     or more years during the five-year period prior to the sale. 
     In addition, if an heir occupies the property as a principal 
     residence, the decedent's period of ownership and occupancy 
     of the property as a principal residence can be added to the 
     heir's subsequent ownership and occupancy in determining 
     whether the property was owned and occupied for two years as 
     a principal residence.
     Excise tax on nonexempt trusts
       Under the bill, split-interest trusts are subject to 
     certain restrictions that are applicable to private 
     foundations if an income tax charitable deduction, including 
     an income tax charitable deduction by an estate or trust, was 
     allowed with respect to transfers to the trust.
     Anti-abuse rules
       The Treasury Secretary is given authority to treat a 
     transfer that purports to be a gift as having never been 
     transferred, if, in connection with such transfer, such 
     treatment is appropriate to prevent income tax avoidance and 
     (1) the transferor (or any person related to or designated by 
     the transferor or such person) has received anything of value 
     in connection with the transfer from the transferee directly 
     or indirectly or (2) there is an understanding or expectation 
     that the transferor (or any person related to or designated 
     by the transferor or such person) will receive anything of 
     value in connection with the transfer from the transferee 
     directly or indirectly.
     Study mandated by the bill
       The bill requires the Treasury Secretary to conduct a study 
     of opportunities for avoidance of the income tax, if any, and 
     potential increases in income tax revenues by reason of 
     enactment of the bill. The results of such study are required 
     to be submitted to the House Committee on Ways and Means and 
     the Senate Committee on Finance no later than December 31, 
     2002.
     Interaction of the bill with death tax treaties
       The Committee expects that, where applicable, references in 
     U.S. tax treaties to the unified credit under section 2010 
     (as in effect prior to January 1, 2002) will be construed as 
     applying, in a similar manner, to the unified exemption 
     amount (as in effect for decedents dying and gifts made after 
     December 31, 2001).\53\
---------------------------------------------------------------------------
     \53\ See, e.g., Article 3, Protocol Amending the Convention 
     Between the United States of America and the Federal Republic 
     of Germany for the Avoidance of Double Taxation with Respect 
     to Taxes on Estates, Inheritances, and Gifts (Senate Treaty 
     Doc. 106-13, September 21, 1999.) Under the protocol, a pro 
     rata unified credit is provided to the estate of an 
     individual domiciled in Germany (who is not a U.S. citizen) 
     for purposes of computing U.S. estate tax. Such an individual 
     domiciled in Germany is entitled to a credit against U.S. 
     estate tax based on the extent to which the assets of the 
     estate are situated in the United States.
---------------------------------------------------------------------------
     Effective date
       The unified credit is replaced with a unified exemption, 
     the 5-percent surtax is repealed, and the rates in excess of 
     53 percent are repealed for estates of decedents dying and 
     gifts and generation-skipping transfers made after December 
     31, 2001. The estate and gift tax rates in excess of 50 
     percent are repealed for estates of decedents dying and gifts 
     and generation-skipping transfers made after December 31, 
     2002.
       The additional reductions in estate and gift tax rates and 
     of the State death tax credit occur for decedents dying and 
     gifts and generation-skipping transfers made in 2004 through 
     2010.
       The estate, gift, and generation-skipping transfer 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, 2010.
       The provisions relating to purported gifts and recognition 
     of gain on transfers to nonresidents who are not U.S. 
     citizens are effective for transfers made after December 31, 
     2010.


                            senate amendment

       The Senate amendment is similar to the provision in H.R. 8; 
     however, under the Senate amendment, the gift tax will not be 
     repealed.
       The Senate amendment also includes the following 
     modifications:
     Phaseout and repeal of estate and generation-skipping 
         transfer taxes; modifications to gift tax
       The Senate amendment provides that the unified credit 
     effective exemption amount will be increased and the estate 
     and gift tax rates will be reduced over time. The unified 
     credit effective exemption amount (for estate and gift tax 
     purposes) will be increased to $1 million in 2002. For gift 
     tax purposes, the unified credit effective exemption amount 
     will remain at $1 million in 2002 and thereafter. For estate 
     tax purposes, the unified credit effective exemption amount 
     and generation-skipping transfer tax exemption will increase 
     over time.

 TABLE 18.--UNIFIED CREDIT EXEMPTION AMOUNTS AND HIGHEST ESTATE AND GIFT
                                TAX RATES
------------------------------------------------------------------------
                          Estate and GST tax
    Calendar year         deathtime transfer     Highest estate and gift
                              exemption                 tax rates
------------------------------------------------------------------------
2002................  $1 million...............  50%
2003................  $1 million...............  49%
2004................  $2 million...............  48%
2005................  $3 million...............  47%
2006................  $3 million...............  46%
2007................  $3 million...............  45%
2008................  $3 million...............  45%
2009................  $3.5 million.............  45%
2010................  $4 million...............  45%
2011................  N/A (taxes repealed).....  40% (gift tax only)
------------------------------------------------------------------------

       Under the Senate amendment, except as provided in 
     regulations, a transfer to a trust will be treated as a 
     taxable gift beginning in 2011, unless the trust is treated 
     as wholly owned by the donor or the donor's spouse under the 
     grantor trust provisions of the Code.
       After repeal of the estate tax, the modified carryover 
     basis rules provided in the House bill also apply under the 
     Senate amendment.
     Reduction in State death tax credit; deduction for State 
         death taxes paid
       The Senate amendment provides that, from 2002 through 2004, 
     the top State death tax credit rate is decreased from 16 
     percent as follows: to 8 percent in 2002, to 7.2 percent in 
     2003, and to 7.04 percent in 2004. In 2005, after the state 
     death tax credit is repealed, there will be a deduction for 
     death taxes (e.g., any estate, inheritance, legacy, or 
     succession taxes) actually paid to any State or the District 
     of Columbia, in respect of property included in the gross 
     estate of the decedent. Such State taxes must have been paid 
     and claimed before the later of: (1) four years after the 
     filing of the estate tax return; or (2) (a) 60 days after a 
     decision of the U.S. Tax Court determining the estate tax 
     liability becomes final, (b) the expiration of the period of 
     extension to pay estate taxes over time under section 6166, 
     or (c) the expiration of the period of limitations in which 
     to file a claim for refund or 60 days after a decision of a 
     court in which such refund suit has been filed becomes final.
     Reporting requirements
       In general
       For transfers at death, the Senate amendment contains 
     reporting requirements identical to those provided in the 
     House bill. For transfers during life, the Senate amendment 
     provides that a donor is required to provide to recipients of 
     property by gift the information relating to the property 
     (e.g., the fair market value and basis of property) that was 
     reported on the donor's gift tax return with respect to such 
     property.
       Penalties for failure to comply with the reporting 
           requirements
       Any donor required to provide to recipients of property by 
     gift the information relating to the property that was 
     reported on the donor's gift tax return (e.g., the fair 
     market value and basis of property) with respect to such 
     property who fails to do so is liable for a penalty of $50 
     for each failure to report such information to a donee.
       Any person required to report to the IRS transfers at death 
     of non-cash assets in excess of $1.3 million in value who 
     fails to do so is liable for a penalty of $10,000 for the 
     failure to report such information. Any person required to 
     report to the IRS the receipt by a decedent of appreciated 
     property acquired by the decedent within three years of death

[[Page 9674]]

     for which a gift tax return was required to have been filed 
     by the donor who fails to do so is liable for a penalty of 
     $500 for the failure to report such information to the IRS. 
     There also is a penalty of $50 for each failure to report 
     such information to a beneficiary.
       No penalty is imposed with respect to any failure that is 
     due to reasonable cause. If any failure to report to the IRS 
     or a beneficiary under the bill is due to intentional 
     disregard of the rules, then the penalty is five percent of 
     the fair market value of the property for which reporting was 
     required, determined at the date of the decedent's death (for 
     property passing at death) or determined at the time of gift 
     (for a lifetime gift).
     Certain tax benefits extending past the date for repeal of 
         the estate tax
       As under the House bill, there will continue to be (1) the 
     additional estate tax for those with a retained development 
     right with respect to property for which a conservation 
     easement was claimed, (2) the additional estate tax imposed 
     under the special-use valuation rules, (3) the additional tax 
     imposed under the qualified family-owned business deduction 
     rules, and (4) acceleration of tax under the installment 
     payment of estate tax provisions.
       In addition, under the Senate amendment, there will 
     continue to be an estate tax imposed on (1) any distribution 
     prior to January 1, 2022, from a qualified domestic trust 
     before the date of the death of the noncitizen surviving 
     spouse and (2) the value of the property remaining in a 
     qualified domestic trust on the date of death of the 
     noncitizen surviving spouse if such surviving spouse dies 
     before January 1, 2011.
     Effective date
       The estate and gift rate reductions, increases in the 
     estate tax unified credit exemption equivalent amounts and 
     generation-skipping transfer tax exemption amount, and 
     reductions in and repeal of the state death tax credit are 
     phased-in over time, beginning with estates of decedents 
     dying and gifts and generation-skipping transfers made after 
     December 31, 2001. The repeal of the qualified family-owned 
     business deduction is effective for estates of decedents 
     dying after December 31, 2003.
       The estate and generation-skipping transfer taxes are 
     repealed, and the carryover basis regime takes effect for 
     estates of decedents dying and generation-skipping transfers 
     made after December 31, 2010. The provisions relating to 
     recognition of gain on transfers to nonresident noncitizens 
     are effective for transfers made after December 31, 2010.
       The top gift tax rate will be 40 percent, and transfers to 
     trusts generally will be treated as a taxable gift unless the 
     trust is treated as wholly owned by the donor or the donor's 
     spouse, effective for gifts made after December 31, 2010.
       An estate tax on distributions made from a qualified 
     domestic trust before the date of the death of the surviving 
     spouse will no longer apply for distributions made after 
     December 31, 2021. An estate tax on the value of property 
     remaining in a qualified domestic trust on the date of death 
     of the surviving spouse will no longer apply after December 
     31, 2010.

                          Conference Agreement

     Overview
       The conference agreement follows the Senate amendment with 
     modifications. Under the conference agreement, the estate, 
     gift, and generation-skipping transfer taxes are reduced 
     between 2002 and 2009, and the estate and generation-skipping 
     transfer taxes are repealed in 2010.
     Phaseout and repeal of estate and generation-skipping 
         transfer taxes
       In general
       Under the conference agreement, in 2002, the 5-percent 
     surtax (which phases out the benefit of the graduated rates) 
     and the rates in excess of 50 percent are repealed. In 
     addition, in 2002, the unified credit effective exemption 
     amount (for both estate and gift tax purposes) is increased 
     to $1 million. In 2003, the estate and gift tax rates in 
     excess of 49 percent are repealed. In 2004, the estate and 
     gift tax rates in excess of 48 percent are repealed, and the 
     unified credit effective exemption amount for estate tax 
     purposes is increased to $1.5 million. (The unified credit 
     effective exemption amount for gift tax purposes remains at 
     $1 million as increased in 2002.) In addition, in 2004, the 
     family-owned business deduction is repealed. In 2005, the 
     estate and gift tax rates in excess of 47 percent are 
     repealed. In 2006, the estate and gift tax rates in excess of 
     46 percent are repealed, and the unified credit effective 
     exemption amount for estate tax purposes is increased to $2 
     million. In 2007, the estate and gift tax rates in excess of 
     45 percent are repealed. In 2009, the unified credit 
     effective exemption amount is increased to $3.5 million. In 
     2010, the estate and generation-skipping transfer taxes are 
     repealed.
       From 2002 through 2009, the estate and gift tax rates and 
     unified credit effective exemption amount for estate tax 
     purposes are as follows:

------------------------------------------------------------------------
                       Estate and GST tax
   Calendar year       deathtime transfer    Highest estate and gift tax
                           exemption                    rates
------------------------------------------------------------------------
2002..............  $1 million.............  50%
2003..............  $1 million.............  49%
2004..............  $1.5 million...........  48%
2005..............  $1.5 million...........  47%
2006..............  $2 million.............  46%
2007..............  $2 million.............  45%
2008..............  $2 million.............  45%
2009..............  $3.5 million...........  45%
2010..............  N/A (taxes repealed)...  top individual rate under
                                              the bill (gift tax only)
------------------------------------------------------------------------

       The generation-skipping transfer tax exemption for a given 
     year (prior to repeal) is equal to the unified credit 
     effective exemption amount for estate tax purposes. In 
     addition, as under present law, the generation-skipping 
     transfer tax rate for a given year will be the highest estate 
     and gift tax rate in effect for such year.
       Repeal of estate and generation-skipping transfer taxes; 
           modifications to gift tax
       In 2010, the estate and generation-skipping transfer taxes 
     are repealed. Also beginning in 2010, the top gift tax rate 
     will be the top individual income tax rate as provided under 
     the bill, and, except as provided in regulations, a transfer 
     to trust will be treated as a taxable gift, unless the trust 
     is treated as wholly owned by the donor or the donor's spouse 
     under the grantor trust provisions of the Code.
       Reduction in State death tax credit; deduction for State 
           death taxes paid
       Under the conference agreement, from 2002 through 2004, the 
     State death tax credit allowable under present law is reduced 
     as follows: in 2002, the State death tax credit is reduced by 
     25 percent (from present law amounts); in 2003, the State 
     death tax credit is reduced by 50 percent (from present law 
     amounts); and in 2004, the State death tax credit is reduced 
     by 75 percent (from present law amounts). In 2005, the State 
     death tax credit is repealed, after which there will be a 
     deduction for death taxes (e.g., any estate, inheritance, 
     legacy, or succession taxes) actually paid to any State or 
     the District of Columbia, in respect of property included in 
     the gross estate of the decedent. Such State taxes must have 
     been paid and claimed before the later of: (1) four years 
     after the filing of the estate tax return; or (2) (a) 60 days 
     after a decision of the U.S. Tax Court determining the estate 
     tax liability becomes final, (b) the expiration of the period 
     of extension to pay estate taxes over time under section 
     6166, or (c) the expiration of the period of limitations in 
     which to file a claim for refund or 60 days after a decision 
     of a court in which such refund suit has become final.
     Basis of property acquired from a decedent
       The conference agreement includes the rules regarding the 
     determination of basis of property acquired from a decedent 
     after repeal of the estate tax included in H.R. 8 and the 
     Senate amendment; however, these rules will be in effect 
     beginning in 2010 (i.e., when the estate tax is repealed 
     under the conference agreement).
     Reporting requirements
       The conference agreement follows the Senate amendment.
     Certain tax benefits extending past the date for repeal of 
         the estate tax
       The conference agreement follows the Senate amendment, with 
     a modification regarding property in a qualified domestic 
     trust. There will continue to be an estate tax imposed on (1) 
     any distribution prior to January 1, 2021, from a qualified 
     domestic trust before the date of the death of the noncitizen 
     surviving spouse and (2) the value of the property remaining 
     in a qualified domestic trust on the date of death of the 
     noncitizen surviving spouse if such surviving spouse dies 
     before January 1, 2010.
     Transfers to foreign trusts, foreign estates, and 
         nonresidents who are not U.S. citizens
       The conference agreement follows H.R. 8 and the Senate 
     amendment, with a modification. Under the conference 
     agreement, beginning in 2010, only a transfer by a U.S. 
     person's estate (i.e., by a U.S. person at death) to a 
     nonresident who is not a U.S. citizen is treated as a sale or 
     exchange of the property for an amount equal to the fair 
     market value of the transferred property. The amount of gain 
     that must be recognized by the transferor is equal to the 
     excess of the fair market value of the property transferred 
     over the adjusted basis of such property in the hands of the 
     transferor.
     Transfers of property in satisfaction of a pecuniary bequest
       The conference agreement follows H.R. 8 and the Senate 
     amendment.
     Transfer of property subject to a liability
       The conference agreement follows H.R. 8 and the Senate 
     amendment.
     Income tax exclusion for the gain on the sale of a principal 
         residence
       The conference agreement follows H.R. 8 and the Senate 
     amendment, with a modification. Under the conference 
     agreement, the income tax exclusion for the gain on the sale 
     of a principal residence applies to property sold by a trust 
     that was a qualified revocable trust under section 645 of the 
     Code immediately prior to the decedent's death. The 
     decedent's period of occupancy of the property as a principal 
     residence can be added to an heir's subsequent ownership and 
     occupancy in determining whether the property was owned and 
     occupied for two years as a principal residence, regardless 
     of whether the

[[Page 9675]]

     residence was owned by such trust during the decedent's 
     occupancy.
     Excise tax on non-exempt trusts
       The conference agreement follows H.R. 8 and the Senate 
     amendment.
     Effective date
       The estate and gift rate reductions, increases in the 
     estate tax unified credit exemption equivalent amounts and 
     generation-skipping transfer tax exemption amount, and 
     reductions in and repeal of the state death tax credit are 
     phased-in over time, beginning with estates of decedents 
     dying and gifts and generation-skipping transfers after 
     December 31, 2001. The repeal of the qualified family-owned 
     business deduction is effective for estates of decedents 
     dying after December 31, 2003.
       The estate and generation-skipping transfer taxes are 
     repealed, and the carryover basis regime takes effect for 
     estates of decedents dying and generation-skipping transfers 
     after December 31, 2009. The provisions relating to 
     recognition of gain on transfers by the estate of a U.S. 
     person (i.e., at death) to nonresidents who are not U.S. 
     citizens is effective for transfers made after December 31, 
     2009.
       The top gift tax rate will be the top individual income tax 
     rate as provided in the bill, and transfers to trusts 
     generally will be treated as a taxable gift unless the trust 
     is treated as wholly owned by the donor or the donor's 
     spouse, effective for gifts made after December 31, 2009.
       An estate tax on distributions made from a qualified 
     domestic trust before the date of the death of the surviving 
     spouse will no longer apply for distributions made after 
     December 31, 2020. An estate tax on the value of property 
     remaining in a qualified domestic trust on the date of death 
     of the surviving spouse will no longer apply after December 
     31, 2009.

B. Expand Estate Tax Rule for Conservation Easements (Sec. 501 of H.R. 
    8, Sec. 551 of the Senate Amendment, and Sec. 2031 of the Code)


                              Present Law

     In general
       An executor can 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.
     Retained development rights
       The exclusion for land subject to a conservation easement 
     does not apply to any development right retained by the donor 
     in the conveyance of the conservation easement. An example of 
     such a development right would be the right to extract 
     minerals from the land. If such development rights exist, 
     then the value of the conservation easement must be reduced 
     by the value of any retained development right.
       If the donor or holders of the development rights agree in 
     writing to extinguish the development rights in the land, 
     then the value of the easement need not be reduced by the 
     development rights. In such case, those persons with an 
     interest in the land must execute the agreement no later than 
     the earlier of (1) two years after the date of the decedent's 
     death or (2) the date of the sale of such land subject to the 
     conservation easement. If such agreement is not entered into 
     within this time, then those with an interest in the land are 
     personally liable for an additional tax, which is the amount 
     of tax which would have been due on the retained development 
     rights subject to the termination agreement.


                               House Bill

       No provision. However, H.R. 8, as passed by the House 
     expands the availability of qualified conservation easements 
     by modifying the distance requirements. Under the bill, the 
     distance within 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 bill also clarifies that 
     the date for determining easement compliance is the date on 
     which the donation was made.
       Effective date.--The provisions are effective for estates 
     of decedents dying after December 31, 2000.


                            Senate Amendment

       The Senate amendment expands availability of qualified 
     conservation easements by eliminating the requirement that 
     the land be located within a certain distance from a 
     metropolitan area, national park, wilderness area, or Urban 
     National Forest. Thus, under the Senate amendment, a 
     qualified conservation easement may be claimed with respect 
     to any land that is located in the United States or its 
     possessions. The Senate amendment also clarifies that the 
     date for determining easement compliance is the date on which 
     the donation was made.
       Effective date.--The provisions are effective for estates 
     of decedents dying after December 31, 2000.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

            C. Modify Generation-Skipping Transfer Tax Rules

     1. Deemed allocation of the generation-skipping transfer tax 
         exemption to lifetime transfers to trusts that are not 
         direct skips (sec. 601 of H.R. 8, sec. 561 of the Senate 
         amendment, and sec. 2632 of the Code)


                              Present Law

       A generation-skipping transfer 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 generation-skipping 
     transfer tax include direct skips, taxable terminations, and 
     taxable distributions. An exemption of $1 million (indexed 
     beginning in 1999; the inflation-adjusted amount for 2001 is 
     $1,060,000) is provided for each person making generation-
     skipping transfers. The exemption can 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 
     generation-skipping transfer indicates the amount of 
     ``generation-skipping transfer tax exemption'' allocated to a 
     trust. The allocation of generation-skipping transfer tax 
     exemption reduces the 55-percent tax rate on a generation-
     skipping transfer.
       If an individual makes a direct skip during his or her 
     lifetime, any unused generation-skipping transfer tax 
     exemption is automatically allocated to a direct skip to the 
     extent necessary to make the inclusion ratio for such 
     property equal to zero. An individual can 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 generation-skipping 
     transfer tax exemption--the allocation is not automatic. If 
     generation-skipping transfer tax exemption is allocated on a 
     timely-filed gift tax return, then the portion of the trust 
     which is exempt from generation-skipping transfer 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 generation-skipping transfer tax is 
     based on the value of the property at

[[Page 9676]]

     the time the allocation of generation-skipping transfer tax 
     exemption was made.
       Treas. Reg. sec. 26.2632-1(d) further provides that any 
     unused generation-skipping transfer 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 generation-skipping 
     transfer 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 balance, if any, of unused 
     generation-skipping transfer 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

       No provision. However, H.R. 8, as passed by the house 
     provides that generation-skipping transfer tax exemption will 
     be 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 generation-skipping transfer trust.
       A generation-skipping transfer trust is defined as a trust 
     that could have a generation-skipping transfer 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 one or more individuals who are non-skip persons (a) 
     before the date that the individual attains age 46, (b) on or 
     before one 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 one 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;
       The trust instrument provides that, if one or more 
     individuals who are non-skip persons 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 one or more of such individuals or is subject 
     to a general power of appointment exercisable by one 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 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.
       If any individual makes an indirect skip during the 
     individual's lifetime, then any unused portion of such 
     individual's generation-skipping transfer tax exemption is 
     allocated to the property transferred to the extent necessary 
     to produce the lowest possible inclusion ratio for such 
     property.
       An individual can 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 been made or on such later date or 
     dates as may be prescribed by the Treasury Secretary. An 
     individual can elect not to have the automatic allocation 
     rules apply to any or all transfers made by such individual 
     to a particular trust and can elect to treat any trust as a 
     generation-skipping transfer trust with respect to any or all 
     transfers made by the individual to such trust, and such 
     election can 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, 2000, and to 
     estate tax inclusion periods ending after December 31, 2000.


                            Senate Amendment

       The Senate amendment is the same as the provision in H.R. 
     8.


                          Conference Agreement

       The conference agreement follows H.R. 8 and the Senate 
     amendment.
     2. Retroactive allocation of the generation-skipping transfer 
         tax exemption (sec. 601 of H.R. 8, sec. 561 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 generation-skipping transfer tax exemption to a 
     trust prior to the taxable termination or taxable 
     distribution, generation-skipping transfer tax may be 
     avoided.
       A transferor likely will not allocate generation-skipping 
     transfer 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 generation-skipping 
     transfer tax exemption had not been allocated to the trust, 
     then generation-skipping transfer tax would be due even if 
     the transferor had unused generation-skipping transfer tax 
     exemption.


                               House Bill

       No provision. However, H.R. 8, as passed by the House, 
     provided that generation-skipping transfer tax exemption can 
     be allocated retroactively when there is an unnatural order 
     of death. If a lineal descendant of the transferor 
     predeceases the transferor, then the transferor can allocate 
     any unused generation-skipping transfer exemption to any 
     previous transfer or transfers to the trust on a 
     chronological basis. The provision allows a transferor to 
     retroactively allocate generation-skipping transfer exemption 
     to a trust where a beneficiary (a) is a non-skip person, (b) 
     is a lineal descendant of the transferor's grandparent or a 
     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 would be determined based on the value of the property 
     on the date that the property was transferred to trust.
       Effective date.--The provision applies to deaths of non-
     skip persons occurring after December 31, 2000.


                            Senate Amendment

       The Senate amendment is the same as the provision in H.R. 
     8.


                          Conference Agreement

       The conference agreement follows H.R. 8 and the Senate 
     amendment.
     3. Severing of trusts holding property having an inclusion 
         ratio of greater than zero (sec. 602 of H.R. 8, sec. 562 
         of the Senate amendment, and sec. 2642 of the Code)


                              Present Law

       A generation-skipping transfer 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 generation-skipping 
     transfer tax include direct skips, taxable terminations, and 
     taxable distributions. An exemption of $1 million (indexed 
     beginning in 1999; the inflation-adjusted amount for 2001 is 
     $1,060,000) is provided for each person making generation-
     skipping transfers. The exemption can be allocated by a 
     transferor (or his or her executor) to transferred property.
       If the value of transferred property exceeds the amount of 
     the generation-skipping transfer tax exemption allocated to 
     that property, then the generation-skipping transfer tax 
     generally is determined by multiplying a flat tax rate equal 
     to the highest estate tax rate (which is currently 55 
     percent) 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 generation-skipping transfer 
     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 generation-skipping transfer 
     tax after the trust has been created.


                               House Bill

       No provision. However, H.R. 8, as passed by the House, 
     provides that a trust can 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

[[Page 9677]]

     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 zero and the other trust 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 December 31, 2000.


                            Senate Amendment

       The Senate amendment is the same as the provision in H.R. 
     8.


                          Conference Agreement

       The conference agreement follows the provision in H.R. 8 
     and the Senate amendment.
     4. Modification of certain valuation rules (sec. 603 of H.R. 
         8, sec. 563 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 generation-skipping 
     transfer tax exemption made on timely filed gift tax returns. 
     The inclusion ratio generally is determined using estate tax 
     values for allocations of generation-skipping transfer 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

       No provision. However, H.R. 8, as passed by the House, 
     provides that in connection with timely and automatic 
     allocations of generation-skipping transfer 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 generation-skipping transfer 
     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 for transfers 
     subject to estate or gift tax made after December 31, 2000.


                            Senate Amendment

       The Senate amendment is the same as the provision in H.R. 
     8.


                          Conference Agreement

       The conference agreement follows H.R. 8 and the Senate 
     amendment.
     5. Relief from late elections (sec. 604 of H.R. 8, sec. 564 
         of the Senate amendment, and sec. 2642 of the Code)


                              Present Law

       Under present law, an election to allocate generation-
     skipping transfer 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 trust, 
     then the value on the date of transfer to the trust is used 
     for determining generation-skipping transfer tax exemption 
     allocation. However, if the allocation relating to a specific 
     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 generation-skipping transfer tax exemption.


                               House Bill

       No provision. However, H.R. 8, as passed by the House, 
     provides that the Treasury Secretary is authorized and 
     directed to grant extensions of time to make the election to 
     allocate generation-skipping transfer tax exemption and to 
     grant exceptions to the time requirement, without regard to 
     whether any period of limitations has expired. If such relief 
     is granted, then the gift tax or estate tax value of the 
     transfer to trust would be used for determining generation-
     skipping transfer 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, December 31, 2000. No inference is 
     intended with respect to the availability of relief from late 
     elections prior to the effective date of the provision.


                            Senate Amendment

       The Senate amendment is the same as the provision in H.R. 
     8.


                          Conference Agreement

       The conference agreement follows the provision in H.R. 8 
     and the Senate amendment.
     6. Substantial compliance (sec. 604 of the House bill, sec. 
         564 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 generation-skipping 
     transfer tax exemption will suffice to establish that 
     generation-skipping transfer tax exemption was allocated to a 
     particular transfer or trust.


                               House Bill

       No provision. However, H.R. 8, as passed by the House, 
     provides that substantial compliance with the statutory and 
     regulatory requirements for allocating generation-skipping 
     transfer tax exemption will suffice to establish that 
     generation-skipping transfer 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 generation-skipping transfer 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 provision applies to transfers subject 
     to estate or gift tax made after December 31, 2000. No 
     inference is intended with respect to the availability of a 
     rule of substantial compliance prior to the effective date of 
     the provision.


                            Senate Amendment

       The Senate amendment is the same as the provision in H.R. 
     8.


                          Conference Agreement

       The conference agreement follows H.R. 8 and the Senate 
     amendment.

D. Expand and Modify Availability of Installment Payment of Estate Tax 
 for Closely-Held Businesses (sec. 701 of H.R. 8, secs. 571 and 572 of 
            the Senate amendment, and sec. 6166 of the Code)


                              PRESENT LAW

       Under present law, the estate tax generally is due within 
     nine months of a decedent's death. However, an executor 
     generally may elect to pay estate tax attributable to an 
     interest in a closely-held business in two or more 
     installments (but no more than 10). An estate is eligible for 
     payment of estate tax in installments if the value of the 
     decedent's interest in a closely-held business exceeds 35 
     percent of the decedent's adjusted gross estate (i.e., the 
     gross estate less certain deductions). If the election is 
     made, the estate may defer payment of principal and pay only 
     interest for the first five years, followed by up to 10 
     annual installments of principal and interest. This provision 
     effectively extends the time for paying estate tax by 14 
     years from the original due date of the estate tax.\54\ A 
     special two-percent interest rate applies to the amount of 
     deferred estate tax attributable to the first $1 million 
     (adjusted annually for inflation occurring after 1998; the 
     inflation-adjusted amount for 2001 is $1,060,000) in taxable 
     value of a closely-held business. The interest rate 
     applicable to the amount of estate tax attributable to the 
     taxable value of the closely-held business in excess of $1 
     million is equal to 45 percent of the rate applicable to 
     underpayments of tax under section 6621 (i.e., 45 percent of 
     the Federal short-term rate plus 3 percentage points). 
     Interest paid on deferred estate taxes is not deductible for 
     estate or income tax purposes.
---------------------------------------------------------------------------
     \54\ For example, assume estate tax is due in 2001. If 
     interest only is paid each year for the first five years 
     (2001 through 2005), and if 10 installments of both principal 
     and interest are paid for the 10 years thereafter (2006 
     through 2015), then payment of estate tax would be extended 
     by 14 years from the original due date of 2001.
---------------------------------------------------------------------------
       For purposes of these rules, an interest in a closely-held 
     business is: (1) an interest as a proprietor in a sole 
     proprietorship, (2) an interest as a partner in a partnership 
     carrying on a trade or business if 20 percent or more of the 
     total capital interest of such partnership is included in the 
     decedent's gross estate or the partnership had 15 or fewer 
     partners, and (3) stock in a corporation carrying on a trade 
     or business if 20 percent or more of the value of the voting 
     stock of the corporation is included in the decedent's gross 
     estate or such corporation had 15 or fewer shareholders. The 
     decedent may own the interest directly or, in certain cases, 
     ownership may be indirect, through a holding company. If 
     ownership is through a holding company, the stock must be 
     non-readily tradable. If stock in a holding company is 
     treated as business company stock for purposes of the 
     installment payment provisions, the five-year deferral for 
     principal and the 2-percent interest rate do not apply. The 
     value of any interest in a closely-held business does not 
     include the value of that portion of such interest 
     attributable to passive assets held by such business.

[[Page 9678]]




                               HOUSE BILL

       No provision. However, H.R. 8, as passed by the House, 
     expands the definition of a closely-held business for 
     purposes of installment payment of estate tax. The bill 
     increases from 15 to 45 the number of partners in a 
     partnership and shareholders in a corporation that is 
     considered a closely-held business in which a decedent held 
     an interest, and thus will qualify the estate for installment 
     payment of estate tax.
       Effective date.--The provision is effective for decedents 
     dying after December 31, 2001.


                            SENATE AMENDMENT

       The Senate amendment expands availability of the 
     installment payment provisions by providing that an estate of 
     a decedent with an interest in a qualifying lending and 
     financing business is eligible for installment payment of the 
     estate tax. The bill also provides that an estate with an 
     interest in a qualifying lending and financing business that 
     claims installment payment of estate tax must make 
     installment payments of estate tax (which will include both 
     principal and interest) relating to the interest in a 
     qualifying lending and financing business over five years.
       The Senate amendment also clarifies that the installment 
     payment provisions require that only the stock of holding 
     companies, not that of operating subsidiaries, must be non-
     readily tradable in order to qualify for installment payment 
     of the estate tax. The bill also provides that an estate with 
     a qualifying property interest held through holding companies 
     that claims installment payment of estate tax must make all 
     installment payments of estate tax (which will include both 
     principal and interest) relating to a qualifying property 
     interest held through holding companies over five years.
       Effective date.--The provision is effective for decedents 
     dying after December 31, 2001.


                          CONFERENCE AGREEMENT

       The conference agreement includes the provision in H.R. 8 
     and the provisions in the Senate amendment.
       No inference is intended as to whether one or more of the 
     specified activities of a qualified lending and financing 
     business would be a trade or business eligible for 
     installment payment of estate tax under present law.

   VI. PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS \55\
---------------------------------------------------------------------------

     \55\ The provisions of the bill as passed by the House did 
     not contain provisions relating to pensions and individual 
     retirement arrangements. Provisions described under the House 
     bill refer to the provisions of H.R. 10, the ``Comprehensive 
     Retirement Security and Pension Reform Act of 2001,'' as 
     passed by the House.
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A. Individual Retirement Arrangements (``IRAs'') (sec. 101 of the House 
  bill, secs. 601-603 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
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
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

       The AGI phase-out range for married taxpayers filing a 
     separate return is $0 to $10,000.
       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 a 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 four 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, or 
     subject to the additional 10-percent tax on early 
     withdrawals. A qualified distribution is a distribution that 
     (1) is made after the five-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).\56\ The same 
     exceptions to the early withdrawal tax that apply to IRAs 
     apply to Roth IRAs.
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     \56\ Early distribution of converted amounts may also 
     accelerate income inclusion of converted amounts that are 
     taxable under the four-year rule applicable to 1998 
     conversions.
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     Taxation of charitable contributions
       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 that 
     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 adjusted 
     annually for inflation. The threshold amount for 2001 is 
     $132,950 ($66,475 for married individuals filing separate 
     returns). For those deductions that are subject to the limit, 
     the total amount of itemized deductions is reduced by three 
     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

     Increase in annual contribution limits
       The House bill increases the maximum annual dollar 
     contribution limit for IRA contributions from $2,000 to 
     $3,000 in 2002, $4,000

[[Page 9679]]

     in 2003, and $5,000 in 2004. The limit is indexed in $500 
     increments in 2005 and thereafter.
     Additional catch-up contributions
       The House bill accelerates the increase of the IRA maximum 
     contribution limit for individuals who have attained age 50 
     before the end of the taxable year. The maximum dollar 
     contribution limit (before application of the AGI phase-out 
     limits) for such an individual is increased to $5,000 in 2002 
     and 2003. In 2004 and thereafter, the general limit applies 
     to all individuals.
     Deemed IRAs under qualified plans
       No provision.
     Tax-free IRA withdrawals for charitable purposes
       No provision.
     Effective date
       The provision is effective for taxable years beginning 
     after December 31, 2001.


                            Senate Amendment

     Increase in annual contribution limits
       The Senate amendment increases the maximum annual dollar 
     contribution limit for IRA contributions from $2,000 to 
     $2,500 for 2002 through 2005, $3,000 for 2006 and 2007, 
     $3,500 for 2008 and 2009, $4,000 for 2010, and $5,000 for 
     2011. After 2011, the limit is adjusted annually for 
     inflation in $500 increments.
     Additional catch-up contributions
       The Senate amendment provides that individuals who have 
     attained age 50 may make additional catch-up IRA 
     contributions. The otherwise maximum contribution limit 
     (before application of the AGI phase-out limits) for an 
     individual who has attained age 50 before the end of the 
     taxable year is increased by $500 for 2002 through 2005, 
     $1,000 for 2006 through 2009, $1,500 for 2010, and $2,000 for 
     2011 and thereafter.
     Deemed IRAs under employer plans
       The Senate amendment provides that, if an eligible 
     retirement plan permits employees to make voluntary employee 
     contributions to a separate account or annuity that (1) is 
     established under the plan, and (2) meets the requirements 
     applicable to either traditional IRAs or Roth IRAs, then the 
     separate account or annuity is deemed a traditional IRA or a 
     Roth IRA, as applicable, for all purposes of the Code. For 
     example, the reporting requirements applicable to IRAs apply. 
     The deemed IRA, and contributions thereto, are not subject to 
     the Code rules pertaining to the eligible retirement plan. In 
     addition, the deemed IRA, and contributions thereto, are not 
     taken into account in applying such rules to any other 
     contributions under the plan. The deemed IRA, and 
     contributions thereto, are subject to the exclusive benefit 
     and fiduciary rules of ERISA to the extent otherwise 
     applicable to the plan, and are not subject to the ERISA 
     reporting and disclosure, participation, vesting, funding, 
     and enforcement requirements applicable to the eligible 
     retirement plan.\57\ An eligible retirement plan is a 
     qualified plan (sec. 401(a)), tax-sheltered annuity (sec. 
     403(b)), or a governmental section 457 plan.
---------------------------------------------------------------------------
     \57\ The Senate amendment does not specify the treatment of 
     deemed IRAs for purposes other than the Code and ERISA.
---------------------------------------------------------------------------
     Tax-free IRA withdrawals for charitable purposes
       The Senate amendment provides an exclusion from gross 
     income for qualified charitable distributions from an IRA: 
     (1) to a charitable organization (as described in sec. 
     170(c)) to which deductible contributions may 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 is 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 Senate amendment, 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 that would have been taxable but for the Senate 
     amendment and that is used to purchase the annuity as an 
     investment in the annuity contract.
       A qualified charitable distribution is any distribution 
     from an IRA that is made after age 70\1/2\, that qualifies as 
     a charitable contribution (within the meaning of sec. 
     170(c)), and that 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).\58\ A taxpayer 
     is not permitted to claim a charitable contribution deduction 
     for amounts transferred from his or her IRA to a charity or 
     to a trust, fund, or annuity that, because of the Senate 
     amendment, are excluded from the taxpayer's income. 
     Conversely, if the amounts transferred are otherwise 
     nontaxable, e.g., a qualified distribution from a Roth IRA, 
     the regularly applicable deduction rules apply.
---------------------------------------------------------------------------
     \58\ It is intended 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.
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     Effective date
       The Senate amendment is generally effective for taxable 
     years beginning after December 31, 2001. The provision 
     relating to deemed IRAs under employer plans is effective for 
     plan years beginning after December 31, 2002. The provision 
     relating to tax-free IRA withdrawals for charitable purposes 
     is effective for taxable years beginning after December 31, 
     2009.


                          Conference Agreement

     Increase in annual contribution limits
       The conference agreement increases the maximum annual 
     dollar contribution limit for IRA contributions from $2,000 
     to $3,000 for 2002 through 2004, $4,000 for 2005 through 
     2007, and $5,000 for 2008. After 2008, the limit is adjusted 
     annually for inflation in $500 increments.
     Additional catch-up contributions
       The conference agreement provides that individuals who have 
     attained age 50 may make additional catch-up IRA 
     contributions. The otherwise maximum contribution limit 
     (before application of the AGI phase-out limits) for an 
     individual who has attained age 50 before the end of the 
     taxable year is increased by $500 for 2002 through 2005, and 
     $1,000 for 2006 and thereafter.
     Deemed IRAs under employer plans
       The conference agreement follows the Senate amendment.
     Tax-free IRA withdrawals for charitable purposes
       The conference agreement does not include the Senate 
     amendment.
     Effective date
       The conference agreement is generally effective for taxable 
     years beginning after December 31, 2001. The provision 
     relating to deemed IRAs under employer plans is effective for 
     plan years beginning after December 31, 2002.

                         B. Pension Provisions

     1. Expanding Coverage
       (a) Increase in benefit and contribution limits (secs. 201 
           and 209 of the House bill, sec. 611 of the Senate 
           amendment, and secs. 401(a)(17), 401(c)(2), 402(g), 
           408(p), 415 and 457 of the Code)


                              present law

     In general
       Present law imposes limits on 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 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) $35,000 (for 2001). 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 $35,000 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) $140,000 (for 2001). 
     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.
     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 $170,000 (for 2001). The compensation 
     limit is indexed for cost-of-living adjustments in $10,000 
     increments.
       In general, contributions to qualified plans and IRAs are 
     based on compensation. For a self-employed individual, 
     compensation generally means net earnings subject to self-
     employment taxes (``SECA taxes''). Members of

[[Page 9680]]

     certain religious faiths may elect to be exempt from SECA 
     taxes on religious grounds. Because the net earnings of such 
     individuals are not subject to SECA taxes, these individuals 
     are considered to have no compensation on which to base 
     contributions to a retirement plan. Under an exception to 
     this rule, net earnings of such individuals are treated as 
     compensation for purposes of making contributions to an IRA.
     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 $10,500 (for 
     2001). The maximum annual amount of elective deferrals that 
     an individual may make to a SIMPLE plan is $6,500 (for 2001). 
     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) 
     $8,500 (for 2001) or (2) 33\1/3\ percent of compensation. The 
     $8,500 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 three 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 $35,000 limit on annual 
     additions to a defined contribution plan to $40,000. This 
     amount is indexed in $1,000 increments.\59\
---------------------------------------------------------------------------
     \59\ 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 $140,000 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.\60\ In adopting rules 
     regarding the application of the increase in the defined 
     benefit plan limits under the House bill, it is intended that 
     the Secretary will apply rules similar to those adopted in 
     Notice 99-44 regarding benefit increases due to the repeal of 
     the combined plan limit under former section 415(e). Thus, 
     for example, a defined benefit plan could provide for benefit 
     increases to reflect the provisions of the House bill for a 
     current or former employee who has commenced benefits under 
     the plan prior to the effective date of the bill if the 
     employee or former employee has an accrued benefit under the 
     plan (other than an accrued benefit resulting from a benefit 
     increase solely as a result of the increases in the section 
     415 limits under the bill). As under the notice, the maximum 
     amount of permitted increase is generally the amount that 
     could have been provided had the provisions of the House bill 
     been in effect at the time of the commencement of benefit. In 
     no case may benefits reflect increases that could not be paid 
     prior to the effective date because of the limits in effect 
     under present law. In addition, in no case may plan 
     amendments providing increased benefits under the relevant 
     provision of the House bill be effective prior to the 
     effective date of the House bill.
---------------------------------------------------------------------------
     \60\ Another provision of the House bill modifies the defined 
     benefit pension plan limits for multiemployer plans.
---------------------------------------------------------------------------
     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. The House bill also amends 
     the definition of compensation for purposes of all qualified 
     plans and IRAs (including SIMPLE arrangements) to include an 
     individual's net earnings that would be subject to SECA taxes 
     but for the fact that the individual is covered by a 
     religious exemption.
     Elective deferral limitations
       The House bill increases the dollar limit on annual 
     elective deferrals under section 401(k) plans, section 403(b) 
     annuities and salary reduction SEPs to $11,000 in 2002. In 
     2003 and thereafter, the limits are increased in $1,000 
     annual increments until the limits reach $15,000 in 2006, 
     with indexing in $500 increments thereafter. The House bill 
     increases the maximum annual elective deferrals that may be 
     made to a SIMPLE plan to $7,000 in 2002. In 2003 and 
     thereafter, the SIMPLE plan deferral limit is increased in 
     $1,000 annual increments until the limit reaches $10,000 in 
     2005. Beginning after 2005, the $10,000 dollar limit is 
     indexed in $500 increments.
     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 2002, and is 
     increased in $1,000 annual increments thereafter until the 
     limit reaches $15,000 in 2006. The limit is indexed 
     thereafter in $500 increments. The limit is twice the 
     otherwise applicable dollar limit in the three years prior to 
     retirement.\61\
---------------------------------------------------------------------------
     \61\ Another provision of the House 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, 2001.


                            senate amendment

     Limits on contributions and benefits
       The Senate amendment provides faster annual adjusting for 
     inflation of the $35,000 limit on annual additions to a 
     defined contribution plan. Under the Senate amendment this 
     limit amount is adjusted annually for inflation in $1,000 
     increments.\62\
---------------------------------------------------------------------------
     \62\ The 25 percent of compensation limitation is increased 
     to 100 percent of compensation under another provision of the 
     Senate amendment.
---------------------------------------------------------------------------
       The Senate amendment increases the $140,000 annual benefit 
     limit under a defined benefit plan to $150,000 for 2002 
     through 2004 and to $160,000 for 2005 and thereafter. The 
     dollar limit is reduced for benefit commencement before age 
     62 and increased for benefit commencement after age 65.
     Compensation limitation
       The Senate amendment increases the limit on compensation 
     that may be taken into account under a plan to $180,000 for 
     2002, $190,000 for 2003, and $200,000 for 2004 and 2005. 
     After 2005, this amount is adjusted annually for inflation in 
     $5,000 increments.
     Elective deferral limitations
       In 2002, the Senate amendment increases the dollar limit on 
     annual elective deferrals under section 401(k) plans, section 
     403(b) annuities, and salary reduction SEPs to $11,000. In 
     2003 and thereafter, the limits increase in $500 annual 
     increments until the limits reach $15,000 in 2010, with 
     annual adjustments for inflation in $500 increments 
     thereafter. The Senate amendment increases the maximum annual 
     elective deferrals that may be made to a SIMPLE plan to 
     $7,000 for 2002 and 2003, $8,000 for 2004 and 2005, $9,000 
     for 2006 and 2007, and $10,000 for 2008. After 2008, the 
     $10,000 dollar limit is adjusted annually for inflation in 
     $500 increments.
     Section 457 plans
       The dollar limit on deferrals under a section 457 plan is 
     increased to $9,000 in 2002, and is increased in $500 annual 
     increments thereafter until the limit reaches $11,000 in 
     2006. Beginning in 2007, the limit is increased in $1,000 
     annual increments until it reaches $15,000 in 2010. After 
     2010, the limit is adjusted annually for inflation thereafter 
     in $500 increments. The limit is twice the otherwise 
     applicable dollar limit in the three years prior to 
     retirement.\63\
---------------------------------------------------------------------------
     \63\ Another provision 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, 2001.


                          conference agreement

     Limits on contributions and benefits
       The conference agreement follows the House bill.
     Compensation limitation
       The conference agreement follows the House bill.
     Elective deferral limitations
       The conference agreement follows the House bill.
     Section 457 plans
       The conference agreement follows the House bill.
     Effective date
       The conference agreement generally is effective for years 
     beginning after December 31, 2001. The provisions relating to 
     defined benefit plans are effective for years ending after 
     December 31, 2001.
       (b) Plan loans for S corporation shareholders, partners, 
           and sole proprietors (sec. 202 of the House bill, sec. 
           612 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.\64\ 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 Secretary of Labor can grant an 
     administrative exemption from the prohibited transaction 
     rules if the Secretary finds the exemption is 
     administratively feasible, in the interest of the plan

[[Page 9681]]

     and plan participants and beneficiaries, and protective of 
     the rights of participants and beneficiaries of the plan. 
     Pursuant to this exemption process, the Secretary of Labor 
     grants exemptions both with respect to specific transactions 
     and classes of transactions.
---------------------------------------------------------------------------
     \64\ 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.
---------------------------------------------------------------------------
       The statutory exemptions to the prohibited transaction 
     rules do not apply to certain transactions in which the plan 
     makes a loan to an owner-employee.\65\ Loans to participants 
     other than owner-employees are permitted if loans are 
     available to all participants on a reasonably equivalent 
     basis, are not made available to highly compensated employees 
     in an amount greater than made available to other employees, 
     are made in accordance with specific provisions in the plan, 
     bear a reasonable rate of interest, and are adequately 
     secured. In addition, the Code places limits on the amount of 
     loans and repayment terms.
---------------------------------------------------------------------------
     \65\ Certain transactions involving a plan and S corporation 
     shareholders are permitted.
---------------------------------------------------------------------------
       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 five 
     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 (other 
     than the owner of an IRA). Thus, the general statutory 
     exemption applies to such transactions. Present law continues 
     to apply with respect to IRAs.
       Effective date.--The House bill is effective with respect 
     to years beginning after December 31, 2001.


                            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 intend that the Secretary of 
     the Treasury and the Secretary of Labor will waive any 
     penalty or excise tax in situations where a loan made prior 
     to the effective date of the provision was exempt when 
     initially made (treating any refinancing as a new loan) and 
     the loan would have been exempt throughout the period of the 
     loan if the provision had been in effect during the period of 
     the loan.
       (c) Modification of top-heavy rules (sec. 203 of the House 
           bill, sec. 613 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 nonkey employees and (2) minimum 
     nonintegrated employer contributions or benefits for plan 
     participants who are non-key employees.
     Definition of top-heavy plan
       A defined benefit plan is a top-heavy plan if more than 60 
     percent of the cumulative accrued benefits under the plan are 
     for key employees. A defined contribution plan is top heavy 
     if the sum of the account balances of key employees is more 
     than 60 percent of the total account balances under the plan. 
     For each plan year, the determination of top-heavy status 
     generally is made as of the last day of the preceding plan 
     year (``the determination date'').
       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 five-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 five-year period ending on the determination date.
       In some cases, two or more plans of a single employer must 
     be aggregated for purposes of determining whether the group 
     of plans is top-heavy. The following plans must be 
     aggregated: (1) plans which cover a key employee (including 
     collectively bargained plans); and (2) any plan upon which a 
     plan covering a key employee depends for purposes of 
     satisfying the Code's nondiscrimination rules. The employer 
     may be required to include terminated plans in the required 
     aggregation group. In some circumstances, an employer may 
     elect to aggregate plans for purposes of determining whether 
     they are top heavy.
       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 four 
     preceding plan years, is (1) an officer earning over one-half 
     of the defined benefit plan dollar limitation of section 415 
     ($70,000 for 2001), (2) a five-percent owner of the employer, 
     (3) a one-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 ($35,000 for 2001) 
     with the largest ownership interests in the employer. A 
     family ownership attribution rule applies to the 
     determination of one-percent owner status, five-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) two 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) three 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).\66\
---------------------------------------------------------------------------
     \66\ Treas. Reg. sec. 1.416-1 Q&A M-19.
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     Top-heavy vesting
       Benefits under a top-heavy plan must vest at least as 
     rapidly as under one of the following schedules: (1) three-
     year cliff vesting, which provides for 100 percent vesting 
     after three years of service; and (2) two-six year graduated 
     vesting, which provides for 20 percent vesting after two 
     years of service, and 20 percent more each year thereafter so 
     that a participant is fully vested after six years of 
     service.\67\
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     \67\ Benefits under a plan that is not top heavy must vest at 
     least as rapidly as under one of the following schedules: (1) 
     five-year cliff vesting; and (2) three-seven year graded 
     vesting, which provides for 20 percent vesting after three 
     years and 20 percent more each year thereafter so that a 
     participant is fully vested after seven years of service.
---------------------------------------------------------------------------
     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. A plan satisfies the contribution 
     requirement under the safe harbor rule for qualified cash or 
     deferred arrangements if the employer either (1) satisfies a 
     matching contribution requirement or (2) makes a nonelective 
     contribution to a defined contribution plan of at least three 
     percent of an employee's compensation on behalf of each 
     nonhighly compensated employee who is eligible to participate 
     in the arrangement without regard to the permitted disparity 
     rules (sec. 401(1)). A plan satisfies the matching 
     contribution requirement if, under the arrangement: (1) the 
     employer makes a matching contribution on behalf of each 
     nonhighly compensated employee that is equal to (a) 100 
     percent of the

[[Page 9682]]

     employee's elective deferrals up to three percent of 
     compensation and (b) 50 percent of the employee's elective 
     deferrals from three to five percent of compensation; and 
     (2), the rate of match with respect to any elective 
     contribution for highly compensated employees is not greater 
     than the rate of match for nonhighly compensated employees. 
     Matching contributions that satisfy the design-based safe 
     harbor for cash or deferred arrangements are deemed to 
     satisfy the ACP test. Certain additional matching 
     contributions are also deemed to satisfy the ACP test.


                               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.\68\
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     \68\ 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.
---------------------------------------------------------------------------
       In determining whether a plan is top-heavy, distributions 
     during the year ending on the date the top-heavy 
     determination is being made are taken into account. The 
     present-law five-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 one-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 and (2) repeals the 
     top-10 owner key employee category. The House bill repeals 
     the four-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 preceding plan 
     year.
       Thus, under the House bill, an employee is considered a key 
     employee if, during the prior year, the employee was (1) an 
     officer with compensation in excess of $150,000, (2) a five-
     percent owner, or (3) a one-percent owner with compensation 
     in excess of $150,000. The present-law limits on the number 
     of officers treated as key employees under (1) continue to 
     apply.
       The family ownership attribution rule no longer applies in 
     determining whether an individual is a five-percent owner of 
     the employer for purposes of the top-heavy rules only. The 
     family ownership attribution rule continues to apply to other 
     provisions that cross reference the top-heavy rules, such as 
     the definition of highly compensated employee and the 
     definition of one-percent owner under the top-heavy rules.
     Minimum benefit for nonkey employees
       Under the House bill, matching contributions are taken into 
     account in determining whether the minimum benefit 
     requirement has been satisfied.\69\
---------------------------------------------------------------------------
     \68\ 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.
---------------------------------------------------------------------------
       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 key employee or 
     former key employee benefits under the plan (as determined 
     under sec. 410).
     Effective date
       The House bill is effective for years beginning after 
     December 31, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill, with 
     the following modifications.
       Under the Senate amendment, an employee is considered a key 
     employee if, during the prior year, the employee was (1) an 
     officer with compensation in excess of $85,000 (for 2001), 
     (2) a five-percent owner, or (3) a one-percent owner with 
     compensation in excess of $150,000. The present-law limits on 
     the number of officers treated as key employees under (1) 
     continue to apply. An employee who was not an employee in the 
     preceding plan year, or who was an employee only for part of 
     the year, is treated as a key employee if it can be 
     reasonably anticipated that the employee will meet the 
     definition of a key employee for the current plan year.
       Under the Senate amendment, the family ownership 
     attribution rule continues to apply in determining whether an 
     individual is a five-percent owner of the employer for 
     purposes of the top-heavy rules. In addition, the Senate 
     amendment does not provide 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.
       Effective date.--The Senate amendment is effective for 
     years beginning after December 31, 2001.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     following modifications.
       Under the conference agreement, an employee is considered a 
     key employee if, during the prior year, the employee was (1) 
     an officer with compensation in excess of $130,000 (adjusted 
     for inflation in $5,000 increments), (2) a five-percent 
     owner, or (3) a one-percent owner with compensation in excess 
     of $150,000. The present-law limits on the number of officers 
     treated as key employees under (1) continue to apply.
       Under the conference agreement, the family ownership 
     attribution rule continues to apply in determining whether an 
     individual is a five-percent owner of the employer for 
     purposes of the top-heavy rules.
       Effective date.--The conference agreement is effective for 
     years beginning after December 31, 2001.
       (d) Elective deferrals not taken into account for purposes 
           of deduction limits (sec. 204 of the House bill, sec. 
           614 of the Senate amendment, 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.
       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, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill, with 
     the following modification.
       Under the Senate amendment, the applicable percentage of 
     elective deferral contributions is 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 the applicable 
     percentage of elective deferral contributions. The applicable 
     percentage is 25 percent for 2002 through 2010, and 100 
     percent for 2011 and thereafter.


                          Conference Agreement

       The conference agreement follows the House bill.
       (e) Repeal of coordination requirements for deferred 
           compensation plans of state and local governments and 
           tax-exempt organizations (sec. 205 of the House bill, 
           sec. 615 of the Senate amendment, 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) $8,500 (in 2001) or (2) 33\1/3\ 
     percent of compensation. The $8,500 limit is increased for 
     inflation in $500 increments. Under a special catch-up rule, 
     a section 457 plan may provide that, for one or more of the 
     participant's last three 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.

[[Page 9683]]

       The $8,500 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 
     $8,500 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.\70\
---------------------------------------------------------------------------
     \70\ The limits on deferrals under a section 457 plan are 
     modified under other provisions of the House bill.
---------------------------------------------------------------------------
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2001.


                            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) Eliminate IRS user fees for certain determination 
           letter requests regarding employer plans (sec. 206 of 
           the House bill and sec. 621 of the Senate amendment)


                              Present Law

       An employer that maintains a retirement plan for the 
     benefit of its employees may request from the 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 Secretary determines the user fee 
     applicable for various types of requests, subject to 
     statutory minimum requirements for average fees based on the 
     category of the request. 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.\71\
---------------------------------------------------------------------------
     \71\ Authorization for the user fees was originally enacted 
     in section 10511 of the Revenue Act of 1987 (Pub. L. No. 100-
     203, December 22, 1987). The authorization was extended 
     through September 30, 2003, by Public Law Number 104-117 (An 
     Act to provide that members of the Armed Forces 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)).
---------------------------------------------------------------------------
       Present law provides that plans that do not meet the 
     qualification requirements will be treated as meeting such 
     requirements if appropriate retroactive plan amendments are 
     made during the remedial amendment period. In general, the 
     remedial amendment period ends on the due date for the 
     employer's tax return (including extensions) for the taxable 
     year in which the event giving rise to the disqualifying 
     provision occurred (e.g., a plan amendment or a change in the 
     law). The Secretary may provide for general extensions of the 
     remedial amendment period or for extensions in certain cases. 
     For example, the remedial amendment period with respect to 
     amendments relating to the qualification requirements 
     affected by the General Agreements on Tariffs and Trade, the 
     Uniformed Services Employment and Reemployment Rights Act of 
     1994, the Small Business Job Protection Act of 1996, the 
     Taxpayer Relief Act of 1997, and the Internal Revenue Service 
     Restructuring and Reform Act of 1998 generally ends the last 
     day of the first plan year beginning on or after January 1, 
     2001.\72\
---------------------------------------------------------------------------
     \72\ Rev. Proc. 2000-27, 2000-26 I.R.B. 1272.
---------------------------------------------------------------------------


                               House Bill

       A small employer (100 or fewer employees) is not required 
     to pay a user fee for a determination letter request with 
     respect to the qualified status of a retirement plan that the 
     employer maintains if the request is made before the later of 
     (1) the last day of the fifth plan year of the plan or (2) 
     the end of any applicable remedial amendment period with 
     respect to the plan that begins before the end of the fifth 
     plan year of the plan. In addition, determination letter 
     requests for which user fees are not required under the House 
     bill are not taken into account in determining average user 
     fees. 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, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill, with 
     the following modifications. An eligible employer is not 
     required to pay a user fee for a ruling letter, opinion 
     letter, determination letter, or similar request with respect 
     to the qualified status of a new retirement plan that the 
     employer maintains and with respect to which the employer has 
     not previously made a request. An employer is eligible under 
     the Senate amendment if (1) the employer has no more than 100 
     employees, (2) the employer has at least one nonhighly 
     compensated employee who is participating in the plan, and 
     (3) during the three-taxable year period immediately 
     preceding the taxable year in which the request is made, 
     neither the employer nor a related employer established or 
     maintained a qualified plan with respect to which 
     contributions were made or benefits were accrued for 
     substantially the same employees covered under the plan with 
     respect to which the request is made.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     following modification. An employer is eligible under the 
     conference agreement if the employer has no more than 100 
     employees and has at least one nonhighly compensated employee 
     who is participating in the plan.
       (g) Deduction limits (sec. 207 of the House bill, sec. 616 
           of the Senate amendment, 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.\73\
---------------------------------------------------------------------------
     \73\ Another provision of the House bill provides that 
     elective deferrals are not subject to the deduction limits.
---------------------------------------------------------------------------
       For purposes of the deduction limits, compensation means 
     the compensation otherwise paid or accrued during the taxable 
     year to the beneficiaries under the plan, and the 
     beneficiaries under a profit-sharing or stock bonus plan are 
     the employees who benefit under the plan with respect to the 
     employer's contribution.\74\ An employee who is eligible to 
     make elective deferrals under a section 401(k) plan is 
     treated as benefitting under the arrangement even if the 
     employee elects not to defer.\75\
---------------------------------------------------------------------------
     \74\ Rev. Rul. 65-295, 1965-2 C.B. 148.
     \75\ Treas. Reg. sec. 1.410(b)-3.
---------------------------------------------------------------------------
       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. In 
     addition, the annual limitation on the amount of deductible 
     contributions to a profit-sharing or stock bonus plan is 
     increased from 15 percent to 20 percent of compensation of 
     the employees covered by the plan for the year.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2001.


                            Senate Amendment

       Under the Senate amendment, the definition of compensation 
     for purposes of the deduction rules includes salary reduction

[[Page 9684]]

     amounts treated as compensation under section 415. In 
     addition, the annual limitation on the amount of deductible 
     contributions to a profit-sharing or stock bonus plan is 
     increased from 15 percent to 25 percent of compensation of 
     the employees covered by the plan for the year. Also, except 
     to the extent provided in regulations, a money purchase 
     pension plan is treated like a profit-sharing or stock bonus 
     plan for purposes of the deduction rules.
       Effective date.--The Senate amendment is effective for 
     years beginning after December 31, 2001.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
       (h) Option to treat elective deferrals as after-tax 
           contributions (sec. 208 of the bill, sec. 617 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.
       Elective deferrals for a taxable year that exceed the 
     annual dollar limitation (``excess deferrals'') are 
     includible in gross income for the taxable year. If an 
     employee makes elective deferrals under a plan (or plans) of 
     a single employer that exceed the annual dollar limitation 
     (``excess deferrals''), then the plan may provide for the 
     distribution of the excess deferrals, with earnings thereon. 
     If the excess deferrals are made to more than one plan of 
     unrelated employers, then the plan may permit the individual 
     to allocate excess deferrals among the various plans, no 
     later than the March 1 (April 15 under the applicable 
     regulations) following the end of the taxable year. If excess 
     deferrals are distributed not later than April 15 following 
     the end of the taxable year, along with earnings attributable 
     to the excess deferrals, then the excess deferrals are not 
     again includible in income when distributed. The earnings are 
     includible in income in the year distributed. If excess 
     deferrals (and income thereon) are not distributed by the 
     applicable April 15, then the excess deferrals (and income 
     thereon) are includible in income when received by the 
     participant. Thus, excess deferrals that are not distributed 
     by the applicable April 15th are taxable both in the taxable 
     year when the deferral was made and in the year the 
     participant receives a distribution of the excess deferral.
       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 five-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).\76\
---------------------------------------------------------------------------
     \76\ Early distributions of converted amounts may also 
     accelerate income inclusion of converted amounts that are 
     taxable under the four-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 (at such time and in such manner as 
     the Secretary may prescribe) \77\ as not excludable from the 
     participant's gross income.
---------------------------------------------------------------------------
     \77\ It is intended that the Secretary will generally not 
     permit retroactive designations of elective deferrals as 
     designated plus contributions.
---------------------------------------------------------------------------
       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.\78\ Under a section 401(k) plan, designated 
     plus contributions also are treated as any other elective 
     deferral for purposes of the special nondiscrimination 
     requirements.\79\
---------------------------------------------------------------------------
     \78\ Similarly, designated plus contributions to a section 
     403(b) annuity are treated the same as other salary reduction 
     contributions to the annuity (except that designated plus 
     contributions are includible in income).
     \79\ It is intended that the Secretary provide ordering rules 
     regarding the return of excess contributions under the 
     special nondiscrimination rules (pursuant to sec. 401(k)(8)) 
     in the event a participant makes both regular elective 
     deferrals and designated plus contributions. It is intended 
     that such rules will generally permit a plan to allow 
     participants to designate which contributions are returned 
     first or to permit the plan to specify which contributions 
     are returned first. It is also intended that the Secretary 
     will provide ordering rules to determine the extent to which 
     a distribution consists of excess Roth contributions.
---------------------------------------------------------------------------
       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.\80\ The nonexclusion period is 
     the five-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.
---------------------------------------------------------------------------
     \80\ 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.
---------------------------------------------------------------------------
       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 or a corrective 
     distribution of an excess contribution under the special 
     nondiscrimination rules (pursuant to sec. 401(k)(8) (and 
     income allocable thereto) is not a qualified distribution. In 
     addition, the treatment of excess designated plus 
     contributions is similar to the treatment of excess deferrals 
     attributable to non-designated plus contributions. If excess 
     designated plus contributions (including earnings thereon) 
     are distributed no later than the April 15th following the 
     taxable year, then the designated plus contributions is not 
     includible in gross income as a result of the distribution, 
     because such contributions are includible in gross income 
     when made. Earnings on such excess designated plus 
     contributions are treated the same as earnings on excess 
     deferrals distributed no later than April 15th, i.e., they 
     are includible in income when distributed. If excess 
     designated plus contributions are not distributed no later 
     than the applicable April 15th, then such contributions (and 
     earnings thereon) are taxable when distributed. Thus, as is 
     the case with excess elective deferrals that are not 
     distributed by the applicable April 15th, the contributions 
     are includible in income in the year when made and again when 
     distributed from the plan. Earnings on such contributions are 
     taxable when received.
       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, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that the Senate amendment refers to designated plus 
     contributions as ``Roth contributions.''
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2003.


                          Conference Agreement

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

[[Page 9685]]


       (i) Certain nonresident aliens excluded in applying minimum 
           coverage requirements (sec. 210 of the House bill, sec. 
           622 of the Senate amendment, and secs. 410(b)(3) and 
           861(a)(3) of the Code)


                              Present Law

       Under the minimum coverage requirements (sec. 410(b)), a 
     qualified plan must benefit a minimum number of the 
     employer's nonhighly compensated employees. In applying the 
     minimum coverage requirements, employees who are nonresident 
     aliens are disregarded if they have no earned income from 
     sources within the United States (``U.S. source income'').
       Generally, compensation for services performed in the 
     United States is treated as U.S. source income. Under a 
     special rule, compensation is not treated as U.S. source 
     income if the compensation is paid for labor or services 
     performed by a nonresident alien in connection with the 
     individual's temporary presence in the United States as a 
     regular member of the crew of a foreign vessel engaged in 
     transportation between the United States and a foreign 
     country or a possession of the United States. However, this 
     special rule does not apply for purposes of qualified 
     retirement plans (including the minimum coverage and 
     nondiscrimination requirements applicable to such plans), 
     employer-provided group-term life insurance, or employer-
     provided accident and health plans. As a result, such 
     compensation is treated as U.S. source income for purposes of 
     such plans, including the application of the qualified 
     retirement plan minimum coverage and nondiscrimination 
     requirements. As a result, such nonresident aliens must be 
     taken into account in determining whether the plan satisfies 
     the minimum coverage requirements.


                               House Bill

       For purposes of the application of the minimum coverage 
     requirements (sec. 410(b)), compensation is not treated as 
     U.S. source income if the compensation is paid for labor or 
     services performed by a nonresident alien in connection with 
     the individual's temporary presence in the United States as a 
     regular member of the crew of a foreign vessel engaged in 
     transportation between the United States and a foreign 
     country or a possession of the United States. As a result, 
     such nonresident aliens are excluded from consideration in 
     the application of the minimum coverage requirements.
       Effective date.--The House bill is effective with respect 
     to plan years beginning after December 31, 2001.


                            Senate Amendment

       Under the Senate amendment, the special rule relating to 
     compensation paid for labor or services performed by a 
     nonresident alien in connection with the individual's 
     temporary presence in the United States as a regular member 
     of the crew of a foreign vessel engaged in transportation 
     between the United States and a foreign country or a 
     possession of the United States compensation is extended in 
     order to apply for purposes of qualified retirement plans, 
     employer-provided group-term life insurance, and employer-
     provided accident and health plans. Therefore, such 
     compensation is not treated as U.S. source income for any 
     purpose under such plans, including the application of the 
     qualified retirement plan minimum coverage and 
     nondiscrimination requirements.
       Effective date.--The Senate amendment is effective with 
     respect to plan years beginning after December 31, 2001.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
       (j) Nonrefundable credit to certain individuals for 
           elective deferrals and IRA contributions (sec. 618 of 
           the Senate amendment and new sec. 25B of the Code)


                              Present Law

       Present law provides favorable tax treatment for a variety 
     of retirement savings vehicles, including employer-sponsored 
     retirement plans and individual retirement arrangements 
     (``IRAs'').
       Several different types of tax-favored employer-sponsored 
     retirement plans exist, such as section 401(a) qualified 
     plans (including plans with a section 401(k) qualified cash-
     or-deferred arrangement), section 403(a) qualified annuity 
     plans, section 403(b) annuities, section 408(k) simplified 
     employee pensions (``SEPs''), section 408(p) SIMPLE 
     retirement accounts, and section 457(b) eligible deferred 
     compensation plans. In general, an employer and, in certain 
     cases, employees, contribute to the plan. Taxation of the 
     contributions and earnings thereon is generally deferred 
     until benefits are distributed from the plan to participants 
     or their beneficiaries.\81\ Contributions and benefits under 
     tax-favored employer-sponsored retirement plans are subject 
     to specific limitations.
---------------------------------------------------------------------------
     \81\ In the case of after-tax employee contributions, only 
     earnings are taxed upon withdrawal.
---------------------------------------------------------------------------
       Coverage and nondiscrimination rules also generally apply 
     to tax-favored employer-sponsored retirement plans to ensure 
     that plans do not disproportionately cover higher-paid 
     employees and that benefits provided to moderate- and lower-
     paid employees are generally proportional to those provided 
     to higher-paid employees.
       IRAs include both traditional IRAs and Roth IRAs. In 
     general, an individual makes contributions to an IRA, and 
     investment earnings on those contributions accumulate on a 
     tax-deferred basis. Total annual IRA contributions per 
     individual are limited to $2,000 (or the compensation of the 
     individual or the individual's spouse, if smaller). 
     Contributions to a traditional IRA may be deducted from gross 
     income if an individual's adjusted gross income (``AGI'') is 
     below certain levels or the individual is not an active 
     participant in certain employer-sponsored retirement plans. 
     Contributions to a Roth IRA are not deductible from gross 
     income, regardless of adjusted gross income. A distribution 
     from a traditional IRA is includible in the individual's 
     gross income except to the extent of individual contributions 
     made on a nondeductible basis. A qualified distribution from 
     a Roth IRA is excludable from gross income.
       Taxable distributions made from employer retirement plans 
     and IRAs before the employee or individual has reached age 
     59\1/2\ are subject to a 10-percent additional tax, unless an 
     exception applies.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a temporary nonrefundable tax 
     credit for contributions made by eligible taxpayers to a 
     qualified plan. The maximum annual contribution eligible for 
     the credit is $2,000. The credit rate depends on the adjusted 
     gross income (``AGI'') of the taxpayer. Only joint returns 
     with AGI of $50,000 or less, head of household returns of 
     $37,500 or less, and single returns of $25,000 or less are 
     eligible for the credit. The AGI limits applicable to single 
     taxpayers apply to married taxpayers filing separate returns. 
     The credit is in addition to any deduction or exclusion that 
     would otherwise apply with respect to the contribution. The 
     credit offsets minimum tax liability as well as regular tax 
     liability. The credit is available to individuals who are 18 
     or over, other than individuals who are full-time students or 
     claimed as a dependent on another taxpayer's return.
       The credit is available with respect to elective 
     contributions to a section 401(k) plan, section 403(b) 
     annuity, or eligible deferred compensation arrangement of a 
     State or local government (a ``sec. 457 plan''), SIMPLE, or 
     SEP, contributions to a traditional or Roth IRA, and 
     voluntary after-tax employee contributions to a qualified 
     retirement plan. The present-law rules governing such 
     contributions continue to apply.
       The amount of any contribution eligible for the credit is 
     reduced by taxable distributions received by the taxpayer and 
     his or her spouse from any savings arrangement described 
     above or any other qualified retirement plan during the 
     taxable year for which the credit is claimed, the two taxable 
     years prior to the year the credit is claimed, and during the 
     period after the end of the taxable year and prior to the due 
     date for filing the taxpayer's return for the year. In the 
     case of a distribution from a Roth IRA, this rule applies to 
     any such distributions, whether or not taxable.
       The credit rates based on AGI are as follows.

------------------------------------------------------------------------
                         Heads of
   Joint filers         households       All other filers    Credit rate
------------------------------------------------------------------------
        $0-$30,000          $0-$22,500          $0-$15,000    50 percent
   $30,000-$32,500     $22,500-$24,375     $15,000-$16,250    20 percent
   $32,500-$50,000     $24,375-$37,500     $16,250-$25,000    10 percent
      Over $50,000        Over $37,500        Over $25,000     0 percent
------------------------------------------------------------------------

       The Senate amendment directs the Secretary of the Treasury 
     to report annually to the Senate Finance Committee and the 
     House Committee on Ways and Means regarding the number of 
     individuals who claim the credit.
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2001, and before 
     January 1, 2007.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
       (k) Small business tax credit for qualified retirement plan 
           contributions (sec. 619 of the Senate amendment and new 
           sec. 45E of the Code)


                              Present Law

       The timing of an employer's deduction for compensation paid 
     to an employee generally corresponds to the employee's 
     recognition of the compensation. However, an employer that 
     contributes to a qualified retirement plan is entitled to a 
     deduction (within certain limits) for the employer's 
     contribution to the plan on behalf of an employee even though 
     the employee does not recognize income with respect to the 
     contribution until the amount is distributed to the employee.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment provides a nonrefundable income tax 
     credit for small employers equal to 50 percent of certain 
     qualifying employer contributions made to qualified 
     retirement plans on behalf of nonhighly compensated 
     employees. The credit is not

[[Page 9686]]

     available with respect to contributions to a SIMPLE IRA or 
     SEP. For purposes of the Senate amendment, a small employer 
     means an employer with no more than 20 employees who received 
     at least $5,000 of earnings in the preceding year. A 
     nonhighly compensated employee is defined as an employee who 
     neither (1) was a five-percent owner of the employer at any 
     time during the current year or the preceding year, or (2) 
     for the preceding year, had compensation in excess of $80,000 
     (adjusted annually for inflation, this amount is $85,000 for 
     2001).\82\ The credit is available for the first three plan 
     years of the plan.\83\
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     \82\ The top paid group election, which under present law 
     permits an employer to classify an employee as a nonhighly 
     compensated employee if the employee had compensation in 
     excess of $80,000 (adjusted annually for inflation) during 
     the preceding year but was not among the top 20 percent of 
     employees of the employer when ranked on the basis of 
     compensation paid to employees during the preceding year, is 
     not taken into account in determining nonhighly compensated 
     employees for purposes of the Senate amendment.
     \83\ The credit only applies if the employer has not had 
     another qualified retirement plan in the prior three taxable 
     years with respect to which contributions or accruals were 
     made for substantially the same employees. It is intended 
     that a plan will be for substantially the same employees if 
     half or more of the employees for whom contributions or 
     accruals are made under the new plan are employees for whom 
     contributions or accruals were made under a prior plan.
---------------------------------------------------------------------------
       The Senate amendment requires a small employer to make 
     nonelective contributions equal to at least one percent of 
     compensation to qualify for the credit. The credit applies to 
     both qualifying nonelective employer contributions and 
     qualifying employer matching contributions, but only up to a 
     total of three percent of the nonhighly compensated 
     employee's compensation. The credit is available for 50 
     percent of qualifying benefit accruals under a nonintegrated 
     defined benefit plan if the benefits are equivalent, as 
     defined in regulations, to a three-percent nonelective 
     contribution to a defined contribution plan.
       To qualify for the credit, the nonelective and matching 
     contributions to a defined contribution plan and the benefit 
     accruals under a defined benefit plan are required to vest at 
     least as rapidly as under either a three-year cliff vesting 
     schedule or a graded schedule that provides 20-percent 
     vesting per year for the first five years. In order to 
     qualify for the credit, contributions to plans other than 
     pension plans must be subject to the same distribution 
     restrictions that apply to qualified nonelective employer 
     contributions to a section 401(k) plan, i.e., distribution 
     only upon separation from service, death, disability, 
     attainment of age 59\1/2\, plan termination without a 
     successor plan, or acquisition of a subsidiary or 
     substantially all the assets of a trade or business that 
     employs the participant.\84\ Qualifying contributions to 
     pension plans are subject to the distribution restrictions 
     applicable to such plans.
---------------------------------------------------------------------------
     \84\ The rules relating to distribution upon separation from 
     service are modified under another provision of the Senate 
     amendment.
---------------------------------------------------------------------------
       A defined contribution plan to which the small employer 
     makes the qualifying contributions (and any plan aggregated 
     with that plan for nondiscrimination testing purposes) is 
     required to allocate any nonelective employer contributions 
     proportionally to participants' compensation from the 
     employer (or on a flat-dollar basis) and, accordingly, 
     without the use of permitted disparity or cross-testing. An 
     equivalent requirement must be met with respect to a defined 
     benefit plan.
       Forfeited nonvested qualifying contributions or accruals 
     for which the credit was claimed generally result in 
     recapture of the credit at a rate of 35 percent. However, 
     recapture does not apply to the extent that forfeitures of 
     contributions are reallocated to nonhighly compensated 
     employees or applied to future contributions on behalf of 
     nonhighly compensated employees. The Secretary of the 
     Treasury is authorized to issue administrative guidance, 
     including de minimis rules, to simplify or facilitate 
     claiming and recapturing the credit.
       The credit is a general business credit.\85\ The 50 percent 
     of qualifying contributions that are effectively offset by 
     the tax credit are not deductible; the other 50 percent of 
     the qualifying contributions (and other contributions) are 
     deductible to the extent permitted under present law.
---------------------------------------------------------------------------
     \85\ The credit cannot be carried back to years before the 
     effective date.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective with 
     respect to contributions paid or incurred in taxable years 
     beginning after December 31, 2002.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.
       (l) Small business tax credit for new retirement plan 
           expenses (sec. 620 of the Senate amendment and new sec. 
           45E of the Code)


                              present law

       The costs incurred by an employer related to the 
     establishment and maintenance of a retirement plan (e.g., 
     payroll system changes, investment vehicle set-up fees, 
     consulting fees) generally are deductible by the employer as 
     ordinary and necessary expenses in carrying on a trade or 
     business.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides a nonrefundable income tax 
     credit for 50 percent of the administrative and retirement-
     education expenses for any small business that adopts a new 
     qualified defined benefit or defined contribution plan 
     (including a section 401(k) plan), SIMPLE plan, or simplified 
     employee pension (``SEP''). The credit applies to 50 percent 
     of the first $1,000 in administrative and retirement-
     education expenses for the plan for each of the first three 
     years of the plan.
       The credit is available to an employer that did not employ, 
     in the preceding year, more than 100 employees with 
     compensation in excess of $5,000. In order for an employer to 
     be eligible for the credit, the plan must cover at least one 
     nonhighly compensated employee. In addition, if the credit is 
     for the cost of a payroll deduction IRA arrangement, the 
     arrangement must be made available to all employees of the 
     employer who have worked with the employer for at least three 
     months.
       The credit is a general business credit.\86\ The 50 percent 
     of qualifying expenses that are effectively offset by the tax 
     credit are not deductible; the other 50 percent of the 
     qualifying expenses (and other expenses) are deductible to 
     the extent permitted under present law.
---------------------------------------------------------------------------
     \86\ The credit cannot be carried back to years before the 
     effective date.
---------------------------------------------------------------------------
       Effective date.--The Senate amendment is effective with 
     respect to costs paid or incurred in taxable years beginning 
     after December 31, 2001, with respect to plans established 
     after such date.


                          conference agreement

       The conference agreement follows the Senate amendment.
     2. Enhancing Fairness for Women
       (a) Additional salary reduction catch-up contributions 
           (sec. 301 of the House bill, sec. 631 of the Senate 
           amendment, and sec. 414 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 $10,500 (for 2001). The 
     maximum annual amount of elective deferrals that an 
     individual may make to a SIMPLE plan is $6,500 (for 2001). 
     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) 
     $8,500 (for 2001) or (2) 33\1/3\ percent of compensation. The 
     $8,500 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 three 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

       The House bill provides that the otherwise applicable 
     dollar limit on elective deferrals under a section 401(k) 
     plan, section 403(b) annuity, SEP, or SIMPLE, or deferrals 
     under a section 457 plan are increased for individuals who 
     have attained age 50 by the end of the year.\87\ Additional 
     contributions are permitted 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 House bill, the 
     additional amount of elective contributions that are 
     permitted to be made by an eligible individual participating 
     in such a plan is the lesser of (1) $5,000, or (2) the 
     participant's compensation for the year reduced by any other 
     elective deferrals of the participant for the year. This 
     $5,000 amount is indexed for inflation in $500 increments in 
     2007 and thereafter.\88\
---------------------------------------------------------------------------
     \87\ Another provision of the House bill increases the dollar 
     limit on elective deferrals under such arrangements.
     \88\ In the case of a section 457 plans, this catch-up rule 
     does not apply during the participant's last three years 
     before retirement (in those years, the regularly applicable 
     dollar limit is doubled).
---------------------------------------------------------------------------
       Catch-up contributions made under the House bill are not 
     subject to any other contribution limits and are not taken 
     into account in applying other contribution limits. Such 
     contributions are subject to applicable

[[Page 9687]]

     nondiscrimination rules. Although catch-up contributions are 
     subject to applicable nondiscrimination rules, a plan does 
     not fail to meet the applicable nondiscrimination 
     requirements under section 401(a)(4) with respect to 
     benefits, rights, and features if the plan allows all 
     eligible individuals participating in the plan to make the 
     same election with respect to catch-up contributions. For 
     purposes of this rule, all plans of related employers are 
     treated as a single plan.
       An employer is permitted to make matching contributions 
     with respect to catch-up contributions. Any such matching 
     contributions are subject to the normally applicable rules.
       Effective date.--The House bill is effective for taxable 
     years beginning after December 31, 2001.


                            senate amendment

       The Senate amendment provides that the otherwise applicable 
     dollar limit on elective deferrals under a section 401(k) 
     plan, section 403(b) annuity, SEP, or SIMPLE, or deferrals 
     under a section 457 plan is increased for individuals who 
     have attained age 50 by the end of the year.\89\ Additional 
     contributions could 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 Senate amendment, the 
     additional amount of elective contributions that could be 
     made by an eligible individual participating in such a plan 
     is the lesser of (1) the applicable dollar amount or (2) the 
     participant's compensation for the year reduced by any other 
     elective deferrals of the participant for the year.\90\ The 
     applicable dollar amount is $500 for 2002 through 2004, 
     $1,000 for 2005 and 2006, $2,000 for 2007, $3,000 for 2008, 
     $4,000 for 2009, and $7,500 for 2010 and thereafter.
---------------------------------------------------------------------------
     \89\ Another provision of the Senate amendment increases the 
     dollar limit on elective deferrals under such arrangements.
     \90\ In the case of a section 457 plan, this catch-up rule 
     does not apply during the participant's last three years 
     before retirement (in those years, the regularly applicable 
     dollar limit is doubled).
---------------------------------------------------------------------------
       Catch-up contributions made under the Senate amendment 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.\91\
---------------------------------------------------------------------------
     \91\ Another provision increases the dollar limit on elective 
     deferrals under such arrangements.
---------------------------------------------------------------------------
       An employer is permitted to make matching contributions 
     with respect to catch-up contributions. Any such matching 
     contributions are subject to the normally applicable rules.
       The following examples illustrate the application of the 
     Senate amendment, after the catch-up is fully phased-in.
       Example 1: Employee A is a highly compensated employee who 
     is over 50 and who participates in a section 401(k) plan 
     sponsored by A's employer. The maximum annual deferral limit 
     (without regard to the provision) is $15,000. After 
     application of the special nondiscrimination rules applicable 
     to section 401(k) plans, the maximum elective deferral A may 
     make for the year is $8,000. Under the provision, A is able 
     to make additional catch-up salary reduction contributions of 
     $7,500.
       Example 2: Employee B, who is over 50, is a participant in 
     a section 401(k) plan. B's compensation for the year is 
     $30,000. The maximum annual deferral limit (without regard to 
     the provision) is $15,000. Under the terms of the plan, the 
     maximum permitted deferral is 10 percent of compensation or, 
     in B's case, $3,000. Under the provision, B can contribute up 
     to $10,500 for the year ($3,000 under the normal operation of 
     the plan, and an additional $7,500 under the provision).
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2001.


                          conference agreement

       The conference agreement provides that the otherwise 
     applicable dollar limit on elective deferrals under a section 
     401(k) plan, section 403(b) annuity, SEP, or SIMPLE, or 
     deferrals under a section 457 plan is increased for 
     individuals who have attained age 50 by the end of the 
     year.\92\ The catch-up contribution provision does not apply 
     to after-tax employee contributions. 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 conference agreement, 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 dollar amount or (2) the participant's 
     compensation for the year reduced by any other elective 
     deferrals of the participant for the year.\93\ The applicable 
     dollar amount under a section 401(k) plan, section 403(b) 
     annuity, SEP, or section 457 plan is $1,000 for 2002, $2,000 
     for 2003, $3,000 for 2004, $4,000 for 2005, and $5,000 for 
     2006 and thereafter. The applicable dollar amount under a 
     SIMPLE is $500 for 2002, $1,000 for 2003, $1,500 for 2004, 
     $2,000 for 2005, and $2,500 for 2006 and thereafter. The 
     $5,000 and $2,500 amounts are adjusted for inflation in $500 
     increments in 2007 and thereafter.\94\
---------------------------------------------------------------------------
     \92\ Another provision of the conference agreement increases 
     the dollar limit on elective deferrals under such 
     arrangements.
     \93\ In the case of a section 457 plan, this catch-up rule 
     does not apply during the participant's last three years 
     before retirement (in those years, the regularly applicable 
     dollar limit is doubled).
     \94\ In the case of a section 457 plans, this catch-up rule 
     does not apply during the participant's last three years 
     before retirement (in those years, the regularly applicable 
     dollar limit is doubled).
---------------------------------------------------------------------------
       Catch-up contributions made under the conference agreement 
     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. However, a plan fails to meet the 
     applicable nondiscrimination requirements under section 
     401(a)(4) with respect to benefits, rights, and features 
     unless the plan allows all eligible individuals participating 
     in the plan to make the same election with respect to catch-
     up contributions. For purposes of this rule, all plans of 
     related employers are treated as a single plan.
       An employer is permitted to make matching contributions 
     with respect to catch-up contributions. Any such matching 
     contributions are subject to the normally applicable rules.
       The following examples illustrate the application of the 
     conference agreement, after the catch-up is fully phased-in.
       Example 1: Employee A is a highly compensated employee who 
     is over 50 and who participates in a section 401(k) plan 
     sponsored by A's employer. The maximum annual deferral limit 
     (without regard to the provision) is $15,000. After 
     application of the special nondiscrimination rules applicable 
     to section 401(k) plans, the maximum elective deferral A may 
     make for the year is $8,000. Under the provision, A is able 
     to make additional catch-up salary reduction contributions of 
     $5,000.
       Example 2: Employee B, who is over 50, is a participant in 
     a section 401(k) plan. B's compensation for the year is 
     $30,000. The maximum annual deferral limit (without regard to 
     the provision) is $15,000. Under the terms of the plan, the 
     maximum permitted deferral is 10 percent of compensation or, 
     in B's case, $3,000. Under the provision, B can contribute up 
     to $8,000 for the year ($3,000 under the normal operation of 
     the plan, and an additional $5,000 under the provision).
       Effective date.--The Senate amendment is effective for 
     taxable years beginning after December 31, 2001.
       (b) Equitable treatment for contributions of employees to 
           defined contribution plans (sec. 302 of the House bill, 
           sec. 632 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 $35,000 (for 2001) 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 before January 1, 2000, an overall limit applied 
     if an employee was 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.
       In addition to this general rule, employees of nonprofit 
     educational institutions, hospitals, home health service 
     agencies, health and welfare service agencies, and churches 
     may elect application of one of several special rules that 
     increase the amount of the otherwise permitted contributions. 
     The election of a special rule is irrevocable; an employee 
     may not elect to have more than one special rule apply.
       Under one special rule, in the year the employee separates 
     from service, the employee may elect to contribute up to the 
     exclusion allowance, without regard to the 25 percent of 
     compensation limit under section 415. Under this rule, the 
     exclusion allowance is determined by taking into account no 
     more than 10 years of service.

[[Page 9688]]

       Under a second special rule, the employee may contribute up 
     to the lesser of: (1) the exclusion allowance; (2) 25 percent 
     of the participant's includible compensation; or (3) $15,000.
       Under a third special rule, the employee may elect to 
     contribute up to the section 415(c) limit, without regard to 
     the exclusion allowance. If this option is elected, then 
     contributions to other plans of the employer are also taken 
     into account in applying the limit.
       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) $8,500 (in 2001) or (2) 33-1/3 
     percent of compensation. The $8,500 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 \95\ to 100 percent.\96\
---------------------------------------------------------------------------
     \95\ Another provision of the House bill increases the 
     defined contribution plan dollar limit.
     \96\ The House bill preserves the present-law deduction rules 
     for money purchase pension plans. Thus, for purposes of such 
     rules, the limitation on the amount the employer generally 
     may deduct is an amount equal to 25 percent of compensation 
     of the employees covered by the plan for the year.
---------------------------------------------------------------------------
     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.
       The House bill also 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.
     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 generally is effective for years beginning 
     after December 31, 2001. The provision regarding the 
     regulations under section 403(b)(2) is effective on the date 
     of enactment.


                            Senate Amendment

       The Senate amendment is the same as the House bill, with 
     the following modifications.
       The Senate amendment increases the 25 percent of 
     compensation limitation on annual additions under a defined 
     contribution plan to 50 percent for 2002 through 2010, and 
     100 percent for 2011 and thereafter.\97\ The Senate amendment 
     increases the 33-1/3 percent of compensation limitation on 
     deferrals under a section 457 plan to 50 percent for 2002 
     through 2010, and 100 percent for 2011 and thereafter.
---------------------------------------------------------------------------
     \97\ Another provision of the Senate amendment increases the 
     defined contribution plan dollar limit.
---------------------------------------------------------------------------
       With respect to the direction to 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, 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 for taxable years beginning after 
     December 31, 2000.
       Effective date.--The Senate amendment generally is 
     effective for years beginning after December 31, 2001. The 
     provision regarding the regulations under section 403(b)(2) 
     is effective on the date of enactment. The provision 
     regarding the repeal of the exclusion allowance applicable to 
     tax-sheltered annuities is effective for years beginning 
     after December 31, 2010.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     following modifications.
       With respect to the increase in the defined contribution 
     plan limit, the conferees intend that the Secretary of the 
     Treasury will use the Secretary's existing authority to 
     address situations where qualified nonelective contributions 
     are targeted to certain participants with lower compensation 
     in order to increase the average deferral percentage of 
     nonhighly compensated employees.
       For taxable years beginning after December 31, 1999, a plan 
     may disregard the requirement that contributions to a defined 
     benefit plan be treated as previously excluded amounts for 
     purposes of the exclusion allowance.
       (c) Faster vesting of employer matching contributions (sec. 
           303 of the House bill, sec. 633 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 five years 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 three years of service, 40 percent after 
     four years of service, 60 percent after five years of 
     service, 80 percent after six years of service, and 100 
     percent after seven years of service.\98\
---------------------------------------------------------------------------
     \98\ The minimum vesting requirements are also contained in 
     Title I of ERISA.
---------------------------------------------------------------------------


                               House Bill

       The House bill applies faster vesting schedules to employer 
     matching contributions. Under the House bill, employer 
     matching contributions are required 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 three 
     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 six years of service.
       Effective date.--The House bill is effective for 
     contributions for plan years beginning after December 31, 
     2001, with a delayed effective date for plans maintained 
     pursuant to a collective bargaining agreement. The House bill 
     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.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       (d) Modifications to minimum distribution rules (sec. 304 
           of the House bill, sec. 634 of the Senate amendment, 
           and sec. 401(a)(9) 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 may be waived if the individual 
     establishes to the satisfaction of the Commissioner that the 
     shortfall in the amount distributed was due to reasonable 
     error and reasonable steps are being taken to remedy the 
     shortfall. Under certain circumstances following the death of 
     a participant, the excise tax is automatically waived under 
     proposed Treasury regulations.
     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

[[Page 9689]]

     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 five-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 five-
     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.\99\ In the case of distributions from an IRA 
     other than a Roth IRA, the required beginning date is the 
     April 1 of the calendar year 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.
---------------------------------------------------------------------------
     \99\ 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 the proposed Treasury regulations, in 
     order to satisfy the minimum distribution rules, annuity 
     payments under a defined benefit plan must be paid in 
     periodic 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 an amount from the uniform table provided in the proposed 
     regulations.
     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 five years of the 
     participant's death. The five-year rule does not apply if 
     distributions begin within one year of the participant's 
     death and are payable over the life of a designated 
     beneficiary or 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\.


                               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 is 
     required to be made within five 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 April 1 of the calendar year 
     following the calendar year in which the surviving spouse 
     attains age 70\1/2\. The House bill includes a transition 
     rule with respect to the provision providing that the 
     required beginning date in the case of a surviving spouse is 
     no earlier than the April 1 of the calendar year following 
     the calendar year in which the surviving spouse attains age 
     70\1/2\. In the case of an individual who died before the 
     date of enactment and prior to his or her required beginning 
     date and whose beneficiary is the surviving spouse, minimum 
     distributions to the surviving spouse are not required to 
     begin earlier than the date distributions would have been 
     required to begin under present law.
     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 revise the life expectancy 
     tables under the applicable regulations to reflect current 
     life expectancy.
     Effective date
       In general, the House bill is effective for years beginning 
     after December 31, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill, with 
     the following modification. The Senate amendment does not 
     modify the excise tax on failures to satisfy the minimum 
     distribution rules.


                          Conference Agreement

       The conference agreement directs the Treasury to revise the 
     life expectancy tables under the applicable regulations to 
     reflect current life expectancy.
       Effective date.--The conference agreement is effective on 
     the date of enactment.
       (e) Clarification of tax treatment of division of section 
           457 plan benefits upon divorce (sec. 305 of the House 
           bill, sec. 635 of the Senate amendment, and secs. 
           414(p) and 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 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 does not violate 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 House bill is effective for transfers, 
     distributions, and payments made after December 31, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill, with a 
     modification of the effective date.
       Effective date.--The provision of the Senate amendment 
     relating to tax treatment of distributions made pursuant to a 
     domestic relations order from a section 457 plan is effective 
     for transfers, distributions, and payments made after 
     December 31, 2001. The provisions of the Senate amendment 
     relating to the waiver of restrictions on distributions and 
     the application of the special rule for determining whether a 
     distribution is pursuant to a QDRO are effective on January 
     1, 2002, except that in the case of a domestic relations 
     order entered before January 1, 2002, the plan administrator 
     (1) is required to treat such order as a QDRO if the 
     administrator is paying benefits pursuant to such order on 
     January 1, 2002, and (2) is permitted to treat any other such 
     order entered before January 1, 2002, as a QDRO even if such 
     order does not meet the relevant requirements of the 
     provision.


                          Conference Agreement

       The conference agreement follows the House bill.
       (f) Provisions relating to hardship withdrawals (sec. 306 
           of the House bill, sec. 636 of the Senate amendment, 
           and sec. 401(k) and 402 of the Code)


                              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 \100\ 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.
---------------------------------------------------------------------------
     \100\ 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

[[Page 9690]]

     all other plans maintained by the employer for at least 12 
     months after receipt of the hardship distribution.
       Under present law, hardship withdrawals of elective 
     deferrals from a qualified cash or deferred arrangement (or 
     403(b) annuity) are not eligible rollover distributions. 
     Other types of hardship distributions, e.g., employer 
     matching contributions distributed on account of hardship, 
     are eligible rollover distributions. Different withholding 
     rules apply to distributions that are eligible rollover 
     distributions and to distributions that are not eligible 
     rollover distributions. Eligible rollover distributions that 
     are not directly rolled over are subject to withholding at a 
     flat rate of 20-percent. Distributions that are not eligible 
     rollover distributions are subject to elective withholding. 
     Periodic distributions are subject to withholding as if the 
     distribution were wages; nonperiodic distributions are 
     subject to withholding at a rate of 10 percent. In either 
     case, the individual may elect not to have withholding apply.


                               House Bill

       The Secretary of the Treasury is directed to revise the 
     applicable regulations to reduce from 12 months to six 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. The revised regulations 
     are to be effective for years beginning after December 31, 
     2001.
       In addition, any distribution made upon hardship of an 
     employee is not an eligible rollover distribution. Thus, such 
     distributions may not be rolled over, and are subject to the 
     withholding rules applicable to distributions that are not 
     eligible rollover distributions. The House bill does not 
     modify the rules under which hardship distributions may be 
     made. For example, as under present law, hardship 
     distributions of qualified employer matching contributions 
     are only permitted under the rules applicable to elective 
     deferrals.
       The House bill is intended to clarify that all assets 
     distributed as a hardship withdrawal, including assets 
     attributable to employee elective deferrals and those 
     attributable to employer matching or nonelective 
     contributions, are ineligible for rollover. This rule is 
     intended to apply to all hardship distributions from any tax 
     qualified plan, including those made pursuant to standards 
     set forth in section 401(k)(2)(B)(i)(IV) (which are 
     applicable to section 401(k) plans and section 403(b) 
     annuities) and to those treated as hardship distributions 
     under any profit-sharing plan (whether or not in accordance 
     with the standards set forth in section 401(k)(2)(B)(i)(IV)). 
     For this purpose, a distribution that could be made either 
     under the hardship provisions of a plan or under other 
     provisions of the plan (such as provisions permitting in-
     service withdrawal of assets attributable to employer 
     matching or nonelective contributions after a fixed period of 
     years) could be treated as made upon hardship of the employee 
     if the plan treats it that way. For example, if a plan makes 
     an in-service distribution that consists of assets 
     attributable to both elective deferrals (in circumstances 
     where those assets could be distributed only upon hardship) 
     and employer matching or nonelective contributions (which 
     could be distributed in nonhardship circumstances under the 
     plan), the plan is permitted to treat the distribution in its 
     entirety as made upon hardship of the employee.
       Effective date.--The provision of the House bill directing 
     the Secretary to revise the rules relating to safe harbor 
     hardship distributions is effective on the date of enactment. 
     The provision that hardship distributions are not eligible 
     rollover distributions is effective for distributions made 
     after December 31, 2001. The Secretary has the authority to 
     issue transitional guidance with respect to the provision 
     that hardship distributions are not eligible rollover 
     distributions to provide sufficient time for plans to 
     implement the new rule.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       (g) Pension coverage for domestic and similar workers (sec. 
           307 of the House bill, sec. 637 of the Senate 
           amendment, and sec. 4972(c)(6) of the Code)


                              Present Law

       Under present law, within limits, employers may make 
     deductible contributions to qualified retirement plans for 
     employees. Subject to certain exceptions, a 10-percent excise 
     tax applies to nondeductible contributions to such plans.
       Employers of household workers may establish a pension plan 
     for their employees. Contributions to such plans are not 
     deductible because they are not made in connection with a 
     trade or business of the employer.


                               House Bill

       The 10-percent excise tax on nondeductible contributions 
     does not apply to contributions to a SIMPLE plan or a SIMPLE 
     IRA that are nondeductible solely because the contributions 
     are not a trade or business expense under section 162 because 
     they are not made in connection with a trade or business of 
     the employer. Thus, for example, employers of household 
     workers are able to make contributions to such plans without 
     imposition of the excise tax. As under present law, the 
     contributions are not deductible. The present-law rules 
     applicable to such plans, e.g., contribution limits and 
     nondiscrimination rules, continue to apply. The House bill 
     does not apply with respect to contributions on behalf of the 
     individual and members of his or her family.
       No inference is intended with respect to the application of 
     the excise tax under present law to contributions that are 
     not deductible because they are not made in connection with a 
     trade or business of the employer.
       As under present law, a plan covering domestic workers is 
     not qualified unless the coverage rules are satisfied by 
     aggregating all employees of family members taken into 
     account under the attribution rules in section 414(c), but 
     disregarding employees employed by a controlled group of 
     corporations or a trade or business.
       It is intended that the House bill is restricted to 
     contributions made by employers of household workers with 
     respect to whom all applicable employment taxes have been and 
     are being paid.
       Effective date.--The House bill is effective for taxable 
     years beginning after December 31, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill, with 
     the following modification. The legislative history of the 
     Senate amendment does not include a statement of intention 
     that the Senate amendment is restricted to contributions made 
     by employers of household workers with respect to whom all 
     applicable employment taxes have been and are being paid.


                          Conference Agreement

       The conference agreement follows the House bill.
     3. Increasing Portability for Participants
       (a) Rollovers of retirement plan and IRA distributions 
           (secs. 401-403 and 409 of the House bill, secs. 641-643 
           and 649 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'') \101\ or another qualified 
     plan.\102\ 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.
---------------------------------------------------------------------------
     \101\ A ``traditional'' IRA refers to IRAs other than Roth 
     IRAs or SIMPLE IRAs. All references to IRAs refer only to 
     traditional IRAs.
     \102\ 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

[[Page 9691]]

     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.\103\
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     \103\ Distributions from qualified plans and section 403(b) 
     annuities that are not eligible rollover distributions are 
     subject to elective withholding. Periodic distributions are 
     subject to withholding as if the distribution were wages; 
     nonperiodic distributions are subject to withholding at a 
     rate of 10 percent. In either case, the individual may elect 
     not to have withholding apply.
---------------------------------------------------------------------------
     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) 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 could 
     be rolled over to any of such plans or arrangements.\104\ 
     Similarly, distributions from an IRA generally are permitted 
     to 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.\105\ 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 would not be required to accept rollovers.
---------------------------------------------------------------------------
     \104\ Hardship distributions from governmental section 457 
     plans would be considered eligible rollover distributions.
     \105\ The elective withholding rules applicable to 
     distributions from qualified plans and section 403(b) 
     annuities that are not eligible rollover distributions are 
     also extended to distributions from governmental section 457 
     plans. Thus, periodic distributions from governmental section 
     457 plans that are not eligible rollover distributions are 
     subject to withholding as if the distribution were wages and 
     nonperiodic distributions from such plans that are not 
     eligible rollover distributions are subject to withholding at 
     a 10-percent rate. In either case, the individual may elect 
     not to have withholding apply.
---------------------------------------------------------------------------
       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 
     would have 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.
     Rollover of after-tax contributions
       The House bill 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 is 
     permitted to be accomplished only through a direct rollover. 
     In addition, a qualified plan is not permitted to 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) are not permitted to 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 House bill provides that surviving spouses may roll 
     over distributions to a qualified plan, section 403(b) 
     annuity, or governmental section 457 plan in which the 
     surviving spouse participates.
     Treasury regulations
       The Secretary is directed to prescribe rules necessary to 
     carry out the House bill. 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 House bill is effective for distributions made after 
     December 31, 2001. It is intended that the Secretary will 
     revise the safe harbor rollover notice that plans may use to 
     satisfy the rollover requirements. No penalty is imposed on a 
     plan for a failure to provide the information required under 
     the House bill with respect to any distribution made before 
     the date that is 90 days after the date the Secretary issues 
     a new safe harbor rollover notice, if the plan administrator 
     makes a reasonable attempt to comply with such notice 
     requirement. For example, the House bill requires that the 
     rollover notice include a description 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 the distribution. A plan 
     is treated as making a reasonable good faith effort to comply 
     with this requirement if the notice states that distributions 
     from the plan to which the rollover is made may be subject to 
     different restrictions and tax consequences than those that 
     apply to distributions from the plan from which the rollover 
     is made.


                            senate Amendment

       The Senate amendment is the same as the House bill, with 
     the following modification. The Senate amendment does not 
     include a provision for relief from the imposition of a 
     penalty for failure to provide the information required under 
     the Senate amendment.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     following modification. Hardship distributions from 
     governmental section 457 plans are not considered eligible 
     rollover distributions.
       (b) Waiver of 60-day rule (sec. 404 of the House bill, sec. 
     644 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, except during military service in a combat zone 
     or by reason of a Presidentially declared disaster. The 
     Secretary has issued regulations postponing the 60-day rule 
     in such cases.


                               House Bill

       The House bill provides that the Secretary may waive the 
     60-day rollover period if the

[[Page 9692]]

     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. For example, the Secretary may 
     issue guidance that includes objective standards for a waiver 
     of the 60-day rollover period, such as waiving the rule due 
     to military service in a combat zone or during a 
     Presidentially declared disaster (both of which are provided 
     for under present law), or for a period during which the 
     participant has received payment in the form of a check, but 
     has not cashed the check, or for errors committed by a 
     financial institution.
       Effective date.--The House bill applies to distributions 
     made after December 31, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement 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. For example, the Secretary may issue guidance 
     that includes objective standards for a waiver of the 60-day 
     rollover period, such as waiving the rule due to military 
     service in a combat zone or during a Presidentially declared 
     disaster (both of which are provided for under present law), 
     or for a period during which the participant has received 
     payment in the form of a check, but has not cashed the check, 
     or for errors committed by a financial institution, or in 
     cases of inability to complete a rollover due to death, 
     disability, hospitalization, incarceration, restrictions 
     imposed by a foreign country, or postal error.
       Effective date.--The conference agreement applies to 
     distributions made after December 31, 2001.
       (c) Treatment of forms of distribution (sec. 405 of the 
     House bill, sec. 645 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)).\106\
---------------------------------------------------------------------------
     \106\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
       Under regulations recently issued by the Secretary,\107\ 
     this prohibition against the elimination of an optional form 
     of benefit does not apply in the case of (1) a defined 
     contribution plan that offers a lump sum at the same time as 
     the form being eliminated if the participant receives at 
     least 90 days' advance notice of the elimination, or (2) a 
     voluntary transfer between defined contribution plans, 
     subject to the requirements that a transfer from a money 
     purchase pension plan, an ESOP, or a section 401(k) plan must 
     be to a plan of the same type and that the transfer be made 
     in connection with certain corporate mergers, acquisitions, 
     or similar transactions or changes in employment status.
---------------------------------------------------------------------------
     \107\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(e) and Q&A-(3)(b).
---------------------------------------------------------------------------


                               House Bill

       A defined contribution plan to which benefits are 
     transferred will not be 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, and (4) 
     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. The 
     House bill does not modify the rules relating to survivor 
     annuities under section 417. Thus, as under present law, a 
     plan that is a transferee of a plan subject to the joint and 
     survivor rules is also subject to those rules.
       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.
       Furthermore, the House bill directs 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 do 
     not apply to plan amendments that 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, but only if 
     such an amendment does not adversely affect the rights of any 
     participant in more than a de minimis manner.
       It is intended that the factors to be considered in 
     determining whether an amendment has more than a de minimis 
     adverse effect on any participant will 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.
       This provision of the House bill does not affect the rules 
     relating to involuntary cash outs (sec. 411(a)(11)) or 
     survivor annuity requirements (sec. 417). Accordingly, if a 
     participant is entitled to protections of the joint and 
     survivor rules, those protections may not be eliminated. The 
     intent of the provision authorizing regulations is solely to 
     permit the elimination of early retirement benefits, 
     retirement-type subsidies, or optional forms of benefit that 
     have no more than a de minimis effect on any participant but 
     create disproportionate burdens and complexities for a plan 
     and its participants.
       For example, assume the following. Employer A acquires 
     employer B and merges B's defined benefit plan into A's 
     defined benefit plan. The defined benefit plan maintained by 
     B before the merger provides an early retirement subsidy for 
     individuals age 55 with a specified number of years of 
     service. E1 and E2 are were employees of B and who transfer 
     to A in connection with the merger. E1 is 25 years old and 
     has compensation of $40,000. The present value of E1's early 
     retirement subsidy under B's plan is $75. E2 is 50 years old 
     and also has compensation of $40,000. The present value of 
     E2's early retirement subsidy under B's plan is $10,000.
       Assume that A's plan has an early retirement subsidy for 
     individuals who have attained age 50 with a specified number 
     of years of service, but the subsidy is not the same as under 
     B's plan. Under A's plan, the present value of E2's early 
     retirement subsidy is $9,850. Maintenance of both subsidies 
     after the plan merger would create burdens for the plan and 
     complexities for the plan and its participants.
       Treasury regulations could permit E1's early retirement 
     subsidy under B's plan to be eliminated entirely (i.e., even 
     if A's plan did not have an early retirement subsidy). Taking 
     into account all relevant factors, including the value of the 
     benefit, E1's compensation, and the number of years until E1 
     would be eligible to receive the subsidy, the subsidy is de 
     minimis. Treasury regulations could permit E2's early 
     retirement subsidy under B's plan to be eliminated as to be 
     replaced by the subsidy under A's plan, because the 
     difference in the subsidies is de minimis. However, A's 
     subsidy could not be entirely eliminated.
       The Secretary is directed to issue, not later than December 
     31, 2003, final regulations under section 411(d)(6), 
     including regulations required under the House bill.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2001, except that the direction 
     to the Secretary is effective on the date of enactment.


                            senate amendment

       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, and (4) 
     the

[[Page 9693]]

     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.
       Furthermore, the Senate amendment directs 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 do 
     not apply to plan amendments that 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, but only if 
     such an amendment does not adversely affect the rights of any 
     participant in more than a de minimis manner.
       It is intended that the factors to be considered in 
     determining whether an amendment has more than a de minimis 
     adverse effect on any participant will 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 Secretary is directed to issue, not later than December 
     31, 2002, final regulations under section 411(d)(6), 
     including regulations required under the Senate amendment.
       Effective date.--The provision is effective for years 
     beginning after December 31, 2001, except that the direction 
     to the Secretary is effective on the date of enactment.


                          conference agreement

       The conference agreement follows the House bill.
       (d) Rationalization of restrictions on distributions (sec. 
           406 of the House bill, sec. 646 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.\108\
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     \108\ 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 do not experience a separation from service 
     because the employees continue 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. Under a recent IRS ruling, a 
     person is generally deemed to have separated from service if 
     that person is transferred to another employer in connection 
     with a sale of less than substantially all the assets of a 
     trade or business.\109\
---------------------------------------------------------------------------
     \109\ Rev. Rul. 2000-27, 2000-21 I.R.B. 1016.
---------------------------------------------------------------------------


                               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 House bill.
       Effective date.--The House bill is effective for 
     distributions after December 31, 2001, regardless of when the 
     severance of employment occurred.


                            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 intend that a plan may provide that certain 
     specified types of severance from employment do not 
     constitute distributable events. For example, a plan could 
     provide that a severance from employment is not a 
     distributable event if it would not have constituted a 
     ``separation from service'' under the law in effect prior to 
     a specified date. Also, if a plan describes distributable 
     events by reference to section 401(k)(2), the plan may be 
     amended to restrict distributable events to fewer than all 
     events that constitute a severance from employment. Thus, for 
     example, if a plan sponsor had employees who experienced a 
     severance from employment in the past that the ``same desk 
     rule'' prevented from being treated as a distributable event, 
     the plan sponsor would have the option of providing in the 
     plan that such severance from employment would, or would not, 
     be treated as a distributable event under the plan.
       The conferees intend that, as under current law, if there 
     is a transfer of plan assets and liabilities relating to any 
     portion of an employee's benefit under a plan of the 
     employee's former employer to a plan being maintained or 
     created by the employee's new employer (other than a rollover 
     or elective transfer), then that employee has not experienced 
     a severance from employment with the employer maintaining the 
     plan that covers the employee.
       (e) Purchase of service credit under governmental pension 
           plans (sec. 407 of the House bill, sec. 647 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 or 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 House bill is effective for transfers 
     after December 31, 2001.


                            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) Employers may disregard rollovers for purposes of cash-
           out rules (sec. 408 of the House bill, sec. 648 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,

[[Page 9694]]

     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.\110\
---------------------------------------------------------------------------
     \110\ A similar provision is contained 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.\111\
---------------------------------------------------------------------------
     \111\ Other provisions expand the kinds of plans to which 
     benefits may be rolled over.
---------------------------------------------------------------------------


                               house bill

       For purposes of the cash-out rule, 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 House bill is effective for 
     distributions after December 31, 2001.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       (g) Minimum distribution and inclusion requirements for 
           section 457 plans (sec. 409 of the House bill, sec. 649 
           of the Senate amendment, and sec. 457 of the Code)


                              present law

       A ``section 457 plan'' is an eligible deferred compensation 
     plan of a State or local government or tax-exempt employer 
     that meets certain requirements. For example, amounts 
     deferred under a section 457 plan cannot exceed certain 
     limits. Amounts deferred under a section 457 plan are 
     generally includible in income when paid or made available. 
     Amounts deferred under a plan of deferred compensation of a 
     State or local government or tax-exempt employer that does 
     not meet the requirements of section 457 are includible in 
     income when the amounts are not subject to a substantial risk 
     of forfeiture, regardless of whether the amounts have been 
     paid or made available.\112\
---------------------------------------------------------------------------
     \112\ This rule of inclusion does not apply to amounts 
     deferred under a tax-qualified retirement plan or similar 
     plans.
---------------------------------------------------------------------------
       Section 457 plans are subject to the minimum distribution 
     rules applicable to tax-qualified pension plans. In addition, 
     such plans are subject to additional minimum distribution 
     rules (sec. 457(d)(2)(B)).


                               house bill

       The House bill provides that amounts deferred under a 
     section 457 plan of a State or local government are 
     includible in income when paid. The House bill also repeals 
     the special minimum distribution rules applicable to section 
     457 plans. Thus, such plans are subject to the minimum 
     distribution rules applicable to qualified plans.
       Effective date.--The House bill is effective for 
     distributions after December 31, 2001.


                            senate amendment

       The Senate amendment is the same as the House bill, with 
     the following modification.
       The Senate amendment also modifies the transition rule 
     adopted in the 1986 Act relating to deferred compensation 
     plans of tax-exempt employers. Under the Senate amendment, 
     the transition rule applies to agreements providing cost-of-
     living adjustments to amounts that otherwise satisfy the 
     requirements of the transition rule. The grandfather does not 
     apply to the extent that the annual amount provided under 
     such an agreement exceeds the annual grandfathered amount 
     multiplied by the cumulative increase in the Consumer Price 
     Index (as published by the Department of Labor).
       Effective date.--The Senate amendment is generally 
     effective for distributions after December 31, 2001. The 
     provision relating to plans of tax-exempt organizations is 
     effective for taxable years ending after the date of 
     enactment for cost-of-living increases after September 1993.


                          conference agreement

       The conference agreement follows the House bill.
     4. Strengthening Pension Security and Enforcement
       (a) Phase in repeal of 160 percent of current liability 
           funding limit; deduction for contributions to fund 
           termination liability (secs. 501-502 of the House bill, 
           secs. 651-652 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 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) 160 percent of the plan's current liability, 
     over (2) the value of the plan's assets (sec. 
     412(c)(7)).\113\ 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: 165 
     percent for plan years beginning in 2003 and 2004, and 170 
     percent for plan years beginning in 2005 and thereafter.\114\ 
     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.
---------------------------------------------------------------------------
     \113\ The minimum funding requirements, including the full 
     funding limit, are also contained in title I of ERISA.
     \114\ 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, 160 percent in 2001 and 2002, 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. Under the bill, the 
     current liability full funding limit is 165 percent of 
     current liability 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. Thus, in 2004 and 
     thereafter, the full funding limit is the excess, if any, of 
     (1) the accrued liability under the plan (including normal 
     cost), over (2) the value of the plan's assets.
     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 House bill 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.\115\
---------------------------------------------------------------------------
     \115\ The PBGC termination insurance program does not cover 
     plans of professional service employers that have fewer than 
     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.
     General Accounting Office study
       In connection with the Committee's desire to strengthen 
     pension security, the Committee directs the General 
     Accounting Office to conduct a study examining the extent to 
     which certain present-law rules create obstacles or 
     disincentives for taxpayers experiencing financial hardships 
     to make current and future contributions to underfunded 
     defined benefit pension plans. The Committee is concerned 
     that, as a result of not obtaining a current or carryback 
     deduction for pension contributions, taxpayers experiencing 
     financial hardships will be subject to higher after-tax costs 
     of maintaining pension funding levels. In the study, the 
     General Accounting Office is to consider whether pension 
     funding would be enhanced if section 172(f), which since 1998 
     has permitted only listed items to be carried back, were 
     modified to list deductions for payments to defined benefit 
     pension plans as an item for which 10-year specified loss 
     carrybacks may be available. This study is to be submitted to 
     the Committee on Ways and Means of the House of 
     Representatives and the Committee on Finance of the Senate 
     not later than one year after the date of enactment.
     Effective date
       The House bill is effective for plan years beginning after 
     December 31, 2001.


                            senate amendment

     Current liability full funding limit
       The Senate amendment gradually increases and then repeals 
     the current liability full funding limit. Under the Senate 
     amendment, the current liability full funding limit is 160 
     percent of current liability for plan years beginning in 
     2002, 165 percent for plan years beginning in 2003, and 170 
     percent for plan years beginning in 2004. The current 
     liability full funding limit is repealed for plan years 
     beginning in 2005 and thereafter. Thus, in 2005 and 
     thereafter, the full funding limit is the excess, if any, of 
     (1) the accrued liability under the plan (including normal 
     cost), over (2) the value of the plan's assets.

[[Page 9695]]


     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 Senate amendment 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.\116\
---------------------------------------------------------------------------
     \116\ The PBGC termination insurance program does not cover 
     plans of professional service employers that have fewer than 
     25 participants.
---------------------------------------------------------------------------
       The Senate amendment 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 Senate amendment is effective for plan years beginning 
     after December 31, 2001.


                          conference agreement

       The conference agreement follows the Senate amendment, with 
     modifications.
       The conference agreement gradually increases and then 
     repeals the current liability full funding limit. Under the 
     conference agreement, the current liability full funding 
     limit is 165 percent of current liability 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. Thus, in 
     2004 and thereafter, the full funding limit is the excess, if 
     any, of (1) the accrued liability under the plan (including 
     normal cost), over (2) the value of the plan's assets.
       With respect to the special rule allowing a deduction for 
     unfunded current liability, the modification of the rule to 
     provide that the deduction is for up to 100 percent of 
     unfunded termination liability is applicable only for a plan 
     that terminates within the plan year.
       (b) Excise tax relief for sound pension funding (sec. 503 
           of the House bill, sec. 653 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) 160 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: 165 percent for plan years 
     beginning in 2003 and 2004, and 170 percent for plan years 
     beginning in 2005 and thereafter.\117\ 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.
---------------------------------------------------------------------------
     \117\ 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, 160 percent in 2001 and 2002, and 
     adopted the scheduled increases described in the text. 
     Another provision would gradually increase and then repeal 
     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 six 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 is permitted to 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 is not permitted to take 
     advantage of the present-law exceptions for certain 
     terminating plans and certain contributions to defined 
     contribution plans. The House bill applies to terminated 
     plans as well as ongoing plans.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2001.


                            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) Notice of significant reduction in plan benefit 
           accruals (sec. 504 of the House bill, sec. 659 of the 
           Senate amendment, and new sec. 4980f of the Code)


                              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 \118\ 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.
---------------------------------------------------------------------------
     \118\ 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 
     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 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. 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 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 House bill 
     authorizes the Secretary of the Treasury to provide a 
     simplified notice requirement or an exemption from the notice 
     requirement for plans with less than 100 participants and to 
     allow any notice required under the House bill to be provided 
     by using new technologies. The House bill also authorizes the 
     Secretary to provide a simplified notice requirement or an 
     exemption from the notice requirement if participants are 
     given the option to choose between benefits under the new 
     plan formula and the old plan formula. In such cases, the 
     House bill will have no effect on the fiduciary rules 
     applicable to pension plans that may require

[[Page 9696]]

     appropriate disclosure to participants, even if no disclosure 
     is required under the House bill.
       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 whose rate of future benefit accrual may reasonably be 
     expected to be significantly reduced by the plan amendment.
       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 House bill permits a plan administrator to 
     provide any notice required under the House bill to a person 
     designated in writing by the individual to whom it would 
     otherwise be provided.
       The House bill 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. No 
     excise tax is imposed during any period during which any 
     person subject to liability for the tax did not know that the 
     failure existed and exercised reasonable diligence to meet 
     the notice requirement. In addition, no excise tax is imposed 
     on any failure if any person subject to liability for the tax 
     exercised reasonable diligence to meet the notice requirement 
     and such person provides the required notice during the 30-
     day period beginning on the first date such person knew, or 
     exercising reasonable diligence would have known, that the 
     failure existed. Also, if the person subject to liability for 
     the excise tax exercised reasonable diligence to meet the 
     notice requirement, 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.
       It is intended under the House bill that the Secretary 
     issue the necessary regulations with respect to disclosure 
     within 90 days of enactment. It is also intended 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.
       In addition, the House bill directs the Secretary of the 
     Treasury to prepare a report on the effects of conversions of 
     traditional defined benefit plans to cash balance or hybrid 
     formula plans. Such study is to examine the effect of such 
     conversions on longer service participants, including the 
     incidence and effects of ``wear away'' provisions under which 
     participants earn no additional benefits for a period of time 
     after the conversion. The Secretary is directed to submit 
     such report, together with recommendations thereon, to the 
     Committee on Ways and Means and the Committee on Education 
     and the Workforce of the House of Representatives and the 
     Committee on Finance and the Committee on Health, Education, 
     Labor, and Pensions of the Senate as soon as practicable, but 
     not later than 60 days after the date of enactment.
       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 three-month 
     period following the date of enactment. Prior to the issuance 
     of Treasury regulations, a plan is treated as meeting the 
     requirements of the House bill if the plan makes a good faith 
     effort to comply with such requirements. The notice 
     requirement under the House bill does not apply to any plan 
     amendment taking effect on or after the date of enactment if, 
     before April 25, 2001, notice is provided to participants and 
     beneficiaries adversely affected by the plan amendment (or 
     their representatives) that is reasonably expected to notify 
     them of the nature and effective date of the plan amendment.


                            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.\119\ The notice is required to set forth: (1) a 
     summary of the plan amendment and the effective date of the 
     amendment; (2) a statement that the amendment is expected to 
     significantly reduce the rate of future benefit accrual; (3) 
     a description of the classes of employees reasonably expected 
     to be affected by the reduction in the rate of future benefit 
     accrual; (4) examples illustrating the plan changes for these 
     classes of employees; (5) in the event of an amendment that 
     results in the significant restructuring of the plan benefit 
     formula, as determined under regulations prescribed by the 
     Secretary (a ``significant restructuring amendment''), a 
     notice that the plan administrator will provide, generally no 
     later than 15 days prior to the effective date of the 
     amendment, a ``benefit estimation tool kit'' (described 
     below) that will enable employees who have completed at least 
     one year of participation to personalize the illustrative 
     examples; and (6) notice of each affected participant's right 
     to request, and of the procedures for requesting, an annual 
     benefit statement as provided under present law. The plan 
     administrator is required to provide the notice not less than 
     45 days before the effective date of the plan amendment.
---------------------------------------------------------------------------
     \119\ 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 in the event of a failure by the plan 
     administrator to exercise due diligence in meeting a notice 
     requirement similar to the notice requirement that the 
     provision adds to the Internal Revenue Code. In addition, the 
     provision expands the current ERISA notice requirement 
     regarding significant reductions in normal retirement benefit 
     accrual rates to early retirement benefits and retirement-
     type subsidies.
---------------------------------------------------------------------------
       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 plan administrator is required to provide this 
     generalized notice to each affected participant and each 
     affected alternate payee. For purposes of the Senate 
     amendment, 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.
       As noted above, the Senate amendment requires the plan 
     administrator to provide a benefit estimation tool kit, no 
     later than 15 days prior to the amendment effective date, to 
     a participant for whom the amendment may reasonably be 
     expected to produce a significant reduction in the rate of 
     future benefit accrual if the amendment is a significant 
     restructuring amendment. The plan administrator is not 
     required to provide this benefit estimation tool kit to any 
     participant who has less than one year of participation in 
     the plan.
       The benefit estimation tool kit is designed to enable 
     participants to estimate benefits under the old and new plan 
     provisions. The Senate amendment permits the tool kit to be 
     in the form of software (for use at home, at a workplace 
     kiosk, or on a company intranet), worksheets, or calculation 
     instructions, or other formats to be determined by the 
     Secretary of the Treasury. The tool kit is required to 
     include any necessary actuarial assumptions and formulas and 
     to permit the participant to estimate both a single life 
     annuity at appropriate ages and, when available, a lump sum 
     distribution. The tool kit is required to disclose the 
     interest rate used to compute a lump sum distribution and 
     whether the value of early retirement benefits is included in 
     the lump sum distribution.
       The Senate amendment requires the benefit estimation tool 
     kit to accommodate employee-provided variables with respect 
     to age, years of service, retirement age, covered 
     compensation, and interest rate (when variable rates apply). 
     The tool kit is required to permit employees to recalculate 
     estimated benefits by changing the values of these variables. 
     The Senate amendment does not require the tool kit to 
     accommodate employee variables with respect to qualified 
     domestic relations orders, factors that result in unusual 
     patterns of credited service (such as extended time away from 
     the job), special benefit formulas for unusual situations, 
     offsets from other plans, and forms of annuity distributions.
       In the case of a significant restructuring amendment that 
     occurs in connection with a business disposition or 
     acquisition transaction and within one year following the 
     date of the transaction, the Senate amendment requires the 
     plan administrator to provide the benefit estimation tool kit 
     prior to the date that is 12 months after the date on which 
     the generalized notice of the amendment is given to the 
     affected participants.
       The Senate amendment permits a plan administrator to 
     provide any notice required under the Senate amendment to a 
     person designated in writing by the individual to whom it 
     would otherwise be provided. In addition, the Senate 
     amendment authorizes the Secretary of the Treasury to allow 
     any notice required under the Senate amendment to be provided 
     by using new technologies, provided that at least one option 
     for providing notice is not dependent upon new technologies.
       The Senate amendment 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. No excise tax is imposed during any period during 
     which any person subject to liability for the tax did not 
     know that the failure existed and exercised reasonable 
     diligence to meet the notice requirement. In addition, no 
     excise tax is imposed on any failure if any person subject to 
     liability for the tax exercised reasonable diligence to meet 
     the notice requirement and such person provides the required 
     notice during the 30-day period beginning on the first date 
     such

[[Page 9697]]

     person knew, or exercising reasonable diligence would have 
     known, that the failure existed. Also, if the person subject 
     to liability for the excise tax exercised reasonable 
     diligence to meet the notice requirement, 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 is excessive relative to 
     the failure involved.
       The Senate amendment directs the Secretary of the Treasury 
     to issue, not later than one year after the date of 
     enactment, regulations with respect to early retirement 
     benefits or retirement-type subsidies, the determination of a 
     significant restructuring amendment, and the examples that 
     are required under the generalized notice and the benefit 
     estimation tool kit.
       In addition, the Senate amendment directs the Secretary of 
     the Treasury to prepare a report on the effects of 
     significant restructurings of plan benefit formulas of 
     traditional defined benefit plans. Such study is to examine 
     the effect of such restructurings on longer service 
     participants, including the incidence and effects of ``wear 
     away'' provisions under which participants earn no additional 
     benefits for a period of time after the restructuring. The 
     Secretary is directed to submit such report, together with 
     recommendations thereon, to the Committee on Ways and Means 
     and the Committee on Education and the Workforce of the House 
     of Representatives and the Committee on Finance and the 
     Committee on Health, Education, Labor, and Pensions of the 
     Senate as soon as practicable, but not later than one year 
     after the date of enactment.
       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 Senate 
     amendment will not end before the last day of the three-month 
     period following the date of enactment. Prior to the issuance 
     of Treasury regulations, a plan is treated as meeting the 
     requirements of the Senate amendment if the plan makes a good 
     faith effort to comply with such requirements.


                          Conference Agreement

       The conference agreement follows the House bill, with the 
     following modifications. The conference agreement 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 
     in the event of an egregious failure by the plan 
     administrator to comply with a notice requirement similar to 
     the notice requirement that the conference agreement adds to 
     the Internal Revenue Code. In addition, the conference 
     agreement expands the current ERISA notice requirement 
     regarding significant reductions in normal retirement benefit 
     accrual rates to early retirement benefits and retirement-
     type subsidies.
       (d) Modifications to section 415 limits for multiemployer 
           plans (sec. 505 of the House bill, sec. 654 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) $140,000 (for 2001). 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 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 \120\ or (2) $35,000 (for 2001).
---------------------------------------------------------------------------
     \120\ Another provision of the House bill increases this 
     limit to 100 percent of compensation.
---------------------------------------------------------------------------
       In applying the limits on contributions and benefits, plans 
     of the same employer are aggregated. That is, all defined 
     benefit plans of the same employer are treated as a single 
     plan, and all defined contribution plans of the same employer 
     are treated as a single plan. Under Treasury regulations, 
     multiemployer plans are not aggregated with other 
     multiemployer plans. However, if an employer maintains both a 
     plan that is not a multiemployer plan and a mulitemployer 
     plan, the plan that is not a multiemployer plan is aggregated 
     with the multiemployer plan to the extent that benefits 
     provided under the multiemployer plan are provided with 
     respect to a common participant.\121\
---------------------------------------------------------------------------
     \121\ Treas. Reg. sec. 1.415-8(e).
---------------------------------------------------------------------------


                               House Bill

       Under the House bill, the 100 percent of compensation 
     defined benefit plan limit does not apply to multiemployer 
     plans. With respect to aggregation of multiemployer plans 
     with other plans, the House bill provides that multiemployer 
     plans are not aggregated with single-employer defined benefit 
     plans maintained by an employer contributing to the 
     multiemployer plan for purposes of applying the 100 percent 
     of compensation limit to such single-employer plan.
       Effective date.--The House bill is effective for years 
     beginning after December 31, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill with 
     respect to the waiver of the 100 percent of compensation 
     limit.
       With respect to aggregation of multiemployer plans with 
     other plans, multiemployer plans are not aggregated with any 
     other plan maintained by the same employer, except for 
     purposes of applying the dollar limitation on defined plans 
     and the limits on annual additions to a plan that is not a 
     multiemployer plan.


                          Conference Agreement

       The conference agreement follows the House bill.
       (e) Investment of employee contributions in 401(k) plans 
           (sec. 506 of the House bill, sec. 655 of the Senate 
           amendment, and sec. 1524(b) of the Taxpayer Relief Act 
           of 1997)


                              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 one 
     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

       The House bill 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 House bill 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).


                            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 9698]]


       (f) Periodic pension benefit statements (sec. 507 of the 
           House bill and sec. 105(a) 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 one 
     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 one-year break in service. For purposes of this 
     benefit statement requirement, a ``one-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 
     one 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

       A plan administrator of a defined contribution plan 
     generally is required to 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 
     participant or beneficiary upon written request, the plan 
     administrator of a defined benefit plan generally is required 
     either (1) to furnish a benefit statement at least once every 
     three 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) to 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 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.
       The Secretary of Labor is authorized to provide that years 
     in which no employee or former employee benefits under a plan 
     need not be taken into account in determining the applicable 
     three-year period.
       In addition, the Secretary of Labor is directed to develop 
     a model benefit statement, written in a manner calculated to 
     be understood by the average plan participant, that may be 
     used by plan administrators in complying with the 
     requirements of section 105 of ERISA. The use of the model 
     statement is optional. It is intended that the model 
     statement include items such as the amount of nonforfeitable 
     accrued benefits as of the statement date that are payable at 
     normal retirement age under the plan, the amount of accrued 
     benefits that are forfeitable but that may become 
     nonforfeitable under the terms of the plan, information on 
     how to contact the Social Security Administration to obtain a 
     participant's personal earnings and benefit estimate 
     statement, and other information that may be important to 
     understanding benefits earned under the plan. Statements 
     provided by electronic forms of communications shall be 
     provided consistent with Department of Labor and Department 
     of Treasury regulations.
       Effective date.--The provision is effective for plan years 
     beginning after December 31, 2002.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill.
       (g) Prohibited allocations of stock in an S corporation 
           ESOP (sec. 508 of the House bill, sec. 656 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

     In general
       Under the House bill, if there is a nonallocation year with 
     respect to an ESOP maintained by an S corporation: (1) the 
     amount allocated in a prohibited allocation to an individual 
     who is a disqualified person is treated as distributed to 
     such individual (i.e., the value of the prohibited allocation 
     is includible in the gross income of the individual receiving 
     the prohibited allocation); (2) an excise tax is imposed on 
     the S corporation equal to 50 percent of the amount involved 
     in a prohibited allocation; and (3) an excise tax is imposed 
     on the S corporation with respect to any synthetic equity 
     owned by a disqualified person.\122\
---------------------------------------------------------------------------
     \122\ The plan is not disqualified merely because an excise 
     tax is imposed under the provision.
---------------------------------------------------------------------------
       It is intended that the House bill will limit the 
     establishment of ESOPs by S corporations to those that 
     provide broad-based employee coverage and that benefit rank-
     and-file employees as well as highly compensated employees 
     and historical owners.
     Definition of nonallocation year
       A nonallocation year means any plan year of an ESOP holding 
     shares in an S corporation if, at any time during the plan 
     year, disqualified persons own at least 50 percent of the 
     number of outstanding shares of the S corporation.
       A person is a disqualified person if the person is either 
     (1) a member of a ``deemed 20-percent shareholder group'' or 
     (2) a ``deemed 10-percent shareholder.'' A person is a member 
     of a ``deemed 20-percent shareholder group'' if the aggregate 
     number of deemed-owned shares of the person and his or her 
     family members is at least 20 percent of the number of 
     deemed-owned shares of stock in the S corporation.\123\ A 
     person is a deemed 10-percent shareholder if the person is 
     not a member of a deemed 20-percent shareholder group and the 
     number of the person's deemed-owned shares is at least 10 
     percent of the number of deemed-owned shares of stock of the 
     corporation.
---------------------------------------------------------------------------
     \123\ A family member of a member of a ``deemed 20-percent 
     shareholder group'' with deemed owned shares is also treated 
     as a disqualified person.
---------------------------------------------------------------------------
       In general, ``deemed-owned shares'' means: (1) stock 
     allocated to the account of an individual under the ESOP, and 
     (2) an 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 there is a 
     nonallocation year, ownership of stock generally is 
     attributed under the rules of section 318,\124\ except that: 
     (1) the family attribution rules are modified to include 
     certain other family members, as described below, (2) option 
     attribution does not apply (but instead special rules 
     relating to synthetic equity described below apply), and (3) 
     ``deemed-owned shares'' held by the ESOP are treated as held 
     by the individual with respect to whom they are deemed owned.
---------------------------------------------------------------------------
     \124\ These attribution rules also apply to stock treated as 
     owned by reason of the ownership of synthetic equity.
---------------------------------------------------------------------------
       Under the House bill, family members of an individual 
     include (1) the spouse \125\ 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).
---------------------------------------------------------------------------
     \125\ As under section 318, an individual's spouse is not 
     treated as a member of the individual's family if the spouses 
     are legally separated.
---------------------------------------------------------------------------
       The House bill contains special rules applicable to 
     synthetic equity interests. Except to the extent provided in 
     regulations, the stock on which a synthetic equity interest 
     is based are treated as outstanding stock of the S 
     corporation and as deemed-owned shares of the person holding 
     the synthetic equity interest if such treatment will result 
     in the treatment of any person as a disqualified person or 
     the treatment of any year as a nonallocation year. Thus, for 
     example, disqualified persons for a year include those 
     individuals who are disqualified persons under the general 
     rule (i.e., treating only those shares held by the ESOP as 
     deemed-owned shares) and those individuals who are 
     disqualified individuals if synthetic equity interests are 
     treated as deemed-owned shares.
       ``Synthetic equity'' means any stock option, warrant, 
     restricted stock, deferred issuance stock right, or similar 
     interest that gives the holder the right to acquire or 
     receive stock of the S corporation in the future. Except to 
     the extent provided in regulations, synthetic equity also 
     includes a stock appreciation right, phantom stock

[[Page 9699]]

     unit, or similar right to a future cash payment based on the 
     value of such stock or appreciation in such value.\126\
---------------------------------------------------------------------------
     \126\ The provisions relating to synthetic equity do not 
     modify the rules relating to S corporations, e.g., the 
     circumstances in which options or similar interests are 
     treated as creating a second class of stock.
---------------------------------------------------------------------------
       Ownership of synthetic equity is attributed in the same 
     manner as stock is attributed under the House bill (as 
     described above). In addition, ownership of synthetic equity 
     is attributed under the rules of section 318(a)(2) and (3) in 
     the same manner as stock.
     Definition of prohibited allocation
       An ESOP of an S corporation is required to provide that no 
     portion of the assets of the plan attributable to (or 
     allocable in lieu of) S corporation stock may, during a 
     nonallocation year, accrue (or be allocated directly or 
     indirectly under any qualified plan of the S corporation) for 
     the benefit of a disqualified person. A ``prohibited 
     allocation'' refers to violations of this provision. A 
     prohibited allocation occurs, for example, if income on S 
     corporation stock held by an ESOP is allocated to the account 
     of an individual who is a disqualified person.
     Application of excise tax
       In the case of a prohibited allocation, the S corporation 
     is liable for an excise tax equal to 50 percent of the amount 
     of the allocation. For example, if S corporation stock is 
     allocated in a prohibited allocation, the excise tax is equal 
     to 50 percent of the fair market value of such stock.
       A special rule applies in the case of the first 
     nonallocation year, regardless of whether there is a 
     prohibited allocation. In that year, the excise tax also 
     applies to the fair market value of the deemed-owned shares 
     of any disqualified person held by the ESOP, even though 
     those shares are not allocated to the disqualified person in 
     that year.
       As mentioned above, the S corporation also is liable for an 
     excise tax with respect to any synthetic equity interest 
     owned by any disqualified person in a nonallocation year. The 
     excise tax is 50 percent of the value of the shares on which 
     synthetic equity is based.
     Treasury regulations
       The Treasury Department is given the authority to prescribe 
     such regulations as may be necessary to carry out the 
     purposes of the House bill.
     Effective date
       The House bill generally is effective with respect to plan 
     years beginning after December 31, 2004. In the case of an 
     ESOP established after March 14, 2001, or an ESOP established 
     on or before such date if the employer maintaining the plan 
     was not an S corporation on such date, the House bill is 
     effective with respect to plan years ending after March 14, 
     2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill, with a 
     modification of the effective date.
       Effective date.--The Senate amendment generally is 
     effective with respect to plan years beginning after December 
     31, 2002. In the case of an ESOP established after July 11, 
     2000, or an ESOP established on or before such date if the 
     employer maintaining the plan was not an S corporation on 
     such date, the Senate amendment is effective with respect to 
     plan years ending after July 11, 2000.


                          Conference Agreement

       The conference agreement follows the House bill. The 
     conference agreement authorizes the Secretary to determine, 
     by regulation or other guidance of general applicability, 
     that a nonallocation year occurs in any case in which the 
     principal purpose of the ownership structure of an S 
     corporation constitutes, in substance, an avoidance or 
     evasion of the prohibited allocation rules. For example, this 
     might apply if more than 10 independent businesses are 
     combined in an S corporation owned by an ESOP in order to 
     take advantage of the income tax treatment of S corporations 
     owned by an ESOP.
       (h) Automatic rollovers of certain mandatory distributions 
           (sec. 657 of the Senate amendment and secs. 401(a)(31) 
           and 402(f)(1) of the Code and sec. 404(c) of ERISA)


                              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.
       Generally, a participant may roll over an involuntary 
     distribution from a qualified plan to an IRA or to another 
     qualified plan. Before making a distribution that is eligible 
     for rollover, a plan administrator must provide the 
     participant with a written explanation of the ability to have 
     the distribution rolled over directly to an IRA or another 
     qualified plan and the related tax consequences.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment makes a direct rollover the default 
     option for involuntary distributions that exceed $1,000 and 
     that are eligible rollover distributions from qualified 
     retirement plans. The distribution must be rolled over 
     automatically to a designated IRA, unless the participant 
     affirmatively elects to have the distribution transferred to 
     a different IRA or a qualified plan or to receive it 
     directly.
       The written explanation provided by the plan administrator 
     is required to explain that an automatic direct rollover will 
     be made unless the participant elects otherwise. The plan 
     administrator is also required to notify the participant in 
     writing (as part of the general written explanation or 
     separately) that the distribution may be transferred without 
     cost to another IRA.
       The Senate amendment amends the fiduciary rules of ERISA so 
     that, in the case of an automatic direct rollover, the 
     participant is treated as exercising control over the assets 
     in the IRA upon the earlier of (1) the rollover of any 
     portion of the assets to another IRA, or (2) one year after 
     the automatic rollover.
       The Senate amendment directs the Secretary of Labor to 
     issue safe harbors under which the designation of an 
     institution and investment of funds in accordance with the 
     Senate amendment are deemed to satisfy the requirements of 
     section 404(a) of ERISA. In addition, the Senate amendment 
     authorizes and directs the Secretary of the Treasury and the 
     Secretary of Labor to give consideration to providing special 
     relief with respect to the use of low-cost individual 
     retirement plans for purposes of the provision and for other 
     uses that promote the preservation of tax-qualified 
     retirement assets for retirement income purposes.
       Effective date.--The Senate amendment applies to 
     distributions that occur after the Department of Labor has 
     adopted final regulations implementing the Senate amendment.


                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     modifications. The conference agreement directs the Secretary 
     of Labor to adopt final regulations implementing the 
     conference agreement not later than three years after the 
     date of enactment.
       (i) Clarification of treatment of contributions to a 
           multiemployer plan (sec. 658 of the bill)


                              Present Law

       Employer contributions to one or more qualified retirement 
     plans are deductible subject to certain limits. In general, 
     contributions are deductible for the taxable year of the 
     employer in which the contributions are made. Under a special 
     rule, an employer may be deemed to have made a contribution 
     on the last day of the preceding taxable year if the 
     contribution is on account of the preceding taxable year and 
     is made not later than the time prescribed by law for filing 
     the employer's income tax return for that taxable year 
     (including extensions).\127\
---------------------------------------------------------------------------
     \127\ Section 404(a)(6).
---------------------------------------------------------------------------
       A change in method of accounting includes a change in the 
     overall plan of accounting for gross income or deductions or 
     a change in the treatment of any material item used in such 
     overall plan. A material item is any item that involves the 
     proper time for the inclusion of the item in income or taking 
     of a deduction.\128\ A change in method of accounting does 
     not include correction of mathematical or posting errors, or 
     errors in the computation of tax liability. Also, a change in 
     method of accounting does not include adjustment of any item 
     of income or deduction that does not involve the proper time 
     for the inclusion of the item of income or the taking of a 
     deduction. A change in method of accounting also does not 
     include a change in treatment resulting from a change in 
     underlying facts.
---------------------------------------------------------------------------
     \128\ Treas. Reg. sec. 1.446-1(e)(2)(ii)(a).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment clarifies that a determination of 
     whether contributions to multiemployer pension plans are on 
     account of a prior year under section 404(a)(6) is not a 
     method of accounting. Thus, any taxpayer that begins to 
     deduct contributions to multiemployer plans as provided in 
     section 404(a)(6) has not changed its method of accounting 
     and is not subject to an adjustment under section 481. The 
     Senate amendment is intended to respect, not disturb, the 
     effect of the statute of limitations. The Senate amendment is 
     not intended to permit, as of the end of the taxable year, 
     aggregate deductions for contributions to a qualified plan in 
     excess of the amounts actually contributed or deemed 
     contributed to the plan by the taxpayer. The Secretary of the 
     Treasury is authorized to promulgate regulations to clarify 
     that, in the aggregate, no taxpayer will be permitted 
     deductions in excess of amounts actually contributed to 
     multiemployer plans, taking into account the provisions of 
     section 404(a)(6).

[[Page 9700]]

       No inference is intended regarding whether the 
     determination of whether a contribution to a multiemployer 
     pension plan on account of a prior year under section 
     404(a)(6) is a method of accounting prior to the effective 
     date of the provision.
       Effective date.--The Senate amendment is effective after 
     the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     5. Reducing regulatory burdens
       (a) Modification of timing of plan valuations (sec. 601 of 
           the House bill, sec. 661 of the Senate amendment, and 
           sec. 412 of the Code)


                              Present Law

       Under present law, plan valuations are generally required 
     annually for plans subject to the minimum funding rules. 
     Under proposed Treasury regulations, except as provided by 
     the Commissioner, the valuation must be as of a date within 
     the plan year to which the valuation refers or within the 
     month prior to the beginning of that year.\129\
---------------------------------------------------------------------------
     \129\ Prop. Treas. Reg. sec. 1.412(c)(9)-1(b)(1).
---------------------------------------------------------------------------


                               House Bill

       The House bill incorporates into the statute the proposed 
     regulation regarding the date of valuations. The House bill 
     also provides, as an exception to this general rule, that the 
     valuation date with respect to a plan year may be any date 
     within the immediately preceding plan year if, as of such 
     date, plan assets are not less than 125 percent of the plan's 
     current liability. Information determined as of such date is 
     required to be adjusted actuarially, in accordance with 
     Treasury regulations, to reflect significant differences in 
     plan participants. An election to use a prior plan year 
     valuation date, once made, may only be revoked with the 
     consent of the Secretary.
       Effective date.--The House bill is effective for plan years 
     beginning after December 31, 2001.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement incorporates into the statute the 
     proposed regulation regarding the date of valuations. The 
     conference agreement also provides, as an exception to this 
     general rule, that the valuation date with respect to a plan 
     year may be any date within the immediately preceding plan 
     year if, as of such date, plan assets are not less than 100 
     percent of the plan's current liability. Information 
     determined as of such date is required to be adjusted 
     actuarially, in accordance with Treasury regulations, to 
     reflect significant differences in plan participants. A 
     change in funding method to take advantage of the exception 
     to the general rule may not be made unless, as of such date, 
     plan assets are not less than 125 percent of the plan's 
     current liability. The Secretary is directed to automatically 
     approve changes in funding method to use a prior year 
     valuation date if the change is within the first three years 
     that the plan is eligible to make the change.
       (b) ESOP dividends may be reinvested without loss of 
           dividend deduction (sec. 602 of the House bill, sec. 
           662 of the Senate amendment, and sec. 404 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 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.
       The Secretary may disallow the deduction for any ESOP 
     dividend if he determines that the dividend constitutes, in 
     substance, an evasion of taxation (sec. 404(k)(5)).


                               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.
       The House bill permits the Secretary to disallow the 
     deduction for any ESOP dividend if the Secretary determines 
     that the dividend constitutes, in substance, the avoidance or 
     evasion of taxation.
       Effective date.--The House bill is effective for taxable 
     years beginning after December 31, 2001.


                            Senate Amendment

       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 the 
     applicable percentage of 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. The applicable percentage is 25 percent 
     for 2002 through 2004, 50 percent for 2005 through 2007, 75 
     percent for 2008 through 2010 and 100 percent for 2011 and 
     thereafter.


                          Conference Agreement

       The conference agreement follows the House bill. The 
     provision of the conference agreement that authorizes the 
     Secretary to disallow the deduction for any ESOP dividend if 
     the Secretary determines that the dividend constitutes, in 
     substance, the avoidance or evasion of taxation includes 
     authority to disallow a deduction of unreasonable dividends. 
     For purposes of the section 404(k)(2)(A)(iii) reinvested 
     dividends, a dividend paid on common stock that is primarily 
     and regularly traded on an established securities market 
     would be reasonable. In addition, for this purpose in the 
     case of employers with no common stock (determined on a 
     controlled group basis) that is primarily and regularly 
     traded on an established securities market, the 
     reasonableness of a dividend is determined by comparing the 
     dividend rate on stock held by the ESOP with the dividend 
     rate for common stock of comparable corporations whose stock 
     is primarily and regularly traded on an established 
     securities market. Whether a corporation is comparable is 
     determined by comparing relevant corporate characteristics 
     such as industry, corporate size, earnings, debt-equity 
     structure and dividend history.
       (c) Repeal transition rule relating to certain highly 
           compensated employees (sec. 603 of the House bill, sec. 
           663 of the Senate amendment, and sec. 1114(c)(4) of the 
           Tax Reform Act of 1986)


                              Present Law

       Under present law, for purposes of the rules relating to 
     qualified plans, a highly compensated employee is generally 
     defined as an employee \130\ who (1) was a five-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 $85,000 (for 2001) or (b) at the election 
     of the employer, had compensation in excess of $85,000 for 
     the preceding year and was in the top 20 percent of employees 
     by compensation for such year.
---------------------------------------------------------------------------
     \130\ 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, 2001.


                            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) Employees of tax-exempt entities (sec. 604 of the House 
           bill and sec. 664 of the Senate amendment)


                              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.\131\
---------------------------------------------------------------------------
     \131\ Treas. Reg. sec. 1.410(b)-6(g).
---------------------------------------------------------------------------
       Tax-exempt charitable organizations may maintain a tax-
     sheltered annuity (a ``section

[[Page 9701]]

     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 are to 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.
       (e) Treatment of employer-provided retirement advice (sec. 
           605 of the House bill, sec. 665 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 
     December 31, 2001.\132\ Education not excludable under 
     section 127 may be excludable as a working condition fringe.
---------------------------------------------------------------------------
     \132\ The exclusion does not apply with respect to graduate-
     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 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. ``Qualified retirement planning 
     services'' are retirement planning advice and information. 
     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 does not apply to services that 
     may be related to retirement planning, such as tax 
     preparation, accounting, legal or brokerage services.
       It is intended that the House bill will clarify the 
     treatment of retirement advice provided in a 
     nondiscriminatory manner. It is intended that the Secretary, 
     in determining the application of the exclusion to highly 
     compensated employees, may permit employers to take into 
     consideration employee circumstances other than compensation 
     and position in providing advice to classifications of 
     employees. Thus, for example, the Secretary may permit 
     employers to limit certain advice to individuals nearing 
     retirement age under the plan.
       Effective date.--The House bill is effective with respect 
     to years beginning after December 31, 2001.


                            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) Reporting simplification (sec. 606 of the House bill 
           and sec. 666 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.\133\ 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 Department 
     of Labor, which forwards the form to the Internal Revenue 
     Service and the PBGC.
---------------------------------------------------------------------------
     \133\ Treas. Reg. sec. 301.6058-1(a).
---------------------------------------------------------------------------
       The Form 5500 series consists of two different forms: Form 
     5500 and Form 5500-EZ. Form 5500 is the more comprehensive of 
     the forms and requires the most detailed financial 
     information. A plan administrator generally may file Form 
     5500-EZ, which consists of only one page, 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 assets as of the end of the 
     plan year and all prior plan years beginning on or after 
     January 1, 1994, does not exceed $100,000, the plan 
     administrator is not required to file a return.
       With respect to a plan that does not satisfy the 
     eligibility requirements for Form 5500-EZ, the 
     characteristics and the size of the plan determine the amount 
     of detailed financial information that the plan administrator 
     must provide on Form 5500. If the plan has more than 100 
     participants at the beginning of the plan year, the plan 
     administrator generally must provide more information.


                               House Bill

       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 
     beginning on or after January 1, 1994, does not exceed 
     $250,000, the plan administrator is not required to file a 
     return. In addition, the House bill directs the Secretary of 
     the Treasury and the Secretary of Labor to provide simplified 
     reporting requirements for certain plans with fewer than 25 
     employees.
       Effective date.--The House bill is effective on January 1, 
     2002.


                            Senate Amendment

       The Senate amendment is the same as the House bill, with 
     the following modification. The Senate amendment does not 
     include the direction to the Secretary of the Treasury and 
     the Secretary of Labor to provide simplified reporting 
     requirements for certain plans with fewer than 25 employees.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment.
       (g) Improvement to Employee Plans Compliance Resolution 
           System (sec. 607 of the House bill and sec. 667 of the 
           Senate amendment)


                              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), section 403(a), or section 403(b), as 
     applicable.\134\ EPCRS permits employers to correct 
     compliance failures and continue to provide their employees 
     with retirement benefits on a tax-favored basis.
---------------------------------------------------------------------------
     \134\ Rev. Proc. 2001-17, 2001-7 I.R.B. 589.
---------------------------------------------------------------------------
       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

[[Page 9702]]

     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 Self-Correction Program (``SCP'') 
     generally 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 two-year period, without 
     payment of any fee or sanction. The Voluntary Correction 
     Program (``VCP'') program permits 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 SCP for significant compliance 
     failures, (4) expanding the availability to correct 
     insignificant compliance failures under SCP 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

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment.
       (h) Repeal of the multiple use test (sec. 608 of the House 
           bill, sec. 668 of the Senate amendment, 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 two 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 two 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) 
     two percentage points plus (but not more than two 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) two percentage points plus (but not more than 
     two 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, 2001.


                            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.
       (i) Flexibility in nondiscrimination, coverage, and line of 
           business rules (sec. 609 of the House bill, sec. 669 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, 2003, the existing regulations issued 
     under 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 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.
       The Secretary of the Treasury is directed to provide by 
     regulation applicable to years beginning after December 31, 
     2003, 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 provision of the House bill relating 
     to the line of business requirements under section 414(r) is 
     effective on the date of enactment. The provision relating to 
     the nondiscrimination requirements under section 401(a)(4) is 
     effective on the date of enactment, except that any condition 
     of availability prescribed by the Secretary is not effective 
     before the first year beginning

[[Page 9703]]

     not less than 120 days after the date on which such condition 
     is prescribed. The provision relating to the minimum coverage 
     requirements under section 410(b) is effective for years 
     beginning after December 31, 2003, except that any condition 
     of availability prescribed by the Secretary by regulation 
     does not apply before the first year beginning not less than 
     120 days after the date on which such condition is 
     prescribed.


                            senate amendment

       The Senate amendment is the same as the House bill, with 
     the following modification. The Senate amendment provides 
     that the regulations required with respect to the 
     nondiscrimination requirements of section 401(a)(4) are to be 
     applicable to plan years beginning after December 31, 2001, 
     and that the regulations required with respect to the line of 
     business requirements of section 414(r) are to be issued by 
     December 31, 2001.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment.
       (j) Extension to all governmental plans of moratorium on 
           application of certain nondiscrimination rules 
           applicable to state and local government plans (sec. 
           610 of the House bill, sec. 670 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)). All other governmental plans are not 
     exempt from the nondiscrimination and minimum participation 
     rules.


                               house bill

       The House bill exempts all governmental plans (as defined 
     in sec. 414(d)) from the nondiscrimination and minimum 
     participation rules.
       Effective date.--The House bill is effective for plan years 
     beginning after December 31, 2001.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment.
       (k) Notice and consent period regarding distributions (sec. 
           611 of the House bill 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 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.\135\
---------------------------------------------------------------------------
     \135\ 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, (2) the 
     participant's right, if any, to have the distribution 
     directly transferred to another retirement plan or IRA, and 
     (3) the rules concerning the taxation of a distribution. If 
     the joint and survivor annuity requirements apply to the 
     participant, this notice also must contain 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 this notice 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 180 days 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 180 days 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, 2001.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not include the House bill.
       (l) Annual report dissemination (sec. 612 of the House bill 
           and sec. 104(b)(3) 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 seven months after 
     the end of the plan year. Within nine months after the end of 
     the plan year, the plan administrator generally must furnish 
     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

       The requirement that a plan administrator furnish a summary 
     annual report is satisfied if the report is made reasonably 
     available through electronic means or other new technology. 
     The interpretation of the House bill is to be consistent with 
     the regulations of the Department of Labor and the Department 
     of the Treasury.
       Effective date.--The House bill is effective for reports 
     for years beginning after December 31, 2000.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not include the House bill.
       (m) Modifications to the SAVER Act (sec. 613 of the House 
           bill and sec. 517 of ERISA)


                              present law

       The Savings Are Vital to Everyone's Retirement (``SAVER'') 
     Act initiated a public-private partnership to educate 
     American workers about retirement savings and directed the 
     Department of Labor to maintain an ongoing program of public 
     information and outreach. The Act also convened a National 
     Summit on Retirement Savings held June 4-5, 1998, and to be 
     held again in 2001 and 2005, co-hosted by the President and 
     the bipartisan Congressional leadership. The National Summit 
     brings together experts in the fields of employee benefits 
     and retirement savings, key leaders of government, and 
     interested parties from the private sector and general 
     public. The delegates are selected by the Congressional 
     leadership and the President. The National Summit is a 
     public-private partnership, receiving substantial funding 
     from private sector contributions. The goals of the National 
     Summits are to: (1) advance the public's knowledge and 
     understanding of retirement savings and facilitate the 
     development of a broad-based, public education program; (2) 
     identify the barriers which hinder workers from setting aside 
     adequate savings for retirement and impede employers, 
     especially small employers, from assisting their workers in 
     accumulating retirement savings; and (3) develop specific 
     recommendations for legislative, executive, and private 
     sector actions to promote retirement income savings among 
     American workers.


                               house bill

       The House bill clarifies that future National Summits on 
     Retirement Savings are to be held in the month of September 
     in 2001 and 2005, and adds an additional National Summit in 
     2009. To facilitate the administration of future National 
     Summits, the Department of Labor is given authority to enter 
     into cooperative agreements (pursuant to the Federal Grant 
     and Cooperative Agreement Act of 1977) with its 1999 summit 
     partner, the American Savings Education Council.
       Six new statutory delegates are added to future National 
     Summits: the Chairman and Ranking Member of the House Ways 
     and Means Committee, the Senate Finance Committee, and the 
     Subcommittee on Employer-Employee Relations of the House 
     Committee on Education and the Workforce. Further, the 
     President, in consultation with the Congressional leadership, 
     may appoint up to three percent of the delegates (not to 
     exceed 10) from a list of nominees provided by the private 
     sector partner in Summit administration. The provision also 
     clarifies that new delegates are to be appointed for each 
     future National Summit (as was the intent of the original 
     legislation) and sets deadlines for their appointment.
       The provision also sets deadlines for the Department of 
     Labor to publish the Summit agenda, gives the Department of 
     Labor limited reception and representation authority, and 
     mandates that the Department of Labor consult with the 
     Congressional leadership in drafting the post-Summit report.

[[Page 9704]]

       Effective date.--The provision is effective on the date of 
     enactment.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not include the House bill.
     6. Other ERISA provisions
       (a) Extension of PBGC missing participants program (sec. 
           701 of the House bill, sec. 681 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 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 of a 
     single employer plan 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

       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.
       In addition, plan administrators of certain types of plans 
     not subject to the PBGC termination insurance program under 
     present law are permitted, but not required, to elect to 
     transfer missing participants' benefits to the PBGC upon plan 
     termination. Specifically, the House bill extends the missing 
     participants program to defined contribution plans, defined 
     benefit plans that have no more than 25 active participants 
     and are maintained by professional service employers, and the 
     portion 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 House bill is effective for 
     distributions from terminating plans that occur after the 
     PBGC has adopted final regulations implementing the House 
     bill.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment.
       (b) Reduce PBGC premiums for small and new plans (secs. 
           702-703 of the House bill, secs. 682-683 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 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.
       The PBGC guarantee is phased in ratably in the case of 
     plans that have been in effect for less than five years, and 
     with respect to benefit increases from a plan amendment that 
     was in effect for less than five years before termination of 
     the plan.


                               house bill

     Reduced flat-rate premiums for new plans of small employers
       Under the House bill, 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.
       A new plan means a defined benefit plan maintained by a 
     contributing sponsor if, during the 36-month period ending on 
     the date of adoption of the plan, such contributing sponsor 
     (or controlled group member or a predecessor of either) has 
     not established or maintained a plan subject to PBGC coverage 
     with respect to which benefits were accrued for substantially 
     the same employees as are in the new plan.
     Reduced variable-rate PBGC premium for new plans
       The House bill provides that the variable-rate 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-rate premium is a percentage of the variable 
     premium otherwise due, as follows: zero percent of the 
     otherwise applicable variable-rate 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 plan year; and 100 percent in the sixth 
     plan year (and thereafter).
       A new defined benefit plan is defined as described above 
     under the flat-rate premium provision of the House bill 
     relating to new small employer plans.
     Reduced variable-rate PBGC premium for small plans
       In the case of a plan of a small employer, the variable-
     rate premium is no more than $5 multiplied by the number of 
     plan participants in the plan at the end of the preceding 
     plan year. For purposes of the House bill, a small employer 
     is a contributing sponsor that, on the first day of the plan 
     year, has 25 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.
     Effective date
       The reduction of the flat-rate premium for new plans of 
     small employers and the reduction of the variable-rate 
     premium for new plans is effective with respect to plans 
     established after December 31, 2001. The reduction of the 
     variable-rate premium for small plans is effective with 
     respect to plan years beginning after December 31, 2001.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment.
       (c) Authorization for PBGC to pay interest on premium 
           overpayment refunds (sec. 704 of the House bill, sec. 
           684 of the Senate amendment, and sec. 4007(b) of ERISA)


                              present law

       The PBGC charges interest on underpayments of premiums, but 
     is not authorized to pay interest on overpayments.


                               House bill

       The House bill allows the PBGC to pay interest on 
     overpayments made by premium payors. Interest paid on 
     overpayments is calculated at the same rate and in the same 
     manner as interest is charged on premium underpayments.
       Effective date.--The House bill is effective with respect 
     to interest accruing for periods beginning not earlier than 
     the date of enactment.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment.
       (d) Rules for substantial owner benefits in terminated 
           plans (sec. 705 of the House bill, sec. 685 of the 
           Senate amendment, and secs. 4021, 4022, 4043 and 4044 
           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 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

[[Page 9705]]

     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

       The House bill 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 occurs over a 10-year period and 
     depends on the number of years the plan has been in effect. 
     The majority owner's guaranteed benefit is limited so that it 
     could not be more than the amount phased in over 60 months 
     for other participants. The rules regarding allocation of 
     assets applies to substantial owners, other than majority 
     owners, in the same manner as other participants.
       Effective date.--The House bill 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, 
     2001.


                            senate amendment

       The Senate amendment is the same as the House bill.


                          conference agreement

       The conference agreement does not include the House bill or 
     the Senate amendment.
       (e) Civil penalties for breach of fiduciary responsibility 
           (sec. 706 of the House bill and sec. 502 of ERISA)


                              present law

       Present law requires the Secretary of Labor to assess a 
     civil penalty against (1) a fiduciary who breaches a 
     fiduciary responsibility under, or commits a violation of, 
     part 4 of Title I of ERISA, or (2) any other person who 
     knowingly participates in such a breach or violation. The 
     penalty is equal to 20 percent of the ``applicable recovery 
     amount'' that is paid pursuant to a settlement agreement with 
     the Secretary of Labor or that a court orders to be paid in a 
     judicial proceeding brought by the Secretary of Labor to 
     enforce ERISA's fiduciary responsibility provisions. The 
     Secretary of Labor may waive or reduce the penalty only if 
     the Secretary finds in writing that either (1) the fiduciary 
     or other person acted reasonably and in good faith, or (2) it 
     is reasonable to expect that the fiduciary or other person 
     cannot restore all the losses without severe financial 
     hardship unless the waiver or reduction is granted.


                               house bill

       The House bill makes the assessment of the penalty 
     discretionary with the Secretary of Labor, rather than 
     mandatory. This change will allow the Secretary to refrain 
     from imposing the penalty in certain cases as well as to 
     assess a penalty of less than 20 percent of the applicable 
     recovery amount. The requirement of a settlement agreement is 
     also eliminated. The applicable recovery amount is any amount 
     recovered by a plan or by a participant or beneficiary more 
     than 30 days after the fiduciary's or other person's receipt 
     of a written notice of the violation from the Department of 
     Labor (``DOL''). Payments made after the 30-day grace period, 
     whether they are made pursuant to a settlement agreement, or 
     simply to discourage the DOL from bringing a legal action, 
     are subject to the penalty, as are amounts recovered pursuant 
     to a court order. ERISA section 502(l) is also amended to 
     clarify that the term ``applicable recovery amount'' includes 
     payments by third parties that are made on behalf of the 
     relevant fiduciary or other persons liable for the amount 
     that is recovered, including those who did not actually pay. 
     These changes prevent avoidance of the penalty by having an 
     unrelated third party pay the recovery amount.
       Effective date.--The House bill applies to any breach of 
     fiduciary responsibility or other violation of part 4 of 
     Title I of ERISA occurring on or after the date of enactment. 
     The change with respect to ``applicable recovery amount'' 
     includes a transition rule whereby a breach or other 
     violation occurring before the date of enactment which 
     continues past the 180th day from enactment (and which may 
     have been discontinued during that period) is treated as 
     having occurred after the date of enactment (to avoid having 
     to make a complex determination regarding how much of the 
     applicable recovery amount for such continuing violations 
     should be attributed to the post-enactment part of the 
     violation).


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not include the House bill.
       (f) Benefit suspension notice (sec. 707 of the House bill 
           and sec. 203 of ERISA)


                              present law

       Under present law (ERISA sec. 203(a)(3)(B)), a plan will 
     not fail to satisfy the vesting requirements with respect to 
     a participant by reason of suspending payment of the 
     participant's benefits while such participant is employed. 
     Under the applicable Department of Labor (``DOL'') 
     regulations, such a suspension is only permissible if the 
     plan notifies the participant during the first calendar month 
     or payroll period in which the plan withholds benefit 
     payments. Such notice must provide certain information and 
     must also include a copy of the plan's provisions relating to 
     the suspension of payments.
       In the case of a plan that does not pay benefits to active 
     participants upon attainment of normal retirement age, the 
     employer must monitor plan participants to determine when any 
     participant who is still employed attains normal retirement 
     age. In order to suspend payment of such a participant's 
     benefits, generally a plan must, as noted above, promptly 
     provide the participant with a suspension notice.


                               house bill

       The House bill directs the Secretary of Labor to revise the 
     regulations relating to the benefit suspension notice to 
     generally permit the information currently required to be set 
     forth in a suspension notice to be included in the summary 
     plan description. The House bill also directs the Secretary 
     of Labor to eliminate the requirement that the notice include 
     a copy of relevant plan provisions. However, individuals 
     reentering the workforce to resume work with a former 
     employer after they have begun to receive benefits will still 
     receive the notification of the suspension of benefits (and a 
     copy of the plan's provisions relating to suspension of 
     payments). In addition, if a reduced rate of future benefit 
     accruals will apply to a returning employee (as of his or her 
     first date of participation in the plan after returning to 
     work) who has begun to receive benefits, the notice must 
     include a statement that the rate of future benefit accruals 
     will be reduced.
       Effective date.--The House bill applies to plan years 
     beginning after December 31, 2001.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not include the House bill.
       (g) Studies (sec. 708 of the House bill)


                              present law

       No provision.


                               house bill

     Study on small employer group plans
       The House bill directs the Secretary of Labor, in 
     consultation with the Secretary of the Treasury, to conduct a 
     study to determine (1) the most appropriate form(s) of 
     pension plans that would be simple to create and easy to 
     maintain by multiple small employers, while providing ready 
     portability of benefits for all participants and 
     beneficiaries, (2) how such arrangements could be established 
     by employer or employee associations, (3) how such 
     arrangements could provide for employees to contribute 
     independent of employer sponsorship, and (4) appropriate 
     methods and strategies for making such pension plan coverage 
     more widely available to American workers.
       The Secretary of Labor is to consider the adequacy and 
     availability of existing pension plans and the extent to 
     which existing models may be modified to be more accessible 
     to both employees and employers. The Secretary of Labor is to 
     issue a report within 18 months, including recommendations 
     for one or more model plans or arrangements as described 
     above which may serve as the basis for appropriate 
     administrative or legislative action.
     Study on pension coverage
       The House bill also directs the Secretary of Labor to 
     report to the Committee on Education and the Workforce of the 
     House of Representatives and the Committee on Health, 
     Education, Labor and Pensions of the Senate regarding the 
     effect of the bill on pension coverage, including: the extent 
     of pension plan coverage for low and middle-income workers, 
     the levels of pension plan benefits generally, the quality of 
     pension plan coverage generally, worker's access to and 
     participation in pension plans, and retirement security. This 
     report is required to be submitted no later than five years 
     after the date of enactment.
     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.
     7. Miscellaneous provisions
       (a) Tax treatment of electing Alaska Native Settlement 
           Trusts (section 691 of the Senate amendment and new 
           sections 646 and 6039H of the Code, modifying Code 
           sections including 1(e), 301, 641, 651, 661, and 
           6034A))


                              Present Law

       An Alaska Native Corporation (``ANC'') may establish a 
     Settlement Trust (``Trust'') under section 39 of the Alaska 
     Native Claims Settlement Act (``ANCSA'') \136\ and transfer 
     money or other property to such Trust for

[[Page 9706]]

     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.
---------------------------------------------------------------------------
     \136\ 43 U.S.C. 1601 et seq. A settlement Trust is subject to 
     certain limitations under ANCSA, including that it may not 
     operate a business. 43 U.S.C. 1629e(b).
---------------------------------------------------------------------------
       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 judgment, 
     except with respect to the lawful debts and obligations of 
     the Trust.
       The Internal Revenue Service (``IRS'') 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.\137\ Also, 
     a Trust and its beneficiaries are generally taxed subject to 
     applicable trust rules.\138\
---------------------------------------------------------------------------
     \137\ See, e.g., PLR 9824014; PLR 9433021; PLR 9329026 and 
     PLR 9326019.
     \138\ See Subchapter J of the Code (secs. 641 et. seq.); 
     Treas. Reg. Sec. 301.7701-4.
---------------------------------------------------------------------------
       Under general rules regarding the classification of 
     entities, an entity that is taxed as a trust may not engage 
     in business activity and must meet certain other 
     requirements.\139\ Under certain circumstances, a trust can 
     be treated as a ``grantor'' trust rather than being taxed as 
     a trust; and its income can be taxed directly to the person 
     or persons considered the owner of the trust.\140\
---------------------------------------------------------------------------
     \139\ Treas. Reg. Sec. 301.7701-4.
     \140\ 140 Sec. 671 et. seq.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment allows an election under which special 
     rules will apply in determining the income tax treatment of 
     an electing Trust and of its beneficiaries. An electing Trust 
     will pay tax on its income at the lowest rate specified for 
     ordinary income of an individual (or corresponding lower 
     capital gains rate). The provision also specifies the 
     treatment of distributions by an electing Trust to 
     beneficiaries, the reporting requirements associated with 
     such an election, and the consequences of disqualification 
     for these benefits due to the allowance of certain 
     impermissible dispositions of Trust interests, or of ANC 
     stock.
       Under the provision, a trust that is a Trust established by 
     an Alaska Native Corporation under section 39 of ANCSA may 
     make an election for its first taxable year ending after the 
     date of enactment of the provision to be subject to the rules 
     of the provision rather than otherwise applicable income tax 
     rules. If the election is in effect, no amount will be 
     included in the gross income of a beneficiary of such Trust 
     by reason of a contribution to the Trust.\141\ In addition, 
     ordinary income of the electing Trust, whether accumulated or 
     distributed, will be taxed only to the Trust (and not to 
     beneficiaries) at the lowest individual tax rate for ordinary 
     income. Capital gains of the electing Trust will similarly be 
     taxed to the Trust at the capital gains rate applicable to 
     individuals subject to such lowest rate. These rates will 
     apply, rather than the higher rates generally applicable to 
     trusts or to higher tax bracket beneficiaries. The election 
     is made on a one-time basis only. The benefits of the 
     election will terminate, however, and other special rules 
     will apply, if the electing Trust or the sponsoring ANC fail 
     to satisfy the restrictions on transferability of Trust 
     beneficial interests or of ANC stock.
---------------------------------------------------------------------------
     \141\ If the ANC transfers appreciated property to the Trust, 
     section 311(b) of the Code will apply to the ANC, as under 
     present law, so that the ANC will recognize gain as if it had 
     sold the property for fair market value. The Trust takes the 
     property with a fair market value basis, pursuant to section 
     301(d) of the Code.
---------------------------------------------------------------------------
       The treatment to beneficiaries of amounts distributed by an 
     electing Trust depends upon the amount of the distribution. 
     Solely for purposes of determining what amount has been 
     distributed and thus which treatment applies under these 
     rules, the amount of any distribution of property is the fair 
     market value of the property at the time of the 
     distribution.\142\
---------------------------------------------------------------------------
     \142\ Section 661 of the Code, which provides a deduction to 
     the trust for certain distributions, does not apply to an 
     electing Trust under the provision unless the election is 
     terminated by disqualification. Similarly, the inclusion 
     provisions of section 662 of the Code, relating to amounts to 
     be included in income of beneficiaries, also do not apply to 
     a qualified electing Trust.
---------------------------------------------------------------------------
       Amounts distributed by an electing Trust during any taxable 
     year are excludable from the gross income of the recipient 
     beneficiary to the extent of (1) the taxable income of the 
     Trust for the taxable year and all prior taxable years for 
     which an election was in effect (decreased by any income tax 
     paid by the Trust with respect to the income) plus (2) any 
     amounts excluded from gross income of the Trust under section 
     103 for those periods.\143\
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     \143\ In the case of any such excludable distribution that 
     involves a distribution of property other than cash, the 
     basis of such property in the hands of the recipient 
     beneficiary will generally be the adjusted basis of the 
     property in the hands of the Trust, unless the Trust makes an 
     election to pay tax, in which case the basis in the hands of 
     the beneficiary would be the fair market value of the 
     property. See Code sections 643(e) and 643(e)(3).
---------------------------------------------------------------------------
       If distributions to beneficiaries exceed the excludable 
     amounts described above, then such excess distributions are 
     reported and taxed to beneficiaries as if distributed by the 
     ANC in the year of the distribution by the electing Trust to 
     the extent the ANC then has current or accumulated earnings 
     and profits, and are treated as dividends to 
     beneficiaries.\144\ Additional distributions in excess of the 
     current or accumulated earnings and profits of the ANC are 
     treated by the beneficiaries as distributions by the Trust in 
     excess of the distributable net income of the Trust for such 
     year.\145\
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     \144\ The treatment of such amounts distributed by an 
     electing Trust as a dividend applies even if all or any part 
     of the contributions by an ANC to a Trust would not have been 
     dividends at the time of the contribution under present law; 
     for example, because the ANC had no current or accumulated 
     earnings and profits, or because the contribution was made 
     from Alaska Native Fund amounts that may not have been 
     taxable. See 43 U.S.C. 1605.
     \145\ Such distributions would not be taxable to the 
     beneficiaries. In the case of any such nontaxable 
     distribution that involves a distribution of property other 
     than cash, the basis of such property in the hands of the 
     recipient beneficiary will generally be the adjusted basis of 
     the property in the hands of the Trust, unless the Trust 
     makes an election to pay tax, in which case the basis in the 
     hands of the beneficiary will be the fair market value of the 
     property. See Code sections 643(e) and 643(e)(3).
---------------------------------------------------------------------------
       The fiduciary of an electing Trust must report to the IRS, 
     with the Trust tax return, the amount of distributions to 
     each beneficiary, and the tax treatment to the beneficiary of 
     such distributions under the provision (either as exempt from 
     tax to the beneficiary, or as a distribution deemed made by 
     the ANC). The electing Trust must also furnish such 
     information to the ANC. In the case of distributions that are 
     treated as if made by the ANC, the ANC must then report such 
     amounts to the beneficiaries and must indicate whether they 
     are dividends or not, in accordance with the earnings and 
     profits of the ANC. The reporting thus required by an 
     electing Trust will be in lieu of, and will satisfy, the 
     reporting requirements of section 6034A (and such other 
     reporting requirements as the Secretary of the Treasury may 
     deem appropriate).
       The earnings and profits of an ANC will not be reduced by 
     the amount of its contributions to an electing Trust at the 
     time of the contributions. However, the ANC earnings and 
     profits will be reduced as and when distributions are 
     thereafter made by the electing Trust that are taxed to 
     beneficiaries under the provision as dividends from the ANC 
     to the Trust beneficiaries.
       If in any taxable year the beneficial interests in the 
     electing Trust may be disposed of 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),\146\ then the special provisions applicable 
     to electing Trusts, including the favorable ordinary income 
     tax rate and corresponding lower capital gains tax rate, 
     cease to apply as of the beginning of such taxable year. The 
     distributable net income of the Trust is increased up to the 
     amount of current and accumulated earnings and profits of the 
     ANC as of the end of that year, but such increase shall not 
     exceed the fair market value of the assets of the Trust as of 
     the date the beneficial interests of the Trust became 
     disposable.\147\ Thereafter, the Trust and its beneficiaries 
     are generally subject to the rules of subchapter J and to the 
     generally applicable trust income tax rates. Thus, the 
     increase in distributable net income will result in the Trust 
     being taxed at regular trust rates to the extent the 
     recomputed distributable net income is not distributed to 
     beneficiaries; and beneficiaries will be taxed to the extent 
     there are distributions. Normal reporting rules applicable to 
     trusts and their beneficiaries will apply. The basis of any 
     property distributed to beneficiaries will also be determined 
     under normal trust rules. The same rules apply if any stock 
     of the ANC may be disposed of to a person in a manner that 
     would not be permitted under ANCSA if the stock were 
     Settlement Common Stock and the ANC makes a transfer to the 
     Trust.
---------------------------------------------------------------------------
     \146\ Under ANSCA, Settlement Common Stock is subject to 
     restrictions on transferability, generally limiting 
     transfers. However, if changes are made to permit transfers 
     of stock that would not be permitted for Settlement Common 
     Stock, then the Settlement Common Stock is cancelled and 
     Replacement Common Stock is issued. See 43 U.S.C. 1602(p), 
     1606(h) and 1629c.
     \147\ To the extent the earnings and profits of the ANC 
     increase distributable net income of the Trust under this 
     provision, the ANC will have a corresponding adjustment 
     reducing its earnings and profits.
---------------------------------------------------------------------------
       The provision contains a special loss disallowance rule 
     that reduces any loss that would otherwise be recognized by a 
     shareholder upon the disposition of a share of stock of a 
     sponsoring ANC by a ``per share loss adjustment factor''. 
     This factor reflects the aggregate of all contributions to an 
     electing Trust sponsored by such ANC made on or after the 
     first day the trust is treated as an electing Trust, 
     expressed on a per share basis and determined as of the day 
     of each such contribution.
       The special loss disallowance rule is intended to prevent 
     the allowance of noneconomic losses if the ANC stock owned by 
     beneficiaries ever becomes transferable in any type of 
     transaction that could cause the recognition of taxable gain 
     or loss, (including a redemption by the ANC) where the basis 
     of the stock in the hands of the beneficiary (or in the hands 
     of any transferee of

[[Page 9707]]

     a beneficiary) fails to reflect the allocable reduction in 
     corporate value attributable to amounts transferred by the 
     ANC into the Trust.
       Effective date.--The provision is effective for taxable 
     years of Trusts, their beneficiaries, and sponsoring Alaska 
     Native Corporations ending after the date of enactment, and 
     to contributions made to electing Trusts during such year and 
     thereafter.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
       The conferees wish to state certain technical 
     clarifications of the description of the Senate amendment, 
     which also apply under the conference agreement.
       Under the Senate amendment and the conference agreement, a 
     Trust that makes the election remains subject to the 
     generally applicable requirements for classification and 
     taxation as a trust, in order to obtain the benefits of the 
     provision.
       Under the Senate amendment and the conference agreement, 
     the per share loss adjustment factor for stock of an ANC is 
     the aggregate of all contributions to all electing Trusts 
     sponsored by such ANC made on or after the first day each 
     such Trust is treated as an electing Trust expressed on a per 
     share basis and determined as of the day of each such 
     contribution.
       Under the Senate amendment and the conference agreement, 
     the restrictions on transfer of stock or beneficial interests 
     under the provision are those that would apply to Settlement 
     Common Stock under section 7(h) of ANSCA \148\ (whether or 
     not the interest or stock in question is in fact Settlement 
     Common Stock). To the extent section 7(h) of ANSCA permits 
     certain transfers of Settlement Common stock on death or in 
     other special circumstances, those are also permitted under 
     the provision. Also, the mere transferability of ANC stock in 
     manner that would not be permitted for Settlement Common 
     Stock (but without such transferability of any Trust 
     interests) will not destroy the beneficial treatment of an 
     existing electing Trust unless and until the ANC thereafter 
     makes a transfer to the Trust.
---------------------------------------------------------------------------
     \148\ 43 U.S.C. 1606(h).
---------------------------------------------------------------------------
       Under the Senate amendment and the conference agreement, 
     the surrender of an interest in an ANC or an electing Trust 
     in order to accomplish the whole or partial redemption of the 
     interest of a shareholder or beneficiary in such ANC or 
     Trust, or to accomplish the whole or partial liquidation of 
     such ANC or Trust, is deemed to be a transfer permitted by 
     section 7(h) of ANSCA for purposes of the provision.
       The conferees also wish to clarify the effect of the 
     general sunset rule of the legislation on this provision. The 
     general sunset is effective for taxable years beginning after 
     December 31, 2010. For such taxable years, the tax 
     consequences of any election previously made under this 
     provision, and any right to make a future election, shall be 
     terminated. Thus, for taxable years beginning after December 
     31, 2010, any electing Trust then in existence, its 
     beneficiaries, and the sponsoring ANC shall be taxed under 
     the provisions of law in effect immediately prior to the 
     enactment of this provision.
     8. Provisions relating to plan amendments (sec. 801 of the 
         House bill)


                              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

       The House bill permits certain plan amendments made 
     pursuant to the changes made by the bill (or regulations 
     issued under the provisions of the House bill) to be 
     retroactively effective. If the plan amendment meets the 
     requirements of the bill, then the plan is treated as being 
     operated in accordance with its terms and the amendment does 
     not violate the prohibition of reductions of accrued 
     benefits. In order for this treatment to apply, the plan 
     amendment must be made on or before the last day of the first 
     plan year beginning on or after January 1, 2004 (January 1, 
     2006, in the case of a governmental plan). If the amendment 
     is required to be made to retain qualified status as a result 
     of the changes in the bill (or regulations) the amendment 
     must be made retroactively effective as of the date on which 
     the change became effective with respect to the plan and the 
     plan must be operated in compliance until the amendment is 
     made. Amendments that are not required to retain qualified 
     status but that are made pursuant to the changes made by the 
     bill (or applicable regulations) may be made retroactive as 
     of the first day the plan was operated in accordance with the 
     amendment.
       A plan amendment is not considered to be pursuant to the 
     bill (or applicable regulations) if it has an effective date 
     before the effective date of the provision of the House bill 
     (or regulations) to which it relates. Similarly, the House 
     bill does not provide relief from section 411(d)(6) for 
     periods prior to the effective date of the relevant provision 
     of the House bill (or regulations) or the plan amendment.
       The Secretary is authorized to provide exceptions to the 
     relief from the prohibition on reductions in accrued 
     benefits. It is intended that the Secretary will not permit 
     inappropriate reductions in contributions or benefits that 
     are not directly related to the provisions of the House bill. 
     For example, it is intended that a plan that incorporates the 
     section 415 limits by reference could be retroactively 
     amended to impose the section 415 limits in effect before the 
     bill. On the other hand, suppose a plan that incorporates the 
     section 401(a)(17) limit on compensation by reference 
     provides for an employer contribution of three percent of 
     compensation. It is expected that the Secretary will provide 
     that the plan could not be amended retroactively to reduce 
     the contribution percentage for those participants not 
     affected by the section 401(a)(17) limit, even though the 
     reduction will result in the same dollar level of 
     contributions for some participants because of the increase 
     in compensation taken into account under the plan. As another 
     example, suppose that under present law a plan is top-heavy 
     and therefore a minimum benefit is required under the plan, 
     and that under the provisions of the House bill, the plan 
     would not be considered to be top heavy. It is expected that 
     the Secretary will generally permit plans to be retroactively 
     amended to reflect the new top-heavy provisions of the House 
     bill.
       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.

                      VII. ALTERNATIVE MINIMUM TAX

A. Individual Alternative Minimum Tax Relief (sec. 3(c) of H.R. 6, sec. 
          701 of the Senate amendment and sec. 55 of the Code)


                              Present Law

       Present law imposes an alternative minimum tax (``AMT'') on 
     individuals to the extent that the tentative minimum tax 
     exceeds the regular tax. An individual's tentative minimum 
     tax generally is an amount equal to the sum of (1) 26 percent 
     of the first $175,000 ($87,500 in the case of a married 
     individual filing a separate return) of alternative minimum 
     taxable income (``AMTI'') in excess of an exemption amount 
     and (2) 28 percent of the remaining AMTI. AMTI is the 
     individual's taxable income adjusted to take account of 
     specified preferences and adjustments.
       The AMT exemption amounts are: (1) $45,000 in the case of 
     married individuals filing a joint return and surviving 
     spouses; (2) $33,750 in the case of other unmarried 
     individuals; and (3) $22,500 in the case of married 
     individuals filing a separate return, estates and trusts. The 
     exemption amounts are phased out by an amount equal to 25 
     percent of the amount by which the individual's AMTI exceeds 
     (1) $150,000 in the case of married individuals filing a 
     joint return and surviving spouses, (2) $112,500 in the case 
     of other unmarried individuals, and (3) $75,000 in the case 
     of married individuals filing separate returns or an estate 
     or a trust. The exemption amounts, the threshold phase-out 
     amounts, and rate brackets are not indexed for inflation.


                               House Bill

       No provision.
       However, H.R. 6, as passed by the House, increases the AMT 
     exemption amount for married couples filing a joint return 
     and surviving spouses by $1,000 in 2005, by an additional 
     $500 in 2006, and by an additional $500 every even-numbered 
     year thereafter. The exemption amount for married individuals 
     filing a separate return is one-half the exemption amount for 
     a married couple filing a joint return.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2004.


                            Senate Amendment

       The Senate amendment increases the AMT exemption amount for 
     married couples filing a joint return and surviving spouses 
     by $4,000. The AMT exemption amounts for other individuals 
     (i.e., unmarried individuals and married individuals filing a 
     separate return) are increased by $2,000.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2000, and before January 1, 
     2007.


                          Conference Agreement

       The conference agreement increases the AMT exemption amount 
     for married couples filing a joint return and surviving 
     spouses by $4,000. The AMT exemption amounts for other 
     individuals (i.e., unmarried individuals and married 
     individuals filing a separate return) are increased by 
     $2,000.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2000, and beginning before 
     January 1, 2005.

                         VIII. OTHER PROVISIONS

A. Modification to Corporate Estimated Tax Requirements (Secs. 801 and 
                      815 of the Senate Amendment)


                              Present Law

       In general, corporations are required to make quarterly 
     estimated tax payments of

[[Page 9708]]

     their income tax liability (section 6655). For a corporation 
     whose taxable year is a calendar year, these estimated tax 
     payments must be made by April 15, June 15, September 15, and 
     December 15.


                               House Bill

       No provision.


                            Senate Amendment

       With respect to corporate estimated tax payments due on 
     September 17, 2001,\149\ 30 percent is required to be paid by 
     September 17, 2001, and 70 percent is required to be paid by 
     October 1, 2001. With respect to corporate estimated tax 
     payments due on September 15, 2004, 80 percent is required to 
     be paid by September 15, 2004, and 20 percent is required to 
     be paid by October 1, 2004.
---------------------------------------------------------------------------
     \149\ September 15, 2001 will be a Saturday. Under present 
     law, payments required to be made on a Saturday must be made 
     no later than the next banking day.
---------------------------------------------------------------------------
       With respect to corporate estimated tax payments due in 
     July, August, or September 2011, the payment must be 170 
     percent of the amount otherwise required to be paid under the 
     corporate estimated tax rules.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     respect to corporate estimated tax payments due on September 
     15, 2004. With respect to corporate estimated tax payments 
     due on September 17, 2001, 100 percent is not due until 
     October 1, 2001. The conference agreement does not include 
     the provision affecting corporate estimated tax payments due 
     in 2011.

  B. Authority To Postpone Certain Tax-Related Deadlines by Reason of 
Presidentially Declared Disaster (Sec. 802 of the Senate Amendment and 
                        Sec. 7508A of the Code)


                              Present Law

       The Secretary of the Treasury may specify that certain 
     deadlines are postponed for a period of up to 90 days in the 
     case of a taxpayer determined to be affected by a 
     Presidentially declared disaster.\150\ The deadlines that may 
     be postponed are the same as are postponed by reason of 
     service in a combat zone. If the Secretary extends the period 
     of time for filing income tax returns and for paying income 
     tax, the Secretary must abate related interest for that same 
     period of time.\151\
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     \150\ Section 7508A.
     \151\ Section 6404(h).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment directs the Secretary to create in the 
     IRS a Permanent Disaster Response Team, which, in 
     coordination with the Federal Emergency Management Agency, is 
     to assist taxpayers in clarifying and resolving tax matters 
     associated with a Presidentially declared disaster. One of 
     the duties of the Disaster Response Team is to postpone 
     certain tax-related deadlines for up to 120 days in 
     appropriate cases for taxpayers determined to be affected by 
     a Presidentially declared disaster.
       It is anticipated that the Disaster Response Team would be 
     staffed by IRS employees with relevant knowledge and 
     experience. It is anticipated that the Disaster Response Team 
     would staff a toll-free number dedicated to responding to 
     taxpayers affected by a Presidentially declared disaster and 
     provide relevant information via the IRS website.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement expands the period of time with 
     respect to which the Secretary may postpone certain deadlines 
     from 90 days to 120 days. The conference agreement does not 
     include the provision of the Senate amendment that provides 
     for a Permanent Disaster Response Team.

 C. Income Tax Treatment of Certain Restitution Payments to Holocaust 
               Victims (Sec. 803 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 that excludable restitution 
     payments made to an eligible individual (or the individual's 
     heirs or estate) are: (1) excluded from gross income; and (2) 
     not taken into account for any provision of the Code which 
     takes into account excludable gross income in computing 
     adjusted gross income (e.g., taxation of Social Security 
     benefits).
       The basis of any property received by an eligible 
     individual (or the individual's heirs or estate) that is 
     excluded under this provision is the fair market value of 
     such property at the time of receipt by the eligible 
     individual (or the individual's heirs or estate).
       The Senate amendment provides that any excludible 
     restitution payment is disregarded in determining eligibility 
     for, and the amount of benefits and services to be provided 
     under, any Federal or federally assisted program which 
     provides benefit or service based, in whole or in part, on 
     need. Under the Senate amendment, no officer, agency, or 
     instrumentality of any government may attempt to recover the 
     value of excessive benefits or services provided under such a 
     program before January 1, 2000, by reason of failure to take 
     account of excludable restitution payments received before 
     that date. Similarly, the Senate amendment requires a good 
     faith effort to notify any eligible individual who may have 
     been denied such benefits or services of their potential 
     eligibility for such benefits or services. The Senate 
     amendment also provides coordination between this bill and 
     Public Law 103-286, which also disregarded certain 
     restitution payments in determining eligibility for, and the 
     amount of certain needs-based benefits and services.
       Eligible restitution payments are any payment or 
     distribution made to an eligible individual (or the 
     individual's heirs or estate) which: (1) is payable by reason 
     of the individual's status as an eligible individual 
     (including any amount payable by any foreign country, the 
     United States, or any foreign or domestic entity or fund 
     established by any such country or entity, any amount payable 
     as a result of a final resolution of legal action, and any 
     amount payable under a law providing for payments or 
     restitution of property); (2) constitutes the direct or 
     indirect return of, or compensation or reparation for, assets 
     stolen or hidden, or otherwise lost to, the individual 
     before, during, or immediately after World War II by reason 
     of the individual's status as an eligible individual 
     (including any proceeds of insurance under policies issued on 
     eligible individuals by European insurance companies 
     immediately before and during World War II); or (3) interest 
     payable as part of any payment or distribution described in 
     (1) or (2), above. An eligible individual is a person who was 
     persecuted for racial or religious reasons by Nazi Germany, 
     or any other Axis regime, or any other Nazi-controlled or 
     Nazi-allied country.
       Effective date.--The provision is effective for any amounts 
     received on or after January 1, 2000. No inference is 
     intended with respect to the income tax treatment of any 
     amount received before January 1, 2000.


                          conference agreement

       The conference agreement follows the Senate amendment, with 
     three changes. First, the definition of eligible individuals 
     is expanded to also include individuals persecuted on the 
     basis of physical or mental disability or sexual orientation. 
     Second, interest earned by enumerated escrow or settlement 
     funds are also excluded from tax. Third, the provision 
     disregarding excludible restitution in determining 
     eligibility for and the benefit calculation of certain 
     Federal or Federally assisted programs is deleted.

D. Treatment of Survivor Annuity Payments with Respect to Public Safety 
              Officers (Sec. 804 of the Senate amendment)


                              present law

       The Taxpayer Relief Act of 1997 provided 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.
       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.
       For purposes of the exclusion, ``public safety officer'' is 
     defined as in section 1204 of the Omnibus Crime Control and 
     Safe Streets Act of 1968 (as amended). Under that Act, a 
     public safety officer is an: (1) individual serving a public 
     agency (with or without compensation) as a law enforcement 
     officer, firefighter, rescue squad member, or ambulance crew 
     member; (2) employee of the Federal Emergency Management 
     Agency (FEMA) performing hazardous duties with respect to a 
     Federally declared disaster area; and (3) employee of a 
     State, local, or tribal emergency agency who is performing 
     hazardous duties in cooperation with FEMA in a Federally 
     declared disaster area.
       The provision applies to amounts received in taxable years 
     beginning after December 31, 1996, with respect to 
     individuals dying after that date.


                               house bill

       No provision. However, H.R. 1727, the ``Fallen Hero 
     Survivor Benefit Fairness Act of 2001,'' as passed by the 
     House, extends the present-law treatment of survivor 
     annuities with respect to public safety officers killed

[[Page 9709]]

     in the line of duty with respect to individuals dying on or 
     before December 31, 1996.
       Effective date.--The provision is effective with respect to 
     payments received after December 31, 2001.


                            senate amendment

       The Senate amendment provision is the same as H.R. 1727.
       Effective date.--The provision is effective with respect to 
     payments received after December 31, 2000.


                          conference agreement

       The conference agreement does not include the provisions of 
     H.R. 1727 or the Senate amendment provision.

         E. Circuit Breaker (Sec. 805 of the Senate Amendment)


                              present law

       The Congressional Budget Act of 1974 contains numerous 
     rules enforcing the scope of items permitted to be considered 
     under the budget reconciliation process.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that, in any fiscal year 
     beginning with fiscal year 2004, if the level of debt held by 
     the public at the end of that fiscal year (as projected by 
     the Office of Management and Budget sequestration update 
     report on August 20th preceding the beginning of that fiscal 
     year) would exceed the level of debt held by the public for 
     that fiscal year set forth in the concurrent resolution on 
     the budget for fiscal year 2002, any Member of Congress may 
     move to proceed to a bill that would make changes in law to 
     reduce discretionary spending and direct spending (except for 
     changes in Social Security, Medicare and COLA's) and increase 
     revenues in a manner that would reduce the debt held by the 
     public for the fiscal year to a level not exceeding the level 
     provided in that concurrent resolution for that fiscal year.
       A bill considered pursuant to this provision would be 
     considered as provided in section 310(e) of the Congressional 
     Budget Act.
       The Senate amendment provides that it shall not be in order 
     in the Senate to consider any bill, joint resolution, motion, 
     amendment, or conference report pursuant to the provision 
     that contains any provisions other than those enumerated in 
     sections 310(a)(1) and 310(a)(2) of the Congressional Budget 
     Act. This point of order may be waived or suspended in the 
     Senate only by the affirmative vote of three-fifths of the 
     Members. An affirmative vote of three-fifths of the Members 
     shall be required in the Senate to sustain an appeal of the 
     ruling of the Chair on a point of order raised pursuant to 
     the provision.
       Effective date.--The provision is effective on the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

    F. Acceleration of Health Insurance Deduction for Self-Employed 
Individuals (Secs. 806 and 807 of the Senate amendment and Sec. 162(l) 
                              of the Code)


                              present law

       Under present law, the individual income 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 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 individual is eligible to participate in a 
     subsidized health plan maintained by the employer of the 
     individual or the individual'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, 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 2001 is as follows: $230 in the case of an 
     individual 40 years old or less; $430 in the case of an 
     individual who is over 40 but not more than 50; $860 in the 
     case of an individual who is more than 50 but not more than 
     60; $2,290 in the case of an individual who is more than 60 
     but not more than 70; and $2,860 in the case of an individual 
     who is more than 70. These dollar limits are indexed for 
     inflation.


                               house bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the deduction for health 
     insurance expenses (and qualified long-term care insurance 
     expenses) of self-employed individuals to 100 percent 
     beginning in 2002. The Senate amendment also provides that 
     the deduction is not available for any month in which the 
     self-employed individual participates in (rather than is 
     eligible for) a subsidized health plan maintained by an 
     employer of the individual or his or her spouse.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2001.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

G. Enhanced Deduction for Charitable Contribution of Literary, Musical, 
 and Artistic Compositions (Sec. 808 of the Senate Amendment and Sec. 
                            170 of the Code)


                              present law

       In the case of a charitable contribution of inventory or 
     other ordinary-income or short-term capital gain property, 
     the amount of the deduction is limited to the taxpayer's 
     basis in the property. In the case of a charitable 
     contribution of tangible personal property, the deduction is 
     limited to the taxpayer's basis in such property if the use 
     by the recipient charitable organization is unrelated to the 
     organization's tax-exempt purpose. In cases involving 
     contributions to a private foundation (other than certain 
     private operating foundations), the amount of the deduction 
     is limited to the taxpayer's basis in the property.
       Under present law, charitable contributions of literary, 
     musical, and artistic compositions are considered ordinary 
     income property and a taxpayer's deduction of such property 
     is limited to the taxpayer's basis (typically, cost) in the 
     property. To be eligible for the deduction, the contribution 
     must be of an undivided portion of the donor's entire 
     interest in the property. For purposes of the charitable 
     income tax deduction, the copyright and the work in which the 
     copyright is embodied are not treated as separate property 
     interests. Accordingly, if a donor owns a work of art and the 
     copyright to the work of art, a gift of the artwork without 
     the copyright or the copyright without the artwork will 
     constitute a gift of a ``partial interest'' and will not 
     qualify for the income tax charitable deduction.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that a deduction for 
     qualified artistic charitable contributions is the fair 
     market value of the property contributed at the time of the 
     contribution. The Senate amendment defines a qualified 
     artistic charitable contribution to mean a charitable 
     contribution of any literary, musical, artistic, or scholarly 
     composition, or similar property, or the copyright thereon 
     (or both). The tangible property and the copyright on such 
     property are treated as separate interests in the property 
     for purposes of the ``partial interest'' rule. Contributions 
     of letters, memoranda, or similar property that are written, 
     prepared, or produced by or for an individual in his or her 
     capacity as an officer or employee of any person (including a 
     government agency or instrumentality) do not qualify for fair 
     market value deduction unless the contributed property is 
     entirely personal.
       Under the Senate amendment, the increase in the deduction 
     that results from the provision cannot exceed the amount of 
     adjusted gross income of the donor for the taxable year from 
     the sale or use of property created by the donor that is of 
     the same type as the donated property, and from teaching, 
     lecturing, performing, or similar activities with respect to 
     such property. The fair market value deduction cannot be 
     carried over and deducted in other taxable years.
       A contribution is required to meet several requirements in 
     order to qualify for the fair market value deduction. First, 
     the contributed property must have been created by the 
     personal efforts of the donor at least 18 months prior to the 
     date of contribution. Second, the donor must obtain a 
     qualified appraisal of the contributed property, a copy of 
     which must be attached to the donor's income tax return for 
     the taxable year in which such contribution is made. Third, 
     the contribution must be made to a public charity or to 
     certain limited types of private foundations. Finally, the 
     use of donated property by the recipient organization must be 
     related to the organization's charitable purpose or function, 
     and the donor must receive a written statement from the 
     organization verifying such use.
     Effective date
       The deduction for qualified artistic charitable 
     contributions applies to contributions made after the date of 
     enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

 H. Estate Tax Recapture from Cash Rents of Specially-Valued Property 
                   (Sec. 809 of the Senate Amendment)


                              present law

       Under the special-use valuation rules of section 2032A, the 
     executor may elect to

[[Page 9710]]

     value certain ``qualified real property'' used in farming or 
     another qualifying trade or business at its current use 
     rather than its highest and best use. If, after the special-
     use valuation election is made, the heir who acquired the 
     real property ceases to use it in its qualified use within 10 
     years (15 years for individuals dying before 1982) of the 
     decedent's death, an additional estate tax is imposed in 
     order to ``recapture'' the benefit of the special-use 
     valuation. Section 2032A is effective for estates of 
     decedents dying after December 31, 1976.
       Under prior law, some courts had held that cash rental of 
     property for which special-use valuation was claimed was not 
     a qualified use under the rules, because the heirs no longer 
     bore the financial risk of working the property, thus 
     triggering the additional estate tax.\152\
---------------------------------------------------------------------------
     \152\ See Martin v. Commissioner, 783 F.2d 81 (7th Cir. 1986) 
     (cash lease to unrelated party not qualified use); Williamson 
     v. Commissioner, 93 T.C. 242 (1989), aff'd. 974 F.2d 1525 
     (9th Cir. 1992) (cash lease to family member not a qualified 
     use); Fisher v. Commissioner, T.C. Memo. 1993-139 (cash lease 
     to family member not a qualified use); cf. Minter v. U.S., 19 
     F.3d 426 (8th Cir. 1994) (cash lease to family's farming 
     corporation is qualified use); Estate of Gavin v. U.S., 103 
     F.3d 802 (8th Cir. 1997) (heir's option to pay cash rent or 
     50 percent crop share is qualified use).
---------------------------------------------------------------------------
       With respect to a decedent's surviving spouse, a special 
     rule provides that the surviving spouse will not be treated 
     as failing to use the property in a qualified use solely 
     because the spouse rents the property to a member of the 
     spouse's family on a net cash basis. Members of an 
     individual's family include (1) the individual's spouse, (2) 
     the individual's ancestors, (3) lineal descendants of the 
     individual, of the individual's spouse, or of the 
     individual's parents, and (4) the spouses of any such lineal 
     descendants.
       Section 504(c) of the Tax Reform Act of 1997 expanded the 
     class of heirs eligible to lease property for which special-
     use valuation was claimed without causing the qualified use 
     of such property to cease for purposes of imposition of the 
     additional estate tax. Section 2032A(c)(7)(E) provides that 
     the net cash lease of property (for which special-use 
     valuation was claimed) by a lineal descendant of the decedent 
     to a member of such lineal descendant's family does not cause 
     the qualified use of the property to cease for purposes of 
     imposition of the additional estate tax. The amendment made 
     under the Tax Reform Act of 1997 applies to leases entered 
     into after December 31, 1976.
       In Technical Advice Memorandum 9843001, the IRS determined 
     that the retroactive effective date in the changes made by 
     the Tax Reform Act of 1997 did not constitute a waiver of the 
     period of limitations otherwise applicable on a taxpayer's 
     claim. Accordingly, the IRS determined that a taxpayer's 
     claim for refund of recapture tax paid on account of the 
     cessation of a qualified use was barred under the generally 
     applicable statute of limitations on refund claims.


                               house bill

       No provision.


                            Senate Amendment

       The Senate amendment provides that, if on the date of 
     enactment or at any time within one year after the date of 
     enactment, a claim for refund or credit of any overpayment of 
     tax resulting from the application of net cash lease 
     provisions for spouses and lineal descendants (sec. 
     2032A(c)(7)(E)) is barred by operation of law or rule of law, 
     then the refund or credit of such overpayment shall, 
     nonetheless, be allowed if a claim therefore is filed before 
     the date that is one year after the date of enactment.
       Effective date.--This provision is effective for refund 
     claims filed prior to the date that is one year after the 
     date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment.

I. Extension of Research and Experimentation Tax Credit and New Vaccine 
 Research Credit (Sec. 810 and 811 of the Senate Amendment and Sec. 41 
                     and new Sec. 45G 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 generally 
     applies to amounts paid or incurred before July 1, 2004.
       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 0.16). All other taxpayers (so-called 
     ``start-up firms'') are assigned a fixed-base percentage of 
     3.0 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 2.65 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 1.0 percent (i.e., the base amount equals 1.0 
     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 3.2 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 2.0 percent. A credit rate of 3.75 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 2.0 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

       No provision.


                            senate amendment

       The Senate amendment would make the research credit 
     permanent.
       The Senate amendment also would increase the credit rates 
     under the alternative incremental credit from 2.65 percent to 
     3.0 percent, from 3.2 percent to 4.0 percent, and from 3.75 
     percent to 5.0 percent.
       In addition, the Senate amendment would provide a new 
     research credit with respect to certain qualified vaccine and 
     microbiocide research. The amendment would provide a credit 
     equal to 30 percent of qualifying vaccine research expenses 
     undertaken to develop vaccines and microbicides for malaria, 
     tuberculosis, HIV, or any infectious disease (of a single 
     etiology) which, according to the World Health Organization, 
     causes over one million human deaths annually.\153\ 
     Qualifying expenses would include 100 percent of in-house 
     research expenses and 100 percent of contract research 
     expenses. In-house research expenses and contract research 
     expenses would be defined as in present-law sec. 41. 
     Qualifying vaccine research expenses would not include 
     expenses for research incurred outside the United States, 
     other than in the case of expenses for human clinical 
     testing. No credit may be claimed for pre-clinical expenses 
     unless a research plan has been filed with the Secretary of 
     the Treasury.
---------------------------------------------------------------------------
     \153\ The credit for vaccine research expenses would be 
     coordinated with the credit for research under present-law 
     sec. 41 and any deduction otherwise allowed with respect to 
     qualifying vaccine research expenses would be reduced by the 
     amount of the credit claimed for vaccine research expenses.
---------------------------------------------------------------------------
       Effective date.--The provision generally would be effective 
     on the date of enactment. The increase in credit rates under 
     the alternative incremental credit and the new credit for 
     qualifying vaccine research expenses would be effective for 
     taxable years ending after the date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment.

 J. Acceleration of Round II Empowerment Zone Wage Credit (Sec. 812 of 
            the Senate Amendment and Sec. 1396 of the Code)


                              present law

       The Omnibus Budget Reconciliation Act of 1993 (``OBRA 
     1993'') authorized the designation of nine empowerment zones 
     (``Round I empowerment zones'') to provide tax incentives for 
     businesses to locate within targeted areas designated by the 
     Secretaries of Housing and Urban Development and Agriculture. 
     The Taxpayer Relief Act of 1997 (``1997 Act'') authorized the 
     designation of two additional Round I urban empowerment 
     zones. Among other incentives, Round I empowerment zones 
     qualify for a 20-percent wage credit for the first $15,000 of 
     wages paid to a zone resident who works in the empowerment 
     zone.
       The 1997 Act also authorized the designation of 20 
     additional empowerment zones (``Round II empowerment 
     zones''), of which 15 are located in urban areas and five are 
     located in rural areas. The 1997 Act did not authorize a wage 
     credit for businesses located in the Round II empowerment 
     zones. The Community Renewal Tax Relief Act of 2000, however, 
     extended the 20-percent wage credit to Round II empowerment 
     zones for wages paid or incurred after December 31, 
     2001.\154\
---------------------------------------------------------------------------
     \154\ H.R. 5662, sec. 113 (2000) (enacted by Pub. L. No. 106-
     554); sec. 1396(b). Among other changes, the Community 
     Renewal Tax Relief Act of 2000 extended all empowerment zone 
     designations through December 31, 2009, and provided that the 
     wage credit rate remains at 20 percent for all empowerment 
     zones (rather than being phased down) through December 31, 
     2009.
---------------------------------------------------------------------------


                               house bill

       No provision.

[[Page 9711]]




                            senate amendment

       The Senate amendment accelerates the availability of the 
     wage credit for Round II empowerment zones to the earlier of 
     July 1, 2001, or the date of enactment of the bill.
       Effective date.--For wages paid or incurred after the 
     earlier of July 1, 2001 or date of enactment.


                          conference agreement

       The conference agreement does not contain the Senate 
     amendment.

 K. Treatment of Certain Hospital Support Organizations in Determining 
Acquisition Indebtedness (Sec. 813 of the Senate Amendment and Sec. 514 
                              of the Code)


                              present law

       In general, income of a tax-exempt organization that is 
     produced by debt-financed property is treated as unrelated 
     business income in proportion to the acquisition indebtedness 
     on the income-producing property. Acquisition indebtedness 
     generally means the amount of unpaid indebtedness incurred by 
     an organization to acquire or improve the property and 
     indebtedness that would not have been incurred but for the 
     acquisition or improvement of the property. However, under an 
     exception, acquisition indebtedness does not include 
     indebtedness incurred by certain qualified organizations to 
     acquire or improve real property. Qualified organizations 
     include pension trusts, educational institutions, and title-
     holding companies.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment expands the exception to the 
     definition of acquisition indebtedness in the case of a 
     qualified hospital support organization. The exception 
     applies to eligible indebtedness (or the qualified 
     refinancing thereof) of the qualified hospital support 
     organization.
       A qualified hospital support organization is a supporting 
     organization (under Code section 509(a)(3)) of a hospital 
     that is an academic health center (under Code section 
     119(d)(4)(B)). The assets of the supporting organization must 
     also meet certain requirements. First, more than half of the 
     value of its assets at any time since its organization (1) 
     must have been acquired, directly or indirectly, by gift or 
     devise, and (2) must consist of real property. In addition, 
     the fair market value of the organization's real estate 
     acquired by gift or devise must exceed 10 percent of the fair 
     market value of all investment assets held by the 
     organization immediately prior to the time that the eligible 
     indebtedness is incurred. These requirements must be met each 
     time eligible indebtedness is incurred or a qualified 
     refinancing thereof occurs.
       Eligible indebtedness means indebtedness secured by real 
     property acquired by gift or devise, the proceeds of which 
     are used exclusively to acquire a leasehold interest in or to 
     improve the property. A qualified refinancing of eligible 
     indebtedness occurs if the refinancing does not exceed the 
     amount of refinanced eligible indebtedness immediately before 
     the refinancing.
       Effective date.--The Senate amendment applies to 
     indebtedness incurred after December 31, 2003.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

 L. Modify Rules Governing Tax-Exempt Bonds for Certain Private Water 
 Facilities (Sec. 814 of the Senate Amendment and Sec. 142 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 
     privately owned and operated facilities for the furnishing of 
     water. Such facilities must be operated in a manner similar 
     to municipal water facilities in that service must be offered 
     to the general public, and rates must be regulated. Tax-
     exempt private activity bonds for water facilities may be 
     issued to finance arsenic and other pollutant treatment 
     facilities.
       Issuance of private activity tax-exempt bonds for water 
     facilities is subject to aggregate annual State volume 
     limitations that apply to most private activity bonds. 
     Similarly, like most other private activity bonds, interest 
     on these bonds is a preference item for purposes of the 
     alternative minimum tax.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that private activity bonds 
     for facilities to remediate arsenic levels in water (as 
     opposed to such bonds to finance private water treatment 
     facilities generally) are not subject to the State volume 
     limits and the interest on the bonds is not a preference item 
     for the alternative minimum tax. A bond is treated as for 
     arsenic remediation if at least 95 percent of the proceeds 
     are used for facilities to comply with the 10 parts per 
     billion standard recommended by the National Academy of 
     Sciences. The provision does not affect governmental bonds 
     for municipal water facilities.
       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.

M. Combined Employment Tax Reporting (Sec. 816 of the Senate Amendment 
                    and Sec. 6103(d)(5) of the Code)


                              present law

       The Internal Revenue Code prohibits disclosure of tax 
     returns and return information, except to the extent 
     specifically authorized by the Internal Revenue Code (sec. 
     6103). Unauthorized disclosure is a felony punishable by a 
     fine not exceeding $5,000 or imprisonment of not more than 
     five years, or both (sec. 7213). An action for civil damages 
     also may be brought for unauthorized disclosure (sec. 7431). 
     No tax information may be furnished by the Internal Revenue 
     Service (``IRS'') to another agency unless the other agency 
     establishes procedures satisfactory to the IRS for 
     safeguarding the tax information it receives (sec. 6103(p)).
       The Taxpayer Relief Act of 1997 authorized a demonstration 
     project to assess the feasibility and desirability of 
     expanding combined reporting. The demonstration project was: 
     (1) limited to State of Montana, (2) limited to employment 
     taxes, (3) limited to taxpayer identity (name, address, 
     taxpayer identifying number) and the signature of the 
     taxpayer and (4) limited to a period of five years. After 
     August 5, 2002, the demonstration project will expire.
       To implement that demonstration project, the Taxpayer 
     Relief Act of 1997 amended the Code to authorize the IRS to 
     disclose the name, address, taxpayer identifying number, and 
     signature of the taxpayer, which is common to both the State 
     and Federal portions of the combined form. The Code permits 
     the IRS to disclose these common data items to the State and 
     not have it subject to the redisclosure restrictions, 
     safeguards, or criminal penalty provisions.\155\ Essentially, 
     the State is allowed to use this information as if the State 
     directly received this information from the taxpayer.
---------------------------------------------------------------------------
     \155\ Sec. 6103(d)(5). The following restrictions and 
     requirements do not apply: (1) the prohibition on disclosure 
     of returns or return information by State officers and 
     employees (sec. 6103(a)(2); (2) the Federal penalties for 
     unauthorized disclosure and inspection of returns and return 
     information (secs. 7213 and 7213A) and (3) the requirement 
     that the State establish safeguards regarding the information 
     obtained from the IRS (sec. 6103(p)(4)).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment makes the IRS disclosure authority 
     permanent and expands the authorized recipients to include 
     any State agency, body, or commission, for the purpose of 
     carrying out a combined Federal and State employment tax 
     reporting program approved by the Secretary. The statutory 
     waiver of the redisclosure restrictions, safeguards, and 
     criminal penalty provisions continues to apply. Further, the 
     items authorized for disclosure continue to be limited to the 
     name, address, taxpayer identification number, and signature 
     of the taxpayer.
       Effective date.--The Senate amendment is effective on the 
     date of enactment.


                          conference agreement

       The conference agreement does not contain the Senate 
     amendment.

 N. Reporting Requirements of State and Local Political Organizations 
 (Secs. 901-904 of the Senate Amendment and Secs. 527 and 6012 of the 
                                 Code)


                              present law

     In general
       Under present law, section 527 provides a limited tax-
     exempt status to ``political organizations,'' meaning a 
     party, committee, association, fund, account, or other 
     organization (whether or not incorporated) organized and 
     operated primarily for the purpose of directly or indirectly 
     accepting contributions or making expenditures (or both) for 
     an ``exempt function.'' These organizations are generally 
     exempt from Federal income tax on contributions they receive, 
     but are subject to tax on their net investment income and 
     certain other income at the highest corporate income tax rate 
     (``political organization taxable income''). Donors are 
     exempt from gift tax on their contributions to such 
     organizations. For purposes of section 527, the term ``exempt 
     function'' means: the function of influencing or attempting 
     to influence the selection, nomination, election, or 
     appointment of any individual to any Federal, State, or local 
     public office or office in a political organization, or the 
     election of Presidential or Vice-Presidential electors, 
     whether or not such individual or electors are selected, 
     nominated, elected, or appointed. Thus, by definition, the 
     purpose of a section 527 organization is to accept 
     contributions or make expenditures for political campaign 
     (and similar) activities.
     Notice of section 527 organization
       An organization is not treated as a section 527 
     organization unless it has given notice to

[[Page 9712]]

     the Secretary of the Treasury, electronically and in writing, 
     that it is a section 527 organization. The notice is not 
     required (1) of any person required to report as a political 
     committee under the Federal Election Campaign Act of 1971, 
     (2) by organizations that reasonably anticipate that their 
     annual gross receipts will always be less than $25,000, and 
     (3) organizations described in section 501(c). All other 
     organizations, including State and local candidate 
     committees, are required to file the notice.
       The notice is required to be transmitted no later than 24 
     hours after the date on which the organization is organized. 
     The notice is required to include the following information: 
     (1) the name and address of the organization and its 
     electronic mailing address, (2) the purpose of the 
     organization, (3) the names and addresses of the 
     organization's officers, highly compensated employees, 
     contact person, custodian of records, and members of the 
     organization's Board of Directors, (4) the name and address 
     of, and relationship to, any related entities, and (5) such 
     other information as the Secretary may require.
       The notice of status as a section 527 organization is 
     required to be disclosed to the public by the IRS and by the 
     organization. In addition, the Secretary of the Treasury is 
     required to make publicly available on the Internet and at 
     the offices of the IRS a list of all political organizations 
     that file a notice with the Secretary under section 527 and 
     the name, address, electronic mailing address, custodian of 
     records, and contact person for such organization. The IRS is 
     required to make this information available within 5 business 
     days after the Secretary of the Treasury receives a notice 
     from a section 527 organization.
       An organization that fails to file the notice is not 
     treated as a section 527 organization and its exempt function 
     income is taken into account in determining taxable income.
     Disclosure by political organizations of expenditures and 
         contributors
       A political organization that accepts a contribution or 
     makes an expenditure for an exempt function during any 
     calendar year is required to file with the Secretary of the 
     Treasury certain reports. The following reports are required: 
     either (1) in the case of a calendar year in which a 
     regularly scheduled election is held, quarterly reports, a 
     pre-election report, and a post-general election report and, 
     in the case of any other calendar year, a report covering 
     January 1 to June 30 and July 1 to December 31, or (2) 
     monthly reports for the calendar year, except that, in lieu 
     of the reports due for November and December of any year in 
     which a regularly scheduled general election is held, a pre-
     general election report, a post-general election report, and 
     a year end report are to be filed.
       The reports are required to include the following 
     information: (1) the amount of each expenditure made to a 
     person if the aggregate amount of expenditures to such person 
     during the calendar year equals or exceeds $500 and the name 
     and address of the person (in the case of an individual, 
     including the occupation and name of the employer of the 
     individual); and (2) the name and address (in the case of an 
     individual, including the occupation and name of employer of 
     such individual) of all contributors that contributed an 
     aggregate amount of $200 or more to the organization during 
     the calendar year and the amount of the contribution.
       The disclosure requirements do not apply (1) to any person 
     required to report as a political committee under the Federal 
     Election Campaign Act of 1971, (2) to any State or local 
     committee of a political party or political committee of a 
     State or local candidate, (3) to any organization that 
     reasonably anticipates that it will not have gross receipts 
     of $25,000 or more for any taxable year, (4) to any 
     organization described in section 501(c), or (5) with respect 
     to any expenditure that is an independent expenditure (as 
     defined in section 301 of the Federal Election Campaign Act 
     of 1971).
       For purposes of the disclosure requirements, the term 
     ``election'' means (1) a general, special, primary, or runoff 
     election for a Federal office, (2) a convention or caucus of 
     a political party that has authority to nominate a candidate 
     for Federal office, (3) a primary election held for the 
     selection of delegates to a national nominating convention of 
     a political party, or (4) a primary election held for the 
     expression of a preference for the nomination of individuals 
     for election to the office of President.
       The IRS is required to make available to the public any 
     report filed by a political organization. In addition, the 
     organization is required to make any such report available to 
     the public. A penalty is imposed for failure to file a report 
     or provide required information in the report.
     Return requirements for section 527 organizations
       Under present law, a section 527 organization that has 
     political organization taxable income is required annually to 
     file Form 1120-POL (Return of Organization Exempt from Income 
     Tax). Section 527 organizations that do not have political 
     organization taxable income but have gross receipts of 
     $25,000 or more during the taxable year also are required 
     to file an income tax return. The gross receipts 
     requirement does not apply to political organizations that 
     are subject to section 527 solely by reason of section 
     527(f)(1) (which makes certain charities subject to 
     section 527 based on the charity's political activities). 
     The annual return must be made available to the public by 
     the organization and by the IRS.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that a political organization 
     that is a political committee of a State or local candidate 
     is exempt from the requirement to provide notice to the 
     Secretary of its formation and purpose.
       In addition, the Senate amendment exempts certain political 
     organizations from the requirement provided by section 
     527(j)(2) to file regular reports with the Secretary 
     detailing contribution and expenditure information. To be 
     exempt from such reporting requirements under the amendment: 
     (1) the organization must not be an organization already 
     exempt from the reporting requirement under present law (as 
     provided by section 527(j)(5)); (2) the organization must not 
     engage in any exempt function activities other than 
     activities for the purpose of influencing or attempting to 
     influence the selection, nomination, election, or appointment 
     of any individual to any State or local public office or 
     office in a State or local political organization; and (3) no 
     candidate for Federal office or individual holding Federal 
     office can control or materially participate in the direction 
     of the organization, solicit any contributions to the 
     organization, or direct, in whole or in part, any expenditure 
     made by the organization. Further, during the calendar year, 
     the organization must be required to report under State or 
     local law, and must in fact report, information regarding 
     each separate expenditure and contribution (including 
     information regarding the person who makes such contribution 
     or receives such expenditure) that otherwise would be 
     required. The agency with which such information is filed 
     must make the filed information public and available for 
     public inspection. If the minimum amount of a contribution or 
     expenditure that triggers disclosure under State or local law 
     is more than $100 than the minimum amount for disclosure 
     required by the Code, the requirements for exemption from 
     reporting will not be met.
       Under the Senate amendment, political organizations 
     described in the preceding paragraph are exempt from the 
     requirement to file an income tax return if such organization 
     does not have political organization taxable income, is not 
     subject to section 527 solely by reason of section 527(f)(1) 
     (as described above), and has gross receipts of less than 
     $100,000 for the taxable year.
       The Senate amendment further provides that the Secretary in 
     consultation with the Federal Election Commission shall 
     publicize the effects of these changes and the interaction of 
     the requirements to file a notification or report under 
     section 527 and reports under the Federal Election Campaign 
     Act of 1971.
       Finally, the Senate amendment gives the Secretary the 
     authority to waive all or any portion of the penalties 
     imposed on an organization for failure to notify the 
     Secretary of the organization's establishment or the failure 
     to file a report. Such waiver is subject to a showing by the 
     organization that the failure was due to reasonable cause and 
     not to willful neglect.
     Effective date
       The exemptions from the notification, reporting, and return 
     requirements are effective as of July 1, 2000. The authority 
     to the Secretary to waive penalties is effective for any tax 
     assessed or penalty imposed after June 30, 2000.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.

IX. COMPLIANCE WITH CONGRESSIONAL BUDGET ACT (Secs. 111, 211, 311, 451, 
            581, 695, 711, and 821 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 the 
     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 generally permits members to raise a point 
     of order against extraneous provisions (those which are 
     unrelated to the goals of the reconciliation process) from 
     either a 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;

[[Page 9713]]

       (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 nonbudgetary 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

     Sunset of provisions
       To ensure compliance with the Budget Act, the Senate 
     amendment provides that all provisions of, and amendments 
     made by, the bill that are in effect on September 30, 2011, 
     shall cease to apply as of the close of September 30, 2011.


                          conference agreement

       The conference agreement follows the Senate amendment, 
     except that all provisions of, and amendments made by, the 
     bill generally do not apply for taxable, plan or limitation 
     years beginning after December 31, 2010. With respect to the 
     estate, gift, and generation-skipping provisions of the bill, 
     the provisions do not apply to estates of decedents dying, 
     gifts made, or generation skipping transfers, after December 
     31, 2010. The Code and the Employee Retirement Income 
     Security Act of 1974 are applied to such years, estates, 
     gifts and transfers after December 31, 2010, as if the 
     provisions of and amendments made by the bill had never been 
     enacted.

                       X. 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 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 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 and the Treasury 
     Department 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. Reduction in income tax rates for individuals (sec. 101 of 
         the conference agreement)
     Summary description of provision
       The bill creates a new 10-percent regular income tax 
     bracket for a portion of the taxable income that is currently 
     taxed at 15 percent. The bill reduces the other regular 
     income tax rates. By 2006, the present-law individual income 
     tax rates of 28 percent, 31 percent, 36 percent, and 39.6 
     percent are lowered to 25 percent, 28 percent, 33 percent, 
     and 35 percent, respectively. The bill also provides for 
     acceleration of the 10 percent income tax rate bracket 
     benefit for 2001, principally through advance payment of the 
     credit in the form of checks issued to taxpayers by the 
     Department of the Treasury.
     Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 100 million individual tax returns.
     Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to this provision. It should not 
     result in an increase in disputes with the IRS, nor will 
     regulatory guidance be necessary to implement this provision. 
     It may, however, increase the number of questions that 
     taxpayers ask the IRS, such as when taxpayers will receive 
     their checks. This increased volume of questions could have 
     an adverse impact on other elements of IRS' operations, such 
     as the levels of taxpayer service. In addition, the provision 
     should not increase the tax preparation costs for most 
     individuals.
       The IRS will need to add to the individual income tax forms 
     package a new worksheet so that taxpayers can reconcile the 
     amount of the check they receive from the Department of the 
     Treasury with the credit they are allowed as an acceleration 
     of the 10 percent income tax rate bracket benefit for 2001. 
     This worksheet should be relatively simple and many taxpayers 
     will not need to fill it out completely because they will 
     have received the full amount by check.
       The Secretary of the Treasury is expected to make 
     appropriate revisions to the wage withholding tables to 
     reflect the proposed rate reduction for calendar year 2001 as 
     expeditiously as possible. To implement the effects of the 
     rate cuts for 2001, employers would be required to use a new 
     (second) set of withholding rate tables to determine the 
     correct withholding amounts for each employee. Switching to 
     the new withholding rate tables during the year can be 
     expected to result in a one-time additional burden for 
     employers (or additional costs for employers that rely on a 
     bookkeeping or payroll service).
     2. Standard deduction tax relief (sec. 301 of the conference 
         agreement)
     Summary description of provision
       The bill increases the basic standard deduction for married 
     taxpayers filing a joint return to twice the basic standard 
     deduction for an unmarried individual. The increase is 
     phased-in over five years beginning in 2005 and would be 
     fully phased-in for 2009 and thereafter.
     Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 23 million individual returns.
     Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to this provision. The higher basic 
     standard deduction should not result in an increase in 
     disputes with the IRS, nor will 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. According to estimates by the staff of 
     the Joint Committee on Taxation, approximately three million 
     individual tax returns will realize greater tax savings from 
     the increased standard deduction than from itemizing their 
     deductions. In addition to the tax savings, such taxpayers 
     will no longer have to file Schedule A to Form 1040 and a 
     significant number of which will no longer need to engage in 
     the record keeping inherent in itemizing below-the-line 
     deductions. Moreover, by claiming the standard deduction, 
     such taxpayers may qualify to use simpler versions of the 
     Form 1040 (i.e., Form 1040EZ or Form 1040A) that are not 
     available to individuals who itemize their deductions. These 
     forms simplify the return preparation process by eliminating 
     from the Form 1040 those items that do not apply to 
     particular taxpayers.
       This reduction in complexity and record keeping also may 
     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. Furthermore, if the provision results in a taxpayer 
     qualifying to use one of the simpler versions of the Form 
     1040, the taxpayer may be eligible to file a paperless 
     Federal tax return by telephone. The provision also should 
     reduce the number of disputes between taxpayers and the IRS 
     regarding substantiation of itemized deductions.
     3. Expansion of the 15-percent rate bracket (sec. 302 of the 
         conference agreement)
     Summary description of provision
       The provision increases the size of the 15-percent regular 
     income tax rate bracket for married individuals filing a 
     joint return to twice the size of the corresponding rate 
     bracket for unmarried individuals. This increase is phased-in 
     over four years beginning in 2005. It is fully effective 
     beginning in 2008.
     Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 20 million individual tax returns.
     Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to this provision. The increased size 
     of the 15-percent regular income tax rate bracket for married 
     individuals filing joint returns should not result in an 
     increase in disputes with the IRS, nor will regulatory 
     guidance be necessary to implement this provision.
     4. Increase the child tax credit (sec. 201 of the conference 
         agreement)
     Summary description of provision
       The provision increases the child tax credit from $500 to 
     $1,000, phased in over an ten-year period beginning in 2001, 
     extends refundability of the credit, allows the credit to the 
     extent of the full regular tax and alternative minimum tax, 
     and repeals the provision that reduces the refundable child 
     credit by the individual's alternative minimum tax.
     Number of affected taxpayers
       It is estimated that the provisions will affect 
     approximately 25 million individual tax returns.
     Discussion
       Individuals should not have to keep additional records due 
     to this provision, nor will additional regulatory guidance be 
     necessary to implement this provision. More taxpayers will 
     have to perform the additional calculations necessary to 
     determine eligibility for the refundable child credit but 
     this should not lead to an increase in disputes with the IRS. 
     For taxpayer's with less than two children, however, the 
     provision can be expected to increase tax preparation costs 
     and the number of individuals using a tax preparation 
     service. (See, also, the discussion of the

[[Page 9714]]

     interactive effect of the child credit and the individual 
     alternative minimum tax, below.)
     5. The effect of the alternative minimum tax rules
       The provisions relating to the rate reductions, increased 
     standard deduction, the expanded 15-percent rate bracket, and 
     the increased child tax credit are affected by the 
     alternative minimum tax rules. Although the bill provides 
     relief from the alternative minimum tax, additional 
     individuals will need to make the necessary calculations to 
     determine the applicability of the alternative minimum tax 
     rules. It is estimated that for the year 2010, 18 million 
     additional individual income tax returns that will benefit 
     from the rate reductions, increased standard deduction, 
     expanded 15-percent rate bracket, and increased child tax 
     credit would be affected by the alternative minimum tax. For 
     these taxpayers, it could be expected that the interaction of 
     the provisions with the alternative minimum tax rules would 
     result in an increase in tax preparation costs and in the 
     number of individuals using a tax preparation service.
       The bill also provides that the alternative minimum tax 
     exemption amount for married individuals filing a joint 
     return is increased. This should reduce complexity for 
     affected taxpayers. It is estimated that, for the year 2006, 
     the provision increasing the alternative minimum tax 
     exemption amount will apply to seven million individual 
     income tax returns. Some of these taxpayers will no longer be 
     affected by the alternative minimum tax.

                                       Department of the Treasury,


                                     Internal Revenue Service,

                                     Washington, DC, May 25, 2001.
     Ms. Lindy L. Paull,
     Chief of Staff, Joint Committee on Taxation, Washington, DC.
       Dear Ms. Paull: Enclosed are the combined comments of the 
     Internal Revenue Service and the Treasury Department on the 
     provisions of the conference agreement on the ``Economic 
     Growth and Tax Relief Reconciliation Act.'' Our comments are 
     based on the description of these provisions contained in a 
     brief summary of the conference agreement prepared by the 
     staff of the Joint Committee on Taxation.
       Due to the short turnaround time, our comments are 
     necessarily provisional.
           Sincerely,
                                              Charles O. Rossotti.
       Enclosure.

 Complexity Analysis of Economic Growth and Tax Relief Reconciliation 
                              Act of 2001


    New 10-Percent Rate Bracket and Reduction in Other Rate Brackets

     Provision
       Create a new 10-percent regular income tax bracket ($6,000/
     $10,000/$12,000 of taxable income in 2001-2007 and $7,000/
     $10,000/$14,000 of taxable income in 2008 and thereafter; 
     index in 2009); advance payments would be made to taxpayers 
     in 2001.
       Reduce the present-law regular income tax rates of 28, 31, 
     36, and 39.6 percent to 25, 28, 33, and 35 percent, 
     respectively. The reduction is phased in over 6 years 
     beginning July 1, 2001.
     IRS and Treasury Comments
       The new tax bracket and the reduced tax rates would be 
     incorporated into the tax table and the tax rate schedules 
     shown in the instructions for Forms 1040, 1040A, 1040EZ, 
     1040NR, 1040NR-EZ, and 1041, and on Forms W-4V and 8814 for 
     2001 and later years. Other forms (e.g., Form 8752 and 
     Schedule D (Form 1040)) would also be affected. No new forms 
     would be required.
       The new tax bracket and the reduced tax rates would also be 
     incorporated into the tax rate schedules shown on Form 1040-
     ES for 2002 and later years. Subsequent to enactment, the IRS 
     would have to advise taxpayers who make estimated tax 
     payments for 2001 how they can adjust their estimated tax 
     payments for 2001 to reflect the reduced rates.
       Programming changes would be required to reflect the new 
     tax bracket and rates for tax years 2001 through 2006. 
     Currently, the IRS tax computation programs are updated 
     annually to incorporate mandated inflation adjustments. 
     Programming changes necessitated by the provision would be 
     included during that process for 2002 and later years. 
     Supplemental programming changes would be required to 
     accommodate the new 10-percent tax bracket for 2001.
       New withholding rate tables and schedules will be published 
     soon after enactment to update the current Circular E for use 
     by employers during the remainder of calendar year 2001.
       The advance payment of the credit for 2001 would require a 
     notice to explain the advance payment amount; programming 
     changes to compute the advance payment amount; and resources 
     to answer taxpayer questions about the payment.
       The new credit for 2001 would require a new form to report 
     to taxpayers the amount of the advance payment made to them; 
     one new line to be added to Forms 1040, 1040A, and 1040EZ for 
     taxpayers to compute the amount, if any, of their allowable 
     credit; programming changes to compute the amount of the 
     credit; and script and other changes to enable TeleFile to 
     compute the amount of the credit.
       The alternative minimum tax (AMT) is projected to apply to 
     an increasing number of taxpayers over time. The provision 
     would increase the number of taxpayers particularly in the 
     later years of the budget period (2006-2011), whose liability 
     is affected by the AMT, and would also cause additional 
     taxpayers to perform AMT calculation to determine whether 
     their liability is affected by the AMT.


                            Child Tax Credit

     Provision
       Increase the amount of the child tax credit to $600 (2001-
     2004), $700 (2005-2008), $800 (2009), and $1,000 (2010).
       Make the child tax credit refundable to the extent of 10 
     percent of the taxpayer's earned income in excess of $10,000 
     for 2001-2004 (15 percent for 2005 and later). The $10,000 
     figure would be indexed beginning in 2002.
       Change the tax liability limitation for the child tax 
     credit, including the order in which the credit is claimed, 
     beginning in 2002. The child tax credit, but not the other 
     personal nonrefundable credits, would be allowed against the 
     sum of the regular tax and the alternative minimum tax. Under 
     a new ordering rule, the foreign tax credit and the other 
     nonrefundable personal credits would be taken into account 
     before the child tax credit.
     IRS and Treasury Comments
       No new forms would be required as a result of any of the 
     above-mentioned child tax credit provisions.
       The increase in the amount of the child tax credit would be 
     incorporated in the instructions for Forms 1040, 1040A, and 
     1040NR for 2001 and later years. This increase also affects 
     the amount of the refundable child tax residents of Puerto 
     Rico and would be reflected in the instructions for Forms 
     1040-PR and 1040-SS for 2001 and later years.
       The change in the tax liability limitation for 2002 and 
     later years would:
       1. Eliminate two questions from the instructions for Forms 
     1040 and 1040A.
       2. Eliminate the need to refer taxpayers with three or more 
     qualifying children and certain other personal nonrefundable 
     credits to Publication 972 to compute their child tax credit. 
     Such taxpayers will no longer be required to complete an 
     additional 10-line worksheet (the ``Line 11 Worksheet'') in 
     Publication 972.
       3. Add three lines to the child tax worksheet in the Form 
     1040 instructions and one line to that worksheet in the Form 
     1040A instructions.
       4. Change the ordering of the credits on Forms 1040, 1040A, 
     and 1040NR.
       Nine million additional taxpayers would be required to file 
     Form 8812 to benefit from the provision that would make the 
     tax credit refundable to the extent of 15 percent of earned 
     income in excess of $10,000. Form 8812 would be expanded from 
     nine lines to 13 lines, beginning in 2001. (A similar change 
     will be necessary on Forms 1040-PR and 1040-SS for resident 
     of Puerto Rico.)
       The increase in the amount of the credit would be 
     incorporated on Form 1040-ES for 2004, 2007, 2010, and 2011.
       Supplemental programming changes would be required to 
     accommodate the changes to the computation of the child tax 
     credit for 2001.
       As a result of this change, the number of taxpayers 
     affected by the AMT would decrease.


        Standard Deduction for Married Taxpayers Filing Jointly

     Provision
       Increase the basic standard deduction for a married couple 
     filing a joint return to twice the basic standard deduction 
     for an unmarried individual filing a single return, phased in 
     over 5 years beginning in 2006.
     IRS and Treasury Comments
       The increase in the basic standard deduction for married 
     taxpayers would be incorporated in the instructions for Forms 
     1040, 1040A, 1040EZ, and on Forms 1040, 1040A, 1040EZ, and 
     1040-ES beginning in 2006. No new forms would be required.
       Programming changes would be required to reflect the 
     increased standard deduction for married taxpayers. 
     Currently, IRS tax computation programs are updated annally 
     to incorporate mandated inflation adjustments. Programming 
     changes necessitated by this provision would be included 
     during that process.
       Compared with current law, the larger standard deduction 
     would reduce the number of taxpayers who itemize deductions.
       As a result of this provision, the number of taxpayers 
     affected by the AMT would increase.


      15-Percent Rate Bracket For Married Taxpayers Filing Jointly

     Provision
       Increase the width of the 15-percent regular income tax 
     rate bracket for a married couple filing a joint return to 
     twice the width of the corresponding rate bracket for an 
     unmarried individual filing a single return, phased in over 5 
     years beginning in 2006.
     IRS and Treasury Comments
       The increase in the width of the 15-percent rate bracket 
     for married taxpayers would be

[[Page 9715]]

     incorporated in the tax tables and the tax rate schedules 
     shown in the instructions for Forms 1040, 1040A, 1040EZ, 
     1040NR, 1040NR-EZ, and on Form 1040-ES for each year during 
     the phase-in period (2006-2010). No new forms would be 
     required.
       Programming changes would be required to reflect the 
     expanded 15-percent rate bracket. Currently, the IRS tax 
     computation programs are updated annually to incorporate 
     mandated inflation adjustments. Programming changes 
     necessitated by the provision would be included during that 
     process.
       As a result of this provision, the number of taxpayers 
     affected by the AMT would increase.

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     William Thomas,
     Dick Armey,
                                Managers on the Part of the House.

     Chuck Grassley,
     Orrin Hatch,
     Frank H. Murkowski,
     Don Nickles,
     Phil Gramm,
     Max Baucus,
     John Breaux,
                               Managers on the Part of the Senate.

     

                          ____________________