[House Report 104-324]
[From the U.S. Government Publishing Office]



                                                                       
104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    104-324
_______________________________________________________________________


 
               THRIFT CHARTER CONVERSION TAX ACT OF 1995


November 7, 1995.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______


    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2494]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Ways and Means, to whom was referred the 
bill (H.R. 2494) to amend the Internal Revenue Code of 1986 to 
provide for the treatment of bad debt reserves of savings 
associations which are required to convert into banks, and for 
other purposes, having considered the same, report favorably 
thereon with an amendment and recommend that the bill as 
amended do pass.

                                CONTENTS

                                                                   Page
 I. Introduction......................................................4
        A. Purpose and summary...................................     4
        B. Background and need for legislation...................     4
        C. Legislative history...................................     5
II. Explanation of the bill...........................................5
        A. Treatment of bad debt deductions and reserves for bad 
            debt of thrift institutions (sec. 2).................     5
        B. Tax treatment of special assessments (sec. 3).........    14
III.Votes of the committee...........................................15

IV. Budget effects of the bill.......................................16
        A. Committee estimate of budgetary effects...............    16
        B. Statement regarding new budget authority and tax 
            expenditures.........................................    16
        C. Cost estimate prepared by the Congressional Budget 
            Office...............................................    16
 V. Other matters to be discussed under house rules..................17
        A. Committee oversight findings and recommendations......    17
        B. Summary of findings and recommendations of the 
            Committee on Government Reform and Oversight.........    17
        C. Inflationary impact statement.........................    18
VI. Changes in existing law made by the bill, as reported............18
  The amendment is as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Thrift Charter Conversion Tax Act of 
1995''.

SEC. 2. TREATMENT OF RESERVES FOR BAD DEBTS OF SAVINGS ASSOCIATIONS 
                    WHICH ARE REQUIRED TO CONVERT INTO BANKS.

  (a) In General.--Section 593 of the Internal Revenue Code of 1986 
(relating to reserves for losses on loans) is hereby repealed.
  (b) Conforming Amendments.--
          (1) Subsection (d) of section 50 of such Code is amended by 
        adding at the end the following new sentence:
``Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) referred to 
in paragraph (1) of this subsection shall not apply to any taxable year 
beginning after December 31, 1995.''
          (2) Subsection (e) of section 52 of such Code is amended by 
        striking paragraph (1) and by redesignating paragraphs (2) and 
        (3) as paragraphs (1) and (2), respectively.
          (3) Subsection (a) of section 57 of such Code is amended by 
        striking paragraph (4).
          (4) Section 246 of such Code is amended by striking 
        subsection (f).
          (5) Clause (i) of section 291(e)(1)(B) of such Code is 
        amended by striking ``or to which section 593 applies''.
          (6) Subparagraph (A) of section 585(a)(2) of such Code is 
        amended by striking ``other than an organization to which 
        section 593 applies''.
          (7) Section 595 of such Code is hereby repealed.
          (8) Section 596 of such Code is hereby repealed.
          (9) Subsection (a) of section 860E of such Code is amended--
                  (A) by striking ``Except as provided in paragraph 
                (2), the'' in paragraph (1) and inserting ``The'',
                  (B) by striking paragraphs (2) and (4) and 
                redesignating paragraphs (3) and (5) as paragraphs (2) 
                and (3), respectively, and
                  (C) by striking in paragraph (2) (as so redesignated) 
                all that follows ``subsection'' and inserting a period.
          (10) Paragraph (3) of section 992(d) of such Code is amended 
        by striking ``or 593''.
          (11) Section 1038 of such Code is amended by striking 
        subsection (f).
          (12) Clause (ii) of section 1042(c)(4)(B) of such Code is 
        amended by striking ``or 593''.
          (13) Subsection (c) of section 1277 of such Code is amended 
        by striking ``or to which section 593 applies''.
          (14) Subparagraph (B) of section 1361(b)(2) of such Code is 
        amended by striking ``or to which section 593 applies''.
          (15) The table of sections for part II of subchapter H of 
        chapter 1 of such Code is amended by striking the items 
        relating to sections 593, 595, and 596.
  (c) 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, 1995.
          (2) Repeal of section 595.--The amendment made by subsection 
        (b)(7) shall apply to property acquired in taxable years 
        beginning after December 31, 1995.
  (d) 6-Year Spread of Adjustments.--
          (1) In general.--In the case of any taxpayer who is required 
        by reason of the amendments made by this section to change its 
        method of computing reserves for bad debts--
                  (A) such change shall be treated as a change in a 
                method of accounting,
                  (B) such change shall be treated as initiated by the 
                taxpayer and as having been made with the consent of 
                the Secretary, and
                  (C) the net amount of the adjustments required to be 
                taken into account by the taxpayer under section 481(a) 
                of the Internal Revenue Code of 1986--
                          (i) shall be determined by taking into 
                        account only applicable excess reserves, and
                          (ii) as so determined, shall be taken into 
                        account ratably over the 6-taxable year period 
                        beginning with the first taxable year beginning 
                        after December 31, 1995.
          (2) Applicable excess reserves.--
                  (A) In general.--For purposes of paragraph (1), the 
                term ``applicable excess reserves'' means the excess 
                (if any) of--
                          (i) the balance of the reserves described in 
                        section 593(c)(1) of such Code (as in effect on 
                        the day before the date of the enactment of 
                        this Act) as of the close of the taxpayer's 
                        last taxable year beginning before January 1, 
                        1996, over
                          (ii) the balance of such reserves as of the 
                        close of the taxpayer's last taxable year 
                        beginning before January 1, 1988.
                  (B) Special rule for thrifts which become small 
                banks.--In the case of a bank (as defined in section 
                581 of such Code) which was not a large bank (as 
                defined in section 585(c)(2) of such Code) for its 
                first taxable year beginning after December 31, 1995--
                          (i) the balance taken into account under 
                        subparagraph (A)(ii) shall not be less than the 
                        amount which would be the balance of such 
                        reserve as of the close of its last taxable 
                        year beginning before January 1, 1996, if the 
                        additions to such reserve for all taxable years 
                        had been determined under section 585(b)(2)(A) 
                        of such Code, and
                          (ii) the opening balance of the reserve for 
                        bad debts as of the beginning of such first 
                        taxable year shall be the balance taken into 
                        account under subparagraph (A)(ii) (determined 
                        after the application of clause (i) of this 
                        subparagraph).
                The preceding sentence shall not apply for purposes of 
                paragraphs (4), (5), and (6).
          (3) Suspension of recapture if residential loan requirement 
        met.--
                  (A) In general.--In the case of a taxpayer which 
                meets the residential loan requirement of subparagraph 
                (B) for any taxable year--
                          (i) no adjustment shall be taken into account 
                        under paragraph (1) for such taxable year, and
                          (ii) such taxable year shall be disregarded 
                        in determining--
                                  (I) whether any other taxable year is 
                                a taxable year for which an adjustment 
                                is required to be taken into account 
                                under paragraph (1), and
                                  (II) the amount of such adjustment.
                  (B) Residential loan requirement.--A taxpayer meets 
                the residential loan requirement of this subparagraph 
                for any taxable year if--
                          (i) the principal amount of the residential 
                        loans made by the taxpayer during such year is 
                        not less than the base amount for such year, or
                          (ii) the principal amount of the residential 
                        loans made by the taxpayer during each of the 2 
                        preceding taxable years is not less than the 
                        base amount for such preceding years.
                Clause (ii) shall not apply for purposes of determining 
                whether a taxpayer meets the residential loan 
                requirement of this subparagraph for any taxable year 
                beginning before January 1, 1998.
                  (C) Residential loan.--For purposes of this 
                paragraph, the term ``residential loan'' means any loan 
                described in clause (v) of section 7701(a)(19)(C) of 
                such Code but only if such loan is incurred in 
                acquiring, constructing, or improving the property 
                described in such clause.
                  (D) Base amount.--For purposes of subparagraph (B), 
                the base amount is the average of the principal amounts 
                of the residential loans made by the taxpayer during 
                the 6 most recent taxable years beginning before 
                January 1, 1996. At the election of the taxpayer who 
                made such loans during each of such 6 taxable years, 
                the preceding sentence shall be applied without regard 
                to the taxable year in which such principal amount was 
                the highest and the taxable year in such principal 
                amount was the lowest. Such an election may be made 
                only for the first taxable year beginning after 
                December 31, 1995, and, if made for such taxable year, 
                shall apply to all succeeding taxable years unless 
                revoked with the consent of the Secretary of the 
                Treasury or his delegate.
                  (E) Inflation adjustment of base amount.--In the case 
                of a taxable year beginning in a calendar year after 
                1996, the amount determined under subparagraph (D) 
                shall be increased by an amount equal to--
                          (i) the amount so determined, multiplied by
                          (ii) the cost-of-living adjustment determined 
                        under section 1(f)(3) of such Code for such 
                        calendar year, by substituting ``calendar year 
                        1995'' for ``calendar year 1992'' in 
                        subparagraph (B) thereof.
                  (F) Controlled groups.--In the case of a taxpayer 
                which is a member of any controlled group of 
                corporations described in section 1563(a)(1) of such 
                Code, subparagraph (B) shall be applied with respect to 
                such group.
          (4) Continued application of fresh start under section 585 
        transitional rules.--In the case of a taxpayer to which 
        paragraph (1) applied and which was not a large bank (as 
        defined in section 585(c)(2) of such Code) for its first 
        taxable year beginning after December 31, 1995--
                  (A) In general.--For purposes of determining the net 
                amount of adjustments referred to in section 
                585(c)(3)(A)(iii) of such Code, there shall be taken 
                into account only the excess of the reserve for bad 
                debts as of the close of the last taxable year before 
                the disqualification year over the balance taken into 
                account by such taxpayer under paragraph (2)(A)(ii) of 
                this subsection.
                  (B) Treatment under elective cut-off method.--For 
                purposes of applying section 585(c)(4) of such Code--
                          (i) the balance of the reserve taken into 
                        account under subparagraph (B) thereof shall be 
                        reduced by the balance taken into account by 
                        such taxpayer under paragraph (2)(A)(ii) of 
                        this subsection, and
                          (ii) no amount shall be includible in gross 
                        income by reason of such reduction.
          (5) Continued application of section 593(e).--Notwithstanding 
        the amendments made by this section, in the case of a taxpayer 
        to which paragraph (1) of this subsection applies, section 
        593(e) of such Code (as in effect on the day before the date of 
        the enactment of this Act) shall continue to apply to such 
        taxpayer as if such taxpayer were a domestic building and loan 
        association but the amount of the reserve taken into account 
        under such section 593(e) shall be only the balance taken into 
        account by such taxpayer under paragraph (2)(A)(ii) of this 
        subsection.
          (6) Certain items included as section 381(c) items.--The 
        balance of the applicable excess reserves, and the balance 
        taken into account by a taxpayer under paragraph (2)(A)(ii) of 
        this subsection, shall be treated as items described in section 
        381(c) of such Code.
          (7) Regulations.--The Secretary of the Treasury or his 
        delegate shall prescribe such regulations as may be necessary 
        to carry out this subsection, including regulations providing 
        for the application of paragraph (3) in the case of mergers, 
        spin-offs, and other reorganizations.

SEC. 3. DEDUCTION FOR SPECIAL ASSESSMENTS.

  For purposes of subtitle A of the Internal Revenue Code of 1986, the 
amount allowed as a deduction under section 162 of such Code for a 
taxable year shall include the amount paid during such year as a 
special assessment under section 7(b)(6)(B) of the Federal Deposit 
Insurance Act, as amended by the Thrift Charter Conversion Act of 1995, 
as contained in subtitle B of title II of H.R. 2491 of the 104th 
Congress, as passed by the House of Representatives.

                            I. INTRODUCTION

                         a. purpose and summary

    The bill (H.R. 2494, as amended) amends the Internal 
Revenue Code of 1986 to repeal the reserve method of 
determining deductions for bad debts by thrift institutions 
under section 593 and to provide rules to implement the change 
of the method of accounting required by the repeal of such 
section. The bill also clarifies that certain special 
assessments to be paid to the Savings Association Insurance 
Fund by thrift institutions are deductible.

                 b. background and need for legislation

    Title II (Chapter 2, subtitle B) of H.R. 2491 (``Seven-Year 
Balanced Budget Reconciliation Act of 1995''), which passed the 
House of Representatives on October 26, 1995, would require 
savings and loan institutions (``thrift institutions'') to 
forego their Federal thrift charters and become either State-
chartered depository institutions or Federally-chartered banks. 
Under proposed Treasury regulations, if a thrift institution 
becomes a bank, the thrift institution would be required to 
change its method of accounting for bad debts and would be 
subject to recapture of all or a portion of its bad debt 
reserve. It is understood that such recapture would require the 
institution immediately to record, for financial accounting 
purposes, a current or deferred tax liability for the amount of 
bad debt recapture for which liabilities previously had not 
been recorded (generally, with respect to the pre-1988 
reserves), regardless of when such recapture is taken into 
account for Federal income tax purposes. It is further 
understood that the recording of this tax liability generally 
would decrease the regulatory capital of the new bank.
    In addition, Title II of H.R. 2491 would require thrift 
institutions to pay a special assessment to the Savings 
Association Insurance Fund (``SAIF''). The SAIF generally is 
the insurance fund for deposits in thrift institutions. There 
is some question as to whether the special assessments paid to 
the SAIF would be deductible currently or required to be 
capitalized.
    The Committee bill addresses the tax questions that arise 
concerning the H.R. 2491 banking legislation, and the 
provisions of the Committee bill are described in Part II of 
this report.

                         c. legislative history

    H.R. 2494 was introduced by Chairman Archer, Mr. Leach, and 
Ms. Roukema on October 11, 1995, and the Committee on Ways and 
Means held a public hearing on H.R. 2494 on October 26, 1995. 
The Committee on Ways and Means marked up H.R. 2494 on November 
1, 1995, and approved Chairman Archer's amendment in the nature 
of a substitute to the bill as introduced.

                      II. EXPLANATION OF THE BILL

a. treatment of bad debt deductions and reserves for bad debt of thrift 
       institutions (sec. 2 of the bill and sec. 593 of the code)

                       Present Law and Background

Tax treatment of bad debt deductions of savings institutions

    Generally, a taxpayer engaged in a trade or business may 
deduct the amount of any debt that becomes wholly or partially 
worthless during the year (the ``specific charge-off'' method). 
Certain thrift institutions (building and loan associations, 
mutual savings banks, or cooperative banks) are allowed 
deductions for bad debts under rules more favorable than those 
granted to other taxpayers (and more favorable than the rules 
applicable to other financial institutions). Qualified thrift 
institutions may compute deductions for bad debts using either 
the specific charge-off method or the reserve method of section 
593 of the Internal Revenue Code. To qualify for this reserve 
method, a thrift institution must meet an asset test, requiring 
that 60 percent of its assets consist of ``qualifying assets'' 
(generally cash, government obligations, and loans secured by 
residential real property). This percentage must be computed at 
the close of the taxable year, or at the option of the 
taxpayer, as the annual average of monthly, quarterly, or 
semiannual computations of similar percentages.
    If a thrift institution uses the reserve method of 
accounting, it must establish and maintain a reserve for bad 
debts and charge actual losses against the reserve, and is 
allowed a deduction for annual additions to restore the reserve 
to its permitted balance. Under section 593, a thrift 
institution annually may elect to calculate its addition to its 
bad debt reserve under either (1) the ``percentage of taxable 
income'' method applicable only to thrift institutions, or (2) 
the ``experience'' method that also is available to small 
banks.
    Under the ``percentage of taxable income'' method, a thrift 
institution generally is allowed a deduction for an addition to 
its bad debt reserve equal to 8 percent of its taxable income 
(determined without regard to this deduction and with 
additional adjustments). Under the experience method, a thrift 
institution generally is allowed a deduction for an addition to 
its bad debt reserve equal to the greater of: (1) an amount 
based on its actual average experience for losses in the 
current and five preceding taxable years, or (2) an amount 
necessary to restore the reserve to its balance as of the close 
of the base year. For taxable years beginning before 1988, the 
``base year'' was the last taxable year before the most recent 
adoption of the experience method (i.e., generally, the last 
year the taxpayer was on the percentage of taxable income 
method). For taxable years beginning after 1987, the base year 
is the last taxable year beginning before 1988. Prior to 1988, 
computing bad debts under a ``base year'' rule allowed a thrift 
institution to claim a deduction for bad debts for an amount at 
least equal to the thrift institution's actual losses that were 
incurred during the taxable year.
            Bad debt methods of commercial banks
    A small commercial bank (i.e., one with adjusted bases of 
assets of $500 million or less) only may use the experience 
method or the specific charge-off method for purposes of 
computing its deduction for bad debts. A large commercial bank 
must use the specific charge-off-method of section 166. If a 
small bank becomes a large bank, it must recapture its existing 
bad debt reserve (i.e., include the amount of the reserve in 
income) through one of two elective methods. Under the 4-year 
recapture method, the bank generally includes 10 percent of the 
reserve in income in the first taxable year, 20 percent in the 
second year, 30 percent in the third year, and 40 percent in 
the fourth year. Under the cut-off method, the bank generally 
neither restores its bad debt reserve to income nor may it 
deduct losses relating to loans held by the bank as of the date 
of the required change in the method of accounting. Rather, the 
amount of such losses are charged against and reduce the 
existing bad debt reserve; any losses in excess of the reserve 
are deductible. Any reserve balance in excess of the balance of 
related loans is includible in income.
            Recapture of bad debt reserves by thrift institutions
    If a thrift institution becomes a commercial bank, or if 
the institution fails to satisfy the 60-percent qualified asset 
test, it is required to change its method of accounting for bad 
debts and, under proposed Treasury regulations,\1\ is required 
to recapture its bad debt reserve. The percentage-of-taxable-
income portion of the reserve generally is included in income 
ratably over a 6-taxable year period. The experience method 
portion of the reserve is not restored to income if the former 
thrift institutions qualifies as a small bank. If the former 
thrift institution is treated as a large bank, the experience 
method portion of the reserve is restored to income either 
ratably over a 6-taxable year period, or under the 4-year 
recapture method or the cut-off method described above.
    \1\ Prop. Treas. reg. sec. 1.593-13.
---------------------------------------------------------------------------
    In addition, a thrift institution may be subject to a form 
of reserve recapture even if the institution continues to 
qualify for the percentage of taxable income method. 
Specifically, if a thrift institution distributes to its 
shareholders an amount in excess of its post-1951 earnings and 
profits, such excess is deemed to be distributed from the 
institution's bad debt reserve and is restored to income. In 
the case of any distribution in redemption of stock or in 
partial or complete liquidation of an institution, the 
distribution is treated as first coming out of the bad debt 
reserves of the institution (sec. 593(e)).

Proposed banking legislation (H.R. 2491)

            Treatment of thrift institutions under H.R. 2491
    Title II (Chapter 2, subtitle B) of H.R. 2491, which passed 
the House of Representatives on October 26, 1995, would require 
savings and loan institutions to forgo their Federal thrift 
charters and become either State-chartered depository 
institutions or Federally-chartered banks. Under proposed 
Treasury regulations, if a thrift institution becomes a bank, 
the institution would be required to recapture all or a portion 
of its bad debt reserve. As described in detail below, the 
Committee understands that such recapture would require the 
institution immediately to record, for financial accounting 
purposes, a current or deferred tax liability for the amount of 
bad debt recapture for which liabilities previously had not 
been recorded (generally, with respect to the pre-1988 
reserves), regardless of when such recapture is taken into 
account for Federal income tax purposes. The Committee further 
understands that the recording of this liability generally 
would decrease the regulatory capital of the new bank.

Financial accounting treatment of tax reserves of bad debts of thrift 
        institutions

    In general, for financial accounting purposes, a 
corporation must record a deferred tax liability with respect 
to items that are deductible for tax purposes in a period 
earlier than they are expensed for book purposes. The deferred 
tax liability signifies that, although a corporation may be 
reducing its current tax expense because of the accelerated tax 
deduction, the corporation will become liable for tax in a 
future period when the timing item ``reserves'' (i.e., when the 
item is expensed for book purposes but for which the tax 
deduction had already been allowed). Under the applicable 
accounting standard (Accounting Principles Board Opinion 23), 
deferred tax liabilities generally were not required for pre-
1988 tax deductions attributable to the bad debt reserve method 
of thrift institutions because the potential reversal of the 
bad debt reserve was indefinite (i.e., generally, a reversal 
only would occur by operation of sec. 593(e), a condition 
within the control of a thrift institution). However, the 
establishment of 1987 as a base year increased the likelihood 
of bad debt reserve reversals with respect to post-1987 
additions to the reserve and the Committee understands that 
thrift institutions generally have recorded deferred tax 
liabilities for these additions.\2\
    \2\ For taxable years beginning before 1988, the base year balance 
of a thrift institution was the reserve balance whenever the 
institution changed from one bad debt method to another (e.g., from the 
percentage of taxable income method to the experience method). How the 
establishment of 1987 as a permanent base year changed the nature of 
the bad debt reserves of thrift institutions between pre-1988 years and 
post-1987 years (which, in turn, changed the financial accounting 
treatment of such reserves) can be illustrated by the following 
example:
    Assume that a thrift institution (``T'') always had used the 
percentage of taxable income (``PTI'') method to deduct bad debts 
through 1986 when its reserve balance was $10,000. Further assume that 
in 1987, T: (1) has insufficient taxable income to use the PTI method, 
(2) has actual bad debt losses of $1,000, and (3) under the six-year 
average formula of the experience method, would be allowed a deduction 
of $900. Under these facts, T would be allowed a bad debt deduction of 
$1,000 (rather than $900) in 1987 because $1,000 is the amount 
necessary to restore the reserve to its base year (PTI) level. 
Specifically, in 1987, T would charge the year-end 1986 reserve of 
$10,000 for the $1,000 actual loss and then add (and deduct) $1,000 to 
the reserve so that the balance of the reserve at year end 1987 is once 
against $10,000. Thus, T's former PTI deductions, which gave rise to 
the $10,000 reserve balance, generally would not be restored to income 
(unless subject to sec. 593(e)).
    Further assume that in 1988, T has sufficient taxable income to be 
allowed a PTI deduction of $1,500, increasing the balance of the 
reserve to $11,500 at year-end 1988. Further assume that in 1989, T: 
(1) again has insufficient taxable income to use the PTI method, (2) 
has actual bad debts of $2,500, and (3) under the six-year average 
formula of the experience method would be allowed a deduction of $900. 
Under these facts, T would be allowed a deduction of $1,000 (i.e., the 
amount necessary to restore the reserve to its base year (year-end 
1987) level). Specifically, T would charge the year-end 1988 reserve 
balance of $11,500 for the $2,500 actual loss and then add (and deduct) 
$1,000 to the reserve to restore the balance to the $10,000 base year 
amount. Thus, T's post-1987 PTI deduction of $1,500 is restored to 
income (i.e., T actually had losses of $2,500 in 1989, but only was 
allowed to deduct $1,000).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that the reserve method of bad debts 
accorded to qualified thrift institutions under present law 
results in a mismeasurement of economic income and provides 
those institutions with a tax benefit not provided to 
similarly-situated depository institutions.
    The Committee also believes that whenever a taxpayer 
changes its method of accounting, it is appropriate to 
implement such change in a manner such that items of income or 
expense are not taken into account twice--once under the old 
method and again under the new method. Thus, under present law, 
most accounting method changes are implemented under section 
481 which requires the calculation of an adjustment that 
reflects the cumulative effect of the method change and that is 
restored to income over a specified period of time. 
Specifically, under present law, whenever a thrift institution 
no longer qualifies for the reserve method of accounting for 
bad debts, the bad debt reserve of the thrift institution must 
be restored to income.
    A provision of H.R. 2491, as passed by the House of 
Representatives on October 26, 1995, will require Federally-
chartered savings and loan institutions to become Federally-
chartered banks or State-chartered depository institutions. 
Under proposed Treasury regulations, the choice of charter will 
have different Federal income tax effects--those institutions 
choosing bank charters will have a recapture of their bad debt 
reserves while those institutions choosing State thrift 
charters may escape recapture. Further, the Committee 
understands that, because thrift institutions had not provided 
deferred taxes with respect to a portion of their bad debt 
reserves for financial and regulatory accounting purposes, 
requiring recapture at this time would reduce the regulatory 
capital of thrift institutions converting to banks.
    The Committee believes that in order to further national 
banking policy, certain changes to the Internal Revenue Code 
are warranted. First, the Committee believes that, in order to 
provide similar treatment to similarly-situated depository 
institutions, the special bad debt reserve methods available to 
qualified thrift institutions should be repealed. In 
implementing this change in accounting method, the Committee 
believes it is appropriate to provide relief from the recapture 
of that portion of the bad debt reserves for which thrift 
institutions have not recorded deferred tax liabilities for 
financial and regulatory accounting purposes. The Committee 
believes that this relief should not directly benefit the 
shareholders of the institution in a manner similar to the way 
in which present-law section 593(e) provides a limitation on 
the direct enjoyment of the benefits of section 593 by 
shareholders of a thrift institution.
    Finally, the Committee is concerned that the proposed 
banking legislation may cause a change in thrift institutions' 
traditional roles as home mortgage lenders and may result in a 
shortage in the availability of mortgage loans in some regions. 
The Committee bill addresses this issue by providing an 
incentive for former thrift institutions to continue to provide 
a level of residential mortgage financing. The Committee 
recognizes that it may be appropriate to reexamine, in the 
future, this and other issues raised by the bill.

                       Explanation of Provisions

Repeal of section 593

    The bill repeals the section 593 reserve method of 
accounting for bad debts by thrift institutions, effective for 
taxable years beginning after 1995. Under the bill, thrift 
institutions that qualify as small banks are allowed to utilize 
the experience method applicable to such institutions, while 
thrift institutions that are treated as large banks are 
required to use only the specific charge-off method. Thus, the 
percentage of taxable income method of accounting for bad debts 
is no longer available for any institution. The bill also 
repeals the following present-law provisions that only apply to 
thrift institutions to which section 593 applies: (1) the 
denial of a portion of certain tax credits to a thrift 
institution (sec. 50(d)(1)); (2) the special rules with respect 
to the foreclosure of property securing loans of a thrift 
institution (sec. 595); (3) the reduction in the dividends 
received reduction of a thrift institution (sec. 596); and (4) 
the ability of a thrift institution to use a net operating loss 
to offset its income from a residual interest in a REMIC.

Treatment of recapture of bad debt reserves

            In general
    A thrift institution required to change its method of 
computing reserves for bad debts will treat such change as a 
change in a method of accounting, initiated by the taxpayer, 
and having been made with the consent of the Secretary of the 
Treasury.\3\ Any section 481(a) adjustment required to be taken 
into account with respect to such change generally will be 
determined solely with respect to the ``applicable excess 
reserves'' of the taxpayer. The amount of applicable excess 
reserves shall be taken into account ratably over a 6-taxable 
year period, beginning with the first taxable year beginning 
after 1995, subject to the residential loan requirement 
described below. In the case of a thrift institution that 
becomes a ``large bank'' (as determined under sec. 585(c)(2)), 
the amount of the institution's applicable excess reserves will 
be the excess of (1) the balance of its reserves described in 
section 593(c)(1) (i.e., its supplemental reserve for losses on 
loans, its reserve for losses on qualifying real property 
loans, and its reserve for losses on nonqualifying loans) as of 
the close of its last taxable year beginning before January 1, 
1996, over (2) the balance of such reserves as of the close of 
its last taxable year beginning before January 1, 1988 (i.e., 
the ``pre-1988 reserves''). Thus, unless the taxpayer meets the 
residential loan requirement described below, a thrift 
institution that is treated as a large bank generally is 
required to recapture its post-1987 additions to its bad debt 
reserves, whether such additions are made pursuant to the 
percentage of taxable income method or the experience method.
    \3\ A thrift institution that uses a reserve method described in 
section 593 will be deemed to have changed its method of computing 
reserves for bad debts even though such institution will be allowed to 
use the reserve method of section 585.
---------------------------------------------------------------------------
    In the case of a thrift institution that becomes a ``small 
bank'' (as determined under sec. 585(c)(2)), the amount of the 
institution's applicable excess reserves will be the excess of 
(1) the balance of its reserves described in section 593(c)(1) 
as of the close of its last taxable year beginning before 
January 1, 1996, over (2) the greater of the balance of: (a) 
its pre-1988 reserves or (b) what the institution's reserves 
would have been at the close of its last taxable year beginning 
before January 1, 1996, had the institution always used the 
experience method described in section 585(b)(2)(A) (i.e., the 
six-year average method). For purposes of the future 
application of section 585, the beginning balance of the small 
bank's reserve for its first taxable year beginning after 
December 31, 1995, will be the greater of the two amounts 
described in (2) in the preceding sentence, and the balance of 
the reserve at the close of the base year (for purposes of sec. 
585(b)(2)(B)) will be the amount of its pre-1988 reserves. If 
such small bank later becomes a large bank, any section 481(a) 
adjustment amount required to be taken into account under 
section 585(c)(3) will not include any portion of the bank's 
pre-1988 reserve. Similarly, if the bank elects the cut-off 
method to implement its conversion to large bank status, the 
amount of the reserve against the bank charges its actual 
losses will not include any portion of the bank's pre-1988 
reserve and the amount by which the pre-1988 reserve exceeds 
actual losses will not be included in gross income.
    The balance of the pre-1988 reserves will continue to be 
subject to the provisions of present-law section 593(e) 
(requiring recapture in the case of certain excess 
distributions to, and redemptions of, shareholders). Thus, 
section 593(e) will continue to apply to an institution 
regardless of whether the institution becomes a bank or remains 
a thrift institution. In addition, the balance of the pre-1988 
reserve will be treated as a tax attribute to which section 381 
applies. Treasury regulations are expected to provide rules for 
the continued application of section 593(e) in the case of 
mergers, acquisitions, spin-offs, and other reorganizations of 
thrift and other institutions. The Committee strongly believes 
that any such regulations should provide that if the stock of 
an institution with a pre-1988 reserve is acquired by another 
taxpayer, the pre-1988 reserve will not be restored to income 
by reason of the acquisition. Similarly, if an institution with 
a pre-1988 reserve is merged or liquidated tax-free into a 
bank, the pre-1988 reserve should not be restored to income by 
reason of the merger or liquidation.\4\ Rather, the bank will 
inherit the pre-1988 reserve and the post-1951 earnings and 
profits of the former thrift institution and section 593(e) 
will apply to the bank as if it were a thrift institution. That 
is, the pre-1988 reserve will be restored into income in the 
case of any distribution in redemption of the stock of the bank 
or in partial or complete liquidation of the bank following the 
merger or liquidation. In the case of any other distribution, 
the pre-1988 reserve will not be restored to income unless the 
distribution is in excess of the sum of the post-1951 earnings 
and profits inherited from the thrift institution and the post-
1913 earnings and profits of the acquiring bank. Treasury 
regulations should address the case where the shareholders of 
an institution with a pre-1988 reserve are ``cashed out'' in a 
taxable merger of the institution and a bank. Such regulations 
may provide that the pre-1988 reserve may be restored to income 
if such redemption represents a concealed distribution from the 
former thrift institution. For example, cash received by former 
thrift shareholders pursuant to a taxable reverse merger may 
represent a concealed distribution if, immediately preceding 
the merger, the acquiring bank had no available resources to 
distribute and its existing debt structure, indenture 
restrictions, financial condition, or regulatory capital 
requirements precluded it from borrowing money for purposes of 
making the cash payment to the former thrift shareholders. 
Treasury regulations also should address the treatment of boot 
received in a tax-free reorganization.
    \4\ The issue of whether section 593(e) applies in cases where a 
thrift institution is merged into a bank does not arise under present 
law because such merger results in a charter change under present law, 
requiring full bad debt reserve recapture.
---------------------------------------------------------------------------
    Further, it is anticipated that any balance of a taxpayer's 
pre-1988 reserve will be restored to income if the taxpayer no 
longer qualifies as a bank, as defined by section 581.
            Residential loan requirement
    Under a special rule, if the taxpayer meets the 
``residential loan requirement'' for any taxable year, the 
recapture of the applicable excess reserves otherwise to be 
taken into account as a section 481(a) adjustment for such year 
will be suspended. The residential loan requirement will 
continue to apply to subsequent taxable years until the 
taxpayer recaptures its entire section 481(a) adjustment (i.e., 
the residential loan requirement would no longer apply once the 
taxpayer has failed to meet the requirement in six separate 
taxable years and has thus recaptured its entire adjustment). A 
taxpayer meets the residential loan requirement if, for any 
taxable year, the principal amount of residential loans made by 
the taxpayer during the year is not less than its base amount. 
A taxpayer will be deemed to meet the residential loan 
requirement for any taxable year beginning after December 31, 
1997, if the taxpayer met the requirement for the two preceding 
years (determined without the application of this special, two-
out-of-three rule).
    For the first taxable year beginning after December 31, 
1995, the ``base amount'' for a taxpayer means the average of 
the principal amounts of the residential loans made by the 
taxpayer during the six most recent taxable years beginning 
before January 1, 1996. At the election of the taxpayer, the 
base amount may be computed by disregarding the taxable years 
within that 6-year period in which the principal amounts of 
loans made during such years were highest and lowest. This 
election must be made for the first taxable year beginning 
after December 31, 1995, and applies to all succeeding years 
unless revoked with the consent of the Secretary of the 
Treasury or his delegate. For taxable years beginning after 
December 31, 1996, the base amount is indexed for inflation.
    For purposes of the residential loan requirement, a loan 
will be deemed to be ``made'' by a financial institution to the 
extent the institution is, in fact, the principal source of the 
loan financing. Thus, any loan only can be ``made'' once. The 
Committee expects that Treasury regulations may provide that 
loans ``made'' by a financial institution may include, but are 
not limited to, loans (1) originated directly by the 
institution through its place of business or its employees, (2) 
closed in the name of the institution, (3) originated by a 
broker that acts as an agent for the institution, and (4) 
originated by another person (other than a financial 
institution) and that are acquired by the institution pursuant 
to a preexisting, enforceable agreement to acquire such loans. 
In addition, Treasury regulations also may provide that loans 
``made'' by a financial institution may include loans 
originated by another person (other than a financial 
institution) acquired by the institution soon after origination 
if such acquisition is pursuant to a customary practice of 
acquiring such loans from such person. A loan acquired by a 
financial institution from another financial institution 
generally will be considered to be made by the transferor 
rather than the transferee of the loan; however, such loan may 
be completely disregarded if a principal purpose of the 
transfer was to allow the transferor to meet the residential 
loan requirement. A loan may be considered to be made by a 
financial institution even if such institution has an 
arrangement to transfer such loan to the Federal National 
Mortgage Association or the Federal Home Loan Mortgage 
Corporation.
    For purposes of the residential loan requirement, a 
``residential loan'' is a loan described in section 
7701(a)(19)(C)(v) (generally, loans secured by residential real 
and church property and certain mobile homes),\5\ but only to 
the extent the loan is made to the owner of the property to 
acquire, construct, or improve the property. Thus, mortgage 
refinancings and home equity loans are not considered to be 
residential loans, except to the extent the proceeds of the 
loan are used to acquire, construct, or improve qualified 
residential real property. The Committee understands that 
pursuant to the Home Mortgage Disclosure Act, financial 
institutions are required to disclose the purpose for which 
loans are made. The Committee further understands that for 
purposes of this disclosure, institutions are required to 
classify loans as home purchase loans, home improvement loans, 
refinancings, and multifamily dwelling loans (whether for 
purchase, improvement or refinancing of such property). The 
Committee expects that taxpayers (and the Secretary of the 
Treasury in promulgating guidance) may take such reporting into 
account, and make such adjustments as are appropriate,\6\ in 
determining: (1) whether or not a loan qualifies as a 
``residential loan'' and (2) whether the institution ``made'' 
the loan. A taxpayer must use consistent standards for 
determining whether loans qualify as residential loans made by 
the institution both for purposes of determining its base 
amount and for purposes of determining whether it met the 
residential loan requirement for a taxable year.
    \5\ For this purpose, as under present law, if a multifamily 
structure securing a loan is used in part for nonresidential purposes, 
the entire loan will be deemed a residential real property loan if the 
planned residential use exceeds 80 percent of the property's planned 
use (determined as of the time the loan is made). In addition, loans 
made to finance the acquisition or development of land will be deemed 
to be loans secured by an interest in residential real property if, 
under regulations prescribed by the Secretary of the Treasury, there is 
a reasonable assurance that the property will become residential real 
property within a period of three years from the date of acquisition of 
the land.
    \6\ For example, adjustments will be required with respect to the 
reporting of multifamily dwellings in order to distinguish home 
purchase, home improvement, and refinancing loans.
---------------------------------------------------------------------------
    The residential loan requirement is determined on a 
controlled group basis. Thus, for example, if a controlled 
group consists of two thrift institutions with applicable 
excess reserves that are wholly owned by a bank, the 
residential loan requirement will be met (or not met) with 
respect to both thrift institutions by comparing the principal 
amount of the residential loans made by all three members of 
the group during the taxable year to the group's base amount. 
The group's base amount will be the average principal amount of 
residential loans made by all three members of the group during 
the base period. The election to disregard the high and low 
taxable years during the 6-year base period also would be 
applied on a controlled group basis (i.e., generally by 
treating the members of the group as one taxpayer so that all 
members of the group must join in the election, and the same 
corresponding years of each member would be so disregarded).
    The balance of a taxpayer's applicable excess reserve is 
treated as a tax attribute to which section 381 applies. Thus, 
if an institution with an applicable excess reserve is acquired 
in a tax-free reorganization, the balance of such reserve will 
not be immediately restored to income but will continue to be 
subject to the residential loan requirement in the hands of the 
acquirer. Treasury regulations will provide rules for the 
application of the residential loan requirement in the case of 
mergers, acquisitions, and other reorganizations of thrift and 
other institutions. The Committee expects that if a financial 
institution joins or merges into (or leaves) a group of 
financial institutions, the base amount of the acquiring (or 
remaining) group will be appropriately adjusted to reflect the 
base amount of the acquired (or departing) institution for 
purposes of determining whether the group meets the residential 
loan requirement for the year of the acquisition (or departure) 
and subsequent years. Similarly, for purposes of determining 
whether the group meets the special two-out-of-three rule for 
the year of, and the year following, the acquisition (or 
departure), the group must determine whether or not it would 
have satisfied the test had the new member also been a member 
of the group (or had the departing member never been a member 
of the group). Finally, if a controlled group of institutions 
had made an election to disregard its high and low years in 
computing its base amount, it is anticipated that such election 
shall be binding on any institution that subsequently joins the 
group and the election shall be applied to the new member by 
disregarding the high and low years of the new member even if 
such years do not correspond to the years applicable to the 
other members of the group.
    Finally, the Committee expects that any balance of a 
taxpayer's applicable excess reserve will be restored to income 
if the taxpayer no longer qualifies as a bank, as defined by 
section 581.

                             Effective Date

    The repeal of section 593 is effective for taxable years 
beginning after December 31, 1995. The repeal of section 595 is 
effective for property acquired in taxable years beginning 
after December 31, 1995.

 B. Tax Treatment of Special Assessments (sec. 3 of the bill and sec. 
                            162 of the Code)

                       Present Law and Background

    Title II (Chapter 1, subtitle B) of H.R. 2491, as passed by 
the House, would require thrift institutions to pay a special 
assessment to the Savings Association Insurance Fund 
(``SAIF''). The SAIF generally is the insurance fund for 
deposits in thrift institutions. The amount of the assessment 
would be the amount necessary to ensure that the SAIF has 
reserves of $1.25 for each $100 of insured deposits, and the 
due date of the payment would be the first business day of 
January 1996. Effective January 1, 1998, the SAIF would be 
merged with the Bank Insurance Fund (``BIF'') (the insurance 
fund for deposits in banks). Thrift institutions and banks also 
are required to pay annual premiums to the SAIF and BIF, 
respectively, based on the amount of their insured deposits. 
Currently, the premium rate for the SAIF deposits is 
substantially higher than the premium rate for BIF deposits. 
After the merger of the SAIF and BIF in 1998, under H.R. 2491, 
thrift institutions and banks would be subject to the same 
lower deposit insurance rates generally applicable to banks.
    In general, a taxpayer is allowed to deduct ordinary and 
necessary expenses paid or incurred in carrying on a trade or 
business during the taxable year (sec. 162). However, amounts 
that give rise to a permanent improvement or betterment must be 
capitalized rather than deducted currently (sec. 263). Whether 
an expenditure is deductible under section 162 or must be 
capitalized under section 263 is often a matter of dispute 
between the IRS and taxpayers, and has been the subject of 
significant litigation. Most recently, in INDOPCO v. 
Commissioner,  503 U.S. 79 (1992), the U.S. Supreme Court noted 
that the capitalization of expenditures is the norm and that a 
current ``income tax deduction is a matter of legislative grace 
and that the burden of clearly showing the right to the claimed 
deduction is on the taxpayer.'' \7\ In INDOPCO, the Supreme 
Court found that the record supported the lower courts' 
findings that the investment banking fees in question produced 
significant benefits extending beyond the tax year in which 
they were incurred so as to warrant capitalization. The scope 
of the INDOPCO decision and its application to the payments of 
the special assessments provided in H.R. 2491 may be open to 
interpretation.
    \7\ INDOPCO, citing Interstate Transit Lines v. Comm., 319 U.S. 
590, 593 (1943); Deputy v. DuPont, 308 U.S. 488, 493 (1940); and New 
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (19934).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that the treatment of the special 
assessments paid to the SAIF pursuant to H.R. 2491 should be 
statutorily clarified in a manner consistent with the analysis 
of the Treasury Department for the proper treatment of such 
payments under present law.\8\
    \8\ See, e.g., the testimony of Cynthia G. Beerbower, Deputy 
Assistant Secretary (Tax Policy) Department of the Treasury, on H.R. 
2494 before the House Committee on Ways and Means, October 26, 1995, 
which provides that it is the view of the Treasury Department that the 
special assessments would be deductible under current law.
---------------------------------------------------------------------------

                        Explanation of Provision

    The bill provides that the special assessments paid to the 
SAIF are deductible when paid. Because such payments relate to 
the current needs of the SAIF fund, the Committee understands 
that section 172(f) does not apply to any net operating loss 
occurring as a result of the deduction provided by the bill. No 
inference is intended with respect to the treatment of any 
payment or assessment not described in the bill.

                             Effective Date

    The provision is effective upon enactment.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 2(l)(2)(B) of rule XI of the 
Rules of the House of Representatives, the following statement 
is made concerning the votes of the Committee in its 
consideration of the bill, H.R. 2494.

Motion to report the bill

    The bill, H.R. 2494, as amended, was ordered favorably 
reported by voice vote on November 1, 1995, with a quorum 
present.

                     IV. BUDGET EFFECTS OF THE BILL

               A. Committee Estimate of Budgetary Effects

    In compliance with clause 7(a) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of this bill, H.R. 2424, 
as reported.
    The bill, as amended, is estimated to have the following 
effects on budget receipts for fiscal years 1996-2000:

           ESTIMATED BUDGET EFFECTS OF H.R. 2494, THE THRIFT CHARTER CONVERSION TAX ACT OF 1995 AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS          
                                                                [In millions of dollars]                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   1996-   1996-   1996-
                Provision                            Effective             1996    1997    1998    1999    2000    2001    2002    2000    2002    2005 
--------------------------------------------------------------------------------------------------------------------------------------------------------
The ``Thrift Charter Conversion Tax Act    tyba 12/31/95................      69     106     103     105     106     107     100     489     696     952
 of 1995''.                                                                                                                                             
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--Details may not add to totals due to rounding.                                                                                                   
                                                                                                                                                        
Source: Joint Committee on Taxation.                                                                                                                    

    B. Statement Regarding New Budget Authority and Tax Expenditures

    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that the bill as amended involves no new 
budget authority.
    The Committee further states that the bill as amended 
involves a reduction of tax expenditures of $489 million for 
the fiscal year period 1996-2000. (For year-by-year amounts, 
see revenue table in Part IV.A., above.)

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with subdivision (C) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, requiring 
a cost estimate prepared by the Congressional Budget Office 
(``CBO''), the following statement prepared by CBO is provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, November 7, 1995.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office and the 
Joint Committee on Taxation (JCT) have reviewed H.R. 2494, as 
ordered reported by the House Committee on Ways and Means on 
November 1, 1995. The JCT estimates that this bill would 
increase receipts by $69 million in fiscal year 1996 and by 
$696 million over fiscal years 1996 through 2002. CBO concurs 
with the estimate.
    H.R. 2494 addresses the tax treatment of thrift 
institutions in two ways. First, the bill would repeal the 
reserve method of accounting allowed under section 593 of the 
Internal Revenue Code for the bad debts of thrifts. A thrift 
institution would be required to include in taxable income over 
a six-year period some portion of its post-1987 additions to 
its bad debt reserve. The inclusion in income would be 
suspended during years in which the institution made qualifying 
residential loans in excess of a specified base amount. Second, 
the bill would provide that a special assessment paid by 
thrifts, established in H.R. 2491 (the ``Seven-Year Balanced 
Budget Reconciliation Act of 1995''), passed by the House of 
Representatives on October 26, 1995, would be allowed as a 
deduction in computing taxable income. No direct revenue effect 
is estimated for this second provision.
    CBO understands that the JCT estimate represents the 
effects of H.R. 2494 on governmental receipts (revenue) under 
the assumption that it is a stand-alone bill, as well as the 
combined effect on governmental receipts of H.R. 2494 and the 
thrift provisions of H.R. 2491. As discussed in my letter to 
Chairman Leach dated October 6, 1995, the reconciliation 
provisions of the House Committee on Banking and Financial 
Services, included in H.R. 2491, could cause many federal 
thrifts to reorganize as banks, which could affect future 
corporate income tax revenues. The JCT estimates, however, that 
any such effect from H.R. 2491 would be dominated by the effect 
of H.R. 2494 if it were included in H.R. 2491. The revenue 
effects of H.R. 2494 are summarized below:

                                          REVENUE EFFECTS OF H.R. 2494                                          
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                     1996     1997     1998     1999     2000     2001     2002 
----------------------------------------------------------------------------------------------------------------
Change in Revenues...............................       69      106      103      105      106      107      100
----------------------------------------------------------------------------------------------------------------

    If you wish further details, please feel free to contact me 
or your staff may wish to contact Mark Booth.
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          a. committee oversight findings and recommendations

    With respect to subdivision (A) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives, relating to 
oversight findings, the Committee advises that it was as a 
result of the Committee's oversight activities concerning the 
treatment of thrift institution conversion legislation included 
in H.R. 2491 as passed by the House and the tax-related issues 
involved in that legislation that the Committee concluded that 
it is appropriate to enact the provisions contained in the bill 
as amended. (See also Parts I.B. and I.C. of this report for a 
discussion of the background of this bill and the legislative 
history of, and hearings on, the bill.)

    b. summary of findings and recommendations of the committee on 
                    government reform and oversight

    With respect to subdivision (D) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives, the Committee 
advises that no oversight findings or recommendations have been 
submitted to this Committee by the Committee on Government 
Reform and Oversight with respect to the provisions contained 
in this bill.

                    c. inflationary impact statement

    In compliance with clause 2(l)(4) of rule XI of the Rules 
of the House of Representatives, the Committee states that the 
provisions of the bill are not expected to have an overall 
inflationary impact on prices and costs in the operation of the 
national economy.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In compliance with clause 3 of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                     INTERNAL REVENUE CODE OF 1986

          * * * * * * *

                        Subtitle A--Income Taxes

          * * * * * * *

                  CHAPTER 1--NORMAL TAXES AND SURTAXES

          * * * * * * *

              Subchapter A--Determination of Tax Liability

          * * * * * * *

                      PART IV--CREDITS AGAINST TAX

          * * * * * * *

            Subpart E--Rules for Computing Investment Credit

          * * * * * * *

SEC. 50. OTHER SPECIAL RULES.

  (a) * * *
          * * * * * * *
  (d) Certain Rules Made Applicable.--For purposes of this 
subpart, rules similar to the rules of the following provisions 
(as in effect on the day before the date of the enactment of 
the Revenue Reconciliation Act of 1990) shall apply:
          (1) * * *
          * * * * * * *
          (7) Section 48(r) (relating to certain 501(d) 
        organizations.
Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) 
referred to in paragraph (1) of this subsection shall not apply 
to any taxable year beginning after December 31, 1995.
          * * * * * * *

          Subpart F--Rules for Computing Targeted Jobs Credit

          * * * * * * *

SEC. 52. SPECIAL RULES.

  (a) * * *
          * * * * * * *
  (e) Limitations With Respect to Certain Persons.--Under 
regulations prescribed by the Secretary, in the case of--
          [(1) an organization to which section 593 (relating 
        to reserves for losses on loans) applies,]
          [(2)] (1) a regulated investment company or a real 
        estate investment trust subject to taxation under 
        subchapter M (section 851 and following), and
          [(3)] (2) a cooperative organization described in 
        section 1381(a), rules similar to the rules provided in 
        subsections (e) and (h) of section 46 (as in effect on 
        the day before the date of the enactment of the Revenue 
        Reconciliation Act of 1990) shall apply in determining 
        the amount of the credit under this subpart.
          * * * * * * *

                    PART VI--ALTERNATIVE MINIMUM TAX

          * * * * * * *

SEC. 57. ITEMS OF TAX PREFERENCE.

  (a) General Rule.--For purposes of this part, the items of 
tax preference determined under this section are--
          (1) * * *
          * * * * * * *
          [(4) Reserves for losses on bad debts of financial 
        institutions.--In the case of a financial institution 
        to which section 593 applies, the amount by which the 
        deduction allowable for the taxable year for a 
        reasonable addition to a reserve for bad debts exceeds 
        the amount that would have been allowable had the 
        institution maintained its bad debt reserve for all 
        taxable years on the basis of actual experience.]
          * * * * * * *

             PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS

          * * * * * * *

SEC. 246. RULES APPLYING TO DEDUCTIONS FOR DIVIDENDS RECEIVED.

  (a) * * *
          * * * * * * *
  [(f) Cross Reference.--

          [For special rule relating to mutual savings banks, etc., to 
        which section 593 applies, see section 596.]
          * * * * * * *

     PART XI--SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS

          * * * * * * *

SEC. 291. SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS.

  (a) * * *
          * * * * * * *
  (e) Definitions.--For purposes of this section--
          (1) Financial institution preference item.--The term 
        ``financial institution preference item'' includes the 
        following:
                  (A) * * *
                  (B) Interest on debt to carry tax-exempt 
                obligations acquired after december 31, 1982, 
                and before august 8, 1986.--
                          (i) In general.--In the case of a 
                        financial institution which is a bank 
                        (as defined in section 585(a)(2)) [or 
                        to which section 593 applies], the 
                        amount of interest on indebtedness 
                        incurred or continued to purchase or 
                        carry obligations acquired after 
                        December 31, 1982, and before August 8, 
                        1986, the interest on which is exempt 
                        from taxes for the taxable year, to the 
                        extent that a deduction would (but for 
                        this paragraph or section 265(b)) be 
                        allowable with respect to such interest 
                        for such taxable year.
          * * * * * * *

                   Subchapter H--Banking Institutions

          * * * * * * *

      PART I--RULES OF GENERAL APPLICATION TO BANKING INSTITUTIONS

          * * * * * * *

SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS.

  (a) Reserve for Bad Debts.--
          (1) * * *
          (2) Bank.--For purposes of this section--
                  (A) In general.--The term ``bank'' means any 
                bank (as defined in section 581) [other than an 
                organization to which section 593 applies].
          * * * * * * *

                  PART II--MUTUAL SAVINGS BANKS, ETC.

        Sec. 591. Deduction for dividends pain on deposit.
     * * * * * * *
        [Sec. 593. Reserves on losses on loans.]
     * * * * * * *
        [Sec. 595. Foreclosure on property securing loans.
        [Sec. 596. Limitation on dividends receiving deduction.]
     * * * * * * *

[SEC. 593. RESERVES FOR LOSSES ON LOANS.

  [(a) Reserve for Bad Debts.--
          [(1) In general.--Except as provided in paragraph 
        (2), in the case of--
                  [(A) any domestic building and loan 
                association,
                  [(B) any mutual savings bank, or
                  [(C) any cooperative bank without capital 
                stock organized and operated for mutual 
                purposes and without profit,
        there shall be allowed a deduction for a reasonable 
        addition to a reserve for bad debts. Such deduction 
        shall be in lieu of any deduction under section 166(a).
          [(2) Organization must meet 60-percent asset test of 
        section 7701(a)(19).--This section shall apply to an 
        association or bank referred to in paragraph (1) only 
        if it meets the requirements of section 7701(a)(19)(C).
  [(b) Addition to Reserves for Bad Debts.--
          [(1) In general.--For purposes of subsection (a), the 
        reasonable addition for the taxable year to the reserve 
        for bad debts of any taxpayer described in subsection 
        (a) shall be an amount equal to the sum of--
                  [(A) the amount determined to be a reasonable 
                addition to the reserve for losses on 
                nonqualifying loans, computed in the same 
                manner as is provided with respect to additions 
                to the reserves for losses on loans of banks 
                under section 585(b)(2), plus
                  [(B) the amount determined by the taxpayer to 
                be a reasonable addition to the reserve for 
                losses on qualifying real property loans, but 
                such amount shall not exceed the amount 
                determined under paragraph (2) or (3), 
                whichever is the larger, but the amount 
                determined under this subparagraph shall in no 
                case be greater than the larger of--
                          [(i) the amount determined under 
                        paragraph (3), or
                          [(ii) the amount which, when added to 
                        the amount determined under 
                        subparagraph (A), equals the amount by 
                        which 12 percent of the total deposits 
                        or withdrawable accounts of depositors 
                        of the taxpayer at the close of such 
                        year exceeds the sum of its surplus, 
                        undivided profits, and reserves at the 
                        beginning of such year (taking into 
                        account any portion thereof 
                        attributable to the period before the 
                        first taxable year beginning after 
                        December 31, 1951).
          [(2) Percentage of taxable income method.--
                  [(A) In general.--Subject to subparagraphs 
                (B) and (C), the amount determined under this 
                paragraph for the taxable year shall be an 
                amount equal to 8 percent of the taxable income 
                for such year.
                  [(B) Reduction for amounts referred to in 
                paragraph (1)(a).--The amount determined under 
                subparagraph (A) shall be reduced (but not 
                below 0) by the amount determined under 
                paragraph (1)(A).
                  [(C) Overall limitation on paragraph.--The 
                amount determined under this paragraph shall 
                not exceed the amount necessary to increase the 
                balance at the close of the taxable year of the 
                reserve for losses on qualifying real property 
                loans to 6 percent of such loans outstanding at 
                such time.
                  [(D) Computation of taxable income.--For 
                purposes of this paragraph, taxable income 
                shall be computed--
                          [(i) by excluding from gross income 
                        any amount included therein by reason 
                        of subsection (e),
                          [(ii) without regard to any deduction 
                        allowable for any addition to the 
                        reserve for bad debts,
                          [(iii) by excluding from gross income 
                        an amount equal to the net gain for the 
                        taxable year arising from the sale or 
                        exchange of stock of a corporation or 
                        of obligations the interest on which is 
                        excludable from gross income under 
                        section 103,
                          [(iv) by excluding from gross income 
                        dividends with respect to which a 
                        deduction is allowable by part VIII of 
                        subchapter B, reduced by an amount 
                        equal to 8 percent of the dividends 
                        received deduction (determined without 
                        regard to section 596) for the taxable 
                        year, and
                          [(v) if there is a capital gain rate 
                        differential (as defined in section 
                        904(b)(3)(D)) for the taxable year, by 
                        excluding from gross income the rate 
                        differential portion (within the 
                        meaning of section 904(b)(3)(E)) of the 
                        lesser of--
                                  [(I) the net long-term 
                                capital gain for the taxable 
                                year, or
                                  [(II) the net long-term 
                                capital gain for the taxable 
                                year from the sale or exchange 
                                of property other than property 
                                described in clause (iii).
          [(3) Experience method.--The amount determined under 
        this paragraph for the taxable year shall be computed 
        in the same manner as is provided with respect to 
        additions to the reserves for losses on loans of banks 
        under section 585(b)(2).
  [(c) Treatment of Reserve for Bad Debts.--
          [(1) Establishment of reserves.--Each taxpayer 
        described in subsection (a) which uses the reserve 
        method of accounting for bad debts shall establish and 
        maintain a reserve for losses on qualifying real 
        property loans, a reserve for losses on nonqualifying 
        loans, and a supplemental reserve for losses on loans. 
        For purposes of this title, such reserves shall be 
        treated as reserves for bad debts, but no deduction 
        shall be allowed for any addition to the supplemental 
        reserve for losses on loans.
          [(2) Certain pre-1963 reserves.--Notwithstanding the 
        second sentence of paragraph (1), any amount allocated 
        pursuant to paragraph (5) (as in effect immediately 
        before the enactment of the Tax Reform Act of 1976) 
        during a taxable year beginning before January 1, 1977, 
        to the reserve for losses on qualifying real property 
        loans out of the surplus, undivided profits, and bad 
        debt reserves (determined as of December 31, 1962) 
        attributable to the period before the first taxable 
        year beginning after December 31, 1951, shall not be 
        treated as a reserve for bad debts for any purpose 
        other than determining the amount referred to in 
        subsection (b)(1)(B), and for such purpose such amount 
        shall be treated as remaining in such reserve.
          [(3) Charging of bad debts to reserves.--Any debt 
        becoming worthless or partially worthless in respect of 
        a qualifying real property loan shall be charged to the 
        reserve for losses on such loans, and any debt becoming 
        worthless or partially worthless in respect of a 
        nonqualifying loan shall be charged to the reserve for 
        losses on nonqualifying loans; except that any such 
        debt may, at the election of the taxpayer, be charged 
        in whole or in part to the supplemental reserve for 
        losses on loans.
  [(d) Loans Defined.--For purposes of this section--
          [(1) Qualifying real property loans.--The term 
        ``qualifying real property loan'' means any loan 
        secured by an interest in improved real property or 
        secured by an interest in real property which is to be 
        improved out of the proceeds of the loan, but such term 
        does not include--
                  [(A) any loan evidenced by a security (as 
                defined in section 165(g)(2)(C));
                  [(B) any loan, whether or not evidenced by a 
                security (as defined in section 165(g)(2)(C)), 
                the primary obligor on which is--
                          [(i) a government or political 
                        subdivision or instrumentality thereof;
                          [(ii) a bank (as defined in section 
                        581); or
                          [(iii) another member of the same 
                        affiliated group;
                  [(C) any loan, to the extent secured by a 
                deposit in or share of the taxpayer; or
                  [(D) any loan which, within a 60-day period 
                beginning in one taxable year of the creditor 
                and ending in its next taxable year, is made or 
                acquired and then repaid or disposed of, unless 
                the transactions by which such loan was made or 
                acquired and then repaid or disposed of are 
                established to be for bona fide business 
                purposes.
        For purposes of subparagraph (B)(iii), the term 
        ``affiliated group'' has the meaning assigned to such 
        term by section 1504(a); except that (i) the phrase 
        ``more than 50 percent'' shall be substituted for the 
        phrase ``at least 80 percent'' each place it appears in 
        section 1504(a), and (ii) all corporations shall be 
        treated as includible corporations (without any 
        exclusion under section 1504(b)).
          [(2) Nonqualifying loans.--The term ``nonqualifying 
        loan'' means any loan which is not a qualifying real 
        property loan.
          [(3) Loan.--The term ``loan'' means debt, as the term 
        ``debt'' is used in section 166.
          [(4) Treatment of interests in remic's.--A regular or 
        residual interest in a REMIC shall be treated as a 
        qualifying real property loan; except that, if less 
        than 95 percent of the assets of such REMIC are 
        qualifying real property loans (determined as if the 
        taxpayer held the assets of the REMIC), such interest 
        shall be so treated only in the proportion which the 
        assets of such REMIC consist of such loans. For 
        purposes of determining whether any interest in a REMIC 
        qualifies under the preceding sentence, any interest in 
        another REMIC held by such REMIC shall be treated as a 
        qualifying real property loan under principles similar 
        to the principles of the preceding sentence, except 
        that if such REMIC's are part of a tiered structure, 
        they shall be treated as 1 REMIC for purposes of this 
        paragraph.
  [(e) Distributions to Shareholders.--
          [(1) In general.--For purposes of this chapter, any 
        distribution of property (as defined in section 317(a)) 
        by a domestic building and loan association or an 
        institution that is treated as a mutual savings bank 
        under section 591(b) to a shareholder with respect to 
        its stock, if such distribution is not allowable as a 
        deduction under section 591, shall be treated as made--
                  [(A) first out of its earnings and profits 
                accumulated in taxable years beginning after 
                December 31, 1951, to the extent thereof,
                  [(B) then out of the reserve for losses on 
                qualifying real property loans, to the extent 
                additions to such reserve exceed the additions 
                which would have been allowed under subsection 
                (b)(3),
                  [(C) then out of the supplemental reserve for 
                losses on loans, to the extent thereof,
                  [(D) then out of such other accounts as may 
                be proper.
        This paragraph shall apply in the case of any 
        distribution in redemption of stock or in partial or 
        complete liquidation of the association, or an 
        institution that is treated as a mutual savings bank 
        under section 591(b), except that any such distribution 
        shall be treated as made first out of the amount 
        referred to in subparagraph (B), second out of the 
        amount referred to in subparagraph (C), third out of 
        the amount referred to in subparagraph (A), and then 
        out of such other accounts as may be proper. This 
        paragraph shall not apply to any transaction to which 
        section 381 applies, or to any distribution to the 
        Federal Savings and Loan Insurance Corporation (or any 
        successor thereof) or the Federal Deposit Insurance 
        Corporation in redemption of an interest in an 
        association, if such interest was originally received 
        by any such entity in exchange for assistance provided 
        under a provision of law referred to in section 597(c).
          [(2) Amounts charged to reserve accounts and included 
        in gross income.--If any distribution is treated under 
        paragraph (1) as having been made out of the reserves 
        described in subparagraphs (B) and (C) of such 
        paragraph, the amount charged against such reserve 
        shall be the amount which, when reduced by the amount 
        of tax imposed under this chapter and attributable to 
        the inclusion of such amount in gross income, is equal 
        to the amount of such distribution; and the amount so 
        charged against such reserve shall be included in gross 
        income of the taxpayer.
          [(3) Special rules.--
                  [(A) For purposes of paragraph (1)(B), 
                additions to the reserve for losses on 
                qualifying real property loans for the taxable 
                year in which the distribution occurs shall be 
                taken into account.
                  [(B) For purposes of computing under this 
                section the amount of a reasonable addition to 
                the reserve for losses on qualifying real 
                property loans for any taxable year, any amount 
                charged during any year to such reserve 
                pursuant to the provisions of paragraph (2) 
                shall not be taken into account.]
          * * * * * * *

[SEC. 595. FORECLOSURE ON PROPERTY SECURING LOANS.

  [(a) Nonrecognition of Gain or Loss as a Result of 
Foreclosure.--In the case of a creditor which is an 
organization described in section 593(a), no gain or loss shall 
be recognized, and no debt shall be considered as becoming 
worthless or partially worthless, as the result of such 
organization having bid in at foreclosure, or having otherwise 
reduced to ownership or possession by agreement or process of 
law, any property which was security for the payment of any 
indebtedness.
  [(b) Character of Property.--For purposes of sections 166 and 
1221, any property acquired in a transaction with respect to 
which gain or loss to an organization was not recognized by 
reason of subsection (a) shall be considered as property having 
the same characteristics as the indebtedness for which such 
property was security. Any amount realized by such organization 
with respect to such property shall be treated for purposes of 
this chapter as a payment on account of such indebtedness, and 
any loss with respect thereto shall be treated as a bad debt to 
which the provisions of section 166 (relating to allowance of a 
deduction for bad debts) apply.
  [(c) Basis.--The basis of any property to which subsection 
(a) applies shall be the basis of the indebtedness for which 
such property was security (determined as of the date of the 
acquisition of such property), properly increased for costs of 
acquisition.
  [(d) Regulatory Authority.--The Secretary shall prescribe 
such regulations as he may deem necessary to carry out the 
purposes of this section.

[SEC. 596. LIMITATION ON DIVIDENDS RECEIVED DEDUCTION

  [In the case of an organization to which section 593 applies 
and which computes additions to the reserve for losses on loans 
for the taxable year under section 593(b)(2), the total amount 
allowed under sections 243, 244, and 245 (determined without 
regard to this section) for the taxable year as a deduction 
with respect to dividends received shall be reduced by an 
amount equal to 8 percent of such total amount.]
          * * * * * * *

Subchapter M--Regulated Investment Companies and Real Estate Investment 
                                 Trusts

          * * * * * * *

           PART IV--REAL ESTATE MORTGAGE INVESTMENT CONDUITS

          * * * * * * *

SEC. 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON RESIDUAL 
                    INTERESTS.

  (a) Excess Inclusions May Not be Offset by Net Operating 
Losses.--
          (1) In general.--[Except as provided in paragraph 
        (2), the] The taxable income of any holder of a 
        residual interest in a REMIC for any taxable year shall 
        in no event be less than the excess inclusion for such 
        taxable year.
          [(2) Exception for certain financial institutions.--
        Paragraph (1) shall not apply to any organization to 
        which section 593 applies. The Secretary may by 
        regulations provide that the preceding sentence shall 
        not apply where necessary or appropriate to prevent 
        avoidance of tax imposed by this chapter.]
          [(3)] (2) Special rule for affiliated groups.--All 
        members of an affiliated group filing a consolidated 
        return shall be treated as 1 taxpayer for purposes of 
        this subsection[, except that paragraph (2) shall be 
        applied separately with respect to each corporation 
        which is a member of such group and to which section 
        593 applies.].
          [(4) Treatment of certain subsidiaries.--
                  [(A) In general.--For purposes of this 
                subsection, a corporation to which section 593 
                applies and each qualified subsidiary of such 
                corporation shall be treated as a single 
                corporation to which section 593 applies.
                  [(B) Qualified subsidiary.--For purposes of 
                this subsection, the term "qualified 
                subsidiary" means any corporation--
                          [(i) all the stock of which, and 
                        substantially all the indebtedness of 
                        which, is held directly by the 
                        corporation to which section 593 
                        applies, and
                          [(ii) which is organized and operated 
                        exclusively in connection with the 
                        organization and operation of 1 or more 
                        REMIC's.]
          [(5)] (3) Coordination with section 172.--Any excess 
        inclusion for any taxable year shall not be taken into 
        account--
                  (A) in determining under section 172 the 
                amount of any net operating loss for such 
                taxable year, and
                  (B) in determining taxable income for such 
                taxable year for purposes of the 2nd sentence 
                of section 172(b)(2).
          * * * * * * *

 Subchapter N--Tax Based on Income From Sources Within or Without the 
                             United States

          * * * * * * *

           PART IV--DOMESTIC INTERNATIONAL SALES CORPORATIONS

          * * * * * * *

            Subpart A--Treatment of Qualifying Corporations

          * * * * * * *

SEC. 992. REQUIREMENTS OF A DOMESTIC INTERNATIONAL SALES CORPORATION.

  (a) * * *
          * * * * * * *
  (d) Ineligible Corporations.--The following corporations 
shall not be eligible to be treated as a DISC--
          (1) * * *
          * * * * * * *
          (3) a financial institution to which section 581 [or 
        593] applies,
          * * * * * * *

         Subchapter O--Gain or Loss on Disposition of Property

          * * * * * * *

                 PART III--COMMON NONTAXABLE EXCHANGES

          * * * * * * *

SEC. 1038. CERTAIN REACQUISITIONS OF REAL PROPERTY.

  (a) * * *
          * * * * * * *
  [(f) Reacquisitions by Domestic Building and Loan 
Associations.--This section shall not apply to a reacquisition 
of real property by an organization described in section 593(a) 
(relating to domestic building and loan associations, etc.).]
          * * * * * * *

SEC. 1042. SALES OF STOCK TO EMPLOYEE STOCK OWNERSHIP PLANS OR CERTAIN 
                    COOPERATIVES.

  (a) * * *
          * * * * * * *
  (c) Definitions; Special Rules.--For purposes of this 
section--
          (1) * * *
          * * * * * * *
          (4) Qualified replacement property.--
                  (A) * * *
                  (B) Operating corporation.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``operating 
                        corporation'' means a corporation more 
                        than 50 percent of the assets of which 
                        were, at the time the security was 
                        purchased or before the close of the 
                        replacement period, used in the active 
                        conduct of the trade or business.
                          (ii) Financial institutions and 
                        insurance companies.--The term 
                        ``operating corporation'' shall 
                        include--
                                  (I) any financial institution 
                                described in section 581 [or 
                                593], and
                                  (II) an insurance company 
                                subject to tax under subchapter 
                                L.
          * * * * * * *

                 Subchapter P--Capital Gains and Losses

          * * * * * * *

       PART V--SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS

          * * * * * * *

                  Subpart B--Market Discount on Bonds

          * * * * * * *

SEC. 1277. DEFERRAL OF INTEREST DEDUCTION ALLOCABLE TO ACCRUED MARKET 
                    DISCOUNT.

  (a) * * *
          * * * * * * *
  (c) Net Direct Interest Expense.--For purposes of this 
section, the term ``net direct interest expense'' means, with 
respect to any market discount bond, the excess (if any) of--
          (1) the amount of interest paid or accrued during the 
        taxable year on indebtedness which is incurred or 
        continued to purchase or carry such bond, over
          (2) the aggregate amount of interest (including 
        original issue discount) includible in gross income for 
        the taxable year with respect to such bond.
In the case of any financial institution which is a bank (as 
defined in section 585(a)(2)) [or to which section 593 
applies], the determination of whether interest is described in 
paragraph (1) shall be made under principles similar to the 
principles of section 291(e)(1)(B)(ii). Under rules similar to 
the rules of section 265(a)(5), short sale expenses shall be 
treated as interest for purposes of determining net direct 
interest expense.
          * * * * * * *

  Subchapter S--Tax Treatment of S Corporations and Their Shareholders

          * * * * * * *

                           PART I--IN GENERAL

          * * * * * * *

SEC. 1361. S CORPORATION DEFINED.

  (a) * * *
          * * * * * * *
  (b) Small Business Corporation.--
          (1) * * *
          (2) Ineligible corporation defined.---For purposes of 
        paragraph (1), the term ``ineligible corporation'' 
        means any corporation which is--
                  (A) a member of an affiliated group 
                (determined under section 1504 without regard 
                to the exceptions contained in subsection (b) 
                thereof),
                  (B) a financial institution to which section 
                585 applies (or would apply but for subsection 
                (c) thereof) [or to which section 593 applies],
          * * * * * * *

                                
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