[House Report 104-542]
[From the U.S. Government Publishing Office]



104th Congress                                            Rept. 104-542
                        HOUSE OF REPRESENTATIVES

 2d Session                                                      Part 2
_______________________________________________________________________


 
              ADOPTION PROMOTION AND STABILITY ACT OF 1996

                                _______


  May 3, 1996.--Committed to the Committee of the Whole House on the 
               State of the Union and ordered be printed

_______________________________________________________________________


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

                              R E P O R T

                        [To accompany H.R. 3286]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 3286) to help families defray adoption costs, and to 
promote the adoption of minority children, having considered 
the same, report favorably thereon with an amendment and 
recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
 I. Introduction.....................................................15
        A. Purpose and Summary...................................    15
        B. Background and Need for Legislation...................    15
        C. Legislative History...................................    16
II. Explanation of the Bill..........................................17
        A. Tax Credit for Adoption Expenses; Exclusion for 
            Certain Adoption Expenses (sec. 101).................    17
        B. Removal of Barriers to Interethnic Adoptions (sec. 
            201).................................................    20
        C. Revenue Offsets.......................................    22
            1. Remove business exclusion for energy subsidies 
                provided by public utilities (sec. 401)..........    22
            2. Modify treatment of foreign trusts (secs. 411-417)    23
III.Votes of the Committee...........................................34

IV.  Budget Effects of the Bill......................................35
        A. Committee Estimates of Budgetary Effects..............    35
        B. Statement Regarding New Budget Authority and Tax 
            Expenditures.........................................    37
        C. Cost Estimate Prepared by the Congressional Budget 
            Office...............................................    37
 V. Other Matters To Be Discussed Under the Rules of the House.......39
        A. Committee Oversight Findings and Recommendations......    39
        B. Summary of Findings and Recommendations of the 
            Committee on Government Reform and Oversight.........    39
        C. Inflationary Impact Statement.........................    39
        D. Information Relating to Unfunded Mandates.............    40
        E. Applicability of House Rule XXI5(c)...................    41
VI. Changes in Existing Law Made by the Bill, as Reported............41

  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 ``Adoption Promotion and Stability Act 
of 1996''.

SEC. 2. TABLE OF CONTENTS.

  The table of contents of this Act is as follows:

Sec. 1. Short title.
Sec. 2. Table of contents.

                 TITLE I--CREDIT FOR ADOPTION EXPENSES

Sec. 101. Credit for adoption expenses.

                     TITLE II--INTERETHNIC ADOPTION

Sec. 201. Removal of barriers to interethnic adoption.

   TITLE III--CHILD CUSTODY PROCEEDINGS AFFECTED BY THE INDIAN CHILD 
                          WELFARE ACT OF 1978

Sec. 301. Inapplicability of the Indian Child Welfare Act of 1978 to 
child custody proceedings involving a child whose parents do not 
maintain affiliation with their Indian tribe.
Sec. 302. Membership and child custody proceedings.
Sec. 303. Effective date.
                       TITLE IV--REVENUE OFFSETS

Sec. 400. Amendment of 1986 Code.

  Subtitle A--Exclusion for Energy Conservation Subsidies Limited to 
                Subsidies With Respect to Dwelling Units

Sec. 401. Exclusion for energy conservation subsidies limited to 
subsidies with respect to dwelling units.

                Subtitle B--Foreign Trust Tax Compliance

Sec. 411. Improved information reporting on foreign trusts.
Sec. 412. Comparable penalties for failure to file return relating to 
transfers to foreign entities.
Sec. 413. Modifications of rules relating to foreign trusts having one 
or more United States beneficiaries.
Sec. 414. Foreign persons not to be treated as owners under grantor 
trust rules.
Sec. 415. Information reporting regarding foreign gifts.
Sec. 416. Modification of rules relating to foreign trusts which are 
not grantor trusts.
Sec. 417. Residence of trusts, etc.

                 TITLE I--CREDIT FOR ADOPTION EXPENSES

SEC. 101. CREDIT FOR ADOPTION EXPENSES.

  (a) In General.--Subpart A of part IV of subchapter A of chapter 1 of 
the Internal Revenue Code of 1986 (relating to nonrefundable personal 
credits) is amended by inserting after section 22 the following new 
section:

``SEC. 23. ADOPTION EXPENSES.

  ``(a) Allowance of Credit.--In the case of an individual, there shall 
be allowed as a credit against the tax imposed by this chapter for the 
taxable year the amount of the qualified adoption expenses paid or 
incurred by the taxpayer during such taxable year.
  ``(b) Limitations.--
          ``(1) Dollar limitation.--The aggregate amount of qualified 
        adoption expenses which may be taken into account under 
        subsection (a) for all taxable years with respect to the 
        adoption of a child by the taxpayer shall not exceed $5,000.
          ``(2) Income limitation.--The amount allowable as a credit 
        under subsection (a) for any taxable year shall be reduced (but 
        not below zero) by an amount which bears the same ratio to the 
        amount so allowable (determined without regard to this 
        paragraph but with regard to paragraph (1)) as--
                  ``(A) the amount (if any) by which the taxpayer's 
                adjusted gross income (determined without regard to 
                sections 911, 931, and 933) exceeds $75,000, bears to
                  ``(B) $40,000.
          ``(3) Denial of double benefit.--
                  ``(A) In general.--No credit shall be allowed under 
                subsection (a) for any expense for which a deduction or 
                credit is allowable under any other provision of this 
                chapter.
                  ``(B) Grants.--No credit shall be allowed under 
                subsection (a) for any expense to the extent that funds 
                for such expense are received under any Federal, State, 
                or local program. The preceding sentence shall not 
                apply to expenses for the adoption of a child with 
                special needs.
                  ``(C) Reimbursement.--No credit shall be allowed 
                under subsection (a) for any expense to the extent that 
                such expense is reimbursed and the reimbursement is 
                excluded from gross income under section 137.
  ``(c) Carryforwards of Unused Credit.--If the credit allowable under 
subsection (a) for any taxable year exceeds the limitation imposed by 
section 26(a) for such taxable year reduced by the sum of the credits 
allowable under this subpart (other than this section), such excess 
shall be carried to the succeeding taxable year and added to the credit 
allowable under subsection (a) for such taxable year. No credit may be 
carried forward under this subsection to any taxable year following the 
fifth taxable year after the taxable year in which the credit arose. 
For purposes of the preceding sentence, credits shall be treated as 
used on a first-in first-out basis.
  ``(d) Definitions.--For purposes of this section--
          ``(1) Qualified adoption expenses.--The term `qualified 
        adoption expenses' means reasonable and necessary adoption 
        fees, court costs, attorney fees, and other expenses--
                  ``(A) which are directly related to, and the 
                principal purpose of which is for, the legal adoption 
                of an eligible child by the taxpayer, and
                  ``(B) which are not incurred in violation of State or 
                Federal law or in carrying out any surrogate parenting 
                arrangement.
          ``(2) Expenses for adoption of spouse's child not eligible.--
        The term `qualified adoption expenses' shall not include any 
        expenses in connection with the adoption by an individual of a 
        child who is the child of such individual's spouse.
          ``(3) Eligible child.--The term `eligible child' means any 
        individual--
                  ``(A) who has not attained age 18 as of the time of 
                the adoption, or
                  ``(B) who is physically or mentally incapable of 
                caring for himself.
          ``(4) Child with special needs.--The term `child with special 
        needs' means any child if--
                  ``(A) a State has determined that the child cannot or 
                should not be returned to the home of his parents, and
                  ``(B) such State has determined that there exists 
                with respect to the child a specific factor or 
                condition (such as his ethnic background, age, or 
                membership in a minority or sibling group, or the 
                presence of factors such as medical conditions or 
                physical, mental, or emotional handicaps) because of 
                which it is reasonable to conclude that such child 
                cannot be placed with adoptive parents without 
                providing adoption assistance.
  ``(e) Special Rules for Foreign Adoptions.--In the case of a foreign 
adoption--
          ``(1) subsection (a) shall not apply to any qualified 
        adoption expense with respect to such adoption unless such 
        adoption becomes final, and
          ``(2) any such expense which is paid or incurred before the 
        taxable year in which such adoption becomes final shall be 
        taken into account under this section as if such expense were 
        paid or incurred during such year.
  ``(f) Married Couples Must File Joint Returns.--Rules similar to the 
rules of paragraphs (2), (3), and (4) of section 21(e) shall apply for 
purposes of this section.
  ``(g) Basis Adjustments.--For purposes of this subtitle, if a credit 
is allowed under this section for any expenditure with respect to any 
property, the increase in the basis of such property which would (but 
for this subsection) result from such expenditure shall be reduced by 
the amount of the credit so allowed.
  ``(h) Regulations.--The Secretary shall prescribe such regulations as 
may be appropriate to carry out this section and section 137, including 
regulations which treat unmarried individuals who pay or incur 
qualified adoption expenses with respect to the same child as 1 
taxpayer for purposes of applying the dollar limitation in subsection 
(b)(1) of this section and in section 137(b)(1).''.
  (b) Exclusion of Amounts Received Under Employer's Adoption 
Assistance Programs.--Part III of subchapter B of chapter 1 of such 
Code (relating to items specifically excluded from gross income) is 
amended by redesignating section 137 as section 138 and by inserting 
after section 136 the following new section:

``SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

  ``(a) In General.--Gross income of an employee does not include 
amounts paid or expenses incurred by the employer for qualified 
adoption expenses in connection with the adoption of a child by an 
employee if such amounts are furnished pursuant to an adoption 
assistance program.
  ``(b) Limitations.--
          ``(1) Dollar limitation.--The aggregate amount excludable 
        from gross income under subsection (a) for all taxable years 
        with respect to the adoption of a child by the taxpayer shall 
        not exceed $5,000.
          ``(2) Income limitation.--The amount excludable from gross 
        income under subsection (a) for any taxable year shall be 
        reduced (but not below zero) by an amount which bears the same 
        ratio to the amount so excludable (determined without regard to 
        this paragraph but with regard to paragraph (1)) as--
                  ``(A) the amount (if any) by which the taxpayer's 
                adjusted gross income exceeds $75,000, bears to
                  ``(B) $40,000.
          ``(3) Determination of adjusted gross income.--For purposes 
        of paragraph (2), adjusted gross income shall be determined--
                  ``(A) without regard to this section and sections 
                911, 931, and 933, and
                  ``(B) after the application of sections 86, 135, 219, 
                and 469.
  ``(c) Adoption Assistance Program.--For purposes of this section, an 
adoption assistance program is a plan of an employer--
          ``(1) under which the employer provides employees with 
        adoption assistance, and
          ``(2) which meets requirements similar to the requirements of 
        paragraphs (2), (3), and (5) of section 127(b).
An adoption reimbursement program operated under section 1052 of title 
10, United States Code (relating to armed forces) or section 514 of 
title 14, United States Code (relating to members of the Coast Guard) 
shall be treated as an adoption assistance program for purposes of this 
section.
  ``(d) Qualified Adoption Expenses.--For purposes of this section, the 
term `qualified adoption expenses' has the meaning given such term by 
section 23(d).
  ``(e) Certain Rules To Apply.--Rules similar to the rules of 
subsections (e) and (g) of section 23 shall apply for purposes of this 
section.''.
  (c) Conforming Amendments.--
          (1) Sections 86(b)(2)(A) and 135(c)(4)(A) of such Code are 
        each amended by inserting ``137,'' before ``911''.
          (2) Clause (i) of section 219(g)(3)(A) of such Code is 
        amended by inserting ``, 137,'' before ``and 911''.
          (3) Clause (ii) of section 469(i)(3)(E) of such Code is 
        amended to read as follows:
                          ``(ii) the amounts excludable from gross 
                        income under sections 135 and 137,''.
          (4) Subsection (a) of section 1016 of such Code is amended by 
        striking ``and'' at the end of paragraph (24), by striking the 
        period at the end of paragraph (25) and inserting ``, and'', 
        and by adding at the end the following new paragraph:
          ``(26) to the extent provided in sections 23(g) and 137(e).''
          (5) The table of sections for subpart A of part IV of 
        subchapter A of chapter 1 of such Code is amended by inserting 
        after the item relating to section 22 the following new item:

                              ``Sec. 23. Adoption expenses.''.

          (6) The table of sections for part III of subchapter B of 
        chapter 1 of such Code is amended by striking the item relating 
        to section 137 and inserting the following:

                              ``Sec. 137. Adoption assistance programs.
                              ``Sec. 138. Cross reference to other 
                                        Acts.''.

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

                     TITLE II--INTERETHNIC ADOPTION

SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOPTION.

  (a) State Plan Requirements.--Section 471(a) of the Social Security 
Act (42 U.S.C 671(a)) is amended--
          (1) by striking ``and'' at the end of paragraph (16);
          (2) by striking the period at the end of paragraph (17) and 
        inserting ``; and''; and
          (3) by adding at the end the following:
          ``(18) not later than January 1, 1997, provides that neither 
        the State nor any other entity in the State that receives funds 
        from the Federal Government and is involved in adoption or 
        foster care placements may--
                  ``(A) deny to any person the opportunity to become an 
                adoptive or a foster parent, on the basis of the race, 
                color, or national origin of the person, or of the 
                child, involved; or
                  ``(B) delay or deny the placement of a child for 
                adoption or into foster care, on the basis of the race, 
                color, or national origin of the adoptive or foster 
                parent, or the child, involved.''.
  (b) Enforcement.--Section 474 of such Act (42 U.S.C. 674) is amended 
by adding at the end the following:
  ``(d)(1) If a State's program operated under this part is found, as a 
result of a review conducted under section 1123, to have violated 
section 471(a)(18) during a quarter with respect to any person, then, 
notwithstanding subsection (a) of this section and any regulations 
promulgated under section 1123(b)(3), the Secretary shall reduce the 
amount otherwise payable to the State under this part, for the quarter 
and for each subsequent quarter before the 1st quarter for which the 
State program is found, as a result of such a review, not to have 
violated section 471(a)(18) with respect to any person, by--
          ``(A) 2 percent of such otherwise payable amount, in the case 
        of the 1st such finding with respect to the State;
          ``(B) 5 percent of such otherwise payable amount, in the case 
        of the 2nd such finding with respect to the State; or
          ``(C) 10 percent of such otherwise payable amount, in the 
        case of the 3rd or subsequent such finding with respect to the 
        State.
  ``(2) Any other entity which is in a State that receives funds under 
this part and which violates section 471(a)(18) during a quarter with 
respect to any person shall remit to the Secretary all funds that were 
paid by the State to the entity during the quarter from such funds.
  ``(3)(A) Any individual who is aggrieved by a violation of section 
471(a)(18) by a State or other entity may bring an action seeking 
relief from the State or other entity in any United States district 
court.
  ``(B) An action under this paragraph may not be brought more than 2 
years after the date the alleged violation occurred.
  ``(4) This subsection shall not be construed to affect the 
application of the Indian Child Welfare Act of 1978.''.
  (c) Civil Rights.--
          (1) Prohibited conduct.--A person or government that is 
        involved in adoption or foster care placements may not--
                  (A) deny to any individual the opportunity to become 
                an adoptive or a foster parent, on the basis of the 
                race, color, or national origin of the individual, or 
                of the child, involved; or
                  (B) delay or deny the placement of a child for 
                adoption or into foster care, on the basis of the race, 
                color, or national origin of the adoptive or foster 
                parent, or the child, involved.
          (2) Enforcement.--Noncompliance with paragraph (1) is deemed 
        a violation of title VI of the Civil Rights Act of 1964.
          (3) No effect on the indian child welfare act of 1978.--This 
        subsection shall not be construed to affect the application of 
        the Indian Child Welfare Act of 1978.
  (d) Conforming Repeal.--Section 553 of the Howard M. Metzenbaum 
Multiethnic Placement Act of 1994 (42 U.S.C. 5115a) is repealed.

   TITLE III--CHILD CUSTODY PROCEEDINGS AFFECTED BY THE INDIAN CHILD 
                          WELFARE ACT OF 1978

SEC. 301. INAPPLICABILITY OF THE INDIAN CHILD WELFARE ACT OF 1978 TO 
                    CHILD CUSTODY PROCEEDINGS INVOLVING A CHILD WHOSE 
                    PARENTS DO NOT MAINTAIN AFFILIATION WITH THEIR 
                    INDIAN TRIBE.

  Title I of the Indian Child Welfare Act of 1978 (25 U.S.C. 1911 et 
seq.) is amended by adding at the end the following:
  ``Sec. 114. (a) This title does not apply to any child custody 
proceeding involving a child who does not reside or is not domiciled 
within a reservation unless--
          ``(1) at least one of the child's biological parents is of 
        Indian descent; and
          ``(2) at least one of the child's biological parents 
        maintains significant social, cultural, or political 
        affiliation with the Indian tribe of which either parent is a 
        member.
  ``(b) The factual determination as to whether a biological parent 
maintains significant social, cultural, or political affiliation with 
the Indian tribe of which either parent is a member shall be based on 
such affiliation as of the time of the child custody proceeding.
  ``(c) The determination that this title does not apply pursuant to 
subsection (a) is final, and, thereafter, this title shall not be the 
basis for determining jurisdiction over any child custody proceeding 
involving the child.''.

SEC. 302. MEMBERSHIP AND CHILD CUSTODY PROCEEDINGS.

  Title I of the Indian Child Welfare Act of 1978 (25 U.S.C. 1911 et 
seq.), as amended by section 301 of this title, is further amended by 
adding at the end the following:
  ``Sec. 115. (a) A person who attains the age of 18 years before 
becoming a member of an Indian tribe may become a member of an Indian 
tribe only upon the person's written consent.
  ``(b) For the purposes of any child custody proceeding involving an 
Indian child, membership in an Indian tribe shall be effective from the 
actual date of admission to membership in the Indian tribe and shall 
not be given retroactive effect.''.

SEC. 303. EFFECTIVE DATE.

  The amendments made by this title shall take effect on the date of 
the enactment of this Act and shall apply with respect to any child 
custody proceeding in which a final decree has not been entered as of 
such date.

                       TITLE IV--REVENUE OFFSETS

SEC. 400. AMENDMENT OF 1986 CODE.

  Except as otherwise expressly provided, whenever in this title an 
amendment or repeal is expressed in terms of an amendment to, or repeal 
of, a section or other provision, the reference shall be considered to 
be made to a section or other provision of the Internal Revenue Code of 
1986.

  Subtitle A--Exclusion for Energy Conservation Subsidies Limited to 
                Subsidies With Respect to Dwelling Units

SEC. 401. EXCLUSION FOR ENERGY CONSERVATION SUBSIDIES LIMITED TO 
                    SUBSIDIES WITH RESPECT TO DWELLING UNITS.

  (a) In General.--Paragraph (1) of section 136(c) (defining energy 
conservation measure) is amended by striking ``energy demand--'' and 
all that follows and inserting ``energy demand with respect to a 
dwelling unit.''
  (b) Conforming Amendments.--
          (1) Subsection (a) of section 136 is amended to read as 
        follows:
  ``(a) Exclusion.--Gross income shall not include the value of any 
subsidy provided (directly or indirectly)by a public utility to a 
customer for the purchase or installation of any energy conservation 
measure.''
          (2) Paragraph (2) of section 136(c) is amended--
                  (A) by striking subparagraph (A) and by redesignating 
                subparagraphs (B) and (C) as subparagraphs (A) and (B), 
                respectively, and
                  (B) by striking ``and special rules'' in the 
                paragraph heading.
  (c) Effective Date.--The amendments made by this section shall apply 
to amounts received after December 31, 1996, unless received pursuant 
to a written binding contract in effect on September 13, 1995, and at 
all times thereafter.

                Subtitle B--Foreign Trust Tax Compliance

SEC. 411. IMPROVED INFORMATION REPORTING ON FOREIGN TRUSTS.

  (a) In General.--Section 6048 (relating to returns as to certain 
foreign trusts) is amended to read as follows:

``SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN FOREIGN TRUSTS.

  ``(a) Notice of Certain Events.--
          ``(1) General rule.--On or before the 90th day (or such later 
        day as the Secretary may prescribe) after any reportable event, 
        the responsible party shall provide written notice of such 
        event to the Secretary in accordance with paragraph (2).
          ``(2) Contents of notice.--The notice required by paragraph 
        (1) shall contain such information as the Secretary may 
        prescribe, including--
                  ``(A) the amount of money or other property (if any) 
                transferred to the trust in connection with the 
                reportable event, and
                  ``(B) the identity of the trust and of each trustee 
                and beneficiary (or class of beneficiaries) of the 
                trust.
          ``(3) Reportable event.--For purposes of this subsection--
                  ``(A) In general.--The term `reportable event' 
                means--
                          ``(i) the creation of any foreign trust by a 
                        United States person,
                          ``(ii) the transfer of any money or property 
                        (directly or indirectly) to a foreign trust by 
                        a United States person, including a transfer by 
                        reason of death, and
                          ``(iii) the death of a citizen or resident of 
                        the United States if--
                                  ``(I) the decedent was treated as the 
                                owner of any portion of a foreign trust 
                                under the rules of subpart E of part I 
                                of subchapter J of chapter 1, or
                                  ``(II) any portion of a foreign trust 
                                was included in the gross estate of the 
                                decedent.
                  ``(B) Exceptions.--
                          ``(i) Fair market value sales.--Subparagraph 
                        (A)(ii) shall not apply to any transfer of 
                        property to a trust in exchange for 
                        consideration of at least the fair market value 
                        of the transferred property. For purposes of 
                        the preceding sentence, consideration other 
                        than cash shall be taken into account at its 
                        fair market value and the rules of section 
                        679(a)(3) shall apply.
                          ``(ii) Deferred compensation and charitable 
                        trusts.--Subparagraph (A) shall not apply with 
                        respect to a trust which is--
                                  ``(I) described in section 402(b), 
                                404(a)(4), or 404A, or
                                  ``(II) determined by the Secretary to 
                                be described in section 501(c)(3).
          ``(4) Responsible party.--For purposes of this subsection, 
        the term `responsible party' means--
                  ``(A) the grantor in the case of the creation of an 
                inter vivos trust,
                  ``(B) the transferor in the case of a reportable 
                event described in paragraph (3)(A)(ii) other than a 
                transfer by reason of death, and
                  ``(C) the executor of the decedent's estate in any 
                other case.
  ``(b) United States Grantor of Foreign Trust.--
          ``(1) In general.--If, at any time during any taxable year of 
        a United States person, such person is treated as the owner of 
        any portion of a foreign trust under the rules of subpart E of 
        part I of subchapter J of chapter 1, such person shall be 
        responsible to ensure that--
                  ``(A) such trust makes a return for such year which 
                sets forth a full and complete accounting of all trust 
                activities and operations for the year, the name of the 
                United States agent for such trust, and such other 
                information as the Secretary may prescribe, and
                  ``(B) such trust furnishes such information as the 
                Secretary may prescribe to each United States person 
                (i) who is treated as the owner of any portion of such 
                trust or (ii) who receives (directly or indirectly) any 
                distribution from the trust.
          ``(2) Trusts not having united states agent.--
                  ``(A) In general.--If the rules of this paragraph 
                apply to any foreign trust, the determination of 
                amounts required to be taken into account with respect 
                to such trust by a United States person under the rules 
                of subpart E of part I of subchapter J of chapter 1 
                shall be determined by the Secretary.
                  ``(B) United states agent required.--The rules of 
                this paragraph shall apply to any foreign trust to 
                which paragraph (1) applies unless such trust agrees 
                (in such manner, subject to such conditions, and at 
                such time as the Secretary shall prescribe) to 
                authorize a United States person to act as such trust's 
                limited agent solely for purposes of applying sections 
                7602, 7603, and 7604 with respect to--
                          ``(i) any request by the Secretary to examine 
                        records or produce testimony related to the 
                        proper treatment of amounts required to be 
                        taken into account under the rules referred to 
                        in subparagraph (A), or
                          ``(ii) any summons by the Secretary for such 
                        records or testimony.
                The appearance of persons or production of records by 
                reason of a United States person being such an agent 
                shall not subject such persons or records to legal 
                process for any purpose other than determining the 
                correct treatment under this title of the amounts 
                required to be taken into account under the rules 
                referred to in subparagraph (A). A foreign trust which 
                appoints an agent described in this subparagraph shall 
                not be considered to have an office or a permanent 
                establishment in the United States, or to be engaged in 
                a trade or business in the United States, solely 
                because of the activities of such agent pursuant to 
                this subsection.
                  ``(C) Other rules to apply.--Rules similar to the 
                rules of paragraphs (2) and (4) of section 6038A(e) 
                shall apply for purposes of this paragraph.
  ``(c) Reporting by United States Beneficiaries of Foreign Trusts.--
          ``(1) In general.--If any United States person receives 
        (directly or indirectly) during any taxable year of such person 
        any distribution from a foreign trust, such person shall make a 
        return with respect to such trust for such year which 
        includes--
                  ``(A) the name of such trust,
                  ``(B) the aggregate amount of the distributions so 
                received from such trust during such taxable year, and
                  ``(C) such other information as the Secretary may 
                prescribe.
          ``(2) Inclusion in income if records not provided.--
                  ``(A) In general.--If adequate records are not 
                provided to the Secretary to determine the proper 
                treatment of any distribution from a foreign trust, 
                such distribution shall be treated as an accumulation 
                distribution includible in the gross income of the 
                distributee under chapter 1. To the extent provided in 
                regulations, the preceding sentence shall not apply if 
                the foreign trust elects to be subject to rules similar 
                to the rules of subsection (b)(2)(B).
                  ``(B) Application of accumulation distribution 
                rules.--For purposes of applying section 668 in a case 
                to which subparagraph (A) applies, the applicable 
                number of years for purposes of section 668(a) shall be 
                \1/2\ of the number of years the trust has been in 
                existence.
  ``(d) Special Rules.--
          ``(1) Determination of whether united states person makes 
        transfer or receives distribution.--For purposes of this 
        section, in determining whether a United States person makes a 
        transfer to, or receives a distribution from, a foreign trust, 
        the fact that a portion of such trust is treated as owned by 
        another person under the rules of subpart E of part I of 
        subchapter J of chapter 1 shall be disregarded.
          ``(2) Domestic trusts with foreign activities.--To the extent 
        provided in regulations, a trust which is a United States 
        person shall be treated as a foreign trust for purposes of this 
        section and section 6677 if such trust has substantial 
        activities, or holds substantial property, outside the United 
        States.
          ``(3) Time and manner of filing information.--Any notice or 
        return required under this section shall be made at such time 
        and in such manner as the Secretary shall prescribe.
          ``(4) Modification of return requirements.--The Secretary is 
        authorized to suspend or modify any requirement of this section 
        if the Secretary determines that the United States has no 
        significant tax interest in obtaining the required 
        information.''.
  (b) Increased Penalties.--Section 6677 (relating to failure to file 
information returns with respect to certain foreign trusts) is amended 
to read as follows:

``SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN 
                    FOREIGN TRUSTS.

  ``(a) Civil Penalty.--In addition to any criminal penalty provided by 
law, if any notice or return required to be filed by section 6048--
          ``(1) is not filed on or before the time provided in such 
        section, or
          ``(2) does not include all the information required pursuant 
        to such section or includes incorrect information,
the person required to file such notice or return shall pay a penalty 
equal to 35 percent of the gross reportable amount. If any failure 
described in the preceding sentence continues for more than 90 days 
after the day on which the Secretary mails notice of such failure to 
the person required to pay such penalty, such person shall pay a 
penalty (in addition to the amount determined under the preceding 
sentence) of $10,000 for each 30-day period (or fraction thereof) 
during which such failure continues after the expiration of such 90-day 
period. In no event shall the penalty under this subsection with 
respect to any failure exceed the gross reportable amount.
  ``(b) Special Rules for Returns Under Section 6048(b).--In the case 
of a return required under section 6048(b)--
          ``(1) the United States person referred to in such section 
        shall be liable for the penalty imposed by subsection (a), and
          ``(2) subsection (a) shall be applied by substituting `5 
        percent' for `35 percent'.
  ``(c) Gross Reportable Amount.--For purposes of subsection (a), the 
term `gross reportable amount' means--
          ``(1) the gross value of the property involved in the event 
        (determined as of the date of the event) in the case of a 
        failure relating to section 6048(a),
          ``(2) the gross value of the portion of the trust's assets at 
        the close of the year treated as owned by the United States 
        person in the case of a failure relating to section 6048(b)(1), 
        and
          ``(3) the gross amount of the distributions in the case of a 
        failure relating to section 6048(c).
  ``(d) Reasonable Cause Exception.--No penalty shall be imposed by 
this section on any failure which is shown to be due to reasonable 
cause and not due to willful neglect. The fact that a foreign 
jurisdiction would impose a civil or criminal penalty on the taxpayer 
(or any other person) for disclosing the required information is not 
reasonable cause.
  ``(e) Deficiency Procedures Not To Apply.--Subchapter B of chapter 63 
(relating to deficiency procedures for income, estate, gift, and 
certain excise taxes) shall not apply in respect of the assessment or 
collection of any penalty imposed by subsection (a).''.
  (c) Conforming Amendments.--
          (1) Paragraph (2) of section 6724(d) is amended by striking 
        ``or'' at the end of subparagraph (S), by striking the period 
        at the end of subparagraph (T) and inserting ``, or'', and by 
        inserting after subparagraph (T) the following new 
        subparagraph:
                  ``(U) section 6048(b)(1)(B) (relating to foreign 
                trust reporting requirements).''.
          (2) The table of sections for subpart B of part III of 
        subchapter A of chapter 61 is amended by striking the item 
        relating to section 6048 and inserting the following new item:

                              ``Sec. 6048. Information with respect to 
                                        certain foreign trusts.''.

          (3) The table of sections for part I of subchapter B of 
        chapter 68 is amended by striking the item relating to section 
        6677 and inserting the following new item:

                              ``Sec. 6677. Failure to file information 
                                        with respect to certain foreign 
                                        trusts.''.

  (d) Effective Dates.--
          (1) Reportable events.--To the extent related to subsection 
        (a) of section 6048 of the Internal Revenue Code of 1986, as 
        amended by this section, the amendments made by this section 
        shall apply to reportable events (as defined in such section 
        6048) occurring after the date of the enactment of this Act.
          (2) Grantor trust reporting.--To the extent related to 
        subsection (b) of such section 6048, the amendments made by 
        this section shall apply to taxable years of United States 
        persons beginning after December 31, 1995.
          (3) Reporting by united states beneficiaries.--To the extent 
        related to subsection (c) of such section 6048, the amendments 
        made by this section shall apply to distributions received 
        after the date of the enactment of this Act.

SEC. 412. COMPARABLE PENALTIES FOR FAILURE TO FILE RETURN RELATING TO 
                    TRANSFERS TO FOREIGN ENTITIES.

  (a) In General.--Section 1494 is amended by adding at the end the 
following new subsection:
  ``(c) Penalty.--In the case of any failure to file a return required 
by the Secretary with respect to any transfer described in section 
1491, the person required to file such return shall be liable for the 
penalties provided in section 6677 in the same manner as if such 
failure were a failure to file a notice under section 6048(a).''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to transfers after the date of the enactment of this Act.

SEC. 413. MODIFICATIONS OF RULES RELATING TO FOREIGN TRUSTS HAVING ONE 
                    OR MORE UNITED STATES BENEFICIARIES.

  (a) Treatment of Trust Obligations, Etc.--
          (1) Paragraph (2) of section 679(a) is amended by striking 
        subparagraph (B) and inserting the following:
                  ``(B) Transfers at fair market value.--To any 
                transfer of property to a trust in exchange for 
                consideration of at least the fair market value of the 
                transferred property. For purposes of the preceding 
                sentence, consideration other than cash shall be taken 
                into account at its fair market value.''.
          (2) Subsection (a) of section 679 (relating to foreign trusts 
        having one or more United States beneficiaries) is amended by 
        adding at the end the following new paragraph:
          ``(3) Certain obligations not taken into account under fair 
        market value exception.--
                  ``(A) In general.--In determining whether paragraph 
                (2)(B) applies to any transfer by a person described in 
                clause (ii) or (iii) of subparagraph (C), there shall 
                not be taken into account--
                          ``(i) except as provided in regulations, any 
                        obligation of a person described in 
                        subparagraph (C), and
                          ``(ii) to the extent provided in regulations, 
                        any obligation which is guaranteed by a person 
                        described in subparagraph (C).
                  ``(B) Treatment of principal payments on 
                obligation.--Principal payments by the trust on any 
                obligation referred to in subparagraph (A) shall be 
                taken into account on and after the date of the payment 
                in determining the portion of the trust attributable to 
                the property transferred.
                  ``(C) Persons described.--The persons described in 
                this subparagraph are--
                          ``(i) the trust,
                          ``(ii) any grantor or beneficiary of the 
                        trust, and
                          ``(iii) any person who is related (within the 
                        meaning of section 643(i)(2)(B)) to any grantor 
                        or beneficiary of the trust.''.
  (b) Exemption of Transfers to Charitable Trusts.--Subsection (a) of 
section 679 is amended by striking ``section 404(a)(4) or 404A'' and 
inserting ``section 6048(a)(3)(B)(ii)''.
  (c) Other Modifications.--Subsection (a) of section 679 is amended by 
adding at the end the following new paragraphs:
          ``(4) Special rules applicable to foreign grantor who later 
        becomes a united states person.--
                  ``(A) In general.--If a nonresident alien individual 
                has a residency starting date within 5 years after 
                directly or indirectly transferring property to a 
                foreign trust, this section and section 6048 shall be 
                applied as if such individual transferred to such trust 
                on the residency starting date an amount equal to the 
                portion of such trust attributable to the property 
                transferred by such individual to such trust in such 
                transfer.
                  ``(B) Treatment of undistributed income.--For 
                purposes of this section, undistributed net income for 
                periods before such individual's residency starting 
                date shall be taken into account in determining the 
                portion of the trust which is attributable to property 
                transferred by such individual to such trust but shall 
                not otherwise be taken into account.
                  ``(C) Residency starting date.--For purposes of this 
                paragraph, an individual's residency starting date is 
                the residency starting date determined under section 
                7701(b)(2)(A).
          ``(5) Outbound trust migrations.--If--
                  ``(A) an individual who is a citizen or resident of 
                the United States transferred property to a trust which 
                was not a foreign trust, and
                  ``(B) such trust becomes a foreign trust while such 
                individual is alive,
        then this section and section 6048 shall be applied as if such 
        individual transferred to such trust on the date such trust 
        becomes a foreign trust an amount equal to the portion of such 
        trust attributable to the property previously transferred by 
        such individual to such trust. A rule similar to the rule of 
        paragraph (4)(B) shall apply for purposes of this paragraph.''.
  (d) Modifications Relating to Whether Trust Has United States 
Beneficiaries.--Subsection (c) of section 679 is amended by adding at 
the end the following new paragraph:
          ``(3) Certain united states beneficiaries disregarded.--A 
        beneficiary shall not be treated as a United States person in 
        applying this section with respect to any transfer of property 
        to foreign trust if such beneficiary first became a United 
        States person more than 5 years after the date of such 
        transfer.''.
  (e) Technical Amendment.--Subparagraph (A) of section 679(c)(2) is 
amended to read as follows:
                  ``(A) in the case of a foreign corporation, such 
                corporation is a controlled foreign corporation (as 
                defined in section 957(a)),''.
  (f) Regulations.--Section 679 is amended by adding at the end the 
following new subsection:
  ``(d) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary or appropriate to carry out the purposes of this 
section.''.
  (g) Effective Date.--The amendments made by this section shall apply 
to transfers of property after February 6, 1995.

SEC. 414. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS UNDER GRANTOR 
                    TRUST RULES.

  (a) General Rule.--
          (1) Subsection (f) of section 672 (relating to special rule 
        where grantor is foreign person) is amended to read as follows:
  ``(f) Subpart Not To Result in Foreign Ownership.--
          ``(1) In general.--Notwithstanding any other provision of 
        this subpart, this subpart shall apply only to the extent such 
        application results in an amount (if any) being currently taken 
        into account (directly or through 1 or more entities) under 
        this chapter in computing the income of a citizen or resident 
        of the United States or a domestic corporation.
          ``(2) Exceptions.--
                  ``(A) Certain revocable and irrevocable trusts.--
                Paragraph (1) shall not apply to any portion of a trust 
                if--
                          ``(i) the power to revest absolutely in the 
                        grantor title to the trust property to which 
                        such portion is attributable is exercisable 
                        solely by the grantor without the approval or 
                        consent of any other person or with the consent 
                        of a related or subordinate party who is 
                        subservient to the grantor, or
                          ``(ii) the only amounts distributable from 
                        such portion (whether income or corpus) during 
                        the lifetime of the grantor are amounts 
                        distributable to the grantor or the spouse of 
                        the grantor.
                  ``(B) Compensatory trusts.--Except as provided in 
                regulations, paragraph (1) shall not apply to any 
                portion of a trust distributions from which are taxable 
                as compensation for services rendered.
          ``(3) Special rules.--Except as otherwise provided in 
        regulations prescribed by the Secretary--
                  ``(A) a controlled foreign corporation (as defined in 
                section 957) shall be treated as a domestic corporation 
                for purposes of paragraph (1), and
                  ``(B) paragraph (1) shall not apply for purposes of 
                applying section 1296.
          ``(4) Recharacterization of purported gifts.--In the case of 
        any transfer directly or indirectly from a partnership or 
        foreign corporation which the transferee treats as a gift or 
        bequest, the Secretary may recharacterize such transfer in such 
        circumstances as the Secretary determines to be appropriate to 
        prevent the avoidance of the purposes of this subsection.
          ``(5) Special rule where grantor is foreign person.--If--
                  ``(A) but for this subsection, a foreign person would 
                be treated as the owner of any portion of a trust, and
                  ``(B) such trust has a beneficiary who is a United 
                States person,
        such beneficiary shall be treated as the grantor of such 
        portion to the extent such beneficiary or any member of such 
        beneficiary's family (within the meaning of section 267(c)(4)) 
        has made (directly or indirectly) transfers of property (other 
        than in a sale for full and adequate consideration) to such 
        foreign person. For purposes of the preceding sentence, any 
        gift shall not be taken into account to the extent such gift 
        would be excluded from taxable gifts under section 2503(b).
          ``(6) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection, including regulations providing 
        that paragraph (1) shall not apply in appropriate cases.''.
          (2) The last sentence of subsection (c) of section 672 of 
        such Code is amended by inserting ``subsection (f) and'' before 
        ``sections 674''.
  (b) Credit for Certain Taxes.--
          (1) Paragraph (2) of section 665(d) is amended by adding at 
        the end the following new sentence: ``Under rules or 
        regulations prescribed by the Secretary, in the case of any 
        foreign trust of which the settlor or another person would be 
        treated as owner of any portion of the trust under subpart E 
        but for section 672(f), the term `taxes imposed on the trust' 
        includes the allocable amount of any income, war profits, and 
        excess profits taxes imposed by any foreign country or 
        possession of the United States on the settlor or such other 
        person in respect of trust income.''.
          (2) Paragraph (5) of section 901(b) is amended by adding at 
        the end the following new sentence: ``Under rules or 
        regulations prescribed by the Secretary, in the case of any 
        foreign trust of which the settlor or another person would be 
        treated as owner of any portion of the trust under subpart E 
        but for section 672(f), the allocable amount of any income, war 
        profits, and excess profits taxes imposed by any foreign 
        country or possession of the United States on the settlor or 
        such other person in respect of trust income.''.
  (c) Distributions by Certain Foreign Trusts Through Nominees.--
          (1) Section 643 is amended by adding at the end the following 
        new subsection:
  ``(h) Distributions by Certain Foreign Trusts Through Nominees.--For 
purposes of this part, any amount paid to a United States person which 
is derived directly or indirectly from a foreign trust of which the 
payor is not the grantor shall be deemed in the year of payment to have 
been directly paid by the foreign trust to such United States 
person.''.
          (2) Section 665 is amended by striking subsection (c).
  (d) Effective Date.--
          (1) In general.--Except as provided by paragraph (2), the 
        amendments made by this section shall take effect on the date 
        of the enactment of this Act.
          (2) Exception for certain trusts.--The amendments made by 
        this section shall not apply to any trust--
                  (A) which is treated as owned by the grantor under 
                section 676 or 677 (other than subsection (a)(3) 
                thereof) of the Internal Revenue Code of 1986, and
                  (B) which is in existence on September 19, 1995.
        The preceding sentence shall not apply to the portion of any 
        such trust attributable to any transfer to such trust after 
        September 19, 1995.
  (e) Transitional Rule.--If--
          (1) by reason of the amendments made by this section, any 
        person other than a United States person ceases to be treated 
        as the owner of a portion of a domestic trust, and
          (2) before January 1, 1997, such trust becomes a foreign 
        trust, or the assets of such trust are transferred to a foreign 
        trust,
no tax shall be imposed by section 1491 of the Internal Revenue Code of 
1986 by reason of such trust becoming a foreign trust or the assets of 
such trust being transferred to a foreign trust.

SEC. 415. INFORMATION REPORTING REGARDING FOREIGN GIFTS.

  (a) In General.--Subpart A of part III of subchapter A of chapter 61 
is amended by inserting after section 6039E the following new section:

``SEC. 6039F. NOTICE OF LARGE GIFTS RECEIVED FROM FOREIGN PERSONS.

  ``(a) In General.--If the value of the aggregate foreign gifts 
received by a United States person (other than an organization 
described in section 501(c) and exempt from tax under section 501(a)) 
during any taxable year exceeds $10,000, such United States person 
shall furnish (at such time and in such manner as the Secretary shall 
prescribe) such information as the Secretary may prescribe regarding 
each foreign gift received during such year.
  ``(b) Foreign Gift.--For purposes of this section, the term `foreign 
gift' means any amount received from a person other than a United 
States person which the recipient treats as a gift or bequest. Such 
term shall not include any qualified transfer (within the meaning of 
section 2503(e)(2)) or any distribution properly disclosed in a return 
under section 6048(c).
  ``(c) Penalty for Failure To File Information.--
          ``(1) In general.--If a United States person fails to furnish 
        the information required by subsection (a) with respect to any 
        foreign gift within the time prescribed therefor (including 
        extensions)--
                  ``(A) the tax consequences of the receipt of such 
                gift shall be determined by the Secretary, and
                  ``(B) such United States person shall pay (upon 
                notice and demand by the Secretary and in the same 
                manner as tax) an amount equal to 5 percent of the 
                amount of such foreign gift for each month for which 
                the failure continues (not to exceed 25 percent of such 
                amount in the aggregate).
          ``(2) Reasonable cause exception.--Paragraph (1) shall not 
        apply to any failure to report a foreign gift if the United 
        States person shows that the failure is due to reasonable cause 
        and not due to willful neglect.
  ``(d) Cost-of-Living Adjustment.--In the case of any taxable year 
beginning after December 31, 1996, the $10,000 amount under subsection 
(a) shall be increased by an amount equal to the product of such amount 
and the cost-of-living adjustment for such taxable year under section 
1(f)(3), except that subparagraph (B) thereof shall be applied by 
substituting `1995' for `1992'.
  ``(e) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary or appropriate to carry out the purposes of this 
section.''.
  (b) Clerical Amendment.--The table of sections for such subpart is 
amended by inserting after the item relating to section 6039E the 
following new item:

                              ``Sec. 6039F. Notice of large gifts 
                                        received from foreign 
                                        persons.''.

  (c) Effective Date.--The amendments made by this section shall apply 
to amounts received after the date of the enactment of this Act in 
taxable years ending after such date.

SEC. 416. MODIFICATION OF RULES RELATING TO FOREIGN TRUSTS WHICH ARE 
                    NOT GRANTOR TRUSTS.

  (a) Modification of Interest Charge on Accumulation Distributions.--
Subsection (a) of section 668 (relating to interest charge on 
accumulation distributions from foreign trusts) is amended to read as 
follows:
  ``(a) General Rule.--For purposes of the tax determined under section 
667(a)--
          ``(1) Interest determined using underpayment rates.--The 
        interest charge determined under this section with respect to 
        any distribution is the amount of interest which would be 
        determined on the partial tax computed under section 667(b) for 
        the period described in paragraph (2) using the rates and the 
        method under section 6621 applicable to underpayments of tax.
          ``(2) Period.--For purposes of paragraph (1), the period 
        described in this paragraph is the period which begins on the 
        date which is the applicable number of years before the date of 
        the distribution and which ends on the date of the 
        distribution.
          ``(3) Applicable number of years.--For purposes of paragraph 
        (2)--
                  ``(A) In general.--The applicable number of years 
                with respect to a distribution is the number determined 
                by dividing--
                          ``(i) the sum of the products described in 
                        subparagraph (B) with respect to each 
                        undistributed income year, by
                          ``(ii) the aggregate undistributed net 
                        income.
                The quotient determined under the preceding sentence 
                shall be rounded under procedures prescribed by the 
                Secretary.
                  ``(B) Product described.--For purposes of 
                subparagraph (A), the product described in this 
                subparagraph with respect to any undistributed income 
                year is the product of--
                          ``(i) the undistributed net income for such 
                        year, and
                          ``(ii) the sum of the number of taxable years 
                        between such year and the taxable year of the 
                        distribution (counting in each case the 
                        undistributed income year but not counting the 
                        taxable year of the distribution).
          ``(4) Undistributed income year.--For purposes of this 
        subsection, the term `undistributed income year' means any 
        prior taxable year of the trust for which there is 
        undistributed net income, other than a taxable year during all 
        of which the beneficiary receiving the distribution was not a 
        citizen or resident of the United States.
          ``(5) Determination of undistributed net income.--
        Notwithstanding section 666, for purposes of this subsection, 
        an accumulation distribution from the trust shall be treated as 
        reducing proportionately the undistributed net income for 
        undistributed income years.
          ``(6) Periods before 1996.--Interest for the portion of the 
        period described in paragraph (2) which occurs before January 
        1, 1996, shall be determined--
                  ``(A) by using an interest rate of 6 percent, and
                  ``(B) without compounding until January 1, 1996.''.
  (b) Abusive Transactions.--Section 643(a) is amended by inserting 
after paragraph (6) the following new paragraph:
          ``(7) Abusive transactions.--The Secretary shall prescribe 
        such regulations as may be necessary or appropriate to carry 
        out the purposes of this part, including regulations to prevent 
        avoidance of such purposes.''.
  (c) Treatment of Loans From Trusts.--
          (1) In general.--Section 643 (relating to definitions 
        applicable to subparts A, B, C, and D) is amended by adding at 
        the end the following new subsection:
  ``(i) Loans From Foreign Trusts.--For purposes of subparts B, C, and 
D--
          ``(1) General rule.--Except as provided in regulations, if a 
        foreign trust makes a loan of cash or marketable securities 
        directly or indirectly to--
                  ``(A) any grantor or beneficiary of such trust who is 
                a United States person, or
                  ``(B) any United States person not described in 
                subparagraph (A) who is related to such grantor or 
                beneficiary,
        the amount of such loan shall be treated as a distribution by 
        such trust to such grantor or beneficiary (as the case may be).
          ``(2) Definitions and special rules.--For purposes of this 
        subsection--
                  ``(A) Cash.--The term `cash' includes foreign 
                currencies and cash equivalents.
                  ``(B) Related person.--
                          ``(i) In general.--A person is related to 
                        another person if the relationship between such 
                        persons would result in a disallowance of 
                        losses under section 267 or 707(b). In applying 
                        section 267 for purposes of the preceding 
                        sentence, section 267(c)(4) shall be applied as 
                        if the family of an individual includes the 
                        spouses of the members of the family.
                          ``(ii) Allocation.--If any person described 
                        in paragraph (1)(B) is related to more than one 
                        person, the grantor or beneficiary to whom the 
                        treatment under this subsection applies shall 
                        be determined under regulations prescribed by 
                        the Secretary.
                  ``(C) Exclusion of tax-exempts.--The term `United 
                States person' does not include any entity exempt from 
                tax under this chapter.
                  ``(D) Trust not treated as simple trust.--Any trust 
                which is treated under this subsection as making a 
                distribution shall be treated as not described in 
                section 651.
          ``(3) Subsequent transactions regarding loan principal.--If 
        any loan is taken into account under paragraph (1), any 
        subsequent transaction between the trust and the original 
        borrower regarding the principal of the loan (by way of 
        complete or partial repayment, satisfaction, cancellation, 
        discharge, or otherwise) shall be disregarded for purposes of 
        this title.''.
          (2) Technical amendment.--Paragraph (8) of section 7872(f) is 
        amended by inserting ``, 643(i),'' before ``or 1274'' each 
        place it appears.
  (d) Effective Dates.--
          (1) Interest charge.--The amendment made by subsection (a) 
        shall apply to distributions after the date of the enactment of 
        this Act.
          (2) Abusive transactions.--The amendment made by subsection 
        (b) shall take effect on the date of the enactment of this Act.
          (3) Loans from trusts.--The amendment made by subsection (c) 
        shall apply to loans of cash or marketable securities made 
        after September 19, 1995.

SEC. 417. RESIDENCE OF TRUSTS, ETC.

  (a) Treatment as United States Person.--
          (1) In general.--Paragraph (30) of section 7701(a) is amended 
        by striking ``and'' at the end of subparagraph (C) and by 
        striking subparagraph (D) and by inserting the following new 
        subparagraphs:
                  ``(D) any estate (other than a foreign estate, within 
                the meaning of paragraph (31)), and
                  ``(E) any trust if--
                          ``(i) a court within the United States is 
                        able to exercise primary supervision over the 
                        administration of the trust, and
                          ``(ii) one or more United States fiduciaries 
                        have the authority to control all substantial 
                        decisions of the trust.''.
          (2) Conforming amendment.--Paragraph (31) of section 7701(a) 
        is amended to read as follows:
          ``(31) Foreign estate or trust.--
                  ``(A) Foreign estate.--The term `foreign estate' 
                means an estate the income of which, from sources 
                without the United States which is not effectively 
                connected with the conduct of a trade or business 
                within the United States, is not includible in gross 
                income under subtitle A.
                  ``(B) Foreign trust.--The term `foreign trust' means 
                any trust other than a trust described in subparagraph 
                (E) of paragraph (30).''.
          (3) Effective date.--The amendments made by this subsection 
        shall apply--
                  (A) to taxable years beginning after December 31, 
                1996, or
                  (B) at the election of the trustee of a trust, to 
                taxable years ending after the date of the enactment of 
                this Act.
        Such an election, once made, shall be irrevocable.
  (b) Domestic Trusts Which Become Foreign Trusts.--
          (1) In general.--Section 1491 (relating to imposition of tax 
        on transfers to avoid income tax) is amended by adding at the 
        end the following new flush sentence:
``If a trust which is not a foreign trust becomes a foreign trust, such 
trust shall be treated for purposes of this section as having 
transferred, immediately before becoming a foreign trust, all of its 
assets to a foreign trust.''.
          (2) Effective date.--The amendment made by this subsection 
        shall take effect on the date of the enactment of this Act.

                            I. INTRODUCTION

                         A. Purpose and Summary

    H.R. 3286, as amended and reported by the Committee on Ways 
and Means, provides: (1) a tax credit for certain adoption 
expenses and an exclusion for amounts received by an employee 
for certain adoption expenses under an employer adoption 
assistance program (Title I); (2) removal of barriers to 
interethnic adoptions (Title II); and (3) revenue offsets for 
the bill (repeal of business exclusion for energy subsidies 
provided by public utilities and modification of foreign trust 
rules) (Title IV). The Committee on Ways and Means acted only 
on Titles I, II, and IV of the bill. Title III ( relating to 
child custody proceedings affected by the Indian Child Welfare 
Act of 1978) was referred to the Committee on Resources, which 
struck Title III of the bill on April 25, 1996 (see H. Rept. 
104-542, Part 1, April 30, 1996). Title II also was referred to 
the Committee on Economic and Educational Opportunities, which 
was discharged on April 30, 1996.

                 B. Background and Need for Legislation

    Adoption in the United States is too rare. One of the most 
troubling demographic trends in recent decades is the 
increasing number of children living apart from their 
biological parents, primarily in foster homes. The best 
available information indicates that about 450,000 children 
live in foster care at any given moment, and as many as 600,000 
live in foster care during the course of a given year. Both 
figures appear to be rising slightly after more rapid growth 
during the late 1980s.
    The Committee on Ways and Means, which has jurisdiction 
over many of the major Federal programs designed to address the 
problem of family dissolution, has a long history of taking 
decisive action to help these children. Federal programs under 
Committee jurisdiction now provide well over $5 billion per 
year to support foster care, adoption, and family services. 
Based on evidence presented to the Committee in recent years 
through testimony, letters, and various reports, the Committee 
has determined that a major goal of Federal policy must be the 
promotion of adoption. This legislation was designed to address 
two of the major barriers to adoption: the cost to families of 
adopting a child and the practice of requiring adopting parents 
and the adopted child to be of the same race or color.
    Adoption costs now constitute a major disincentive to 
adoption, especially for moderate-income families. Given that 
adoption expenses can total $10,000 to $15,000 or even more in 
some cases, the Committee designed a tax credit to help 
families defray these expenses. The bill provides a 
nonrefundable tax credit for up to $5,000 for qualified 
adoption expenses and an exclusion of up to $5,000 for amounts 
received by an employee for qualified adoption expenses under 
an employer adoption assistance program. Both the tax credit 
and the exclusion are phased out for taxpayers with modified 
adjusted gross income above $75,000. The $5,000 maximums are 
per child adopted. These provisions will assist families that 
need financial assistance in adopting children.
    The bill also is intended to remove bureaucratic barriers 
to interethnic adoptions by providing that not later than 
January 1, 1997, States receiving funds from the Federal 
Government for adoption or foster care placements may not deny 
any person the opportunity to become an adoptive or foster 
parent on the basis of race, color, or national origin of the 
person or of the child, nor may the State delay or deny the 
placement of a child for adoption or into foster care on the 
basis of race, color, or national origin of the adoptive or 
foster parent or of the child. Recent studies show that many 
States allow the use of race in the placement of children in 
foster care and adoption, which has resulted in minority 
children remaining in foster care at least twice as long as 
non-minority children.
    Finally, the bill includes two revenue offsets to pay for 
the other provisions of the bill: (1) repeal of the business 
exclusion for energy subsidies provided by public utilities; 
and (2) modification of the foreign trust rules to improve 
compliance.

                         C. Legislative History

Committee Bill

    H.R. 3286 was introduced on April 23, 1996, by Ms. Molinari 
and Messrs. Archer and Bunning, Ms. Pryce, and Messrs. Solomon, 
Tiahrt, and Shaw. The bill was amended in a Committee markup on 
May 1, 1996. The bill, as amended, was ordered favorably 
reported by the Committee on Ways and Means by a voice vote on 
May 1, 1996.
    An amendment by Mr. Jacobs, to the pending Rangel amendment 
restoring current law language regarding the use of cultural, 
ethnic or racial considerations in placement of children into 
foster care or adoptive homes, to clarify that the Rangel 
amendment was not intended to result in continued foster care 
of the child, was approved by unanimous consent. The Rangel 
amendment, as amended, was defeated by a roll call vote of 15 
yeas to 22 nays.
    An amendment by Mr. Shaw to strike the phrase ``or 
otherwise discriminate in making a placement decision'' on 
pages 10 (lines 9-11) and 12 (lines 10-11) of the introduced 
bill was approved by unanimous consent.
    An amendment by Chairman Archer to clarify the provisions 
of Title IV relating to treatment of foreign trusts was 
approved by unanimous consent.
    A provision similar to the interethnic adoption provision 
in H.R. 3286 was approved by the Committee on March 8, 1995, as 
part of H.R. 4, the Welfare Transformation Act of 1995. That 
provision was subsequently incorporated into both the Balanced 
Budget Act of 1995 (H.R. 2491) and the Personal Responsibility 
and Work Opportunity Act of 1995 (H.R. 4), both of which were 
passed by Congress but vetoed by President Clinton.
    Provisions similar to the Title I adoption tax credit were 
approved by the Committee as part of H.R. 1215 (Contract With 
America Tax Relief Act of 1995) on March 14, 1995 (H. Rept. 
104-84). These provisions were also incorporated into the 
vetoed Balanced Budget Act of 1995, H.R. 2491 (see H. Rept. 
104-350 for the conference report). In addition, provisions 
similar to the Title IV revenue-offset provisions (repeal of 
the business exclusion for energy subsidies provided by public 
utilities and modification of the foreign trust rules) were 
included in the vetoed H.R. 2491.

Legislative Hearings

    The Subcommittee on Human Resources of the Committee on 
Ways and Means held a joint hearing on child care and child 
welfare with the Subcommittee on Children, Youth, and Families 
of the Committee on Economic and Educational Opportunities on 
February 3, 1995. In addition, the Subcommittee on Human 
Resources held a Federal adoption policy hearing on May 10, 
1995. Also, the Committee held hearings on January 17-18, 1995, 
on ``Contract With America'' tax proposals relating to the 
family--including a tax credit for adoption expenses.

                      II. EXPLANATION OF THE BILL

  A. Tax Credit for Adoption Expenses; Exclusion for Certain Adoption 
  Expenses (sec. 101 of the bill and new secs. 23 and 137 of the Code)

                              Present Law

    Present law does not provide a tax credit for adoption 
expenses. Also, present law does not provide an exclusion from 
gross income for employer-provided adoption assistance. The 
Federal Adoption Assistance program (a Federal outlay program) 
provides financial assistance for the adoption of certain 
special needs children. In general, a special needs child is 
defined as a child who (1) according to a State determination, 
could not or should not be returned to the home of the birth 
parents and (2) on account of a specific factor or condition 
(such as ethnic background, age, membership in a minority or 
sibling group, medical condition, or physical, mental or 
emotional handicap), could not reasonably be expected to be 
adopted unless adoption assistance is provided. Specifically, 
the program provides assistance for adoption expenses for those 
special needs children receiving Federally assisted adoption 
assistance payments as well as special needs children in 
private and State-funded programs. The maximum Federal 
reimbursement is $1,000 per special needs child. Reimbursable 
expenses include those nonrecurring costs directly associated 
with the adoption process such as legal costs, social service 
review, and transportation costs.

                           Reasons for Change

    The Committee believes that the financial costs of the 
adoption process should not be a barrier to adoptions. In 
addition, the Committee wishes to encourage further the 
adoption of special needs children. Therefore the tax credit is 
allowed in addition to any grant money received for the 
adoption expenses associated with the adoption of special needs 
children.

                        Explanation of Provision

Tax credit

    The bill provides taxpayers with a maximum nonrefundable 
credit against income tax liability of $5,000 per child for 
qualified adoption expenses paid or incurred by the taxpayer. 
Qualified adoption expenses are reasonable and necessary 
adoption fees, court costs, attorneys' fees and other expenses 
that are directly related to the legal adoption of an eligible 
child. In the case of an international adoption, the credit is 
not available unless the adoption is finalized. In that case 
the credit is allowed for all prior qualified expenses in the 
year that the adoption becomes final. An eligible child is an 
individual (1) who has not attained age 18 as of the time of 
the adoption, or (2) who is physically or mentally incapable of 
caring for himself or herself. No credit is allowed for 
expenses incurred (1) in violation of State or Federal law, (2) 
in carrying out any surrogate parenting arrangement, or (3) in 
connection with the adoption of a child of the taxpayer's 
spouse. The credit is phased out ratably for taxpayers with 
modified adjusted gross income (AGI) above $75,000, and is 
fully phased out at $115,000 of modified AGI. For these 
purposes modified AGI is computed by increasing the taxpayer's 
AGI by the amount otherwise excluded from gross income under 
Code sections 911, 931, or 933 (relating to the exclusion of 
income of U.S. citizens or residents living abroad; residents 
of Guam, American Samoa, and the Northern Mariana Islands, and 
residents of Puerto Rico, respectively).
    The $5,000 limit is a per child limit, not an annual 
limitation. For example, in the case of a domestic adoption if 
a taxpayer pays or incurs $3,000 of otherwise allowable 
qualified adoption expenses with respect to a child in year one 
and $3,000 of otherwise allowable qualified adoption expenses 
with respect to that same child in year two, then the taxpayer 
would receive a $3,000 credit with respect to year one and a 
$2,000 credit with respect to year two. The credit may be less 
than $5,000 because of other limitations. It is also intended 
that when more than one taxpayer pays or incurs qualified 
adoption expenses for the adoption of the same child the total 
adoption credit claimed by all parties shall not exceed $5,000.
    To avoid a double benefit, the bill denies the credit to 
taxpayers to the extent the taxpayer may use otherwise 
qualified adoption expenses as the basis of another credit or 
deduction. Also, when the adoption credit is allowed because 
the taxpayer expends amounts chargeable to a capital account 
(e.g., the costs of constructing a ramp at the taxpayer's house 
to accommodate a wheelchair that is required as a condition of 
the adoption) the taxpayer is not allowed additional basis in 
the house to the extent of the adoption credit allowed. Where 
the amount of qualified adoption expenses exceeds $5,000, 
(e.g., $5,000 of legal fees and $5,000 of ramp construction 
costs) it is intended that the amounts not chargeable to a 
capital account (the legal fees) are treated as the basis of 
the credit before any amounts that are chargeable to a capital 
account. In this way the taxpayer may satisfy the requirements 
of the adoption credit with the legal fees and may add the ramp 
construction costs to the basis in the house.
    The credit is not allowed for any expenses for which a 
grant is received under any Federal, State, or local program. 
This latter limit, however, does not apply in the case of 
special needs adoptions. A special needs child is a child who 
the State has determined: (1) cannot or should not be returned 
to the home of the birth parents, and (2) has a specific factor 
or condition because of which the child cannot be placed with 
adoptive parents without adoption assistance. Examples of 
factors or conditions are the child's ethnic background, age, 
membership in a minority or sibling group, medical conditions, 
or physical, mental, or emotional handicaps.
    The bill provides that individuals who are married at the 
end of the taxable year must file a joint return to receive the 
credit unless they lived apart from each other for the last six 
months of the taxable year and the individual claiming the 
credit (1) maintained as his or her home a household for the 
child for more than one-half of the taxable year and (2) 
furnished over one-half of the cost of maintaining that 
household in that taxable year. Further, the bill provides that 
an individual legally separated from his spouse under a decree 
of divorce or separate maintenance would not be considered 
married for purposes of this provision.
    The bill provides that to the extent the otherwise 
allowable credit exceeds the tax liability limitation of 
section 26 (reduced by other personal credits) the excess shall 
be carried forward as an adoption credit into the next taxable 
year, up to a maximum of five taxable years.

Exclusion from income

    The bill provides a maximum $5,000 exclusion from the gross 
income of an employee for qualified adoption expenses paid by 
the employer. The $5,000 limit is a per child limit, not an 
annual limitation. Also, the total exclusion allowed to two or 
more taxpayers with respect to the adoption of the same child 
may not exceed $5,000. In order for the exclusion to apply, the 
expenses have to be paid under an adoption assistance program 
in connection with an adoption of an eligible child (as 
described above) by an employee. An adoption assistance program 
is a nondiscriminatory plan of an employer under which the 
employer provides employees with adoption assistance. Also, not 
more than five percent of the benefits under the program for 
any year can benefit a class of individuals consisting of more 
than five-percent owners of the employee or their spouses or 
dependents. An adoption assistance program does not have to be 
funded. An adoption reimbursement program operated under 
section 1052 of title 10 of the U.S. Code (relating to the 
armed forces) or section 514 of title 14 of the U.S. Code 
(relating to members of the Coast Guard) is treated as an 
adoption assistance program for these purposes. Adoption 
assistance is a qualified benefit under a cafeteria plan. The 
exclusion is phased out ratably for taxpayers with modified AGI 
above $75,000 and is fully phased out at $115,000 of modified 
AGI. In the case of expenses paid under an adoption assistance 
program that may otherwise be chargeable to a capital account, 
an ordering rule similar to the one for the adoption credit 
applies.
    Adoption expenses paid or reimbursed under an adoption 
assistance program may not be taken into account in determining 
the adoption credit. A taxpayer may, however, satisfy the 
requirements of the adoption credit and exclusion with 
different expenses paid or incurred by the taxpayer and 
employer respectively. For example in the case of an adoption 
that costs $10,000 with $5,000 of expenses paid by the taxpayer 
and $5,000 paid by the taxpayer's employer under an adoption 
assistance program the taxpayer may qualify for the adoption 
credit and the exclusion.

Taxpayer identification numbers (TINS)

    The Committee is concerned that problems may arise in 
processing tax returns of adopting parents because of 
unavoidable delays involved in obtaining a social security 
number of a child who is being adopted. The Committee 
understands that the Internal Revenue Service recognizes these 
concerns and is committed to working with the Committee to 
develop as soon as possible an administrative solution that 
minimizes the burdens imposed on adopting parents while 
balancing processing and potential compliance considerations.
                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1996.

             B. Removal of Barriers to Interethnic Adoption
 (Sec. 201 of the bill and secs. 471(a) and 474 of the Social Security 
                                  Act)
                              Present Law

    State law governs adoption and foster care placement. Many 
States permit race matching of foster and adoptive parents with 
children either in regulation, statute, policy, or practice. 
The Howard M. Metzenbaum Multiethnic Placement Act of 1994 
(``Metzenbaum Act'', Public Law 103-382) permits States to 
consider race and ethnicity in selecting a foster care or 
adoptive home, but States cannot delay or deny the placement of 
the child solely on the basis of race, color or national 
origin.
    Noncompliance with the Metzenbaum Act is deemed a violation 
of Title VI of the Civil Rights Act of 1964.

                           Reasons for Change
    Various hearings and numerous letters led the Committee to 
conclude that Public Law 103-382 was not having the intended 
effect of facilitating the adoption of minority children. The 
Committee concluded that the legislative language was 
internally inconsistent. On the one hand, it prohibited any 
agency or state entity that receives Federal assistance from 
delaying or denying the placement of a child for adoption or 
into foster care solely on the basis of the race, color or 
national origin of the adoptive or foster parents. On the other 
hand, it also allowed placement agencies to use ``cultural, 
ethnic or racial background of the child'' as criteria in 
making placement decisions. In addition, Public Law 103-382 
lacked an enforcement provision backed by serious penalties. As 
a result, the bill was ineffective in promoting the best 
interests of children by decreasing the length of time they 
wait to be adopted.
    Under the terms of the Committee bill, ``race, color or 
national origin'' cannot be used to delay or deny the placement 
of a child into a foster or adoptive placement. The Committee 
agreed that any delay is clearly not in the child's best 
interest and must not be tolerated for the purposes of race-
matching. The major concern of the Committee is to ensure that 
States that can be shown to pursue policies that lead to any 
delay in the adoption of any child be subjected to the penalty 
terms of this legislation.

                        Explanation of Provision

    Section 553 of the Metzenbaum Act is repealed. In addition, 
Section 471 of the Social Security Act is amended to prohibit a 
State or other entity that receives Federal assistance from 
denying to any person the opportunity to become an adoptive or 
a foster parent on the basis of the race, color, or national 
origin of the person or of the child involved. Similarly, no 
State or other entity receiving Federal funds can delay or deny 
the placement of a child for adoption or foster care, or 
otherwise discriminate in making a placement decision, on the 
basis of the race, color, or national origin of the adoptive or 
foster parent or the child involved.
    Section 474 of the Social Security Act is amended to 
require the Secretary to reduce the amount of Federal foster 
care and adoption funds provided to the State through Title IV-
E if the State program is found in violation of this provision 
as a result of a review conducted under Section 1123 of the 
Social Security Act. States found to be in violation would have 
their quarterly funds reduced by 2 percent for the first 
violation, by 5 percent for the second violation, and by 10 
percent for the third or subsequent violation.
    Private entities found to be in violation of this provision 
for a quarter are required to return to the Secretary all 
federal funds received from the State during the quarter.
    Any individual who is harmed by a violation of this 
provision may seek redress in any United States district court. 
An action under this provision may not be brought more than two 
years after the alleged violation occurred.
    Noncompliance with this provision constitutes a violation 
of Title VI of the Civil Rights Act of 1964. The Indian Child 
Welfare Act of 1978 is not affected by changes made in this 
title.

                             Effective Date

    The effective date for this provision is upon enactment 
(except States must meet the State plan requirement provision 
of bill section 201(a) not later than January 1, 1997).

                           C. Revenue Offsets

1. Remove business exclusion for energy subsidies provided by public 
        utilities (sec. 401 of the bill and sec. 136 of the Code)

                              Present Law

    Internal Revenue Code section 136, as added by the Energy 
Policy Act of 1992, provides an exclusion from the gross income 
of a customer of a public utility for the value of any subsidy 
provided by the utility for the purchase or installation of an 
energy conservation measure with respect to a dwelling unit (as 
defined by sec. 280A(f)(1)). In addition, for subsidies 
received after 1994, section 136 provides a partial exclusion 
from gross income for the value of any subsidy provided by a 
utility for the purchase or installation of an energy 
conservation measure with respect to property that is not a 
dwelling unit. The amount of the exclusion is 40 percent of the 
value for subsidies received in 1995, 50 percent of the value 
for subsidies received in 1996, and 65 percent of the value for 
subsidies received after 1996.
    For this purpose, an energy conservation measure is any 
installation or modification primarily designed to reduce 
consumption of electricity or natural gas or to improve the 
management of energy demand with respect to property. With 
respect to property other than a dwelling unit, an energy 
conservation measure includes ``specially defined energy 
property'' (generally, property described in sec. 48(l)(5) of 
the Code as in effect on the day before the date of enactment 
of the Revenue Reconciliation Act of 1990).
    The exclusion does not apply to payments made to or from a 
qualified cogeneration facility or a qualifying small power 
production facility pursuant to section 210 of the Public 
Utility Regulatory Policy Act of 1978.
    Section 136 denies a deduction or credit to a taxpayer (or 
in appropriate cases requires a reduction in the adjusted basis 
of property of a taxpayer) for any expenditure to the extent 
that a subsidy related to the expenditure was excluded from the 
gross income of the taxpayer.

                           Reasons for Change

    The Committee believes that the present-law exclusion for 
energy conservation subsidies results in the mismeasurement of 
income and may create biases against certain types of 
conservation programs. However, the Committee believes the 
exclusion is appropriate for individual consumers because the 
taxation of such benefits may impose unduly harsh recordkeeping 
burdens with respect to these taxpayers. Thus, the bill only 
repeals the exclusion for subsidies with respect to 
nonresidential property.

                        Explanation of Provision

    The bill repeals the partial exclusion for any subsidy 
provided by a utility for the purchase or installation of an 
energy conservation measure with respect to property that is 
not a dwelling unit.

                             Effective Date

    The provision is effective for subsidies received after 
December 31, 1996, unless received pursuant to a binding 
written contract in effect on September 13, 1995, and all times 
thereafter.

2. Modify treatment of foreign trusts (secs. 411-417 of the bill and 
        secs. 643, 665, 668(a), 672, 679, 1491, 1494, 6038, 6039G, 
        6677, 7701(a) and 7872(f) of the Code)

                              Present Law

Inbound grantor trusts with foreign grantors

    Under the grantor trust rules (secs. 671-679), a grantor 
that retains certain rights or powers generally is treated as 
the owner of the trust's assets without regard to whether the 
grantor is a domestic or foreign person. Under these rules, 
U.S. trust beneficiaries are not subject to U.S. tax on 
distributions from a trust where a foreign grantor is treated 
as owner of the trust, even though no tax may be imposed on the 
trust income by any jurisdiction. In addition, a special rule 
provides that if a U.S. beneficiary of an inbound grantor trust 
transfers property to the foreign grantor by gift, that U.S. 
beneficiary is treated as the grantor of the trust to the 
extent of the transfer.

Foreign trusts that are not grantor trusts

    Under the accumulation distribution rules (which generally 
apply to distributions from a trust in excess of the trust's 
distributable net income for the taxable year), a distribution 
by a foreign nongrantor trust of previously accumulated income 
generally is taxed at the U.S. beneficiary's average marginal 
rate for the prior 5 years, plus interest (secs. 666 and 667). 
Interest is computed at a fixed annual rate of 6 percent, with 
no compounding (sec. 668). If adequate records of the trust are 
not available to determine the proper application of the rules 
relating to accumulation distributions to any distribution from 
a trust, the distribution is treated as an accumulation 
distribution out of income earned during the first year of the 
trust (sec. 666(d)).
    If a foreign nongrantor trust makes a loan to one of its 
beneficiaries, the principal of such a loan generally is not 
taxable as income to the beneficiary.

Outbound foreign grantor trusts with U.S. grantors

    Under the grantor trust rules, a U.S. person that transfers 
property to a foreign trust generally is treated as the owner 
of the portion of the trust comprising that property for any 
taxable year in which there is a U.S. beneficiary of any 
portion of the trust (sec. 679(a)). This treatment generally 
does not apply, however, to transfers by reason of death, to 
transfers made before the transferor became a U.S. person, or 
to transfers that represent sales or exchanges of property at 
fair market value where gain is recognized to the transferor.

Residence of trusts

    A trust is treated as foreign if it is not subject to U.S. 
income taxation on its income that is neither derived from U.S. 
sources nor effectively connected with the conduct of a U.S. 
trade or business. Thus, if a trust is taxed in a manner 
similar to a nonresident alien individual, it is considered to 
be a foreign trust. Any other trust is treated as domestic.
    Section 1491 generally imposes a 35-percent excise tax on a 
U.S. person that transfers appreciated property to certain 
foreign entities, including a foreign trust. In the case of a 
domestic trust that changes its situs and becomes a foreign 
trust, it is unclear whether property has been transferred from 
a U.S. person to a foreign entity and, thus, whether the 
transfer is subject to the excise tax.

Information reporting and penalties related to foreign trusts

    Any U.S. person that creates a foreign trust or transfers 
money or property to a foreign trust is required to report that 
event to the Treasury Department without regard to whether the 
trust is a grantor trust or a nongrantor trust. Similarly, any 
U.S. person that transfers property to a foreign trust that has 
one or more U.S. beneficiaries is required to report annually 
to the Treasury Department. In addition, any U.S. person that 
makes a transfer described in section 1491 is required to 
report the transfer to the Treasury Department.
    Any person that fails to file a required report with 
respect to the creation of, or a transfer to, a foreign trust 
may be subject to a penalty of 5 percent of the amount 
transferred to the foreign trust. Similarly, any person that 
fails to file a required annual report with respect to a 
foreign trust with U.S. beneficiaries may be subject to a 
penalty of 5 percent of the value of the corpus of the trust at 
the close of the taxable year. The maximum amount of the 
penalty imposed under either case may not exceed $1,000. A 
reasonable cause exception is available.

Reporting of foreign gifts

    There is no requirement to report gifts or bequests from 
foreign sources.

                           Reasons for Change

Grantor trust rules

            Inbound grantor trusts
    The Committee has been informed that the U.S. grantor trust 
provisions are being used as a vehicle to avoid U.S. tax. If a 
trust is treated as a grantor trust, only the owner of the 
trust is taxable on the trust's income and not the trust's 
beneficiaries. Thus, if a foreign person creates a trust with 
U.S. beneficiaries that is treated as a grantor trust for U.S. 
tax purposes and if the foreign person's home country does not 
tax the income, the income of the trust would not be subject to 
tax by either the United States or the foreign country. The 
Committee believes that the income derived through these types 
of arrangements should be subject to tax by at least one 
jurisdiction.
            Outbound grantor trusts
    The Committee understands that taxpayers have avoided the 
application of the outbound grantor trust rules of section 679. 
For example, a transfer of property to a foreign trust may be 
structured as a sale in exchange for a note issued by the trust 
or a person related to the trust where the note will not be 
repaid. The Committee believes that it is appropriate to 
disregard notes that do not reflect arm's-length terms in 
determining whether the transferor received fair market value 
for the property transferred.

Foreign nongrantor trust rules

    The 6-percent simple interest charge applicable to 
accumulation distributions has not been updated since 1976. In 
essence, income earned through a foreign nongrantor trust may 
be deferred from U.S. taxation, then subjected to a below-
market interest rate when distributed to a U.S. beneficiary. 
The Committee believes that it is appropriate to charge the 
same rate of interest on accumulation distributions as is 
applicable to general underpayments of income tax.
    Under current law, a U.S. beneficiary of a foreign trust 
may avoid U.S. tax on the income accumulated through the trust 
by obtaining a ``loan'' of cash or marketable securities from 
the trust in lieu of an actual distribution. The Committee 
believes that it is appropriate to treat loans that do not 
reflect arm's-length terms as distributions to the borrower.

Residence of trusts

    Because the U.S. tax treatment of a trust (and the 
beneficiaries of a trust) depends on the residence of the 
trust, the Committee believes that it is appropriate to provide 
objective criteria for determining the residence of trusts.

Information reporting requirements and associated penalties

    The Committee has been informed that certain U.S. settlors 
have established foreign trusts, including grantor trusts, in 
tax haven jurisdictions. Income from such foreign grantor 
trusts is taxable currently to the U.S. grantor, but the 
Committee understands that there is noncompliance in this 
regard. The Committee is concerned that the present-law civil 
penalties for failure to comply with the reporting requirements 
applicable to foreign trusts established by U.S. persons have 
proven to be ineffective. In order to deter noncompliance, the 
Committee believes that it is appropriate to expand the 
reporting requirements relating to activities of foreign trusts 
with U.S. grantors or U.S. beneficiaries and to increase the 
civil penalties applicable to a failure to comply with such 
reporting requirements.
    The Committee understands that some of the jurisdictions in 
which U.S. settlors have established foreign trusts have strict 
secrecy laws. The Committee is concerned that the secrecy laws 
may effectively preclude the Treasury Department from obtaining 
information necessary to determine the tax liabilities of the 
U.S. grantors or U.S. beneficiaries with respect to items 
related to such foreign trusts. The Committee believes that, it 
is useful, in the case of a foreign trust with a U.S. grantor, 
to provide an incentive for the trust to have a limited U.S. 
agent to accept service of process in order to improve the 
administrability of the tax law applicable to taxation of 
income derived from foreign trusts.

                       Explanation of Provisions

Overview

    The bill modifies the tax treatment of trusts as follows:
    a. The grantor trust rules generally apply only to the 
extent that they result, directly or indirectly, in income or 
other amounts (if any) being currently taken into account in 
computing the income of a U.S. person. Certain exceptions 
apply.
    b. Beginning on January 1, 1996, the interest rate 
applicable to accumulation distributions from foreign 
nongrantor trusts is the rate imposed on underpayment of tax 
under section 6621(a)(2), with compounding. The accumulation 
distribution generally is allocated proportionately to prior 
trust years in which the trust had undistributed net income. 
The full amount of a loan of cash or marketable securities by a 
foreign nongrantor trust to a U.S. grantor or a U.S. 
beneficiary (or a U.S. person related to such a grantor or 
beneficiary) generally is treated as a distribution to the 
grantor or beneficiary.
    c. A nonresident alien who transfers property to a foreign 
trust and then becomes a U.S. resident within 5 years after the 
transfer is treated as making a transfer to the foreign trust 
on his residency starting date. In determining whether a 
foreign trust paid fair market value to the transferor for 
property transferred to the trust, obligations issued by the 
trust, by any grantor or beneficiary of the trust, or by any 
person related to any grantor or beneficiary generally are not 
taken into account.
    d. The bill authorizes the Secretary of the Treasury to 
issue regulations to prevent abusive transactions to avoid the 
purposes of these rules.
    e. A two-part objective test is established for determining 
whether a trust is foreign or domestic for tax purposes.
    f. The bill expands the reporting requirements with respect 
to foreign trusts if there is a U.S. grantor of the foreign 
trust or a distribution from the foreign trust to a U.S. 
person. The bill requires the responsible parties to file 
information returns with the Treasury Department upon the 
occurrence of certain events. A failure to comply with the 
reporting requirements results in increased monetary penalties. 
Special sanctions apply unless a U.S. owner of any portion of a 
foreign trust appoints a limited agent to accept service of 
process with respect to requests and summons by the Treasury 
Department in connection with the tax treatment of items 
relating to the trust.
    g. Any U.S. person (other than certain tax-exempt 
organizations) that receives purported gifts or bequests from 
foreign sources totaling more than $10,000 during the year is 
required to report the gift to the Treasury Department. 
Monetary penalties and other sanctions apply to a failure to 
comply with the reporting requirement.
    The provisions are described in more detail below.
            a. Inbound grantor trusts with foreign grantors

Foreign grantors not treated as owners

    Under the bill, the grantor trust rules generally apply 
only to the extent that they result, directly or indirectly, in 
income or other amounts (if any) being currently taken into 
account in computing the income of a U.S. citizen or resident 
or a domestic corporation. Thus, the grantor trust rules 
generally do not apply to any portion of a trust where their 
effect is to treat a foreign person as owner of that portion.
    The bill provides certain exceptions to the rule described 
above. Under one exception, the grantor trust rules continue to 
apply to the portion of a trust where that portion of the trust 
is revocable by the grantor either without approval of another 
person or with the consent of a related or subordinate party 
who is subservient to the grantor (as defined in sec. 672(c)). 
Under another exception, the grantor trust rules continue to 
apply to the portion of a trust where the only amounts 
distributable from that portion during the lifetime of the 
grantor are to the grantor or the grantor's spouse. The general 
rule denying grantor trust status does not apply to trusts 
established to pay compensation, and certain trusts in 
existence as of September 19, 1995 provided that such trust is 
treated as owned by the grantor under section 676 or 677 (other 
than sec. 677(a)(3)).1 In addition, the grantor trust 
rules generally apply where the grantor is a controlled foreign 
corporation (as defined in sec. 957). Finally, the grantor 
trust rules continue to apply in determining whether a foreign 
corporation is characterized as a passive foreign investment 
company (``PFIC''). Thus, a foreign corporation cannot avoid 
PFIC status by transferring its assets to a grantor trust.
---------------------------------------------------------------------------
    \1\ The exception does not apply to the portion of any such trust 
attributable to any transfers made after September 19, 1995.
---------------------------------------------------------------------------
    If a U.S. beneficiary, or a family member of such a 
beneficiary,2 of an inbound grantor trust transfers 
property to the foreign grantor, such beneficiary generally is 
treated as a grantor of a portion of the trust to the extent of 
the transfer. This rule applies without regard to whether the 
foreign grantor is otherwise treated as the owner of any 
portion of such trust. However, this rule does not apply if the 
transfer is a sale of the property for full and adequate 
consideration or if the transfer is a gift that qualifies for 
the annual exclusion described in section 2503(b).
---------------------------------------------------------------------------
    \2\ For this purpose, a family member is generally defined as a 
brother, sister, spouse, ancestor or lineal descendant.
---------------------------------------------------------------------------
    The bill provides a special rule that allows the Secretary 
of the Treasury to recharacterize a transfer, directly or 
indirectly, from a partnership or foreign corporation which the 
transferee treats as a gift or bequest, to prevent the 
avoidance of the purpose of section 672(f).3
---------------------------------------------------------------------------
    \3\ See discussion below for reporting requirements under the bill 
with respect to certain foreign gifts and bequests received by a U.S. 
person.
---------------------------------------------------------------------------
    In a case where a foreign person (that would be treated as 
the owner of a trust but for the above rule) actually pays tax 
on the income of the trust to a foreign country, the Committee 
anticipates that Treasury regulations will provide that, for 
foreign tax credit purposes, U.S. beneficiaries that are 
subject to U.S. income tax on the same income will be treated 
as having paid the foreign taxes that are paid by the foreign 
grantor. Any resulting foreign tax credits would be subject to 
applicable foreign tax credit limitations.
    The bill provides a transition rule for any domestic trust 
that has a foreign grantor that is treated as the owner of the 
trust under present law, but becomes a nongrantor trust under 
the bill. If such a trust becomes a foreign trust before 
January 1, 1997, or if the assets of such a trust are 
transferred to a foreign trust before that date, such trust is 
exempt from the excise tax on transfers to a foreign trust 
otherwise imposed by section 1491. However, the bill's new 
reporting requirements and penalties are applicable to such a 
trust and its beneficiaries. In addition, the assets of such a 
trust will be treated as if they were recontributed to a 
nongrantor trust by the foreign grantor, with no recognition of 
gain or loss, on the date the trust ceases to be treated as a 
grantor trust. The nongrantor trust will have the same basis in 
such assets as did the grantor on the date the trust ceases to 
be treated as a grantor trust.

Distributions by foreign trusts through nominees

    The bill generally treats any amount paid to a U.S. person, 
where the amount was derived (directly or indirectly) from a 
foreign trust, as if paid by the foreign trust directly to the 
U.S. person. This rule disregards the role of an intermediary 
or nominee that may be interposed between a foreign trust and a 
U.S. beneficiary. Unlike present law, however, the rule applies 
whether or not the trust was created by a U.S. person. The rule 
does not apply to a withdrawal from a foreign trust by its 
grantor, with a subsequent gift or other payment to a U.S. 
person.

Effective date

    The provisions discussed in this part are effective on the 
date of enactment.
            b. Foreign trusts that are not grantor trusts

Interest charge on accumulation distributions

    The bill changes the interest rate applicable to 
accumulation distributions from foreign trusts from simple 
interest at a fixed rate of 6 percent to compound interest 
determined in the same manner as interest imposed on 
underpayments of tax under section 6621(a)(2). Simple interest 
is accrued at the rate of 6 percent through 1995. Beginning on 
January 1, 1996, however, compound interest based on the 
underpayment rate is imposed not only on tax amounts determined 
under the accumulation distribution rules but also on the total 
simple interest for pre-1996 periods, if any. For purposes of 
computing the interest charge, the accumulation distribution is 
allocated proportionately to prior trust years in which the 
trust has undistributed net income (and the beneficiary 
receiving the distribution was a U.S. citizen or resident), 
rather than to the earliest of such years. An accumulation 
distribution is treated as reducing proportionately the 
undistributed net income from prior years.
    The bill includes a formula to determine the period for 
which interest is charged using the underpayment rates under 
section 6621(a)(2). Under the formula, for example, if a 
foreign nongrantor trust had $100 of undistributed net income 
each year in years 1 through 3 and the trust distributes $100 
of accumulated income to its U.S. beneficiary in year 4, the 
taxpayer has to pay interest using the section 6621(a)(2) 
interest rates as if the income accrued for 2 years.4 In 
addition, the $100 accumulation distribution reduces the 
trust's undistributed net income by $33 each year for years 1 
through 3.5
---------------------------------------------------------------------------
    \4\ The number of years is determined as a weighted average as 
follows: ($100 x 3 years)+($100 x 2 years)+($100 x 1 year)$300=2
    \5\ That is, one-third of the $100 of distribution reduces the $100 
of undistributed net income for each of years 1, 2 and 3.
---------------------------------------------------------------------------

Loans to grantors or beneficiaries

    In the case of a loan of cash or marketable securities by 
the foreign trust to a U.S. grantor or a U.S. beneficiary (or a 
U.S. person related to such grantor or beneficiary 6), 
except to the extent provided by Treasury regulations, the bill 
treats the full amount of the loan as distributed to the 
grantor or beneficiary. The Committee expects that the Treasury 
regulations will provide an exception from this treatment for 
loans with arm's-length terms. In applying this exception, the 
Committee further expects consideration to be given to whether 
there is a reasonable expectation that a loan will be repaid. 
In addition, any subsequent transaction between the trust and 
the original borrower regarding the principal of the loan 
(e.g., repayment) is disregarded for all purposes of the Code. 
This provision does not apply to loans made to persons that are 
exempt from U.S. income tax.
---------------------------------------------------------------------------
    \6\ For this purpose, a person generally would be treated as 
related to the grantor or beneficiary if the relationship between such 
person and the grantor or beneficiary would result in a disallowance of 
losses under section 267 or 707(b), except that in applying section 
267(c)(4) an individual's family includes the spouses of the members of 
the family.
---------------------------------------------------------------------------

Effective date

    The provision to modify the interest charge on accumulation 
distributions applies to distributions after the date of 
enactment. The provision with respect to loans to U.S. 
grantors, U.S. beneficiaries or a related U.S. person related 
to such a grantor or beneficiary applies to loans made after 
September 19, 1995.
            c. Outbound foreign grantor trusts with U.S. grantors
    The bill makes several modifications to the general rule of 
section 679(a)(1) under which a U.S. person who transfers 
property to a foreign trust generally is treated as the owner 
of the portion of the trust comprising that property for any 
taxable year in which there is a U.S. beneficiary of the trust. 
The bill also contains an amendment to conform the definition 
of certain foreign corporations the income of which is deemed 
to be accumulated for the benefit of a U.S. beneficiary to the 
definition of controlled foreign corporations (as defined in 
sec. 957(a)).

Sale or exchange at market value

    Present law contains several exceptions to grantor trust 
treatment under section 679(a)(1) described above. Under one of 
the exceptions, grantor trust treatment does not result from a 
transfer of property by a U.S. person to a foreign trust in the 
form of a sale or exchange at fair market value where gain is 
recognized to the transferor. In determining whether the trust 
paid fair market value to the transferor, the bill provides 
that obligations issued (or, to the extent provided by 
regulations, guaranteed) by the trust, by any grantor or 
beneficiary of the trust, or by any person related to any 
grantor or beneficiary 7 (referred to as ``trust 
obligations'') generally are not taken into account except as 
provided in Treasury regulations. The Committee expects that 
the Treasury regulations will provide an exception from this 
treatment for loans with arm's- length terms. In applying this 
exception, the Committee further expects consideration to be 
given to whether there is a reasonable expectation that a loan 
will be repaid. Principal payments by the trust on any such 
trust obligations generally will reduce the portion of the 
trust attributable to the property transferred (i.e., the 
portion of which the transferor is treated as the grantor).
---------------------------------------------------------------------------
    \7\ For this purpose, a person is treated as related to the grantor 
or beneficiary if the relationship between such person and the grantor 
or beneficiary would result in a disallowance of losses under section 
267 or 707(b), except that in applying section 267(c)(4) an 
individual's family includes the spouses of the members of the family.
---------------------------------------------------------------------------

Other transfers

    The bill adds a new exception to the general rule of 
section 679(a)(1) described above. Under the bill, a transfer 
of property to certain charitable trusts is exempt from the 
application of the rules treating foreign trusts with U.S. 
grantors and U.S. beneficiaries as grantor trusts.

Transferors or beneficiaries who become U.S. persons

    The bill applies the rule of section 679(a)(1) to certain 
foreign persons who transfer property to a foreign trust and 
subsequently become U.S. persons. A nonresident alien 
individual who transfers property, directly or indirectly, to a 
foreign trust and then becomes a resident of the United States 
within 5 years after the transfer generally is treated as 
making a transfer to the foreign trust on the individual's U.S. 
residency starting date (as defined in sec. 7701(b)(2)(A)). The 
amount of the deemed transfer is the portion of the trust 
(including undistributed earnings) attributable to the property 
previously transferred. Consequently, the individual generally 
is treated under section 679(a)(1) as the owner of that portion 
of the trust in any taxable year in which the trust has U.S. 
beneficiaries. The bill's reporting requirements and penalties 
(discussed below) also are applicable.
    Under the bill, a beneficiary is not treated as a U.S. 
person for purposes of determining whether the transferor of 
property to a foreign trust is taxed as a grantor with respect 
to any portion of a foreign trust if such beneficiary first 
became a U.S. person more than 5 years after the transfer.

Outbound trust migrations

     The bill applies the rules of section 679(a)(1) to a U.S. 
person that transferred property to a domestic trust if the 
trust subsequently becomes a foreign trust while the transferor 
is still alive. Such a person is deemed to make a transfer to 
the foreign trust on the date of the migration. The amount of 
the deemed transfer is the portion of the trust (including 
undistributed earnings) attributable to the property previously 
transferred. Consequently, the individual generally is treated 
under the rules of section 679(a)(1) as the owner of that 
portion of the trust in any taxable year in which the trust has 
U.S. beneficiaries. The bill's reporting requirements and 
penalties (discussed below) also are applicable.

Effective date

    The provisions to amend section 679 apply to transfers of 
property after February 6, 1995.
            d. Anti-abuse regulatory authority

In general

    The bill includes an anti-abuse rule which authorizes the 
Secretary of the Treasury to issue regulations, on or after the 
date of enactment, that may be necessary or appropriate to 
carry out the purposes of the rules applicable to estates, 
trusts and beneficiaries, including regulations to prevent the 
avoidance of those purposes.

Effective date

    The provision is effective on the date of enactment.
            e. Residence of trusts

Treatment as U.S. person

     The bill establishes a two-part objective test for 
determining for tax purposes whether a trust is foreign or 
domestic. If both parts of the test are satisfied, the trust is 
treated as domestic.
    Under the first part of the proposed test, in order for a 
trust to be treated as domestic, a U.S. court (i.e., Federal, 
State, or local) must be able to exercise primary supervision 
over the administration of the trust. The Committee expects 
that this test generally will be satisfied by any trust 
instrument that specifies that it is to be governed by the laws 
of any State.
    Under the second part of the proposed test, in order for a 
trust to be treated as domestic, one or more U.S. fiduciaries 
must have the authority to control all substantial decisions of 
the trust. The Committee expects that this test will be 
satisfied in any case where fiduciaries that are U.S. persons 
hold a majority of the fiduciary power (whether by vote or 
otherwise), and where no foreign fiduciary, such as a ``trust 
protector'' or other trust advisor, has the power to veto 
important decisions of the U.S. fiduciaries. The Committee 
further expects that, in applying this test, a reasonable 
period of time will be allowed for a trust to replace a U.S. 
fiduciary that resigns or dies before the trust is treated as 
foreign.
    Under the bill, a foreign trust is defined as a trust other 
than a trust that is determined to be domestic under both the 
court-supervision test and the U.S. fiduciary test.

Outbound migration of domestic trusts

    Under the bill, if a domestic trust changes its situs and 
becomes a foreign trust, the trust is treated as having made a 
transfer of its assets to a foreign trust and is subject to the 
35-percent excise tax imposed by present-law section 1491 
unless one of the exceptions to this excise tax is applicable. 
The U.S. grantor also is required to report the transfer under 
the reporting requirements described below. Failure to report 
such a transfer would result in penalties (discussed below).

Effective date

    The provision to modify the treatment of a trust as a U.S. 
person applies to taxable years beginning after December 31, 
1996. In addition, if the trustee of a trust so elects, the 
provision would apply to taxable years ending after the date of 
enactment. The amendment to section 1491 is effective on the 
date of enactment.
            f. Information reporting and penalties relating to foreign 
                    trusts
    The bill expands the reporting requirements with respect to 
foreign trusts if there is a U.S. grantor of the foreign trust 
or a distribution from the foreign trust to a U.S. person. The 
bill requires the responsible parties to file information 
returns with the Treasury Department upon the occurrence of 
certain events. A failure to comply with the reporting 
requirements will result in increased monetary penalties.

Information reporting requirements

    First, the bill requires the grantor, transferor or 
executor (i.e., the ``responsible party'') to notify the 
Treasury Department upon the occurrence of certain reportable 
events. The term ``reportable event'' means the creation of any 
foreign trust by a U.S. person, the direct and indirect 
transfer of any money or property to a foreign trust, including 
a transfer by reason of death, and the death of a U.S. citizen 
or resident if any portion of a foreign trust was included in 
the gross estate of the decedent. A reportable event does not 
include any transfer of property to a foreign trust in exchange 
for consideration of at least the fair market value of the 
property. 8 Also excluded are transfers to certain pension 
trusts, nonexempt employees' trusts described in section 
402(b), and charitable trusts. The required return provides 
information regarding the amount of money or other property 
transferred to the trust, the identities of the trustee and 
beneficiaries of the foreign trust, and other items as 
prescribed by the Secretary of the Treasury.
---------------------------------------------------------------------------
    \8\ For this purpose, consideration other than cash is taken into 
account at its fair market value and the rules of section 679(a)(3), as 
modified by the bill, apply (see earlier discussion).
---------------------------------------------------------------------------
    Second, a U.S. person that is treated as the owner of any 
portion of a foreign trust is required to ensure that the trust 
files an annual return to provide full accounting of all the 
trust activities for the taxable year, the name of the U.S. 
agent for the trust, and other information as prescribed by the 
Secretary of the Treasury. 9 In addition, unless a U.S. 
person is authorized to accept service of process as the 
trust's limited agent with respect to any request by the 
Treasury Department to examine records or to take testimony, 
and any summons for such records or testimony, in connection 
with the tax treatment of any items related to the trust, the 
Treasury Secretary is entitled to determine the tax 
consequences of amounts to be taken into account under the 
grantor trust rules (secs. 671 through 679). This limited 
agency relationship does not constitute an agency relationship 
for any other purpose under Federal or State law. The Committee 
intends that the Treasury Secretary's exercise of its authority 
to make such a determination will be subject to judicial review 
under an arbitrary or capricious standard, which provides a 
high degree of deference to such determination. For this 
purpose, rules similar to the rules of sections 6038A(e)(2) and 
(4) with respect to enforcement of requests for certain records 
apply.
---------------------------------------------------------------------------
    \9\ The Committee intends that the Treasury regulations would 
require the trust to furnish information to U.S. grantors and 
beneficiaries concerning income reportable by such persons in a manner 
similar to that used to report the items on schedule K-1 of Form 1041.
---------------------------------------------------------------------------
    Third, any U.S. person that receives (directly or 
indirectly) any distribution from a foreign trust is required 
to file a return to report the name of the trust, the aggregate 
amount of the distributions received, and other information 
that the Secretary of the Treasury may prescribe. In cases 
where adequate records are not provided to the Secretary of 
Treasury to determine the proper treatment of any distributions 
from a foreign trust, the distribution is includable in the 
gross income of the U.S. distributee and is treated as an 
accumulation distribution from the middle year of a foreign 
trust (i.e., computed by taking the number of years that the 
trust has been in existence divided by 2) for purposes of 
computing the interest charge applicable to such distribution, 
unless the foreign trust elects to have a U.S. agent for the 
limited purpose of accepting service of process (as described 
above).

Monetary penalties for failure to report

    Under the bill, a person that fails to provide the required 
notice or return in cases involving the transfer of property to 
a new or existing foreign trust, or a distribution by a foreign 
trust to a U.S. person, is subject to an initial penalty equal 
to 35 percent of the gross reportable amount. A failure to 
provide an annual reporting of trust activities will result in 
an initial penalty equal to 5 percent of the gross reportable 
amount.
    In cases involving a transfer of property to a foreign 
trust, the gross reportable amount is the gross value of the 
property transferred. In cases involving the death of a U.S. 
citizen or resident whose estate includes any portion of a 
foreign trust, the gross amount is the greater of: (a) the 
amount the decedent is treated as owning under the grantor 
trust rules or (b) the value of the property includable in the 
gross estate of the decedent. In cases where annual reporting 
of trust activities is required, the gross reportable amount is 
the gross value of the portion of the foreign trust's assets 
treated as owned by the U.S. grantor at the close of the year, 
and in cases involving a distribution to a U.S. beneficiary of 
a foreign trust, the gross reportable amount is the amount of 
the distribution to the beneficiary. An additional $10,000 
penalty is imposed for continued failure for each 30-day period 
(or fraction thereof) beginning 90 days after the Treasury 
Department notifies the responsible party of such failure. The 
same penalties are applicable to a failure to report (as 
required by present law) certain transfers to other foreign 
entities. Such penalties are subject to a reasonable cause 
exception. The Committee intends that the reasonable cause 
standard will be satisfied upon the showing of reasonable 
efforts to comply with the reporting requirements. In no event 
will the total amount of penalties exceed the gross reportable 
amount.

Effective date

    The reporting requirements and applicable penalties 
generally apply to reportable events occurring or distributions 
received after the date of enactment. The annual reporting 
requirement and penalties applicable to U.S. grantors apply to 
taxable years of such persons beginning after December 31, 
1995.
            g. Reporting of foreign gifts
    The bill generally requires any U.S. person (other than 
certain tax-exempt organizations) that receives purported gifts 
or bequests from foreign sources total more than $10,000 during 
the taxable year to report them to the Treasury Department. The 
threshold for this reporting requirement is indexed for 
inflation. The definition of a gift to a U.S. person for this 
purpose excludes amounts that are qualified tuition or medical 
payments made on behalf of the U.S. person, as defined for gift 
tax purposes (sec. 2503(e)(2)), and amounts that are 
distributions to a U.S. beneficiary of a foreign trust if such 
amounts are properly disclosed under the reporting requirements 
of the bill. If the U.S. person fails, without reasonable 
cause, to report foreign gifts as required, the Treasury 
Secretary is authorized to determine the tax treatment of the 
unreported gifts. The Committee intends that the Treasury 
Secretary's exercise of its authority to make such a 
determination will be subject to judicial review under an 
arbitrary or capricious standard, which provides a high degree 
of deference to such determination. In addition, the U.S. 
person is subject to a penalty equal to 5 percent of the amount 
of the gift for each month that the failure continues, with the 
total penalty not to exceed 25 percent of such amount.

Effective date

    The provision applies to amounts received after the date of 
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:

Motion to report the bill

    The bill, H.R. 3286, was ordered favorably reported, as 
amended, on May 1, 1996, by voice vote, with a quorum present.

Roll call vote on amendment

    An amendment by Mr. Rangel, as amended by Mr. Jacobs, to 
Title II to restore current law language regarding the use of 
cultural, ethnic or racial considerations in placement of 
children into foster care or adoptive homes was defeated by a 
roll call vote of 15 yeas to 22 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Gibbons......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mr. Jacobs.......        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Ford.........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Hancock....................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Zimmer.....................  ........        X   .........  Mr. Lewis........  ........  ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. Payne........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Collins....................  ........        X   .........                                                  
Mr. Portman....................  ........        X   .........                                                  
Mr. Hayes......................  ........  ........  .........                                                  
Mr. Laughlin...................  ........        X   .........                                                  
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

                     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 the revenue provisions 
of the bill, H.R. 3286, as reported.
    The revenue provisions of the bill, as amended, are 
estimated to have the following effects on the budget for 
fiscal years 1996-2002:

    ESTIMATED BUDGET EFFECTS OF THE REVENUE PROVISIONS CONTAINED IN H.R. 3286 AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS, FISCAL YEARS 1996-2002    
                                                                [In millions of dollars]                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
              Provision                          Effective               1996     1997     1998     1999     2000     2001     2002    1996-00   1996-02
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. $5,000 credit for adoption         tyba 12/31/96..................  .......      -30     -305     -327     -348     -354     -357    -1,010    -1,721
 expenses: phase out beginning at                                                                                                                       
 $75,000 AGI; require finalized                                                                                                                         
 adoption only for foreign                                                                                                                              
 adoptions; special needs adoptions.                                                                                                                    
2. Remove business exclusion for      tyba 12/31/96..................  .......       63      100      104      107      109      111       373       593
 energy subsidies provided by public                                                                                                                    
 utilities.                                                                                                                                             
3. Modify treatment of foreign        (\1\)..........................       52      143      171      180      188      197      206       734     1,137
 trusts.                                                                                                                                                
                                     -------------------------------------------------------------------------------------------------------------------
      Net totals....................  ...............................       52      176      -34      -43      -53      -48      -40        97         9
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Various effective dates depending on provisions.                                                                                                    
                                                                                                                                                        
Source: Joint Committee on Taxation.                                                                                                                    
                                                                                                                                                        
Note: Details may not add to totals due to rounding.                                                                                                    

    B. Statement Regarding New Budget Authority and Tax Expenditures

Budget authority

    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 involves no new or increased 
budget authority.

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 involves a new tax expenditure 
for the Title I adoption credit and exclusion provisions (sec. 
101) and reduced tax expenditures for the Title IV provision 
relating to exclusion for business energy conservation 
subsidies (sec. 401). (See the budget table in 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 by CBO is provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                       Washington, DC, May 2, 1996.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office (CBO) 
has estimated the budgetary effects of H.R. 3286, the Adoption 
Promotion and Stability Act of 1996, as ordered reported by the 
Committee on Ways and Means on May 1, 1996. Because H.R. 3286 
would affect revenues, H.R. 3286 would be subject to the pay-
as-you go procedures under Section 252 of the Balanced Budget 
and Emergency Deficit Control Act of 1985.
    The attached table displays the federal budgetary effects 
of H.R. 3286. The revenue estimates for Titles I and IV of the 
bill have been provided by the Joint Committee on Taxation. The 
total revenue effects of the bill amount to increases of $52 
million in 1996, $176 million in 1997, and $9 million over the 
1996-2002 period. Titles I and IV contain no intergovernmental 
mandates, as defined in Public Law 104-4, and would impose no 
direct costs on state, local, or tribal governments. These 
titles do, however, contain private sector mandates, as 
described in the attached private sector mandate statement.
    CBO estimates that the provisions of Title II that would 
remove barriers to interethnic adoptions would have a 
negligible effect on federal outlays. Although state 
governments or any other entity in the state that receives any 
federal funds for adoption or foster care placements could pay 
penalties for the failure to follow the provisions of Title II, 
the penalties are sufficiently large that states would comply 
with the new provisions, and the penalties collected would be 
negligible.
    Section 4 of the Unfunded Mandates Reform Act of 1995 
excludes from the application of that act legislative 
provisions that establish or enforce statutory rights that 
prohibit discrimination on the basis of race, color, or 
national origin. CBO has determined that the provisions in 
Titles II fit within that exclusion.
    The staff contacts are Justin Latus for federal issues and 
Karen McVey for state, local, and tribal issues.
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).
    Attachments.
    Estimated budgetary effects of H.R. 3286:

----------------------------------------------------------------------------------------------------------------
                                                     1996     1997     1998     1999     2000     2001     2002 
----------------------------------------------------------------------------------------------------------------
                                                 Direct spending                                                
                                                                                                                
Title II--Interethnic adoptions:                                                                                
    Estimated budget authority:..................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)
    Estimated outlays............................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)
                                                    Revenues                                                    
                                                                                                                
Title I--Credit for adoption assistance..........  .......      -30     -305     -327     -348     -354     -357
Title IV--Revenue Offsets........................       52      206      271      284      295      306      317
                                                  --------------------------------------------------------------
      Total:.....................................       52      176      -34      -43      -53      -48      -40
Net effect on the deficit........................      -52     -176       34       43       53       48       40
----------------------------------------------------------------------------------------------------------------
\1\ Indicates less than $500,000.                                                                               
Note: Revenue estimates provided by the Joint Committee on Taxation.                                            

    Pay-as-you-go considerations:

------------------------------------------------------------------------
                                       1996         1997         1998   
------------------------------------------------------------------------
Change in outlays................            0            0            0
Change in revenues...............           52          176          -34
------------------------------------------------------------------------

    Congressional Budget Office Estimate of Costs of Private Sector 
                                Mandates

    1. Bill number: H.R. 3286.
    2. Bill title: Adoption Promotion and Stability Act of 
1996.
    3. Bill status: As ordered reported by the House Committee 
on Ways and Means on May 1, 1996.
    4. Bill purpose: The purpose of the bill is to defray 
adoption costs and promote the adoption of minority children.
    5. Private sector mandates contained in the bill: H.R. 3286 
contains mandates as defined in Public Law 104-4 that would 
affect taxes paid by private sector entities. In particular, 
the bill would remove the business exclusion for energy 
subsidies provided by public utilities and modify the treatment 
of foreign trusts. In addition to these mandates, the bill 
includes a new credit for adoption expenses that would reduce 
tax payments.
    6. Estimated direct cost to the private sector: The Joint 
Committee on taxation (JCT) estimates that the direct private 
sector costs of the tax increases in H.R. 3286 would be no less 
than the amounts that appear in the following table.

----------------------------------------------------------------------------------------------------------------
                                                                       1996     1997     1998     1999     2000 
----------------------------------------------------------------------------------------------------------------
Remove business exclusion for energy subsidies provided by public                                               
 utilities.........................................................  .......       63      100      104      107
Modify treatment of foreign trusts.................................       52      143      171      180      188
----------------------------------------------------------------------------------------------------------------

    In addition to these mandates, the bill also provides for a 
reduction in taxes. At this point, it is unclear to CBO whether 
under Public law 104-4 this tax reduction should be viewed as 
an offset to the direct costs of the mandates in the bill. JCT 
estimates that the savings associated with the tax reduction in 
H.R. 3286 would be as displayed in the following table.

----------------------------------------------------------------------------------------------------------------
                                                              1996       1997       1998       1999       2000  
----------------------------------------------------------------------------------------------------------------
Credit for adoption expenses.............................  .........        -30       -305       -327       -348
----------------------------------------------------------------------------------------------------------------

    7. Appropriations or other Federal financial assistance: 
None.
    8. Previous CBO estimates: None.
    9. Estimate prepared by: Daniel Mont (non-tax items) and 
Rick Kasten (tax items).
    10. Estimate approved by: Joseph R. Antos, Assistant 
Director for Health and Human Resources.

     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 the 
result of the Committee's oversight activities concerning the 
encouragement of adoptions of children and the costs of 
adoptions to families, barriers to interethnic adoptions, and 
needed revenue offsets (repealing the exclusion for business 
energy conservation subsidies provided by utilities and 
modification of the foreign trust tax rules) that the Committee 
concluded that it is appropriate and timely to enact the 
provisions contained in the bill as amended.

    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 the 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 national 
economy.

              D. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
    The Committee has determined that two of the revenue 
provisions of the bill contain Federal mandates on the private 
sector: (1) the provision to remove the business exclusion for 
energy subsidies provided by public utilities and (2) the 
provision to modify the treatment of foreign trusts. The first 
provision repeals an exclusion from gross income for energy 
subsidies provided to a business by a public utility. The 
second provision changes the tax treatment applicable to trusts 
and modifies the information reporting requirements and 
penalties applicable to foreign trusts. These two provisions 
will increase the Federal tax liabilities of certain taxpayers 
and, in the case of the foreign trust provisions, will also 
impose costs related to the new recordkeeping and reporting 
requirements imposed by the bill.
    The cost required to comply with each mandate generally is 
no greater than the revenue estimate for the provision. 
Benefits from the provisions include improved administration of 
the Federal income tax laws and a more accurate measurement of 
gross income for Federal income tax purposes. The Committee 
believes the benefits of the bill are greater than the costs 
required to comply with the Federal private sector mandates 
contained in the bill.
    The provision relating to the business energy exclusion 
results in a better measurement of gross income for Federal 
income tax purposes. A business would be permitted to 
depreciate any property received by a public utility that 
previously had been excluded from income. Therefore, relative 
to the revenue estimate, the cost of the Federal private sector 
mandate is reduced to the extent of future depreciation 
deductions permitted.
    The provisions modifying the treatment of foreign trusts 
contain Federal private sector mandates to the extent the 
provisions impose new reporting requirements and recharacterize 
the income of such trusts to ensure that U.S. Federal income 
tax is paid. In general, these rules are designed to reflect 
changes in the uses of foreign trusts and to limit the 
avoidance of U.S. taxes through the use of such trusts.
    The revenue-raising provisions of the bill are used to 
offset the cost of providing a tax credit to individuals who 
adopt a child. This tax credit furthers the social policy goal 
of ensuring that families who desire to adopt a child have the 
financial resources to do so. The revenue-raising provisions 
are critical to achieving this goal.
    The revenue provisions of the bill do not contain any 
intergovernmental mandates.
    The revenue provisions of the bill affect activities that 
are only engaged in by the private sector and, thus, do not 
affect the competitive balance between State, local, or tribal 
governments and the private sector.

                 E. Applicability of House Rule XXI5(c)

    Rule XXI5(c) of the Rules of the House of Representatives 
provides that ``No bill or joint resolution, amendment, or 
conference report carrying a Federal income tax rate increase 
shall be considered as passed or agreed to unless so determined 
by a vote of not less than three-fifths of the Members 
voting.'' The Committee has carefully reviewed the provisions 
of the bill to determine whether any of these provisions 
constitute a Federal income tax rate increase within the 
meaning of the House rules. It is the opinion of the Committee 
that there is no provision in the bill that constitutes a 
Federal income tax rate increase within the meaning of House 
rule XXI5(c) or (d).

       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 A--Nonrefundable Personal Credits

        Sec. 21. Expenses for household and dependent care services 
                  necessary for gainful employment.
     * * * * * * *
        Sec. 23. Adoption expenses.
          * * * * * * *

SEC. 23. ADOPTION EXPENSES.

  (a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this 
chapter for the taxable year the amount of the qualified 
adoption expenses paid or incurred by the taxpayer during such 
taxable year.
  (b) Limitations.--
          (1) Dollar limitation.--The aggregate amount of 
        qualified adoption expenses which may be taken into 
        account under subsection (a) for all taxable years with 
        respect to the adoption of a child by the taxpayer 
        shall not exceed $5,000.
          (2) Income limitation.--The amount allowable as a 
        credit under subsection (a) for any taxable year shall 
        be reduced (but not below zero) by an amount which 
        bears the same ratio to the amount so allowable 
        (determined without regard to this paragraph but with 
        regard to paragraph (1)) as--
                  (A) the amount (if any) by which the 
                taxpayer's adjusted gross income (determined 
                without regard to sections 911, 931, and 933) 
                exceeds $75,000, bears to
                  (B) $40,000.
          (3) Denial of double benefit.--
                  (A) In general.--No credit shall be allowed 
                under subsection (a) for any expense for which 
                a deduction or credit is allowable under any 
                other provision of this chapter.
                  (B) Grants.--No credit shall be allowed under 
                subsection (a) for any expense to the extent 
                that funds for such expense are received under 
                any Federal, State, or local program. The 
                preceding sentence shall not apply to expenses 
                for the adoption of a child with special needs.
                  (C) Reimbursement.--No credit shall be 
                allowed under subsection (a) for any expense to 
                the extent that such expense is reimbursed and 
                the reimbursement is excluded from gross income 
                under section 137.
  (c) Carryforwards of Unused Credit.--If the credit allowable 
under subsection (a) for any taxable year exceeds the 
limitation imposed by section 26(a) for such taxable year 
reduced by the sum of the credits allowable under this subpart 
(other than this section), such excess shall be carried to the 
succeeding taxable year and added to the credit allowable under 
subsection (a) for such taxable year. No credit may be carried 
forward under this subsection to any taxable year following the 
fifth taxable year after the taxable year in which the credit 
arose. For purposes of the preceding sentence, credits shall be 
treated as used on a first-in first-out basis.
  (d) Definitions.--For purposes of this section--
          (1) Qualified adoption expenses.--The term `qualified 
        adoption expenses' means reasonable and necessary 
        adoption fees, court costs, attorney fees, and other 
        expenses--
                  (A) which are directly related to, and the 
                principal purpose of which is for, the legal 
                adoption of an eligible child by the taxpayer, 
                and
                  (B) which are not incurred in violation of 
                State or Federal law or in carrying out any 
                surrogate parenting arrangement.
          (2) Expenses for adoption of spouse's child not 
        eligible.--The term `qualified adoption expenses' shall 
        not include any expenses in connection with the 
        adoption by an individual of a child who is the child 
        of such individual's spouse.
          (3) Eligible child.--The term `eligible child' means 
        any individual--
                  (A) who has not attained age 18 as of the 
                time of the adoption, or
                  (B) who is physically or mentally incapable 
                of caring for himself.
          (4) Child with special needs.--The term `child with 
        special needs' means any child if--
                  (A) a State has determined that the child 
                cannot or should not be returned to the home of 
                his parents, and
                  (B) such State has determined that there 
                exists with respect to the child a specific 
                factor or condition (such as his ethnic 
                background, age, or membership in a minority or 
                sibling group, or the presence of factors such 
                as medical conditions or physical, mental, or 
                emotional handicaps) because of which it is 
                reasonable to conclude that such child cannot 
                be placed with adoptive parents without 
                providing adoption assistance.
  (e) Special Rules for Foreign Adoptions.--In the case of a 
foreign adoption--
          (1) subsection (a) shall not apply to any qualified 
        adoption expense with respect to such adoption unless 
        such adoption becomes final, and
          (2) any such expense which is paid or incurred before 
        the taxable year in which such adoption becomes final 
        shall be taken into account under this section as if 
        such expense were paid or incurred during such year.
  (f) Married Couples Must File Joint Returns.--Rules similar 
to the rules of paragraphs (2), (3), and (4) of section 21(e) 
shall apply for purposes of this section.
  (g) Basis Adjustments.--For purposes of this subtitle, if a 
credit is allowed under this section for any expenditure with 
respect to any property, the increase in the basis of such 
property which would (but for this subsection) result from such 
expenditure shall be reduced by the amount of the credit so 
allowed.
  (h) Regulations.--The Secretary shall prescribe such 
regulations as may be appropriate to carry out this section and 
section 137, including regulations which treat unmarried 
individuals who pay or incur qualified adoption expenses with 
respect to the same child as 1 taxpayer for purposes of 
applying the dollar limitation in subsection (b)(1) of this 
section and in section 137(b)(1).
          * * * * * * *

              Subchapter B--Computation of Taxable Income

          * * * * * * *

          PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME

          * * * * * * *

SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.

  (a) * * *
  (b) Taxpayers to Whom Subsection (a) Applies.--
          (1) * * *
          (2) Modified adjusted gross income.--For purposes of 
        this subsection, the term ``modified adjusted gross 
        income'' means adusted gross income--
                  (A) determined without regard to this section 
                and sections 135, 137, 911, 931, and 933, and
                  (B) increased by the amount of interest 
                received or accrued by the taxpayer during the 
                taxable year which is exempt from tax.
          * * * * * * *

        PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

        Sec. 101. Certain death benefits.
     * * * * * * *
        [Sec. 137. Cross reference to other Acts.]
        Sec. 137. Adoption assistance programs.
        Sec. 138. Cross reference to other Acts.
          * * * * * * *

SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER 
                    EDUCATION TUITION AND FEES

  (a) * * *
          * * * * * * *
  (c) Definitions.--For purposes of this section--
          (1) * * *
          * * * * * * *
          (4) Modified adjusted gross income.--The term 
        ``modified adjusted gross income'' means the adjusted 
        gross income of the taxpayer for the taxable year 
        determined--
                  (A) without regard to this section and 
                sections 137, 911, 931, and 933, and
                  (B) after the application of sections 86, 
                469, and 219.
          * * * * * * *

SEC. 136. ENERGY CONSERVATION SUBSIDIES PROVIDED BY PUBLIC UTILITIES.

  [(a) Exclusion.--
          [(1) In general.--Gross income shall not include the 
        value of any subsidy provided (directly or indirectly) 
        by a public utility to a customer for the purchase or 
        installation of any energy conservation measure.
          [(2) Limitation on exclusion for nonresidential 
        property.--
                  [(A) In general.--In the case of any subsidy 
                provided with respect to any energy 
                conservation measure referred to in subsection 
                (c)(1)(B), only the applicable percentage of 
                such subsidy shall be excluded from gross 
                income under paragraph (1).
                  [(B) Applicable percentage.--For purposes of 
                subparagraph (A), the term ``applicable 
                percentage'' means--
                          [(i) 40 percent in the case of 
                        subsidies provided during 1995,
                          [(ii) 50 percent in the case of 
                        subsidies provided during 1996, and
                          [(iii) 65 percent in the case of 
                        subsidies provided after 1996.]
  (a) Exclusion.--Gross income shall not include the value of 
any subsidy provided (directly or indirectly) by a public 
utility to a customer for the purchase or installation of any 
energy conservation measure.
          * * * * * * *
  (c) Energy Conservation Measure.--
          (1) In general.--For purposes of this section, the 
        term ``energy conservation measure'' means any 
        installation or modification primarily designed to 
        reduce consumption of electricity or natural gas or to 
        improve the management of [energy demand--
                  [(A) with respect to a dwelling unit, and
                  [(B) on or after January 1, 1995, with 
                respect to property other than dwelling units.
        The purchase and installation of specially defined 
        energy property shall be treated as an energy 
        conservation measure described in subparagraph (B).] 
        energy demand with respect to a dwelling unit.
          (2) Other definitions [and special rules].--For 
        purposes of this subsection--
                  [(A) Specially defined energy property.--The 
                term ``specially defined energy property'' 
                means--
                          [(i) a recuperator,
                          [(ii) a heat wheel,
                          [(iii) a regenerator,
                          [(iv) a heat exchanger,
                          [(v) a waste heat boiler,
                          [(vi) a heat pipe,
                          [(vii) an automatic energy control 
                        system,
                          [(viii) a turbulator,
                          (ix) a preheater,
                          [(x) a combustible gas recovery 
                        system,
                          [(xi) an economizer,
                          [(xii) modifications to alumina 
                        electrolytic cells,
                          [(xiii) modifications to chlor-alkali 
                        electrolytic cells, or
                          [(xiv) any other property of a kind 
                        specified by the Secretary by 
                        regulations, the principal purpose of 
                        which is reducing the amount of energy 
                        consumed in any existing industrial or 
                        commercial process and which is 
                        installed in connection with an 
                        existing industrial or commercial 
                        facility.]
                  [(B)] (A) Dwelling unit.--The term ``dwelling 
                unit'' has the meaning given such term by 
                section 280A(f)(1).
                  [(C)] (B) Public utility.--The term ``public 
                utility'' means a person engaged in the sale of 
                electricity or natural gas to residential, 
                commercial, or industrial customers for use by 
                such customers. For purposes of the preceding 
                sentence, the term 'person' includes the 
                Federal Government, a State or local government 
                or any political subdivision thereof, or any 
                instrumentality of any of the foregoing.
          * * * * * * *

SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

  (a) In General.--Gross income of an employee does not include 
amounts paid or expenses incurred by the employer for qualified 
adoption expenses in connection with the adoption of a child by 
an employee if such amounts are furnished pursuant to an 
adoption assistance program.
  (b) Limitations.--
          (1) Dollar limitation.--The aggregate amount 
        excludable from gross income under subsection (a) for 
        all taxable years with respect to the adoption of a 
        child by the taxpayer shall not exceed $5,000.
          (2) Income limitation.--The amount excludable from 
        gross income under subsection (a) for any taxable year 
        shall be reduced (but not below zero) by an amount 
        which bears the same ratio to the amount so excludable 
        (determined without regard to this paragraph but with 
        regard to paragraph (1)) as--
                  (A) the amount (if any) by which the 
                taxpayer's adjusted gross income exceeds 
                $75,000, bears to
                  (B) $40,000.
          (3) Determination of adjusted gross income.--For 
        purposes of paragraph (2), adjusted gross income shall 
        be determined--
                  (A) without regard to this section and 
                sections 911, 931, and 933, and
                  (B) after the application of sections 86, 
                135, 219, and 469.
  (c) Adoption Assistance Program.--For purposes of this 
section, an adoption assistance program is a plan of an 
employer--
          (1) under which the employer provides employees with 
        adoption assistance, and
          (2) which meets requirements similar to the 
        requirements of paragraphs (2), (3), and (5) of section 
        127(b).
An adoption reimbursement program operated under section 1052 
of title 10, United States Code (relating to armed forces) or 
section 514 of title 14, United States Code (relating to 
members of the Coast Guard) shall be treated as an adoption 
assistance program for purposes of this section.
  (d) Qualified Adoption Expenses.--For purposes of this 
section, the term `qualified adoption expenses' has the meaning 
given such term by section 23(d).
  (e) Certain Rules To Apply.--Rules similar to the rules of 
subsections (e) and (g) of section 23 shall apply for purposes 
of this section.

SEC. [137.] 138. CROSS REFERENCE TO OTHER ACTS.

  (a) * * *
          * * * * * * *

        PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

          * * * * * * *

SEC. 219. RETIREMENT SAVINGS.

  (a) * * *
          * * * * * * *
  (g) Limitation on Deduction for Active Participants in 
Certain Pension Plans.--
          (1) * * *
          * * * * * * *
          (3) Adjusted gross income; applicable dollar 
        amount.--For purposes of this subsection--
                  (A) Adjusted gross income.--Adjusted gross 
                income of any taxpayer shall be determined--
                          (i) after application of sections 86 
                        and 469, and
                          (ii) without regard to sections 135, 
                        137, and 911 or the deduction allowable 
                        under this section.
          * * * * * * *

       Subchapter E--Accounting Periods and Methods of Accounting

          * * * * * * *

                     PART II--METHODS OF ACCOUNTING

          * * * * * * *

           Subpart C--Taxable Year for Which Deductions Taken

          * * * * * * *

SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.

  (a) * * *
          * * * * * * *
  (i) $25,000 Offset for Rental Real Estate Activities.--
          (1) * * *
          * * * * * * *
          (3) Phase-out of exemption.--
                  (A) * * *
          * * * * * * *
                  (E) Adjusted gross income.--For purposes of 
                this paragraph, adjusted gross income shall be 
                determined without regard to--
                          (i) any amount includible in gross 
                        income under section 86,
                          [(ii) the amount excludable from 
                        gross income under section 135,]
                          (ii) the amounts excludable from 
                        gross income under sections 135 and 
                        137,
          * * * * * * *

      Subchapter J--Estates, Trusts, Beneficiaries, and Dependents

          * * * * * * *

               PART I--ESTATES, TRUSTS, AND BENEFICIARIES

          * * * * * * *

      Subpart A--General Rules for Taxation of Estates and Trusts

          * * * * * * *

SEC. 643. DEFINITIONS APPLICABLE TO SUBPARTS A, B, C, AND D

  (a) Distributable Net Income.--For purposes of this part, the 
term ``distributable net income'' means, with respect to any 
taxable year, the taxable income of the estate or trust 
computed with the following modifications--
          (1) * * *
          * * * * * * *
          (7) Abusive transactions.--The Secretary shall 
        prescribe such regulations as may be necessary or 
        appropriate to carry out the purposes of this part, 
        including regulations to prevent avoidance of such 
        purposes.
          * * * * * * *
  (h) Distributions by Certain Foreign Trusts Through 
Nominees.--For purposes of this part, any amount paid to a 
United States person which is derived directly or indirectly 
from a foreign trust of which the payor is not the grantor 
shall be deemed in the year of payment to have been directly 
paid by the foreign trust to such United States person.
  (i) Loans From Foreign Trusts.--For purposes of subparts B, 
C, and D--
          (1) General rule.--Except as provided in regulations, 
        if a foreign trust makes a loan of cash or marketable 
        securities directly or indirectly to--
                  (A) any grantor or beneficiary of such trust 
                who is a United States person, or
                  (B) any United States person not described in 
                subparagraph (A) who is related to such grantor 
                or beneficiary,
        the amount of such loan shall be treated as a 
        distribution by such trust to such grantor or 
        beneficiary (as the case may be).
          (2) Definitions and special rules.--For purposes of 
        this subsection--
                  (A) Cash.--The term ``cash'' includes foreign 
                currencies and cash equivalents.
                  (B) Related person.--
                          (i) In general.--A person is related 
                        to another person if the relationship 
                        between such persons would result in a 
                        disallowance of losses under section 
                        267 or 707(b). In applying section 267 
                        for purposes of the preceding sentence, 
                        section 267(c)(4) shall be applied as 
                        if the family of an individual includes 
                        the spouses of the members of the 
                        family.
                          (ii) Allocation.--If any person 
                        described in paragraph (1)(B) is 
                        related to more than one person, the 
                        grantor or beneficiary to whom the 
                        treatment under this subsection applies 
                        shall be determined under regulations 
                        prescribed by the Secretary.
                  (C) Exclusion of tax-exempts.--The term 
                ``United States person'' does not include any 
                entity exempt from tax under this chapter.
                  (D) Trust not treated as simple trust.--Any 
                trust which is treated under this subsection as 
                making a distribution shall be treated as not 
                described in section 651.
          (3) Subsequent transactions regarding loan 
        principal.--If any loan is taken into account under 
        paragraph (1), any subsequent transaction between the 
        trust and the original borrower regarding the principal 
        of the loan (by way of complete or partial repayment, 
        satisfaction, cancellation, discharge, or otherwise) 
        shall be disregarded for purposes of this title.
          * * * * * * *

         Subpart D--Treatment of Excess Distribution by Trusts

          * * * * * * *

SEC. 665. DEFINITIONS APPLICABLE TO SUBPART D

  (a) * * *
          * * * * * * *
  [(c) Special Rule Applicable to Distributions by Certain 
Foreign Trusts.--For purposes of this subpart, any amount paid 
to a United States person which is from a payor who is not a 
United States person and which is derived directly or 
indirectly from a foreign trust created by a United States 
person shall be deemed in the year of payment to have been 
directly paid by the foreign trust.]
  (d) Taxes Imposed on the Trust.--For purposes of this 
subpart--
          (1) * * *
          (2) Foreign trusts.--In the case of any foreign 
        trust, the term ``taxes imposed on the trust'' includes 
        the amount, reduced as provided in the last sentence of 
        paragraph (1), of any income, war profits, and excess 
        profits taxes imposed by any foreign country or 
        possession of the United States on such foreign trust 
        which, as determined under paragraph (1), are so 
        properly allocable. Under rules or regulations 
        prescribed by the Secretary, in the case of any foreign 
        trust of which the settlor or another person would be 
        treated as owner of any portion of the trust under 
        subpart E but for section 672(f), the term ``taxes 
        imposed on the trust'' includes the allocable amount of 
        any income, war profits, and excess profits taxes 
        imposed by any foreign country or possession of the 
        United States on the settlor or such other person in 
        respect of trust gross income.
          * * * * * * *

SEC. 668. INTEREST CHARGE ON ACCUMULATION DISTRIBUTIONS FROM FOREIGN 
                    TRUSTS.

  [(a) General Rule.--For purposes of the tax determined under 
section 667(a), the interest charge is an amount equal to 6 
percent of the partial tax computed under section 667(b) 
multiplied by a fraction--
          [(1) the numerator of which is the sum of the number 
        of taxable years between each taxable year to which the 
        distribution is allocated under section 666(a) and the 
        taxable year of the distribution (counting in each case 
        the taxable year to which the distribution is allocated 
        but not counting the taxable year of the distribution), 
        and
          [(2) the denominator of which is the number of 
        taxable years to which the distribution is allocated 
        under section 666(a).]
  (a) General Rule.--For purposes of the tax determined under 
section 667(a)--
          (1) Interest determined using underpayment rates.--
        The interest charge determined under this section with 
        respect to any distribution is the amount of interest 
        which would be determined on the partial tax computed 
        under section 667(b) for the period described in 
        paragraph (2) using the rates and the method under 
        section 6621 applicable to underpayments of tax.
          (2) Period.--For purposes of paragraph (1), the 
        period described in this paragraph is the period which 
        begins on the date which is the applicable number of 
        years before the date of the distribution and which 
        ends on the date of the distribution.
          (3) Applicable number of years.--For purposes of 
        paragraph (2)--
                  (A) In general.--The applicable number of 
                years with respect to a distribution is the 
                number determined by dividing--
                          (i) the sum of the products described 
                        in subparagraph (B) with respect to 
                        each undistributed income year, by
                          (ii) the aggregate undistributed net 
                        income.
                The quotient determined under the preceding 
                sentence shall be rounded under procedures 
                prescribed by the Secretary.
                  (B) Product described.--For purposes of 
                subparagraph (A), the product described in this 
                subparagraph with respect to any undistributed 
                income year is the product of--
                          (i) the undistributed net income for 
                        such year, and
                          (ii) the sum of the number of taxable 
                        years between such year and the taxable 
                        year of the distribution (counting in 
                        each case the undistributed income year 
                        but not counting the taxable year of 
                        the distribution).
          (4) Undistributed income year.--For purposes of this 
        subsection, the term ``undistributed income year'' 
        means any prior taxable year of the trust for which 
        there is undistributed net income, other than a taxable 
        year during all of which the beneficiary receiving the 
        distribution was not a citizen or resident of the 
        United States.
          (5) Determination of undistributed net income.--
        Notwithstanding section 666, for purposes of this 
        subsection, an accumulation distribution from the trust 
        shall be treated as reducing proportionately the 
        undistributed net income for undistributed income 
        years.
          (6) Periods before 1996.--Interest for the portion of 
        the period described in paragraph (2) which occurs 
        before January 1, 1996, shall be determined--
                  (A) by using an interest rate of 6 percent, 
                and
                  (B) without compounding until January 1, 
                1996.
          * * * * * * *

      Subpart E--Grantor and Others Treated as Substantial Owners

          * * * * * * *

SEC. 672. DEFINITIONS AND RULES.

  (a) * * *
          * * * * * * *
  (c) Related or Subordinate Party.--For purposes of this 
subpart, the term ``related or subordinate party'' means any 
nonadverse party who is--
          (1) the grantor's spouse if living with the grantor;
          (2) any one of the following: The grantor's father, 
        mother, issue, brother or sister; an employee of the 
        grantor; a corporation or any employee of a corporation 
        in which the stock holdings of the grantor and the 
        trust are significant from the viewpoint of voting 
        control; a subordinate employee of a corporation in 
        which the grantor is an executive.
For purposes of subsection (f) and sections 674 and 675, a 
related or subordinate party shall be presumed to be 
subservient to the grantor in respect of the exercise or 
nonexercise of the powers conferred on him unless such party is 
shown not to be subservient by a preponderance of the evidence.
          * * * * * * *
  [(f) Special Rule Where Grantor is Foreign Person.--
          [(1) In general.--If--
                  [(A) but for this subsection, a foreign 
                person would be treated as the owner of any 
                portion of a trust, and
                  [(B) such trust has a beneficiary who is a 
                United States person,
        such beneficiary shall be treated as the grantor of 
        such portion to the extent such beneficiary has made 
        transfers of property by gift (directly or indirectly) 
        to such foreign person. For purposes of the preceding 
        sentence, any gift shall not be taken into account to 
        the extent such gift would be excluded from taxable 
        gifts under section 2503(b).
          [(2) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        purposes of this subsection.]
  (f) Subpart Not To Result in Foreign Ownership.--
          (1) In general.--Notwithstanding any other provision 
        of this subpart, this subpart shall apply only to the 
        extent such application results in an amount being 
        currently taken into account (directly or through 1 or 
        more entities) under this chapter in computing the 
        income of a citizen or resident of the United States or 
        a domestic corporation.
          (2) Exceptions.--
                  (A) Certain revocable and irrevocable 
                trusts.--Paragraph (1) shall not apply to any 
                trust if--
                          (i) the power to revest absolutely in 
                        the grantor title to the trust property 
                        is exercisable solely by the grantor 
                        without the approval or consent of any 
                        other person or with the consent of a 
                        related or subordinate party who is 
                        subservient to the grantor, or
                          (ii) the only amounts distributable 
                        from such trust (whether income or 
                        corpus) during the lifetime of the 
                        grantor are amounts distributable to 
                        the grantor or the spouse of the 
                        grantor.
                  (B) Compensatory trusts.--Except as provided 
                in regulations, paragraph (1) shall not apply 
                to any portion of a trust distributions from 
                which are taxable as compensation for services 
                rendered.
          (3) Special rules.--Except as otherwise provided in 
        regulations prescribed by the Secretary--
                  (A) a controlled foreign corporation (as 
                defined in section 957) shall be treated as a 
                domestic corporation for purposes of paragraph 
                (1), and
                  (B) paragraph (1) shall not apply for 
                purposes of applying section 1296.
          (4) Recharacterization of purported gifts.--In the 
        case of any transfer directly or indirectly from a 
        partnership or foreign corporation which the transferee 
        treats as a gift or bequest, the Secretary may 
        recharacterize such transfer in such circumstances as 
        the Secretary determines to be appropriate to prevent 
        the avoidance of the purposes of this subsection.
          (5) Special rule where grantor is foreign person.--
                  If--(A) but for this subsection, a foreign 
                person would be treated as the owner of any 
                portion of a trust, and
                  (B) such trust has a beneficiary who is a 
                United States person,
        such beneficiary shall be treated as the grantor of 
        such portion to the extent such beneficiary has made 
        transfers of property by gift (directly or indirectly) 
        to such foreign person. For purposes of the preceding 
        sentence, any gift shall not be taken into account to 
        the extent such gift would be excluded from taxable 
        gifts under section 2503(b).
          (6) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection, including 
        regulations providing that paragraph (1) shall not 
        apply in appropriate cases.
          * * * * * * *

SEC. 679. FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES 
                    BENEFICIARIES.

  (a) Transferor Treated as Owner.--
          (1) In general.-- A United States person who directly 
        or indirectly transfers property to a foreign trust 
        (other than a trust described in [section 404(a)(4) or 
        section 404A] 6048(a)(3)(B)(ii)) shall be treated as 
        the owner for his taxable year of the portion of such 
        trust attributable to such property if for such year 
        there is a United States beneficiary of any portion of 
        such trust.
          (2) Exceptions.-- Paragraph (1) shall not apply--
                  (A) Transfers by reason of death.--To any 
                transfer by reason of the death of the 
                transferor.
                  [(B) Transfers where gain is recognized to 
                transferor.--To any sale or exchange of the 
                property at its fair market value in a 
                transaction in which all of the gain to the 
                transferor is realized at the time of the 
                transfer and is recognized either at such time 
                or is returned as provided in section 453.]
                  (B) Transfers at fair market value.--To any 
                transfer of property to a trust in exchange for 
                consideration of at least the fair market value 
                of the transferred property. For purposes of 
                the preceding sentence, consideration other 
                than cash shall be taken into account at its 
                fair market value.
          * * * * * * *
          (3) Certain obligations not taken into account under 
        fair market value exception.--
                  (A) In general.--In determining whether 
                paragraph (2)(B) applies to any transfer by a 
                person described in clause (ii) or (iii) of 
                subparagraph (C), there shall not be taken into 
                account--
                          (i) except as provided in 
                        regulations, any obligation of a person 
                        described in subparagraph (C), and
                          (ii) to the extent provided in 
                        regulations, any obligation which is 
                        guaranteed by a person described in 
                        subparagraph (C).
                  (B) Treatment of principal payments on 
                obligation.--Principal payments by the trust on 
                any obligation referred to in subparagraph (A) 
                shall be taken into account on and after the 
                date of the payment in determining the portion 
                of the trust attributable to the property 
                transferred.
                  (C) Persons described.--The persons described 
                in this subparagraph are--
                          (i) the trust,
                          (ii) any grantor or beneficiary of 
                        the trust, and
                          (iii) any person who is related 
                        (within the meaning of section 
                        643(i)(2)(B)) to any grantor or 
                        beneficiary of the trust.
          (4) Special rules applicable to foreign grantor who 
        later becomes a united states person.--
                  (A) In general.--If a nonresident alien 
                individual has a residency starting date within 
                5 years after directly or indirectly 
                transferring property to a foreign trust, this 
                section and section 6048 shall be applied as if 
                such individual transferred to such trust on 
                the residency starting date an amount equal to 
                the portion of such trust attributable to the 
                property transferred by such individual to such 
                trust in such transfer.
                  (B) Treatment of undistributed income.--For 
                purposes of this section, undistributed net 
                income for periods before such individual's 
                residency starting date shall be taken into 
                account in determining the portion of the trust 
                which is attributable to property transferred 
                by such individual to such trust but shall not 
                otherwise be taken into account.
                  (C) Residency starting date.--For purposes of 
                this paragraph, an individual's residency 
                starting date is the residency starting date 
                determined under section 7701(b)(2)(A).
          (5) Outbound trust migrations.--If--
                  (A) an individual who is a citizen or 
                resident of the United States transferred 
                property to a trust which was not a foreign 
                trust, and
                  (B) such trust becomes a foreign trust while 
                such individual is alive,
        then this section and section 6048 shall be applied as 
        if such individual transferred to such trust on the 
        date such trust becomes a foreign trust an amount equal 
        to the portion of such trust attributable to the 
        property previously transferred by such individual to 
        such trust. A rule similar to the rule of paragraph 
        (4)(B) shall apply for purposes of this paragraph.
          * * * * * * *
  (c) Trusts Treated as Having a United States Beneficiary.--
          (1) * * *
          (2) Attribution of ownership.--For purposes of 
        paragraph (1), an amount shall be treated as paid or 
        accumulated to or for the benefit of a United States 
        person if such amount is paid to or accumulated for a 
        foreign corporation, foreign partnership, or foreign 
        trust or estate, and--
                  [(A) in the case of a foreign corporation, 
                more than 50 percent of the total combined 
                voting power of all classes of stock entitled 
                to vote of such corporation is owned (within 
                the meaning of section 958(a)) or is considered 
                to be owned (within the meaning of section 
                958(b)) by United States shareholders (as 
                defined in section 951(b)),]
                  (A) in the case of a foreign corporation, 
                such corporation is a controlled foreign 
                corporation (as defined in section 957(a)),
                  (B) in the case of a foreign partnership, a 
                United States person is a partner of such 
                partnership, or
                  (C) in the case of a foreign trust or estate, 
                such trust or estate has a United States 
                beneficiary (within the meaning of paragraph 
                (1)).
          (3) Certain united states beneficiaries 
        disregarded.--A beneficiary shall not be treated as a 
        United States person in applying this section with 
        respect to any transfer of property to foreign trust if 
        such beneficiary first became a United States person 
        more than 5 years after the date of such transfer.
  (d) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.
          * * * * * * *

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

          * * * * * * *

        PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

          * * * * * * *

                     Subpart A--Foreign Tax Credit

          * * * * * * *

SEC. 901. TAXES OF FOREIGN COUNTRIES AND OF POSSESSIONS OF UNITED 
                    STATES.

  (a) * * *
          * * * * * * *
  (b) Amount Allowed.--Subject to the limitation of section 
904, the following amounts shall be allowed as the credit under 
subsection (a):
          (1) * * *
          * * * * * * *
          (5) Partnerships and estates.--In the case of any 
        individual described in paragraph (1), (2), (3), or 
        (4), who is a member of a partnership or a beneficiary 
        of an estate or trust, the amount of his proportionate 
        share of the taxes (described in such paragraph) of the 
        partnership or the estate or trust paid or accrued 
        during the taxable year to a foreign country or to any 
        possession of the United States, as the case may be. 
        Under rules or regulations prescribed by the Secretary, 
        in the case of any foreign trust of which the settlor 
        or another person would be treated as owner of any 
        portion of the trust under subpart E but for section 
        672(f), the allocable amount of any income, war 
        profits, and excess profits taxes imposed by any 
        foreign country or possession of the United States on 
        the settlor or such other person in respect of trust 
        income.
          * * * * * * *

         Subchapter O--Gain or Loss on Disposition of Property

          * * * * * * *

              PART II--BASIS RULES OF GENERAL APPLICATION

          * * * * * * *

1016. ADJUSTMENTS TO BASIS.

  (a) General Rule.--Proper adjustment in respect of the 
property shall in all cases be made--
          (1) * * *
          * * * * * * *
          (24) to the extent provided in section 179A(e)(6)(A), 
        [and]
          (25) to the extent provided in section 30(d)(1)[.]; 
        and
          (26) to the extent provided in sections 23(g) and 
        137(e).
          * * * * * * *

            CHAPTER 5--TAX ON TRANSFERS TO AVOID INCOME TAX

          * * * * * * *

SEC. 1491. IMPOSITION OF TAX.

  There is hereby imposed on the transfer of property by a 
citizen or resident of the United States, or by a domestic 
corporation or partnership, or by an estate or trust which is 
not a foreign estate or trust, to a foreign corporation as 
paid-in surplus or as a contribution to capital, or to a 
foreign estate or trust, or to a foreign partnership, an excise 
tax equal to 35 percent of the excess of--
          (1) the fair market value of the property so 
        transferred, over
          (2) the sum of--
                  (A) the adjusted basis (for determining gain) 
                of such property in the hands of the 
                transferor, plus
                  (B) the amount of the gain recognized to the 
                transferor at the time of the transfer.
If a trust which is not a foreign trust becomes a foreign 
trust, such trust shall be treated for purposes of this section 
as having transferred, immediately before becoming a foreign 
trust, all of its assets to a foreign trust.
          * * * * * * *

SEC. 1494. PAYMENT AND COLLECTION.

  (a) * * *
          * * * * * * *
  (c) Penalty.--In the case of any failure to file a return 
required by the Secretary with respect to any transfer 
described in section 1491, the person required to file such 
return shall be liable for the penalties provided in section 
6677 in the same manner as if such failure were a failure to 
file a notice under section 6048(a).
          * * * * * * *

                Subtitle F--Procedure and Administration

          * * * * * * *

                  CHAPTER 61--INFORMATION AND RETURNS

          * * * * * * *

                   Subchapter A--Returns and Records

          * * * * * * *

                   PART III--INFORMATION AND RETURNS

          * * * * * * *

Subpart A--Information Concerning Persons Subject to Special Provisions

        Sec. 6031. Return of partnership income.
     * * * * * * *
        Sec. 6039E. Information concerning resident status.
        Sec. 6039F. Notice of large gifts received from foreign persons.
          * * * * * * *

SEC. 6039F. NOTICE OF LARGE GIFTS RECEIVED FROM FOREIGN PERSONS.

  (a) In General.--If the value of the aggregate foreign gifts 
received by a United States person (other than an organization 
described in section 501(c) and exempt from tax under section 
501(a)) during any taxable year exceeds $10,000, such United 
States person shall furnish (at such time and in such manner as 
the Secretary shall prescribe) such information as the 
Secretary may prescribe regarding each foreign gift received 
during such year.
  (b) Foreign Gift.--For purposes of this section, the term 
``foreign gift'' means any amount received from a person other 
than a United States person which the recipient treats as a 
gift or bequest. Such term shall not include any qualified 
transfer (within the meaning of section 2503(e)(2)) or any 
distribution properly disclosed in a return under section 
6048(c).
  (c) Penalty for Failure To File Information.--
          (1) In general.--If a United States person fails to 
        furnish the information required by subsection (a) with 
        respect to any foreign gift within the time prescribed 
        therefor (including extensions)--
                  (A) the tax consequences of the receipt of 
                such gift shall be determined by the Secretary, 
                and
                  (B) such United States person shall pay (upon 
                notice and demand by the Secretary and in the 
                same manner as tax) an amount equal to 5 
                percent of the amount of such foreign gift for 
                each month for which the failure continues (not 
                to exceed 25 percent of such amount in the 
                aggregate).
          (2) Reasonable cause exception.--Paragraph (1) shall 
        not apply to any failure to report a foreign gift if 
        the United States person shows that the failure is due 
        to reasonable cause and not due to willful neglect.
  (d) Cost-of-Living Adjustment.--In the case of any taxable 
year beginning after December 31, 1996, the $10,000 amount 
under subsection (a) shall be increased by an amount equal to 
the product of such amount and the cost-of-living adjustment 
for such taxable year under section 1(f)(3), except that 
subparagraph (B) thereof shall be applied by substituting 
``1995'' for ``1992''.
  (e) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.
          * * * * * * *

   Subpart B--Information Concerning Transactions with Other Persons

        Sec. 6041. Information at source.
     * * * * * * *
        [Sec. 6048. Returns as to certain foreign trusts.]
        Sec. 6048. Information with respect to certain foreign trusts.
          * * * * * * *

[SEC. 6048. RETURNS AS TO CERTAIN FOREIGN TRUSTS.

  [(a) General Rule.--On or before the 90th day (or on or 
before such later day as the Secretary may by regulations 
prescribe) after--
          [(1) the creation of any foreign trust by a United 
        States person, or
          [(2) the transfer of any money or property to a 
        foreign trust by a United States person,
the grantor in the case of an inter vivos trust, the fiduciary 
of an estate in the case of a testamentary trust, or the 
transferor, as the case may be, shall make a return in 
compliance with the provisions of subsection (b).
  [(b) Form and Contents of Returns.--The returns required by 
subsection (a) shall be in such form and shall set forth, in 
respect of the foreign trust, such information as the Secretary 
prescribes by regulation as necessary for carrying out the 
provisions of the income tax laws.
  [(c) Annual Returns for Foreign Trusts Having One or More 
United States Beneficiaries.--Each taxpayer subject to tax 
under section 679 (relating to foreign trusts having one or 
more United States beneficiaries) for his taxable year with 
respect to any trust shall make a return with respect to such 
trust for such year at such time and in such manner, and 
setting forth such information, as the Secretary may by 
regulations prescribe.
  [(d) Cross Reference.--

          [For provisions relating to penalties for violation of this 
        section, see sections 6677 and 7203.]

SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN FOREIGN TRUSTS.

  (a) Notice of Certain Events.--
          (1) General rule.--On or before the 90th day (or such 
        later day as the Secretary may prescribe) after any 
        reportable event, the responsible party shall provide 
        written notice of such event to the Secretary in 
        accordance with paragraph (2).
          (2) Contents of notice.--The notice required by 
        paragraph (1) shall contain such information as the 
        Secretary may prescribe, including--
                  (A) the amount of money or other property (if 
                any) transferred to the trust in connection 
                with the reportable event, and
                  (B) the identity of the trust and of each 
                trustee and beneficiary (or class of 
                beneficiaries) of the trust.
          (3) Reportable event.--For purposes of this 
        subsection--
                  (A) In general.--The term ``reportable 
                event'' means--
                          (i) the creation of any foreign trust 
                        by a United States person,
                          (ii) the transfer of any money or 
                        property (directly or indirectly) to a 
                        foreign trust by a United States 
                        person, including a transfer by reason 
                        of death, and
                          (iii) the death of a citizen or 
                        resident of the United States if--
                                  (I) the decedent was treated 
                                as the owner of any portion of 
                                a foreign trust under the rules 
                                of subpart E of part I of 
                                subchapter J of chapter 1, or
                                  (II) any portion of a foreign 
                                trust was included in the gross 
                                estate of the decedent.
                  (B) Exceptions.--
                          (i) Fair market value sales.--
                        Subparagraph (A)(ii) shall not apply to 
                        any transfer of property to a trust in 
                        exchange for consideration of at least 
                        the fair market value of the 
                        transferred property. For purposes of 
                        the preceding sentence, consideration 
                        other than cash shall be taken into 
                        account at its fair market value and 
                        the rules of section 679(a)(3) shall 
                        apply.
                          (ii) Deferred compensation and 
                        charitable trusts.--Subparagraph (A) 
                        shall not apply with respect to a trust 
                        which is--
                                  (I) described in section 
                                402(b), 404(a)(4), or 404A, or
                                  (II) determined by the 
                                Secretary to be described in 
                                section 501(c)(3).
          (4) Responsible party.--For purposes of this 
        subsection, the term ``responsible party'' means--
                  (A) the grantor in the case of the creation 
                of an inter vivos trust,
                  (B) the transferor in the case of a 
                reportable event described in paragraph 
                (3)(A)(ii) other than a transfer by reason of 
                death, and
                  (C) the executor of the decedent's estate in 
                any other case.
  (b) United States Grantor of Foreign Trust.--
          (1) In general.--If, at any time during any taxable 
        year of a United States person, such person is treated 
        as the owner of any portion of a foreign trust under 
        the rules of subpart E of part I of subchapter J of 
        chapter 1, such person shall be responsible to ensure 
        that--
                  (A) such trust makes a return for such year 
                which sets forth a full and complete accounting 
                of all trust activities and operations for the 
                year, the name of the United States agent for 
                such trust, and such other information as the 
                Secretary may prescribe, and
                  (B) such trust furnishes such information as 
                the Secretary may prescribe to each United 
                States person (i) who is treated as the owner 
                of any portion of such trust or (ii) who 
                receives (directly or indirectly) any 
                distribution from the trust.
          (2) Trusts not having united states agent.--
                  (A) In general.--If the rules of this 
                paragraph apply to any foreign trust, the 
                determination of amounts required to be taken 
                into account with respect to such trust by a 
                United States person under the rules of subpart 
                E of part I of subchapter J of chapter 1 shall 
                be determined by the Secretary.
                  (B) United states agent required.--The rules 
                of this paragraph shall apply to any foreign 
                trust to which paragraph (1) applies unless 
                such trust agrees (in such manner, subject to 
                such conditions, and at such time as the 
                Secretary shall prescribe) to authorize a 
                United States person to act as such trust's 
                limited agent solely for purposes of applying 
                sections 7602, 7603, and 7604 with respect to--
                          (i) any request by the Secretary to 
                        examine records or produce testimony 
                        related to the proper treatment of 
                        amounts required to be taken into 
                        account under the rules referred to in 
                        subparagraph (A), or
                          (ii) any summons by the Secretary for 
                        such records or testimony.
                The appearance of persons or production of 
                records by reason of a United States person 
                being such an agent shall not subject such 
                persons or records to legal process for any 
                purpose other than determining the correct 
                treatment under this title of the amounts 
                required to be taken into account under the 
                rules referred to in subparagraph (A). A 
                foreign trust which appoints an agent described 
                in this subparagraph shall not be considered to 
                have an office or a permanent establishment in 
                the United States, or to be engaged in a trade 
                or business in the United States, solely 
                because of the activities of such agent 
                pursuant to this subsection.
                  (C) Other rules to apply.--Rules similar to 
                the rules of paragraphs (2) and (4) of section 
                6038A(e) shall apply for purposes of this 
                paragraph.
  (c) Reporting by United States Beneficiaries of Foreign 
Trusts.--
          (1) In general.--If any United States person receives 
        (directly or indirectly) during any taxable year of 
        such person any distribution from a foreign trust, such 
        person shall make a return with respect to such trust 
        for such year which includes--
                  (A) the name of such trust,
                  (B) the aggregate amount of the distributions 
                so received from such trust during such taxable 
                year, and
                  (C) such other information as the Secretary 
                may prescribe.
          (2) Inclusion in income if records not provided.--
                  (A) In general.--If adequate records are not 
                provided to the Secretary to determine the 
                proper treatment of any distribution from a 
                foreign trust, such distribution shall be 
                treated as an accumulation distribution 
                includible in the gross income of the 
                distributee under chapter 1. To the extent 
                provided in regulations, the preceding sentence 
                shall not apply if the foreign trust elects to 
                be subject to rules similar to the rules of 
                subsection (b)(2)(B).
                  (B) Application of accumulation distribution 
                rules.--For purposes of applying section 668 in 
                a case to which subparagraph (A) applies, the 
                applicable number of years for purposes of 
                section 668(a) shall be \1/2\ of the number of 
                years the trust has been in existence.
  (d) Special Rules.--
          (1) Determination of whether united states person 
        makes transfer or receives distribution.--For purposes 
        of this section, in determining whether a United States 
        person makes a transfer to, or receives a distribution 
        from, a foreign trust, the fact that a portion of such 
        trust is treated as owned by another person under the 
        rules of subpart E of part I of subchapter J of chapter 
        1 shall be disregarded.
          (2) Domestic trusts with foreign activities.--To the 
        extent provided in regulations, a trust which is a 
        United States person shall be treated as a foreign 
        trust for purposes of this section and section 6677 if 
        such trust has substantial activities, or holds 
        substantial property, outside the United States.
          (3) Time and manner of filing information.--Any 
        notice or return required under this section shall be 
        made at such time and in such manner as the Secretary 
        shall prescribe.
          (4) Modification of return requirements.--The 
        Secretary is authorized to suspend or modify any 
        requirement of this section if the Secretary determines 
        that the United States has no significant tax interest 
        in obtaining the required information.
          * * * * * * *

 CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE 
                               PENALTIES

          * * * * * * *

                   Subchapter B--Assessable Penalties

          * * * * * * *

                       PART I--GENERAL PROVISIONS

          * * * * * * *
        [Sec. 6677. Failure to file information returns with respect to 
                  certain foreign trusts.]
        Sec. 6677. Failure to file information with respect to certain 
                  foreign trusts.
          * * * * * * *

[SEC. 6677. FAILURE TO FILE INFORMATION RETURNS WITH RESPECT TO CERTAIN 
                    FOREIGN TRUSTS.

  [(a) Civil Penalty.--In addition to any criminal penalty 
provided by law, any person required to file a return under 
section 6048 who fails to file such return at the time provided 
in such section, or who files a return which does not show the 
information required pursuant to such section, shall pay a 
penalty equal to 5 percent of the amount transferred to a trust 
(or, in the case of a failure with respect to section 6048(c), 
equal to 5 percent of the value of the corpus of the trust at 
the close of the taxable year), but not more than $1,000, 
unless it is shown that such failure is due to reasonable 
cause.
  [(b) Deficiency Procedures Not To Apply.--Subchapter B of 
chapter 63 (relating to deficiency procedures for income, 
estate, gift, and certain excise taxes) shall not apply in 
respect of the assessment or collection of any penalty imposed 
by subsection (a).]

SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN FOREIGN 
                    TRUSTS.

  (a) Civil Penalty.--In addition to any criminal penalty 
provided by law, if any notice or return required to be filed 
by section 6048--
          (1) is not filed on or before the time provided in 
        such section, or
          (2) does not include all the information required 
        pursuant to such section or includes incorrect 
        information,
the person required to file such notice or return shall pay a 
penalty equal to 35 percent of the gross reportable amount. If 
any failure described in the preceding sentence continues for 
more than 90 days after the day on which the Secretary mails 
notice of such failure to the person required to pay such 
penalty, such person shall pay a penalty (in addition to the 
amount determined under the preceding sentence) of $10,000 for 
each 30-day period (or fraction thereof) during which such 
failure continues after the expiration of such 90-day period. 
In no event shall the penalty under this subsection with 
respect to any failure exceed the gross reportable amount.
  (b) Special Rules for Returns Under Section 6048(b).--In the 
case of a return required under section 6048(b)--
          (1) the United States person referred to in such 
        section shall be liable for the penalty imposed by 
        subsection (a), and
          (2) subsection (a) shall be applied by substituting 
        ``5 percent'' for ``35 percent''.
  (c) Gross Reportable Amount.--For purposes of subsection (a), 
the term ``gross reportable amount'' means--
          (1) the gross value of the property involved in the 
        event (determined as of the date of the event) in the 
        case of a failure relating to section 6048(a),
          (2) the gross value of the portion of the trust's 
        assets at the close of the year treated as owned by the 
        United States person in the case of a failure relating 
        to section 6048(b)(1), and
          (3) the gross amount of the distributions in the case 
        of a failure relating to section 6048(c).
  (d) Reasonable Cause Exception.--No penalty shall be imposed 
by this section on any failure which is shown to be due to 
reasonable cause and not due to willful neglect. The fact that 
a foreign jurisdiction would impose a civil or criminal penalty 
on the taxpayer (or any other person) for disclosing the 
required information is not reasonable cause.
  (e) Deficiency Procedures Not To Apply.--Subchapter B of 
chapter 63 (relating to deficiency procedures for income, 
estate, gift, and certain excise taxes) shall not apply in 
respect of the assessment or collection of any penalty imposed 
by subsection (a).
          * * * * * * *

     PART II--FAILURE TO COMPLY WITH CERTAIN INFORMATION REPORTING 
                              REQUIREMENTS

          * * * * * * *

SEC. 6724. WAIVER; DEFINITIONS AND SPECIAL RULES.

  (a) * * *
          * * * * * * *
  (d) Definitions.--For purposes of this part---
          (1) * * *
          (2) Payee Statement.--The term ``payee statement'' 
        means any statement required to be furnished under--
                  (A) * * *
          * * * * * * *
                  (S) section 6053(b) or (c) (relating to 
                reports of tips), [or]
                  (T) section 4093(c)(4)(B) (relating to 
                certain purchasers of diesel and aviation 
                fuels)[.], or
                  (U) section 6048(b)(1)(B) (relating to 
                foreign trust reporting requirements).
        Such term also includes any form, statement, or 
        schedule required to be furnished to the recipient of 
        any amount from which tax was required to be deducted 
        and withheld under chapter 3 (or from which tax would 
        be required to be so deducted and withheld but for an 
        exemption under this title or any treaty obligation of 
        the United States).
          * * * * * * *

                        CHAPTER 79--DEFINITIONS

          * * * * * * *

SEC. 7701. DEFINITIONS.

  (a) When used in this title, where not otherwise distinctly 
expressed or manifestly incompatible with the intent thereof--
          (1) * * *
          * * * * * * *
          (30) United states person.--The term ``United States 
        person'' means--
                  (A) a citizen or resident of the United 
                States,
                  (B) a domestic partnership,
                  (C) a domestic corporation, [and]
                  [(D) any estate or trust (other than a 
                foreign estate or foreign trust, within the 
                meaning of section 7701(a)(31)).]
                  (D) any estate (other than a foreign estate, 
                within the meaning of paragraph (31)), and
                  (E) any trust if--
                          (i) a court within the United States 
                        is able to exercise primary supervision 
                        over the administration of the trust, 
                        and
                          (ii) one or more United States 
                        fiduciaries have the authority to 
                        control all substantial decisions of 
                        the trust.
          [(31) Foreign estate or trust.--The terms ``foreign 
        estate'' and ``foreign trust'' mean an estate or trust, 
        as the case may be, the income of which, from sources 
        without the United States which is not effectively 
        connected with the conduct of a trade or business 
        within the United States, is not includible in gross 
        income under subtitle A.]
          (31) Foreign estate or trust.--
                  (A) Foreign estate.--The term ``foreign 
                estate'' means an estate the income of which, 
                from sources without the United States which is 
                not effectively connected with the conduct of a 
                trade or business within the United States, is 
                not includible in gross income under subtitle 
                A.
                  (B) Foreign trust.--The term ``foreign 
                trust'' means any trust other than a trust 
                described in subparagraph (E) of paragraph 
                (30).
          * * * * * * *

                       CHAPTER 80--GENERAL RULES

          * * * * * * *

      Subchapter C--Provisions Affecting More Than One Substitute

          * * * * * * *

SEC. 7872. TREATMENT OF LOANS WITH BELOW-MARKET INTEREST RATES.

  (a) * * *
          * * * * * * *
  (f) Other Definitions and Special Rules.--For purposes of 
this section--
          (1) * * *
          * * * * * * *
          (8) Loans to which section 483, 643(i), or 1274 
        applies.--This section shall not apply to any loan to 
        which section 483, 643(i), or 1274 applies.
          * * * * * * *
                              ----------                              


                          SOCIAL SECURITY ACT

          * * * * * * *

TITLE IV--GRANTS TO STATES FOR AID AND SERVICES TO NEEDY FAMILIES WITH 
                CHILDREN AND FOR CHILD-WELFARE SERVICES

          * * * * * * *

    Part E--Federal Payments for Foster Care and Adoption Assistance

          * * * * * * *

           STATE PLAN FOR FOSTER CARE AND ADOPTION ASSISTANCE

  Sec. 471. (a) In order for a State to be eligible for 
payments under this part, it shall have a plan approved by the 
Secretary which--
          (1)  * * *
          * * * * * * *
          (16) provides for the development of a case plan (as 
        defined in section 475(1)) for each child receiving 
        foster care maintenance payments under the State plan 
        and provides for a case review system which meets the 
        requirements described in section 475(5)(B) with 
        respect to each such child; [and]
          (17) provides that, where appropriate, all steps will 
        be taken, including cooperative efforts with the State 
        agencies administering the plans approved under parts A 
        and D, to secure an assignment to the State of any 
        rights to support on behalf of each child receiving 
        foster care maintenance payments under this part[.]; 
        and
          (18) not later than January 1, 1997, provides that 
        neither the State nor any other entity in the State 
        that receives funds from the Federal Government and is 
        involved in adoption or foster care placements may--
                  (A) deny to any person the opportunity to 
                become an adoptive or a foster parent, on the 
                basis of the race, color, or national origin of 
                the person, or of the child, involved; or
                  (B) delay or deny the placement of a child 
                for adoption or into foster care, on the basis 
                of the race, color, or national origin of the 
                adoptive or foster parent, or the child, 
                involved.
          * * * * * * *

                PAYMENTS TO STATES; ALLOTMENTS TO STATES

  Sec. 474. (a)  * * *
          * * * * * * *
  (d)(1) If a State's program operated under this part is 
found, as a result of a review conducted under section 1123, to 
have violated section 471(a)(18) during a quarter with respect 
to any person, then, notwithstanding subsection (a) of this 
section and any regulations promulgated under section 
1123(b)(3), the Secretary shall reduce the amount otherwise 
payable to the State under this part, for the quarter and for 
each subsequent quarter before the 1st quarter for which the 
State program is found, as a result of such a review, not to 
have violated section 471(a)(18) with respect to any person, 
by--
          (A) 2 percent of such otherwise payable amount, in 
        the case of the 1st such finding with respect to the 
        State;
          (B) 5 percent of such otherwise payable amount, in 
        the case of the 2nd such finding with respect to the 
        State; or
          (C) 10 percent of such otherwise payable amount, in 
        the case of the 3rd or subsequent such finding with 
        respect to the State.
  (2) Any other entity which is in a State that receives funds 
under this part and which violates section 471(a)(18) during a 
quarter with respect to any person shall remit to the Secretary 
all funds that were paid by the State to the entity during the 
quarter from such funds.
  (3)(A) Any individual who is aggrieved by a violation of 
section 471(a)(18) by a State or other entity may bring an 
action seeking relief from the State or other entity in any 
United States district court.
  (B) An action under this paragraph may not be brought more 
than 2 years after the date the alleged violation occurred.
  (4) This subsection shall not be construed to affect the 
application of the Indian Child Welfare Act of 1978.
          * * * * * * *
                              ----------                              


 SECTION 553 OF THE HOWARD M. METZENBAUM MULTIETHNIC PLACEMENT ACT OF 
                                  1994

[SEC. 553. MULTIETHNIC PLACEMENTS.

  [(a) Activities.--
          [(1) Prohibition.--An agency, or entity, that 
        receives Federal assistance and is involved in adoption 
        or foster care placements may not--
                  [(A) categorically deny to any person the 
                opportunity to become an adoptive or a foster 
                parent, solely on the basis of the race, color, 
                or national origin of the adoptive or foster 
                parent, or the child, involved; or
                  [(B) delay or deny the placement of a child 
                for adoption or into foster care, or otherwise 
                discriminate in making a placement decision, 
                solely on the basis of the race, color, or 
                national origin of the adoptive or foster 
                parent, or the child, involved.
          [(2) Permissible consideration.--An agency or entity 
        to which paragraph (1) applies may consider the 
        cultural, ethnic, or racial background of the child and 
        the capacity of the prospective foster or adoptive 
        parents to meet the needs of a child of this background 
        as one of a number of factors used to determine the 
        best interests of a child.
          [(3) Definition.--As used in this subsection, the 
        term ``placement decision'' means the decision to 
        place, or to delay or deny the placement of, a child in 
        a foster care or an adoptive home, and includes the 
        decision of the agency or entity involved to seek the 
        termination of birth parent rights or otherwise make a 
        child legally available for adoptive placement.
  [(b) Equitable Relief.--Any individual who is aggrieved by an 
action in violation of subsection (a), taken by an agency or 
entity described in subsection (a), shall have the right to 
bring an action seeking relief in a United States district 
court of appropriate jurisdiction.
  [(c) Federal Guidance.--Not later than 6 months after the 
date of the enactment of this Act, the Secretary of Health and 
Human Services shall publish guidance to concerned public and 
private agencies and entities with respect to compliance with 
this subpart.
  [(d) Deadline for Compliance.--
          [(1) In general.--Except as provided in paragraph 
        (2), an agency or entity that receives Federal 
        assistance and is involved with adoption or foster care 
        placements shall comply with this subpart not later 
        than six months after publication of the guidance 
        referred to in subsection (c), or one year after the 
        date of enactment of this Act, whichever occurs first.
          [(2) Authority to extend deadline.--If a State 
        demonstrates to the satisfaction of the Secretary that 
        it is necessary to amend State statutory law in order 
        to change a particular practice that is inconsistent 
        with this subpart, the Secretary may extend the 
        compliance date for the State a reasonable number of 
        days after the close of the first State legislative 
        session beginning after the date the guidance referred 
        to in subsection (c) is published.
  [(e) Noncompliance Deemed a Civil Rights Violation.--
Noncompliance with this subpart is deemed a violation of title 
VI of the Civil Rights Act of 1964.
  [(f) No Effect on Indian Child Welfare Act of 1978.--Nothing 
in this section shall be construed to affect the application of 
the Indian Child Welfare Act of 1978 (25 U.S.C. 1901 et seq.).]
                              ----------                              


                    INDIAN CHILD WELFARE ACT OF 1978

          * * * * * * *

                   TITLE I--CHILD CUSTODY PROCEEDINGS

          * * * * * * *
  Sec. 114. (a) This title does not apply to any child custody 
proceeding involving a child who does not reside or is not 
domiciled within a reservation unless--
          (1) at least one of the child's biological parents is 
        of Indian descent; and
          (2) at least one of the child's biological parents 
        maintains significant social, cultural, or political 
        affiliation with the Indian tribe of which either 
        parent is a member.
  (b) The factual determination as to whether a biological 
parent maintains significant social, cultural, or political 
affiliation with the Indian tribe of which either parent is a 
member shall be based on such affiliation as of the time of the 
child custody proceeding.
  (c) The determination that this title does not apply pursuant 
to subsection (a) is final, and, thereafter, this title shall 
not be the basis for determining jurisdiction over any child 
custody proceeding involving the child.
  Sec. 115. (a) A person who attains the age of 18 years before 
becoming a member of an Indian tribe may become a member of an 
Indian tribe only upon the person's written consent.
  (b) For the purposes of any child custody proceeding 
involving an Indian child, membership in an Indian tribe shall 
be effective from the actual date of admission to membership in 
the Indian tribe and shall not be given retroactive effect.
          * * * * * * *