[House Report 104-586]
[From the U.S. Government Publishing Office]
104th Congress REPORT
HOUSE OF REPRESENTATIVES
2d Session 104-586
_______________________________________________________________________
SMALL BUSINESS JOB PROTECTION ACT OF 1996
__________
R E P O R T
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
on
H.R. 3448
together with
SUPPLEMENTAL AND DISSENTING VIEWS
[Together with cost estimate of the Congressional Budget Office]
May 20, 1996.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
SMALL BUSINESS JOB PROTECTION ACT OF 1996
104th Congress REPORT
HOUSE OF REPRESENTATIVES
2d Session 104-586
_______________________________________________________________________
SMALL BUSINESS JOB PROTECTION ACT OF 1996
__________
R E P O R T
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
on
H.R. 3448
together with
SUPPLEMENTAL AND DISSENTING VIEWS
[Together with cost estimate of the Congressional Budget Office]
May 20, 1996.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
C O N T E N T S
__________
Page
I. INTRODUCTION...................................................61
A. Purpose and Summary..........................................61
B. Background and Need for Legislation..........................61
C. Legislative History..........................................62
II. EXPLANATION OF THE BILL.......................................63
Small Business and Other Tax Provisions.........................63
A. Small Business Provisions....................................63
1. Increase in expensing for small businesses (sec.
1111).............................................. 63
2. Tax credit for Social Security taxes paid with
respect to employee cash tips (sec. 1112).......... 64
3. Home office deduction: Treatment of storage of
product samples (sec. 1113)........................ 65
4. Treatment of certain charitable risk pools (sec.
1114).............................................. 66
5. Treatment of dues paid to agriculture or
horticulture organizations (sec. 1115)............. 68
6. Clarify employment tax status of certain fishermen
(sec. 1116(a))..................................... 69
7. Reporting requirements for purchasers of fish (sec.
1116(b))........................................... 70
B. Extension of Certain Expiring Provisions.....................71
1. Work opportunity tax credit (sec. 1201)............. 71
2. Employer-provided educational assistance (sec. 1202) 79
3. Permanent extension of FUTA exemption for alien
agricultural workers (sec. 1203)................... 81
C. Provisions Relating to S Corporations........................81
1. S corporations permitted to have 75 shareholders
(sec. 1301)........................................ 81
2. Electing small business trusts (sec. 1302)......... 82
3. Expansion of post-death qualification for certain
trusts (sec. 1303)................................. 84
4. Financial institutions permitted to hold safe
harbor debt (sec. 1304)............................ 84
5. Rules relating to inadvertent terminations and
invalid elections (sec. 1305)...................... 85
6. Agreement to terminate year (sec. 1306)............ 86
7. Expansion of post-termination transition period
(sec. 1307)........................................ 86
8. S corporations permitted to hold subsidiaries (sec.
1308).............................................. 87
9. Treatment of distributions during loss years (sec.
1309).............................................. 89
10. Treatment of S corporations under subchapter C
(sec. 1310)........................................ 91
11. Elimination of certain earnings and profits (sec.
1311).............................................. 92
12. Carryover of disallowed losses and deductions under
the at-risk rules (sec. 1312)...................... 93
13. Adjustments to basis of inherited S stock to
reflect certain items of income (sec. 1313)........ 94
14. S corporations eligible for rules applicable to
real property subdivided for sale by noncorporate
taxpayers (sec. 1314).............................. 95
15. Reelecting subchapter S status (sec. 1315)......... 95
Pension Simplification Provisions; Foreign Simplification.......96
A. Simplified Distribution Rules (secs. 1401-1404)..............96
B. Increased Access to Pension Plans...........................100
1. Establish SIMPLE retirement plans (secs. 1421-1422). 100
2. Tax-exempt organizations eligible under section
401(k) (sec. 1426)................................. 105
C. Nondiscrimination Provisions................................105
1. Definition of highly compensated employees and
repeal of family aggregation rules (sec. 1431)..... 105
2. Modification of additional participation
requirements (sec. 1432)........................... 107
3. Nondiscrimination rules for qualified cash or
deferred arrangements and matching contributions
(sec. 1433)........................................ 108
4. Definition of compensation for purposes of the
limits on contributions and benefits (sec. 1434)... 112
D. Miscellaneous Pension Simplification........................112
1. Plans covering self-employed individuals (sec.
1441).............................................. 112
2. Elimination of special vesting rule for
multiemployer plans (sec. 1442).................... 113
3. Distributions under rural cooperative plans (sec.
1443).............................................. 114
4. Treatment of governmental plans under section 415
(sec. 1444)........................................ 114
5. Uniform retirement age (sec. 1445)................. 115
6. Contributions on behalf of disabled employees (sec.
1446).............................................. 116
7. Treatment of deferred compensation plans of State
and local governments and tax-exempt organizations
(sec. 1447)........................................ 116
8. Trust requirement for deferred compensation plans
of State and local governments (sec. 1448)......... 117
9. Correction of GATT interest and mortality rate
provisions in the Retirement Protection Act (sec.
1449).............................................. 118
10. Multiple salary reduction agreements permitted
under section 403(b) (sec. 1450(a))................ 119
11. Treatment of Indian tribal governments under
section 403(b) (sec. 1450(b))...................... 120
12. Application of elective deferral limit to section
403(b) contracts (sec. 1450(c)).................... 121
13. Waiver of minimum waiting period for qualified plan
distributions (sec. 1451).......................... 121
14. Repeal of combined plan limit (sec. 1452).......... 122
15. Tax on prohibited transactions (sec. 1453)......... 123
16. Treatment of leased employees (sec. 1454).......... 124
17. Uniform penalty provisions to apply to certain
pension reporting requirements (sec. 1455)......... 126
18. Retirement benefits of ministers not subject to tax
on net earnings from self-employment (sec. 1456)... 127
19. Date for adoption of plan amendments (sec. 1457)... 127
E. Foreign Simplification Provision............................128
1. Repeal of excess passive assets provision (sec.
1501).............................................. 128
Revenue Offsets................................................130
1. Phased-in repeal of Puerto Rico and possession tax
credit (sec. 1601)................................. 130
2. Repeal 50-percent interest income exclusion for
financial institution loans to ESOPs (sec. 1602)... 135
3. Apply look-through rule for purposes of
characterizing certain subpart F insurance income
as unrelated business taxable income (sec. 1603)... 136
4. Depreciation under the income forecast method (sec.
1604).............................................. 138
5. Modify exclusion of damages received on account of
personal injury or sickness (sec. 1605)............ 142
6. Repeal advance refunds of diesel fuel tax for
purchasers of diesel-powered automobiles, vans, and
light trucks (sec. 1606)........................... 144
Tax Technical Corrections Provisions...........................146
A. Technical Corrections to the Revenue Reconciliation Act of 1146
1. Excise tax provisions............................... 146
a. Application of the 2.5-cents-per-gallon tax on
fuel used in rail transportation to States and
local governments (sec. 1702(b)(2))............ 146
b. Small winery production credit and bonding
requirements (secs. 1702(b)(5),(6), and (7))... 146
2. Other revenue-increase provisions of the 1990 Act... 147
a. Deposits of Railroad Retirement Tax Act taxes
(sec. 1702(c)(3)).............................. 147
b. Treatment of salvage and subrogation of property
and casualty insurance companies (sec.
1702(c)(4)).................................... 147
c. Information with respect to certain foreign-
owned or foreign corporations: Suspension of
statute of limitations during certain judicial
proceedings (sec. 1702(c)(5)).................. 148
d. Rate of interest for large corporate
underpayments (secs. 1702(c)(6) and (7))....... 150
3. Research credit provision: Effective date for repeal
of special proration rule (sec. 1702(d)(1))........ 150
4. Energy tax provision: Alternative minimum tax
adjustment based on energy preferences (secs.
1702(e)(1) and (4))................................ 151
5. Estate tax freezes (sec. 1702(f))................... 152
6. Miscellaneous provisions............................ 156
a. Conforming amendments to the repeal of the
General Utilities doctrine (secs. 1702(g)(1)
and (2))....................................... 156
b. Prohibited transaction rules (sec. 1702(g)(3)).. 157
c. Effective date of LIFO adjustment for purposes
of computing adjusted current earnings (sec.
1702(g)(4)).................................... 157
d. Low-income housing tax credit (sec. 1702(g)(5)). 158
7. Expired or obsolete provisions (``deadwood
provisions'') (sec. 1702(h)(1)-(18))............... 158
B. Technical Corrections to the Revenue Reconciliation Act of 1159
1. Treatment of full-time students under the low-
income housing credit (sec. 1703(b)(1))............ 159
2. Indexation of threshold applicable to excise tax on
luxury automobiles (sec. 1703(c)).................. 159
3. Indexation of the limitation based on modified
adjusted gross income for income from United States
savings bonds used to pay higher education tuition
and fees (sec. 1703(d))............................ 160
4. Reporting and notification requirements for
lobbying and political expenditures of tax-exempt
organizations (sec. 1703(g))....................... 160
5. Estimated tax rules for certain tax-exempt
organizations (sec. 1703(h))....................... 161
6. Current taxation of certain earnings of controlled
foreign corporations--application of foreign tax
credit limitations (sec. 1703(i)(1))............... 161
7. Current taxation of certain earnings of controlled
foreign corporations--measurement of accumulated
earnings (sec. 1703(i)(2))......................... 162
8. Current taxation of certain earnings of controlled
foreign corporations--aggregation and look-through
rules (sec. 1703(i)(3))............................ 163
9. Treatment of certain leased assets for PFIC
purposes (sec. 1703(i)(5))......................... 163
10. Amortization of goodwill and certain other
intangibles (sec. 1703(k))......................... 164
11. Empowerment zones and eligibility of small farms
for tax incentives (sec. 1703(l)).................. 165
C. Other Tax Technical Corrections.............................165
1. Hedge bonds (sec. 1704(b))......................... 165
2. Withholding on distributions from U.S. real
property holding companies (sec. 1704(c)).......... 166
3. Treatment of credits attributable to working
interests in oil and gas properties (sec. 1704(d)). 168
4. Clarification of passive loss disposition rule
(sec. 1704(e))..................................... 168
5. Estate tax unified credit allowed nonresident
aliens under treaty (sec. 1704(f)(1)).............. 169
6. Limitation on deduction for certain interest paid
by corporation to related persons (sec.
1704(f)(2)(A))..................................... 170
7. Interaction between passive loss activity rules and
earnings stripping rules (sec. 1704(f)(2)(B) and
(C))............................................... 172
8. Branch-level interest tax (sec. 1704(f)(3))........ 173
9. Determination of source in case of sales of
inventory property (sec. 1704(f)(4))............... 174
10. Repeal of obsolete provisions (sec. 1704(f)(5))... 175
11. Clarification of a certain stadium bond transition
rule in Tax Reform Act of 1986 (sec. 1704(g))...... 176
12. Health care continuation rules (sec. 1704(h))..... 176
13. Taxation of excess inclusions of a residual
interest in a REMIC for taxpayers subject to
alternative minimum tax with net operating losses
(sec. 1704(i))..................................... 177
14. Application of harbor maintenance tax to Alaska
and Hawaii ship passengers (sec. 1704(j)).......... 178
15. Modify effective date provision relating to the
Energy Policy Act of 1992 (sec. 1704(k))........... 178
16. Treat qualified football coaches plan as
multiemployer pension plan for purposes of the
Internal Revenue Code (sec. 1704(l))............... 179
17. Determination of unrecovered investment in annuity
contract (sec. 1704(m))............................ 180
18. Election by parent to claim unearned income of
certain children on parent's return (sec. 1704(n)). 180
19. Treatment of certain veterans' reemployment rights
(sec. 1704(o))..................................... 181
20. Reporting of real estate transactions (sec.
1704(p))........................................... 183
21. Clarification of denial of deduction for stock
redemption expenses (sec. 1704(q))................. 183
22. Definition of passive income in determining
passive foreign investment company status (sec.
1704(s))........................................... 184
23. Exclusion from income for combat zone compensation
(sec. 1704(t)(4)).................................. 185
24. Certain property not treated as section 179
property (sec. 1704(u))............................ 186
III. VOTES OF THE COMMITTEE........................................186
IV. BUDGET EFFECTS OF THE BILL....................................191
A. Committee Estimates of Budgetary Effects....................191
B. Statement Regarding New Budget Authority and Tax Expenditure196
C. Cost Estimate Prepared by the Congressional Budget Office...196
V. OTHER MATTERS TO BE DISCUSSED UNDER RULES OF THE HOUSE........200
A. Committee Oversight Findings and Recommendations............200
B. Summary of Findings and Recommendations of the Committee on
Government Reform and Oversight................................200
C. Inflationary Impact Statement...............................200
D. Information Relating to Unfunded Mandates...................200
E. Applicability of House Rule XXI5(c).........................202
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED.........203
VII. SUPPLEMENTAL VIEWS............................................396
VIII. DISSENTING VIEWS..............................................400
104th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 104-586
_______________________________________________________________________
SMALL BUSINESS JOB PROTECTION ACT OF 1996
_______
May 20, 1996.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______________________________________________________________________
Mr. Archer, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
SUPPLEMENTAL AND DISSENTING VIEWS
[To accompany H.R. 3448]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 3448) to provide tax relief for small businesses, to
protect jobs, to create opportunities, to increase the take
home pay of workers, and for other purposes, having considered
the same, report favorably thereon with an amendment and
recommend that the bill as amended do pass.
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Small Business Job
Protection Act of 1996''.
(b) Table of Contents.--
TITLE I--SMALL BUSINESS AND OTHER TAX PROVISIONS
Sec. 1101. Amendment of 1986 Code.
Sec. 1102. Underpayments of estimated tax.
Subtitle A--Expensing; Etc.
Sec. 1111. Increase in expense treatment for small businesses.
Sec. 1112. Treatment of employee tips.
Sec. 1113. Treatment of storage of product samples.
Sec. 1114. Treatment of certain charitable risk pools.
Sec. 1115. Treatment of dues paid to agricultural or horticultural
organizations.
Sec. 1116. Clarification of employment tax status of certain fishermen;
information reporting.
Subtitle B--Extension of Certain Expiring Provisions
Sec. 1201. Work opportunity tax credit.
Sec. 1202. Employer-provided educational assistance programs.
Sec. 1203. FUTA exemption for alien agricultural workers.
Subtitle C--Provisions Relating to S Corporations
Sec. 1301. S corporations permitted to have 75 shareholders.
Sec. 1302. Electing small business trusts.
Sec. 1303. Expansion of post-death qualification for certain trusts.
Sec. 1304. Financial institutions permitted to hold safe harbor debt.
Sec. 1305. Rules relating to inadvertent terminations and invalid
elections.
Sec. 1306. Agreement to terminate year.
Sec. 1307. Expansion of post-termination transition period.
Sec. 1308. S corporations permitted to hold subsidiaries.
Sec. 1309. Treatment of distributions during loss years.
Sec. 1310. Treatment of S corporations under subchapter C.
Sec. 1311. Elimination of certain earnings and profits.
Sec. 1312. Carryover of disallowed losses and deductions under at-risk
rules allowed.
Sec. 1313. Adjustments to basis of inherited S stock to reflect certain
items of income.
Sec. 1314. S corporations eligible for rules applicable to real
property subdivided for sale by noncorporate taxpayers.
Sec. 1315. Effective date.
Subtitle D--Pension Simplification
Chapter 1--Simplified Distribution Rules
Sec. 1401. Repeal of 5-year income averaging for lump-sum
distributions.
Sec. 1402. Repeal of $5,000 exclusion of employees' death benefits.
Sec. 1403. Simplified method for taxing annuity distributions under
certain employer plans.
Sec. 1404. Required distributions.
Chapter 2--Increased Access to Pension Plans
SUBCHAPTER A--SIMPLE SAVINGS PLANS
Sec. 1421. Establishment of savings incentive match plans for employees
of small employers.
Sec. 1422. Extension of simple plan to 401(k) arrangements.
SUBCHAPTER B--OTHER PROVISIONS
Sec. 1426. Tax-exempt organizations eligible under section 401(k).
Chapter 3--Nondiscrimination Provisions
Sec. 1431. Definition of highly compensated employees; repeal of family
aggregation.
Sec. 1432. Modification of additional participation requirements.
Sec. 1433. Nondiscrimination rules for qualified cash or deferred
arrangements and matching contributions.
Sec. 1434. Definition of compensation for section 415 purposes.
Chapter 4--Miscellaneous Provisions
Sec. 1441. Plans covering self-employed individuals.
Sec. 1442. Elimination of special vesting rule for multiemployer plans.
Sec. 1443. Distributions under rural cooperative plans.
Sec. 1444. Treatment of governmental plans under section 415.
Sec. 1445. Uniform retirement age.
Sec. 1446. Contributions on behalf of disabled employees.
Sec. 1447. Treatment of deferred compensation plans of State and local
governments and tax-exempt organizations.
Sec. 1448. Trust requirement for deferred compensation plans of State
and local governments.
Sec. 1449. Transition rule for computing maximum benefits under section
415 limitations.
Sec. 1450. Modifications of section 403(b).
Sec. 1451. Waiver of minimum period for joint and survivor annuity
explanation before annuity starting date.
Sec. 1452. Repeal of limitation in case of defined benefit plan and
defined contribution plan for same employee; excess distributions.
Sec. 1453. Tax on prohibited transactions.
Sec. 1454. Treatment of leased employees.
Sec. 1455. Uniform penalty provisions to apply to certain pension
reporting requirements.
Sec. 1456. Retirement benefits of ministers not subject to tax on net
earnings from self-employment.
Sec. 1457. Date for adoption of plan amendments.
Subtitle E--Foreign Simplification
Sec. 1501. Repeal of inclusion of certain earnings invested in excess
passive assets.
Subtitle F--Revenue Offsets
Sec. 1601. Termination of Puerto Rico and possession tax credit.
Sec. 1602. Repeal of exclusion for interest on loans used to acquire
employer securities.
Sec. 1603. Certain amounts derived from foreign corporations treated as
unrelated business taxable income.
Sec. 1604. Depreciation under income forecast method.
Sec. 1605. Repeal of exclusion for punitive damages and for damages not
attributable to physical injuries or sickness.
Sec. 1606. Repeal of diesel fuel tax rebate to purchasers of diesel-
powered automobiles and light trucks.
Subtitle G--Technical Corrections
Sec. 1701. Coordination with other subtitles.
Sec. 1702. Amendments related to Revenue Reconciliation Act of 1990.
Sec. 1703. Amendments related to Revenue Reconciliation Act of 1993.
Sec. 1704. Miscellaneous provisions.
TITLE I--SMALL BUSINESS AND OTHER TAX PROVISIONS
SEC. 1101. 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.
SEC. 1102. UNDERPAYMENTS OF ESTIMATED TAX.
No addition to the tax shall be made under section 6654 or 6655 of
the Internal Revenue Code of 1986 (relating to failure to pay estimated
tax) with respect to any underpayment of an installment required to be
paid before the date of the enactment of this Act to the extent such
underpayment was created or increased by any provision of this title.
Subtitle A--Expensing; Etc.
SEC. 1111. INCREASE IN EXPENSE TREATMENT FOR SMALL BUSINESSES.
(a) General Rule.--Paragraph (1) of section 179(b) (relating to
dollar limitation) is amended to read as follows:
``(1) Dollar limitation.--The aggregate cost which may be
taken into account under subsection (a) for any taxable year
shall not exceed the following applicable amount:
``If the taxable year
The applicable
begins in:
amount is:
1996............................... $18,500
1997............................... 19,000
1998............................... 20,000
1999............................... 21,000
2000............................... 22,000
2001............................... 23,000
2002............................... 23,500
2003 or thereafter................. 25,000.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1995.
SEC. 1112. TREATMENT OF EMPLOYEE TIPS.
(a) Employee Cash Tips.--
(1) Reporting requirement not considered.--Subparagraph (A)
of section 45B(b)(1) (relating to excess employer social
security tax) is amended by inserting ``(without regard to
whether such tips are reported under section 6053)'' after
``section 3121(q)''.
(2) Taxes paid.--Subsection (d) of section 13443 of the
Revenue Reconciliation Act of 1993 is amended by inserting ``,
with respect to services performed before, on, or after such
date'' after ``1993''.
(3) Effective date.--The amendments made by this subsection
shall take effect as if included in the amendments made by, and
the provisions of, section 13443 of the Revenue Reconciliation
Act of 1993.
(b) Tips for Employees Delivering Food or Beverages.--
(1) In general.--Paragraph (2) of section 45B(b) is amended
to read as follows:
``(2) Only tips received for food or beverages taken into
account.--In applying paragraph (1), there shall be taken into
account only tips received from customers in connection with
the delivering or serving of food or beverages for consumption
if the tipping of employees delivering or serving food or
beverages by customers is customary.''
(2) Effective date.--The amendment made by paragraph (1)
shall apply to tips received for services performed after
December 31, 1996.
SEC. 1113. TREATMENT OF STORAGE OF PRODUCT SAMPLES.
(a) In General.--Paragraph (2) of section 280A(c) is amended by
striking ``inventory'' and inserting ``inventory or product samples''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1995.
SEC. 1114. TREATMENT OF CERTAIN CHARITABLE RISK POOLS.
(a) General Rule.--Section 501 (relating to exemption from tax on
corporations, certain trusts, etc.) is amended by redesignating
subsection (n) as subsection (o) and by inserting after subsection (m)
the following new subsection:
``(n) Charitable Risk Pools.--
``(1) In general.--For purposes of this title--
``(A) a qualified charitable risk pool shall be
treated as an organization organized and operated
exclusively for charitable purposes, and
``(B) subsection (m) shall not apply to a qualified
charitable risk pool.
``(2) Qualified charitable risk pool.--For purposes of this
subsection, the term `qualified charitable risk pool' means any
organization--
``(A) which is organized and operated solely to pool
insurable risks of its members (other than risks
related to medical malpractice) and to provide
information to its members with respect to loss control
and risk management,
``(B) which is comprised solely of members that are
organizations described in subsection (c)(3) and exempt
from tax under subsection (a), and
``(C) which meets the organizational requirements of
paragraph (3).
``(3) Organizational requirements.--An organization
(hereinafter in this subsection referred to as the `risk pool')
meets the organizational requirements of this paragraph if--
``(A) such risk pool is organized as a nonprofit
organization under State law provisions authorizing
risk pooling arrangements for charitable organizations,
``(B) such risk pool is exempt from any income tax
imposed by the State (or will be so exempt after such
pool qualifies as an organization exempt from tax under
this title),
``(C) such risk pool has obtained at least $1,000,000
in startup capital from nonmember charitable
organizations,
``(D) such risk pool is controlled by a board of
directors elected by its members, and
``(E) the organizational documents of such risk pool
require that--
``(i) each member of such pool shall at all
times be an organization described in
subsection (c)(3) and exempt from tax under
subsection (a),
``(ii) any member which receives a final
determination that it no longer qualifies as an
organization described in subsection (c)(3)
shall immediately notify the pool of such
determination and the effective date of such
determination, and
``(iii) each policy of insurance issued by
the risk pool shall provide that such policy
will not cover the insured with respect to
events occurring after the date such final
determination was issued to the insured.
An organization shall not cease to qualify as a qualified
charitable risk pool solely by reason of the failure of any of
its members to continue to be an organization described in
subsection (c)(3) if, within a reasonable period of time after
such pool is notified as required under subparagraph (C)(ii),
such pool takes such action as may be reasonably necessary to
remove such member from such pool.
``(4) Other definitions.--For purposes of this subsection--
``(A) Startup capital.--The term `startup capital'
means any capital contributed to, and any program-
related investments (within the meaning of section
4944(c)) made in, the risk pool before such pool
commences operations.
``(B) Nonmember charitable organization.--The term
`nonmember charitable organization' means any
organization which is described in subsection (c)(3)
and exempt from tax under subsection (a) and which is
not a member of the risk pool and does not benefit
(directly or indirectly) from the insurance coverage
provided by the pool to its members.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1115. TREATMENT OF DUES PAID TO AGRICULTURAL OR HORTICULTURAL
ORGANIZATIONS.
(a) General Rule.--Section 512 (defining unrelated business taxable
income) is amended by adding at the end thereof the following new
subsection:
``(d) Treatment of Dues of Agricultural or Horticultural
Organizations.--
``(1) In general.--If--
``(A) an agricultural or horticultural organization
described in section 501(c)(5) requires annual dues to
be paid in order to be a member of such organization,
and
``(B) the amount of such required annual dues does
not exceed $100,
in no event shall any portion of such dues be treated as
derived by such organization from an unrelated trade or
business by reason of any benefits or privileges to which
members of such organization are entitled.
``(2) Indexation of $100 amount.--In the case of any taxable
year beginning in a calendar year after 1995, the $100 amount
in paragraph (1) shall be increased by an amount equal to--
``(A) $100, multiplied by
``(B) the cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which the
taxable year begins, by substituting `calendar year
1994' for `calendar year 1992' in subparagraph (B)
thereof.
``(3) Dues.--For purposes of this subsection, the term `dues'
includes any payment required to be made in order to be
recognized by the organization as a member of the
organization.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1994.
SEC. 1116. CLARIFICATION OF EMPLOYMENT TAX STATUS OF CERTAIN FISHERMEN;
INFORMATION REPORTING.
(a) Clarification of Employment Tax Status.--
(1) Amendments of internal revenue code of 1986.--
(A) Determination of size of crew.--Subsection (b) of
section 3121 (defining employment) is amended by adding
at the end thereof the following new sentence:
``For purposes of paragraph (20), the operating crew of a boat shall be
treated as normally made up of fewer than 10 individuals if the average
size of the operating crew on trips made during the preceding 4
calendar quarters consisted of fewer than 10 individuals.''
(B) Certain cash remuneration permitted.--
Subparagraph (A) of section 3121(b)(20) is amended to
read as follows:
``(A) such individual does not receive any cash
remuneration other than as provided in subparagraph (B)
and other than cash remuneration--
``(i) which does not exceed $100 per trip;
``(ii) which is contingent on a minimum
catch; and
``(iii) which is paid solely for additional
duties (such as mate, engineer, or cook) for
which additional cash remuneration is
traditional in the industry,''.
(C) Conforming amendment.--Section 6050A(a) is
amended by striking ``and'' at the end of paragraph
(3), by striking the period at the end of paragraph (4)
and inserting ``; and'', and by adding at the end
thereof the following new paragraph:
``(5) any cash remuneration described in section
3121(b)(20)(A).''
(2) Amendment of social security act.--
(A) Determination of size of crew.--Subsection (a) of
section 210 of the Social Security Act is amended by
adding at the end thereof the following new sentence:
``For purposes of paragraph (20), the operating crew of a boat shall be
treated as normally made up of fewer than 10 individuals if the average
size of the operating crew on trips made during the preceding 4
calendar quarters consisted of fewer than 10 individuals.''
(B) Certain cash remuneration permitted.--
Subparagraph (A) of section 210(a)(20) of such Act is
amended to read as follows:
``(A) such individual does not receive any additional
compensation other than as provided in subparagraph (B)
and other than cash remuneration--
``(i) which does not exceed $100 per trip;
``(ii) which is contingent on a minimum
catch; and
``(iii) which is paid solely for additional
duties (such as mate, engineer, or cook) for
which additional cash remuneration is
traditional in the industry,''.
(3) Effective date.--
(A) In general.--The amendments made by this
subsection shall apply to remuneration paid after
December 31, 1996.
(B) Special rule.--The amendments made by this
subsection (other than paragraph (1)(C)) shall also
apply to remuneration paid after December 31, 1984, and
before January 1, 1997, unless the payor treated such
remuneration (when paid) as being subject to tax under
chapter 21 of the Internal Revenue Code of 1986.
(b) Information Reporting.--
(1) In general.--Subpart B of part III of subchapter A of
chapter 68 (relating to information concerning transactions
with other persons) is amended by adding at the end the
following new section:
``SEC. 6050Q. RETURNS RELATING TO CERTAIN PURCHASES OF FISH.
``(a) Requirement of Reporting.--Every person--
``(1) who is engaged in the trade or business of purchasing
fish for resale from any person engaged in the trade or
business of catching fish; and
``(2) who makes payments in cash in the course of such trade
or business to such a person of $600 or more during any
calendar year for the purchase of fish,
shall make a return (at such times as the Secretary may prescribe)
described in subsection (b) with respect to each person to whom such a
payment was made during such calendar year.
``(b) Return.--A return is described in this subsection if such
return--
``(1) is in such form as the Secretary may prescribe, and
``(2) contains--
``(A) the name, address, and TIN of each person to
whom a payment described in subsection (a)(2) was made
during the calendar year;
``(B) the aggregate amount of such payments made to
such person during such calendar year and the date and
amount of each such payment, and
``(C) such other information as the Secretary may
require.
``(c) Statement To Be Furnished With Respect to Whom Information Is
Required.--Every person required to make a return under subsection (a)
shall furnish to each person whose name is required to be set forth in
such return a written statement showing--
``(1) the name and address of the person required to make
such a return, and
``(2) the aggregate amount of payments to the person required
to be shown on the return.
The written statement required under the preceding sentence shall be
furnished to the person on or before January 31 of the year following
the calendar year for which the return under subsection (a) is required
to be made.
``(d) Definitions.--For purposes of this section:
``(1) Cash.--The term `cash' has the meaning given such term
by section 6050I(d).
``(2) Fish.--The term `fish' includes other forms of aquatic
life.''.
(2) Technical amendments.--
(A) Subparagraph (A) of section 6724(d)(1) is amended
by striking ``or'' at the end of clause (vi), by
striking ``and'' at the end of clause (vii) and
inserting ``or'', and by adding at the end the
following new clause:
``(viii) section 6050Q (relating to returns
relating to certain purchases of fish), and''.
(B) Paragraph (2) of section 6724(d) is amended by
redesignating subparagraphs (Q) through (T) as
subparagraphs (R) through (U), respectively, and by
inserting after subparagraph (P) the following new
subparagraph:
``(Q) section 6050Q(c) (relating to returns relating
to certain purchases of fish),''.
(C) The table of sections for subpart B of part III
of subchapter A of chapter 68 is amended by adding at
the end the following new item:
``Sec. 6050Q. Returns relating to certain
purchases of fish.''.
(3) Effective date.--The amendments made by this subsection
shall apply to payments made after December 31, 1996.
Subtitle B--Extension of Certain Expiring Provisions
SEC. 1201. WORK OPPORTUNITY TAX CREDIT.
(a) Amount of Credit.--Subsection (a) of section 51 (relating to
amount of credit) is amended by striking ``40 percent'' and inserting
``35 percent''.
(b) Members of Targeted Groups.--Subsection (d) of section 51 is
amended to read as follows:
``(d) Members of Targeted Groups.--For purposes of this subpart--
``(1) In general.--An individual is a member of a targeted
group if such individual is--
``(A) a qualified IV-A recipient,
``(B) a qualified veteran,
``(C) a qualified ex-felon,
``(D) a high-risk youth,
``(E) a vocational rehabilitation referral, or
``(F) a qualified summer youth employee.
``(2) Qualified IV-A recipient.--
``(A) In general.--The term `qualified IV-A
recipient' means any individual who is certified by the
designated local agency as being a member of a family
receiving assistance under a IV-A program for at least
a 9-month period ending during the 9-month period
ending on the hiring date.
``(B) IV-A program.--For purposes of this paragraph,
the term `IV-A program' means any program providing
assistance under a State plan approved under part A of
title IV of the Social Security Act (relating to
assistance for needy families with minor children) and
any successor of such program.
``(3) Qualified veteran.--
``(A) In general.--The term `qualified veteran' means
any veteran who is certified by the designated local
agency as being--
``(i) a member of a family receiving
assistance under a IV-A program (as defined in
paragraph (2)(B)) for at least a 9-month period
ending during the 12-month period ending on the
hiring date, or
``(ii) a member of a family receiving
assistance under a food stamp program under the
Food Stamp Act of 1977 for at least a 3-month
period ending during the 12-month period ending
on the hiring date.
``(B) Veteran.--For purposes of subparagraph (A), the
term `veteran' means any individual who is certified by
the designated local agency as--
``(i)(I) having served on active duty (other
than active duty for training) in the Armed
Forces of the United States for a period of
more than 180 days, or
``(II) having been discharged or released
from active duty in the Armed Forces of the
United States for a service-connected
disability, and
``(ii) not having any day during the 60-day
period ending on the hiring date which was a
day of extended active duty in the Armed Forces
of the United States.
For purposes of clause (ii), the term `extended active
duty' means a period of more than 90 days during which
the individual was on active duty (other than active
duty for training).
``(4) Qualified ex-felon.--The term `qualified ex-felon'
means any individual who is certified by the designated local
agency--
``(A) as having been convicted of a felony under any
statute of the United States or any State,
``(B) as having a hiring date which is not more than
1 year after the last date on which such individual was
so convicted or was released from prison, and
``(C) as being a member of a family which had an
income during the 6 months immediately preceding the
earlier of the month in which such income determination
occurs or the month in which the hiring date occurs,
which, on an annual basis, would be 70 percent or less
of the Bureau of Labor Statistics lower living
standard.
Any determination under subparagraph (C) shall be valid for the
45-day period beginning on the date such determination is made.
``(5) High-risk youth.--
``(A) In general.--The term `high-risk youth' means
any individual who is certified by the designated local
agency--
``(i) as having attained age 18 but not age
25 on the hiring date, and
``(ii) as having his principal place of abode
within an empowerment zone or enterprise
community.
``(B) Youth must continue to reside in zone.--In the
case of a high-risk youth, the term `qualified wages'
shall not include wages paid or incurred for services
performed while such youth's principal place of abode
is outside an empowerment zone or enterprise community.
``(6) Vocational rehabilitation referral.--The term
`vocational rehabilitation referral' means any individual who
is certified by the designated local agency as--
``(A) having a physical or mental disability which,
for such individual, constitutes or results in a
substantial handicap to employment, and
``(B) having been referred to the employer upon
completion of (or while receiving) rehabilitative
services pursuant to--
``(i) an individualized written
rehabilitation plan under a State plan for
vocational rehabilitation services approved
under the Rehabilitation Act of 1973, or
``(ii) a program of vocational rehabilitation
carried out under chapter 31 of title 38,
United States Code.
``(7) Qualified summer youth employee.--
``(A) In general.--The term `qualified summer youth
employee' means any individual--
``(i) who performs services for the employer
between May 1 and September 15,
``(ii) who is certified by the designated
local agency as having attained age 16 but not
18 on the hiring date (or if later, on May 1 of
the calendar year involved),
``(iii) who has not been an employee of the
employer during any period prior to the 90-day
period described in subparagraph (B)(i), and
``(iv) who is certified by the designated
local agency as having his principal place of
abode within an empowerment zone or enterprise
community.
``(B) Special rules for determining amount of
credit.--For purposes of applying this subpart to wages
paid or incurred to any qualified summer youth
employee--
``(i) subsection (b)(2) shall be applied by
substituting `any 90-day period between May 1
and September 15' for `the 1-year period
beginning with the day the individual begins
work for the employer', and
``(ii) subsection (b)(3) shall be applied by
substituting `$3,000' for `$6,000'.
The preceding sentence shall not apply to an individual
who, with respect to the same employer, is certified as
a member of another targeted group after such
individual has been a qualified summer youth employee.
``(C) Youth must continue to reside in zone.--
Paragraph (5)(B) shall apply for purposes of this
paragraph.
``(8) Hiring date.--The term `hiring date' means the day the
individual is hired by the employer.
``(9) Designated local agency.--The term `designated local
agency' means a State employment security agency established in
accordance with the Act of June 6, 1933, as amended (29 U.S.C.
49-49n).
``(10) Special rules for certifications.--
``(A) In general.--An individual shall not be treated
as a member of a targeted group unless--
``(i) on or before the day on which such
individual begins work for the employer, the
employer has received a certification from a
designated local agency that such individual is
a member of a targeted group, or
``(ii)(I) on or before the day the individual
is offered employment with the employer, a pre-
screening notice is completed by the employer
with respect to such individual, and
``(II) not later than the 14th day after the
individual begins work for the employer, the
employer submits such notice, signed by the
employer and the individual under penalties of
perjury, to the designated local agency as part
of a written request for such a certification
from such agency.
For purposes of this paragraph, the term `pre-screening
notice' means a document (in such form as the Secretary
shall prescribe) which contains information provided by
the individual on the basis of which the employer
believes that the individual is a member of a targeted
group.
``(B) Incorrect certifications.--If--
``(i) an individual has been certified by a
designated local agency as a member of a
targeted group, and
``(ii) such certification is incorrect
because it was based on false information
provided by such individual,
the certification shall be revoked and wages paid by
the employer after the date on which notice of
revocation is received by the employer shall not be
treated as qualified wages.
``(C) Explanation of denial of request.--If a
designated local agency denies a request for
certification of membership in a targeted group, such
agency shall provide to the person making such request
a written explanation of the reasons for such denial.''
(c) Minimum Employment Period.--Paragraph (3) of section 51(i)
(relating to certain individuals ineligible) is amended to read as
follows:
``(3) Individuals not meeting minimum employment period.--No
wages shall be taken into account under subsection (a) with
respect to any individual unless such individual either--
``(A) is employed by the employer at least 180 days
(20 days in the case of a qualified summer youth
employee), or
``(B) has completed at least 500 hours (120 hours in
the case of a qualified summer youth employee) of
services performed for the employer.''
(d) Termination.--Paragraph (4) of section 51(c) (relating to wages
defined) is amended to read as follows:
``(4) Termination.--The term `wages' shall not include any
amount paid or incurred to an individual who begins work for
the employer--
``(A) after December 31, 1994, and before July 1,
1996, or
``(B) after June 30, 1997.''
(e) Redesignation of Credit.--
(1) Sections 38(b)(2) and 51(a) are each amended by striking
``targeted jobs credit'' and inserting ``work opportunity
credit''.
(2) The subpart heading for subpart F of part IV of
subchapter A of chapter 1 is amended by striking ``Targeted
Jobs Credit'' and inserting ``Work Opportunity Credit''.
(3) The table of subparts for such part IV is amended by
striking ``targeted jobs credit'' and inserting ``work
opportunity credit''.
(4) The heading for paragraph (3) of section 1396(c) is
amended by striking ``targeted jobs credit'' and inserting
``work opportunity credit''.
(f) Technical Amendment.--Paragraph (1) of section 51(c) is amended
by striking ``, subsection (d)(8)(D),''.
(g) Effective Date.--The amendments made by this section shall apply
to individuals who begin work for the employer after June 30, 1996.
SEC. 1202. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.
(a) Extension.--Subsection (d) of section 127 (relating to
educational assistance programs) is amended by striking ``December 31,
1994'' and inserting ``December 31, 1996''.
(b) Limitation to Education Below Graduate Level.--The last sentence
of section 127(c)(1) is amended by inserting before the period ``or at
the graduate level''.
(c) Effective Dates.--
(1) Extension.--The amendment made by subsection (a) shall
apply to taxable years beginning after December 31, 1994.
(2) Limitation.--The amendment made by subsection (b) shall
apply to taxable years beginning after December 31, 1995.
(3) Expedited procedures.--The Secretary of the Treasury
shall establish expedited procedures for the refund of any
overpayment of taxes imposed by chapter 24 of the Internal
Revenue Code of 1986 which is attributable to amounts excluded
from gross income during 1995 or 1996 under section 127 of such
Code, including procedures waiving the requirement that an
employer obtain an employee's signature where the employer
demonstrates to the satisfaction of the Secretary that any
refund collected by the employer on behalf of the employee will
be paid to the employee.
SEC. 1203. FUTA EXEMPTION FOR ALIEN AGRICULTURAL WORKERS.
(a) In General.--Subparagraph (B) of section 3306(c)(1) (defining
employment) is amended by striking ``before January 1, 1995,''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to services performed after December 31, 1994.
Subtitle C--Provisions Relating to S Corporations
SEC. 1301. S CORPORATIONS PERMITTED TO HAVE 75 SHAREHOLDERS.
Subparagraph (A) of section 1361(b)(1) (defining small business
corporation) is amended by striking ``35 shareholders'' and inserting
``75 shareholders''.
SEC. 1302. ELECTING SMALL BUSINESS TRUSTS.
(a) General Rule.--Subparagraph (A) of section 1361(c)(2) (relating
to certain trusts permitted as shareholders) is amended by inserting
after clause (iv) the following new clause:
``(v) An electing small business trust.''
(b) Current Beneficiaries Treated as Shareholders.--Subparagraph (B)
of section 1361(c)(2) is amended by adding at the end the following new
clause:
``(v) In the case of a trust described in
clause (v) of subparagraph (A), each potential
current beneficiary of such trust shall be
treated as a shareholder; except that, if for
any period there is no potential current
beneficiary of such trust, such trust shall be
treated as the shareholder during such
period.''
(c) Electing Small Business Trust Defined.--Section 1361 (defining S
corporation) is amended by adding at the end the following new
subsection:
``(e) Electing Small Business Trust Defined.--
``(1) Electing small business trust.--For purposes of this
section--
``(A) In general.--Except as provided in subparagraph
(B), the term `electing small business trust' means any
trust if--
``(i) such trust does not have as a
beneficiary any person other than (I) an
individual, (II) an estate, or (III) an
organization described in paragraph (2), (3),
(4), or (5) of section 170(c) which holds a
contingent interest and is not a potential
current beneficiary,
``(ii) no interest in such trust was acquired
by purchase, and
``(iii) an election under this subsection
applies to such trust.
``(B) Certain trusts not eligible.--The term
`electing small business trust' shall not include--
``(i) any qualified subchapter S trust (as
defined in subsection (d)(3)) if an election
under subsection (d)(2) applies to any
corporation the stock of which is held by such
trust, and
``(ii) any trust exempt from tax under this
subtitle.
``(C) Purchase.--For purposes of subparagraph (A),
the term `purchase' means any acquisition if the basis
of the property acquired is determined under section
1012.
``(2) Potential current beneficiary.--For purposes of this
section, the term `potential current beneficiary' means, with
respect to any period, any person who at any time during such
period is entitled to, or at the discretion of any person may
receive, a distribution from the principal or income of the
trust. If a trust disposes of all of the stock which it holds
in an S corporation, then, with respect to such corporation,
the term `potential current beneficiary' does not include any
person who first met the requirements of the preceding sentence
during the 60-day period ending on the date of such
disposition.
``(3) Election.--An election under this subsection shall be
made by the trustee. Any such election shall apply to the
taxable year of the trust for which made and all subsequent
taxable years of such trust unless revoked with the consent of
the Secretary.
``(4) Cross reference.--
``For special treatment of electing small business
trusts, see section 641(d).''
(d) Taxation of Electing Small Business Trusts.--Section 641
(relating to imposition of tax on trusts) is amended by adding at the
end the following new subsection:
``(d) Special Rules for Taxation of Electing Small Business Trusts.--
``(1) In general.--For purposes of this chapter--
``(A) the portion of any electing small business
trust which consists of stock in 1 or more S
corporations shall be treated as a separate trust, and
``(B) the amount of the tax imposed by this chapter
on such separate trust shall be determined with the
modifications of paragraph (2).
``(2) Modifications.--For purposes of paragraph (1), the
modifications of this paragraph are the following:
``(A) Except as provided in section 1(h), the amount
of the tax imposed by section 1(e) shall be determined
by using the highest rate of tax set forth in section
1(e).
``(B) The exemption amount under section 55(d) shall
be zero.
``(C) The only items of income, loss, deduction, or
credit to be taken into account are the following:
``(i) The items required to be taken into
account under section 1366.
``(ii) Any gain or loss from the disposition
of stock in an S corporation.
``(iii) To the extent provided in
regulations, State or local income taxes or
administrative expenses to the extent allocable
to items described in clauses (i) and (ii).
No deduction or credit shall be allowed for any amount
not described in this paragraph, and no item described
in this paragraph shall be apportioned to any
beneficiary.
``(D) No amount shall be allowed under paragraph (1)
or (2) of section 1211(b).
``(3) Treatment of remainder of trust and distributions.--For
purposes of determining--
``(A) the amount of the tax imposed by this chapter
on the portion of any electing small business trust not
treated as a separate trust under paragraph (1), and
``(B) the distributable net income of the entire
trust,
the items referred to in paragraph (2)(C) shall be excluded.
Except as provided in the preceding sentence, this subsection
shall not affect the taxation of any distribution from the
trust.
``(4) Treatment of unused deductions where termination of
separate trust.--If a portion of an electing small business
trust ceases to be treated as a separate trust under paragraph
(1), any carryover or excess deduction of the separate trust
which is referred to in section 642(h) shall be taken into
account by the entire trust.
``(5) Electing small business trust.--For purposes of this
subsection, the term `electing small business trust' has the
meaning given such term by section 1361(e)(1).''
(e) Technical Amendment.--Paragraph (1) of section 1366(a) is amended
by inserting ``, or of a trust or estate which terminates,'' after
``who dies''.
SEC. 1303. EXPANSION OF POST-DEATH QUALIFICATION FOR CERTAIN TRUSTS.
Subparagraph (A) of section 1361(c)(2) (relating to certain trusts
permitted as shareholders) is amended--
(1) by striking ``60-day period'' each place it appears in
clauses (ii) and (iii) and inserting ``2-year period'', and
(2) by striking the last sentence in clause (ii).
SEC. 1304. FINANCIAL INSTITUTIONS PERMITTED TO HOLD SAFE HARBOR DEBT.
Clause (iii) of section 1361(c)(5)(B) (defining straight debt) is
amended by striking ``or a trust described in paragraph (2)'' and
inserting ``a trust described in paragraph (2), or a person which is
actively and regularly engaged in the business of lending money''.
SEC. 1305. RULES RELATING TO INADVERTENT TERMINATIONS AND INVALID
ELECTIONS.
(a) General Rule.--Subsection (f) of section 1362 (relating to
inadvertent terminations) is amended to read as follows:
``(f) Inadvertent Invalid Elections or Terminations.--If--
``(1) an election under subsection (a) by any corporation--
``(A) was not effective for the taxable year for
which made (determined without regard to subsection
(b)(2)) by reason of a failure to meet the requirements
of section 1361(b) or to obtain shareholder consents,
or
``(B) was terminated under paragraph (2) or (3) of
subsection (d),
``(2) the Secretary determines that the circumstances
resulting in such ineffectiveness or termination were
inadvertent,
``(3) no later than a reasonable period of time after
discovery of the circumstances resulting in such
ineffectiveness or termination, steps were taken--
``(A) so that the corporation is a small business
corporation, or
``(B) to acquire the required shareholder consents,
and
``(4) the corporation, and each person who was a shareholder
in the corporation at any time during the period specified
pursuant to this subsection, agrees to make such adjustments
(consistent with the treatment of the corporation as an S
corporation) as may be required by the Secretary with respect
to such period,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be treated as an
S corporation during the period specified by the Secretary.''
(b) Late Elections, Etc.--Subsection (b) of section 1362 is amended
by adding at the end the following new paragraph:
``(5) Authority to treat late elections, etc., as timely.--
If--
``(A) an election under subsection (a) is made for
any taxable year (determined without regard to
paragraph (3)) after the date prescribed by this
subsection for making such election for such taxable
year or no such election is made for any taxable year,
and
``(B) the Secretary determines that there was
reasonable cause for the failure to timely make such
election,
the Secretary may treat such an election as timely made for
such taxable year (and paragraph (3) shall not apply).''
(c) Effective Date.--The amendments made by subsection (a) and (b)
shall apply with respect to elections for taxable years beginning after
December 31, 1982.
SEC. 1306. AGREEMENT TO TERMINATE YEAR.
Paragraph (2) of section 1377(a) (relating to pro rata share) is
amended to read as follows:
``(2) Election to terminate year.--
``(A) In general.--Under regulations prescribed by
the Secretary, if any shareholder terminates the
shareholder's interest in the corporation during the
taxable year and all affected shareholders and the
corporation agree to the application of this paragraph,
paragraph (1) shall be applied to the affected
shareholders as if the taxable year consisted of 2
taxable years the first of which ends on the date of
the termination.
``(B) Affected shareholders.--For purposes of
subparagraph (A), the term `affected shareholders'
means the shareholder whose interest is terminated and
all shareholders to whom such shareholder has
transferred shares during the taxable year. If such
shareholder has transferred shares to the corporation,
the term `affected shareholders' shall include all
persons who are shareholders during the taxable year.''
SEC. 1307. EXPANSION OF POST-TERMINATION TRANSITION PERIOD.
(a) In General.--Paragraph (1) of section 1377(b) (relating to post-
termination transition period) is amended by striking ``and'' at the
end of subparagraph (A), by redesignating subparagraph (B) as
subparagraph (C), and by inserting after subparagraph (A) the following
new subparagraph:
``(B) the 120-day period beginning on the date of any
determination pursuant to an audit of the taxpayer
which follows the termination of the corporation's
election and which adjusts a subchapter S item of
income, loss, or deduction of the corporation arising
during the S period (as defined in section 1368(e)(2)),
and''.
(b) Determination Defined.--Paragraph (2) of section 1377(b) is
amended by striking subparagraphs (A) and (B), by redesignating
subparagraph (C) as subparagraph (B), and by inserting before
subparagraph (B) (as so redesignated) the following new subparagraph:
``(A) a determination as defined in section 1313(a),
or''.
(c) Repeal of Special Audit Provisions for Subchapter S Items.--
(1) General rule.--Subchapter D of chapter 63 (relating to
tax treatment of subchapter S items) is hereby repealed.
(2) Consistent treatment required.--Section 6037 (relating to
return of S corporation) is amended by adding at the end the
following new subsection:
``(c) Shareholder's Return Must Be Consistent With Corporate Return
or Secretary Notified of Inconsistency.--
``(1) In general.--A shareholder of an S corporation shall,
on such shareholder's return, treat a subchapter S item in a
manner which is consistent with the treatment of such item on
the corporate return.
``(2) Notification of inconsistent treatment.--
``(A) In general.--In the case of any subchapter S
item, if--
``(i)(I) the corporation has filed a return
but the shareholder's treatment on his return
is (or may be) inconsistent with the treatment
of the item on the corporate return, or
``(II) the corporation has not filed a
return, and
``(ii) the shareholder files with the
Secretary a statement identifying the
inconsistency,
paragraph (1) shall not apply to such item.
``(B) Shareholder receiving incorrect information.--A
shareholder shall be treated as having complied with
clause (ii) of subparagraph (A) with respect to a
subchapter S item if the shareholder--
``(i) demonstrates to the satisfaction of the
Secretary that the treatment of the subchapter
S item on the shareholder's return is
consistent with the treatment of the item on
the schedule furnished to the shareholder by
the corporation, and
``(ii) elects to have this paragraph apply
with respect to that item.
``(3) Effect of failure to notify.--In any case--
``(A) described in subparagraph (A)(i)(I) of
paragraph (2), and
``(B) in which the shareholder does not comply with
subparagraph (A)(ii) of paragraph (2),
any adjustment required to make the treatment of the items by
such shareholder consistent with the treatment of the items on
the corporate return shall be treated as arising out of
mathematical or clerical errors and assessed according to
section 6213(b)(1). Paragraph (2) of section 6213(b) shall not
apply to any assessment referred to in the preceding sentence.
``(4) Subchapter s item.--For purposes of this subsection,
the term `subchapter S item' means any item of an S corporation
to the extent that regulations prescribed by the Secretary
provide that, for purposes of this subtitle, such item is more
appropriately determined at the corporation level than at the
shareholder level.
``(5) Addition to tax for failure to comply with section.--
``For addition to tax in the case of a shareholder's
negligence in connection with, or disregard of, the requirements of
this section, see part II of subchapter A of chapter 68.''
(3) Conforming amendments.--
(A) Section 1366 is amended by striking subsection
(g).
(B) Subsection (b) of section 6233 is amended to read
as follows:
``(b) Similar Rules in Certain Cases.--If a partnership return is
filed for any taxable year but it is determined that there is no entity
for such taxable year, to the extent provided in regulations, rules
similar to the rules of subsection (a) shall apply.''
(C) The table of subchapters for chapter 63 is
amended by striking the item relating to subchapter D.
SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.
(a) In General.--Paragraph (2) of section 1361(b) (defining
ineligible corporation) is amended by striking subparagraph (A) and by
redesignating subparagraphs (B), (C), (D), and (E) as subparagraphs
(A), (B), (C), and (D), respectively.
(b) Treatment of Certain Wholly Owned S Corporation Subsidiaries.--
Section 1361(b) (defining small business corporation) is amended by
adding at the end the following new paragraph:
``(3) Treatment of certain wholly owned subsidiaries.--
``(A) In general.--For purposes of this title--
``(i) a corporation which is a qualified
subchapter S subsidiary shall not be treated as
a separate corporation, and
``(ii) all assets, liabilities, and items of
income, deduction, and credit of a qualified
subchapter S subsidiary shall be treated as
assets, liabilities, and such items (as the
case may be) of the S corporation.
``(B) Qualified subchapter s subsidiary.--For
purposes of this paragraph, the term `qualified
subchapter S subsidiary' means any domestic corporation
which is not an ineligible corporation (as defined in
paragraph (2)), if--
``(i) 100 percent of the stock of such
corporation is held by the S corporation, and
``(ii) the S corporation elects to treat such
corporation as a qualified subchapter S
subsidiary.
``(C) Treatment of terminations of qualified
subchapter s subsidiary status.--For purposes of this
title, if any corporation which was a qualified
subchapter S subsidiary ceases to meet the requirements
of subparagraph (B), such corporation shall be treated
as a new corporation acquiring all of its assets (and
assuming all of its liabilities) immediately before
such cessation from the S corporation in exchange for
its stock.''
(c) Certain Dividends Not Treated as Passive Investment Income.--
Paragraph (3) of section 1362(d) is amended by adding at the end the
following new subparagraph:
``(F) Treatment of certain dividends.--If an S
corporation holds stock in a C corporation meeting the
requirements of section 1504(a)(2), the term `passive
investment income' shall not include dividends from
such C corporation to the extent such dividends are
attributable to the earnings and profits of such C
corporation derived from the active conduct of a trade
or business.''
(d) Conforming Amendments.--
(1) Subsection (c) of section 1361 is amended by striking
paragraph (6).
(2) Subsection (b) of section 1504 (defining includible
corporation) is amended by adding at the end the following new
paragraph:
``(8) An S corporation.''
SEC. 1309. TREATMENT OF DISTRIBUTIONS DURING LOSS YEARS.
(a) Adjustments for Distributions Taken Into Account Before Losses.--
(1) Subparagraph (A) of section 1366(d)(1) (relating to
losses and deductions cannot exceed shareholder's basis in
stock and debt) is amended by striking ``paragraph (1)'' and
inserting ``paragraphs (1) and (2)(A)''.
(2) Subsection (d) of section 1368 (relating to certain
adjustments taken into account) is amended by adding at the end
the following new sentence:
``In the case of any distribution made during any taxable year, the
adjusted basis of the stock shall be determined with regard to the
adjustments provided in paragraph (1) of section 1367(a) for the
taxable year.''
(b) Accumulated Adjustments Account.--Paragraph (1) of section
1368(e) (relating to accumulated adjustments account) is amended by
adding at the end the following new subparagraph:
``(C) Net loss for year disregarded.--
``(i) In general.--In applying this section to
distributions made during any taxable year, the amount
in the accumulated adjustments account as of the close
of such taxable year shall be determined without regard
to any net negative adjustment for such taxable year.
``(ii) Net negative adjustment.--For purposes of
clause (i), the term `net negative adjustment' means,
with respect to any taxable year, the excess (if any)
of--
``(I) the reductions in the account for the
taxable year (other than for distributions),
over
``(II) the increases in such account for such
taxable year.''
(c) Conforming Amendments.--Subparagraph (A) of section 1368(e)(1) is
amended--
(1) by striking ``as provided in subparagraph (B)'' and
inserting ``as otherwise provided in this paragraph'', and
(2) by striking ``section 1367(b)(2)(A)'' and inserting
``section 1367(a)(2)''.
SEC. 1310. TREATMENT OF S CORPORATIONS UNDER SUBCHAPTER C.
Subsection (a) of section 1371 (relating to application of subchapter
C rules) is amended to read as follows:
``(a) Application of Subchapter C Rules.--Except as otherwise
provided in this title, and except to the extent inconsistent with this
subchapter, subchapter C shall apply to an S corporation and its
shareholders.''
SEC. 1311. ELIMINATION OF CERTAIN EARNINGS AND PROFITS.
(a) In General.--If--
(1) a corporation was an electing small business corporation
under subchapter S of chapter 1 of the Internal Revenue Code of
1986 for any taxable year beginning before January 1, 1983, and
(2) such corporation is an S corporation under subchapter S
of chapter 1 of such Code for its first taxable year beginning
after December 31, 1996,
the amount of such corporation's accumulated earnings and profits (as
of the beginning of such first taxable year) shall be reduced by an
amount equal to the portion (if any) of such accumulated earnings and
profits which were accumulated in any taxable year beginning before
January 1, 1983, for which such corporation was an electing small
business corporation under such subchapter S.
(b) Conforming Amendments.--
(1) Paragraph (3) of section 1362(d), as amended by section
1308, is amended--
(A) by striking ``subchapter c'' in the paragraph
heading and inserting ``accumulated'',
(B) by striking ``subchapter C'' in subparagraph
(A)(i)(I) and inserting ``accumulated'', and
(C) by striking subparagraph (B) and redesignating
the following subparagraphs accordingly.
(2)(A) Subsection (a) of section 1375 is amended by striking
``subchapter C'' in paragraph (1) and inserting
``accumulated''.
(B) Paragraph (3) of section 1375(b) is amended to read as
follows:
``(3) Passive investment income, etc.--The terms `passive
investment income' and `gross receipts' have the same
respective meanings as when used in paragraph (3) of section
1362(d).''
(C) The section heading for section 1375 is amended by
striking ``subchapter c'' and inserting
``accumulated''.
(D) The table of sections for part III of subchapter S of
chapter 1 is amended by striking ``subchapter C'' in the item
relating to section 1375 and inserting ``accumulated''.
(3) Clause (i) of section 1042(c)(4)(A) is amended by
striking ``section 1362(d)(3)(D)'' and inserting ``section
1362(d)(3)(C)''.
SEC. 1312. CARRYOVER OF DISALLOWED LOSSES AND DEDUCTIONS UNDER AT-RISK
RULES ALLOWED.
Paragraph (3) of section 1366(d) (relating to carryover of disallowed
losses and deductions to post-termination transition period) is amended
by adding at the end the following new subparagraph:
``(D) At-risk limitations.--To the extent that any
increase in adjusted basis described in subparagraph
(B) would have increased the shareholder's amount at
risk under section 465 if such increase had occurred on
the day preceding the commencement of the post-
termination transition period, rules similar to the
rules described in subparagraphs (A) through (C) shall
apply to any losses disallowed by reason of section
465(a).''
SEC. 1313. ADJUSTMENTS TO BASIS OF INHERITED S STOCK TO REFLECT CERTAIN
ITEMS OF INCOME.
(a) In General.--Subsection (b) of section 1367 (relating to
adjustments to basis of stock of shareholders, etc.) is amended by
adding at the end the following new paragraph:
``(4) Adjustments in case of inherited stock.--
``(A) In general.--If any person acquires stock in an
S corporation by reason of the death of a decedent or
by bequest, devise, or inheritance, section 691 shall
be applied with respect to any item of income of the S
corporation in the same manner as if the decedent had
held directly his pro rata share of such item.
``(B) Adjustments to basis.--The basis determined
under section 1014 of any stock in an S corporation
shall be reduced by the portion of the value of the
stock which is attributable to items constituting
income in respect of the decedent.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
in the case of decedents dying after the date of the enactment of this
Act.
SEC. 1314. S CORPORATIONS ELIGIBLE FOR RULES APPLICABLE TO REAL
PROPERTY SUBDIVIDED FOR SALE BY NONCORPORATE
TAXPAYERS.
(a) In General.--Subsection (a) of section 1237 (relating to real
property subdivided for sale) is amended by striking ``other than a
corporation'' in the material preceding paragraph (1) and inserting
``other than a C corporation''.
(b) Conforming Amendment.--Subparagraph (A) of section 1237(a)(2) is
amended by inserting ``an S corporation which included the taxpayer as
a shareholder,'' after ``controlled by the taxpayer,''.
SEC. 1315. EFFECTIVE DATE.
(a) In General.--Except as otherwise provided in this subtitle, the
amendments made by this subtitle shall apply to taxable years beginning
after December 31, 1996.
(b) Treatment of Certain Elections Under Prior Law.--For purposes of
section 1362(g) of the Internal Revenue Code of 1986 (relating to
election after termination), any termination under section 1362(d) of
such Code in a taxable year beginning before January 1, 1997, shall not
be taken into account.
Subtitle D--Pension Simplification
CHAPTER 1--SIMPLIFIED DISTRIBUTION RULES
SEC. 1401. REPEAL OF 5-YEAR INCOME AVERAGING FOR LUMP-SUM
DISTRIBUTIONS.
(a) In General.--Subsection (d) of section 402 (relating to
taxability of beneficiary of employees' trust) is amended to read as
follows:
``(d) Taxability of Beneficiary of Certain Foreign Situs Trusts.--For
purposes of subsections (a), (b), and (c), a stock bonus, pension, or
profit-sharing trust which would qualify for exemption from tax under
section 501(a) except for the fact that it is a trust created or
organized outside the United States shall be treated as if it were a
trust exempt from tax under section 501(a).''
(b) Conforming Amendments.--
(1) Subparagraph (D) of section 402(e)(4) (relating to other
rules applicable to exempt trusts) is amended to read as
follows:
``(D) Lump-sum distribution.--For purposes of this
paragraph--
``(i) In general.--The term `lump sum
distribution' means the distribution or payment
within one taxable year of the recipient of the
balance to the credit of an employee which
becomes payable to the recipient--
``(I) on account of the employee's
death,
``(II) after the employee attains age
59\1/2\,
``(III) on account of the employee's
separation from service, or
``(IV) after the employee has become
disabled (within the meaning of section
72(m)(7)),
from a trust which forms a part of a plan
described in section 401(a) and which is exempt
from tax under section 501 or from a plan
described in section 403(a). Subclause (III) of
this clause shall be applied only with respect
to an individual who is an employee without
regard to section 401(c)(1), and subclause (IV)
shall be applied only with respect to an
employee within the meaning of section
401(c)(1). For purposes of this clause, a
distribution to two or more trusts shall be
treated as a distribution to one recipient. For
purposes of this paragraph, the balance to the
credit of the employee does not include the
accumulated deductible employee contributions
under the plan (within the meaning of section
72(o)(5)).
``(ii) Aggregation of certain trusts and
plans.--For purposes of determining the balance
to the credit of an employee under clause (i)--
``(I) all trusts which are part of a
plan shall be treated as a single
trust, all pension plans maintained by
the employer shall be treated as a
single plan, all profit-sharing plans
maintained by the employer shall be
treated as a single plan, and all stock
bonus plans maintained by the employer
shall be treated as a single plan, and
``(II) trusts which are not qualified
trusts under section 401(a) and annuity
contracts which do not satisfy the
requirements of section 404(a)(2) shall
not be taken into account.
``(iii) Community property laws.--The
provisions of this paragraph shall be applied
without regard to community property laws.
``(iv) Amounts subject to penalty.--This
paragraph shall not apply to amounts described
in subparagraph (A) of section 72(m)(5) to the
extent that section 72(m)(5) applies to such
amounts.
``(v) Balance to credit of employee not to
include amounts payable under qualified
domestic relations order.--For purposes of this
paragraph, the balance to the credit of an
employee shall not include any amount payable
to an alternate payee under a qualified
domestic relations order (within the meaning of
section 414(p)).
``(vi) Transfers to cost-of-living
arrangement not treated as distribution.--For
purposes of this paragraph, the balance to the
credit of an employee under a defined
contribution plan shall not include any amount
transferred from such defined contribution plan
to a qualified cost-of-living arrangement
(within the meaning of section 415(k)(2)) under
a defined benefit plan.
``(vii) Lump-sum distributions of alternate
payees.--If any distribution or payment of the
balance to the credit of an employee would be
treated as a lump-sum distribution, then, for
purposes of this paragraph, the payment under a
qualified domestic relations order (within the
meaning of section 414(p)) of the balance to
the credit of an alternate payee who is the
spouse or former spouse of the employee shall
be treated as a lump-sum distribution. For
purposes of this clause, the balance to the
credit of the alternate payee shall not include
any amount payable to the employee.''
(2) Section 402(c) (relating to rules applicable to rollovers
from exempt trusts) is amended by striking paragraph (10).
(3) Paragraph (1) of section 55(c) (defining regular tax) is
amended by striking ``shall not include any tax imposed by
section 402(d) and''.
(4) Paragraph (8) of section 62(a) (relating to certain
portion of lump-sum distributions from pension plans taxed
under section 402(d)) is hereby repealed.
(5) Section 401(a)(28)(B) (relating to coordination with
distribution rules) is amended by striking clause (v).
(6) Subparagraph (B)(ii) of section 401(k)(10) (relating to
distributions that must be lump-sum distributions) is amended
to read as follows:
``(ii) Lump-sum distribution.--For purposes
of this subparagraph, the term `lump-sum
distribution' has the meaning given such term
by section 402(e)(4)(D) (without regard to
subclauses (I), (II), (III), and (IV) of clause
(i) thereof).''
(7) Section 406(c) (relating to termination of status as
deemed employee not to be treated as separation from service
for purposes of limitation of tax) is hereby repealed.
(8) Section 407(c) (relating to termination of status as
deemed employee not to be treated as separation from service
for purposes of limitation of tax) is hereby repealed.
(9) Section 691(c) (relating to deduction for estate tax) is
amended by striking paragraph (5).
(10) Paragraph (1) of section 871(b) (relating to imposition
of tax) is amended by striking ``section 1, 55, or 402(d)(1)''
and inserting ``section 1 or 55''.
(11) Subsection (b) of section 877 (relating to alternative
tax) is amended by striking ``section 1, 55, or 402(d)(1)'' and
inserting ``section 1 or 55''.
(12) Section 4980A(c)(4) is amended--
(A) by striking ``to which an election under section
402(d)(4)(B) applies'' and inserting ``(as defined in
section 402(e)(4)(D)) with respect to which the
individual elects to have this paragraph apply'',
(B) by adding at the end the following new flush
sentence:
``An individual may elect to have this paragraph apply to only
one lump-sum distribution.'', and
(C) by striking the heading and inserting:
``(4) Special one-time election.--''.
(13) Section 402(e) is amended by striking paragraph (5).
(c) Effective Dates.--
(1) In general.--The amendments made by this section shall
apply to taxable years beginning after December 31, 1998.
(2) Retention of certain transition rules.--Notwithstanding
any other provision of this section, the amendments made by
this section shall not apply to any distribution for which the
taxpayer elects the benefits of section 1122 (h)(3) or (h)(5)
of the Tax Reform Act of 1986. For purposes of the preceding
sentence, the rules of sections 402(c)(10) and 402(d) of the
Internal Revenue Code of 1986 (as in effect before the
amendments made by this Act) shall apply.
SEC. 1402. REPEAL OF $5,000 EXCLUSION OF EMPLOYEES' DEATH BENEFITS.
(a) In General.--Subsection (b) of section 101 is hereby repealed.
(b) Conforming Amendments.--
(1) Subsection (c) of section 101 is amended by striking
``subsection (a) or (b)'' and inserting ``subsection (a)''.
(2) Sections 406(e) and 407(e) are each amended by striking
paragraph (2) and by redesignating paragraph (3) as paragraph
(2).
(3) Section 7701(a)(20) is amended by striking ``, for the
purpose of applying the provisions of section 101(b) with
respect to employees' death benefits''.
(c) Effective Date.--The amendments made by this section shall apply
with respect to decedents dying after the date of the enactment of this
Act.
SEC. 1403. SIMPLIFIED METHOD FOR TAXING ANNUITY DISTRIBUTIONS UNDER
CERTAIN EMPLOYER PLANS.
(a) General Rule.--Subsection (d) of section 72 (relating to
annuities; certain proceeds of endowment and life insurance contracts)
is amended to read as follows:
``(d) Special Rules for Qualified Employer Retirement Plans.--
``(1) Simplified method of taxing annuity payments.--
``(A) In general.--In the case of any amount received
as an annuity under a qualified employer retirement
plan--
``(i) subsection (b) shall not apply, and
``(ii) the investment in the contract shall
be recovered as provided in this paragraph.
``(B) Method of recovering investment in contract.--
``(i) In general.--Gross income shall not
include so much of any monthly annuity payment
under a qualified employer retirement plan as
does not exceed the amount obtained by
dividing--
``(I) the investment in the contract
(as of the annuity starting date), by
``(II) the number of anticipated
payments determined under the table
contained in clause (iii) (or, in the
case of a contract to which subsection
(c)(3)(B) applies, the number of
monthly annuity payments under such
contract).
``(ii) Certain rules made applicable.--Rules
similar to the rules of paragraphs (2) and (3)
of subsection (b) shall apply for purposes of
this paragraph.
``(iii) Number of anticipated payments.--
``If the age of the
primary annuitant on
The number
the annuity starting
of anticipated
date is:
payments is:
Not more than 55........ 360
More than 55 but not 310
more than 60.
More than 60 but not 260
more than 65.
More than 65 but not 210
more than 70.
More than 70............ 160.
``(C) Adjustment for refund feature not applicable.--
For purposes of this paragraph, investment in the
contract shall be determined under subsection (c)(1)
without regard to subsection (c)(2).
``(D) Special rule where lump sum paid in connection
with commencement of annuity payments.--If, in
connection with the commencement of annuity payments
under any qualified employer retirement plan, the
taxpayer receives a lump sum payment--
``(i) such payment shall be taxable under
subsection (e) as if received before the
annuity starting date, and
``(ii) the investment in the contract for
purposes of this paragraph shall be determined
as if such payment had been so received.
``(E) Exception.--This paragraph shall not apply in
any case where the primary annuitant has attained age
75 on the annuity starting date unless there are fewer
than 5 years of guaranteed payments under the annuity.
``(F) Adjustment where annuity payments not on
monthly basis.--In any case where the annuity payments
are not made on a monthly basis, appropriate
adjustments in the application of this paragraph shall
be made to take into account the period on the basis of
which such payments are made.
``(G) Qualified employer retirement plan.--For
purposes of this paragraph, the term `qualified
employer retirement plan' means any plan or contract
described in paragraph (1), (2), or (3) of section
4974(c).
``(2) Treatment of employee contributions under defined
contribution plans.--For purposes of this section, employee
contributions (and any income allocable thereto) under a
defined contribution plan may be treated as a separate
contract.''
(b) Effective Date.--The amendment made by this section shall apply
in cases where the annuity starting date is after the 90th day after
the date of the enactment of this Act.
SEC. 1404. REQUIRED DISTRIBUTIONS.
(a) In General.--Section 401(a)(9)(C) (defining required beginning
date) is amended to read as follows:
``(C) Required beginning date.--For purposes of this
paragraph--
``(i) In general.--The term `required
beginning date' means April 1 of the calendar
year following the later of--
``(I) the calendar year in which the
employee attains age 70\1/2\, or
``(II) the calendar year in which the
employee retires.
``(ii) Exception.--Subclause (II) of clause
(i) shall not apply--
``(I) except as provided in section
409(d), in the case of an employee who
is a 5-percent owner (as defined in
section 416) with respect to the plan
year ending in the calendar year in
which the employee attains age 70\1/2\,
or
``(II) for purposes of section 408
(a)(6) or (b)(3).
``(iii) Actuarial adjustment.--In the case of
an employee to whom clause (i)(II) applies who
retires in a calendar year after the calendar
year in which the employee attains age 70\1/2\,
the employee's accrued benefit shall be
actuarially increased to take into account the
period after age 70\1/2\ in which the employee
was not receiving any benefits under the plan.
``(iv) Exception for governmental and church
plans.--Clauses (ii) and (iii) shall not apply
in the case of a governmental plan or church
plan. For purposes of this clause, the term
`church plan' means a plan maintained by a
church for church employees, and the term
`church' means any church (as defined in
section 3121(w)(3)(A)) or qualified church-
controlled organization (as defined in section
3121(w)(3)(B)).''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to years beginning after December 31, 1996.
CHAPTER 2--INCREASED ACCESS TO PENSION PLANS
Subchapter A--Simple Savings Plans
SEC. 1421. ESTABLISHMENT OF SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES
OF SMALL EMPLOYERS.
(a) In General.--Section 408 (relating to individual retirement
accounts) is amended by redesignating subsection (p) as subsection (q)
and by inserting after subsection (o) the following new subsection:
``(p) Simple Retirement Accounts.--
``(1) In general.--For purposes of this title, the term
`simple retirement account' means an individual retirement plan
(as defined in section 7701(a)(37))--
``(A) with respect to which the requirements of
paragraphs (3), (4), and (5) are met; and
``(B) with respect to which the only contributions
allowed are contributions under a qualified salary
reduction arrangement.
``(2) Qualified salary reduction arrangement.--
``(A) In general.--For purposes of this subsection,
the term `qualified salary reduction arrangement' means
a written arrangement of an eligible employer under
which--
``(i) an employee eligible to participate in
the arrangement may elect to have the employer
make payments--
``(I) as elective employer
contributions to a simple retirement
account on behalf of the employee, or
``(II) to the employee directly in
cash,
``(ii) the amount which an employee may elect
under clause (i) for any year is required to be
expressed as a percentage of compensation and
may not exceed a total of $6,000 for any year,
``(iii) the employer is required to make a
matching contribution to the simple retirement
account for any year in an amount equal to so
much of the amount the employee elects under
clause (i)(I) as does not exceed the applicable
percentage of compensation for the year, and
``(iv) no contributions may be made other
than contributions described in clause (i) or
(iii).
``(B) Employer may elect 2-percent nonelective
contribution.--An employer shall be treated as meeting
the requirements of subparagraph (A)(iii) for any year
if, in lieu of the contributions described in such
clause, the employer elects to make nonelective
contributions of 2 percent of compensation for each
employee who is eligible to participate in the
arrangement and who has at least $5,000 of compensation
from the employer for the year. If an employer makes an
election under this subparagraph for any year, the
employer shall notify employees of such election within
a reasonable period of time before the 30-day period
for such year under paragraph (5)(C).
``(C) Definitions.--For purposes of this subsection--
``(i) Eligible employer.--The term `eligible
employer' means an employer who employs 100 or
fewer employees on any day during the year.
``(ii) Applicable percentage.--
``(I) In general.--The term
`applicable percentage' means 3
percent.
``(II) Election of lower
percentage.--An employer may elect to
apply a lower percentage (not less than
1 percent) for any year for all
employees eligible to participate in
the plan for such year if the employer
notifies the employees of such lower
percentage within a reasonable period
of time before the 30-day election
period for such year under paragraph
(5)(C). An employer may not elect a
lower percentage under this subclause
for any year if that election would
result in the applicable percentage
being lower than 3 percent in more than
2 of the years in the 5-year period
ending with such year.
``(III) Special rule for years
arrangement not in effect.--If any year
in the 5-year period described in
subclause (II) is a year prior to the
first year for which any qualified
salary reduction arrangement is in
effect with respect to the employer (or
any predecessor), the employer shall be
treated as if the level of the employer
matching contribution was at 3 percent
of compensation for such prior year.
``(D) Arrangement may be only plan of employer.--
``(i) In general.--An arrangement shall not
be treated as a qualified salary reduction
arrangement for any year if the employer (or
any predecessor employer) maintained a
qualified plan with respect to which
contributions were made, or benefits were
accrued, for service in any year in the period
beginning with the year such arrangement became
effective and ending with the year for which
the determination is being made.
``(ii) Qualified plan.--For purposes of this
subparagraph, the term `qualified plan' means a
plan, contract, pension, or trust described in
subparagraph (A) or (B) of section 219(g)(5).
``(E) Cost-of-living adjustment.--The Secretary shall
adjust the $6,000 amount under subparagraph (A)(ii) at
the same time and in the same manner as under section
415(d), except that the base period taken into account
shall be the calendar quarter ending September 30,
1995, and any increase under this subparagraph which is
not a multiple of $500 shall be rounded to the next
lower multiple of $500.
``(3) Vesting requirements.--The requirements of this
paragraph are met with respect to a simple retirement account
if the employee's rights to any contribution to the simple
retirement account are nonforfeitable. For purposes of this
paragraph, rules similar to the rules of subsection (k)(4)
shall apply.
``(4) Participation requirements.--
``(A) In general.--The requirements of this paragraph
are met with respect to any simple retirement account
for a year only if, under the qualified salary
reduction arrangement, all employees of the employer
who--
``(i) received at least $5,000 in
compensation from the employer during any 2
preceding years, and
``(ii) are reasonably expected to receive at
least $5,000 in compensation during the year,
are eligible to make the election under paragraph
(2)(A)(i) or receive the nonelective contribution
described in paragraph (2)(B).
``(B) Excludable employees.--An employer may elect to
exclude from the requirement under subparagraph (A)
employees described in section 410(b)(3).
``(5) Administrative requirements.--The requirements of this
paragraph are met with respect to any simplified retirement
account if, under the qualified salary reduction arrangement--
``(A) an employer must--
``(i) make the elective employer
contributions under paragraph (2)(A)(i) not
later than the close of the 30-day period
following the last day of the month with
respect to which the contributions are to be
made, and
``(ii) make the matching contributions under
paragraph (2)(A)(iii) or the nonelective
contributions under paragraph (2)(B) not later
than the date described in section
404(m)(2)(B),
``(B) an employee may elect to terminate
participation in such arrangement at any time during
the year, except that if an employee so terminates, the
arrangement may provide that the employee may not elect
to resume participation until the beginning of the next
year, and
``(C) each employee eligible to participate may
elect, during the 30-day period before the beginning of
any year (and the 30-day period before the first day
such employee is eligible to participate), to
participate in the arrangement, or to modify the
amounts subject to such arrangement, for such year.
``(6) Definitions.--For purposes of this subsection--
``(A) Compensation.--
``(i) In general.--The term `compensation'
means amounts described in paragraphs (3) and
(8) of section 6051(a).
``(ii) Self-employed.--In the case of an
employee described in subparagraph (B), the
term `compensation' means net earnings from
self-employment determined under section
1402(a) without regard to any contribution
under this subsection.
``(B) Employee.--The term `employee' includes an
employee as defined in section 401(c)(1).
``(C) Year.--The term `year' means the calendar
year.''
(b) Tax Treatment of Simple Retirement Accounts.--
(1) Deductibility of contributions by employees.--
(A) Section 219(b) (relating to maximum amount of
deduction) is amended by adding at the end the
following new paragraph:
``(4) Special rule for simple retirement accounts.--This
section shall not apply with respect to any amount contributed
to a simple retirement account established under section
408(p).''
(B) Section 219(g)(5)(A) (defining active
participant) is amended by striking ``or'' at the end
of clause (iv) and by adding at the end the following
new clause:
``(vi) any simple retirement account (within
the meaning of section 408(p)), or''.
(2) Deductibility of employer contributions.--Section 404
(relating to deductions for contributions of an employer to
pension, etc. plans) is amended by adding at the end the
following new subsection:
``(m) Special Rules for Simple Retirement Accounts.--
``(1) In general.--Employer contributions to a simple
retirement account shall be treated as if they are made to a
plan subject to the requirements of this section.
``(2) Timing.--
``(A) Deduction.--Contributions described in
paragraph (1) shall be deductible in the taxable year
of the employer with or within which the calendar year
for which the contributions were made ends.
``(B) Contributions after end of year.--For purposes
of this subsection, contributions shall be treated as
made for a taxable year if they are made on account of
the taxable year and are made not later than the time
prescribed by law for filing the return for the taxable
year (including extensions thereof).''
(3) Contributions and distributions.--
(A) Section 402 (relating to taxability of
beneficiary of employees' trust) is amended by adding
at the end the following new subsection:
``(k) Treatment of Simple Retirement Accounts.--Rules similar to the
rules of paragraphs (1) and (3) of subsection (h) shall apply to
contributions and distributions with respect to a simple retirement
account under section 408(p).''
(B) Section 408(d)(3) is amended by adding at the end
the following new subparagraph:
``(G) Simple retirement accounts.--This paragraph
shall not apply to any amount paid or distributed out
of a simple retirement account (as defined in section
408(p)) unless--
``(i) it is paid into another simple
retirement account, or
``(ii) in the case of any payment or
distribution to which section 72(t)(8) does not
apply, it is paid into an individual retirement
plan.''
(C) Clause (i) of section 457(c)(2)(B) is amended by
striking ``section 402(h)(1)(B)'' and inserting
``section 402(h)(1)(B) or (k)''.
(4) Penalties.--
(A) Early withdrawals.--Section 72(t) (relating to
additional tax in early distributions), as amended by
this Act, is amended by adding at the end the following
new paragraph:
``(6) Special rules for simple retirement accounts.--In the
case of any amount received from a simple retirement account
(within the meaning of section 408(p)) during the 2-year period
beginning on the date such individual first participated in any
qualified salary reduction arrangement maintained by the
individual's employer under section 408(p)(2), paragraph (1)
shall be applied by substituting `25 percent' for `10
percent'.''
(B) Failure to report.--Section 6693 is amended by
redesignating subsection (c) as subsection (d) and by
inserting after subsection (b) the following new
subsection:
``(c) Penalties Relating to Simple Retirement Accounts.--
``(1) Employer penalties.--An employer who fails to provide 1
or more notices required by section 408(l)(2)(C) shall pay a
penalty of $50 for each day on which such failures continue.
``(2) Trustee penalties.--A trustee who fails--
``(A) to provide 1 or more statements required by the
last sentence of section 408(i) shall pay a penalty of
$50 for each day on which such failures continue, or
``(B) to provide 1 or more summary descriptions
required by section 408(l)(2)(B) shall pay a penalty of
$50 for each day on which such failures continue.
``(3) Reasonable cause exception.--No penalty shall be
imposed under this subsection with respect to any failure which
the taxpayer shows was due to reasonable cause.''
(5) Reporting requirements.--
(A) Section 408(l) is amended by adding at the end
the following new paragraph:
``(2) Simple retirement accounts.--
``(A) No employer reports.--Except as provided in
this paragraph, no report shall be required under this
section by an employer maintaining a qualified salary
reduction arrangement under subsection (p).
``(B) Summary description.--The trustee of any simple
retirement account established pursuant to a qualified
salary reduction arrangement under subsection (p) shall
provide to the employer maintaining the arrangement,
each year a description containing the following
information:
``(i) The name and address of the employer
and the trustee.
``(ii) The requirements for eligibility for
participation.
``(iii) The benefits provided with respect to
the arrangement.
``(iv) The time and method of making
elections with respect to the arrangement.
``(v) The procedures for, and effects of,
withdrawals (including rollovers) from the
arrangement.
``(C) Employee notification.--The employer shall
notify each employee immediately before the period for
which an election described in subsection (p)(5)(C) may
be made of the employee's opportunity to make such
election. Such notice shall include a copy of the
description described in subparagraph (B).''
(B) Section 408(l) is amended by striking ``An
employer'' and inserting the following:
``(1) In general.--An employer''.
(6) Reporting requirements.--Section 408(i) is amended by
adding at the end the following new flush sentence:
``In the case of a simple retirement account under subsection (p), only
one report under this subsection shall be required to be submitted each
calendar year to the Secretary (at the time provided under paragraph
(2)) but, in addition to the report under this subsection, there shall
be furnished, within 30 days after each calendar year, to the
individual on whose behalf the account is maintained a statement with
respect to the account balance as of the close of, and the account
activity during, such calendar year.''
(7) Exemption from top-heavy plan rules.--Section 416(g)(4)
(relating to special rules for top-heavy plans) is amended by
adding at the end the following new subparagraph:
``(G) Simple retirement accounts.--The term `top-
heavy plan' shall not include a simple retirement
account under section 408(p).''
(8) Employment taxes.--
(A) Paragraph (5) of section 3121(a) is amended by
striking ``or'' at the end of subparagraph (F), by
inserting ``or'' at the end of subparagraph (G), and by
adding at the end the following new subparagraph:
``(H) under an arrangement to which section 408(p)
applies, other than any elective contributions under
paragraph (2)(A)(i) thereof,''.
(B) Section 209(a)(4) of the Social Security Act is amended
by inserting ``, or (J) under an arrangement to which section
408(p) of such Code applies, other than any elective
contributions under paragraph (2)(A)(i) thereof'' before the
semicolon at the end thereof.
(C) Paragraph (5) of section 3306(b) is amended by striking
``or'' at the end of subparagraph (F), by inserting ``or'' at
the end of subparagraph (G), and by adding at the end the
following new subparagraph:
``(H) under an arrangement to which section 408(p)
applies, other than any elective contributions under
paragraph (2)(A)(i) thereof,''.
(D) Paragraph (12) of section 3401(a) is amended by adding
the following new subparagraph:
``(D) under an arrangement to which section 408(p)
applies; or''.
(9) Conforming amendments.--
(A) Section 280G(b)(6) is amended by striking ``or''
at the end of subparagraph (B), by striking the period
at the end of subparagraph (C) and inserting ``, or''
and by adding after subparagraph (C) the following new
subparagraph:
``(D) a simple retirement account described in
section 408(p).''
(B) Section 402(g)(3) is amended by striking ``and''
at the end of subparagraph (B), by striking the period
at the end of subparagraph (C) and inserting ``, and'',
and by adding after subparagraph (C) the following new
subparagraph:
``(D) any elective employer contribution under
section 408(p)(2)(A)(i).''
(C) Subsections (b), (c), (m)(4)(B), and (n)(3)(B) of
section 414 are each amended by inserting ``408(p),''
after ``408(k),''.
(D) Section 4972(d)(1)(A) is amended by striking
``and'' at the end of clause (ii), by striking the
period at the end of clause (iii) and inserting ``,
and'', and by adding after clause (iii) the following
new clause:
``(iv) any simple retirement account (within
the meaning of section 408(p)).''
(c) Repeal of Salary Reduction Simplified Employee Pensions.--Section
408(k)(6) is amended by adding at the end the following new
subparagraph:
``(H) Termination.--This paragraph shall not apply to
years beginning after December 31, 1996. The preceding
sentence shall not apply to a simplified employee
pension if the terms of such pension, as in effect on
December 31, 1996, provide that an employee may make
the election described in subparagraph (A).''
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1996.
SEC. 1422. EXTENSION OF SIMPLE PLAN TO 401(k) ARRANGEMENTS.
(a) Alternative Method of Satisfying Section 401(k) Nondiscrimination
Tests.--Section 401(k) (relating to cash or deferred arrangements) is
amended by adding at the end the following new paragraph:
``(11) Adoption of simple plan to meet nondiscrimination
tests.--
``(A) In general.--A cash or deferred arrangement
maintained by an eligible employer shall be treated as
meeting the requirements of paragraph (3)(A)(ii) if
such arrangement meets--
``(i) the contribution requirements of
subparagraph (B),
``(ii) the exclusive benefit requirements of
subparagraph (C), and
``(iii) the vesting requirements of section
408(p)(3).
``(B) Contribution requirements.--
``(i) In general.--The requirements of this
subparagraph are met if, under the
arrangement--
``(I) an employee may elect to have
the employer make elective
contributions for the year on behalf of
the employee to a trust under the plan
in an amount which is expressed as a
percentage of compensation of the
employee but which in no event exceeds
$6,000,
``(II) the employer is required to
make a matching contribution to the
trust for the year in an amount equal
to so much of the amount the employee
elects under subclause (I) as does not
exceed 3 percent of compensation for
the year, and
``(III) no other contributions may be
made other than contributions described
in subclause (I) or (II).
``(ii) Employer may elect 2-percent
nonelective contribution.--An employer shall be
treated as meeting the requirements of clause
(i)(II) for any year if, in lieu of the
contributions described in such clause, the
employer elects (pursuant to the terms of the
arrangement) to make nonelective contributions
of 2 percent of compensation for each employee
who is eligible to participate in the
arrangement and who has at least $5,000 of
compensation from the employer for the year. If
an employer makes an election under this
subparagraph for any year, the employer shall
notify employees of such election within a
reasonable period of time before the 30th day
before the beginning of such year.
``(C) Exclusive benefit.--The requirements of this
subparagraph are met for any year to which this
paragraph applies if no contributions were made, or
benefits were accrued, for services during such year
under any qualified plan of the employer on behalf of
any employee eligible to participate in the cash or
deferred arrangement, other than contributions
described in subparagraph (B).
``(D) Definitions and special rule.--
``(i) Definitions.--For purposes of this
paragraph, any term used in this paragraph
which is also used in section 408(p) shall have
the meaning given such term by such section.
``(ii) Coordination with top-heavy rules.--A
plan meeting the requirements of this paragraph
for any year shall not be treated as a top-
heavy plan under section 416 for such year.''
(b) Alternative Methods of Satisfying Section 401(m)
Nondiscrimination Tests.--Section 401(m) (relating to nondiscrimination
test for matching contributions and employee contributions) is amended
by redesignating paragraph (10) as paragraph (11) and by adding after
paragraph (9) the following new paragraph:
``(10) Alternative method of satisfying tests.--A defined
contribution plan shall be treated as meeting the requirements
of paragraph (2) with respect to matching contributions if the
plan--
``(A) meets the contribution requirements of
subparagraph (B) of subsection (k)(11),
``(B) meets the exclusive benefit requirements of
subsection (k)(11)(C), and
``(C) meets the vesting requirements of section
408(p)(3).''
(c) Effective Date.--The amendments made by this section shall apply
to plan years beginning after December 31, 1996.
Subchapter B--Other Provisions
SEC. 1426. TAX-EXEMPT ORGANIZATIONS ELIGIBLE UNDER SECTION 401(k).
(a) In General.--Subparagraph (B) of section 401(k)(4) is amended to
read as follows:
``(B) Eligibility of state and local governments and
tax-exempt organizations.--
``(i) Tax-exempts eligible.--Except as
provided in clause (ii), any organization
exempt from tax under this subtitle may include
a qualified cash or deferred arrangement as
part of a plan maintained by it.
``(ii) Governments ineligible.--A cash or
deferred arrangement shall not be treated as a
qualified cash or deferred arrangement if it is
part of a plan maintained by a State or local
government or political subdivision thereof, or
any agency or instrumentality thereof. This
clause shall not apply to a rural cooperative
plan or to a plan of an employer described in
clause (iii).
``(iii) Treatment of indian tribal
governments.--An employer which is an Indian
tribal government (as defined in section
7701(a)(40)), a subdivision of an Indian tribal
government (determined in accordance with
section 7871(d)), an agency or instrumentality
of an Indian tribal government or subdivision
thereof, or a corporation chartered under
Federal, State, or tribal law which is owned in
whole or in part by any of the foregoing shall
be treated as an organization exempt from tax
under this subtitle for purposes of clause
(i).''
(b) Effective Date.--The amendment made by this section shall apply
to plan years beginning after December 31, 1996, but shall not apply to
any cash or deferred arrangement to which clause (i) of section
1116(f)(2)(B) of the Tax Reform Act of 1986 applies.
CHAPTER 3--NONDISCRIMINATION PROVISIONS
SEC. 1431. DEFINITION OF HIGHLY COMPENSATED EMPLOYEES; REPEAL OF FAMILY
AGGREGATION.
(a) In General.--Paragraph (1) of section 414(q) (defining highly
compensated employee) is amended to read as follows:
``(1) In general.--The term `highly compensated employee'
means any employee who--
``(A) was a 5-percent owner at any time during the
year or the preceding year, or
``(B) for the preceding year--
``(i) had compensation from the employer in
excess of $80,000, and
``(ii) was in the top-paid group of the
employer.
The Secretary shall adjust the $80,000 amount under
subparagraph (B) at the same time and in the same manner as
under section 415(d), except that the base period shall be the
calendar quarter ending September 30, 1996.''
(b) Repeal of Family Aggregation Rules.--
(1) In general.--Paragraph (6) of section 414(q) is hereby
repealed.
(2) Compensation limit.--Paragraph (17)(A) of section 401(a)
is amended by striking the last sentence.
(3) Deduction.--Subsection (l) of section 404 is amended by
striking the last sentence.
(c) Conforming Amendments.--
(1)(A) Subsection (q) of section 414 is amended by striking
paragraphs (2), (5), (8), and (12) and by redesignating
paragraphs (3), (4), (7), (9), (10), and (11) as paragraphs (2)
through (7), respectively.
(B) Sections 129(d)(8)(B), 401(a)(5)(D)(ii), 408(k)(2)(C),
and 416(i)(1)(D) are each amended by striking ``section
414(q)(7)'' and inserting ``section 414(q)(4)''.
(C) Section 416(i)(1)(A) is amended by striking ``section
414(q)(8)'' and inserting ``section 414(r)(9)''.
(2)(A) Section 414(r) is amended by adding at the end the
following new paragraph:
``(9) Excluded employees.--For purposes of this subsection,
the following employees shall be excluded:
``(A) Employees who have not completed 6 months of
service.
``(B) Employees who normally work less than 17\1/2\
hours per week.
``(C) Employees who normally work not more than 6
months during any year.
``(D) Employees who have not attained the age of 21.
``(E) Except to the extent provided in regulations,
employees who are included in a unit of employees
covered by an agreement which the Secretary of Labor
finds to be a collective bargaining agreement between
employee representatives and the employer.
Except as provided by the Secretary, the employer may elect to
apply subparagraph (A), (B), (C), or (D) by substituting a
shorter period of service, smaller number of hours or months,
or lower age for the period of service, number of hours or
months, or age (as the case may be) specified in such
subparagraph.''
(B) Subparagraph (A) of section 414(r)(2) is amended by
striking ``subsection (q)(8)'' and inserting ``paragraph (9)''.
(3) Section 1114(c)(4) of the Tax Reform Act of 1986 is
amended by adding at the end the following new sentence: ``Any
reference in this paragraph to section 414(q) shall be treated
as a reference to such section as in effect on the day before
the date of the enactment of the Small Business Job Protection
Act of 1996.''.
(d) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to years beginning after December 31, 1996, except that
in determining whether an employee is a highly compensated
employee for years beginning in 1997, such amendments shall be
treated as having been in effect for years beginning in 1996.
(2) Family aggregation.--The amendments made by subsection
(b) shall apply to years beginning after December 31, 1996.
SEC. 1432. MODIFICATION OF ADDITIONAL PARTICIPATION REQUIREMENTS.
(a) General Rule.--Section 401(a)(26)(A) (relating to additional
participation requirements) is amended to read as follows:
``(A) In general.--In the case of a trust which is a
part of a defined benefit plan, such trust shall not
constitute a qualified trust under this subsection
unless on each day of the plan year such trust benefits
at least the lesser of--
``(i) 50 employees of the employer, or
``(ii) the greater of--
``(I) 40 percent of all employees of
the employer, or
``(II) 2 employees (or if there is
only 1 employee, such employee).''
(b) Separate Line of Business Test.--Section 401(a)(26)(G) (relating
to separate line of business) is amended by striking ``paragraph (7)''
and inserting ``paragraph (2)(A) or (7)''.
(c) Effective Date.--The amendments made by this section shall apply
to years beginning after December 31, 1996.
SEC. 1433. NONDISCRIMINATION RULES FOR QUALIFIED CASH OR DEFERRED
ARRANGEMENTS AND MATCHING CONTRIBUTIONS.
(a) Alternative Methods of Satisfying Section 401(k)
Nondiscrimination Tests.--Section 401(k) (relating to cash or deferred
arrangements), as amended by section 1422, is amended by adding at the
end the following new paragraph:
``(12) Alternative methods of meeting nondiscrimination
requirements.--
``(A) In general.--A cash or deferred arrangement
shall be treated as meeting the requirements of
paragraph (3)(A)(ii) if such arrangement--
``(i) meets the contribution requirements of
subparagraph (B) or (C), and
``(ii) meets the notice requirements of
subparagraph (D).
``(B) Matching contributions.--
``(i) In general.--The requirements of this
subparagraph are met if, under the arrangement,
the employer makes matching contributions on
behalf of each employee who is not a highly
compensated employee in an amount equal to--
``(I) 100 percent of the elective
contributions of the employee to the
extent such elective contributions do
not exceed 3 percent of the employee's
compensation, and
``(II) 50 percent of the elective
contributions of the employee to the
extent that such elective contributions
exceed 3 percent but do not exceed 5
percent of the employee's compensation.
``(ii) Rate for highly compensated
employees.--The requirements of this
subparagraph are not met if, under the
arrangement, the rate of matching contribution
with respect to any elective contribution of a
highly compensated employee at any rate of
elective contribution is greater than that with
respect to an employee who is not a highly
compensated employee.
``(iii) Alternative plan designs.--If the
rate of any matching contribution with respect
to any rate of elective contribution is not
equal to the percentage required under clause
(i), an arrangement shall not be treated as
failing to meet the requirements of clause (i)
if--
``(I) the rate of an employer's
matching contribution does not increase
as an employee's rate of elective
contributions increase, and
``(II) the aggregate amount of
matching contributions at such rate of
elective contribution is at least equal
to the aggregate amount of matching
contributions which would be made if
matching contributions were made on the
basis of the percentages described in
clause (i).
``(C) Nonelective contributions.--The requirements of
this subparagraph are met if, under the arrangement,
the employer is required, without regard to whether the
employee makes an elective contribution or employee
contribution, to make a contribution to a defined
contribution plan on behalf of each employee who is not
a highly compensated employee and who is eligible to
participate in the arrangement in an amount equal to at
least 3 percent of the employee's compensation.
``(D) Notice requirement.--An arrangement meets the
requirements of this paragraph if, under the
arrangement, each employee eligible to participate is,
within a reasonable period before any year, given
written notice of the employee's rights and obligations
under the arrangement which--
``(i) is sufficiently accurate and
comprehensive to appraise the employee of such
rights and obligations, and
``(ii) is written in a manner calculated to
be understood by the average employee eligible
to participate.
``(E) Other requirements.--
``(i) Withdrawal and vesting restrictions.--
An arrangement shall not be treated as meeting
the requirements of subparagraph (B) or (C) of
this paragraph unless the requirements of
subparagraphs (B) and (C) of paragraph (2) are
met with respect to all employer contributions
(including matching contributions) taken into
account in determining whether the requirements
of subparagraphs (B) and (C) of this paragraph
are met.
``(ii) Social security and similar
contributions not taken into account.--An
arrangement shall not be treated as meeting the
requirements of subparagraph (B) or (C) unless
such requirements are met without regard to
subsection (l), and, for purposes of subsection
(l), employer contributions under subparagraph
(B) or (C) shall not be taken into account.
``(F) Other plans.--An arrangement shall be treated
as meeting the requirements under subparagraph (A)(i)
if any other plan maintained by the employer meets such
requirements with respect to employees eligible under
the arrangement.''
(b) Alternative Methods of Satisfying Section 401(m)
Nondiscrimination Tests.--Section 401(m) (relating to nondiscrimination
test for matching contributions and employee contributions), as amended
by this Act, is amended by redesignating paragraph (11) as paragraph
(12) and by adding after paragraph (10) the following new paragraph:
``(11) Alternative method of satisfying tests.--
``(A) In general.--A defined contribution plan shall
be treated as meeting the requirements of paragraph (2)
with respect to matching contributions if the plan--
``(i) meets the contribution requirements of
subparagraph (B) or (C) of subsection (k)(12),
``(ii) meets the notice requirements of
subsection (k)(12)(D), and
``(iii) meets the requirements of
subparagraph (B).
``(B) Limitation on matching contributions.--The
requirements of this subparagraph are met if--
``(i) matching contributions on behalf of any
employee may not be made with respect to an
employee's contributions or elective deferrals
in excess of 6 percent of the employee's
compensation,
``(ii) the rate of an employer's matching
contribution does not increase as the rate of
an employee's contributions or elective
deferrals increase, and
``(iii) the matching contribution with
respect to any highly compensated employee at
any rate of an employee contribution or rate of
elective deferral is not greater than that with
respect to an employee who is not a highly
compensated employee.''
(c) Year for Computing Nonhighly Compensated Employee Percentage.--
(1) Cash or deferred arrangements.--Clause (ii) of section
401(k)(3)(A) is amended--
(A) by striking ``such year'' and inserting ``the
plan year'',
(B) by striking ``for such plan year'' and inserting
``for the preceding plan year'', and
(C) by adding at the end the following new sentence:
``An arrangement may apply this clause by using the
plan year rather than the preceding plan year if the
employer so elects, except that if such an election is
made, it may not be changed except as provided by the
Secretary.''
(2) Matching and employee contributions.--Section
401(m)(2)(A) is amended--
(A) by inserting ``for such plan year'' after
``highly compensated employees'',
(B) by inserting ``for the preceding plan year''
after ``eligible employees'' each place it appears in
clause (i) and clause (ii), and
(C) by adding at the end the following flush
sentence: ``This subparagraph may be applied by using
the plan year rather than the preceding plan year if
the employer so elects, except that if such an election
is made, it may not be changed except as provided the
Secretary.''
(d) Special Rule for Determining Average Deferral Percentage for
First Plan Year, Etc.--
(1) Paragraph (3) of section 401(k) is amended by adding at
the end the following new subparagraph:
``(E) For purposes of this paragraph, in the case of
the first plan year of any plan (other than a successor
plan), the amount taken into account as the actual
deferral percentage of nonhighly compensated employees
for the preceding plan year shall be--
``(i) 3 percent, or
``(ii) if the employer makes an election
under this subclause, the actual deferral
percentage of nonhighly compensated employees
determined for such first plan year.''
(2) Paragraph (3) of section 401(m) is amended by adding at
the end the following: ``Rules similar to the rules of
subsection (k)(3)(E) shall apply for purposes of this
subsection.''
(e) Distribution of Excess Contributions and Excess Aggregate
Contributions.--
(1) Subparagraph (C) of section 401(k)(8) (relating to
arrangement not disqualified if excess contributions
distributed) is amended by striking ``on the basis of the
respective portions of the excess contributions attributable to
each of such employees'' and inserting ``on the basis of the
amount of contributions by, or on behalf of, each of such
employees''.
(2) Subparagraph (C) of section 401(m)(6) (relating to method
of distributing excess aggregate contributions) is amended by
striking ``on the basis of the respective portions of such
amounts attributable to each of such employees'' and inserting
``on the basis of the amount of contributions on behalf of, or
by, each such employee''.
(f) Effective Dates.--
(1) In general.--The amendments made by this section shall
apply to years beginning after December 31, 1998.
(2) Exceptions.--The amendments made by subsections (c), (d),
and (e) shall apply to years beginning after December 31, 1996.
SEC. 1434. DEFINITION OF COMPENSATION FOR SECTION 415 PURPOSES.
(a) General Rule.--Section 415(c)(3) (defining participant's
compensation) is amended by adding at the end the following new
subparagraph:
``(D) Certain deferrals included.--The term
`participant's compensation' shall include--
``(i) any elective deferral (as defined in
section 402(g)(3)), and
``(ii) any amount which is contributed by the
employer at the election of the employee and
which is not includible in the gross income of
the employee under section 125 or 457.''
(b) Conforming Amendments.--
(1) Section 414(q)(4), as redesignated by section 1431, is
amended to read as follows:
``(4) Compensation.--For purposes of this subsection, the
term `compensation' has the meaning given such term by section
415(c)(3).''
(2) Section 414(s)(2) is amended by inserting ``not'' after
``elect'' in the text and heading thereof.
(c) Effective Date.--The amendments made by this section shall apply
to years beginning after December 31, 1997.
CHAPTER 4--MISCELLANEOUS PROVISIONS
SEC. 1441. PLANS COVERING SELF-EMPLOYED INDIVIDUALS.
(a) Aggregation Rules.--Section 401(d) (relating to additional
requirements for qualification of trusts and plans benefiting owner-
employees) is amended to read as follows:
``(d) Contribution Limit on Owner-Employees.--A trust forming part of
a pension or profit-sharing plan which provides contributions or
benefits for employees some or all of whom are owner-employees shall
constitute a qualified trust under this section only if, in addition to
meeting the requirements of subsection (a), the plan provides that
contributions on behalf of any owner-employee may be made only with
respect to the earned income of such owner-employee which is derived
from the trade or business with respect to which such plan is
established.''
(b) Effective Date.--The amendments made by this section shall apply
to years beginning after December 31, 1996.
SEC. 1442. ELIMINATION OF SPECIAL VESTING RULE FOR MULTIEMPLOYER PLANS.
(a) In General.--Paragraph (2) of section 411(a) (relating to minimum
vesting standards) is amended--
(1) by striking ``subparagraph (A), (B), or (C)'' and
inserting ``subparagraph (A) or (B)''; and
(2) by striking subparagraph (C).
(b) Effective Date.--The amendments made by this section shall apply
to plan years beginning on or after the earlier of--
(1) the later of--
(A) January 1, 1997, or
(B) the date on which the last of the collective
bargaining agreements pursuant to which the plan is
maintained terminates (determined without regard to any
extension thereof after the date of the enactment of
this Act), or
(2) January 1, 1999.
Such amendments shall not apply to any individual who does not have
more than 1 hour of service under the plan on or after the 1st day of
the 1st plan year to which such amendments apply.
SEC. 1443. DISTRIBUTIONS UNDER RURAL COOPERATIVE PLANS.
(a) Distributions for Hardship or After a Certain Age.--Section
401(k)(7) is amended by adding at the end the following new
subparagraph:
``(C) Special rule for certain distributions.--A
rural cooperative plan which includes a qualified cash
or deferred arrangement shall not be treated as
violating the requirements of section 401(a) or of
paragraph (2) merely by reason of a hardship
distribution or a distribution to a participant after
attainment of age 59\1/2\. For purposes of this
section, the term `hardship distribution' means a
distribution described in paragraph (2)(B)(i)(IV)
(without regard to the limitation of its application to
profit-sharing or stock bonus plans).''
(b) Public Utility Districts.--Clause (i) of section 401(k)(7)(B)
(defining rural cooperative) is amended to read as follows:
``(i) any organization which--
``(I) is engaged primarily in
providing electric service on a mutual
or cooperative basis, or
``(II) is engaged primarily in
providing electric service to the
public in its area of service and which
is exempt from tax under this subtitle
or which is a State or local government
(or an agency or instrumentality
thereof), other than a municipality (or
an agency or instrumentality
thereof),''.
(c) Effective Dates.--
(1) Distributions.--The amendments made by subsection (a)
shall apply to distributions after the date of the enactment of
this Act.
(2) Rural cooperative.--The amendments made by subsection (b)
shall apply to plan years beginning after December 31, 1996.
SEC. 1444. TREATMENT OF GOVERNMENTAL PLANS UNDER SECTION 415.
(a) Compensation Limit.--Subsection (b) of section 415 is amended by
adding immediately after paragraph (10) the following new paragraph:
``(11) Special limitation rule for governmental plans.--In
the case of a governmental plan (as defined in section 414(d)),
subparagraph (B) of paragraph (1) shall not apply.''
(b) Treatment of Certain Excess Benefit Plans.--
(1) In general.--Section 415 is amended by adding at the end
the following new subsection:
``(m) Treatment of Qualified Governmental Excess Benefit
Arrangements.--
``(1) Governmental plan not affected.--In determining whether
a governmental plan (as defined in section 414(d)) meets the
requirements of this section, benefits provided under a
qualified governmental excess benefit arrangement shall not be
taken into account. Income accruing to a governmental plan (or
to a trust that is maintained solely for the purpose of
providing benefits under a qualified governmental excess
benefit arrangement) in respect of a qualified governmental
excess benefit arrangement shall constitute income derived from
the exercise of an essential governmental function upon which
such governmental plan (or trust) shall be exempt from tax
under section 115.
``(2) Taxation of participant.--For purposes of this
chapter--
``(A) the taxable year or years for which amounts in
respect of a qualified governmental excess benefit
arrangement are includible in gross income by a
participant, and
``(B) the treatment of such amounts when so
includible by the participant,
shall be determined as if such qualified governmental excess
benefit arrangement were treated as a plan for the deferral of
compensation which is maintained by a corporation not exempt
from tax under this chapter and which does not meet the
requirements for qualification under section 401.
``(3) Qualified governmental excess benefit arrangement.--For
purposes of this subsection, the term `qualified governmental
excess benefit arrangement' means a portion of a governmental
plan if--
``(A) such portion is maintained solely for the
purpose of providing to participants in the plan that
part of the participant's annual benefit otherwise
payable under the terms of the plan that exceeds the
limitations on benefits imposed by this section,
``(B) under such portion no election is provided at
any time to the participant (directly or indirectly) to
defer compensation, and
``(C) benefits described in subparagraph (A) are not
paid from a trust forming a part of such governmental
plan unless such trust is maintained solely for the
purpose of providing such benefits.''
(2) Coordination with section 457.--Subsection (e) of section
457 is amended by adding at the end the following new
paragraph:
``(14) Treatment of qualified governmental excess benefit
arrangements.--Subsections (b)(2) and (c)(1) shall not apply to
any qualified governmental excess benefit arrangement (as
defined in section 415(m)(3)), and benefits provided under such
an arrangement shall not be taken into account in determining
whether any other plan is an eligible deferred compensation
plan.''
(3) Conforming amendment.--Paragraph (2) of section 457(f) is
amended by striking ``and'' at the end of subparagraph (C), by
striking the period at the end of subparagraph (D) and
inserting ``, and'', and by inserting immediately thereafter
the following new subparagraph:
``(E) a qualified governmental excess benefit
arrangement described in section 415(m).''
(c) Exemption for Survivor and Disability Benefits.--Paragraph (2) of
section 415(b) is amended by adding at the end the following new
subparagraph:
``(I) Exemption for survivor and disability benefits
provided under governmental plans.--Subparagraph (C) of
this paragraph and paragraph (5) shall not apply to--
``(i) income received from a governmental
plan (as defined in section 414(d)) as a
pension, annuity, or similar allowance as the
result of the recipient becoming disabled by
reason of personal injuries or sickness, or
``(ii) amounts received from a governmental
plan by the beneficiaries, survivors, or the
estate of an employee as the result of the
death of the employee.''
(d) Revocation of Grandfather Election.--
(1) In general.--Subparagraph (C) of section 415(b)(10) is
amended by adding at the end the following new clause:
``(ii) Revocation of election.--An election
under clause (i) may be revoked not later than
the last day of the third plan year beginning
after the date of the enactment of this clause.
The revocation shall apply to all plan years to
which the election applied and to all
subsequent plan years. Any amount paid by a
plan in a taxable year ending after the
revocation shall be includible in income in
such taxable year under the rules of this
chapter in effect for such taxable year, except
that, for purposes of applying the limitations
imposed by this section, any portion of such
amount which is attributable to any taxable
year during which the election was in effect
shall be treated as received in such taxable
year.''
(2) Conforming amendment.--Subparagraph (C) of section
415(b)(10) is amended by striking ``This'' and inserting:
``(i) In general.--This''.
(e) Effective Date.--
(1) In general.--The amendments made by subsections (a), (b),
and (c) shall apply to years beginning after December 31, 1994.
The amendments made by subsection (d) shall apply with respect
to revocations adopted after the date of the enactment of this
Act.
(2) Treatment for years beginning before january 1, 1995.--
Nothing in the amendments made by this section shall be
construed to infer that a governmental plan (as defined in
section 414(d) of the Internal Revenue Code of 1986) fails to
satisfy the requirements of section 415 of such Code for any
taxable year beginning before January 1, 1995.
SEC. 1445. UNIFORM RETIREMENT AGE.
(a) Discrimination Testing.--Paragraph (5) of section 401(a)
(relating to special rules relating to nondiscrimination requirements)
is amended by adding at the end the following new subparagraph:
``(F) Social security retirement age.--For purposes
of testing for discrimination under paragraph (4)--
``(i) the social security retirement age (as
defined in section 415(b)(8)) shall be treated
as a uniform retirement age, and
``(ii) subsidized early retirement benefits
and joint and survivor annuities shall not be
treated as being unavailable to employees on
the same terms merely because such benefits or
annuities are based in whole or in part on an
employee's social security retirement age (as
so defined).''
(b) Effective Date.--The amendment made by this section shall apply
to years beginning after December 31, 1996.
SEC. 1446. CONTRIBUTIONS ON BEHALF OF DISABLED EMPLOYEES.
(a) All Disabled Participants Receiving Contributions.--Section
415(c)(3)(C) is amended by adding at the end the following: ``If a
defined contribution plan provides for the continuation of
contributions on behalf of all participants described in clause (i) for
a fixed or determinable period, this subparagraph shall be applied
without regard to clauses (ii) and (iii).''
(b) Effective Date.--The amendment made by this section shall apply
to years beginning after December 31, 1996.
SEC. 1447. TREATMENT OF DEFERRED COMPENSATION PLANS OF STATE AND LOCAL
GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.
(a) Special Rules for Plan Distributions.--Paragraph (9) of section
457(e) (relating to other definitions and special rules) is amended to
read as follows:
``(9) Benefits not treated as made available by reason of
certain elections, etc.--
``(A) Total amount payable is $3,500 or less.--The
total amount payable to a participant under the plan
shall not be treated as made available merely because
the participant may elect to receive such amount (or
the plan may distribute such amount without the
participant's consent) if--
``(i) such amount does not exceed $3,500, and
``(ii) such amount may be distributed only
if--
``(I) no amount has been deferred
under the plan with respect to such
participant during the 2-year period
ending on the date of the distribution,
and
``(II) there has been no prior
distribution under the plan to such
participant to which this subparagraph
applied.
A plan shall not be treated as failing to meet the
distribution requirements of subsection (d) by reason
of a distribution to which this subparagraph applies.
``(B) Election to defer commencement of
distributions.--The total amount payable to a
participant under the plan shall not be treated as made
available merely because the participant may elect to
defer commencement of distributions under the plan if--
``(i) such election is made after amounts may
be available under the plan in accordance with
subsection (d)(1)(A) and before commencement of
such distributions, and
``(ii) the participant may make only 1 such
election.''
(b) Cost-of-Living Adjustment of Maximum Deferral Amount.--Subsection
(e) of section 457, as amended by section 1444(b)(2) (relating to
governmental plans), is amended by adding at the end the following new
paragraph:
``(15) Cost-of-living adjustment of maximum deferral
amount.--The Secretary shall adjust the $7,500 amount specified
in subsections (b)(2) and (c)(1) at the same time and in the
same manner as under section 415(d), except that the base
period shall be the calendar quarter ending September 30, 1994,
and any increase under this paragraph which is not a multiple
of $500 shall be rounded to the next lowest multiple of $500.''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1996.
SEC. 1448. TRUST REQUIREMENT FOR DEFERRED COMPENSATION PLANS OF STATE
AND LOCAL GOVERNMENTS.
(a) In General.--Section 457 is amended by adding at the end the
following new subsection:
``(g) Governmental Plans Must Maintain Set-Asides for Exclusive
Benefit of Participants.--
``(1) In general.--A plan maintained by an eligible employer
described in subsection (e)(1)(A) shall not be treated as an
eligible deferred compensation plan unless all assets and
income of the plan described in subsection (b)(6) are held in
trust for the exclusive benefit of participants and their
beneficiaries.
``(2) Taxability of trusts and participants.--For purposes of
this title--
``(A) a trust described in paragraph (1) shall be
treated as an organization exempt from taxation under
section 501(a), and
``(B) notwithstanding any other provision of this
title, amounts in the trust shall be includible in the
gross income of participants and beneficiaries only to
the extent, and at the time, provided in this section.
``(3) Custodial accounts and contracts.--For purposes of this
subsection, custodial accounts and contracts described in
section 401(f) shall be treated as trusts under rules similar
to the rules under section 401(f).''
(b) Conforming Amendment.--Paragraph (6) of section 457(b) is amended
by inserting ``except as provided in subsection (g),'' before ``which
provides that''.
(c) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to assets and
income described in section 457(b)(6) of the Internal Revenue
Code of 1986 held by a plan on and after the date of the
enactment of this Act.
(2) Transition rule.--In the case of assets and income
described in paragraph (1) held by a plan on the date of the
enactment of this Act, a trust need not be established by
reason of the amendments made by this section before January 1,
1999.
SEC. 1449. TRANSITION RULE FOR COMPUTING MAXIMUM BENEFITS UNDER SECTION
415 LIMITATIONS.
(a) In General.--Subparagraph (A) of section 767(d)(3) of the Uruguay
Round Agreements Act is amended to read as follows:
``(A) Exception.--A plan that was adopted and in
effect before December 8, 1994, shall not be required
to apply the amendments made by subsection (b) with
respect to benefits accrued before the earlier of--
``(i) the later of the date a plan amendment
applying such amendment is adopted or made
effective, or
``(ii) the first day of the first limitation
year beginning after December 31, 1999.
Determinations under section 415(b)(2)(E) of the
Internal Revenue Code of 1986 before such earlier date
shall be made with respect to such benefits on the
basis of such section as in effect on December 7, 1994
(except that the modification made by section 1449(b)
of the Small Business Job Protection Act of 1996 shall
be taken into account), and the provisions of the plan
as in effect on December 7, 1994, but only if such
provisions of the plan meet the requirements of such
section (as so in effect).''
(b) Modification of Certain Assumptions for Adjusting Benefits of
Defined Benefit Plans for Early Retirees.--Subparagraph (E) of section
415(b)(2) (relating to limitation on certain assumptions) is amended--
(1) by striking ``Except as provided in clause (ii), for
purposes of adjusting any benefit or limitation under
subparagraph (B) or (C),'' in clause (i) and inserting ``For
purposes of adjusting any limitation under subparagraph (C)
and, except as provided in clause (ii), for purposes of
adjusting any benefit under subparagraph (B),'', and
(2) by striking ``For purposes of adjusting the benefit or
limitation of any form of benefit subject to section
417(e)(3),'' in clause (ii) and inserting ``For purposes of
adjusting any benefit under subparagraph (B) for any form of
benefit subject to section 417(e)(3),''.
(c) Effective Date.--The amendments made by this section shall take
effect as if included in the provisions of section 767 of the Uruguay
Round Agreements Act.
(d) Transitional Rule.--In the case of a plan that was adopted and in
effect before December 8, 1994, if--
(1) a plan amendment was adopted or made effective on or
before the date of the enactment of this Act applying the
amendments made by section 767 of the Uruguay Round Agreements
Act, and
(2) within 1 year after the date of the enactment of this
Act, a plan amendment is adopted which repeals the amendment
referred to in paragraph (1),
the amendment referred to in paragraph (1) shall not be taken into
account in applying section 767(d)(3)(A) of the Uruguay Round
Agreements Act, as amended by subsection (a).
SEC. 1450. MODIFICATIONS OF SECTION 403(b).
(a) Multiple Salary Reduction Agreements Permitted.--
(1) General rule.--For purposes of section 403(b) of the
Internal Revenue Code of 1986, the frequency that an employee
is permitted to enter into a salary reduction agreement, the
salary to which such an agreement may apply, and the ability to
revoke such an agreement shall be determined under the rules
applicable to cash or deferred elections under section 401(k)
of such Code.
(2) Effective date.--This subsection shall apply to taxable
years beginning after December 31, 1995.
(b) Treatment of Indian Tribal Governments.--
(1) In general.--In the case of any contract purchased in a
plan year beginning before January 1, 1995, section 403(b) of
the Internal Revenue Code of 1986 shall be applied as if any
reference to an employer described in section 501(c)(3) of the
Internal Revenue Code of 1986 which is exempt from tax under
section 501 of such Code included a reference to an employer
which is an Indian tribal government (as defined by section
7701(a)(40) of such Code), a subdivision of an Indian tribal
government (determined in accordance with section 7871(d) of
such Code), an agency or instrumentality of an Indian tribal
government or subdivision thereof, or a corporation chartered
under Federal, State, or tribal law which is owned in whole or
in part by any of the foregoing.
(2) Rollovers.--Solely for purposes of applying section
403(b)(8) of such Code to a contract to which paragraph (1)
applies, a qualified cash or deferred arrangement under section
401(k) of such Code shall be treated as if it were a plan or
contract described in clause (ii) of section 403(b)(8)(A) of
such Code.
(c) Elective Deferrals.--
(1) In general.--Subparagraph (E) of section 403(b)(1) is
amended to read as follows:
``(E) in the case of a contract purchased under a
salary reduction agreement, the contract meets the
requirements of section 401(a)(30),''.
(2) Effective date.--The amendment made by this subsection
shall apply to years beginning after December 31, 1995, except
a contract shall not be required to meet any change in any
requirement by reason of such amendment before the 90th day
after the date of the enactment of this Act.
SEC. 1451. WAIVER OF MINIMUM PERIOD FOR JOINT AND SURVIVOR ANNUITY
EXPLANATION BEFORE ANNUITY STARTING DATE.
(a) General Rule.--For purposes of section 417(a)(3)(A) of the
Internal Revenue Code of 1986 (relating to plan to provide written
explanations), the minimum period prescribed by the Secretary of the
Treasury between the date that the explanation referred to in such
section is provided and the annuity starting date shall not apply if
waived by the participant and, if applicable, the participant's spouse.
(b) Effective Date.--Subsection (a) shall apply to plan years
beginning after December 31, 1996.
SEC. 1452. REPEAL OF LIMITATION IN CASE OF DEFINED BENEFIT PLAN AND
DEFINED CONTRIBUTION PLAN FOR SAME EMPLOYEE; EXCESS
DISTRIBUTIONS.
(a) In General.--Section 415(e) is repealed.
(b) Excess Distributions.--Section 4980A is amended by adding at the
end the following new subsection:
``(g) Limitation on Application.--This section shall not apply to
distributions during years beginning after December 31, 1995, and
before January 1, 1999, and such distributions shall be treated as made
first from amounts not described in subsection (f).''
(c) Conforming Amendments.--
(1) Paragraph (1) of section 415(a) is amended--
(A) by adding ``or'' at the end of subparagraph (A),
(B) by striking ``, or'' at the end of subparagraph
(B) and inserting a period, and
(C) by striking subparagraph (C).
(2) Subparagraph (B) of section 415(b)(5) is amended by
striking ``and subsection (e)''.
(3) Paragraph (1) of section 415(f) is amended by striking
``subsections (b), (c), and (e)'' and inserting ``subsections
(b) and (c)''.
(4) Subsection (g) of section 415 is amended by striking
``subsections (e) and (f)'' in the last sentence and inserting
``subsection (f)''.
(5) Clause (i) of section 415(k)(2)(A) is amended to read as
follows:
``(i) any contribution made directly by an
employee under such an arrangement shall not be
treated as an annual addition for purposes of
subsection (c), and''.
(6) Clause (ii) of section 415(k)(2)(A) is amended by
striking ``subsections (c) and (e)'' and inserting ``subsection
(c)''.
(7) Section 416 is amended by striking subsection (h).
(d) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to limitation years
beginning after December 31, 1998.
(2) Excess distributions.--The amendment made by subsection
(b) shall apply to years beginning after December 31, 1995.
SEC. 1453. TAX ON PROHIBITED TRANSACTIONS.
(a) In General.--Section 4975(a) is amended by striking ``5 percent''
and inserting ``10 percent''.
(b) Effective Date.--The amendment made by this section shall apply
to prohibited transactions occurring after the date of the enactment of
this Act.
SEC. 1454. TREATMENT OF LEASED EMPLOYEES.
(a) General Rule.--Subparagraph (C) of section 414(n)(2) (defining
leased employee) is amended to read as follows:
``(C) such services are performed under primary
direction or control by the recipient.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to years beginning after December 31, 1996, but shall not apply to any
relationship determined under an Internal Revenue Service ruling issued
before the date of the enactment of this Act pursuant to section
414(n)(2)(C) of the Internal Revenue Code of 1986 (as in effect on the
day before such date) not to involve a leased employee.
SEC. 1455. UNIFORM PENALTY PROVISIONS TO APPLY TO CERTAIN PENSION
REPORTING REQUIREMENTS.
(a) Penalties.--
(1) Statements.--Paragraph (1) of section 6724(d) is amended
by striking ``and'' at the end of subparagraph (A), by striking
the period at the end of subparagraph (B) and inserting ``,
and'', and by inserting after subparagraph (B) the following
new subparagraph:
``(C) any statement of the amount of payments to
another person required to be made to the Secretary
under--
``(i) section 408(i) (relating to reports
with respect to individual retirement accounts
or annuities), or
``(ii) section 6047(d) (relating to reports
by employers, plan administrators, etc.).''
(2) Reports.--Paragraph (2) of section 6724(d), as amended by
section 1116, is amended by striking ``or'' at the end of
subparagraph (T), by striking the period at the end of
subparagraph (U) and inserting a comma, and by inserting after
subparagraph (U) the following new subparagraphs:
``(V) section 408(i) (relating to reports with
respect to individual retirement plans) to any person
other than the Secretary with respect to the amount of
payments made to such person, or
``(W) section 6047(d) (relating to reports by plan
administrators) to any person other than the Secretary
with respect to the amount of payments made to such
person.''
(b) Modification of Reportable Designated Distributions.--
(1) Section 408.--Subsection (i) of section 408 (relating to
individual retirement account reports) is amended by inserting
``aggregating $10 or more in any calendar year'' after
``distributions''.
(2) Section 6047.--Paragraph (1) of section 6047(d) (relating
to reports by employers, plan administrators, etc.) is amended
by adding at the end the following new sentence: ``No return or
report may be required under the preceding sentence with
respect to distributions to any person during any year unless
such distributions aggregate $10 or more.''
(c) Qualifying Rollover Distributions.--Section 6652(i) is amended--
(1) by striking ``the $10'' and inserting ``$100'', and
(2) by striking ``$5,000'' and inserting ``$50,000''.
(d) Conforming Amendments.--
(1) Paragraph (1) of section 6047(f) is amended to read as
follows:
``(1) For provisions relating to penalties for
failures to file returns and reports required under this section, see
sections 6652(e), 6721, and 6722.''
(2) Subsection (e) of section 6652 is amended by adding at
the end the following new sentence: ``This subsection shall not
apply to any return or statement which is an information return
described in section 6724(d)(1)(C)(ii) or a payee statement
described in section 6724(d)(2)(W).''
(3) Subsection (a) of section 6693 is amended by adding at
the end the following new sentence: ``This subsection shall not
apply to any report which is an information return described in
section 6724(d)(1)(C)(i) or a payee statement described in
section 6724(d)(2)(V).''
(e) Effective Date.--The amendments made by this section shall apply
to returns, reports, and other statements the due date for which
(determined without regard to extensions) is after December 31, 1996.
SEC. 1456. RETIREMENT BENEFITS OF MINISTERS NOT SUBJECT TO TAX ON NET
EARNINGS FROM SELF-EMPLOYMENT.
(a) In General.--Section 1402(a)(8) (defining net earning from self-
employment) is amended by inserting ``, but shall not include in such
net earnings from self-employment the rental value of any parsonage
(whether or not excludable under section 107) provided after the
individual retires, or any other retirement benefit received by such
individual from a church plan (as defined in section 414(e)) after the
individual retires'' before the semicolon at the end.
(b) Effective Date.--The amendments made by this section shall apply
to years beginning before, on, or after December 31, 1994.
SEC. 1457. DATE FOR ADOPTION OF PLAN AMENDMENTS.
If any amendment made by this subtitle requires an amendment to any
plan or annuity contract, such amendment shall not be required to be
made before the first day of the first plan year beginning on or after
January 1, 1997, if--
(1) during the period after such amendment takes effect and
before such first plan year, the plan or contract is operated
in accordance with the requirements of such amendment, and
(2) such amendment applies retroactively to such period.
In the case of a governmental plan (as defined in section 414(d) of the
Internal Revenue Code of 1986), this section shall be applied by
substituting ``1999'' for ``1997''.
Subtitle E--Foreign Simplification
SEC. 1501. REPEAL OF INCLUSION OF CERTAIN EARNINGS INVESTED IN EXCESS
PASSIVE ASSETS.
(a) In General.--
(1) Repeal of inclusion.--Paragraph (1) of section 951(a)
(relating to amounts included in gross income of United States
shareholders) is amended by striking subparagraph (C), by
striking ``; and'' at the end of subparagraph (B) and inserting
a period, and by adding ``and'' at the end of subparagraph (A).
(2) Repeal of inclusion amount.--Section 956A (relating to
earnings invested in excess passive assets) is repealed.
(b) Conforming Amendments.--
(1) Paragraph (1) of section 956(b) is amended to read as
follows:
``(1) Applicable earnings.--For purposes of this section, the
term `applicable earnings' means, with respect to any
controlled foreign corporation, the sum of--
``(A) the amount (not including a deficit) referred
to in section 316(a)(1), and
``(B) the amount referred to in section 316(a)(2),
but reduced by distributions made during the taxable year.''
(2) Paragraph (3) of section 956(b) is amended to read as
follows:
``(3) Special rule where corporation ceases to be controlled
foreign corporation.--If any foreign corporation ceases to be a
controlled foreign corporation during any taxable year--
``(A) the determination of any United States
shareholder's pro rata share shall be made on the basis
of stock owned (within the meaning of section 958(a))
by such shareholder on the last day during the taxable
year on which the foreign corporation is a controlled
foreign corporation,
``(B) the average referred to in subsection (a)(1)(A)
for such taxable year shall be determined by only
taking into account quarters ending on or before such
last day, and
``(C) in determining applicable earnings, the amount
taken into account by reason of being described in
paragraph (2) of section 316(a) shall be the portion of
the amount so described which is allocable (on a pro
rata basis) to the part of such year during which the
corporation is a controlled foreign corporation.''
(3) Subsection (a) of section 959 (relating to exclusion from
gross income of previously taxed earnings and profits) is
amended by adding ``or'' at the end of paragraph (1), by
striking ``or'' at the end of paragraph (2), and by striking
paragraph (3).
(4) Subsection (a) of section 959 is amended by striking
``paragraphs (2) and (3)'' in the last sentence and inserting
``paragraph (2)''.
(5) Subsection (c) of section 959 is amended by adding at the
end the following flush sentence:
``References in this subsection to section 951(a)(1)(C) and subsection
(a)(3) shall be treated as references to such provisions as in effect
on the day before the date of the enactment of the Small Business Job
Protection Act of 1996.''
(6) Paragraph (1) of section 959(f) is amended to read as
follows:
``(1) In general.--For purposes of this section, amounts that
would be included under subparagraph (B) of section 951(a)(1)
(determined without regard to this section) shall be treated as
attributable first to earnings described in subsection (c)(2),
and then to earnings described in subsection (c)(3).''
(7) Paragraph (2) of section 959(f) is amended by striking
``subparagraphs (B) and (C) of section 951(a)(1)'' and
inserting ``section 951(a)(1)(B)''.
(8) Subsection (b) of section 989 is amended by striking
``subparagraph (B) or (C) of section 951(a)(1)'' and inserting
``section 951(a)(1)(B)''.
(9) Paragraph (9) of section 1297(b) is amended by striking
``subparagraph (B) or (C) of section 951(a)(1)'' and inserting
``section 951(a)(1)(B)''.
(10) Subsections (d)(3)(B) and (e)(2)(B)(ii) of section 1297
are each amended by striking ``or section 956A''.
(c) Clerical Amendment.--The table of sections for subpart F of part
III of subchapter N of chapter 1 is amended by striking the item
relating to section 956A.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
1996, and to taxable years of United States shareholders within which
or with which such taxable years of foreign corporations end.
Subtitle F--Revenue Offsets
SEC. 1601. TERMINATION OF PUERTO RICO AND POSSESSION TAX CREDIT.
(a) In General.--Section 936 is amended by adding at the end the
following new subsection:
``(j) Termination.--
``(1) In general.--Except as otherwise provided in this
subsection, this section shall not apply to any taxable year
beginning after December 31, 1995.
``(2) Transition rules for active business income credit.--
Except as provided in paragraph (3)--
``(A) Economic activity credit.--In the case of an
existing credit claimant--
``(i) with respect to a possession other than
Puerto Rico, and
``(ii) to which subsection (a)(4)(B) does not
apply,
the credit determined under subsection (a)(1)(A) shall
be allowed for taxable years beginning after December
31, 1995, and before January 1, 2002.
``(B) Special rule for reduced credit.--
``(i) In general.--In the case of an existing
credit claimant to which subsection (a)(4)(B)
applies, the credit determined under subsection
(a)(1)(A) shall be allowed for taxable years
beginning after December 31, 1995, and before
January 1, 1998.
``(ii) Election irrevocable after 1997.--An
election under subsection (a)(4)(B)(iii) which
is in effect for the taxpayer's last taxable
year beginning before 1997 may not be revoked
unless it is revoked for the taxpayer's first
taxable year beginning in 1997 and all
subsequent taxable years.
``(C) Economic activity credit for Puerto Rico.--
``For economic activity credit for Puerto Rico, see
section 30A.
``(3) Additional restricted credit.--
``(A) In general.--In the case of an existing credit
claimant--
``(i) the credit under subsection (a)(1)(A)
shall be allowed for the period beginning with
the first taxable year after the last taxable
year to which subparagraph (A) or (B) of
paragraph (2), whichever is appropriate,
applied and ending with the last taxable year
beginning before January 1, 2006, except that
``(ii) the aggregate amount of taxable income
taken into account under subsection (a)(1)(A)
for any such taxable year shall not exceed the
adjusted base period income of such claimant.
``(B) Coordination with subsection (a)(4).--The
amount of income described in subsection (a)(1)(A)
which is taken into account in applying subsection
(a)(4) shall be such income as reduced under this
paragraph.
``(4) Adjusted base period income.--For purposes of paragraph
(3)--
``(A) In general.--The term `adjusted base period
income' means the average of the inflation-adjusted
possession incomes of the corporation for each base
period year.
``(B) Inflation-adjusted possession income.--For
purposes of subparagraph (A), the inflation-adjusted
possession income of any corporation for any base
period year shall be an amount equal to the sum of--
``(i) the possession income of such
corporation for such base period year, plus
``(ii) such possession income multiplied by
the inflation adjustment percentage for such
base period year.
``(C) Inflation adjustment percentage.--For purposes
of subparagraph (B), the inflation adjustment
percentage for any base period year means the
percentage (if any) by which--
``(i) the CPI for 1995, exceeds
``(ii) the CPI for the calendar year in which
the base period year for which the
determination is being made ends.
For purposes of the preceding sentence, the CPI for any
calendar year is the CPI (as defined in section
1(f)(5)) for such year under section 1(f)(4).
``(D) Increase in inflation adjustment percentage for
growth during base years.--The inflation adjustment
percentage (determined under subparagraph (C) without
regard to this subparagraph) for each of the 5 taxable
years referred to in paragraph (5)(A) shall be
increased by--
``(i) 5 percentage points in the case of a
taxable year ending during the 1-year period
ending on October 13, 1995;
``(ii) 10.25 percentage points in the case of
a taxable year ending during the 1-year period
ending on October 13, 1994;
``(iii) 15.76 percentage points in the case
of a taxable year ending during the 1-year
period ending on October 13, 1993;
``(iv) 21.55 percentage points in the case of
a taxable year ending during the 1-year period
ending on October 13, 1992; and
``(v) 27.63 percentage points in the case of
a taxable year ending during the 1-year period
ending on October 13, 1991.
``(5) Base period year.--For purposes of this subsection--
``(A) In general.--The term `base period year' means
each of 3 taxable years which are among the 5 most
recent taxable years of the corporation ending before
October 14, 1995, determined by disregarding--
``(i) one taxable year for which the
corporation had the largest inflation-adjusted
possession income, and
``(ii) one taxable year for which the
corporation had the smallest inflation-adjusted
possession income.
``(B) Corporations not having significant possession
income throughout 5-year period.--
``(i) In general.--If a corporation does not
have significant possession income for each of
the most recent 5 taxable years ending before
October 14, 1995, then, in lieu of applying
subparagraph (A), the term `base period year'
means only those taxable years (of such 5
taxable years) for which the corporation has
significant possession income; except that, if
such corporation has significant possession
income for 4 of such 5 taxable years, the rule
of subparagraph (A)(ii) shall apply.
``(ii) Special rule.--If there is no year (of
such 5 taxable years) for which a corporation
has significant possession income--
``(I) the term `base period year'
means the first taxable year ending on
or after October 14, 1995, but
``(II) the amount of possession
income for such year which is taken
into account under paragraph (4) shall
be the amount which would be determined
if such year were a short taxable year
ending on September 30, 1995.
``(iii) Significant possession income.--For
purposes of this subparagraph, the term
`significant possession income' means
possession income which exceeds 2 percent of
the possession income of the taxpayer for the
taxable year (of the period of 6 taxable years
ending with the first taxable year ending on or
after October 14, 1995) having the greatest
possession income.
``(C) Election to use one base period year.--
``(i) In general.--At the election of the
taxpayer, the term `base period year' means--
``(I) only the last taxable year of
the corporation ending in calendar year
1992, or
``(II) a deemed taxable year which
includes the first ten months of
calendar year 1995.
``(ii) Base period income for 1995.--In
determining the adjusted base period income of
the corporation for the deemed taxable year
under clause (i)(II), the possession income
shall be annualized and shall be determined
without regard to any extraordinary item.
``(iii) Election.--An election under this
subparagraph by any possession corporation may
be made only for the corporation's first
taxable year beginning after December 31, 1995,
for which it is a possession corporation. The
rules of subclauses (II) and (III) of
subsection (a)(4)(B)(iii) shall apply to the
election under this subparagraph.
``(D) Acquisitions and dispositions.--Rules similar
to the rules of subparagraphs (A) and (B) of section
41(f)(3) shall apply for purposes of this subsection.
``(6) Possession income.--For purposes of this subsection,
the term `possession income' means, with respect to any
possession, the income referred to in subsection (a)(1)(A)
determined with respect to that possession. In no event shall
possession income be treated as being less than zero.
``(7) Short years.--If the current year or a base period year
is a short taxable year, the application of this subsection
shall be made with such annualizations as the Secretary shall
prescribe.
``(8) Special rules for certain possessions.--
``(A) In general.--In the case of an existing credit
claimant with respect to an applicable possession, this
section (other than the preceding paragraphs of this
subsection) shall apply to such claimant with respect
to such applicable possession for taxable years
beginning after December 31, 1995, and before January
1, 2006.
``(B) Applicable possession.--For purposes of this
paragraph, the term `applicable possession' means Guam,
American Samoa, and the Commonwealth of the Northern
Mariana Islands.
``(9) Existing credit claimant.--For purposes of this
subsection--
``(A) In general.--The term `existing credit
claimant' means a corporation--
``(i) which was actively conducting a trade
or business in a possession on October 13,
1995, and
``(ii) with respect to which an election
under this section is in effect for the
corporation's taxable year which includes
October 13, 1995.
``(B) New lines of business prohibited.--If, after
October 13, 1995, a corporation which would (but for
this subparagraph) be an existing credit claimant adds
a substantial new line of business, such corporation
shall cease to be treated as an existing credit
claimant as of the close of the taxable year ending
before the date of such addition.
``(C) Binding contract exception.--If, on October 13,
1995, and at all times thereafter, there is in effect
with respect to a corporation a binding contract for
the acquisition of assets to be used in, or for the
sale of assets to be produced from, a trade or
business, the corporation shall be treated for purposes
of this paragraph as actively conducting such trade or
business on October 13, 1995. The preceding sentence
shall not apply if such trade or business is not
actively conducted before January 1, 1996.
``(10) Separate application to each possession.--For purposes
of determining--
``(A) whether a taxpayer is an existing credit
claimant, and
``(B) the amount of the credit allowed under this
section,
this subsection (and so much of this section as relates to this
subsection) shall be applied separately with respect to each
possession.''
(b) Economic Activity Credit for Puerto Rico.--
(1) In general.--Subpart B of part IV of subchapter A of
chapter 1 is amended by adding at the end the following new
section:
``SEC. 30A. PUERTO RICAN ECONOMIC ACTIVITY CREDIT.
``(a) Allowance of Credit.--
``(1) In general.--Except as otherwise provided in this
section, if the conditions of both paragraph (1) and paragraph
(2) of subsection (b) are satisfied with respect to a qualified
domestic corporation, there shall be allowed as a credit
against the tax imposed by this chapter an amount equal to the
portion of the tax which is attributable to the taxable income,
from sources without the United States, from--
``(A) the active conduct of a trade or business
within Puerto Rico, or
``(B) the sale or exchange of substantially all of
the assets used by the taxpayer in the active conduct
of such trade or business.
In the case of any taxable year beginning after December 31,
2001, the aggregate amount of taxable income taken into account
under the preceding sentence (and in applying subsection (d))
shall not exceed the adjusted base period income of such
corporation, as determined in the same manner as under section
936(j).
``(2) Qualified domestic corporation.--For purposes of
paragraph (1), the term `qualified domestic corporation' means
a domestic corporation--
``(A) which is an existing credit claimant with
respect to Puerto Rico, and
``(B) with respect to which section 936(a)(4)(B) does
not apply for the taxable year.
``(3) Separate application.--For purposes of determining--
``(A) whether a taxpayer is an existing credit
claimant with respect to Puerto Rico, and
``(B) the amount of the credit allowed under this
section,
this section (and so much of section 936 as relates to this
section) shall be applied separately with respect to Puerto
Rico.
``(b) Conditions Which Must Be Satisfied.--The conditions referred to
in subsection (a) are--
``(1) 3-year period.--If 80 percent or more of the gross
income of the qualified domestic corporation for the 3-year
period immediately preceding the close of the taxable year (or
for such part of such period immediately preceding the close of
such taxable year as may be applicable) was derived from
sources within a possession (determined without regard to
section 904(f)).
``(2) Trade or business.--If 75 percent or more of the gross
income of the qualified domestic corporation for such period or
such part thereof was derived from the active conduct of a
trade or business within a possession.
``(c) Credit Not Allowed Against Certain Taxes.--The credit provided
by subsection (a) shall not be allowed against the tax imposed by--
``(1) section 59A (relating to environmental tax),
``(2) section 531 (relating to the tax on accumulated
earnings),
``(3) section 541 (relating to personal holding company tax),
or
``(4) section 1351 (relating to recoveries of foreign
expropriation losses).
``(d) Limitations on Credit for Active Business Income.--The amount
of the credit determined under subsection (a) for any taxable year
shall not exceed the sum of the following amounts:
``(1) 60 percent of the sum of--
``(A) the aggregate amount of the qualified domestic
corporation's qualified possession wages for such
taxable year, plus
``(B) the allocable employee fringe benefit expenses
of the qualified domestic corporation for such taxable
year.
``(2) The sum of--
``(A) 15 percent of the depreciation allowances for
the taxable year with respect to short-life qualified
tangible property,
``(B) 40 percent of the depreciation allowances for
the taxable year with respect to medium-life qualified
tangible property, and
``(C) 65 percent of the depreciation allowances for
the taxable year with respect to long-life qualified
tangible property.
``(3) If the qualified domestic corporation does not have an
election to use the method described in section
936(h)(5)(C)(ii) (relating to profit split) in effect for the
taxable year, the amount of the qualified possession income
taxes for the taxable year allocable to nonsheltered income.
``(e) Administrative Provisions.--For purposes of this title--
``(1) the provisions of section 936 (including any applicable
election thereunder) shall apply in the same manner as if the
credit under this section were a credit under section
936(a)(1)(A) for a domestic corporation to which section
936(a)(4)(A) applies,
``(2) the credit under this section shall be treated in the
same manner as the credit under section 936, and
``(3) a corporation to which this section applies shall be
treated in the same manner as if it were a corporation electing
the application of section 936.
``(f) Definitions.--For purposes of this section, any term used in
this section which is also used in section 936 shall have the same
meaning given such term by section 936.
``(g) Application of Section.--This section shall apply to taxable
years beginning after December 31, 1995, and before January 1, 2006.''
(2) Conforming amendments.--
(A) Paragraph (1) of section 55(c) is amended by
striking ``and the section 936 credit allowable under
section 27(b)'' and inserting ``, the section 936
credit allowable under section 27(b), and the Puerto
Rican economic activity credit under section 30A''.
(B) Subclause (I) of section 56(g)(4)(C)(ii) is
amended--
(i) by inserting ``30A,'' before ``936'', and
(ii) by striking ``and (i)'' and inserting
``, (i), and (j)''.
(C) Clause (iii) of section 56(g)(4)(C) is amended by
adding at the end the following new subclause:
``(VI) Application to section 30a
corporations.--References in this
clause to section 936 shall be treated
as including references to section
30A.''
(D) Subsection (b) of section 59 is amended by
striking ``section 936,'' and all that follows and
inserting ``section 30A or 936, alternative minimum
taxable income shall not include any income with
respect to which a credit is determined under section
30A or 936.''.
(E) The table of sections for subpart B of part IV of
subchapter A of chapter 1 is amended by adding at the
end the following new item:
``Sec. 30A. Puerto Rican economic
activity credit.''
(F)(i) The heading for subpart B of part IV of
subchapter A of chapter 1 is amended to read as
follows:
``Subpart B--Other Credits''.
(ii) The table of subparts for part IV of subchapter
A of chapter 1 is amended by striking the item relating
to subpart B and inserting the following new item:
``Subpart B. Other credits.''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1995.
SEC. 1602. REPEAL OF EXCLUSION FOR INTEREST ON LOANS USED TO ACQUIRE
EMPLOYER SECURITIES.
(a) In General.--Section 133 (relating to interest on certain loans
used to acquire employer securities) is hereby repealed.
(b) Conforming Amendments.--
(1) Subparagraph (B) of section 291(e)(1) is amended by
striking clause (iv) and by redesignating clause (v) as clause
(iv).
(2) Section 812 is amended by striking subsection (g).
(3) Paragraph (5) of section 852(b) is amended by striking
subparagraph (C).
(4) Paragraph (2) of section 4978(b) is amended by striking
subparagraph (A) and all that follows and inserting the
following:
``(A) first from qualified securities to which
section 1042 applied acquired during the 3-year period
ending on the date of the disposition, beginning with
the securities first so acquired, and
``(B) then from any other employer securities.
If subsection (d) applies to a disposition, the disposition
shall be treated as made from employer securities in the
opposite order of the preceding sentence.''.
(5)(A) Section 4978B (relating to tax on disposition of
employer securities to which section 133 applied) is hereby
repealed.
(B) The table of sections for chapter 43 is amended by
striking the item relating to section 4978B.
(6) Subsection (e) of section 6047 is amended by striking
paragraphs (1), (2), and (3) and inserting the following new
paragraphs:
``(1) any employer maintaining, or the plan administrator
(within the meaning of section 414(g)) of, an employee stock
ownership plan which holds stock with respect to which section
404(k) applies to dividends paid on such stock, or
``(2) both such employer or plan administrator,''.
(7) Subsection (f) of section 7872 is amended by striking
paragraph (12).
(8) The table of sections for part III of subchapter B of
chapter 1 is amended by striking the item relating to section
133.
(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to loans made after October 13, 1995.
(2) Refinancings.--The amendments made by this section shall
not apply to loans made after October 13, 1995, to refinance
securities acquisition loans (determined without regard to
section 133(b)(1)(B) of the Internal Revenue Code of 1986, as
in effect on the day before the date of the enactment of this
Act) made on or before such date or to refinance loans
described in this paragraph if--
(A) the refinancing loans meet the requirements of
section 133 of such Code (as so in effect),
(B) immediately after the refinancing the principal
amount of the loan resulting from the refinancing does
not exceed the principal amount of the refinanced loan
(immediately before the refinancing), and
(C) the term of such refinancing loan does not extend
beyond the last day of the term of the original
securities acquisition loan.
For purposes of this paragraph, the term ``securities
acquisition loan'' includes a loan from a corporation to an
employee stock ownership plan described in section 133(b)(3) of
such Code (as so in effect).
(3) Exception.--Any loan made pursuant to a binding written
contract in effect on October 13, 1995, and at all times
thereafter before such loan is made, shall be treated for
purposes of paragraphs (1) and (2) as a loan made before such
date.
SEC. 1603. CERTAIN AMOUNTS DERIVED FROM FOREIGN CORPORATIONS TREATED AS
UNRELATED BUSINESS TAXABLE INCOME.
(a) General Rule.--Subsection (b) of section 512 (relating to
modifications) is amended by adding at the end the following new
paragraph:
``(17) Treatment of certain amounts derived from foreign
corporations.--
``(A) In general.--Notwithstanding paragraph (1), any
amount included in gross income under section
951(a)(1)(A) shall be included as an item of gross
income derived from an unrelated trade or business to
the extent the amount so included is attributable to
insurance income (as defined in section 953) which, if
derived directly by the organization, would be treated
as gross income from an unrelated trade or business.
There shall be allowed all deductions directly
connected with amounts included in gross income under
the preceding sentence.
``(B) Exception.--Subparagraph (A) shall not apply to
income attributable to a policy of insurance or
reinsurance with respect to which the person (directly
or indirectly) insured is--
``(i) such organization,
``(ii) an affiliate of such organization
which is exempt from tax under section 501(a),
or
``(iii) a director or officer of, or an
individual who (directly or indirectly)
performs services for, such organization or
affiliate but only if the insurance covers
primarily risks associated with the performance
of services in connection with such
organization or affiliate.
For purposes of this subparagraph, the determination as
to whether an entity is an affiliate of an organization
shall be made under rules similar to the rules of
section 168(h)(4)(B).
``(C) Regulations.--The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this paragraph, including
regulations for the application of this paragraph in
the case of income paid through 1 or more entities or
between 2 or more chains of entities.''
(b) Effective Date.--The amendment made by this section shall apply
to amounts included in gross income in any taxable year beginning after
December 31, 1995.
SEC. 1604. DEPRECIATION UNDER INCOME FORECAST METHOD.
(a) General Rule.--Section 167 (relating to depreciation) is amended
by redesignating subsection (g) as subsection (h) and by inserting
after subsection (f) the following new subsection:
``(g) Depreciation Under Income Forecast Method.--
``(1) In general.--If the depreciation deduction allowable
under this section to any taxpayer with respect to any property
is determined under the income forecast method or any similar
method--
``(A) the income from the property to be taken into
account in determining the depreciation deduction under
such method shall be equal to the amount of income
earned in connection with the property before the close
of the 10th taxable year following the taxable year in
which the property was placed in service,
``(B) the adjusted basis of the property shall only
include amounts with respect to which the requirements
of section 461(h) are satisfied,
``(C) the depreciation deduction under such method
for the 10th taxable year beginning after the taxable
year in which the property was placed in service shall
be equal to the adjusted basis of such property as of
the beginning of such 10th taxable year, and
``(D) such taxpayer shall pay (or be entitled to
receive) interest computed under the look-back method
of paragraph (2) for any recomputation year.
``(2) Look-back method.--The interest computed under the
look-back method of this paragraph for any recomputation year
shall be determined by--
``(A) first determining the depreciation deductions
under this section with respect to such property which
would have been allowable for prior taxable years if
the determination of the amounts so allowable had been
made on the basis of the sum of the following (instead
of the estimated income from such property)--
``(i) the actual income earned in connection
with such property for periods before the close
of the recomputation year, and
``(ii) an estimate of the future income to be
earned in connection with such property for
periods after the recomputation year and before
the close of the 10th taxable year following
the taxable year in which the property was
placed in service,
``(B) second, determining (solely for purposes of
computing such interest) the overpayment or
underpayment of tax for each such prior taxable year
which would result solely from the application of
subparagraph (A), and
``(C) then using the adjusted overpayment rate (as
defined in section 460(b)(7)), compounded daily, on the
overpayment or underpayment determined under
subparagraph (B).
For purposes of the preceding sentence, any cost incurred after
the property is placed in service (which is not treated as a
separate property under paragraph (5)) shall be taken into
account by discounting (using the Federal mid-term rate
determined under section 1274(d) as of the time such cost is
incurred) such cost to its value as of the date the property is
placed in service. The taxpayer may elect with respect to any
property to have the preceding sentence not apply to such
property.
``(3) Exception from look-back method.--Paragraph (1)(D)
shall not apply with respect to any property which, when placed
in service by the taxpayer, had a basis of $100,000 or less.
``(4) Recomputation year.--For purposes of this subsection,
except as provided in regulations, the term `recomputation
year' means, with respect to any property, the 3d and the 10th
taxable years beginning after the taxable year in which the
property was placed in service, unless the actual income earned
in connection with the property for the period before the close
of such 3d or 10th taxable year is within 10 percent of the
income earned in connection with the property for such period
which was taken into account under paragraph (1)(A).
``(5) Special rules.--
``(A) Certain costs treated as separate property.--
For purposes of this subsection, the following costs
shall be treated as separate properties:
``(i) Any costs incurred with respect to any
property after the 10th taxable year beginning
after the taxable year in which the property
was placed in service.
``(ii) Any costs incurred after the property
is placed in service and before the close of
such 10th taxable year if such costs are
significant and give rise to a significant
increase in the income from the property which
was not included in the estimated income from
the property.
``(B) Syndication income from television series.--In
the case of property which is an episode in a
television series, income from syndicating such series
shall not be required to be taken into account under
this subsection before the earlier of--
``(i) the 4th taxable year beginning after
the date the first episode in such series is
placed in service, or
``(ii) the earliest taxable year in which the
taxpayer has an arrangement relating to the
future syndication of such series.
``(C) Special rules for financial exploitation of
characters, etc.--For purposes of this subsection, in
the case of television and motion picture films, the
income from the property shall include income from the
exploitation of characters, designs, scripts, scores,
and other incidental income associated with such films,
but only to the extent that such income is earned in
connection with the ultimate use of such items by, or
the ultimate sale of merchandise to, persons who are
not related persons (within the meaning of section
267(b)) to the taxpayer.
``(D) Collection of interest.--For purposes of
subtitle F (other than sections 6654 and 6655), any
interest required to be paid by the taxpayer under
paragraph (1) for any recomputation year shall be
treated as an increase in the tax imposed by this
chapter for such year.
``(E) Determinations.--For purposes of paragraph (2),
determinations of the amount of income earned in
connection with any property shall be made in the same
manner as for purposes of applying the income forecast
method; except that any income from the disposition of
such property shall be taken into account.
``(F) Treatment of pass-thru entities.--Rules similar
to the rules of section 460(b)(4) shall apply for
purposes of this subsection.''
(b) Effective Date.--
(1) In general.--The amendment made by subsection (a) shall
apply to property placed in service after September 13, 1995.
(2) Binding contracts.--The amendment made by subsection (a)
shall not apply to any property produced or acquired by the
taxpayer pursuant to a written contract which was binding on
September 13, 1995, and at all times thereafter before such
production or acquisition.
SEC. 1605. REPEAL OF EXCLUSION FOR PUNITIVE DAMAGES AND FOR DAMAGES NOT
ATTRIBUTABLE TO PHYSICAL INJURIES OR SICKNESS.
(a) In General.--Paragraph (2) of section 104(a) (relating to
compensation for injuries or sickness) is amended to read as follows:
``(2) the amount of any damages (other than punitive damages)
received (whether by suit or agreement and whether as lump sums
or as periodic payments) on account of personal physical
injuries or physical sickness;''.
(b) Emotional Distress as Such Treated as Not Physical Injury or
Physical Sickness.--Section 104(a) is amended by striking the last
sentence and inserting the following new sentence: ``For purposes of
paragraph (2), emotional distress shall not be treated as a physical
injury or physical sickness. The preceding sentence shall not apply to
an amount of damages not in excess of the amount paid for medical care
(described in subparagraph (A) or (B) of section 213(d)(1))
attributable to emotional distress.''.
(c) Application of Prior Law for States in Which Only Punitive
Damages May Be Awarded in Wrongful Death Actions.--Section 104 is
amended by redesignating subsection (c) as subsection (d) and by
inserting after subsection (b) the following new subsection:
``(c) Application of Prior Law in Certain Cases.--The phrase `(other
than punitive damages)' shall not apply to punitive damages awarded in
a civil action--
``(1) which is a wrongful death action, and
``(2) with respect to which applicable State law (as in
effect on September 13, 1995 and without regard to any
modification after such date) provides, or has been construed
to provide by a court of competent jurisdiction pursuant to a
decision issued on or before September 13, 1995, that only
punitive damages may be awarded in such an action.
This subsection shall cease to apply to any civil action filed on or
after the first date on which the applicable State law ceases to
provide (or is no longer construed to provide) the treatment described
in paragraph (2).''
(d) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to amounts received
after June 30, 1996, in taxable years ending after such date.
(2) Exception.--The amendments made by this section shall not
apply to any amount received under a written binding agreement,
court decree, or mediation award in effect on (or issued on or
before) September 13, 1995.
SEC. 1606. REPEAL OF DIESEL FUEL TAX REBATE TO PURCHASERS OF DIESEL-
POWERED AUTOMOBILES AND LIGHT TRUCKS.
(a) In General.--Section 6427 (relating to fuels not used for taxable
purposes) is amended by striking subsection (g).
(b) Conforming Amendments.--
(1) Paragraph (3) of section 34(a) is amended to read as
follows:
``(3) under section 6427 with respect to fuels used for
nontaxable purposes or resold during the taxable year
(determined without regard to section 6427(k)).''.
(2) Paragraphs (1) and (2)(A) of section 6427(i) are each
amended--
(A) by striking ``(g),'', and
(B) by striking ``(or a qualified diesel powered
highway vehicle purchased)'' each place it appears.
(c) Effective Date.--The amendments made by this section shall apply
to vehicles purchased after the date of the enactment of this Act.
Subtitle G--Technical Corrections
SEC. 1701. COORDINATION WITH OTHER SUBTITLES.
For purposes of applying the amendments made by any subtitle of this
title other than this subtitle, the provisions of this subtitle shall
be treated as having been enacted immediately before the provisions of
such other subtitles.
SEC. 1702. AMENDMENTS RELATED TO REVENUE RECONCILIATION ACT OF 1990.
(a) Amendments Related to Subtitle A.--
(1) Subparagraph (B) of section 59(j)(3) is amended by
striking ``section 1(i)(3)(B)'' and inserting ``section
1(g)(3)(B)''.
(2) Clause (i) of section 151(d)(3)(C) is amended by striking
``joint of a return'' and inserting ``joint return''.
(b) Amendments Related to Subtitle B.--
(1) Paragraph (1) of section 11212(e) of the Revenue
Reconciliation Act of 1990 is amended by striking ``Paragraph
(1) of section 6724(d)'' and inserting ``Subparagraph (B) of
section 6724(d)(1)''.
(2)(A) Subparagraph (B) of section 4093(c)(2), as in effect
before the amendments made by the Revenue Reconciliation Act of
1993, is amended by inserting before the period ``unless such
fuel is sold for exclusive use by a State or any political
subdivision thereof''.
(B) Paragraph (4) of section 6427(l), as in effect before the
amendments made by the Revenue Reconciliation Act of 1993, is
amended by inserting before the period ``unless such fuel was
used by a State or any political subdivision thereof''.
(3) Paragraph (1) of section 6416(b) is amended by striking
``chapter 32 or by section 4051'' and inserting ``chapter 31 or
32''.
(4) Section 7012 is amended--
(A) by striking ``production or importation of
gasoline'' in paragraph (3) and inserting ``taxes on
gasoline and diesel fuel'', and
(B) by striking paragraph (4) and redesignating
paragraphs (5) and (6) as paragraphs (4) and (5),
respectively.
(5) Subsection (c) of section 5041 is amended by striking
paragraph (6) and by inserting the following new paragraphs:
``(6) Credit for transferee in bond.--If--
``(A) wine produced by any person would be eligible
for any credit under paragraph (1) if removed by such
person during the calendar year,
``(B) wine produced by such person is removed during
such calendar year by any other person (hereafter in
this paragraph referred to as the `transferee') to whom
such wine was transferred in bond and who is liable for
the tax imposed by this section with respect to such
wine, and
``(C) such producer holds title to such wine at the
time of its removal and provides to the transferee such
information as is necessary to properly determine the
transferee's credit under this paragraph,
then, the transferee (and not the producer) shall be allowed
the credit under paragraph (1) which would be allowed to the
producer if the wine removed by the transferee had been removed
by the producer on that date.
``(7) Regulations.--The Secretary may prescribe such
regulations as may be necessary to carry out the purposes of
this subsection, including regulations--
``(A) to prevent the credit provided in this
subsection from benefiting any person who produces more
than 250,000 wine gallons during a calendar year, and
``(B) to assure proper reduction of such credit for
persons producing more than 150,000 wine gallons of
wine during a calendar year.''
(6) Paragraph (3) of section 5061(b) is amended to read as
follows:
``(3) section 5041(f),''.
(7) Section 5354 is amended by inserting ``(taking into
account the appropriate amount of credit with respect to such
wine under section 5041(c))'' after ``any one time''.
(c) Amendments Related to Subtitle C.--
(1) Paragraph (4) of section 56(g) is amended by
redesignating subparagraphs (I) and (J) as subparagraphs (H)
and (I), respectively.
(2) Subparagraph (B) of section 6724(d)(1) is amended--
(A) by striking ``or'' at the end of clause (xii),
and
(B) by striking the period at the end of clause
(xiii) and inserting ``, or''.
(3) Subsection (g) of section 6302 is amended by inserting
``, 22,'' after ``chapters 21''.
(4) The earnings and profits of any insurance company to
which section 11305(c)(3) of the Revenue Reconciliation Act of
1990 applies shall be determined without regard to any
deduction allowed under such section; except that, for purposes
of applying sections 56 and 902, and subpart F of part III of
subchapter N of chapter 1 of the Internal Revenue Code of 1986,
such deduction shall be taken into account.
(5) Subparagraph (D) of section 6038A(e)(4) is amended--
(A) by striking ``any transaction to which the
summons relates'' and inserting ``any affected taxable
year'', and
(B) by adding at the end thereof the following new
sentence: ``For purposes of this subparagraph, the term
`affected taxable year' means any taxable year if the
determination of the amount of tax imposed for such
taxable year is affected by the treatment of the
transaction to which the summons relates.''.
(6) Subparagraph (A) of section 6621(c)(2) is amended by
adding at the end thereof the following new flush sentence:
``The preceding sentence shall be applied without
regard to any such letter or notice which is withdrawn
by the Secretary.''.
(7) Clause (i) of section 6621(c)(2)(B) is amended by
striking ``this subtitle'' and inserting ``this title''.
(d) Amendments Related to Subtitle D.--
(1) Notwithstanding section 11402(c) of the Revenue
Reconciliation Act of 1990, the amendment made by section
11402(b)(1) of such Act shall apply to taxable years ending
after December 31, 1989.
(2) Clause (ii) of section 143(m)(4)(C) is amended--
(A) by striking ``any month of the 10-year period''
and inserting ``any year of the 4-year period'',
(B) by striking ``succeeding months'' and inserting
``succeeding years'', and
(C) by striking ``over the remainder of such period
(or, if lesser, 5 years)'' and inserting ``to zero over
the succeeding 5 years''.
(e) Amendments Related to Subtitle E.--
(1)(A) Clause (ii) of section 56(d)(1)(B) is amended to read
as follows:
``(ii) appropriate adjustments in the
application of section 172(b)(2) shall be made
to take into account the limitation of
subparagraph (A).''
(B) For purposes of applying sections 56(g)(1) and 56(g)(3)
of the Internal Revenue Code of 1986 with respect to taxable
years beginning in 1991 and 1992, the reference in such
sections to the alternative tax net operating loss deduction
shall be treated as including a reference to the deduction
under section 56(h) of such Code as in effect before the
amendments made by section 1915 of the Energy Policy Act of
1992.
(2) Clause (i) of section 613A(c)(3)(A) is amended by
striking ``the table contained in''.
(3) Section 6501 is amended--
(A) by striking subsection (m) (relating to
deficiency attributable to election under section 44B)
and by redesignating subsections (n) and (o) as
subsections (m) and (n), respectively, and
(B) by striking ``section 40(f) or 51(j)'' in
subsection (m) (as redesignated by subparagraph (A))
and inserting ``section 40(f), 43, or 51(j)''.
(4) Subparagraph (C) of section 38(c)(2) (as in effect on the
day before the date of the enactment of the Revenue
Reconciliation Act of 1990) is amended by inserting before the
period at the end of the first sentence the following: ``and
without regard to the deduction under section 56(h)''.
(5) The amendment made by section 1913(b)(2)(C)(i) of the
Energy Policy Act of 1992 shall apply to taxable years
beginning after December 31, 1990.
(f) Amendments Related to Subtitle F.--
(1)(A) Section 2701(a)(3) is amended by adding at the end
thereof the following new subparagraph:
``(C) Valuation of qualified payments where no
liquidation, etc. rights.--In the case of an applicable
retained interest which is described in subparagraph
(B)(i) but not subparagraph (B)(ii), the value of the
distribution right shall be determined without regard
to this section.''
(B) Section 2701(a)(3)(B) is amended by inserting ``certain''
before ``qualified'' in the heading thereof.
(C) Sections 2701 (d)(1) and (d)(4) are each amended by
striking ``subsection (a)(3)(B)'' and inserting ``subsection
(a)(3) (B) or (C)''.
(2) Clause (i) of section 2701(a)(4)(B) is amended by
inserting ``(or, to the extent provided in regulations, the
rights as to either income or capital)'' after ``income and
capital''.
(3)(A) Section 2701(b)(2) is amended by adding at the end
thereof the following new subparagraph:
``(C) Applicable family member.--For purposes of this
subsection, the term `applicable family member'
includes any lineal descendant of any parent of the
transferor or the transferor's spouse.''
(B) Section 2701(e)(3) is amended--
(i) by striking subparagraph (B), and
(ii) by striking so much of paragraph (3) as precedes
``shall be treated as holding'' and inserting:
``(3) Attribution of indirect holdings and transfers.--An
individual''.
(C) Section 2704(c)(3) is amended by striking ``section
2701(e)(3)(A)'' and inserting ``section 2701(e)(3)''.
(4) Clause (i) of section 2701(c)(1)(B) is amended to read as
follows:
``(i) a right to distributions with respect
to any interest which is junior to the rights
of the transferred interest,''.
(5)(A) Clause (i) of section 2701(c)(3)(C) is amended to read
as follows:
``(i) In general.--Payments under any
interest held by a transferor which (without
regard to this subparagraph) are qualified
payments shall be treated as qualified payments
unless the transferor elects not to treat such
payments as qualified payments. Payments
described in the preceding sentence which are
held by an applicable family member shall be
treated as qualified payments only if such
member elects to treat such payments as
qualified payments.''
(B) The first sentence of section 2701(c)(3)(C)(ii) is
amended to read as follows: ``A transferor or applicable family
member holding any distribution right which (without regard to
this subparagraph) is not a qualified payment may elect to
treat such right as a qualified payment, to be paid in the
amounts and at the times specified in such election.''.
(C) The time for making an election under the second sentence
of section 2701(c)(3)(C)(i) of the Internal Revenue Code of
1986 (as amended by subparagraph (A)) shall not expire before
the due date (including extensions) for filing the transferor's
return of the tax imposed by section 2501 of such Code for the
first calendar year ending after the date of enactment.
(6) Section 2701(d)(3)(A)(iii) is amended by striking ``the
period ending on the date of''.
(7) Subclause (I) of section 2701(d)(3)(B)(ii) is amended by
inserting ``or the exclusion under section 2503(b),'' after
``section 2523,''.
(8) Section 2701(e)(5) is amended--
(A) by striking ``such contribution to capital or
such redemption, recapitalization, or other change'' in
subparagraph (A) and inserting ``such transaction'',
and
(B) by striking ``the transfer'' in subparagraph (B)
and inserting ``such transaction''.
(9) Section 2701(d)(4) is amended by adding at the end
thereof the following new subparagraph:
``(C) Transfer to transferors.--In the case of a
taxable event described in paragraph (3)(A)(ii)
involving a transfer of an applicable retained interest
from an applicable family member to a transferor, this
subsection shall continue to apply to the transferor
during any period the transferor holds such interest.''
(10) Section 2701(e)(6) is amended by inserting ``or to
reflect the application of subsection (d)'' before the period
at the end thereof.
(11)(A) Section 2702(a)(3)(A) is amended--
(i) by striking ``to the extent'' and inserting
``if'' in clause (i),
(ii) by striking ``or'' at the end of clause (i),
(iii) by striking the period at the end of clause
(ii) and inserting ``, or'', and
(iv) by adding at the end thereof the following new
clause:
``(iii) to the extent that regulations
provide that such transfer is not inconsistent
with the purposes of this section.''
(B)(i) Section 2702(a)(3) is amended by striking ``incomplete
transfer'' each place it appears and inserting ``incomplete
gift''.
(ii) The heading for section 2702(a)(3)(B) is amended by
striking ``Incomplete transfer'' and inserting ``Incomplete
gift''.
(g) Amendments Related to Subtitle G.--
(1)(A) Subsection (a) of section 1248 is amended--
(i) by striking ``, or if a United States person
receives a distribution from a foreign corporation
which, under section 302 or 331, is treated as an
exchange of stock'' in paragraph (1), and
(ii) by adding at the end thereof the following new
sentence: ``For purposes of this section, a United
States person shall be treated as having sold or
exchanged any stock if, under any provision of this
subtitle, such person is treated as realizing gain from
the sale or exchange of such stock.''.
(B) Paragraph (1) of section 1248(e) is amended by striking
``, or receives a distribution from a domestic corporation
which, under section 302 or 331, is treated as an exchange of
stock''.
(C) Subparagraph (B) of section 1248(f)(1) is amended by
striking ``or 361(c)(1)'' and inserting ``355(c)(1), or
361(c)(1)''.
(D) Paragraph (1) of section 1248(i) is amended to read as
follows:
``(1) In general.--If any shareholder of a 10-percent
corporate shareholder of a foreign corporation exchanges stock
of the 10-percent corporate shareholder for stock of the
foreign corporation, such 10-percent corporate shareholder
shall recognize gain in the same manner as if the stock of the
foreign corporation received in such exchange had been--
``(A) issued to the 10-percent corporate shareholder,
and
``(B) then distributed by the 10-percent corporate
shareholder to such shareholder in redemption or
liquidation (whichever is appropriate).
The amount of gain recognized by such 10-percent corporate
shareholder under the preceding sentence shall not exceed the
amount treated as a dividend under this section.''
(2) Section 897 is amended by striking subsection (f).
(3) Paragraph (13) of section 4975(d) is amended by striking
``section 408(b)'' and inserting ``section 408(b)(12)''.
(4) Clause (iii) of section 56(g)(4)(D) is amended by
inserting ``, but only with respect to taxable years beginning
after December 31, 1989'' before the period at the end thereof.
(5)(A) Paragraph (11) of section 11701(a) of the Revenue
Reconciliation Act of 1990 (and the amendment made by such
paragraph) are hereby repealed, and section 7108(r)(2) of the
Revenue Reconciliation Act of 1989 shall be applied as if such
paragraph (and amendment) had never been enacted.
(B) Subparagraph (A) shall not apply to any building if the
owner of such building establishes to the satisfaction of the
Secretary of the Treasury or his delegate that such owner
reasonably relied on the amendment made by such paragraph (11).
(h) Amendments Related to Subtitle H.--
(1)(A) Clause (vi) of section 168(e)(3)(B) is amended by
striking ``or'' at the end of subclause (I), by striking the
period at the end of subclause (II) and inserting ``, or'', and
by adding at the end thereof the following new subclause:
``(III) is described in section
48(l)(3)(A)(ix) (as in effect on the
day before the date of the enactment of
the Revenue Reconciliation Act of
1990).''
(B) Subparagraph (B) of section 168(e)(3) (relating to 5-year
property) is amended by adding at the end the following flush
sentence:
``Nothing in any provision of law shall be construed to
treat property as not being described in clause (vi)(I)
(or the corresponding provisions of prior law) by
reason of being public utility property (within the
meaning of section 48(a)(3)).''
(C) Subparagraph (K) of section 168(g)(4) is amended by
striking ``section 48(a)(3)(A)(iii)'' and inserting ``section
48(l)(3)(A)(ix) (as in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of 1990)''.
(2) Clause (ii) of section 172(b)(1)(E) is amended by
striking ``subsection (m)'' and inserting ``subsection (h)''.
(3) Sections 805(a)(4)(E), 832(b)(5)(C)(ii)(II), and
832(b)(5)(D)(ii)(II) are each amended by striking ``243(b)(5)''
and inserting ``243(b)(2)''.
(4) Subparagraph (A) of section 243(b)(3) is amended by
inserting ``of'' after ``In the case''.
(5) The subsection heading for subsection (a) of section 280F
is amended by striking ``Investment Tax Credit and''.
(6) Clause (i) of section 1504(c)(2)(B) is amended by
inserting ``section'' before ``243(b)(2)''.
(7) Paragraph (3) of section 341(f) is amended by striking
``351, 361, 371(a), or 374(a)'' and inserting ``351, or 361''.
(8) Paragraph (2) of section 243(b) is amended to read as
follows:
``(2) Affiliated group.--For purposes of this subsection:
``(A) In general.--The term `affiliated group' has
the meaning given such term by section 1504(a), except
that for such purposes sections 1504(b)(2), 1504(b)(4),
and 1504(c) shall not apply.
``(B) Group must be consistent in foreign tax
treatment.--The requirements of paragraph (1)(A) shall
not be treated as being met with respect to any
dividend received by a corporation if, for any taxable
year which includes the day on which such dividend is
received--
``(i) 1 or more members of the affiliated
group referred to in paragraph (1)(A) choose to
any extent to take the benefits of section 901,
and
``(ii) 1 or more other members of such group
claim to any extent a deduction for taxes
otherwise creditable under section 901.''
(9) The amendment made by section 11813(b)(17) of the Revenue
Reconciliation Act of 1990 shall be applied as if the material
stricken by such amendment included the closing parenthesis
after ``section 48(a)(5)''.
(10) Paragraph (1) of section 179(d) is amended by striking
``in a trade or business'' and inserting ``a trade or
business''.
(11) Subparagraph (E) of section 50(a)(2) is amended by
striking ``section 48(a)(5)(A)'' and inserting ``section
48(a)(5)''.
(12) The amendment made by section 11801(c)(9)(G)(ii) of the
Revenue Reconciliation Act of 1990 shall be applied as if it
struck ``Section 422A(c)(2)'' and inserted ``Section
422(c)(2)''.
(13) Subparagraph (B) of section 424(c)(3) is amended by
striking ``a qualified stock option, an incentive stock option,
an option granted under an employee stock purchase plan, or a
restricted stock option'' and inserting ``an incentive stock
option or an option granted under an employee stock purchase
plan''.
(14) Subparagraph (E) of section 1367(a)(2) is amended by
striking ``section 613A(c)(13)(B)'' and inserting ``section
613A(c)(11)(B)''.
(15) Subparagraph (B) of section 460(e)(6) is amended by
striking ``section 167(k)'' and inserting ``section
168(e)(2)(A)(ii)''.
(16) Subparagraph (C) of section 172(h)(4) is amended by
striking ``subsection (b)(1)(M)'' and inserting ``subsection
(b)(1)(E)''.
(17) Section 6503 is amended--
(A) by redesignating the subsection relating to
extension in case of certain summonses as subsection
(j), and
(B) by redesignating the subsection relating to cross
references as subsection (k).
(18) Paragraph (4) of section 1250(e) is hereby repealed.
(i) Effective Date.--Except as otherwise expressly provided--
(1) the amendments made by this section shall be treated as
amendments to the Internal Revenue Code of 1986 as amended by
the Revenue Reconciliation Act of 1993; and
(2) any amendment made by this section shall apply to periods
before the date of the enactment of this section in the same
manner as if it had been included in the provision of the
Revenue Reconciliation Act of 1990 to which such amendment
relates.
SEC. 1703. AMENDMENTS RELATED TO REVENUE RECONCILIATION ACT OF 1993.
(a) Amendment Related to Section 13114.--Paragraph (2) of section
1044(c) is amended to read as follows:
``(2) Purchase.--The taxpayer shall be considered to have
purchased any property if, but for subsection (d), the
unadjusted basis of such property would be its cost within the
meaning of section 1012.''
(b) Amendments Related to Section 13142.--
(1) Subparagraph (B) of section 13142(b)(6) of the Revenue
Reconciliation Act of 1993 is amended to read as follows:
``(B) Full-time students, waiver authority, and
prohibited discrimination.--The amendments made by
paragraphs (2), (3), and (4) shall take effect on the
date of the enactment of this Act.''
(2) Subparagraph (C) of section 13142(b)(6) of such Act is
amended by striking ``paragraph (2)'' and inserting ``paragraph
(5)''.
(c) Amendment Related to Section 13161.--
(1) In general.--Subsection (e) of section 4001 (relating to
inflation adjustment) is amended to read as follows:
``(e) Inflation Adjustment.--
``(1) In general.--The $30,000 amount in subsection (a) and
section 4003(a) shall be increased by an amount equal to--
``(A) $30,000, multiplied by
``(B) the cost-of-living adjustment under section
1(f)(3) for the calendar year in which the vehicle is
sold, determined by substituting `calendar year 1990'
for `calendar year 1992' in subparagraph (B) thereof.
``(2) Rounding.--If any amount as adjusted under paragraph
(1) is not a multiple of $2,000, such amount shall be rounded
to the next lowest multiple of $2,000.''
(2) Effective date.--The amendment made by paragraph (1)
shall take effect on the date of the enactment of this Act.
(d) Amendment Related to Section 13201.--Clause (ii) of section
135(b)(2)(B) is amended by inserting before the period at the end
thereof the following: ``, determined by substituting `calendar year
1989' for `calendar year 1992' in subparagraph (B) thereof''.
(e) Amendments Related to Section 13203.--Subsection (a) of section
59 is amended--
(1) by striking ``the amount determined under section
55(b)(1)(A)'' in paragraph (1)(A) and (2)(A)(i) and inserting
``the pre-credit tentative minimum tax'',
(2) by striking ``specified in section 55(b)(1)(A)'' in
paragraph (1)(C) and inserting ``specified in subparagraph
(A)(i) or (B)(i) of section 55(b)(1) (whichever applies)'',
(3) by striking ``which would be determined under section
55(b)(1)(A)'' in paragraph (2)(A)(ii) and inserting ``which
would be the pre-credit tentative minimum tax'', and
(4) by adding at the end thereof the following new paragraph:
``(3) Pre-credit tentative minimum tax.--For purposes of this
subsection, the term `pre-credit tentative minimum tax' means--
``(A) in the case of a taxpayer other than a
corporation, the amount determined under the first
sentence of section 55(b)(1)(A)(i), or
``(B) in the case of a corporation, the amount
determined under section 55(b)(1)(B)(i).''
(f) Amendment Related to Section 13221.--Sections 1201(a) and 1561(a)
are each amended by striking ``last sentence'' each place it appears
and inserting ``last 2 sentences''.
(g) Amendments Related to Section 13222.--
(1) Subparagraph (B) of section 6033(e)(1) is amended by
adding at the end thereof the following new clause:
``(iii) Coordination with section 527(f).--
This subsection shall not apply to any amount
on which tax is imposed by reason of section
527(f).''.
(2) Clause (i) of section 6033(e)(1)(B) is amended by
striking ``this subtitle'' and inserting ``section 501''.
(h) Amendment Related to Section 13225.--Paragraph (3) of section
6655(g) is amended by striking all that follows `` `3rd month' '' in
the sentence following subparagraph (C) and inserting ``, subsection
(e)(2)(A) shall be applied by substituting `2 months' for `3 months' in
clause (i)(I), the election under clause (i) of subsection (e)(2)(C)
may be made separately for each installment, and clause (ii) of
subsection (e)(2)(C) shall not apply.''.
(i) Amendments Related to Section 13231.--
(1) Subparagraph (G) of section 904(d)(3) is amended by
striking ``section 951(a)(1)(B)'' and inserting ``subparagraph
(B) or (C) of section 951(a)(1)''.
(2) Paragraph (1) of section 956A(b) is amended to read as
follows:
``(1) the amount (not including a deficit) referred to in
section 316(a)(1) to the extent such amount was accumulated in
prior taxable years beginning after September 30, 1993, and''.
(3) Subsection (f) of section 956A is amended by inserting
before the period at the end thereof: ``and regulations
coordinating the provisions of subsections (c)(3)(A) and (d)''.
(4) Subsection (b) of section 958 is amended by striking
``956(b)(2)'' each place it appears and inserting
``956(c)(2)''.
(5)(A) Subparagraph (A) of section 1297(d)(2) is amended by
striking ``The adjusted basis of any asset'' and inserting
``The amount taken into account under section 1296(a)(2) with
respect to any asset''.
(B) The paragraph heading of paragraph (2) of section 1297(d)
is amended to read as follows:
``(2) Amount taken into account.--''.
(6) Subsection (e) of section 1297 is amended by inserting
``For purposes of this part--'' after the subsection heading.
(j) Amendment Related to Section 13241.--Subparagraph (B) of section
40(e)(1) is amended to read as follows:
``(B) for any period before January 1, 2001, during
which the rates of tax under section 4081(a)(2)(A) are
4.3 cents per gallon.''
(k) Amendment Related to Section 13261.--Clause (iii) of section
13261(g)(2)(A) of the Revenue Reconciliation Act of 1993 is amended by
striking ``by the taxpayer'' and inserting ``by the taxpayer or a
related person''.
(l) Amendment Related to Section 13301.--Subparagraph (B) of section
1397B(d)(5) is amended by striking ``preceding''.
(m) Clerical Amendments.--
(1) Subsection (d) of section 39 is amended--
(A) by striking ``45'' in the heading of paragraph
(5) and inserting ``45A'', and
(B) by striking ``45'' in the heading of paragraph
(6) and inserting ``45B''.
(2) Subparagraph (A) of section 108(d)(9) is amended by
striking ``paragraph (3)(B)'' and inserting ``paragraph
(3)(C)''.
(3) Subparagraph (C) of section 143(d)(2) is amended by
striking the period at the end thereof and inserting a comma.
(4) Clause (ii) of section 163(j)(6)(E) is amended by
striking ``which is a'' and inserting ``which is''.
(5) Subparagraph (A) of section 1017(b)(4) is amended by
striking ``subsection (b)(2)(D)'' and inserting ``subsection
(b)(2)(E)''.
(6) So much of section 1245(a)(3) as precedes subparagraph
(A) thereof is amended to read as follows:
``(3) Section 1245 property.--For purposes of this section,
the term `section 1245 property' means any property which is or
has been property of a character subject to the allowance for
depreciation provided in section 167 and is either--''.
(7) Paragraph (2) of section 1394(e) is amended--
(A) by striking ``(i)'' and inserting ``(A)'', and
(B) by striking ``(ii)'' and inserting ``(B)''.
(8) Subsection (m) of section 6501 (as redesignated by
section 1602) is amended by striking ``or 51(j)'' and inserting
``45B, or 51(j)''.
(9)(A) The section 6714 added by section 13242(b)(1) of the
Revenue Reconciliation Act of 1993 is hereby redesignated as
section 6715.
(B) The table of sections for part I of subchapter B of
chapter 68 is amended by striking ``6714'' in the item added by
such section 13242(b)(2) of such Act and inserting ``6715''.
(10) Paragraph (2) of section 9502(b) is amended by inserting
``and before'' after ``1982,''.
(11) Subsection (a)(3) of section 13206 of the Revenue
Reconciliation Act of 1993 is amended by striking ``this
section'' and inserting ``this subsection''.
(12) Paragraph (1) of section 13215(c) of the Revenue
Reconciliation Act of 1993 is amended by striking ``Public Law
92-21'' and inserting ``Public Law 98-21''.
(13) Paragraph (2) of section 13311(e) of the Revenue
Reconciliation Act of 1993 is amended by striking ``section
1393(a)(3)'' and inserting ``section 1393(a)(2)''.
(14) Subparagraph (B) of section 117(d)(2) is amended by
striking ``section 132(f)'' and inserting ``section 132(h)''.
(n) Effective Date.--Any amendment made by this section shall take
effect as if included in the provision of the Revenue Reconciliation
Act of 1993 to which such amendment relates.
SEC. 1704. MISCELLANEOUS PROVISIONS.
(a) Application of Amendments Made by Title XII of Omnibus Budget
Reconciliation Act of 1990.--Except as otherwise expressly provided,
whenever in title XII of the Omnibus Budget Reconciliation Act of 1990
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.
(b) Treatment of Certain Amounts Under Hedge Bond Rules.--
(1) Clause (iii) of section 149(g)(3)(B) is amended to read
as follows:
``(iii) Amounts held pending reinvestment or
redemption.--Amounts held for not more than 30
days pending reinvestment or bond redemption
shall be treated as invested in bonds described
in clause (i).''
(2) The amendment made by paragraph (1) shall take effect as
if included in the amendments made by section 7651 of the
Omnibus Budget Reconciliation Act of 1989.
(c) Treatment of Certain Distributions Under Section 1445.--
(1) In general.--Paragraph (3) of section 1445(e) is amended
by adding at the end thereof the following new sentence:
``Rules similar to the rules of the preceding provisions of
this paragraph shall apply in the case of any distribution to
which section 301 applies and which is not made out of the
earnings and profits of such a domestic corporation.''
(2) Effective date.--The amendment made by paragraph (1)
shall apply to distributions after the date of the enactment of
this Act.
(d) Treatment of Certain Credits Under Section 469.--
(1) In general.--Subparagraph (B) of section 469(c)(3) is
amended by adding at the end thereof the following new
sentence: ``If the preceding sentence applies to the net income
from any property for any taxable year, any credits allowable
under subpart B (other than section 27(a)) or D of part IV of
subchapter A for such taxable year which are attributable to
such property shall be treated as credits not from a passive
activity to the extent the amount of such credits does not
exceed the regular tax liability of the taxpayer for the
taxable year which is allocable to such net income.''
(2) Effective date.--The amendment made by paragraph (1)
shall apply to taxable years beginning after December 31, 1986.
(e) Treatment of Dispositions Under Passive Loss Rules.--
(1) In general.--Subparagraph (A) of section 469(g)(1) is
amended to read as follows:
``(A) In general.--If all gain or loss realized on
such disposition is recognized, the excess of--
``(i) any loss from such activity for such
taxable year (determined after the application
of subsection (b)), over
``(ii) any net income or gain for such
taxable year from all other passive activities
(determined after the application of subsection
(b)),
shall be treated as a loss which is not from a passive
activity.''
(2) Effective date.--The amendment made by paragraph (1)
shall apply to taxable years beginning after December 31, 1986.
(f) Miscellaneous Amendments to Foreign Provisions.--
(1) Coordination of unified estate tax credit with
treaties.--Subparagraph (A) of section 2102(c)(3) is amended by
adding at the end thereof the following new sentence: ``For
purposes of the preceding sentence, property shall not be
treated as situated in the United States if such property is
exempt from the tax imposed by this subchapter under any treaty
obligation of the United States.''
(2) Treatment of certain interest paid to related person.--
(A) Subparagraph (B) of section 163(j)(1) is amended
by inserting before the period at the end thereof the
following: ``(and clause (ii) of paragraph (2)(A) shall
not apply for purposes of applying this subsection to
the amount so treated)''.
(B) Subsection (j) of section 163 is amended by
redesignating paragraph (7) as paragraph (8) and by
inserting after paragraph (6) the following new
paragraph:
``(7) Coordination with passive loss rules, etc.--This
subsection shall be applied before sections 465 and 469.''
(C) The amendments made by this paragraph shall apply
as if included in the amendments made by section
7210(a) of the Revenue Reconciliation Act of 1989.
(3) Treatment of interest allocable to effectively connected
income.--
(A) In general.--
(i) Subparagraph (B) of section 884(f)(1) is
amended by striking ``to the extent'' and all
that follows down through ``subparagraph (A)''
and inserting ``to the extent that the
allocable interest exceeds the interest
described in subparagraph (A)''.
(ii) The second sentence of section 884(f)(1)
is amended by striking ``reasonably expected''
and all that follows down through the period at
the end thereof and inserting ``reasonably
expected to be allocable interest.''
(iii) Paragraph (2) of section 884(f) is
amended to read as follows:
``(2) Allocable interest.--For purposes of this subsection,
the term `allocable interest' means any interest which is
allocable to income which is effectively connected (or treated
as effectively connected) with the conduct of a trade or
business in the United States.''
(B) Effective date.--The amendments made by
subparagraph (A) shall take effect as if included in
the amendments made by section 1241(a) of the Tax
Reform Act of 1986.
(4) Clarification of source rule.--
(A) In general.--Paragraph (2) of section 865(b) is
amended by striking ``863(b)'' and inserting ``863''.
(B) Effective date.--The amendment made by
subparagraph (A) shall take effect as if included in
the amendments made by section 1211 of the Tax Reform
Act of 1986.
(5) Repeal of obsolete provisions.--
(A) Paragraph (1) of section 6038(a) is amended by
striking ``, and'' at the end of subparagraph (E) and
inserting a period, and by striking subparagraph (F).
(B) Subsection (b) of section 6038A is amended by
adding ``and'' at the end of paragraph (2), by striking
``, and'' at the end of paragraph (3) and inserting a
period, and by striking paragraph (4).
(g) Treatment of Assignment of Interest in Certain Bond-Financed
Facilities.--
(1) In general.--Subparagraph (A) of section 1317(3) of the
Tax Reform Act of 1986 is amended by adding at the end thereof
the following new sentence: ``A facility shall not fail to be
treated as described in this subparagraph by reason of an
assignment (or an agreement to an assignment) by the
governmental unit on whose behalf the bonds are issued of any
part of its interest in the property financed by such bonds to
another governmental unit.''
(2) Effective date.--The amendment made by paragraph (1)
shall take effect as if included in such section 1317 on the
date of the enactment of the Tax Reform Act of 1986.
(h) Clarification of Treatment of Medicare Entitlement Under COBRA
Provisions.--
(1) In general.--
(A) Subclause (V) of section 4980B(f)(2)(B)(i) is
amended to read as follows:
``(V) Medicare entitlement followed
by qualifying event.--In the case of a
qualifying event described in paragraph
(3)(B) that occurs less than 18 months
after the date the covered employee
became entitled to benefits under title
XVIII of the Social Security Act, the
period of coverage for qualified
beneficiaries other than the covered
employee shall not terminate under this
clause before the close of the 36-month
period beginning on the date the
covered employee became so entitled.''
(B) Clause (v) of section 602(2)(A) of the Employee
Retirement Income Security Act of 1974 is amended to
read as follows:
``(v) Medicare entitlement followed by
qualifying event.--In the case of a qualifying
event described in section 603(2) that occurs
less than 18 months after the date the covered
employee became entitled to benefits under
title XVIII of the Social Security Act, the
period of coverage for qualified beneficiaries
other than the covered employee shall not
terminate under this subparagraph before the
close of the 36-month period beginning on the
date the covered employee became so entitled.''
(C) Clause (iv) of section 2202(2)(A) of the Public
Health Service Act is amended to read as follows:
``(iv) Medicare entitlement followed by
qualifying event.--In the case of a qualifying
event described in section 2203(2) that occurs
less than 18 months after the date the covered
employee became entitled to benefits under
title XVIII of the Social Security Act, the
period of coverage for qualified beneficiaries
other than the covered employee shall not
terminate under this subparagraph before the
close of the 36-month period beginning on the
date the covered employee became so entitled.''
(2) Effective date.--The amendments made by this subsection
shall apply to plan years beginning after December 31, 1989.
(i) Treatment of Certain REMIC Inclusions.--
(1) In general.--Subsection (a) of section 860E is amended by
adding at the end thereof the following new paragraph:
``(6) Coordination with minimum tax.--For purposes of part VI
of subchapter A of this chapter--
``(A) the reference in section 55(b)(2) to taxable
income shall be treated as a reference to taxable
income determined without regard to this subsection,
``(B) the alternative minimum taxable income of any
holder of a residual interest in a REMIC for any
taxable year shall in no event be less than the excess
inclusion for such taxable year, and
``(C) any excess inclusion shall be disregarded for
purposes of computing the alternative tax net operating
loss deduction.
The preceding sentence shall not apply to any organization to
which section 593 applies, except to the extent provided in
regulations prescribed by the Secretary under paragraph (2).''
(2) Effective date.--The amendment made by paragraph (1)
shall take effect as if included in the amendments made by
section 671 of the Tax Reform Act of 1986 unless the taxpayer
elects to apply such amendment only to taxable years beginning
after the date of the enactment of this Act.
(j) Exemption From Harbor Maintenance Tax for Certain Passengers.--
(1) In general.--Subparagraph (D) of section 4462(b)(1)
(relating to special rule for Alaska, Hawaii, and possessions)
is amended by inserting before the period the following: ``, or
passengers transported on United States flag vessels operating
solely within the State waters of Alaska or Hawaii and adjacent
international waters''.
(2) Effective date.--The amendment made by paragraph (1)
shall take effect as if included in the amendments made by
section 1402(a) of the Harbor Maintenance Revenue Act of 1986.
(k) Amendments Related to Revenue Provisions of Energy Policy Act of
1992.--
(1) Effective with respect to taxable years beginning after
December 31, 1990, subclause (II) of section 53(d)(1)(B)(iv) is
amended to read as follows:
``(II) the adjusted net minimum tax
for any taxable year is the amount of
the net minimum tax for such year
increased in the manner provided in
clause (iii).''
(2) Subsection (g) of section 179A is redesignated as
subsection (f).
(3) Subparagraph (E) of section 6724(d)(3) is amended by
striking ``section 6109(f)'' and inserting ``section 6109(h)''.
(4)(A) Subsection (d) of section 30 is amended--
(i) by inserting ``(determined without regard to
subsection (b)(3))'' before the period at the end of
paragraph (1) thereof, and
(ii) by adding at the end thereof the following new
paragraph:
``(4) Election to not take credit.--No credit shall be
allowed under subsection (a) for any vehicle if the taxpayer
elects to not have this section apply to such vehicle.''
(B) Subsection (m) of section 6501 (as redesignated by
section 1602) is amended by striking ``section 40(f)'' and
inserting ``section 30(d)(4), 40(f)''.
(5) Subclause (III) of section 501(c)(21)(D)(ii) is amended
by striking ``section 101(6)'' and inserting ``section 101(7)''
and by striking ``1752(6)'' and inserting ``1752(7)''.
(6) Paragraph (1) of section 1917(b) of the Energy Policy Act
of 1992 shall be applied as if ``at a rate'' appeared instead
of ``at the rate'' in the material proposed to be stricken.
(7) Paragraph (2) of section 1921(b) of the Energy Policy Act
of 1992 shall be applied as if a comma appeared after ``(2)''
in the material proposed to be stricken.
(8) Subsection (a) of section 1937 of the Energy Policy Act
of 1992 shall be applied as if ``Subpart B'' appeared instead
of ``Subpart C''.
(l) Treatment of Qualified Football Coaches Plan.--
(1) In general.--Subparagraph (F) of section 3(37) of the
Employee Retirement Income Security Act of 1974 (29 U.S.C.
1002(37)(F)) is amended by redesignating clause (ii) as clause
(iii) and by inserting after clause (i) the following new
clause:
``(ii) For purposes of the Internal Revenue Code of 1986--
``(I) clause (i) shall apply, and
``(II) a qualified football coaches plan shall be treated as
a multiemployer collectively bargained plan.''.
(2) Effective date.--The amendment made by paragraph (1)
shall apply to years beginning after December 22, 1987.
(m) Determination of Unrecovered Investment in Annuity Contract.--
(1) In general.--Subparagraph (A) of section 72(b)(4) is
amended by inserting ``(determined without regard to subsection
(c)(2))'' after ``contract''.
(2) Effective date.--The amendment made by paragraph (1)
shall take effect as if included in the amendments made by
section 1122(c) of the Tax Reform Act of 1986.
(n) Modifications to Election To Include Child's Income on Parent's
Return.--
(1) Eligibility for election.--Clause (ii) of section
1(g)(7)(A) (relating to election to include certain unearned
income of child on parent's return) is amended to read as
follows:
``(ii) such gross income is more than the
amount described in paragraph (4)(A)(ii)(I) and
less than 10 times the amount so described,''.
(2) Computation of tax.--Subparagraph (B) of section 1(g)(7)
(relating to income included on parent's return) is amended--
(A) by striking ``$1,000'' in clause (i) and
inserting ``twice the amount described in paragraph
(4)(A)(ii)(I)'', and
(B) by amending subclause (II) of clause (ii) to read
as follows:
``(II) for each such child, 15
percent of the lesser of the amount
described in paragraph (4)(A)(ii)(I) or
the excess of the gross income of such
child over the amount so described,
and''.
(3) Minimum tax.--Subparagraph (B) of section 59(j)(1) is
amended by striking ``$1,000'' and inserting ``twice the amount
in effect for the taxable year under section 63(c)(5)(A)''.
(4) Effective date.--The amendments made by this subsection
shall apply to taxable years beginning after December 31, 1995.
(o) Treatment of Certain Veterans' Reemployment Rights.--
(1) In general.--Section 414 is amended by adding at the end
the following new subsection:
``(u) Special Rules Relating to Veterans' Reemployment Rights Under
USERRA.--
``(1) Treatment of certain contributions made pursuant to
veterans' reemployment rights.--If any contribution is made by
an employer or an employee under an individual account plan
with respect to an employee, or by an employee to a defined
benefit plan that provides for employee contributions, and such
contribution is required by reason of such employee's rights
under chapter 43 of title 38, United States Code, resulting
from qualified military service, then--
``(A) such contribution shall not be subject to any
otherwise applicable limitation contained in section
402(g), 402(h), 403(b), 404(a), 404(h), 408, 415, or
457, and shall not be taken into account in applying
such limitations to other contributions or benefits
under such plan or any other plan, with respect to the
year in which the contribution is made,
``(B) such contribution shall be subject to the
limitations referred to in subparagraph (A) with
respect to the year to which the contribution relates
(in accordance with rules prescribed by the Secretary),
and
``(C) such plan shall not be treated as failing to
meet the requirements of section 401(a)(4), 401(a)(26),
401(k)(3), 401(k)(11), 401(k)(12), 401(m), 403(b)(12),
408(k)(3), 408(k)(6), 408(p), 410(b), or 416 by reason
of the making of (or the right to make) such
contribution.
For purposes of the preceding sentence, any elective deferral
or employee contribution made under paragraph (2) shall be
treated as required by reason of the employee's rights under
such chapter 43.
``(2) Reemployment rights under userra with respect to
elective deferrals.--
``(A) In general.--For purposes of this subchapter
and section 457, if an employee is entitled to the
benefits of chapter 43 of title 38, United States Code,
with respect to any plan which provides for elective
deferrals, the employer sponsoring the plan shall be
treated as meeting the requirements of such chapter 43
with respect to such elective deferrals only if such
employer--
``(i) permits such employee to make
additional elective deferrals under such plan
(in the amount determined under subparagraph
(B) or such lesser amount as iselected by the
employee) during the period which begins on the date of the
reemployment of such employee with such employer and has the same
length as the lesser of--
``(I) the product of 3 and the period
of qualified military service which
resulted in such rights, and
``(II) 5 years, and
``(ii) makes a matching contribution with
respect to any additional elective deferral
made pursuant to clause (i) which would have
been required had such deferral actually been
made during the period of such qualified
military service.
``(B) Amount of makeup required.--The amount
determined under this subparagraph with respect to any
plan is the maximum amount of the elective deferrals
that the individual would have been permitted to make
under the plan in accordance with the limitations
referred to in paragraph (1)(A) during the period of
qualified military service if the individual had
continued to be employed by the employer during such
period and received compensation as determined under
paragraph (7). Proper adjustment shall be made to the
amount determined under the preceding sentence for any
elective deferrals actually made during the period of
such qualified military service.
``(C) Elective deferral.--For purposes of this
paragraph, the term `elective deferral' has the meaning
given such term by section 402(g)(3); except that such
term shall include any deferral of compensation under
an eligible deferred compensation plan (as defined in
section 457(b)).
``(D) After-tax employee contributions.--References
in subparagraphs (A) and (B) to elective deferrals
shall be treated as including references to employee
contributions.
``(3) Certain retroactive adjustments not required.--For
purposes of this subchapter and subchapter E, no provision of
chapter 43 of title 38, United States Code, shall be construed
as requiring--
``(A) any crediting of earnings to an employee with
respect to any contribution before such contribution is
actually made, or
``(B) any allocation of any forfeiture with respect
to the period of qualified military service.
``(4) Loan repayment suspensions permitted.--If any plan
suspends the obligation to repay any loan made to an employee
from such plan for any part of any period during which such
employee is performing service in the uniformed services (as
defined in chapter 43 of title 38, United States Code), whether
or not qualified military service, such suspension shall not be
taken into account for purposes of section 72(p), 401(a), or
4975(d)(1).
``(5) Qualified military service.--For purposes of this
subsection, the term `qualified military service' means any
service in the uniformed services (as defined in chapter 43 of
title 38, United States Code) by any individual if such
individual is entitled to reemployment rights under such
chapter with respect to such service.
``(6) Individual account plan.--For purposes of this
subsection, the term `individual account plan' means any
defined contribution plan (including any tax-sheltered annuity
plan under section 403(b), any simplified employee pension
under section 408(k), any qualified salary reduction
arrangement under section 408(p), and any eligible deferred
compensation plan (as defined in section 457(b)).
``(7) Compensation.--For purposes of sections 403(b)(3),
415(c)(3), and 457(e)(5), an employee who is in qualified
military service shall be treated as receiving compensation
from the employer during such period of qualified military
service equal to--
``(A) the compensation the employee would have
received during such period if the employee were not in
qualified military service, determined based on the
rate of pay the employee would have received from the
employer but for absence during the period of qualified
military service, or
``(B) if the compensation the employee would have
received during such period was not reasonably certain,
the employee's average compensation from the employer
during the 12-month period immediately preceding the
qualified military service (or, if shorter, the period
of employment immediately preceding the qualified
military service).
``(8) USERRA requirements for qualified retirement plans.--
For purposes of this subchapter and section 457, an employer
sponsoring a retirement plan shall be treated as meeting the
requirements of chapter 43 of title 38, United States Code,
only if each of the following requirements is met:
``(A) An individual reemployed under such chapter is
treated with respect to such plan as not having
incurred a break in service with the employer
maintaining the plan by reason of such individual's
period of qualified military service.
``(B) Each period of qualified military service
served by an individual is, upon reemployment under
such chapter, deemed with respect to such plan to
constitute service with the employer maintaining the
plan for the purpose of determining the
nonforfeitability of the individual's accrued benefits
under such plan and for the purpose of determining the
accrual of benefits under such plan.
``(C) An individual reemployed under such chapter is
entitled to accrued benefits that are contingent on the
making of, or derived from, employee contributions or
elective deferrals only to the extent the individual
makes payment to the plan with respect to such
contributions or deferrals. No such payment may exceed
the amount the individual would have been permitted or
required to contribute had the individual remained
continuously employed by the employer throughout the
period of qualified military service. Any payment to
such plan shall be made during the period beginning
with the date of reemployment and whose duration is 3
times the period of the qualified military service (but
not greater than 5 years).
``(9) Plans not subject to title 38.--This subsection shall
not apply to any retirement plan to which chapter 43 of title
38, United States Code, does not apply.
``(10) References.--For purposes of this section, any
reference to chapter 43 of title 38, United States Code, shall
be treated as a reference to such chapter as in effect on
December 12, 1994 (without regard to any subsequent
amendment).''
(2) Effective date.--The amendment made by this subsection
shall be effective as of December 12, 1994.
(p) Reporting of Real Estate Transactions.--
(1) In general.--Paragraph (3) of section 6045(e) (relating
to prohibition of separate charge for filing return) is amended
by adding at the end the following new sentence: ``Nothing in
this paragraph shall be construed to prohibit the real estate
reporting person from taking into account its cost of complying
with such requirement in establishing its charge (other than a
separate charge for complying with such requirement) to any
customer for performing services in the case of a real estate
transaction.''
(2) Effective date.--The amendment made by paragraph (1)
shall take effect as if included in section 1015(e)(2)(A) of
the Technical and Miscellaneous Revenue Act of 1988.
(q) Clarification of Denial of Deduction for Stock Redemption
Expenses.
(1) In general.--Paragraph (1) of section 162(k) is amended
by striking ``the redemption of its stock'' and inserting ``the
reacquisition of its stock or of the stock of any related
person (as defined in section 465(b)(3)(C))''.
(2) Certain deductions permitted.--Subparagraph (A) of
section 162(k)(2) is amended by striking ``or'' at the end of
clause (i), by redesignating clause (ii) as clause (iii), and
by inserting after clause (i) the following new clause:
``(ii) deduction for amounts which are
properly allocable to indebtedness and
amortized over the term of such indebtedness,
or''.
(3) Clerical amendment.--The subsection heading for
subsection (k) of section 162 is amended by striking
``Redemption'' and inserting ``Reacquisition''.
(4) Effective date.--
(A) In general.--Except as provided in subparagraph
(B), the amendments made by this subsection shall apply
to amounts paid or incurred after September 13, 1995,
in taxable years ending after such date.
(B) Paragraph (2).--The amendment made by paragraph
(2) shall take effect as if included in the amendment
made by section 613 of the Tax Reform Act of 1986.
(r) Clerical Amendment to Section 404.--
(1) In general.--Paragraph (1) of section 404(j) is amended
by striking ``(10)'' and inserting ``(9)''.
(2) Effective date.--The amendment made by paragraph (1)
shall take effect as if included in the amendments made by
section 713(d)(4)(A) of the Deficit Reduction Act of 1984.
(s) Passive Income Not To Include FSC Income, Etc.--
(1) In general.--Paragraph (2) of section 1296(b) is amended
by striking ``or'' at the end of subparagraph (B), by striking
the period at the end of subparagraph (C) and inserting ``,
or'', and by inserting after subparagraph (C) the following new
subparagraph:
``(D) which is foreign trade income of a FSC or
export trade income of an export trade corporation (as
defined in section 971).''
(2) Effective date.--The amendment made by paragraph (1)
shall take effect as if included in the amendments made by
section 1235 of the Tax Reform Act of 1986.
(t) Miscellaneous Clerical Amendments.--
(1) Subclause (II) of section 56(g)(4)(C)(ii) is amended by
striking ``of the subclause'' and inserting ``of subclause''.
(2) Paragraph (2) of section 72(m) is amended by inserting
``and'' at the end of subparagraph (A), by striking
subparagraph (B), and by redesignating subparagraph (C) as
subparagraph (B).
(3) Paragraph (2) of section 86(b) is amended by striking
``adusted'' and inserting ``adjusted''.
(4)(A) The heading for section 112 is amended by striking
``combat pay'' and inserting ``combat zone
compensation''.
(B) The item relating to section 112 in the table of sections
for part III of subchapter B of chapter 1 is amended by
striking ``combat pay'' and inserting ``combat zone
compensation''.
(C) Paragraph (1) of section 3401(a) is amended by striking
``combat pay'' and inserting ``combat zone compensation''.
(5) Clause (i) of section 172(h)(3)(B) is amended by striking
the comma at the end thereof and inserting a period.
(6) Clause (ii) of section 543(a)(2)(B) is amended by
striking ``section 563(c)'' and inserting ``section 563(d)''.
(7) Paragraph (1) of section 958(a) is amended by striking
``sections 955(b)(1) (A) and (B), 955(c)(2)(A)(ii), and
960(a)(1)'' and inserting ``section 960(a)(1)''.
(8) Subsection (g) of section 642 is amended by striking
``under 2621(a)(2)'' and inserting ``under section
2621(a)(2)''.
(9) Section 1463 is amended by striking ``this subsection''
and inserting ``this section''.
(10) Subsection (k) of section 3306 is amended by inserting a
period at the end thereof.
(11) The item relating to section 4472 in the table of
sections for subchapter B of chapter 36 is amended by striking
``and special rules''.
(12) Paragraph (3) of section 5134(c) is amended by striking
``section 6662(a)'' and inserting ``section 6665(a)''.
(13) Paragraph (2) of section 5206(f) is amended by striking
``section 5(e)'' and inserting ``section 105(e)''.
(14) Paragraph (1) of section 6050B(c) is amended by striking
``section 85(c)'' and inserting ``section 85(b)''.
(15) Subsection (k) of section 6166 is amended by striking
paragraph (6).
(16) Subsection (e) of section 6214 is amended to read as
follows:
``(e) Cross Reference.--
``For provision giving Tax Court jurisdiction to
order a refund of an overpayment and to award sanctions, see section
6512(b)(2).''
(17) The section heading for section 6043 is amended by
striking the semicolon and inserting a comma.
(18) The item relating to section 6043 in the table of
sections for subpart B of part III of subchapter A of chapter
61 is amended by striking the semicolon and inserting a comma.
(19) The table of sections for part I of subchapter A of
chapter 68 is amended by striking the item relating to section
6662.
(20)(A) Section 7232 is amended--
(i) by striking ``lubricating oil,'' in the
heading, and
(ii) by striking ``lubricating oil,'' in the text.
(B) The table of sections for part II of subchapter A of
chapter 75 is amended by striking ``lubricating oil,'' in the
item relating to section 7232.
(21) Paragraph (1) of section 6701(a) of the Omnibus Budget
Reconciliation Act of 1989 is amended by striking ``subclause
(IV)'' and inserting ``subclause (V)''.
(22) Clause (ii) of section 7304(a)(2)(D) of such Act is
amended by striking ``subsection (c)(2)'' and inserting
``subsection (c)''.
(23) Paragraph (1) of section 7646(b) of such Act is amended
by striking ``section 6050H(b)(1)'' and inserting ``section
6050H(b)(2)''.
(24) Paragraph (10) of section 7721(c) of such Act is amended
by striking ``section 6662(b)(2)(C)(ii)'' and inserting
``section 6661(b)(2)(C)(ii)''.
(25) Subparagraph (A) of section 7811(i)(3) of such Act is
amended by inserting ``the first place it appears'' before ``in
clause (i)''.
(26) Paragraph (10) of section 7841(d) of such Act is amended
by striking ``section 381(a)'' and inserting ``section
381(c)''.
(27) Paragraph (2) of section 7861(c) of such Act is amended
by inserting ``the second place it appears'' before ``and
inserting''.
(28) Paragraph (1) of section 460(b) is amended by striking
``the look-back method of paragraph (3)'' and inserting ``the
look-back method of paragraph (2)''.
(29) Subparagraph (C) of section 50(a)(2) is amended by
striking ``subsection (c)(4)'' and inserting ``subsection
(d)(5)''.
(30) Subparagraph (B) of section 172(h)(4) is amended by
striking the material following the heading and preceding
clause (i) and inserting ``For purposes of subsection (b)(2)--
''.
(31) Subparagraph (A) of section 355(d)(7) is amended by
inserting ``section'' before ``267(b)''.
(32) Subparagraph (C) of section 420(e)(1) is amended by
striking ``mean'' and inserting ``means''.
(33) Paragraph (4) of section 537(b) is amended by striking
``section 172(i)'' and inserting ``section 172(f)''.
(34) Subparagraph (B) of section 613(e)(1) is amended by
striking the comma at the end thereof and inserting a period.
(35) Paragraph (4) of section 856(a) is amended by striking
``section 582(c)(5)'' and inserting ``section 582(c)(2)''.
(36) Sections 904(f)(2)(B)(i) and 907(c)(4)(B)(iii) are each
amended by inserting ``(as in effect on the day before the date
of the enactment of the Revenue Reconciliation Act of 1990)''
after ``section 172(h)''.
(37) Subsection (b) of section 936 is amended by striking
``subparagraphs (D)(ii)(I)'' and inserting ``subparagraphs
(D)(ii)''.
(38) Subsection (c) of section 2104 is amended by striking
``subparagraph (A), (C), or (D) of section 861(a)(1)'' and
inserting ``section 861(a)(1)(A)''.
(39) Subparagraph (A) of section 280A(c)(1) is amended to
read as follows:
``(A) as the principal place of business for any
trade or business of the taxpayer,''.
(40) Section 6038 is amended by redesignating the subsection
relating to cross references as subsection (f).
(41) Clause (iv) of section 6103(e)(1)(A) is amended by
striking all that follows ``provisions of'' and inserting
``section 1(g) or 59(j);''.
(42) The subsection (f) of section 6109 of the Internal
Revenue Code of 1986 which was added by section 2201(d) of
Public Law 101-624 is redesignated as subsection (g).
(43) Subsection (b) of section 7454 is amended by striking
``section 4955(e)(2)'' and inserting ``section 4955(f)(2)''.
(44) Subsection (d) of section 11231 of the Revenue
Reconciliation Act of 1990 shall be applied as if ``comma''
appeared instead of ``period'' and as if the paragraph (9)
proposed to be added ended with a comma.
(45) Paragraph (1) of section 11303(b) of the Revenue
Reconciliation Act of 1990 shall be applied as if ``paragraph''
appeared instead of ``subparagraph'' in the material proposed
to be stricken.
(46) Subsection (f) of section 11701 of the Revenue
Reconciliation Act of 1990 is amended by inserting ``(relating
to definitions)'' after ``section 6038(e)''.
(47) Subsection (i) of section 11701 of the Revenue
Reconciliation Act of 1990 shall be applied as if
``subsection'' appeared instead of ``section'' in the material
proposed to be stricken.
(48) Subparagraph (B) of section 11801(c)(2) of the Revenue
Reconciliation Act of 1990 shall be applied as if ``section
56(g)'' appeared instead of ``section 59(g)''.
(49) Subparagraph (C) of section 11801(c)(8) of the Revenue
Reconciliation Act of 1990 shall be applied as if
``reorganizations'' appeared instead of ``reorganization'' in
the material proposed to be stricken.
(50) Subparagraph (H) of section 11801(c)(9) of the Revenue
Reconciliation Act of 1990 shall be applied as if ``section
1042(c)(1)(B)'' appeared instead of ``section 1042(c)(2)(B)''.
(51) Subparagraph (F) of section 11801(c)(12) of the Revenue
Reconciliation Act of 1990 shall be applied as if ``and (3)''
appeared instead of ``and (E)''.
(52) Subparagraph (A) of section 11801(c)(22) of the Revenue
Reconciliation Act of 1990 shall be applied as if ``chapters
21'' appeared instead of ``chapter 21'' in the material
proposed to be stricken.
(53) Paragraph (3) of section 11812(b) of the Revenue
Reconciliation Act of 1990 shall be applied by not executing
the amendment therein to the heading of section 42(d)(5)(B).
(54) Clause (i) of section 11813(b)(9)(A) of the Revenue
Reconciliation Act of 1990 shall be applied as if a comma
appeared after ``(3)(A)(ix)'' in the material proposed to be
stricken.
(55) Subparagraph (F) of section 11813(b)(13) of the Revenue
Reconciliation Act of 1990 shall be applied as if ``tax''
appeared after ``investment'' in the material proposed to be
stricken.
(56) Paragraph (19) of section 11813(b) of the Revenue
Reconciliation Act of 1990 shall be applied as if ``Paragraph
(20) of section 1016(a), as redesignated by section 11801,''
appeared instead of ``Paragraph (21) of section 1016(a)''.
(57) Paragraph (5) section 8002(a) of the Surface
Transportation Revenue Act of 1991 shall be applied as if
``4481(e)'' appeared instead of ``4481(c)''.
(58) Section 7872 is amended--
(A) by striking ``foregone'' each place it appears in
subsections (a) and (e)(2) and inserting ``forgone'',
and
(B) by striking ``Foregone'' in the heading for
subsection (e) and the heading for paragraph (2) of
subsection (e) and inserting ``Forgone''.
(59) Paragraph (7) of section 7611(h) is amended by striking
``approporiate'' and inserting ``appropriate''.
(60) The heading of paragraph (3) of section 419A(c) is
amended by striking ``severence'' and inserting ``severance''.
(61) Clause (ii) of section 807(d)(3)(B) is amended by
striking ``Commissoners' '' and inserting ``Commissioners' ''.
(62) Subparagraph (B) of section 1274A(c)(1) is amended by
striking ``instument'' and inserting ``instrument''.
(63) Subparagraph (B) of section 724(d)(3) by striking
``Subparagaph'' and inserting ``Subparagraph''.
(64) The last sentence of paragraph (2) of section 42(c) is
amended by striking ``of 1988''.
(65) Paragraph (1) of section 9707(d) is amended by striking
``diligence,'' and inserting ``diligence''.
(66) Subsection (c) of section 4977 is amended by striking
``section 132(i)(2)'' and inserting ``section 132(h)''.
(67) The last sentence of section 401(a)(20) is amended by
striking ``section 211'' and inserting ``section 521''.
(68) Subparagraph (A) of section 402(g)(3) is amended by
striking ``subsection (a)(8)'' and inserting ``subsection
(e)(3)''.
(69) The last sentence of section 403(b)(10) is amended by
striking ``an direct'' and inserting ``a direct''.
(70) Subparagraph (A) of section 4973(b)(1) is amended by
striking ``sections 402(c)'' and inserting ``section 402(c)''.
(71) Paragraph (12) of section 3405(e) is amended by striking
``(b)(3)'' and inserting ``(b)(2)''.
(72) Paragraph (41) of section 521(b) of the Unemployment
Compensation Amendments of 1992 shall be applied as if
``section'' appeared instead of ``sections'' in the material
proposed to be stricken.
(73) Paragraph (27) of section 521(b) of the Unemployment
Compensation Amendments of 1992 shall be applied as if
``Section 691(c)(5)'' appeared instead of ``Section 691(c)''.
(74) Paragraph (5) of section 860F(a) is amended by striking
``paragraph (1)'' and inserting ``paragraph (2)''.
(75) Paragraph (1) of section 415(k) is amended by adding
``or'' at the end of subparagraph (C), by striking
subparagraphs (D) and (E), and by redesignating subparagraph
(F) as subparagraph (D).
(76) Paragraph (2) of section 404(a) is amended by striking
``(18),''.
(77) Clause (ii) of section 72(p)(4)(A) is amended to read as
follows:
``(ii) Special rule.--The term `qualified
employer plan' shall not include any plan which
was (or was determined to be) a qualified
employer plan or a government plan.''
(78) Sections 461(i)(3)(C) and 1274(b)(3)(B)(i) are each
amended by striking ``section 6662(d)(2)(C)(ii)'' and inserting
``section 6662(d)(2)(C)(iii)''.
(79) Subsection (a) of section 164 is amended by striking the
paragraphs relating to the generation-skipping tax and the
environmental tax imposed by section 59A and by inserting after
paragraph (3) the following new paragraphs:
``(4) The GST tax imposed on income distributions.
``(5) The environmental tax imposed by section 59A.''
(u) Certain Property Not Treated as Section 179 Property.--
(1) In general.--Paragraph (1) of section 179(d) is amended
by adding at the end thereof the following new sentence: ``Such
term shall not include any property described in section 50(b)
and shall not include air conditioning or heating units and
horses.''
(2) Effective date.--The amendment made by paragraph (1)
shall apply to property placed in service after May 14, 1996.
I. INTRODUCTION
A. Purpose and Summary
The purpose of the Small Business Job Protection Act is to
reduce the tax barriers that interfere with the ability of
America's small businesses to grow and create jobs. The bill
accomplishes this objective through a variety of provisions
that are designed to provide flexibility to and reduced costs
for small businesses and their workers. In addition, the
pension reforms in the bill will help tens of millions of
Americans save for retirement and will make these retirement
savings more secure.
The bill includes the following principal provisions: (1)
increase in expensing for small business from $17,500 to
$25,000; (2) expansion of the FICA tip credit; (3) extension of
certain expiring provisions, including the work opportunity tax
credit and employer-provided educational assistance; (4)
reforms of rules governing S corporations; and (5) extensive
pension reforms. The bill also includes other small business-
related tax provisions. To offset the cost of these provisions,
the bill: (1) phases out and repeals the Puerto Rico and
possession tax credit; (2) repeals the 50-percent interest
income exclusion for financial institution loans to ESOPs; (3)
applies a look-through rules for purposes of characterizing
certain subpart F income as unrelated business income; (4)
modifies the income forecast method of determining depreciation
deductions; (5) modifies the exclusion of damages received on
account of personal injury or sickness; and (6) repeals advance
refunds of the diesel fuel tax for purchasers of diesel-powered
cars, vans, and light trucks. Finally, the bill also contains a
number of technical corrections provisions.
B. Background and Need for Legislation
Many of the items contained in the Small Business Job
Protection Act were contained in the Balanced Budget Act of
1995 (H.R. 2491), which was passed by the Congress and vetoed
by President Clinton. The need for this legislation is as
urgent today as it was when Congress passed the Balanced Budget
Act of 1995.
Small business are the most vibrant segment of our economy.
They are responsible for the lion's share of job growth and
ingenuity in this country. However, recordkeeping and other
actions required to comply with the tax laws impose significant
costs on small businesses. The tax laws should be easier for
small businesses to comply with and as small of a burden as
possible. Similarly, education and employment opportunity must
be strongly encouraged. The Small Business Job Protection Act
is an important first step in this regard.
C. Legislative History
Committee bill
H.R. 3448 was introduced by Chairman Archer on May 14,
1996. The bill was considered in a Committee markup on May 14,
1996, and was ordered favorably reported, as amended, by a roll
call vote of 33 yeas and 3 nays.
The Chairman's amendment in the nature of a substitute
added two provisions to the bill as introduced: (1) clarify
that the present-law rule in section 280A permits deductions
for expenses related to a storage unit in a taxpayer's home
regularly used for inventory or product samples; and (2)
prospectively deny expensing for certain property, including
property described in section 50(b), air conditioning and
heating units, and horses.
In addition, the Committee approved four other amendments
(by voice vote) to the Chairman's amendment in the nature of a
substitute: (1) an amendment by Mr. Crane to provide an
exception if there is a binding contract negotiated before the
October 13, 1995, effective date of the bill's repeal of the
50-percent interest exclusion for employee stock ownership plan
loans; (2) an amendment by Mr. Thomas (California) to provide
tax-exempt status for certain charitable risk pool
organizations operated solely to pool insurance risks of
section 501(c)(3) charitable organizations; (3) an amendment by
Mr. Camp to exclude from unrelated business income certain dues
paid to agricultural and horticultural organizations; and (4)
an amendment by Mr. Neal relating to the employment tax status
of certain fishermen who receive compensation in the form of a
portion of the catch, with a revenue offset to require
reporting on certain purchases of fish. The Committee approved
the Chairman's amendment in the nature of a substitute, as
amended, by voice vote.
Committee hearings
Committee hearings have been held during the 104th Congress
related to various provisions of the bill.
Full Committee hearings were held on January 5 and 10-12,
1995 on the ``Contract With America'' revenue provisions
generally, and January 24-26 and 31, and February 1, 1995, on
savings and investment provisions. The increased expensing for
small business was included in these hearings. Oversight
Subcommittee held a hearing on expiring tax provisions on May
9, 1995. The subchapter S and pension simplification provisions
were derived from previous Committee tax simplification
provisions. These provisions, and the revenue-offset
provisions, were also included in the Balanced Budget Act of
1995 as passed by the Congress and vetoed by the President.
II. EXPLANATION OF THE BILL
SMALL BUSINESS AND OTHER TAX PROVISIONS
A. Small Business Provisions
1. Increase in expensing for small businesses (sec. 1111 of the bill
and sec. 179 of the Code)
Present Law
In lieu of depreciation, a taxpayer with a sufficiently
small amount of annual investment may elect to deduct up to
$17,500 of the cost of qualifying property placed in service
for the taxable year (sec. 179). 1 In general, qualifying
property is defined as depreciable tangible personal property
that is purchased for use in the active conduct of a trade or
business. The $17,500 amount is reduced (but not below zero) by
the amount by which the cost of qualifying property placed in
service during the taxable year exceeds $200,000. In addition,
the amount eligible to be expensed for a taxable year may not
exceed the taxable income of the taxpayer for the year that is
derived from the active conduct of a trade or business
(determined without regard to this provision). Any amount that
is not allowed as a deduction because of the taxable income
limitation may be carried forward to succeeding taxable years
(subject to similar limitations).
---------------------------------------------------------------------------
\1\ The amount permitted to be expensed under Code section 179 is
increased by up to an additional $20,000 for certain property placed in
service by a business located in an empowerment zone (sec. 1397A).
---------------------------------------------------------------------------
Reasons for Change
The Committee believes that section 179 expensing provides
two important benefits for small businesses. First, it lowers
the cost of capital for tangible property used in a trade or
business. Second, it eliminates depreciation recordkeeping
requirements with respect to expensed property. The Committee
would enhance these benefits by increasing the amount allowed
to be expensed under section 179.
Explanation of Provision
The bill increases the $17,500 amount allowed to be
expensed under Code section 179 to $25,000. The increase is
phased in as follows:
Taxable year beginning in-- Maximum expensing
1996.......................................................... $18,500
1997.......................................................... 19,000
1998.......................................................... 20,000
1999.......................................................... 21,000
2000.......................................................... 22,000
2001.......................................................... 23,000
2002.......................................................... 23,500
2003 and thereafter........................................... 25,000
Effective Date
The provision is effective for property placed in service
in taxable years beginning after December 31, 1995, subject to
the phase-in schedule set forth above.
2. Tax credit for Social Security taxes paid with respect to employee
cash tips (sec. 1112 of the bill and sec. 45B of the Code)
Present Law
Employee tip income is treated as employer-provided wages
for purposes of the Federal Insurance Contributions Act
(``FICA''). Employees are required to report to the employer
the amount of tips received. The Omnibus Budget Reconciliation
Act of 1993 (``OBRA 1993'') provided a business tax credit with
respect to certain employer FICA taxes paid with respect to
tips treated as paid by the employer. The credit applies to
tips received from customers in connection with the provision
of food or beverages for consumption on the premises of an
establishment with respect to which the tipping of employees is
customary. OBRA 1993 provided that the FICA tip credit is
effective for taxes paid after December 31, 1993. Temporary
Treasury regulations provide that the tax credit is available
only with respect to tips reported by the employee. The
temporary regulations also provide that the credit is effective
for FICA taxes paid by an employer after December 31, 1993,
with respect to tips received for services performed after
December 31, 1993.
Reasons for Change
The Committee believes it appropriate to clarify the
effective date and scope of the credit for FICA taxes paid on
employer cash tips. Despite the statutory language, there has
been some confusion regarding the effective date. The FICA tip
credit was included in the Senate version of H.R. 4210, the Tax
Fairness and Economic Growth Act of 1992, and was included in
the conference agreement of H.R. 4210 as passed by the 102d
Congress and vetoed by President Bush. The effective date of
that provision would have applied to ``tips received and wages
paid after the date of enactment.'' The FICA tip credit was
also included in the House and Senate versions of H.R. 11, the
Revenue Act of 1992, as considered by the 102d Congress. The
effective date of both those provisions was the same as in H.R.
4210, specifically tips received and wages paid after the date
of enactment. The provision was included in the conference
agreement of the H.R. 11, as adopted by the Congress and vetoed
by President Bush; however, the effective date of that
provision was modified to apply to ``taxes paid after''
December 31, 1992, i.e., no limitation with respect to tips
earned after December 31, 1992, was included.
In 1993, the House and Senate versions of the Omnibus
Budget Reconciliation Act of 1993 (``OBRA 1993'') did not
contain the FICA tip provision, but it was included in the
conference agreement. The FICA tip provision that was included
in OBRA 1993 has the same effective date as the provision in
the conference agreement for H.R. 11, except that the date was
moved one year, to taxes paid after December 31, 1993. The
Committee believes that the legislative history of this
provision indicates intent to change the effective date, and
that the Treasury's interpretation of that date is not
consistent with the provision as finally adopted.
The Committee also believes it appropriate to apply the
credit to all persons who provide food and beverages, whether
for consumption on or off the premises.
Explanation of Provision
The bill clarifies the credit with respect to employer FICA
taxes paid on tips by providing that the credit is (1)
available whether or not the employee reported the tips on
which the employer FICA taxes were paid pursuant to section
6053(a), and (2) effective with respect to taxes paid after
December 31, 1993, regardless of when the services with respect
to which the tips are received were performed.
The bill also modifies the credit so that it applies with
respect to tips received from customers in connection with the
provision of food or beverages, regardless of whether the food
or beverages are for consumption on the premises of the
establishment.
Effective Date
The clarifications relating to the effective date and
nonreported tips are effective as if included in OBRA 1993. The
provision expanding the tip credit to the provision of food or
beverages not for consumption on the premises of the
establishment is effective with respect to FICA taxes paid on
tips received with respect to services performed after December
31, 1996.
3. Home office deduction: Treatment of storage of product samples (sec.
1113 of the bill and sec. 280A of the Code)
Present Law
A taxpayer's business use of his or her home may give rise
to a deduction for the business portion of expenses related to
operating the home (e.g., a portion of rent or depreciation and
repairs). Code section 280A(c)(1) provides, however, that
business deductions generally are allowed only with respect to
a portion of a home that is used exclusively and regularly in
one of the following ways: (1) as the principal place of
business for a trade or business; (2) as a place of business
used to meet with patients, clients, or customers in the normal
course of the taxpayer's trade or business; or (3) in
connection with the taxpayer's trade or business, if the
portion so used constitutes a separate structure not attached
to the dwelling unit. In the case of an employee, the Code
further requires that the business use of the home must be for
the convenience of the employer (sec. 280A(c)(1)). These rules
apply to houses, apartments, condominiums, mobile homes, boats,
and other similar property used as the taxpayer's home (sec.
280A(f)(1)).
Section 280A(c)(2) contains a special rule that allows a
home office deduction for business expenses related to a space
within a home that is used on a regular (even if not exclusive)
basis as a storage unit for the inventory of the taxpayer's
trade or business of selling products at retail or wholesale,
but only if the home is the sole fixed location of such trade
or business.
Home office deductions may not be claimed if they create
(or increase) a net loss from a business activity, although
such deductions may be carried over to subsequent taxable years
(sec. 280A(c)(5)).
Reasons for Change
The Committee believes that present-law section 280A(c)(2)
should be clarified so that taxpayers who sell products at
retail or wholesale, and regularly store such products at home,
need not attempt to distinguish between inventory and product
samples. This clarification will simplify the administration of
present-law section 280A(c)(2).
Explanation of Provision
The bill clarifies that the special rule contained in
present-law section 280A(c)(2) permits deductions for expenses
related to a storage unit in a taxpayer's home regularly used
for inventory or product samples (or both) of the taxpayer's
trade or business of selling products at retail or wholesale,
provided that the home is the sole fixed location of such trade
or business.
Effective Date
The provision applies to taxable years beginning after
December 31, 1995.
4. Treatment of certain charitable risk pools (sec. 1114 of the bill
and new sec. 501(n) of the Code)
Present Law
Organizations described in section 501(c)(3) (which are
referred to as ``charities'') generally are exempt from Federal
income tax and are eligible to receive tax-deductible
contributions and to use the proceeds of tax-exempt financing.
Section 501(c)(3) requires that an organization be organized
and operated exclusively for a charitable or other specifically
enumerated exempt purpose in order to qualify for tax-exempt
status under that section.
Section 501(c)(3) provides that an organization that is
organized and operated exclusively for charitable purposes is
entitled to tax-exempt status under that section only if the
organization satisfies the additional requirements that no part
of its net earnings inures to the benefit of any private
individual or shareholder (referred to as the ``private
inurement test'') and only if the organization does not engage
in political campaign activity on behalf of (or in opposition
to) any candidate for public office and does not engage in
substantial lobbying activities.
Section 501(m) provides that an organization described in
section 501(c)(3) or 501(c)(4) of the Code is exempt from tax
only if no substantial part of its activities consists of
providing commercial-type insurance. For purposes of this rule,
commercial-type insurance does not include insurance provided
at substantially below cost to a class of charitable
recipients.
Present law does not specifically accord tax-exempt status
to an organization that pools insurable risks of a group of
tax-exempt organizations described in section 501(c)(3).
Reasons for Change
The Committee believes that providing tax-exempt status to
not-for-profit risk pools whose members are exclusively tax-
exempt charitable organizations, and which obtain significant
capital from nonmember charitable organizations, will help make
liability insurance more affordable to charitable
organizations.
Explanation of Provision
Under the bill, a qualified charitable risk pool is treated
as organized and operated exclusively for charitable purposes.
The provision makes inapplicable to a qualified charitable risk
pool the present-law rule under section 501(m) that a
charitable organization described in section 501(c)(3) is
exempt from tax only if no substantial part of its activities
consists of providing commercial-type insurance.
The bill defines a qualified charitable risk pool as an
organization organized and operated solely to pool insurable
risks of its members (other than medical malpractice risks) and
to provide information to its members with respect to loss
control and risk management. Because a qualified charitable
risk pool must be organized and operated solely to pool
insurable risks of its members and to provide information to
members with respect to loss control and risk management, no
profit or other benefit may be accorded to any member of the
organization other than through providing members with
insurance coverage below the cost of comparable commercial
coverage and through providing members with loss control and
risk management information. Only charitable tax-exempt
organizations described in section 501(c)(3) may be members of
a qualified charitable risk pool.
The bill further requires that a qualified charitable risk
pool is required to (1) be organized as a nonprofit
organization under State law authorizing risk pooling for
charitable organizations; (2) be exempt from State income tax;
(3) obtain at least $1 million in startup capital from
nonmember charitable organizations; (4) be controlled by a
board of directors elected by its members; and (5) provide in
its organizational documents that members must be tax-exempt
charitable organizations at all times, and if a member loses
that status it must immediately notify the organization, and
that no insurance coverage applies to a member after the date
of any final determination that the member no longer qualifies
as a tax-exempt charitable organization.
To be entitled to tax-exempt status under section
501(c)(3), a qualified charitable risk pool described in the
provision also must satisfy the other requirements of that
section (i.e., the private inurement test and the prohibition
of political campaign activities and substantial lobbying).
Effective Date
The provision applies to taxable years beginning after the
date of enactment.
5. Treatment of dues paid to agricultural or horticultural
organizations (sec. 1115 of the bill and sec. 512 of the Code)
Present Law
Tax-exempt organizations generally are subject to the
unrelated business income tax (``UBIT'') on income derived from
a trade or business regularly carried on that is not
substantially related to the performance of the organization's
tax-exempt functions (secs. 511-514). Dues payments made to a
membership organization generally are not subject to the UBIT.
However, several courts have held that, with respect to postal
labor organizations, dues payments were subject to the UBIT
when received from individuals who were not postal workers, but
who became ``associate'' members for the purpose of obtaining
health insurance available to members of the organization. See
National League of Postmasters of the United States v.
Commissioner, No. 8032-93, T.C. Memo (May 11, 1995); American
Postal Workers Union, AFL-CIO v. United States, 925 F.2d 480
(D.C. Cir. 1991); National Association of Postal Supervisors v.
United States, 944 F.2d 859 (Fed. Cir. 1991).
In Rev. Proc. 95-21 (issued March 23, 1995), the IRS set
forth its position regarding when associate member dues
payments received by an organization described in section
501(c)(5) will be treated as subject to the UBIT. The IRS
stated that dues payments from associate members will not be
treated as subject to UBIT unless, for the relevant period,
``the associate member category has been formed or availed of
for the principal purpose of producing unrelated business
income.'' Thus, under Rev. Proc. 95-21, the focus of the
inquiry is upon the organization's purposes in forming the
associate member category (and whether the purposes of that
category of membership are substantially related to the
organization's exempt purposes other than through the
production of income) rather than upon the motive of the
individuals who join as associate members.
Reasons for Change
The Committee believes that it is appropriate to clarify
the treatment of certain limited dues payments from associate
members of organizations described in section 501(c)(5) to
curtail expensive and time consuming controversies regarding
the treatment of such payments for purposes of the UBIT and to
facilitate administration of the Code.
Explanation of Provision
Under the bill, if an agricultural or horticultural
organization described in section 501(c)(5) requires annual
dues not exceeding $100 to be paid in order to be a member of
such organization, then in no event will any portion of such
dues be subject to the UBIT by reason of any benefits or
privileges to which members of such organization are entitled.
For taxable years beginning after 1995, the $100 amount will be
indexed for inflation. The term ``dues'' is defined as ``any
payment required to be made in order to be recognized by the
organization as a member of the organization.'' Thus, if a
person is recognized as a member of an organization by virtue
of having paid annual dues for his or her membership, then any
subsequent payments made by that person during the year to
purchase another membership in the same organization would not
be within the scope of the provision.
Effective Date
The provision applies to taxable years beginning after
December 31, 1994.
6. Clarify employment tax status of certain fishermen (sec. 1116(a) of
the bill and sec. 3121(b)(20) of the Code)
Present Law
Under present law, service as a crew member on a fishing
vessel is generally excluded from the definition of employment
for purposes of income tax withholding on wages and for
purposes of the Federal Insurance Contributions Act (FICA) and
the Federal Unemployment Tax Act (FUTA) taxes if the operating
crew of the boat normally consists of fewer than 10
individuals, the individual receives a share of the catch based
on the total catch, and the individual does not receive cash
remuneration other than proceeds from the sale of the
individual's share of the catch. Crew members to which the
exemption applies are subject to self-employment taxes. Special
reporting requirements apply to the operators of boats on which
exempt crew members serve.
Reasons for Change
The Committee believes that providing a statutory
definition for determining whether the crew of a fishing boat
normally consists of fewer than 10 individuals would make the
provision easier to apply and administer. Providing that the
exemption continues to apply if an individual receives, in
addition to a share of the catch, a small amount of cash for
certain duties performed would recognize long-standing industry
practice.
Explanation of Provision
The operating crew of a boat is treated as normally made up
of fewer than 10 individuals if the average size of the
operating crew on trips made during the preceding 4 calendar
quarters consisted of fewer than 10 individuals. In addition,
the exemption applies if the crew member receives, in addition
to the cash remuneration permitted under present law, cash
remuneration which does not exceed $100 per trip, is contingent
on a minimum catch, and is paid solely for additional duties
(e.g., as mate, engineer, or cook) for which additional cash
remuneration is customary. The reporting requirements
applicable to boat operators are modified to take into account
the additional cash remuneration that may be paid under the
proposal.
Effective Date
The provision applies to remuneration paid after December
31, 1996. In addition, the provision applies to remuneration
paid after December 31, 1984, and before January 1, 1997,
unless the payor treated such remuneration when paid as subject
to wage withholding and employment taxes.
7. Reporting requirements for purchasers of fish (sec. 1116(b) of the
bill and new sec. 6050Q of the Code)
Present Law
Under present law, a person engaged in a trade or business
who makes payments during the calendar year of $600 or more to
a person for ``rent, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or
determinable gains, profits, or other income'' must file an
information return with the Internal Revenue Service reporting
the amount of such payments, as well as the name, address, and
taxpayer identification number of the person to whom such
payments were made (Code sec. 6041). A similar statement must
also be furnished to the person to whom such payments were
made. Treasury regulations provide that payments for
``merchandise'' are not required to be reported under this
provision (Treas. reg. sec. 1.6041-3(d)). Consequently,
information reporting is generally not required with respect to
purchases of fish or other forms of aquatic life. Information
reporting is required by a person engaged in a trade or
business who, in the course of that trade or business, receives
more than $10,000 in cash in one transaction (or several
related transactions) (Code sec. 6050I).
Reasons for Change
The Committee believes that requiring information reporting
will enhance compliance with the internal revenue laws.
Explanation of Provision
The provision requires persons engaged in the trade or
business of purchasing fish for resale who pay more than $600
in cash in a calendar year for fish or other forms of aquatic
life from any seller engaged in the trade or business of
catching fish to file information reports with the Secretary
regarding such purchases. A copy of the report must be provided
to the seller.
Effective Date
The provision is effective for purchases made after
December 31, 1996.
B. Extension of Certain Expiring Provisions
1. Work opportunity tax credit (sec. 1201 of the bill and sec. 51 of
the Code)
Prior Law
General rules
Prior to January 1, 1995, the targeted jobs tax credit was
available on an elective basis for employers hiring individuals
from one or more of nine targeted groups. The credit generally
was equal to 40 percent of qualified first-year wages.
Qualified first-year wages consisted of wages attributable to
service rendered by a member of a targeted group during the
one-year period beginning with the day the individual began
work for the employer. For a vocational rehabilitation
referral, however, the period began the day the individual
began work for the employer on or after the beginning of the
individual's vocational rehabilitation plan.
No more than $6,000 of wages during the first year of
employment were permitted to be taken into account with respect
to any individual. Thus, the maximum credit per individual was
$2,400.
With respect to economically disadvantaged summer youth
employees, the credit was equal to 40 percent of up to $3,000
of qualified first-year wages, for a maximum credit of $1,200.
The deduction for wages was reduced by the amount of the
credit.
Certification of members of targeted groups
In general, an individual was not treated as a member of a
targeted group unless certification that the individual was a
member of such a group was received or requested in writing by
the employer from the designated local agency on or before the
day on which the individual began work for the employer. In the
case of a certification of an economically disadvantaged youth
participating in a cooperative education program, this
requirement was satisfied if the certification was requested or
received from the participating school on or before the day on
which the individual began work for the employer. The
``designated local agency'' was the State employment security
agency.
If a certification was incorrect because it was based on
false information provided as to the employee's membership in a
targeted group, the certification was revoked. Wages paid after
the revocation notice was received by the employer were not
treated as qualified wages.
The U.S. Employment Service, in consultation with the
Internal Revenue Service, was directed to take whatever steps
necessary to keep employers informed of the availability of the
credit.
Targeted groups eligible for the credit
The nine groups eligible for the credit were either
recipients of payments under means-tested transfer programs,
economically disadvantaged (as measured by family income), or
disabled individuals.
(1) Vocational rehabilitation referrals
Vocational rehabilitation referrals were those individuals
who had a physical or mental disability that constituted a
substantial handicap to employment and who had been referred to
the employer while receiving, or after completing, vocational
rehabilitation services under an individualized, written
rehabilitation plan under a State plan approved under the
Rehabilitation Act of 1973, or under a rehabilitation plan for
veterans carried out under Chapter 31 of Title 38, U.S. Code.
Certification was provided by the designated local employment
agency upon assurances from the vocational rehabilitation
agency that the employee had met the above conditions.
(2) Economically disadvantaged youths
Economically disadvantaged youths were individuals
certified by the designated local employment agency as (1)
members of economically disadvantaged families and (2) at least
age 18 but not age 23 on the date they were hired by the
employer. An individual was determined to be a member of an
economically disadvantaged family if, during the six months
immediately preceding the earlier of the month in which the
determination occurred or the month in which the hiring date
occurred, the individual's family income was, on an annual
basis, not more than 70 percent of the Bureau of Labor
Statistics' lower living standard. A determination that an
individual was a member of an economically disadvantaged family
was valid for 45 days from the date on which the determination
was made.
Except as otherwise noted below, a determination of whether
an individual was a member of an economically disadvantaged
family was made on the same basis and was subject to the same
45-day limitation, where required in connection with the four
other targeted groups that excluded individuals who were not
economically disadvantaged.
(3) Economically disadvantaged Vietnam-era veterans
The third targeted group was Vietnam-era veterans certified
by the designated local employment agency as members of
economically disadvantaged families. For these purposes, a
Vietnam-era veteran was an individual who had served on active
duty (other than for training) in the Armed Forces for more
than 180 days, or who had been discharged or released from
active duty in the Armed Forces for a service-connected
disability, but in either case, the active duty must have taken
place after August 4, 1964, and before May 8, 1975. However,
any individual who had served for a period of more than 90 days
during which the individual was on active duty (other than for
training) was not an eligible employee if any of this active
duty occurred during the 60-day period ending on the date the
individual was hired by the employer. This latter rule was
intended to prevent employers who hired current members of the
armed services (or those departed from service within the last
60-days) from receiving the credit.
(4) SSI recipients
The fourth targeted group was individuals receiving either
Supplemental Security Income (``SSI'') under Title XVI of the
Social Security Act or State supplements described in section
1616 of that Act or section 212 of P.L. 93-66. To be an
eligible employee, the individual must have received SSI
payments during at least a one-month period ending during the
60-day period that ended on the date the individual was hired
by the employer. The designated local agency was to issue the
certification after a determination by the agency making the
payments that these conditions had been fulfilled.
(5) General assistance recipients
General assistance recipients were individuals who received
general assistance for a period of not less than 30 days if
that period ended within the 60-day period ending on the date
the individual was hired by the employer. General assistance
programs were State and local programs that provided
individuals with money payments, vouchers, or scrip based on
need. These programs were referred to by a wide variety of
names, including home relief, poor relief, temporary relief,
and direct relief. Because of the wide variety of such
programs, Congress provided that a recipient was an eligible
employee only after the program had been designated by the
Secretary of the Treasury as a program that provided money
payments, vouchers, or scrip to needy individuals.
Certification was performed by the designated local agency.
(6) Economically disadvantaged former convicts
The sixth targeted group included any individual who was
certified by the designated local employment agency as (1)
having at some time been convicted of a felony under State or
Federal law, (2) being a member of an economically
disadvantaged family, and (3) having been hired within five
years of the later of release from prison or date of
conviction.
(7) Economically disadvantaged cooperative education
students
The seventh targeted group was youths who (1) actively
participated in qualified cooperative education programs, (2)
had attained age 16 but had not attained age 20, (3) had not
graduated from high school or vocational school, and (4) were
members of economically disadvantaged families. The definitions
of a qualified cooperative education program and a qualified
school were similar to those used in the Vocational Education
Act of 1963. Thus, a qualified cooperative education program
meant a program of vocational education for individuals who,
through written cooperative arrangements between a qualified
school and one or more employers, received instruction,
including required academic instruction, by alternation of
study in school with a job in any occupational field, but only
if these two experiences were planned and supervised by the
school and the employer so that each experience contributed to
the student's education and employability.
For this purpose, a qualified school was (1) a specialized
high school used exclusively or principally for the provision
of vocational education to individuals who were available for
study in preparation for entering the labor market, (2) the
department of a high school used exclusively or principally for
providing vocational education to individuals who were
available for study in preparation for entering the labor
market, or (3) a technical or vocational school used
exclusively or principally for the provision of vocational
education to individuals who had completed or left high school
and who were available for study in preparation for entering
the labor market. In order for a nonpublic school to be a
qualified school, it must have been exempt from income tax
under section 501(a) of the Code.
The certification was performed by the school participating
in the cooperative education program. After initial
certification, an individual remained a member of the targeted
group only while meeting the program participation, age, and
degree status requirements of (a), (b), and (c), above.
(8) AFDC recipients
The eighth targeted group included any individual who was
certified by the designated local employment agency as being
eligible for Aid to Families with Dependent Children (``AFDC'')
and as having continually received such aid during the 90 days
before being hired by the employer.
(9) Economically disadvantaged summer youth employees
The ninth targeted group included youths who performed
services during any 90-day period between May 1 and September
15 of a given year and who were certified by the designated
local agency as (1) being 16 or 17 years of age on the hiring
date and (2) a member of an economically disadvantaged family.
A youth must not have been an employee of the employer prior to
that 90-day period. With respect to any particular employer, an
employee could qualify only one time for this summer youth
credit. If, after the end of the 90-day period, the employer
continued to employ a youth who was certified during the 90-day
period as a member of another targeted group, the limit on
qualified first-year wages took into account wages paid to the
youth while a qualified summer youth employee.
Definition of wages
In general, wages eligible for the credit were defined by
reference to the definition of wages under the Federal
Unemployment Tax Act (FUTA) in section 3306(b) of the Code,
except that the dollar limits did not apply. Because wages paid
to economically disadvantaged cooperative education students
and to certain agricultural and railroad employees were not
FUTA wages, special rules were provided for these wages.
Wages were taken into account for purposes of the credit
only if more than one-half of the wages paid during the taxable
year to an employee were for services in the employer's trade
or business. The test as to whether more than one-half of an
employee's wages were for services in a trade or business was
applied to each separate employer without treating related
employers as a single employer.
Other rules
In order to prevent taxpayers from eliminating all tax
liability by reason of the credit, the amount of the credit
could not exceed 90 percent of the taxpayer's income tax
liability. Furthermore, the credit was allowed only after
certain other nonrefundable credits had been taken. If, after
applying these other credits, 90 percent of an employer's
remaining tax liability for the year was less than the targeted
jobs tax credit, the excess credit could be carried back three
years and carried forward 15 years.
All employees of all corporations that were members of a
controlled group of corporations were to be treated as if they
were employees of the same corporation for purposes of
determining the years of employment of any employee and wages
for any employee up to $6,000. Generally, under the controlled
group rules, the credit allowed the group was the same as if
the group were a single company. A comparable rule was provided
in the case of partnerships, sole proprietorships, and other
trades or businesses (whether or not incorporated) that were
under common control, so that all employees of such
organizations generally were to be treated as if they were
employed by a single person. The amount of targeted jobs tax
credit allowable to each member of the controlled group was its
proportionate share of the wages giving rise to the credit.
No credit was available for the hiring of certain related
individuals (primarily dependents or owners of the taxpayer).
The credit was also not available for wages paid to an
individual who was employed by the employer at any time during
which the individual was not a certified member of a targeted
group.
No credit was available for wages paid by an employer to an
individual for services that were the same as, or substantially
similar to, those services performed by employees participating
in, or affected by, a strike or lockout during the period of
such strike or lockout. This rule applied to wages paid to
individuals whose principal place of employment was a plant or
facility where there was a strike or lockout.
No credit was allowed for wages paid unless the eligible
individual was either (1) employed by the employer for at least
90 days (14 days in the case of economically disadvantaged
summer youth employees) or (2) had completed at least 120 hours
(20 hours for summer youth) of services performed for the
employer.
Reasons for Change
While the prior-law targeted jobs tax credit was the
subject of some criticism, the Committee believes that a tax
credit mechanism can provide an important incentive for
employers to undertake the expense of providing jobs and
training to economically disadvantaged individuals, many of
whom are underskilled and/or undereducated. The bill creates a
new program whose design will focus on individuals with poor
workplace attachments, streamline administrative burdens,
promote longer-term employment, and thereby reduce costs
relative to the prior-law program. The Committee intends that
this short-term program will provide the Congress and the
Treasury and Labor Departments an opportunity to assess fully
the operation and effectiveness of the new credit as a hiring
incentive.
Explanation of Provision
General rules
The bill replaces the targeted jobs tax credit with the
``work opportunity tax credit.'' The work opportunity tax
credit is available on an elective basis for employers hiring
individuals from one or more of six targeted groups. The credit
generally is equal to 35 percent of qualified wages. Qualified
wages consist of wages attributable to service rendered by a
member of a targeted group during the one-year period beginning
with the day the individual begins work for the employer. For a
vocational rehabilitation referral, however, the period will
begin on the day the individual begins work for the employer on
or after the beginning of the individual's vocational
rehabilitation plan as under prior law.
Generally, no more than $6,000 of wages during the first
year of employment is permitted to be taken into account with
respect to any individual. Thus, the maximum credit per
individual is $2,100. With respect to qualified summer youth
employees, the maximum credit is 35 percent of up to $3,000 of
qualified first-year wages, for a maximum credit of $1,050.
The deduction for wages is reduced by the amount of the
credit.
Certification of members of targeted groups
In general, an individual is not be treated as a member of
a targeted group unless: (1) on or before the day the
individual begins work for the employer, the employer received
in writing a certification from the designated local agency
that the individual is a member of a specific targeted group,
or (2) on or before the day the individual is offered work with
the employer, a pre-screening notice is completed with respect
to that individual by the employer and within 14 days after the
individual begins work for the employer, the employer submits
such notice, signed by the employer and the individual under
penalties of perjury, to the designated local agency as part of
a written request for certification. The pre-screening notice
will contain the information provided to the employer by the
individual that forms the basis of the employer's belief that
the individual is a member of a targeted group.
If a certification is incorrect because it is based on
false information provided as to the individual's membership in
a targeted group, the certification will be revoked. No credit
will be allowed on wages paid after receipt by the employer of
the revocation notice.
If a designated local agency rejects a certification
request it will have to provide a written explanation of the
basis of the rejection.
Targeted groups eligible for the credit
(1) Families receiving AFDC
An eligible recipient is an individual certified by the
designated local employment agency as being a member of a
family eligible to receive benefits under AFDC or its successor
program for a period of at least nine months part of which is
during the 9-month period ending on the hiring date. For these
purposes, each member of the family receiving such assistance
is treated as receiving such assistance and therefore is
treated as an eligible recipient.
(2) Qualified ex-felon
A qualified ex-felon is an individual certified as: (1)
having been convicted of a felony under any State or Federal
law, (2) being a member of a family that had an income during
the six months before the earlier of the date of determination
or the hiring date which on an annual basis is 70 percent or
less of the Bureau of Labor Statistics lower living standard,
and (3) having a hiring date within one year of release from
prison or date of conviction.
(3) High-risk-youth
A high-risk youth is an individual certified as being at
least 18 but not 25 on the hiring date and as having a
principal place of abode within an empowerment zone or
enterprise community (as defined under Subchapter U of the
Internal Revenue Code). Qualified wages will not include wages
paid or incurred for services performed after the individual
moves outside an empowerment zone or enterprise community.
(4) Vocational rehabilitation referral
Vocational rehabilitation referrals are those individuals
who have a physical or mental disability that constitutes a
substantial handicap to employment and who have been referred
to the employer while receiving, or after completing,
vocational rehabilitation services under an individualized,
written rehabilitation plan under a State plan approved under
the Rehabilitation Act of 1973 or under a rehabilitation plan
for veterans carried out under Chapter 31 of Title 38, U.S.
Code. Certification will be provided by the designated local
employment agency upon assurances from the vocational
rehabilitation agency that the employee has met the above
conditions.
(5) Qualified summer youth employee
Qualified summer youth employees are individuals: (1) who
perform services during any 90-day period between May 1 and
September 15, (2) who are certified by the designated local
agency as being 16 or 17 years of age on the hiring date, (3)
who have not been an employee of that employer before, and (4)
who are certified by the designated local agency as having a
principal place of abode within an empowerment zone or
enterprise community (as defined under Subchapter U of the
Internal Revenue Code). As with high-risk youths, no credit is
available on wages paid or incurred for service performed after
the qualified summer youth moves outside of an empowerment zone
or enterprise community. If, after the end of the 90-day
period, the employer continues to employ a youth who was
certified during the 90-day period as a member of another
targeted group, the limit on qualified first-year wages will
take into account wages paid to the youth while a qualified
summer youth employee.
(6) Qualified Veteran
A qualified veteran is a veteran who is a member of a
family certified as receiving assistance under: (1) AFDC for a
period of at least nine months part of which is during the 12-
month period ending on the hiring date, or (2) a food stamp
program under the Food Stamp Act of 1977 for a period of at
least three months part of which is during the 12-month period
ending on the hiring date.
Further, a qualified veteran is an individual who has
served on active duty (other than for training) in the Armed
Forces for more than 180 days or who has been discharged or
released from active duty in the Armed Forces for a service-
connected disability. However, any individual who has served
for a period of more than 90 days during which the individual
was on active duty (other than for training) is not an eligible
employee if any of this active duty occurred during the 60-day
period ending on the date the individual was hired by the
employer. This latter rule is intended to prevent employers who
hire current members of the armed services (or those departed
from service within the last 60 days) from receiving the
credit.
Definition of wages and other rules
In general, wages eligible for the credit are defined by
reference to the definition of wages under the Federal
Unemployment Tax Act (``FUTA'') in section 3306(b) of the Code,
except that the dollar limits do not apply.
Wages are taken into account for purposes of the credit
only if more than one-half of the wages paid during the taxable
year to an employee are for services in the employer's trade or
business. The test as to whether more than one-half of an
employee's wages are for services in a trade or business are
applied to each separate employer without treating related
employers as a single employer.
In order to prevent taxpayers from eliminating all tax
liability by reason of the credit, the amount of the credit may
not exceed 90 percent of the taxpayer's income tax liability.
Furthermore, the credit is allowed only after certain other
nonrefundable credits had been taken. If, after applying these
other credits, 90 percent of an employer's remaining tax
liability for the year is less than the targeted jobs tax
credit, the excess credit can be carried back three years and
carried forward 15 years.
All employees of all corporations that are members of a
controlled group of corporations are treated as if they were
employees of the same corporation for purposes of determining
the years of employment of any employee and wages for any
employee up to $6,000. Generally, under the controlled group
rules, the credit allowed the group is the same as if the group
were a single company. A comparable rule is provided in the
case of partnerships, sole proprietorships, and other trades or
businesses (whether or not incorporated) that are under common
control, so that all employees of such organizations generally
are treated as if they was employed by a single person. The
amount of the credit allowable to each member of the controlled
group is its proportionate share of the wages giving rise to
the credit.
No credit is available for the hiring of certain related
individuals (primarily dependents or owners of the taxpayer).
The credit is also not available for wages paid to an
individual who is employed by the employer at any time during
which the individual is not a certified member of a targeted
group.
No credit is available for wages paid by an employer to an
individual for services that are the same as, or substantially
similar to, those services performed by employees participating
in, or affected by, a strike or lockout during the period of
such strike or lockout. This rule applies to wages paid to
individuals whose principal place of employment is a plant or
facility where there is a strike or lockout.
Minimum employment period
No credit is allowed for wages paid unless the eligible
individual is employed by the employer for at least 180 days
(20 days in the case of a qualified summer youth employee) or
500 hours (120 hours in the case of a qualified summer youth
employee).
Effective Date
The credit is effective for wages paid or incurred to a
qualified individual who begins work for an employer after June
30, 1996, and before July 1, 1997.
2. Employer-provided educational assistance (sec. 1202 of the bill and
sec. 127 of the Code)
Present and Prior Law
For taxable years beginning before January 1, 1995, an
employee's gross income and wages did not include amounts paid
or incurred by the employer for educational assistance provided
to the employee if such amounts were paid or incurred pursuant
to an educational assistance program that met certain
requirements. This exclusion, which expired for taxable years
beginning after December 31, 1994, was limited to $5,250 of
educational assistance with respect to an individual during a
calendar year. The exclusion applied whether or not the
education was job related. In the absence of this exclusion,
educational assistance is excludable from income only if it is
related to the employee's current job.
Reasons for Change
The section 127 exclusion for employer-provided educational
assistance was first established on a temporary basis by the
Revenue Act of 1978 (through 1983). It subsequently was
extended, again on a temporary basis, by Public Law 98-611
(through 1985), by the Tax Reform Act of 1986 (through 1987),
by the Technical and Miscellaneous Revenue Act of 1988 (through
1988), by the Omnibus Budget Reconciliation Act of 1989
(through September 30, 1990), by the Omnibus Budget
Reconciliation Act of 1990 (through 1991), by the Tax Extension
Act of 1991 (through June 30, 1992), and by the Omnibus Budget
Reconciliation Act of 1993 (through December 31, 1994). Public
Law 98-611 adopted a $5,000 annual limit on the exclusion; this
limit was subsequently raised to $5,250 in the Tax Reform Act
of 1986. The Technical and Miscellaneous Revenue Act of 1988
made the exclusion inapplicable to graduate-level courses. The
restriction on graduate-level courses was repealed by the
Omnibus Budget Reconciliation Act of 1990, effective for
taxable years beginning after December 31, 1990.
The Committee believes that the exclusion for employer-
provided educational assistance should be extended because it
provides needed assistance to workers and aids U.S.
competitiveness by encouraging a better-educated work force.
The need to balance the Federal budget necessitates some
modification to the exclusion, as well as limiting it (as other
expiring tax provisions), to a temporary extension. The
Committee believes that the exclusion for employer-provided
education should be targeted to those most in need of
educational assistance--low- and middle-income employees who
seek to obtain education which improves their skills and
qualifies them for better jobs. Accordingly, the Committee
believes it appropriate to reinstate the restriction on
graduate-level education. However, due to the past practice of
extending the exclusion after it has expired, the Committee is
concerned that some taxpayers may have assumed that the
exclusion would be available for graduate education during
1995. Thus, the restriction on graduate-level education is
effective beginning in 1996.
Explanation of Provision
The bill extends the exclusion for employer-provided
educational assistance for taxable years beginning after
December 31, 1994, and before January 1, 1997. In years
beginning after December 31, 1995, the exclusion would not
apply with respect to graduate-level courses.
To the extent employers have previously filed Forms W-2
reporting the amount of educational assistance provided as
taxable wages, present Treasury regulations would require the
employer to file Forms W-2c (i.e., corrected Forms W-2) with
the Internal Revenue Service.2 It is intended that
employers would also be required to provide copies of Form W-2c
to affected employees.
---------------------------------------------------------------------------
\2\ Treasury regulation section 31.6051-1(c).
---------------------------------------------------------------------------
The Secretary is directed to establish expedited procedures
for the refund of any overpayment of employment taxes paid on
excludable educational assistance provided in 1995 and 1996,
including procedures for waiving the requirement that an
employer obtain an employee's signature if the employer
demonstrates to the satisfaction of the Secretary that any
refund collected by the employer on behalf of the employee will
be paid to the employee.
Because the exclusion is extended, no interest and
penalties should be imposed if an employer failed to withhold
income and employment taxes on excludable educational
assistance or failed to report such educational assistance.
Further, it is intended that the Secretary establish expedited
procedures for refunding any interest and penalties relating to
educational assistance previously paid.
Effective Date
The provision is effective with respect to taxable years
beginning after December 31, 1994, and before January 1, 1997,
and the restriction of the exclusion to undergraduate education
is effective for taxable years beginning after December 31,
1995.
3. Permanent extension of FUTA exemption for alien agricultural workers
(sec. 1203 of the bill and sec. 3306 of the Code)
Present Law
Generally, the Federal Unemployment Tax (``FUTA'') is
imposed on farm operators who (1) employ 10 or more
agricultural workers for some portion of each of 20 different
days, each day being in a different calendar week or (2) have a
quarterly payroll for agricultural services of at least
$20,000. An exclusion from FUTA was provided, however, for
labor performed by an alien admitted to the United States to
perform agricultural labor under section 214(c) and
101(a)(15)(H) of the Immigration and Nationality Act. This
exclusion was effective for labor performed before January 1,
1995.
Reasons for Change
The committee believes that the FUTA exemption is
appropriate in light of the ineligibility of those workers for
FUTA benefits. Further, a permanent extension will provide
certainty to taxpayers, ease tax administration, and obviate
the need for further short-term extensions.
Explanation of Provision
The bill permanently extends the FUTA exemption for alien
agricultural workers.
Effective Date
The provision is effective for labor performed on or after
January 1, 1995.
C. Provisions Relating to S Corporations
1. S corporations permitted to have 75 shareholders (sec. 1301 of the
bill and sec. 1361 of the Code)
Present Law
The taxable income or loss of an S corporation is taken
into account by the corporation's shareholders, rather than by
the entity, whether or not such income is distributed. A small
business corporation may elect to be treated as an S
corporation. A ``small business corporation'' is defined as a
domestic corporation which is not an ineligible corporation and
which does not have (1) more than 35 shareholders, (2) as a
shareholder, a person (other than certain trusts or estates)
who is not an individual, (3) a nonresident alien as a
shareholder, and (4) more than one class of stock. For purposes
of the 35-shareholder limitation, a husband and wife are
treated as one shareholder.
Reasons for Change
The Committee believes that increasing the maximum number
of shareholders of an S corporation will facilitate corporate
ownership by additional family members, employees and capital
investors.
Explanation of Provision
The provision increases maximum number of shareholders from
35 to 75.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
2. Electing small business trusts (sec. 1302 of the bill and sec. 1361
of the Code)
Present Law
Under present law, trusts other than grantor trusts, voting
trusts, certain testamentary trusts and ``qualified subchapter
S trusts'' may not be shareholders in a S corporation. A
``qualified subchapter S trust'' is a trust which, under its
terms, (1) is required to have only one current income
beneficiary (for life), (2) any corpus distributed during the
life of the beneficiary must be distributed to the beneficiary,
(3) the beneficiary's income interest must terminate at the
earlier of the beneficiary's death or the termination of the
trust, and (4) if the trust terminates during the beneficiary's
life, the trust assets must be distributed to the beneficiary.
All the income (as defined for local law purposes) must be
currently distributed to that beneficiary. The beneficiary is
treated as the owner of the portion of the trust consisting of
the stock in the S corporation.
Reasons for Change
The Committee believes that a trust that provides for
income to be distributed to (or accumulated for) a class of
individuals should be allowed to hold S corporation stock. This
would allow an individual to establish a trust to hold S
corporation stock and ``spray'' income among family members (or
others) who are beneficiaries of the trust. The Committee
believes allowing such an arrangement will facilitate family
financial planning.
Explanation of Provision
In general
The provision allows stock in an S corporation to be held
by certain trusts (``electing small business trusts''). In
order to qualify for this treatment, all beneficiaries of the
trust must be individuals or estates eligible to be S
corporation shareholders, except that charitable organizations
may hold contingent remainder interests. No interest in the
trust may be acquired by purchase. For this purpose,
``purchase'' means any acquisition of property with a cost
basis (determined under sec. 1012). Thus, interests in the
trust must be acquired by reason of gift, bequest, etc.
A trust must elect to be treated as an electing small
business trust. An election applies to the taxable year for
which made and could be revoked only with the consent of the
Secretary of the Treasury or his delegate.
Each potential current beneficiary of the trust is counted
as a shareholder for purposes of the proposed 75 shareholder
limitation (or if there were no potential current
beneficiaries, the trust would be treated as the shareholder).
A potential current income beneficiary means any person, with
respect to the applicable period, who is entitled to, or at the
discretion of any person may receive, a distribution from the
principal or income of the trust. Where the trust disposes of
all the stock in an S corporation, any person who first became
so eligible during the 60 days before the disposition is not
treated as a potential current beneficiary.
A qualified subchapter S trust with respect to which an
election is in effect or an exempt trust is not eligible to
qualify as an electing small business trust.
Treatment of items relating to S corporation stock
The portion of the trust which consists of stock in one or
more S corporations is treated as a separate trust for purposes
of computing the income tax attributable to the S corporation
stock held by the trust. The trust is taxed at the highest
individual rate (currently, 39.6 percent on ordinary income and
28 percent on net capital gain) on this portion of the trust's
income. The taxable income attributable to this portion
includes (1) the items of income, loss, or deduction allocated
to it as an S corporation shareholder under the rules of
subchapter S, (2) gain or loss from the sale of the S
corporation stock, and (3) to the extent provided in
regulations, any state or local income taxes and administrative
expenses of the trust properly allocable to the S corporation
stock. Otherwise allowable capital losses are allowed only to
the extent of capital gains.
In computing the trust's income tax on this portion of the
trust, no deduction is allowed for amounts distributed to
beneficiaries, and no deduction or credit is allowed for any
item other than the items described above. This income is not
included in the distributable net income of the trust, and thus
is not included in the beneficiaries' income. No item relating
to the S corporation stock could be apportioned to any
beneficiary.
On the termination of all or any portion of an electing
small business trust the loss carryovers or excess deductions
referred to in section 642(h) is taken into account by the
entire trust, subject to the usual rules on termination of the
entire trust.
Treatment of remainder of items held by trust
In determining the tax liability with regard to the
remaining portion of the trust, the items taken into account by
the subchapter S portion of the trust are disregarded. Although
distributions from the trust are deductible in computing the
taxable income on this portion of the trust, under the usual
rules of subchapter J, the trust's distributable net income
does not include any income attributable to the S corporation
stock.
Termination of trust and conforming amendment applicable to all trusts
Where the trust terminates before the end of the S
corporation's taxable year, the trust takes into account its
pro rata share of S corporation items for its final year. The
bill makes a conforming amendment applicable to all trusts and
estates clarifying that this is the present-law treatment of
trusts and estates that terminate before the end of the S
corporation's taxable year.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
3. Expansion of post-death qualification for certain trusts (sec. 1303
of the bill and sec. 1361 of the Code)
Present Law
Under present law, trusts other than grantor trusts, voting
trusts, certain testamentary trusts and ``qualified subchapter
S trusts'' may not be shareholders in a S corporation. A
grantor trust may remain an S corporation shareholder for 60
days after the death of the grantor. The 60-day period is
extended to 2 years if the entire corpus of the trust is
includable in the gross estate of the deemed owner. In
addition, a trust may be an S corporation shareholder for 60
days after the transfer of S corporation pursuant to a will.
Reasons for Change
The Committee believes that the 60-day holding period
applicable to certain testamentary trusts should be expanded to
facilitate estate administration.
Explanation of Provision
The provision expands the post-death holding period to 2
years for all testamentary trusts.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
4. Financial institutions permitted to hold safe harbor debt (sec. 1304
of the bill and sec. 1361 of the Code)
Present Law
A small business corporation eligible to be an S
corporation may not have more than one class of stock. Certain
debt (``straight debt'') is not treated as a second class of
stock so long as such debt is an unconditional promise to pay
on demand or on a specified date a sum certain in money if: (1)
the interest rate (and interest payment dates) are not
contingent on profits, the borrower's discretion, or similar
factors; (2) there is no convertibility (directly or
indirectly) into stock, and (3) the creditor is an individual
(other than a nonresident alien), an estate, or certain
qualified trusts.
Reasons for Change
The Committee believes that bona fide debt should not be
excluded from the subchapter S safe harbor simply because the
debt is held by a financial institution.
Explanation of Provision
The definition of ``straight debt'' is expanded to include
debt held by creditors, other than individuals, that are
actively and regularly engaged in the business of lending
money.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
5. Rules relating to inadvertent terminations and invalid elections
(sec. 1305 of the bill and sec. 1362 of the Code)
Present Law
Under present law, if the Internal Revenue Service
(``IRS'') determines that a corporation's Subchapter S election
is inadvertently terminated, the IRS can waive the effect of
the terminating event for any period if the corporation timely
corrects the event and if the corporation and shareholders
agree to be treated as if the election had been in effect for
that period. Such waivers generally are obtained through the
issuance of a private letter ruling. Present law does not grant
the IRS the ability to waive the effect of an inadvertent
invalid Subchapter S election.
In addition, under present law, a small business
corporation must elect to be an S corporation no later than the
15th day of the third month of the taxable year for which the
election is effective. The IRS may not validate a late
election.
Reasons for Change
The Committee believes that the Secretary of the Treasury
should have the same authority to validate inadvertently
defective subchapter S elections as it has for inadvertent
subchapter S terminations.
Explanation of Provision
Under the provision, the authority of the IRS to waive the
effect of an inadvertent termination is extended to allow the
Service to waive the effect of an invalid election caused by an
inadvertent failure to qualify as a small business corporation
or to obtain the required shareholder consents (including
elections regarding qualified subchapter S trusts), or both.
The provision also allows the IRS to treat a late Subchapter S
election as timely where the Service determines that there was
reasonable cause for the failure to make the election timely.
The IRS may exercise this authority in cases where the taxpayer
never filed an election. It is intended that the IRS be
reasonable in exercising this authority and apply standards
that are similar to those applied under present law to
inadvertent subchapter S terminations and other late or invalid
elections.
Effective Date
The provision applies to taxable years beginning after
December 31, 1982.\3\
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\3\ This is the effective date of the present-law provision
regarding inadvertent terminations.
---------------------------------------------------------------------------
6. Agreement to terminate year (sec. 1306 of the bill and sec. 1377 of
the Code)
Present Law
In general, each item of S corporation income, deduction
and loss is allocated to shareholders on a per-share, per-day
basis. However, if any shareholder terminates his or her
interest in an S corporation during a taxable year, the S
corporation, with the consent of all its shareholders, may
elect to allocate S corporation items by closing its books as
of the date of such termination rather than apply the per-
share, per-day rule.
Reasons for Change
The Committee believes that the election to close the books
of an S corporation does not need the consent of a shareholder
whose tax liability is unaffected by the election.
Explanation of Provision
The provision provides that, under regulations to be
prescribed by the Secretary of the Treasury, the election to
close the books of the S corporation upon the termination of a
shareholder's interest is made by all affected shareholders and
the corporation, rather than by all shareholders. The closing
of the books applies only to the affected shareholders. For
this purpose, ``affected shareholders'' means any shareholder
whose interest is terminated and all shareholders to whom such
shareholder has transferred shares during the year. If a
shareholder transferred shares to the corporation, ``affected
shareholders'' includes all persons who were shareholders
during the year.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
7. Expansion of post-termination transition period (sec. 1307 of the
bill and secs. 1377 and 6037 of the Code)
Present Law
Distributions made by a former S corporation during its
post-termination period are treated in the same manner as if
the distributions were made by an S corporation (e.g., treated
by shareholders as nontaxable distributions to the extent of
the accumulated adjustment account). Distributions made after
the post-termination period are generally treated as made by a
C corporation (i.e., treated by shareholders as taxable
dividends to the extent of earnings and profits).
The ``post-termination period'' is the period beginning on
the day after the last day of the last taxable year of the S
corporation and ending on the later of: (1) a date that is one
year later, or (2) the due date for filing the return for the
last taxable year and the 120-day period beginning on the date
of a determination that the corporation's S corporation
election had terminated for a previous taxable year.
In addition, the audit procedures adopted by the Tax Equity
and Fiscal Responsibility Act of 1982 (``TEFRA'') with respect
to partnerships also apply to S corporations. Thus, the tax
treatment of items is determined at the corporate, rather than
individual level.
Reasons for Change
The Committee believes that the current scope of the
``post-termination period'' is insufficient under present law.
In addition, the Committee believes that the TEFRA audit
procedures should be inapplicable to entities with a limited
number of owners.
Explanation of Provision
The present-law definition of post-termination period is
expanded to include the 120-day period beginning on the date of
any determination pursuant to an audit of the taxpayer that
follows the termination of the S corporation's election and
that adjusts a subchapter S item of income, loss or deduction
of the S corporation during the S period. In addition, the
definition of ``determination'' is expanded to include a final
disposition of the Secretary of the Treasury of a claim for
refund and, under regulations, certain agreements between the
Secretary and any person, relating to the tax liability of the
person.
In addition, the provision repeals the TEFRA audit
provisions applicable to S corporations and provides other
rules to require consistency between the returns of the S
corporation and its shareholders.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
8. S corporations permitted to hold subsidiaries (sec. 1308 of the bill
and secs. 1361 and 1362 of the Code)
Present Law
A small business corporation may not be a member of an
affiliated group of corporations (other than by reason of
ownership in certain inactive corporations). Thus, an S
corporation may not own 80 percent or more of the stock of
another corporation (whether an S corporation or a C
corporation).
In addition, a small business corporation may not have as a
shareholder another corporation (whether an S corporation or a
C corporation).
Reasons for Change
The Committee understands that there are situations where
taxpayers may wish to separate different trades or businesses
in different corporate entities. The Committee believes that,
in such situations, shareholders should be allowed to arrange
these separate corporate entities under parent-subsidiary
arrangements as well as brother-sister arrangements.
Explanation of Provision
C corporation subsidiaries
An S corporation is allowed to own 80 percent or more of
the stock of a C corporation. The C corporation subsidiary
could elect to join in the filing of a consolidated return with
its affiliated C corporations. An S corporation is not allowed
to join in such election. Dividends received by an S
corporation from a C corporation in which the S corporation has
an 80 percent or greater ownership stake is not treated as
passive investment income for purposes of sections 1362 and
1375 to the extent the dividends are attributable to the
earnings and profits of the C corporation derived from the
active conduct of a trade or business.
S corporation subsidiaries
In addition, an S corporation is allowed to own a qualified
subchapter S subsidiary. The term ``qualified subchapter S
subsidiary'' means a domestic corporation that is not an
ineligible corporation (i.e., a corporation that would be
eligible to be an S corporation if the stock of the corporation
were held directly by the shareholders of its parent S
corporation) if (1) 100 percent of the stock of the subsidiary
were held by its S corporation parent and (2) for which the
parent elects to treat as a qualified subchapter S subsidiary.
If a subsidiary ceases to be a qualified S corporation
subsidiary (either because the subsidiary fails to qualify or
the parent revokes the election) another such election may not
be made for the subsidiary by the parent for five years without
the consent of the Secretary of the Treasury.
Under the election, the qualified subchapter S subsidiary
is not treated as a separate corporation and all the assets,
liabilities, and items of income, deduction, and credit of the
subsidiary are treated as the assets, liabilities, and items of
income, deduction, and credit of the parent S corporation.
Thus, transactions between the S corporation parent and
qualified S corporation subsidiary are not taken into account
and items of the subsidiary (including accumulated earnings and
profits, passive investment income, built-in gains, etc.) are
considered to be items of the parent. In addition, if a
subsidiary ceases to be a qualified subchapter S subsidiary
(e.g., fails to meet the wholly-owned requirement), the
subsidiary will be treated as a new corporation acquiring all
of its assets (and assuming all of its liabilities) immediately
before such cessation from the parent S corporation in exchange
for its stock.\4\
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\4\ Similar rules apply with respect to wholly owned subsidiaries
of real estate investment trusts (REITs) under section 856(i) of
present law.
---------------------------------------------------------------------------
Under the provision, if an election is made to treat an
existing corporation (whether or not its stock was acquired
from another person or previously held by the S corporation) as
a qualified subchapter S subsidiary, the subsidiary will be
deemed to have liquidated under sections 332 and 337
immediately before the election is effective. The built-in
gains tax under section 1374 and the LIFO recapture tax under
section 1363(d) may apply where the subsidiary was previously a
C corporation. Where the stock of the subsidiary was acquired
by the S corporation in a qualified stock purchase, an election
under section 338 with respect to the subsidiary may be made.
Because the parent and each subsidiary corporation that is
a qualified subchapter S subsidiary are treated for Federal
income tax purposes as a single corporation, debt issued by a
subsidiary to a shareholder of the parent corporation will be
treated as debt of the parent for purposes of determining the
amount of losses that may flow through to shareholders of the
parent corporation under section 1366(d)(1)(B). The Secretary
of the Treasury may prescribe rules as to the order that losses
pass through where debt of both the parent and subsidiary
corporations are held by shareholders of the parent. To the
extent a shareholder of the parent S corporation is not at-risk
with respect to losses of a subsidiary, the at-risk rules of
section 465 may cause losses of the subsidiary to be suspended.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
9. Treatment of distributions during loss years (sec. 1309 of the bill
and secs. 1366 and 1368 of the Code)
Present Law
Under present law, the amount of loss an S corporation
shareholder may take into account for a taxable year cannot
exceed the sum of the shareholder's adjusted basis in his or
her stock of the corporation and the adjusted basis in any
indebtedness of the corporation to the shareholder. Any excess
loss is carried forward.
Any distribution to a shareholder by an S corporation
generally is tax-free to the shareholder to the extent of the
shareholder's adjusted basis of his or her stock. The
shareholder's adjusted basis is reduced by the tax-free amount
of the distribution. Any distribution in excess of the
shareholder's adjusted basis is treated as gain from the sale
or exchange of property.
Under present law, income (whether or not taxable) and
expenses (whether or not deductible) serve, respectively, to
increase and decrease an S corporation shareholder's basis in
the stock of the corporation. These rules require that the
adjustments to basis for items of both income and loss for any
taxable year apply before the adjustment for distributions
applies.\5\
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\5\ See section 1368(d)(1); H. Rept. 97-826, p. 17; S. Rept. 97-
640, p. 18; Treas. Reg. sec. 1.1367-1(e).
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These rules limiting losses and allowing tax-free
distributions up to the amount of the shareholder's adjusted
basis are similar in certain respects to the rules governing
the treatment of losses and cash distributions by partnerships.
Under the partnership rules (unlike the S corporation rules),
for any taxable year, a partner's basis is first increased by
items of income, then decreased by distributions, and finally
is decreased by losses for that year.\6\
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\6\ Treas. Reg. sec. 1.704-1(d)(2); Rev. Rul. 66-94, 1966-1 C.B.
166.
---------------------------------------------------------------------------
In addition, if the S corporation has accumulated earnings
and profits,\7\ any distribution in excess of the amount in an
``accumulated adjustments account'' will be treated as a
dividend (to the extent of the accumulated earnings and
profits). A dividend distribution does not reduce the adjusted
basis of the shareholder's stock. The ``accumulated adjustments
account'' generally is the amount of the accumulated
undistributed post-1982 gross income less deductions.
---------------------------------------------------------------------------
\7\ An S corporation may have earnings and profits from years prior
to its subchapter S election or from pre-1983 subchapter S years.
---------------------------------------------------------------------------
Reasons for Change
The Committee believes that the rules regarding the
treatment of distributions by S corporations during loss years
should be the same as the rules applicable to partnerships.
Explanation of Provision
The provision provides that the adjustments for
distributions made by an S corporation during a taxable year
are taken into account before applying the loss limitation for
the year. Thus, distributions during a year reduce the adjusted
basis for purposes of determining the allowable loss for the
year, but the loss for a year does not reduce the adjusted
basis for purposes of determining the tax status of the
distributions made during that year.
The provision also provides that in determining the amount
in the accumulated adjustment account for purposes of
determining the tax treatment of distributions made during a
taxable year by an S corporation having accumulated earnings
and profits, net negative adjustments (i.e., the excess of
losses and deductions over income) for that taxable year are
disregarded.
The following examples illustrate the application of these
provisions:
Example 1.--X is the sole shareholder of corporation A, a
calendar year S corporation with no accumulated earnings and
profits. X's adjusted basis in the stock of A on January 1,
1998, is $1,000 and X holds no debt of A. During 1998, A makes
a distribution to X of $600, recognizes a capital gain of $200
and sustains an operating loss of $900. Under the bill, X's
adjusted basis in the A stock is increased to $1,200 ($1,000
plus $200 capital gain recognized) pursuant to section 1368(d)
to determine the effect of the distribution. X's adjusted basis
is then reduced by the amount of the distribution to $600
($1,200 less $600) to determine the application of the loss
limitation of section 1366(d)(1). X is allowed to take into
account $600 of A's operating loss, which reduces X's adjusted
basis to zero. The remaining $300 loss is carried forward
pursuant to section 1366(d)(2).
Example 2.--The facts are the same as in Example 1, except
that on January 1, 1998, A has accumulated earnings and profits
of $500 and an accumulated adjustments account of $200. Under
the bill, because there is a net negative adjustment for the
year, no adjustment is made to the accumulated adjustments
account before determining the effect of the distribution under
section 1368(c).
As to A, $200 of the $600 distribution is a distribution of
A's accumulated adjustments account, reducing the accumulated
adjustments account to zero. The remaining $400 of the
distribution is a distribution of accumulated earnings and
profits (``E & P'') and reduces A's E & P to $100. A's
accumulated adjustments account is then increased by $200 to
reflect the recognized capital gain and reduced by $900 to
reflect the operating loss, leaving a negative balance in the
accumulated adjustment account on January 1, 1999, of $700
(zero plus $200 less $900).
As to X, $200 of the distribution is applied against X's
adjusted basis of $1,200 ($1,000 plus $200 capital gain
recognized), reducing X's adjusted basis to $1,000. The
remaining $400 of the distribution is taxable as a dividend and
does not reduce X's adjusted basis. Because X's adjusted basis
is $1,000, the loss limitation does not apply to X, who may
deduct the entire $900 operating loss. X's adjusted basis is
then decreased to reflect the $900 operating loss. Accordingly,
X's adjusted basis on January 1, 1999, is $100 ($1,000 plus
$200 less $200 less $900).
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
10. Treatment of S corporations under subchapter C (sec. 1310 of the
bill and sec. 1371 of the Code)
Present Law
Present law contains several provisions relating to the
treatment of S corporations as corporations generally for
purposes of the Internal Revenue Code.
First, under present law, the taxable income of an S
corporation is computed in the same manner as in the case of an
individual (sec. 1363(b)). Under this rule, the provisions of
the Code governing the computation of taxable income which are
applicable only to corporations, such as the dividends received
deduction, do not apply to S corporations.
Second, except as otherwise provided by the Internal
Revenue Code and except to the extent inconsistent with
subchapter S, subchapter C (i.e., the rules relating to
corporate distributions and adjustments) applies to an S
corporation and its shareholders (sec. 1371(a)(1)). Under this
second rule, provisions such as the corporate reorganization
provisions apply to S corporations. Thus, a C corporation may
merge into an S corporation tax-free.
Finally, an S corporation in its capacity as a shareholder
of another corporation is treated as an individual for purposes
of subchapter C (sec. 1371(a)(2)). In 1988, the Internal
Revenue Service took the position that this rule prevents the
tax-free liquidation of a C corporation into an S corporation
because a C corporation cannot liquidate tax-free when owned by
an individual shareholder.\8\ In 1992, the Internal Revenue
Service reversed its position, stating that the prior ruling
was incorrect.\9\
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\8\ PLR 8818049 (Feb. 10, 1988).
\9\ PLR 9245004 (July 28, 1992).
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Reasons for Change
The Committee wishes to clarify that the position taken by
the Internal Revenue Service in 1992 that allows the tax-free
liquidation of a C corporation into an S corporation represents
the proper policy.
Explanation of Provision
The provision repeals the rule that treats an S corporation
in its capacity as a shareholder of another corporation as an
individual. Thus, the provision clarifies that the liquidation
of a C corporation into an S corporation will be governed by
the generally applicable subchapter C rules, including the
provisions of sections 332 and 337 allowing the tax-free
liquidation of a corporation into its parent corporation.
Following a tax-free liquidation, the built-in gains of the
liquidating corporation may later be subject to tax under
section 1374 upon a subsequent disposition. An S corporation
also will be eligible to make a section 338 election (assuming
all the requirements are otherwise met), resulting in immediate
recognition of all the acquired C corporation's gains and
losses (and the resulting imposition of a tax).
The repeal of this rule does not change the general rule
governing the computation of income of an S corporation. For
example, it does not allow an S corporation, or its
shareholders, to claim a dividends received deduction with
respect to dividends received by the S corporation, or to treat
any item of income or deduction in a manner inconsistent with
the treatment accorded to individual taxpayers.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
11. Elimination of certain earnings and profits (sec. 1311 of the bill
and secs. 1362 and 1375 of the Code)
Present Law
Under present law, the accumulated earnings and profits of
a corporation are not increased for any year in which an
election to be treated as an S corporation is in effect.
However, under the subchapter S rules in effect before revision
in 1982, a corporation electing subchapter S for a taxable year
increased its accumulated earnings and profits if its earnings
and profits for the year exceeded both its taxable income for
the year and its distributions out of that year's earnings and
profits. As a result of this rule, a shareholder may later be
required to include in his or her income the accumulated
earnings and profits when it is distributed by the corporation.
The 1982 revision to subchapter S repealed this rule for
earnings attributable to taxable years beginning after 1982 but
did not do so for previously accumulated S corporation earnings
and profits.
Reasons for Change
The Committee believes that the existence of pre-1983
earnings and profits of an S corporation unnecessarily
complicates corporate recordkeeping and constitutes a potential
trap for the unwary.
Explanation of Provision
The provision provides that if a corporation is an S
corporation for its first taxable year beginning after December
31, 1996, the accumulated earnings and profits of the
corporation as of the beginning of that year is reduced by the
accumulated earnings and profits (if any) accumulated in any
taxable year beginning before January 1, 1983, for which the
corporation was an electing small business corporation under
subchapter S. Thus, such a corporation's accumulated earnings
and profits are solely attributable to taxable years for which
an S election was not in effect. This rule is generally
consistent with the change adopted in 1982 limiting the S
shareholder's taxable income attributable to S corporation
earnings to his or her share of the taxable income of the S
corporation.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
12. Carryover of disallowed losses and deductions under at-risk rules
(sec. 1312 of the bill and sec. 1366 of the Code)
Present Law
Under section 1366, the amount of loss an S corporation
shareholder may take into account cannot exceed the sum of the
shareholder's adjusted basis in his or her stock of the
corporation and the unadjusted basis in any indebtedness of the
corporation to the shareholder. Any disallowed loss is carried
forward to the next taxable year. Any loss that is disallowed
for the last taxable year of the S corporation may be carried
forward to the post-termination period. The ``post-termination
period'' is the period beginning on the day after the last day
of the last taxable year of the S corporation and ending on the
later of: (1) a date that is one year later, or (2) the due
date for filing the return for the last taxable year and the
120-day period beginning on the date of a determination that
the corporation's S corporation election had terminated for a
previous taxable year.
In addition, under section 465, a shareholder of an S
corporation may not deduct losses that are flowed through from
the corporation to the extent the shareholder is not ``at-
risk'' with respect to the loss. Any loss not deductible in one
taxable year because of the at-risk rules is carried forward to
the next taxable year.
Reasons for Change
The Committee believes that losses suspended by the at-
risk rules should be conformed to the treatment of losses
suspended by the subchapter S basis rules.
Explanation of Provision
Losses of an S corporation that are suspended under the
at-risk rules of section 465 are carried forward to the S
corporation's post-termination period.
Effective Date
The provision applies to taxable years beginning after
December 31, 1996.
13. Adjustments to basis of inherited S stock to reflect certain items
of income (sec. 1313 of the bill and sec. 1367 of the Code)
Present Law
Income in respect to a decedent (``IRD'') generally
consists of items of gross income that accrued during the
decedent's lifetime but were not includible in the decedent's
income before his or her death under his or her method of
accounting. IRD is includible in the income of the person
acquiring the right to receive such item. A deduction for the
estate tax attributable to an item of IRD is allowed to such
person (sec. 691(c)). The cost or basis of property acquired
from a decedent is its fair market value at the date of death
(or alternate valuation date if that date is elected for estate
tax purposes). This basis is often referred to as a ``stepped-
up basis.'' Property that constitutes a right to receive IRD
does not receive a stepped-up basis.
The basis of a partnership interest or corporate stock
acquired from a decedent generally is stepped-up at death.
Under Treasury regulations, the basis of a partnership interest
acquired from a decedent is reduced to the extent that its
value is attributable to items constituting IRD (Treas. reg.
sec. 1.742-1). This rule insures that the items of IRD held by
a partnership are not later offset by a loss arising from a
stepped-up basis. Although S corporation income is taxed to its
shareholders in a manner similar to the taxation of a
partnership and its partners, no comparable regulation requires
a reduction in the basis of stock in an S corporation acquired
from a decedent where the S corporation holds items of IRD.
Reasons for Change
The Committee believes that the present-law treatment of
IRD items of an S corporation is unclear and that the treatment
of such items should be similar to the treatment of identical
items held by a partnership.
Explanation of Provision
The provision provides that a person acquiring stock in an
S corporation from a decedent would treat as IRD his or her pro
rata share of any item of income of the corporation that would
have been IRD if that item had been acquired directly from the
decedent. Where an item is treated as IRD, a deduction for the
estate tax attributable to the item generally will be allowed
under the provisions of section 691(c). The stepped-up basis in
the stock in an S corporation acquired from a decedent is
reduced by the extent to which the value of the stock is
attributable to items consisting of IRD. This basis rule is
comparable to the present-law partnership rule.
Effective Date
The provision applies with respect to decedents dying
after the date of enactment.
14. S corporations eligible for rules applicable to real property
subdivided for sale by noncorporate taxpayers (sec. 1314 of the
bill and sec. 1237 of the Code)
Present Law
Under present-law section 1237, a lot or parcel of land
held by a taxpayer other than a corporation generally is not
treated as ordinary income property solely by reason of the
land being subdivided if (1) such parcel had not previously
been held as ordinary income property and if in the year of
sale, the taxpayer did not hold other real property; (2) no
substantial improvement has been made on the land by the
taxpayer, a related party, a lessee, or a government; and (3)
the land has been held by the taxpayer for five years.
Reasons for Change
The Committee believes that rules generally applicable to
individuals should be applicable to S corporations.
Explanation of Provision
The provision allows the present-law capital gains
presumption in the case of land held by an S corporation. It is
expected that rules similar to the attribution rules for
partnerships will apply to S corporation (Treas. reg. sec.
1.1237-1(b)(3)).
Effective Date
The provision is effective for sales in taxable years
beginning after December 31, 1996.
15. Reelecting subchapter S status (sec. 1315 of the bill and sec. 1362
of the Code)
Present Law
A small business corporation that terminates its
subchapter S election (whether by revocation or otherwise) may
not make another election to be an S corporation for five
taxable years unless the Secretary of the Treasury consents to
such election.
Reasons for Change
The Committee believes that, given the changes made by the
Committee to subchapter S, it is appropriate to allow
corporations that terminated their elections under subchapter S
within the last five years to re-elect subchapter S status
without the consent of the Secretary.
Explanation of Provision
For purposes of the five-year rule, any termination of
subchapter S status in effect immediately before the date of
enactment of the proposal is not to be taken into account.
Thus, any small business corporation that had terminated its S
corporation election within the five-year period before the
date of enactment may re-elect subchapter S status upon
enactment of the bill without the consent of the Secretary of
the Treasury.
Effective Date
The provision is effective for terminations occurring in
taxable year beginning before January 1, 1997.
PENSION SIMPLIFICATION PROVISIONS; FOREIGN SIMPLIFICATION
A. Simplified Distribution Rules (secs. 1401-1404 of the bill and secs.
72(d), 101(b), 401(a)(9), and 402(d) of the Code)
Present Law
In general, a distribution of benefits from a tax-favored
retirement arrangement (i.e., a qualified plan, a qualified
annuity plan, and a tax-sheltered annuity contract (sec. 403(b)
annuity)) generally is includable in gross income in the year
it is paid or distributed under the rules relating to the
taxation of annuities.
Lump-sum distributions
Lump-sum distributions from qualified plans and qualified
annuity plans are eligible for special 5-year forward
averaging. In general, a lump-sum distribution is a
distribution within one taxable year of the balance to the
credit of an employee that becomes payable to the recipient
first, on account of the death of the employee, second, after
the employee attains age 59\1/2\, third, on account of the
employee's separation from service, or fourth, in the case of
self-employed individuals, on account of disability. Lump-sum
treatment is not available for distributions from a tax-
sheltered annuity.
A taxpayer is permitted to make an election with respect
to a lump-sum distribution received on or after the employee
attains age 59\1/2\ to use 5-year forward income averaging
under the tax rates in effect for the taxable year in which the
distribution is made. In general, this election allows the
taxpayer to pay a separate tax on the lump-sum distribution
that approximates the tax that would be due if the lump-sum
distribution were received in 5 equal installments. If the
election is made, the taxpayer is entitled to deduct the amount
of the lump-sum distribution from gross income. Only one such
election on or after age 59\1/2\ may be made with respect to
any employee.
$5,000 exclusion for employer-provided death benefits
Under present law, the beneficiary or estate of a deceased
employee generally can exclude up to $5,000 in benefits paid by
or on behalf of an employer by reason of the employee's death
(sec. 101(b)).
Recovery of basis
Amounts received as an annuity under a qualified plan
generally are includible in income in the year received, except
to the extent they represent the return of the recipient's
investment in the contract (i.e., basis). Under present law, a
pro-rata basis recovery rule generally applies, so that the
portion of any annuity payment that represents nontaxable
return of basis is determined by applying an exclusion ratio
equal to the employee's total investment in the contract
divided by the total expected payments over the term of the
annuity.
Under a simplified alternative method provided by the IRS,
the taxable portion of qualifying annuity payments is
determined under a simplified exclusion ratio method.
In no event can the total amount excluded from income as
nontaxable return of basis be greater than the recipient's
total investment in the contract.
Required distributions
Present law provides uniform minimum distribution rules
generally applicable to all types of tax-favored retirement
vehicles, including qualified plans and annuities, IRAs, and
tax- sheltered annuities.
Under present law, a qualified plan is required to provide
that the entire interest of each participant will be
distributed beginning no later than the participant's required
beginning date (sec. 401(a)(9)). The required beginning date is
generally April 1 of the calendar year following the calendar
year in which the plan participant or IRA owner attains age
70\1/2\. In the case of a governmental plan or a church plan,
the required beginning date is the later of first, such April
1, or second, the April 1 of the year following the year in
which the participant retires.
Reasons for Change
In almost all cases, the responsibility for determining
the tax liability associated with a distribution from a
qualified plan, tax-sheltered annuity, or IRA rests with the
individual receiving the distribution. Under present law, this
task can be burdensome. Among other things, the taxpayer must
consider (1) whether special tax rules apply that reduce the
tax that otherwise would be paid, (2) the amount of the
taxpayer's basis in the plan, annuity, or IRA and the rate at
which such basis is to be recovered, and (3) whether or not a
portion of the distribution is excludable from income as a
death benefit.
The number of special rules for taxing pension
distributions makes it difficult for taxpayers to determine
which method is best for them and also increases the likelihood
of error. In addition, the specifics of each of the rules
create complexity. For example, the present-law rules for
determining the rate at which a participant's basis in a
qualified plan is recovered often entail calculations that the
average participant has difficulty performing. These rules
require a fairly precise estimate of the period over which
benefits are expected to be paid. The IRS publication on
taxation of pension distributions (Publication 939) contains
over 60 pages of actuarial tables used to determine total
expected payments.
The original intent of the income averaging rules for
pension distributions was to prevent a bunching of taxable
income because a taxpayer received all of the benefits in a
qualified plan in a single taxable year. Liberalization of the
rollover rules in the Unemployment Compensation Amendments of
1992 increased taxpayers' ability to determine the time of the
income inclusion of pension distributions, and eliminates the
need for special rules such as 5-year forward income averaging
to prevent bunching of income.
It is inappropriate to require all participants to
commence distributions by age 70\1/2\ without regard to whether
the participant is still employed by the employer. However, the
accrued benefit of employees who retire after age 70\1/2\
generally should be actuarially increased to take into account
the period after age 70\1/2\ in which the employee was not
receiving benefits.
Explanation of Provisions
Lump-sum distributions
The bill repeals 5-year averaging for lump-sum
distributions from qualified plans. Thus, the bill repeals the
separate tax paid on a lump-sum distribution and also repeals
the deduction from gross income for taxpayers who elect to pay
the separate tax on a lump-sum distribution. The bill preserves
the transition rules adopted in the Tax Reform Act of 1986.
$5,000 exclusion for employer-provided death benefits
The bill repeals the $5,000 exclusion for employer-
provided death benefits.
Recovery of basis
The bill provides that basis recovery on payments from
qualified plans generally is determined under a method similar
to the present-law simplified alternative method provided by
the IRS. The portion of each annuity payment that represents a
return of basis equals to the employee's total basis as of the
annuity starting date, divided by the number of anticipated
payments under the following table:
Age Number of payments:
Not more than 55.................................................. 360
56-60............................................................. 310
61-65............................................................. 260
66-70............................................................. 210
More than 70...................................................... 160
Required distributions
The bill modifies the rule that requires all participants
in qualified plans to commence distributions by age 70\1/2\
without regard to whether the participant is still employed by
the employer and generally replaces it with the rule in effect
prior to the Tax Reform Act of 1986. Under the bill,
distributions generally are required to begin by April 1 of the
calendar year following the later of first, the calendar year
in which the employee attains age 70\1/2\ or second, the
calendar year in which the employee retires. However, in the
case of a 5-percent owner of the employer, distributions are
required to begin no later than the April 1 of the calendar
year following the year in which the 5-percent owner attains
age 70\1/2\.
In addition, in the case of an employee (other than a 5-
percent owner) who retires in a calendar year after attaining
age 70\1/2\, the bill generally requires the employee's accrued
benefit to be actuarially increased to take into account the
period after age 70\1/2\ in which the employee was not
receiving benefits under the plan. Thus, under the bill, the
employee's accrued benefit is required to reflect the value of
benefits that the employee would have received if the employee
had retired at age 70\1/2\ and had begun receiving benefits at
that time.
The actuarial adjustment rule and the rule requiring 5-
percent owners to begin distributions after attainment of age
70\1/2\ does not apply, under the bill, in the case of a
governmental plan or church plan.
Effective Date
Lump-sum distributions
The provision is effective for taxable years beginning
after December 31, 1998.
$5,000 exclusion for employer-provided death benefits
The provision applies with respect to decedents dying
after date of enactment.
Recovery of basis
The provision is effective with respect to annuity
starting dates beginning 90 days after the date of enactment.
Required distributions
The provision is effective for years beginning after
December 31, 1996. Under the provision, the Committee intends
that a plan (or an annuity contract) could permit, but is not
required to permit participants who have already begun to
receive distributions but do not have to under the provision,
to stop receiving distributions until such distributions are
required under the provision.
B. Increased Access to Pension Plans
1. Establish SIMPLE retirement plans (secs. 1421-1422 of the bill and
secs. 401(k) and 408(p) of the Code)
Present Law
Present law does not contain rules relating to SIMPLE
retirement plans. However, present law does provide a number of
ways in which individuals can save for retirement on a tax-
favored basis. These include employer-sponsored retirement
plans that meet the requirements of the Internal Revenue Code
(a ``qualified plan'') and individual retirement arrangements
(``IRAs''). Employees can earn significant retirement benefits
under employer-sponsored retirement plans. However, in order to
receive tax-favored treatment, such plans must comply with a
variety of rules, including complex nondiscrimination and
administrative rules (including top-heavy rules). Such plans
are also subject to certain requirements under the labor law
provisions of the Employee Retirement Income Security Act of
1974 (``ERISA'').
IRAs are not subject to the same rules as qualified plans,
but the amount that can be contributed in any year is
significantly less. The maximum deductible IRA contribution for
a year is limited to $2,000. Distributions from IRAs and
employer-sponsored retirement plans are generally taxable when
made. In addition, distributions prior to age 59\1/2\ generally
are subject to an additional 10-percent early withdrawal tax.
Contributions to an IRA can also be made by an employer at
the election of an employee under a salary reduction simplified
employee pension (``SARSEP''). Under SARSEPs, which are not
qualified plans, employees can elect to have contributions made
to the SARSEP or to receive the contributions in cash. The
amount the employee elects to have contributed to the SARSEP is
not currently includible in income. The annual amount an
employee can elect to contribute to a SARSEP is limited to
$9,500 for 1996. This dollar limit is indexed for inflation in
$500 increments. The election to have amounts contributed to a
SARSEP or received in cash is available only if at least 50
percent of the eligible employees of the employer elect to have
amounts contributed to the SARSEP. In addition, such election
is available for a taxable year only if the employer
maintaining the SARSEP had 25 or fewer eligible employees at
all times during the prior taxable year. Elective deferrals
under SARSEPs are subject to a special nondiscrimination test.
Under one type of qualified plan that can be maintained by
an employer, employees can elect to reduce their taxable
compensation and have nontaxable contributions made to the
plan. Such contributions are called elective deferrals, and the
plans which allow such contributions are called qualified cash
or deferred arrangements (or ``401(k) plans''). Like SARSEPs,
the maximum annual amount of elective deferrals that can be
made by an individual is $9,500 for 1996. A special
nondiscrimination test applies to elective deferrals. An
employer may make contributions based on an employee's elective
contributions. Such contributions are called matching
contributions, and are subject to a special nondiscrimination
test similar to the special nondiscrimination test applicable
to elective deferrals.
Reasons for Change
Retirement plan coverage is lower among small employers
than among medium and large employers. The Committee believes
that one of the reasons small employers do not establish tax-
qualified retirement plans is the complexity of rules relating
to such plans and the cost of complying with such rules. The
Committee believes it is appropriate to encourage small
employers to adopt retirement plans by providing a simplified
retirement plan that is not subject to the complex rules
applicable to tax-qualified plans.
Among the rules applicable to tax-qualified plans are
nondiscrimination rules that help to ensure that plans cover a
broad range of employees, not just an employer's highly
compensated employees. The Committee believes that the goal of
the nondiscrimination rules, broad pension coverage, is an
important one. Unfortunately, the complicated nature of these
rules may prevent small employers from establishing any plan.
The Committee believes that the purposes of the
nondiscrimination rules will be served in the case of small
employers if all full-time employees are given the opportunity
to participate in the plan, the employer is required to match
employee contributions, and there are limits on the total
contributions that can be made.
The Committee believes that employees should be encouraged
to save for retirement, and thus believes a penalty should be
imposed on amounts withdrawn within a short period after the
retirement plan is adopted.
Explanation of Provision
In general
The bill creates a simplified retirement plan for small
business called the savings incentive match plan for employees
(``SIMPLE'') retirement plan. SIMPLE plans can be adopted by
employers who employ 100 or fewer employees on any day during
the year and who do not maintain another employer-sponsored
retirement plan. A SIMPLE plan can be either an IRA for each
employee or part of a qualified cash or deferred arrangement
(``401(k) plan''). If established in IRA form, a SIMPLE plan is
not subject to the nondiscrimination rules generally applicable
to qualified plans (including the top-heavy rules) and
simplified reporting requirements apply. Within limits,
contributions to a SIMPLE plan are not taxable until withdrawn.
A SIMPLE plan can also be adopted as part of a 401(k) plan.
In that case, the plan does not have to satisfy the special
nondiscrimination tests applicable to 401(k) plans and is not
subject to the top-heavy rules. The other qualified plan rules
continue to apply.
SIMPLE retirement plans in IRA form
In general
A SIMPLE retirement plan allows employees to make elective
contributions to an IRA. Employee contributions have to be
expressed as a percentage of the employee's compensation, and
cannot exceed $6,000 per year. The $6,000 dollar limit is
indexed for inflation in $500 increments.
Under the bill, the employer is required to satisfy one of
two contribution formulas. Under the matching contribution
formula, the employer generally is required to match employee
elective contributions on a dollar-for-dollar basis up to 3
percent of the employee's compensation. Under a special rule,
the employer could elect a lower percentage matching
contribution for all employees (but not less than 1 percent of
each employee's compensation). In order for the employer to
lower the matching percentage for any year, the employer has to
notify employees of the applicable match within a reasonable
time before the 30-day election period for the year (described
below). In addition, a lower percentage cannot be elected for
more than 2 out of any 5 years.
Alternatively, for any year, an employer is permitted to
elect, in lieu of making matching contributions, to make a 2
percent of compensation nonelective contribution on behalf of
each eligible employee with at least $5,000 in compensation for
such year. If such an election were made, the employer has to
notify eligible employees of the change within a reasonable
period before the 30-day election period for the year
(described below). No contributions other than employee
elective contributions and required employer matching
contributions (or, alternatively, required employer nonelective
contributions) can be made to a SIMPLE account.
Only employers who employ 100 or fewer employees on any day
during the year and who do not currently maintain a qualified
plan can establish SIMPLE retirement accounts for their
employees.
Each employee of the employer who received at least $5,000
in compensation from the employer during any 2 prior years and
who is reasonably expected to receive at least $5,000 in
compensation during the year must be eligible to participate in
the SIMPLE plan. Nonresident aliens and employees covered under
a collective bargaining agreement do not have to be eligible to
participate in the SIMPLE plan. Self-employed individuals can
participate in a SIMPLE plan.
All contributions to an employee's SIMPLE account have to
be fully vested.
Distributions from a SIMPLE plan generally are taxed as
under the rules relating to IRAs, except that an increased
early withdrawal tax (25 percent) applies to distributions
within the first 2 years the employee first participates in the
SIMPLE plan.
Tax treatment of SIMPLE accounts, contributions, and
distributions
Contributions to a SIMPLE account generally are deductible
by the employer. In the case of matching contributions, the
employer will be allowed a deduction for a year only if the
contributions are made by the due date (including extensions)
for the employer's tax return. Contributions to a SIMPLE
account are excludable from the employee's income. SIMPLE
accounts, like IRAs, are not subject to tax. Distributions from
a SIMPLE retirement account generally are taxed under the rules
applicable to IRAs. Thus, they are includible in income when
withdrawn. Tax-free rollovers can be made from one SIMPLE
account to another. A SIMPLE account can be rolled over to an
IRA on a tax-free basis after a two-year period has expired
since the individual first participated in the SIMPLE plan. To
the extent an employee is no longer participating in a SIMPLE
plan (e.g., the employee has terminated employment), the
employee's SIMPLE account will be treated as an IRA.
Early withdrawals from a SIMPLE account generally are be
subject to the 10-percent early withdrawal tax applicable to
IRAs. However, withdrawals of contributions during the 2-year
period beginning on the date the employee first participated in
the SIMPLE plan are subject to a 25-percent early withdrawal
tax (rather than 10 percent).
Contributions to a SIMPLE account are not subject to
employment taxes or income tax withholding.
Administrative requirements
Each eligible employee can elect, within the 30-day period
before the beginning of any year (or the 30-day period before
first becoming eligible to participate), to participate in the
SIMPLE plan (i.e., to make elective deferrals), and to modify
any previous elections regarding the amount of contributions.
An employer is required to contribute employees' elective
deferrals to the employee's SIMPLE account within 30 days after
the end of the month to which the contributions relate.
Employees must be allowed to terminate participation in the
SIMPLE plan at any time during the year (i.e., to stop making
contributions). The plan can provide that an employee who
terminates participation cannot resume participation until the
following year. A plan can permit (but is not required to
permit) an individual to make other changes to his or her
salary reduction contribution election during the year (e.g.,
reduce contributions). The Committee intends that an employer
is permitted to designate a SIMPLE account trustee to which
contributions on behalf of eligible employees are made.
Reporting requirements
Trustee requirements.--The trustee of a SIMPLE account is
required each year to prepare, and provide to the employer
maintaining the SIMPLE plan, a summary description containing
the following basic information about the plan: the name and
address of the employer and the trustee; the requirements for
eligibility; the benefits provided under the plan; the time and
method of making salary reduction elections; and the procedures
for and effects of, withdrawals (including rollovers) from the
SIMPLE account. At least once a year, the trustee is also
required to furnish an account statement to each individual
maintaining a SIMPLE account. In addition, the trustee is
required to file an annual report with the Secretary. A trustee
who fails to provide any of such reports or descriptions will
be subject to a penalty of $50 per day until such failure is
corrected, unless the failure is due to reasonable cause.
Employer reports.--The employer maintaining a SIMPLE plan
is required to notify each employee of the employee's
opportunity to make salary reduction contributions under the
plan as well as the contribution alternative chosen by the
employer immediately before the employee becomes eligible to
make such election. This notice must include a copy of the
summary description prepared by the trustee. An employer who
fails to provide such notice will be subject to a penalty of
$50 per day on which such failure continues, unless the failure
is due to reasonable cause.
Definitions
For purposes of the rules relating to SIMPLE plans,
compensation means compensation required to be reported by the
employer on Form W-2, plus any elective deferrals of the
employee. In the case of a self-employed individual,
compensation means net earnings from self-employment. The term
employer includes the employer and related employers. Related
employers includes trades or businesses under common control
(whether incorporated or not), controlled groups of
corporations, and affiliated service groups. In addition, the
leased employee rules apply.
For purposes of the rule prohibiting an employer from
establishing a SIMPLE plan, if the employer has another
qualified plan, an employer is treated as maintaining a
qualified plan if the employer (or a predecessor employer)
maintained a qualified plan with respect to which contributions
were made, or benefits were accrued, with respect to service
for any year in the period beginning with the year the SIMPLE
plan became effective and ending with the year for which the
determination is being made. A qualified plan includes a
qualified retirement plan, a qualified annuity plan, a
governmental plan, a tax-sheltered annuity, and a simplified
employee pension.
SIMPLE 401(k) plans
In general, under the bill, a cash or deferred arrangement
(i.e., 401(k) plan), will be deemed to satisfy the special
nondiscrimination tests applicable to employee elective
deferrals and employer matching contributions if the plan
satisfies the contribution requirements applicable to SIMPLE
plans. In addition, the plan is not subject to the top-heavy
rules for any year for which this safe harbor is satisfied. The
plan is subject to the other qualified plan rules.
The safe harbor is satisfied if, for the year, the employer
does not maintain another qualified plan and (1) employee's
elective deferrals are limited to no more than $6,000, (2) the
employer matches employees' elective deferrals up to 3 percent
of compensation (or, alternatively, makes a 2 percent of
compensation nonelective contribution on behalf of all eligible
employees with at least $5,000 in compensation), and (3) no
other contributions are made to the arrangement. Contributions
under the safe harbor have to be 100 percent vested. The
employer cannot reduce the matching percentage below 3 percent
of compensation.
Repeal of SARSEPs
Under the bill, the present-law rules permitting SARSEPs no
longer apply after December 31, 1996, unless the SARSEP was
established before January 1, 1997. Consequently, an employer
is not permitted to establish a SARSEP after December 31, 1996.
SARSEPs established before January 1, 1997, can continue to
receive contributions under present-law rules, and new
employees of the employer hired after December 31, 1996, can
participate in the SARSEP in accordance with such rules.
Effective Date
The provisions relating to SIMPLE plans are effective for
years beginning after December 31, 1996.
2. Tax-exempt organizations eligible under section 401(k) (sec. 1426 of
the bill and sec. 401(k) of the Code)
Present Law
Under present law, tax-exempt and State and local
government organizations are generally prohibited from
establishing qualified cash or deferred arrangements (sec.
401(k) plans). Qualified cash or deferred arrangements (1) of
rural cooperatives, (2) adopted by State and local governments
before May 6, 1986, or (3) adopted by tax-exempt organizations
before July 2, 1986, are not subject to this prohibition.
Reasons for Change
Nongovernmental tax-exempt entities should be permitted to
maintain qualified cash or deferred arrangements for their
employees on the same basis as other employers.
Explanation of Provision
The bill allows tax-exempt organizations (including, for
this purpose, Indian tribal governments, a subdivision of an
Indian tribal government, an agency or instrumentality of an
Indian tribal government or subdivision thereof, or a
corporation chartered under Federal, State, or tribal law which
is owned in whole or in part by any of such entities) to
maintain qualified cash or deferred arrangements. The bill
retains the present-law prohibition against the maintenance of
cash or deferred arrangements by State and local governments,
except to the extent it may apply to Indian tribes.
Effective Date
The provision is effective for plan years beginning after
December 31, 1996.
C. Nondiscrimination Provisions
1. Definition of highly compensated employees and repeal of family
aggregation rules (sec. 1431 of the bill and secs. 401(a)(17),
404(l), and 414(g) of the Code)
Present Law
Definition of highly compensated employee
An employee, including a self-employed individual, is
treated as highly compensated if, at any time during the year
or the preceding year, the employee (1) was a 5-percent owner
of the employer, (2) received more than $100,000 (for 1996) in
annual compensation from the employer, (3) received more than
$66,000 (for 1996) in annual compensation from the employer and
was one of the top-paid 20 percent of employees during the same
year, or (4) was an officer of the employer who received
compensation in excess of $60,000 (for 1996). If, for any year,
no officer has compensation in excess of the threshold, then
the highest paid officer of the employer is treated as a highly
compensated employee.
Family aggregation rules
A special rule applies with respect to the treatment of
family members of certain highly compensated employees for
purposes of the nondiscrimination rules applicable to qualified
plans. Under the special rule, if an employee is a family
member of either a 5-percent owner or 1 of the top-10 highly
compensated employees by compensation, then any compensation
paid to such family member and any contribution or benefit
under the plan on behalf of such family member is aggregated
with the compensation paid and contributions or benefits on
behalf of the 5-percent owner or the highly compensated
employee in the top-10 employees by compensation. Therefore,
such family member and employee are treated as a single highly
compensated employee. An individual is considered a family
member if, with respect to an employee, the individual is a
spouse, lineal ascendant or descendant, or spouses of a lineal
ascendant or descendant of the employee.
Similar family aggregation rules apply with respect to the
$150,000 (for 1996) limit on compensation that may be taken
into account under a qualified plan (sec. 401(a)(17)) and for
deduction purposes (sec. 404(1)). However, under such
provisions, only the spouse of the employee and lineal
descendants of the employee who have not attained age 19 are
taken into account.
Reasons for Change
Under present law, the administrative burden on plan
sponsors to determine which employees are highly compensated
can be significant. The various categories of highly
compensated employees require employers to perform a number of
calculations that for many employers have largely duplicative
results.
The family aggregation rules impose undue restrictions on
the ability of a family-owned small business to provide
adequate retirement benefits for all members of the family
working for the business. In addition, the complexity of the
calculations required under the family aggregation rules
appears to be unnecessary in light of the numerous other
provisions that ensure that qualified pension plans do not
disproportionately favor highly compensated employees.
Explanation of Provisions
Definition of highly compensated employee
Under the bill, an employee is treated as highly
compensated if the employee (1) was a 5-percent owner of the
employer at any time during the year or the preceding year or
(2) had compensation for the preceding year in excess of
$80,000 (indexed for inflation) and the employee was in the top
20 percent of employees by compensation for such year. The bill
also repeals the rule requiring the highest paid officer to be
treated as a highly compensated employee.
Family aggregation rules
The bill repeals the family aggregation rules.
Effective Date
The provisions are effective for years beginning after
December 31, 1996.
2. Modification of additional participation requirements (sec. 1432 of
the bill and sec. 401(a)(26) of the Code)
Present Law
Under present law, a plan is not a qualified plan unless it
benefits no fewer than the lesser of (a) 50 employees of the
employer or (b) 40 percent of all employees of the employer
(sec. 401(a)(26)). This requirement may not be satisfied by
aggregating comparable plans, but may be applied separately to
different lines of business of the employer. A line of business
of the employer does not qualify as a separate line of business
unless it has at least 50 employees.
Reasons for Change
The minimum participation rule was adopted in the Tax
Reform Act of 1986 because the Congress believed that it was
inappropriate to permit an employer to maintain multiple plans,
each of which covered a very small number of employees.
Although plans that are aggregated for nondiscrimination
purposes are required to satisfy comparability requirements
with respect to the amount of contributions or benefits, such
an arrangement may still discriminate in favor of highly
compensated employees.
However, it is appropriate to better target the minimum
participation rule by limiting the scope of the rule to defined
benefit pension plans and increasing the minimum number of
employees required to be covered under very small plans.
Also, the arbitrary requirement that a line of business
must have at least 50 employees requires application of the
minimum participation rule on an employer-wide basis in some
cases in which the employer truly has separate lines of
business.
Explanation of Provision
The bill provides that the minimum participation rule
applies only to defined benefit pension plans. In addition, the
bill provides that a defined benefit pension plan does not
satisfy the rule unless it benefits no fewer than the lesser of
(1) 50 employees or (2) the greater of (a) 40 percent of all
employees of the employer or (b) 2 employees (1 employee if
there is only 1 employee).
The bill provides that the requirement that a line of
business has at least 50 employees does not apply in
determining whether a plan satisfies the minimum participation
rule on a separate line of business basis.
Effective Date
The provision is effective for years beginning after
December 31, 1996.
3. Nondiscrimination rules for qualified cash or deferred arrangements
and matching contributions (sec. 1433 of the bill and secs.
401(k) and 401(m) of the Code)
Present Law
Under present law, a special nondiscrimination test applies
to qualified cash or deferred arrangements (sec. 401(k) plans).
The special nondiscrimination test is satisfied if the actual
deferral percentage (``ADP'') for eligible highly compensated
employees for a plan year is equal to or less than either (1)
125 percent of the ADP of all nonhighly compensated employees
eligible to defer under the arrangement or (2) the lesser of
200 percent of the ADP of all eligible nonhighly compensated
employees or such ADP plus 2 percentage points.
Employer matching contributions and after-tax employee
contributions under qualified defined contribution plans are
subject to a special nondiscrimination test (the actual
contribution percentage (``ACP'') test) similar to the special
nondiscrimination test applicable to qualified cash or deferred
arrangements. Employer matching contributions that satisfy
certain requirements can be used to satisfy the ADP test, but,
to the extent so used, such contributions cannot be considered
when calculating the ACP test.
A plan that would otherwise fail to meet the special
nondiscrimination test for qualified cash or deferred
arrangements is not treated as failing such test if excess
contributions (with allocable income) are distributed to the
employee or, in accordance with Treasury regulations,
recharacterized as after-tax employee contributions. For
purposes of this rule, in determining the amount of excess
contributions and the employees to whom they are allocated, the
elective deferrals of highly compensated employees are reduced
in the order of their actual deferral percentage beginning with
those highly compensated employees with the highest actual
deferral percentages. A similar rule applies to employer
matching contributions.
Reasons for Change
The sources of complexity generally associated with the
nondiscrimination requirements for qualified cash or deferred
arrangements and matching contributions are the recordkeeping
necessary to monitor employee elections, the calculations
involved in applying the tests, and the correction mechanism,
i.e., what to do if the plan fails the tests.
The Committee believes that the complexity of
nondiscrimination requirements, particularly after the Tax
Reform Act of 1986 changes that imposed a dollar cap on
elective deferrals ($9,500 in 1996), is not justified by the
marginal additional participation of rank-and-file employees
that might be achieved by the operation of these requirements.
The result that the nondiscrimination rules are intended to
produce can also be achieved by creating an incentive for
employers to provide certain matching contributions or
nonelective contributions on behalf of rank-and-file employees.
Such contributions should create a sufficient inducement to
rank-and-file employee participation. Thus, the Committee
believes it is appropriate to provide a design-based safe
harbor for qualified cash or deferred arrangements. Plans that
satisfy the safe harbors would not have to satisfy the
nondiscrimination tests for cash or deferred arrangements.
In addition, the significant simplification that a design-
based safe harbor test achieves may reduce the complexity of
the qualified cash or deferred arrangement requirements enough
to encourage additional employers to establish such plans,
thereby expanding employee access to voluntary retirement
savings arrangements. The adoption of a nondiscrimination safe
harbor that eliminates the testing of actual plan contributions
removes a significant administrative burden that may act as a
deterrent to employers who would not otherwise set up such a
plan. Thus, the adoption of a simpler nondiscrimination test
may encourage more employers, particularly small employers, who
do not now provide any tax-favored retirement plan for their
employees, to set up such plans.
A design-based nondiscrimination test provides certainty to
an employer and plan participants that does not exist under
present law. Under such a test, an employer will know at the
beginning of each plan year whether the plan satisfies the
nondiscrimination requirements for the year.
Simplifying the nondiscrimination tests will also reduce
administrative burdens for those plans that do not utilize the
safe harbor.
Explanation of Provisions
Prior-year data
The bill modifies the special nondiscrimination tests
applicable to elective deferrals and employer matching and
after-tax employee contributions to provide that the maximum
permitted actual deferral percentage (and actual contribution
percentage) for highly compensated employees for the year is
determined by reference to the actual deferral percentage (and
actual contribution percentage) for nonhighly compensated
employees for the preceding, rather than the current, year. A
special rule applies for the first plan year.
Alternatively, under the bill, an employer is allowed to
elect to use the current year actual deferral percentage (and
actual contribution percentage). Such an election can be
revoked only as provided by the Secretary.
Safe harbor for cash or deferred arrangements
The bill provides that a cash or deferred arrangement
satisfies the special nondiscrimination tests if the plan
satisfies one of two contribution requirements and satisfies a
notice requirement.
A plan satisfies the contribution requirements under the
safe harbor rule for qualified cash or deferred arrangements if
the plan either first, satisfies a matching contribution
requirement or second, the employer makes a nonelective
contribution to a defined contribution plan of at least 3
percent of an employee's compensation on behalf of each
nonhighly compensated employee who is eligible to participate
in the arrangement without regard to whether the employee makes
elective contributions under the arrangement.
A plan satisfies the matching contribution requirement if,
under the arrangement: first, the employer makes a matching
contribution on behalf of each nonhighly compensated employee
that is equal to (a) 100 percent of the employee's elective
contributions up to 3 percent of compensation and (b) 50
percent of the employee's elective contributions from 3 to 5
percent of compensation; and second, the rate of match with
respect to any elective contribution for highly compensated
employees is not greater than the rate of match for nonhighly
compensated employees.
Alternatively, if the rate of matching contribution with
respect to any rate of elective contribution requirement is not
equal to the percentages described in the preceding paragraph,
the matching contribution requirement will be deemed to be
satisfied if first, the rate of an employer's matching
contribution does not increase as an employee's rate of
elective contribution increases and second, the aggregate
amount of matching contributions at such rate of elective
contribution at least equals the aggregate amount of matching
contributions that would be made if matching contributions
satisfied the above percentage requirements. For example, the
alternative test will be satisfied if an employer matches 125
percent of an employee's elective contributions up to the first
3 percent of compensation, 25 percent of elective deferrals
from 3 to 4 percent of compensation, and provides no match
thereafter. However, the alternative test will not be satisfied
if an employer matches 80 percent of an employee's elective
contributions up to the first 5 percent of compensation. The
former example satisfies the alternative test because the
employer match does not increase and the aggregate amount of
matching contributions at any rate of elective contribution is
at least equal to the aggregate amount of matching
contributions required under the general safe harbor rule.
Employer matching and nonelective contributions used to
satisfy the contribution requirements of the safe harbor rules
are required to be nonforfeitable and are subject to the
restrictions on withdrawals that apply to an employee's
elective deferrals under a qualified cash or deferred
arrangement (sec. 401(k)(2)(B) and (C)). It is intended that
employer matching and nonelective contributions used to satisfy
the contribution requirements of the safe harbor rules can be
used to satisfy other qualified retirement plan
nondiscrimination rules (except the special nondiscrimination
test applicable to employer matching contributions (the ACP
test)). So, for example, a cross-tested defined contribution
plan that includes a qualified cash or deferred arrangement can
consider such employer matching and nonelective contributions
in testing. 10
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\10\ The Committee intends that if two plans which include
qualified cash or deferred arrangements are treated as one plan for
purposes of the nondiscrimination and coverage rules, such qualified
cash or deferred arrangements will be treated as one qualified cash or
deferred arrangement for purposes of the safe harbor rules. In such a
case, unless both qualified cash or deferred arrangements satisfied the
safe harbor, both qualified cash or deferred arrangements tested
together will have to satisfy the ADP and ACP tests.
---------------------------------------------------------------------------
The notice requirement is satisfied if each employee
eligible to participate in the arrangement is given written
notice, within a reasonable period before any year, of the
employee's rights and obligations under the arrangement.
Alternative method of satisfying special nondiscrimination test for
matching contributions
The bill provides a safe harbor method of satisfying the
special nondiscrimination test applicable to employer matching
contributions (the ACP test). Under this safe harbor, a plan is
treated as meeting the special nondiscrimination test if first,
the plan meets the contribution and notice requirements
applicable under the safe harbor method of satisfying the
special nondiscrimination requirement for qualified cash or
deferred arrangements, and second, the plan satisfies a special
limitation on matching contributions.
The limitation on matching contributions is satisfied if:
first, the employer matching contributions on behalf of any
employee may not be made with respect to employee contributions
or elective deferrals in excess of 6 percent of compensation;
second, the rate of an employer's matching contribution does
not increase as the rate of an employee's contributions or
elective deferrals increases; and third, the matching
contribution with respect to any highly compensated employee at
any rate of employee contribution or elective deferral is not
greater than that with respect to an employee who is not highly
compensated.
Any after-tax employee contributions made under the
qualified cash or deferred arrangement will continue to be
tested under the ACP test. Employer matching and nonelective
contributions used to satisfy the safe harbor rules for
qualified cash or deferred arrangements cannot be considered in
calculating such test. However, employer matching and
nonelective contributions in excess of the amount required to
satisfy the safe harbor rules for qualified cash or deferred
arrangements can be taken into account in calculating such
test.
Distribution of excess contributions and excess aggregate contributions
The bill provides that the total amount of excess
contributions (and excess aggregate contributions) is
determined as under present law, but the distribution of excess
contributions (and excess aggregate contributions) are required
to be made on the basis of the amount of contribution by, or on
behalf of, each highly compensated employee. Thus, excess
contributions (and excess aggregate contributions) are deemed
attributable first to those highly compensated employees who
have the greatest dollar amount of elective deferrals.
Effective Date
The provisions relating to use of prior-year data and the
distribution of excess contributions and excess aggregate
contributions are effective for years beginning after December
31, 1996. The provisions providing for a safe harbor for
qualified cash or deferred arrangements and the alternative
method of satisfying the special nondiscrimination test for
matching contributions are effective for years beginning after
December 31, 1998.
4. Definition of compensation for purposes of the limits on
contributions and benefits (sec. 1434 of the bill and sec. 415
of the Code)
Present Law
Present law imposes limits on contributions and benefits
under qualified plans based on the type of plan. For purposes
of these limits, present law provides that the definition of
compensation generally does not include elective employee
contributions to certain employee benefit plans.
Reasons for Change
The Committee believes that not treating employee elective
contributions as compensation for purposes of the limits on
benefits and contributions under qualified plans unduly
restricts the amount that employees, particularly employees who
are not highly compensated, can earn under qualified plans.
Explanation of Provision
The bill provides that elective deferrals to section 401(k)
plans and similar arrangements, elective contributions to
nonqualified deferred compensation plans of tax-exempt
employers and State and local governments (sec. 457 plans), and
salary reduction contributions to a cafeteria plan are
considered compensation for purposes of the limits on
contributions and benefits.
Effective Date
The provision is effective for years beginning after
December 31, 1997.
D. Miscellaneous Pension Simplification
1. Plans covering self-employed individuals (sec. 1441 of the bill and
sec. 401(d) of the Code)
Present Law
Prior to the Tax Equity and Fiscal Responsibility Act of
1982 (``TEFRA''), different rules applied to retirement plans
maintained by incorporated employers and unincorporated
employers (such as partnerships and sole proprietors). In
general, plans maintained by unincorporated employers were
subject to special rules in addition to the other qualification
requirements of the Code. Most, but not all, of this disparity
was eliminated by TEFRA. Under present law, certain special
aggregation rules apply to plans maintained by owner employees
of unincorporated businesses that do not apply to other
qualified plans (sec. 401(d)(1) and (2)).
Reasons for Change
The remaining special aggregation rules for plans
maintained by unincorporated employers are unnecessary and
should be eliminated. Applying the same set of rules to all
types of plans would make the qualification standards easier to
apply and administer.
Explanation of Provision
The bill eliminates the special aggregation rules that
apply to plans maintained by self-employed individuals that do
not apply to other qualified plans.
Effective Date
The provision is effective for years beginning after
December 31, 1996.
2. Elimination of special vesting rule for multiemployer plans (sec.
1442 of the bill and sec. 411(a) of the Code)
Present Law
Under present law, except in the case of multiemployer
plans, a plan is not a qualified plan unless a participant's
employer-provided benefit vests at least as rapidly as under
one of two alternative minimum vesting schedules. A plan
satisfies the first schedule if a participant acquires a
nonforfeitable right to 100 percent of the participant's
accrued benefit derived from employer contributions upon the
participant's completion of 5 years of service. A plan
satisfies the second schedule if a participant has a
nonforfeitable right to at least 20 percent of the
participant's accrued benefit derived from employer
contributions after 3 years of service, 40 percent at the end
of 4 years of service, 60 percent at the end of 5 years of
service, 80 percent at the end of 6 years of service, and 100
percent at the end of 7 years of service.
In the case of a multiemployer plan, a participant's
accrued benefit derived from employer contributions is required
to be 100-percent vested no later than upon the participant's
completion of 10 years of service. This special rule applies
only to employees covered by the plan pursuant to a collective
bargaining agreement.
Reasons for Change
The present-law vesting rules for multiemployer plans add
to complexity because there are different vesting schedules for
different types of plans, and different vesting schedules for
persons within the same multiemployer plan. In addition, the
present-law rule prevents some workers from earning a pension
under a multiemployer plan. Conforming the multiemployer plan
rules to the rules for other plans would mean that workers
could earn additional benefits.
Explanation of Provision
The bill conforms the vesting rules for multiemployer plans
to the rules applicable to other qualified plans.
Effective Date
The provision is effective for plan years beginning on or
after the earlier of (1) the later of January 1, 1997, or the
date on which the last of the collective bargaining agreements
pursuant to which the plan is maintained terminates, or (2)
January 1, 1999, with respect to participants with an hour of
service after the effective date.
3. Distributions under rural cooperative plans (sec. 1443 of the bill
and sec. 401(k)(7) of the Code)
Present Law
A qualified cash or deferred arrangement can permit
withdrawals of employee elective deferrals only after the
earlier of (1) the participant's separation from service,
death, or disability, (2) termination of the arrangement, or
(3) in the case of a profit-sharing or stock bonus plan, the
attainment of age 59\1/2\ or the occurrence of a hardship of
the participant. In the case of a money purchase pension plan,
including a rural cooperative plan, withdrawals by participants
cannot occur upon attainment of age 59\1/2\ or upon hardship.
Reasons for Change
It is appropriate to permit qualified cash or deferred
arrangements of rural cooperatives to permit distributions to
plan participants under the same circumstances as other
qualified cash or deferred arrangements. It is also appropriate
to clarify that certain public utility districts and a national
association of rural cooperatives should be treated as rural
cooperatives for this purpose.
Explanation of Provision
The bill provides that a rural cooperative plan that
includes a cash or deferred arrangement may permit
distributions to plan participants after the attainment of age
59\1/2\ or on account of hardship. In addition, the definition
of a rural cooperative is expanded to include certain public
utility districts and a national association of rural
cooperatives.
Effective Date
The provision generally is effective for distributions
after the date of enactment. The modifications to the
definition of a rural cooperative apply to plan years beginning
after December 31, 1996.
4. Treatment of governmental plans under section 415 (sec. 1444 of the
bill and secs. 415 and 457 of the Code)
Present Law
Present law imposes limits on contributions and benefits
under qualified plans based on the type of plan (sec. 415).
Certain special rules apply to State and local governmental
plans under which such plans may provide benefits greater than
those permitted by the limits on benefits applicable to plans
maintained by private employers.
In the case of defined benefit pension plans, the limit on
the annual retirement benefit is the lesser of (1) 100 percent
of compensation or (2) $120,000 (indexed for inflation). The
dollar limit is reduced in the case of early retirement or if
the employee has less than 10 years of plan participation.
Reasons for Change
The limits on contributions and benefits create unique
problems for plans maintained by public employers.
Explanation of Provision
The bill makes the following modifications to the limits on
contributions and benefits as applied to governmental plans:
(1) the 100 percent of compensation limitation on
defined benefit pension plan benefits would not apply;
and
(2) the early retirement reduction and the 10-year
phase-in of the defined benefit pension plan dollar
limit would not apply to certain disability and
survivor benefits.
The bill also permits State and local government employers
to maintain excess benefit plans without regard to the limits
on unfunded deferred compensation arrangements of State and
local government employers (sec. 457).
Effective Date
The provision is effective for years beginning after
December 31, 1994. No inference is intended with respect to
whether a governmental plan complies with the requirements of
section 415 with respect to years beginning before January 1,
1995. With respect to such years, the Secretary is directed to
enforce the requirements of section 415 consistent with the
provision.
5. Uniform retirement age (sec. 1445 of the bill and sec. 401(a)(5) of
the Code)
Present Law
A qualified plan generally must provide that payment of
benefits under the plan must begin no later than 60 days after
the end of the plan year in which the participant reaches age
65. Also, for purpose of the vesting and benefit accrual rules,
normal retirement age generally can be no later than age 65.
For purposes of applying the limits on contributions and
benefits (sec. 415), Social Security retirement age is
generally used as retirement age. The Social Security
retirement age as used for such purposes is presently age 65,
but is scheduled to gradually increase.
Reasons for Change
Many plans base benefits on social security retirement age
so that the benefits under the plan complement social security.
Under present law, plans that do so may fail applicable
nondiscrimination tests. It is believed that the social
security retirement age is an appropriate age for use under
plans maintained by private employers.
Explanation of Provision
The bill provides that for purposes of the general
nondiscrimination rules (sec. 401(a)(4)) the Social Security
retirement age (as defined in sec. 415) is a uniform retirement
age and that subsidized early retirement benefits and joint and
survivor annuities are not treated as not being available to
employees on the same terms merely because they are based on an
employee's Social Security retirement age (as defined in sec.
415).
Effective Date
The provision is effective for years beginning after
December 31, 1996.
6. Contributions on behalf of disabled employees (sec. 1446 of the bill
and sec. 415(c)(3) of the Code)
Present Law
Under present law, an employer may elect to continue
deductible contributions to a defined contribution plan on
behalf of an employee who is permanently and totally disabled.
For purposes of the limit on annual additions (sec. 415(c)),
the compensation of a disabled employee is deemed to be equal
to the annualized compensation of the employee prior to the
employee's becoming disabled. Contributions are not permitted
on behalf of disabled employees who were officers, owners, or
highly compensated before they became disabled.
Reasons for Change
It is appropriate to facilitate the provision of benefits
for disabled employees, if it is done on a nondiscriminatory
basis.
Explanation of Provision
The bill provides that the special rule for contributions
on behalf of disabled employees is applicable without an
employer election and to highly compensated employees if the
defined contribution plan provides for the continuation of
contributions on behalf of all participants who are permanently
and totally disabled.
Effective Date
The provision is effective for years beginning after
December 31, 1996.
7. Treatment of deferred compensation plans of State and local
governments and tax-exempt organizations (sec. 1447 of the bill
and sec. 457(e) of the Code)
Present Law
Under a section 457 plan, an employee who elects to defer
the receipt of current compensation is taxed on the amounts
deferred when such amounts are paid or made available. The
maximum annual deferral under such a plan is the lesser of (1)
$7,500 or (2) 33\1/3\ percent of compensation (net of the
deferral).
Amounts deferred under a section 457 plan may not be made
available to an employee before the earliest of (1) the
calendar year in which the participant attains age 70\1/2\, (2)
when the participant is separated from the service with the
employer, or (3) when the participant is faced with an
unforeseeable emergency.
Benefits under a section 457 plan are not treated as made
available if the participant may elect to receive a lump sum
payable after separation from service and within 60 days of the
election. This exception is available only if the total amount
payable to the participant under the plan does not exceed
$3,500 and no additional amounts may be deferred under the plan
with respect to the participant.
Reasons for Change
It is appropriate to index the dollar limits on deferrals
under section 457 plans to maintain the value of the deferral
and to provide two additional exceptions to the principle of
constructive receipt with respect to distributions from such
plans.
Explanation of Provision
The bill makes three changes to the rules governing section
457 plans.
The bill: (1) permits in-service distributions of accounts
that do not exceed $3,500 under certain circumstances; (2)
increases the number of elections that can be made with respect
to the time distributions must begin under the plan, and (3)
provides for indexing (in $500 increments) of the dollar limit
on deferrals.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1996.
8. Trust requirement for deferred compensation plans of State and local
governments (sec. 1448 of the bill and sec. 457 of the Code)
Present Law
Until deferrals under a section 457 plan are made available
to a plan participant, such amounts deferred, all property and
rights purchased with such amounts, and all income attributable
to such amounts, property, or rights must remain solely the
property and rights of the employer, subject only to the claims
of the employer's general creditors.
Reasons for Change
The Committee is concerned about the potential for
employees of certain State and local governments to lose
significant portions of their retirement savings because their
employer has chosen to provide benefits through an unfunded
deferred compensation plan rather than a qualified pension
plan. Therefore, the Committee finds it appropriate to require
that benefits under a section 457 plan of a State and local
government should be held in a trust (or custodial account or
annuity contract) to insulate the retirement benefits of
employees from the claims of the employer's creditors.
Explanation of Provision
Under the bill, all amounts deferred under a section 457
plan maintained by a State and local governmental employer have
to be held in trust (or custodial account or annuity contract)
for the exclusive benefit of employees. The trust (or custodial
account or annuity contract) is provided tax-exempt status.
Amounts will not be considered made available merely because
they are held in a trust, custodial account, or annuity
contract.
Effective Date
The provision generally is effective with respect to
amounts held on or after the date of enactment. In the case of
amounts deferred before the date of enactment, a trust will not
need to be established by reason of this provision until
January 1, 1999.
9. Correction of GATT interest and mortality rate provisions in the
Retirement Protection Act (sec. 1449 of the bill and sec. 767
of the General Agreement on Tariffs and Trade)
Present Law
The Retirement Protection Act of 1994, enacted as part of
the implementing legislation for the General Agreement on
Tariffs and Trade (``GATT''), modified the actuarial
assumptions that must be used in adjusting benefits and
limitations. In general, in adjusting a benefit that is payable
in a form other than a straight life annuity and in adjusting
the dollar limitation if benefits begin before age 62, the
interest rate to be used cannot be less than the greater of 5
percent or the rate specified in the plan. Under GATT, if the
benefit is payable in a form subject to the requirements of
section 417(e)(3), then the interest rate on 30-year Treasury
securities is substituted for 5 percent. Also under GATT, for
purposes of adjusting any limit or benefit, the mortality table
prescribed by the Secretary must be used.
This provision of GATT is generally effective as of the
first day of the first limitation year beginning in 1995.
GATT made similar changes to the interest rate and
mortality assumptions used to calculate the value of lump-sum
distributions for purposes of the rule permitting involuntary
dispositions of certain accrued benefits. In the case of a plan
adopted and in effect before December 8, 1995, those provisions
do not apply before the earlier of (1) the date a plan
amendment applying the new assumption is adopted or made
effective (whichever is later), or (2) the first day of the
first plan year beginning after December 31, 1999.
Reasons for Change
The Committee is aware that the GATT provisions enacted in
the 103rd Congress had the result of reducing the benefit
payments to certain pension plan beneficiaries. The Committee
believes that it is appropriate to ameliorate this result by
providing the same transition period for the modifications to
limits on contributions and benefits to that provided under
similar GATT provisions, and by providing that the interest
rate to be used to reduce the dollar limit on benefits under
section 415 in cases where the participant retires before age
62 should be the same regardless of the form of benefit.
Explanation of Provision
The bill conforms the effective date of the new interest
rate and mortality assumptions that must be used under section
415 to calculate the limits on benefits and contributions to
the effective date of the provision relating to the calculation
of lump-sum distributions. This rule applies only in the case
of plans that were adopted and in effect before the date of
enactment of GATT (December 8, 1994). To the extent plans have
already been amended to reflect the new assumptions, plan
sponsors are permitted within 1 year of the date of enactment
to amend the plan to reverse retroactively such amendment.
11
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\11\ The Committee intends that plan sponsors will have flexibility
in adopting the actuarial assumptions required under GATT. For example,
plan sponsors are permitted to apply the actuarial assumptions that
must be used for 415 purposes retroactively as provided under GATT.
Alternatively, plan sponsors can apply such actuarial assumptions
prospectively by either (1) providing a benefit equal to (i) the
accrued benefit as of the effective date of the adoption of the new
actuarial assumptions determined after applying section 415 using the
old actuarial assumptions, plus (ii) the benefit accrued after such
effective date determined after applying section 415 using the new
actuarial assumptions; or (2) providing a benefit equal to the greater
of (i) the accrued benefit as the effective date of the adoption of the
new actuarial assumptions determined after applying section 415 using
the old actuarial assumptions, or (ii) the entire accrued benefit
determined after applying section 415 using the new actuarial
assumptions.
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The bill also repeals the GATT provision which requires
that if the benefit is payable before age 62 in a form subject
to the requirements of section 417(e)(3) (e.g., lump sum), then
the interest rate to be used to reduce the dollar limit on
benefits under section 415 cannot be less than the greater of
the rate on 30-year Treasury securities or the rate specified
in the plan. Consequently, regardless of the form of benefit,
the interest rate to be used cannot be less than the greater of
5 percent or the rate specified in the plan.
Effective Date
The provision is effective as if included in GATT.
10. Multiple salary reduction agreements permitted under section 403(b)
(sec. 1450(a) of the bill and sec. 403(b) of the Code)
Present Law
Under Treasury regulations, a participant in a tax-
sheltered annuity plan (sec. 403(b)) is not permitted to enter
into more than one salary reduction agreement in any taxable
year. These regulations further provide that a salary reduction
agreement is effective only with respect to amounts ``earned''
after the agreement becomes effective, and that a salary
reduction agreement must be irrevocable with respect to amounts
earned while the agreement is in effect.
These restrictions do not apply to other elective deferral
arrangements such as a qualified cash or deferred arrangement
(sec. 401(k)). Under Treasury regulations, participants in a
qualified cash or deferred arrangement may enter into more than
one salary reduction agreement in a taxable year, such an
agreement is effective with respect to compensation currently
available to the participant after the agreement becomes
effective even though previously ``earned,'' and the agreement
may be revoked by the participant.
Reasons for Change
It is appropriate to conform the treatment of salary
reduction agreements under section 403(b) to the treatment of
qualified cash or deferred arrangements.
Explanation of Provision
The bill provides that for participants in a tax-sheltered
annuity plan, the frequency that a salary reduction agreement
may be entered into, the compensation to which such agreement
applies, and the ability to revoke such agreement shall be
determined under the rules applicable to qualified cash or
deferred arrangements.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1995.
11. Treatment of Indian tribal governments under section 403(b) (sec.
1450(b) of the bill and sec. 403(b) of the Code)
Present Law
Under present law, certain tax-exempt employers and certain
State and local government educational organizations are
permitted to maintain tax-sheltered annuity plans (sec.
403(b)). Indian tribal governments are treated as States for
this purpose, so certain educational organizations associated
with a tribal government are eligible to maintain tax-sheltered
annuity plans.
Reasons for Change
The Committee believes that there is some uncertainty under
present law about the ability of Indian tribal governments to
establish 403(b) plans for all tribal government employees.
Following enactment of the Indian Tribal Government Tax Status
Act of 1982, several insurance companies and financial advisors
marketed 403(b) plans to tribes representing that the plans
could be adopted on a tribal-wide basis to cover all employees.
As a result, many tribes adopted 403(b) plans for their
employees that are not in compliance with the law. Given this
uncertainty, the Committee believes it is appropriate to
requalify such plans.
Explanation of Provision
The bill provides that any 403(b) annuity contract
purchased in a plan year beginning before January 1, 1995 by an
Indian tribal government shall be treated as purchased by an
entity permitted to maintain a tax-sheltered annuity plan. The
bill also provides that such contracts may be rolled over into
a section 401(k) plan maintained by the Indian tribal
government.
Effective Date
The provision is effective on the date of enactment.
12. Application of elective deferral limit to section 403(b) contracts
(sec. 1450(c) of the bill and sec. 403(b) of the Code)
Present Law
A tax-sheltered annuity plan must provide that elective
deferrals made under the plan on behalf of an employee may not
exceed the annual limit on elective deferrals ($9,500 for
1996). Plans that do not comply with this requirement may lose
their tax-favored status.
Reasons for Change
The Committee does not believe that employees participating
in a tax-sheltered annuity plan should be negatively affected
if other employees violate the annual limit on elective
deferrals with respect to their individual tax-sheltered
annuity contracts (or custodial accounts).
Explanation of Provision
Under the bill, each tax-sheltered annuity contract, not
the tax-sheltered annuity plan, must provide that elective
deferrals made under the contract may not exceed the annual
limit on elective deferrals. The Committee intends that the
contract terms be given effect in order for this requirement to
be satisfied. Thus, for example, if the annuity contract issuer
takes no steps to ensure that deferrals under the contract do
not exceed the applicable limit, then the contract will not be
treated as satisfying section 403(b). The provision is intended
to make clear that the exclusion of elective deferrals from
gross income by employees who have not exceeded the annual
limit on elective deferrals will not be affected to the extent
other employees exceed the annual limit. However, if the
occurrence of an uncorrected elective deferral made by an
employee is attributable to reasonable error, the contract will
not fail to satisfy section 403(b), and only the portion of the
elective deferral in excess of the annual limit would be
includible in gross income.
Effective Date
The provision is effective for years beginning after
December 31, 1995, except that an annuity contract is not
required to meet any change in any requirement by reason of the
provision before the 90th day after the date of enactment.
13. Waiver of minimum waiting period for qualified plan distributions
(sec. 1451 of the bill and sec. 417(c) of the Code)
Present Law
Under present law, in the case of a qualified joint and
survivor annuity, a written explanation of the form of benefit
must generally be provided to participants no less than 30 days
and no more than 90 days before the annuity starting date. Even
if a participant has elected to waive the qualified joint and
survivor annuity and the spouse has consented to the
distribution, the distribution from the plan cannot be made
until 30 days after the written explanation was provided to the
participant.\12\
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\12\ On September 15, 1995, Treasury issued temporary regulations
(T.D. 8620) which provide that a plan may permit a participant to elect
(with any applicable spousal consent) a distribution with an annuity
starting date before 30 days have elapsed since the explanation was
provided, as long as the distribution commences more than seven days
after the explanation was provided. Consequently, even if the
participant (and spouse, if applicable) has elected to waive the
minimum waiting period for receiving a qualified plan distribution, the
distribution from the plan cannot be made until seven days have elapsed
since the explanation was provided to the participant.
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Reasons for Change
The Committee believes that the notice period applicable to
a QJSA should not prevent the payment of benefits if such
period is waived by the plan participant and, if applicable,
the participant's spouse.
Explanation of Provision
The bill provides that the minimum period between the date
the explanation of the qualified joint and survivor annuity is
provided and the annuity starting date does not apply if it is
waived by the participant and, if applicable, the participant's
spouse. For example, if the participant has not elected to
waive the qualified joint and survivor annuity, only the
participant needs to waive the minimum waiting period.
Effective Date
The provision is effective with respect to plan years
beginning after December 31, 1996.
14. Repeal of combined plan limit (sec. 1452 of the bill and sec.
415(e) of the Code)
Present Law
Combined plan limit
Present law provides limits on contributions and benefits
under qualified retirement plans based on the type of plan (
i.e., based on whether the plan is a defined contribution plan
or a defined benefit pension plan). An overall limit applies if
an individual is a participant in both a defined benefit
pension plan and a defined contribution plan (called the
combined plan limit).
Excess distribution tax
Present law imposes a 15-percent excise tax on excess
distributions from qualified retirement plans, tax-sheltered
annuities, and IRAs. Excess distributions are generally the
aggregate amount of retirement distributions from such plans
during any calendar year in excess of $150,000 (or $750,000 in
the case of a lump-sum distribution). An additional 15-percent
estate tax is also imposed on an individual's excess retirement
accumulation.
Reasons for Change
One of the most significant sources of complexity relating
to qualified pension plans is the calculation of the combined
plan limit under section 415(e). Many new employers do not
establish defined benefit pension plans, which provide
employees with the greatest retirement income security. One of
the reasons that defined benefit pension plans are not being
established is because of the complex rules governing these
plans and the significant administrative costs entailed in
maintaining them. Section 415(e) is just one of the deterrents
to the establishment and maintenance of qualified defined
benefit pension plans. Thus, the Committee does not believe
that the administrative costs associated with section 415(e)
and the complexity of the calculations required are justified.
Further, the Committee believes that section 415(e) may have
the effect of discouraging employers from providing adequate
retirement benefits to their employees.
The excise tax on excess distributions has a similar
purpose to the combined plan limit, although it applies to all
of an individual's retirement distributions, not just those
from a single employer. The Committee believes that both the
combined plan limit and the excise tax on excess distributions
should not apply at the same time.
Explanation of Provision
Combined plan limit
The bill repeals the combined plan limit.
Excess distribution tax
Until the repeal of the combined plan limit is effective,
the bill suspends the excise tax on excess distributions. The
additional estate tax on excess accumulations continues to
apply.
Effective Date
The provision repealing the combined plan limit is
effective with respect to limitation years beginning after
December 31, 1998. The provision relating to the excise tax on
excess distributions is effective with respect to distributions
received in 1996, 1997, and 1998.
15. Tax on prohibited transactions (sec. 1453 of the bill and sec. 4975
of the Code)
Present Law
Present law prohibits certain transactions (prohibited
transactions) between a qualified plan and a disqualified
person in order to prevent persons with a close relationship to
the qualified plan from using that relationship to the
detriment of plan participants and beneficiaries. A two-tier
excise tax is imposed on prohibited transactions. The initial
level tax is equal to 5 percent of the amount involved with
respect to the transaction. If the transaction is not corrected
within a certain period, a tax equal to 100 percent of the
amount involved may be imposed.
Reasons for Change
The Committee believes it is appropriate to increase the
initial level prohibited transaction tax to discourage
disqualified persons from engaging in such transactions.
Explanation of Provision
The bill increases the initial-level prohibited transaction
tax from 5 percent to 10 percent.
Effective Date
The provision is effective with respect to prohibited
transactions occurring after the date of enactment.
16. Treatment of leased employees (sec. 1454 of the bill and sec.
414(n) of the Code)
Present Law
An individual (a leased employee) who performs services for
another person (the recipient) may be required to be treated as
the recipient's employee for various employee benefit
provisions, if the services are performed pursuant to an
agreement between the recipient and any other person (the
leasing organization) who is otherwise treated as the
individual's employer (sec. 414(n)). The individual is to be
treated as the recipient's employee only if the individual has
performed services for the recipient on a substantially full-
time basis for a year, and the services are of a type
historically performed by employees in the recipient's business
field.
An individual who otherwise would be treated as a
recipient's leased employee will not be treated as such an
employee if the individual participates in a safe harbor plan
maintained by the leasing organization meeting certain
requirements. Each leased employee is to be treated as an
employee of the recipient, regardless of the existence of a
safe harbor plan, if more than 20 percent of an employer's
nonhighly compensated workforce are leased.
Reasons for Change
The leased employee rules are complex and have unexpected
and sometimes indefensible results, especially as interpreted
under regulations proposed by the Secretary. For example, under
the ``historically performed'' standard, the employees and
partners of a law firm may be the leased employees of a client
of the firm if they work a sufficient number of hours for the
client and if it is not unusual for employers in that business
field to have in-house counsel. While arguably meeting the
present-law leased employee definition, it is believed that
situations such as this are outside the intended scope of the
rules.
Explanation of Provision
Under the bill, the present-law ``historically performed''
test is replaced with a new test under which an individual is
not considered a leased employee unless the individual's
services are performed under primary direction or control by
the service recipient. As under present law, the determination
of whether someone is a leased employee is made after
determining whether the individual is a common-law employee of
the recipient. Thus, an individual who is not a common-law
employee of the service recipient could nevertheless be a
leased employee of the service recipient. Similarly, the fact
that a person is or is not found to perform services under
primary direction or control of the recipient for purposes of
the employee leasing rules is not determinative of whether the
person is or is not a common-law employee of the recipient.
Whether services are performed by an individual under
primary direction or control by the service recipient depends
on the facts and circumstances. In general, primary direction
and control means that the service recipient exercises the
majority of direction and control over the individual. Factors
that are relevant in determining whether primary direction or
control exists include whether the individual is required to
comply with instructions of the service recipient about when,
where, and how he or she is to perform the services, whether
the services must be performed by a particular person, whether
the individual is subject to the supervision of the service
recipient, and whether the individual must perform services in
the order or sequence set by the service recipient. Factors
that generally are not relevant in determining whether such
direction or control exists include whether the service
recipient has the right to hire or fire the individual and
whether the individual works for others.
For example, an individual who works under the direct
supervision of the service recipient would be considered to be
subject to primary direction or control of the service
recipient even if another company hired and trained the
individual, had the ultimate (but unexercised) legal right to
control the individual, paid his wages, withheld his employment
and income taxes, and had the exclusive right to fire him.
Thus, for example, temporary secretaries, receptionists, word
processing personnel and similar office personnel who are
subject to the day-to-day control of the employer in
essentially the same manner as a common law employee are
treated as leased employees if the period of service threshold
is reached.
On the other hand, an individual who is a common-law
employee of Company A who performs services for Company B on
the business premises of Company B under the supervision of
Company A would generally not be considered to be under primary
direction or control of Company B. The supervision by Company A
must be more than nominal, however, and not merely a mechanism
to avoid the literal language of the direction or control test.
An example of the situation in the preceding paragraph
might be a work crew that comes into a factory to install,
repair, maintain, or modify equipment or machinery at the
factory. The work crew includes a supervisor who is an employee
of the equipment (or equipment repair) company and who has the
authority to direct and control the crew, and who actually does
exercise such direction and control. In this situation, the
supervisor and his or her crew are required to comply with the
safety and environmental precautions of the manufacturer, and
the supervisor is in frequent communication with the employees
of the manufacturer. As another example, certain professionals
(e.g., attorneys, accountants, actuaries, doctors, computer
programmers, systems analysts, and engineers) who regularly
make use of their own judgement and discretion on matters of
importance in the performance of their services and are guided
by professional, legal, or industry standards, are not leased
employees even though the common law employer does not closely
supervise the professional on a continuing basis, and the
service recipient requires the services to be performed on site
and according to certain stages, techniques, and timetables. In
addition to the example above, outside professionals who
maintain their own businesses (e.g., attorneys, accountants,
actuaries, doctors, computer programmers, systems analysts, and
engineers) generally would not be considered to be subject to
such primary direction or control.
Under the direction or control test, clerical and similar
support staff (e.g., secretaries and nurses in a doctor's
office) generally would be considered to be subject to primary
direction or control of the service recipient and would be
leased employees provided the other requirements of section
414(n) are met.
In many cases, the ``historically performed'' test is
overly broad, and results in the unintended treatment of
individuals as leased employees. One of the principal purposes
for changing the leased employee rules is to relieve the
unnecessary hardship and uncertainty created for employers in
these circumstances. However, it is not intended that the
direction or control test enable employers to engage in abusive
practices. Thus, it is intended that the Secretary interpret
and apply the leased employee rules in a manner so as to
prevent abuses. This ability to prevent abuses under the
leasing rules is in addition to the present-law authority of
the Secretary under section 414(o). For example, one
potentially abusive situation exists where the benefit
arrangements of the service recipient overwhelmingly favor its
highly compensated employees, the employer has no or very few
nonhighly compensated common-law employees, yet the employer
makes substantial use of the services of nonhighly compensated
individuals who are not its common-law employees.
Effective Date
The provision is effective for years beginning after
December 31, 1996, except that the bill would not apply to
relationships that have been previously determined by an IRS
ruling not to involve leased employees. In applying the leased
employee rules to years beginning before the effective date, it
is intended that the Secretary use a reasonable interpretation
of the statute to apply the leasing rules to prevent abuse.
17. Uniform penalty provisions to apply to certain pension reporting
requirements (sec. 1455 of the bill and secs. 6652(i) and
6724(d) of the Code)
Present Law
Any person who fails to file an information report with the
IRS on or before the prescribed filing date is subject to
penalties for each failure. A different, flat-amount penalty
applies for each failure to provide information reports to the
IRS or statements to payees relating to pension payments.
Reasons for Change
Conforming the information-reporting penalties that apply
with respect to pension payments to the general information-
reporting penalty structure would simplify the overall penalty
structure through uniformity and provide more appropriate
information-reporting penalties with respect to pension
payments.
Explanation of Provision
The bill incorporates into the general penalty structure
the penalties for failure to provide information reports
relating to pension payments to the IRS and to recipients.
Effective Date
The provision is effective with respect to returns and
statements the due date for which is after December 31, 1996.
18. Retirement benefits of ministers not subject to tax on net earnings
from self-employment (sec. 1456 of the bill and sec. 1402(a) of
the Code)
Present Law
Under present law, certain benefits provided to ministers
after they retire are subject to self-employment tax.
Reasons for Change
The Committee believes that, like retirement benefits paid
from qualified plans sponsored by private employers, retirement
benefits paid from church plans to ministers should not be
subject to self-employment tax. The Committee believes this
treatment should also apply to the rental value of any
parsonage (including utilities) provided after retirement.
Explanation of Provision
The bill provides that retirement benefits received from a
church plan after a minister retires, and the rental value of a
parsonage (including utilities) furnished to a minister after
retirement, are not subject to self-employment taxes.
Effective Date
The provision is effective for years beginning before, on,
or after December 31, 1994.
19. Date for adoption of plan amendments (sec. 1457 of the bill)
Present Law
Plan amendments to reflect amendments to the law generally
must be made by the time prescribed by law for filing the
income tax return of the employer for the employer's taxable
year in which the change in law occurs.
Reasons for Change
Plan sponsors should have adequate time to amend plan
documents.
Explanation of Provision
The bill generally provides that any amendments to a plan
or annuity contract required by the pension simplification
bills would not be required to be made before the first plan
year beginning on or after January 1, 1997. The date for
amendments is extended to the first plan year beginning on or
after January 1, 1999, in the case of a governmental plan.
Effective Date
The provision is effective on the date of enactment.
E. Foreign Simplification Provision
1. Repeal of excess passive assets provision (sec. 1501 of the bill and
sec. 956A of the Code)
Present Law
Under the rules of subpart F (secs. 951-964), certain 10-
percent U.S. shareholders of a controlled foreign corporation
(CFC) are required to include in income currently for U.S. tax
purposes certain earnings of the CFC, whether or not such
earnings are actually distributed currently to the
shareholders. The 10-percent U.S. shareholders of a CFC are
subject to current U.S. tax on their shares of certain income
earned by the CFC (referred to as ``subpart F income''). The
10-percent U.S. shareholders are also subject to current U.S.
tax on their shares of the CFC's earnings to the extent such
earnings are invested by the CFC in certain U.S. property.
In addition to these current inclusion rules, the Omnibus
Budget Reconciliation Act of 1993 enacted section 956A, which
applies another current inclusion rule to U.S. shareholders of
a CFC. Section 956A requires the 10-percent U.S. shareholders
of a CFC to include in income currently their shares of the
CFC's earnings to the extent such earnings are invested by the
CFC in excess passive assets. A CFC generally is treated as
having excess passive assets if the average of the amounts of
its passive assets exceeds 25 percent of the average of the
amounts of its total assets; this calculation requires a
quarterly determination of the CFC's passive assets and total
assets.
Reasons for Change
With the enactment of section 956A, the 1993 Act added an
additional layer of complexity to the subpart F rules. In
addition to determining the current inclusions with respect to
a CFC's subpart F income and earnings invested in U.S.
property, the U.S. shareholders must now also determine the
current inclusion with respect to the CFC's earnings invested
in excess passive assets. Application of section 956A requires
determination and measurement of the CFC's passive assets and
total assets on a quarterly basis. The Committee understands
that compliance with section 956A imposes substantial
administrative burdens on both taxpayers and the IRS.
The Committee also understands that section 956A was
enacted in order to restrict the benefits of tax deferral for
CFCs that accumulate passive assets abroad. However, the
Committee further understands that the rules of section 956A
operate to provide incentives for CFCs to make investments,
enter into transactions, and engage in reorganizations for the
purpose of avoiding the application of such section. The
Committee has been informed that CFCs acquire foreign assets
that would not otherwise be attractive investments if such
acquisitions reduce the CFC's percentage of passive assets
below the threshold for application of section 956A. The
Committee has been further informed that some U.S. shareholders
of CFCs view section 956A as having the effect of an investment
tax credit for foreign investments by CFCs. The Committee is
concerned that section 956A provides taxpayers with incentives
to engage in costly, non-economic transactions. The Committee
is further concerned that section 956A provides incentives for
taxpayers to make investments outside the United States that
might otherwise be made in the United States. The Committee
believes that the administrative burdens of compliance coupled
with the costs associated with transactions undertaken to avoid
its application call into question the appropriateness of
section 956A.
Explanation of Provision
The bill repeals section 956A.
Effective Date
The provision applies to taxable years of foreign
corporations beginning after December 31, 1996, and taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
REVENUE OFFSETS
1. Phased-in repeal of Puerto Rico and possession tax credit (sec. 1601
of the bill and sec. 936 and new sec. 30A of the Code)
Present Law
Certain domestic corporations with business operations in
the U.S. possessions (including, for this purpose, Puerto Rico
and the U.S. Virgin Islands) may elect the Puerto Rico and
possession tax credit which generally eliminates the U.S. tax
on certain income related to their operations in the
possessions. In contrast to the foreign tax credit, the
possessions tax credit is a ``tax sparing'' credit. That is,
the credit is granted whether or not the electing corporation
pays income tax to the possession. Income exempt from U.S. tax
under this provision falls into two broad categories: (1)
possession business income, which is derived from the active
conduct of a trade or business within a U.S. possession or from
the sale or exchange of substantially all of the assets that
were used in such a trade or business; and (2) qualified
possession source investment income (``QPSII''), which is
attributable to the investment in the possession or in certain
Caribbean Basin countries of funds derived from the active
conduct of a possession business.
In order to qualify for the Puerto Rico and possession tax
credit for a taxable year, a domestic corporation must satisfy
two conditions. First, the corporation must derive at least 80
percent of its gross income for the three-year period
immediately preceding the close of the taxable year from
sources within a possession. Second, the corporation must
derive at least 75 percent of its gross income for that same
period from the active conduct of a possession business.
A domestic corporation that has elected the Puerto Rico and
possession tax credit and that satisfies these two conditions
for a taxable year generally is entitled to a credit based on
the U.S. income tax attributable to the sum of the taxpayer's
possession business income and its QPSII. However, the amount
of the credit attributable to possession business income is
subject to the limitations enacted by the Omnibus Budget
Reconciliation Act of 1993 (``1993 Act''). Under the economic
activity limit, the amount of the credit with respect to such
income cannot exceed the sum of a portion of the taxpayer's
wage and fringe benefit expenses and depreciation allowances
(plus, in certain cases, possession income taxes). In the
alternative, the taxpayer may elect to apply a limit equal to
the applicable percentage of the credit that would otherwise be
allowable with respect to possession business income; the
applicable percentage is phased down to 50 percent for 1996, 45
percent for 1997, and 40 percent for 1998 and thereafter. The
amount of the Puerto Rico and possession tax credit
attributable to QPSII is not subject to these limitations.
Reasons for Change
The Committee understands that the tax benefits provided by
the Puerto Rico and possession tax credit are enjoyed by only
the relatively small number of U.S. corporations that operate
in the possessions. Moreover, the Committee is concerned about
the tax cost of the benefits provided to these possession
corporations that is borne by all U.S. taxpayers. In light of
current budget constraints, the Committee believes that the
continuation of the tax exemption provided to corporations
pursuant to the Puerto Rico and possession tax credit is no
longer appropriate. However, the Committee believes that an
appropriate transition period should be provided for
corporations that have existing operations in the possessions.
Moreover, the Committee believes that the credit computed under
the economic activity limit for Puerto Rico should be moved to
a new section of the Code contained in a subpart that includes
other business-type credits; the credit computed under the
economic activity limit operates as a credit in the traditional
sense, measured by the level of employment and other economic
activity engaged in by the taxpayer in the possession.
Explanation of Provision
The bill generally repeals the Puerto Rico and possession
tax credit for taxable years beginning after December 31, 1995.
However, the bill provides grandfather rules under which a
corporation that is an existing credit claimant would be
eligible to claim credits for a transition period. A special
transition rule applies to the credit attributable to
operations in Guam, American Samoa, and the Commonwealth of the
Northern Mariana Islands.
For taxable years beginning after December 31, 1995, the
Puerto Rico and possession tax credit applies only to a
corporation that qualifies as an existing credit claimant (as
defined below). The determination of whether a corporation is
an existing credit claimant is made separately for each
possession. A corporation that is an existing credit claimant
with respect to a possession is entitled to the credit for
income from such possession for taxable years beginning after
December 31, 1995, subject to the limitations described below.
The credit, subject to such limitations, is computed separately
for each possession with respect to which the corporation is an
existing credit claimant.
The Puerto Rico and possession tax credit attributable to
QPSII is eliminated for taxable years beginning after December
31, 1995. For taxable years beginning after December 31, 1995,
the Puerto Rico and possession tax credit is available only
with respect to possession business income. The computation of
the Puerto Rico and possession tax credit attributable to
possession business income during the grandfather period
depends upon whether the corporation is using the economic
activity limit or the applicable percentage limit.
For corporations that are existing credit claimants with
respect to a possession and that use the economic activity
limit, the possession tax credit attributable to business
income from the possession (determined under the economic
activity limit) continues to be determined as under present law
for taxable years beginning after December 31, 1995 and before
January 1, 2002. For taxable years beginning after December 31,
2001 and before January 1, 2006, the corporation's possession
business income that is eligible for the credit is subject to a
cap computed as described below. For taxable years beginning in
2006 and thereafter, the credit attributable to possession
business income (determined under the economic activity limit)
is eliminated.
The bill adds to the Code a new section which provides a
credit determined under the economic activity limit for
business income from Puerto Rico. Such credit is computed under
the rules described above with respect to the possession tax
credit determined under the economic activity limit. Such
section applies for taxable years beginning after December 31,
1995 and before January 1, 2006.
For corporations that are existing credit claimants with
respect to a possession and that elected to use the applicable
percentage limit and not to use the economic activity limit,
the Puerto Rico and possession tax credit attributable to
business income from the possession continues to be determined
as under present law for taxable years beginning after December
31, 1995 and before January 1, 1998. For taxable years
beginning after December 31, 1997 and before January 1, 2006,
the corporation's possession business income that is eligible
for the credit is subject to a cap computed as described below.
For taxable years beginning in 2006 and thereafter, the credit
attributable to possession business income (determined under
the applicable percentage limit) is eliminated.
A corporation that had elected to use the applicable
percentage limit is permitted to revoke that election under
present law. Under the bill, such a revocation is required to
be made not later than with respect to the first taxable year
beginning after December 31, 1996; such revocation, if made,
applies to such taxable year and to all subsequent taxable
years. Accordingly, a corporation that had an election in
effect to use the applicable percentage limit could revoke such
election effective for its taxable year beginning in 1997 and
thereafter; such corporation would continue to use the
applicable percentage limit for its taxable year beginning in
1996 and would use the economic activity limit for its taxable
year beginning in 1997 and thereafter.
The cap on a corporation's possession business income that
is eligible for the Puerto Rico and possession tax credit is
computed based on the corporation's possession business income
for the base period years (``average adjusted base period
possession business income''). Average adjusted base period
possession business income is the average of the adjusted
possession business income for each of the corporation's base
period years. For the purpose of this computation, the
corporation's possession business income for a base period year
is adjusted by an inflation factor that reflects inflation from
such year to 1995. In addition, as a proxy for real growth in
income throughout the base period, the inflation factor is
increased by 5 percentage points compounded for each year from
such year to the corporation's first taxable year beginning on
or after October 14, 1995.
The corporation's base period years generally are three of
the corporation's five most recent years ending before October
14, 1995, determined by disregarding the taxable years in which
the adjusted possession business incomes were highest and
lowest. For purposes of this computation, only years in which
the corporation had significant possession business income are
taken into account. A corporation is considered to have
significant possession business income for a taxable year if
such income exceeds two percent of the corporation's possession
business income for the each of the six taxable years ending
with the first taxable year ending on or after October 14,
1995. If the corporation has significant possession business
income for only four of the five most recent taxable years
ending before October 14, 1995, the base period years are
determined by disregarding the year in which the corporation's
possession business income was lowest. If the corporation has
significant possession business income for three years or fewer
of such five years, then the base period years are all such
years. If there is no year of such five taxable years in which
the corporation has significant possession business income,
then the corporation is permitted to use as its base period its
first taxable year ending on or after October 14, 1995; for
this purpose, the amount of possession business income taken
into account is the annualized amount of such income for the
portion of the year ended September 30, 1995.
As one alternative, the corporation may elect to use its
taxable year ending in 1992 as its base period (with the
adjusted possession business income for such year constituting
its cap). As another alternative, the corporation may elect to
use as its cap the annualized amount of its possession business
income for the first ten months of calendar year 1995,
calculated by excluding any extraordinary items (as determined
under generally accepted accounting principles) for such
period. For this purpose, it is intended that transactions with
a related party that are not in the ordinary course of business
will be considered to be extraordinary items.
If a corporation's possession business income in a year for
which the cap is applicable exceeds the cap, then the
corporation's possession business income for purposes of
computing its Puerto Rico and possession tax credit for the
year is an amount equal to the cap. The corporation's credit
continues to be subject to either the economic activity limit
or the applicable percentage limit, with such limit applied to
the corporation's possession business income as reduced to
reflect the application of the cap.
A corporation is an existing credit claimant with respect
to a possession if (1) the corporation is engaged in the active
conduct of a trade or business within the possession on October
13, 1995, and (2) the corporation has elected the benefits of
the Puerto Rico and possession tax credit pursuant to an
election which is in effect for its taxable year that includes
October 13, 1995. A corporation that adds a substantial new
line of business after October 13, 1995, ceases to be an
existing credit claimant as of the beginning of the taxable
year during which such new line of business is added.
For purposes of these rules, a corporation is treated as
engaged in the active conduct of a trade or business within a
possession on October 13, 1995, if such corporation is engaged
in the active conduct of such trade or business before January
1, 1996, and such corporation has in effect on October 13,
1995, a binding contract for the acquisition of assets to be
used in, or the sale of property to be produced in, such trade
or business. For example, if a corporation has in effect on
October 13, 1995, binding contracts for the lease of a facility
and the purchase of machinery to be used in a manufacturing
business in a possession and if the corporation begins actively
conducting that manufacturing business in the possession before
January 1, 1996, that corporation would be an existing credit
claimant. A change in the ownership of a corporation will not
affect its status as an existing credit claimant.
In determining whether a corporation has added a
substantial new line of business, the Committee intends that
principles similar to those reflected in Treas. Reg. section
1.7704-2(d) (relating to the transition rules for existing
publicly traded partnerships) apply. For example, a corporation
that modifies its current production methods, expands existing
facilities, or adds new facilities to support the production of
its current product lines and products within the same four-
digit Industry Number Standard Industrial Classification Code
(Industry SIC Code) will not be considered to have added a
substantial new line of business. In this regard, the Committee
intends that the fact that a business which is added is
assigned a different four-digit Industry SIC Code than is
assigned to an existing business of the corporation will not
automatically cause the corporation to be considered to have
added a new line of business. For example, a pharmaceutical
corporation that begins manufacturing a new drug will not be
considered to have added a new line of business. Moreover, a
pharmaceutical corporation that begins to manufacture a
complete product from the bulk active chemical through the
finished dosage form, a process that may be assigned two
separate four-digit Industry SIC Codes, will not be considered
to have added a new line of business even though it was
previously engaged in activities that involved only a portion
of the entire manufacturing process from bulk chemicals to
finished dosages. The Committee further intends that, in the
case of a merger of affiliated possession corporations that are
existing credit claimants, the corporation that survives the
merger will not be considered to have added a substantial new
line of business by reason of its operation of the existing
business of the affiliate that was merged into it.
A special transition rule applies to the Puerto Rico and
possession tax credit with respect to operations in Guam,
American Samoa, and the Commonwealth of the Northern Mariana
Islands. For any taxable year beginning after December 31,
1995, and before January 1, 2006, a corporation that is an
existing credit claimant with respect to one of these
possessions for such year continues to determine its credit
with respect to operations in such possession as under present
law. For taxable years beginning in 2006 and thereafter, the
Puerto Rico and possession tax credit with respect to
operations in Guam, American Samoa, and the Commonwealth of the
Northern Mariana Islands is eliminated.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1995.
2. Repeal 50-percent interest income exclusion for financial
institution loans to ESOPs (sec. 1602 of the bill and sec. 133
of the Code)
Present Law
A bank, insurance company, regulated investment company, or
a corporation actively engaged in the business of lending money
may generally exclude from gross income 50 percent of interest
received on an ESOP loan (sec. 133). The 50-percent interest
exclusion only applies if: (1) immediately after the
acquisition of securities with the loan proceeds, the ESOP owns
more than 50 percent of the outstanding stock or more than 50
percent of the total value of all outstanding stock of the
corporation; (2) the ESOP loan term will not exceed 15 years;
and (3) the ESOP provides for full pass-through voting to
participants on all allocated shares acquired or transferred in
connection with the loan.
Reasons for Change
The Committee believes that the 50-percent exclusion for
interest with respect to ESOP loans provides an unnecessary tax
benefit to financial institutions for loans they would make
without regard to the interest exclusion. The Committee finds
no evidence that employers that maintain ESOPs have less access
to borrowing than other borrowers or that there is a need to
provide an incentive to lenders to make money available to
ESOPs.
Explanation of Provision
The bill repeals the 50-percent interest exclusion with
respect to ESOP loans.
Effective Date
The provision is effective with respect to loans made after
October 13, 1995, other than loans made pursuant to a written
binding contract in effect on October 13, 1995, and at all
times thereafter before such loan is made. The repeal of the
50-percent interest exclusion does not apply to the refinancing
of an ESOP loan originally made on or before October 13, 1995,
or pursuant to a binding contract in effect on such date,
provided: (1) such refinancing loan otherwise meets the
requirements of section 133 in effect on or before October 13,
1995; (2) the outstanding principal amount of the loan is not
increased; and (3) the term of the refinancing loan does not
extend beyond the term of the original ESOP loan.
3. Apply look-through rule for purposes of characterizing certain
subpart F insurance income as unrelated business taxable income
(sec. 1603 of the bill and sec. 512 of the Code)
Present Law
An organization that is exempt from tax by reason of Code
section 501(a) (e.g., a charity, business league, or qualified
pension trust) is nonetheless subject to tax on its unrelated
business taxable income (UBTI) (sec. 511). Unrelated business
taxable income generally excludes dividend income (sec.
512(b)(1)).
Special rules apply to a tax-exempt organization described
in section 501(c)(3) or (c)(4) (i.e., a charity or social
welfare organization) that is engaged in commercial-type
insurance activities. Such activities are treated as an
unrelated trade or business and the tax-exempt organization is
subject to tax on the income from such insurance activities
(including investment income that might otherwise be excluded
from the definition of unrelated business taxable income) under
subchapter L (sec. 501(m)(2)). 13 Accordingly, a tax-
exempt organization described in section 501(c)(3) or (c)(4)
generally is subject to tax on its income from commercial-type
insurance activities in the same manner as a taxable insurance
company.
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\13\ If the commercial-type insurance activities constitute a
substantial part of the organization's activities, the organization
will not be tax-exempt under section 501(c)(3) or (c)(4) (sec.
501(m)(1)).
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A tax-exempt organization that conducts insurance
activities through a foreign corporation is not subject to U.S.
tax with respect to such activities. Under the subpart F rules,
the United States shareholders (as defined in sec. 951(b)) of a
controlled foreign corporation (``CFC'') are required to
include in income currently their shares of certain income of
the CFC, whether or not such income is actually distributed to
the shareholders. This current inclusion rule applies to
certain insurance income of the CFC (sec. 953). However, income
inclusions under subpart F have been characterized as dividends
for unrelated business income tax purposes. 14
Accordingly, insurance income earned by the CFC that is
includible in income currently under subpart F by the taxable
United States shareholders of the CFC is excluded from
unrelated business taxable income in the case of a shareholder
that is a tax-exempt organization.
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\14\ The Internal Revenue Service has concluded in private letter
rulings, which are not to be used or cited as precedent, that subpart F
inclusions are treated as dividends received by the United States
shareholder (a tax-exempt entity) for purposes of computing the
shareholder's UBTI (see LTRs 9407007 (November 12, 1993), 9027051
(April 13, 1990), 9024086 (March 22, 1990), 9024026 (March 15, 1990),
8922047 (March 6, 1989), 8836037 (June 14, 1988), 8819034 (February 10,
1988) ). However, the IRS issued one private ruling in which it
concluded that subpart F inclusions are treated as if the underlying
income were realized directly by the United States shareholder (a tax-
exempt entity) for purposes of computing the shareholder's UBTI (see
LTR 9043039 (July 30, 1990)). This ruling gave no explanation for the
IRS's departure from the position in its prior rulings, and the IRS
reiterated in a subsequent ruling the position that subpart F
inclusions are characterized as dividends for purposes of computing
UBTI. Moreover, the application of the look-through rule in the ruling
in question did not affect the ultimate result in the ruling because
the income to which the subpart F inclusion was attributable was of a
type that was excludible from UBTI. The Committee believes that LTR
9043039 (July 30, 1990) is incorrect in its application of a look-
through rule in characterizing income inclusions under subpart F for
unrelated business income tax purposes.
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Reasons for Change
The unrelated business income tax rules are designed to
prevent unfair competition by business operations that would
otherwise be tax-favored due to their ownership by tax-exempt
organizations. The rules applicable to certain tax-exempt
organizations that conduct insurance activities directly are
designed to ensure that such operations are taxed in the same
manner as they would be taxed if conducted by a taxable entity.
However, current law does not prevent unfair competition where
operations involving the insurance of third-party risks are not
conducted directly by such a tax-exempt organization itself,
but are conducted by the organization through a controlled
foreign corporation that is subject to little tax relative to
competing U.S. businesses.
Explanation of Provision
The bill applies a look-through rule in characterizing
certain subpart F insurance income for unrelated business
income tax purposes. Under the bill, the look-through rule
applies to amounts that constitute insurance income currently
includible in gross income under the subpart F rules and that
are not attributable to the insurance of risks of (1) the tax-
exempt organization itself, (2) certain tax-exempt affiliates
of such organization, or (3) an officer or director of, or an
individual who (directly or indirectly) performs services for,
the tax-exempt organization (or certain tax-exempt affiliates)
provided that the insurance covers primarily risks associated
with the individual's performance of services in connection
with the tax-exempt organization (or tax-exempt affiliates). An
individual who performs services for a tax-exempt organization
through a partnership, for example, is indirectly performing
services for such organization. The Committee intends that the
determination of whether insurance covers primarily risks
associated with the performance of services in connection with
the tax-exempt organization or its tax-exempt affiliates will
be based on all the facts and circumstances. The Committee
further intends that a safe harbor be provided under which this
``primarily'' requirement will be considered to be satisfied
where at least 80 percent of the services covered by the
insurance are performed by the insured individual in connection
with the tax-exempt organization or its tax-exempt affiliates.
For purposes of determining whether the insurance covers risks
associated with the individual's performance of services in
connection with the tax-exempt organization, the Committee
intends that the individual will not be considered to have
performed services in connection with a tax-exempt organization
solely by reason of the fact that the individual performs
services at a facility leased to the individual by the tax-
exempt organization.
For purposes of this bill, a tax-exempt organization is an
affiliate of another tax-exempt organization if (1) the two
organizations have significant common purposes and substantial
common membership or (2) the two organizations have directly or
indirectly substantial common direction or control.
The specified exceptions from the look-through rule apply
on a shareholder by shareholder basis. Accordingly, if the
subpart F insurance income allocable to a tax-exempt
organization includes both income attributable to the insurance
of risks of the organization itself and income attributable to
the insurance of risks of another shareholder that is not a
tax-exempt affiliate of such organization, the look-through
rule applies only to that portion of the income that represents
income attributable to the insurance of risks of such other
shareholder (and does not apply to the portion of the income
that represents income attributable to the insurance of risks
of the organization itself). In this regard, the Committee
intends that if the CFC serves as a vehicle for the separate
funding by each shareholder of its risks or liabilities for
claims, without any pooling of a shareholder's risks or
liabilities for claims with those of another shareholder either
directly or through reinsurance, allocations that fairly
reflect such arrangement will be respected for purposes of
applying the look-through rule.
Effective Date
The provision applies to amounts includible in gross income
in taxable years beginning after December 31, 1995.
4. Depreciation under the income forecast method (sec. 1604 of the bill
and sec. 167 of the Code)
Present Law
In general
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through allowances for depreciation or amortization.
Depreciation allowances for tangible property generally are
determined under the modified Accelerated Cost Recovery System
(``MACRS'') of section 168, which provides that depreciation is
computed by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of
various types of depreciable property. Intangible property
generally is amortized under section 197, which provides a 15-
year recovery period and the straight-line method to the cost
of applicable property.
Treatment of film, video tape, and similar property
MACRS does not apply to certain property, including any
motion picture film, video tape, or sound recording or to other
any property if the taxpayer elects to exclude such property
from MACRS and the taxpayer applies a unit-of-production method
or other method of depreciation not expressed in a term of
years. Section 197 does not apply to certain intangible
property, including property produced by the taxpayer or any
interest in a film, sound recording, video tape, book or
similar property not acquired in transaction (or a series of
related transactions) involving the acquisition of assets
constituting a trade or business or substantial portion
thereof. Thus, the recovery of the cost of a film, video tape,
or similar property that is produced by the taxpayer or is
acquired on a ``stand-alone'' basis by the taxpayer may not be
determined under either the MACRS depreciation provisions or
under the section 197 amortization provisions. The cost of such
property may be determined under section 167, which allows a
depreciation deduction for the reasonable allowance for the
exhaustion, wear and tear, or obsolescence of the property.
The ``income forecast'' method is an allowable method for
calculating depreciation under section 167 for certain
property. Under the income forecast method, the depreciation
deduction for a taxable year for a property is determined by
multiplying the cost of the property 15 (less estimated
salvage value) by a fraction, the numerator of which is the
income generated by the property during the year and the
denominator of which is the total forecasted or estimated
income to be derived from the property during its useful life.
The income forecast method has been held to be applicable for
computing depreciation deductions for motion picture films,
television films and taped shows, books, patents, master sound
recordings and video games. 16 The total forecasted or
estimated income to be derived from a property is to be based
on the conditions known to exist at the end of the period for
which depreciation is claimed. This estimate can be revised
upward or downward at the end of a subsequent taxable period
based on additional information that becomes available after
the last prior estimate. These revisions, however, do not
affect the amount of depreciation claimed in a prior taxable
year.
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\15\ In Transamerica Corp. v. U.S., 999 F.2d 1362, (9th Cir. 1993),
the Ninth Circuit overturned the District Court and held that, for
purposes of applying the income forecast method to a film, ``cost of a
film'' includes ``participation'' and ``residual'' payments (i.e.,
payments to producers, writers, directors, actors, guilds, and others
based on a percentage of the profits from the film) even though these
payments were contingent on the occurrence of future events. It is
unclear to what extent, if any, the Transamerica decision applies to
amounts incurred after the enactment of the economic performance rules
of Code section 461(h), as contained in the Deficit Reduction Act of
1984.
\16\ See, e.g., Rev. Rul. 60-358, 1960-2 C.B. 68; Rev. Rul. 64-273,
1964-2 C.B. 62; Rev. Rul. 79-285, 1979-2 C.B. 91; and Rev. Rul. 89-62,
1989-1 C.B. 78. Conversely, the courts have held that certain tangible
personal property was not of a character to which the income forecast
method was applicable. See, e.g., ABC Rentals of San Antonio v. Comm.,
68 TCM 1362 (1994) (consumer durable property subject to short-term,
``rent-to-own'' leases not eligible) and Carland, Inc. v. Comm,, 90
T.C. 505 (1988), aff'd. on this issue, 909 F.2d 1101 (8th Cir. 1990)
(railroad rolling stock subject to a lease not eligible).
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In the case of a film, income to be taken into account
under the income forecast method means income from the film
less the expense of distributing the film, including estimated
income from foreign distribution or other exploitation of the
film. 17 In the case of a motion picture released for
theatrical exhibition, income does not include estimated income
from future television exhibition of the film (unless an
arrangement for domestic television exhibition has been entered
into before the film has been depreciated to its reasonable
salvage value). In the case of a series or a motion picture
produced for television exhibition, income does not include
estimated income from domestic syndication of the series or the
film (unless an arrangement for syndication has been entered
into before the series or film has been depreciated to its
reasonable salvage value). 18 The Internal Revenue Service
also has ruled that income does not include net merchandising
revenue received from the exploitation of film characters.
19
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\17\ Rev. Rul. 60-358, 1960-2 C.B. 68.
\18\ Rev. Proc. 71-29, 1971-2 C.B. 568.
\19\ Private letter ruling 7918012, January 24, 1979. Private
letter rulings do not have precedential authority and may not be relied
upon by any taxpayer other than the taxpayer receiving the ruling but
are some indication of IRS administrative practice.
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Reasons for Change
The Committee believes that, in theory, the income forecast
method is an appropriate method for matching the capitalized
cost of certain property with the income produced by such
property. However, the Committee believes that the application
of the income forecast method under present law does not meet
the theoretical objective of the method. In addition, the
Committee recognizes that the reliance of the operation of the
income forecast method upon estimated income may result in a
mismatch between income and depreciation deductions when future
income is over- or under-estimated. The Committee bill attempts
to address these issues.
Explanation of Provision
The bill makes several amendments to the income forecast
method of determining depreciation deductions.
Determination of estimated income
First, the bill provides that income to be taken into
account under the income forecast method includes all estimated
income generated by the property. In applying this rule, a
taxpayer generally need not take into account income expected
to be generated after the close of the tenth taxable year after
the year the property was placed in service. In the case of a
film, television show, or similar property, such income
includes, but is not necessarily limited to, income from
foreign and domestic theatrical, television, and other releases
and syndications; and video tape releases, sales, rentals, and
syndications.
Pursuant to a special rule, in the case of television and
motion picture films, the income from the property shall
include income from the financial exploitation of characters,
designs, scripts, scores, and other incidental income
associated with such films, but only to the extent the income
is earned in connection with the ultimate use of such items by,
or the ultimate sale of merchandise to, persons who are not
related to the taxpayer (within the meaning of sec. 267(b)). As
an example of this special rule, assume a taxpayer produces a
motion picture the subject of which is the adventures of a
newly-created fictional character. If the taxpayer produces
dolls or T-shirts using the character's image, income from the
sales of these products by the taxpayer to consumers would be
taken into account in determining depreciation for the motion
picture under the income forecast method. Similarly, if the
taxpayer enters into any licensing or similar agreement with an
unrelated party with respect to the use of the image, such
licensing income would be taken into account in determining
depreciation for the motion picture. However, if the taxpayer
uses the character's image to promote a ride at an amusement
park that is wholly-owned by the taxpayer, no portion of the
admission fees for the amusement park are to be taken into
account under the income forecast method with respect to the
motion picture.
In addition, pursuant to another special rule, if a
taxpayer produces a television series and initially does not
anticipate syndicating the episodes from the series, the
forecasted income for the episodes of the first three years of
the series need not take into account any future syndication
fees (unless the taxpayer enters into an arrangement to
syndicate such episodes during such period).
The 10th-taxable-year rule, the financial exploitation
rule, and the syndication rule apply for purposes of the look-
back method described below.
Determination of income forecast property costs
The cost of property subject to depreciation only includes
amounts that satisfy the economic performance standard of
section 461(h). 20 For this purpose, if the taxpayer
incurs a noncontingent liability to acquire property subject to
the income forecast method from another person, economic
performance will be deemed to occur with respect to such
noncontingent liability when the property is provided to the
taxpayer. In addition, it is expected that the recurring item
exception of section 461(h)(3) will apply in appropriate cases.
Any costs that are taken into account after the property is
placed in service are treated as a separate piece of property
to the extent (1) such amounts are significant and are expected
to give rise to a significant increase in the income from the
property that was not included in the estimated income from the
property, or (2) such costs are incurred more than 10 years
after the property was placed in service. To the extent costs
are incurred more than 10 years after the property was placed
in service and give rise to a separate piece of property for
which no income is generated, such costs may be written off and
deducted they are incurred. For example, assume a taxpayer
places property subject to the income forecast method in
service during a taxable year and all income from the property
is generated in the following four-year period. If the taxpayer
incurs additional costs with respect to that property more than
10 years later (e.g., a payment pursuant to a deferred
contingent compensation arrangement to a person that produced
the property), such costs may be deducted in the year incurred
provided no more income is generated with respect to such costs
or the original property.
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\20\ No inference is intended as to the proper application of
section 461(h) to the income forecast method under present law.
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Any costs that are not recovered by the end of the tenth
taxable year after the property was placed in service may be
taken into account as depreciation in such year.
Look-back method
Finally, taxpayers that claim depreciation deductions under
the income forecast method are required to pay (or would
receive) interest based on the recalculation of depreciation
under a ``look-back'' method. 21 The ``look-back'' method
is applied in any ``recomputation year'' by (1) comparing
depreciation deductions that had been claimed in prior periods
to depreciation deductions that would have been claimed had the
taxpayer used actual, rather than estimated, total income from
the property; (2) determining the hypothetical overpayment or
underpayment of tax based on this recalculated depreciation;
and (3) applying the overpayment rate of section 6621 of the
Code.
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\21\ The ``look-back'' method of the provision resembles the look-
back method applicable to long-term contracts accounted for under the
percentage-of-completion method of present-law sec. 460.
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Except as provided in Treasury regulations, a
``recomputation year'' is the third and tenth taxable year
after the taxable year the property was placed in service,
unless the actual income from the property for each taxable
year ending with or before the close of such years was within
10 percent of the estimated income from the property for such
years. The Secretary of the Treasury has the authority to allow
a taxpayer to delay the initial application of the look-back
method where the taxpayer may be expected to have significant
income from the property after the third taxable year after the
taxable year the property was placed in service (e.g., the
Treasury Secretary may exercise such authority where the
depreciable life of the property is expected to be longer than
three years).
In applying the look-back method, any cost that is taken
into account after the property was placed in service may be
taken into account by discounting (using the Federal mid-term
rate determined under sec. 1274(d) as of the time the costs
were taken into account) such cost to its value as of the date
the property was placed in service. Property with an adjusted
basis of $100,000 or less when the property was placed in
service is not subject to the look-back method. The provision
provides a simplified look-back method for pass-through
entities.
Effective Date
The provision is effective for property placed in service
after September 13, 1995, unless placed in service pursuant to
a binding written contract in effect before such date and all
times thereafter.
5. Modify exclusion of damages received on account of personal injury
or sickness (sec. 1605 of the bill and sec. 104(a)(2) of the
Code)
Present Law
Under present law, gross income does not include any
damages received (whether by suit or agreement and whether as
lump sums or as periodic payments) on account of personal
injury or sickness (sec. 104(a)(2)).
The exclusion from gross income of damages received on
account of personal injury or sickness specifically does not
apply to punitive damages received in connection with a case
not involving physical injury or sickness. Courts presently
differ as to whether the exclusion applies to punitive damages
received in connection with a case involving a physical injury
or physical sickness. 22 Certain States provide that, in
the case of claims under a wrongful death statute, only
punitive damages may be awarded.
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\22\ The Supreme Court recently agreed to decide whether punitive
damages awarded in a physical injury lawsuit are excludable from gross
income. O'gilvie v. U.S., 66 F.3d 1550 (10th Cir. 1995), cert. granted,
64 U.S.L.W. 3639 (U.S. March 25, 1996)(No. 95-966). Also, the Tax Court
recently held that if punitive damages are not of a compensatory
nature, they are not excludable from income, regardless of whether the
underlying claim involved a physical injury or physical sickness.
Bagley v. Commissioner, 105 T.C. No. 27 (1995).
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Courts have interpreted the exclusion from gross income of
damages received on account of personal injury or sickness
broadly in some cases to cover awards for personal injury that
do not relate to a physical injury or sickness. For example,
some courts have held that the exclusion applies to damages in
cases involving certain forms of employment discrimination and
injury to reputation where there is no physical injury or
sickness. The damages received in these cases generally consist
of back pay and other awards intended to compensate the
claimant for lost wages or lost profits. The Supreme Court
recently held that damages received based on a claim under the
Age Discrimination in Employment Act could not be excluded from
income. 23 In light of the Supreme Court decision, the
Internal Revenue Service has suspended existing guidance on the
tax treatment of damages received on account of other forms of
employment discrimination.
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\23\ Schleier v. Commissioner, 115 S. Ct. 2159 (1995).
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Reasons for Change
Punitive damages are intended to punish the wrongdoer and
do not compensate the claimant for lost wages or pain and
suffering. Thus, they are a windfall to the taxpayer and
appropriately should be included in taxable income. Further,
including all punitive damages in taxable income provides a
bright-line standard which avoids prospective litigation on the
tax treatment of punitive damages received in connection with a
case involving a physical injury or physical sickness.
Damages received on a claim not involving a physical injury
or physical sickness are generally to compensate the claimant
for lost profits or lost wages that would otherwise be included
in taxable income. The confusion as to the tax treatment of
damages received in cases not involving physical injury or
physical sickness has led to substantial litigation, including
two Supreme Court cases within the last four years. The
taxation of damages received in cases not involving a physical
injury or physical sickness should not depend on the type of
claim made.
Explanation of Provisions
Include in income all punitive damages
The bill provides that the exclusion from gross income does
not apply to any punitive damages received on account of
personal injury or sickness whether or not related to a
physical injury or physical sickness. Under the bill, present
law continues to apply to punitive damages received in a
wrongful death action if the applicable State law (as in effect
on September 13, 1995 without regard to subsequent
modification) provides, or has been construed to provide by a
court decision issued on or before such date, that only
punitive damages may be awarded in a wrongful death action. The
Committee intends no inference as to the application of the
exclusion to punitive damages prior to the effective date of
the bill in connection with a case involving a physical injury
or physical sickness.
Include in income damage recoveries for nonphysical injuries
The bill provides that the exclusion from gross income only
applies to damages received on account of a personal physical
injury or physical sickness. If an action has its origin in a
physical injury or physical sickness, then all damages (other
than punitive damages) that flow therefrom are treated as
payments received on account of physical injury or physical
sickness whether or not the recipient of the damages is the
injured party. For example, damages (other than punitive
damages) received by an individual on account of a claim for
loss of consortium due to the physical injury or physical
sickness of such individual's spouse are excludable from gross
income. In addition, damages (other than punitive damages)
received on account of a claim of wrongful death continue to be
excludable from taxable income as under present law.
The bill also specifically provides that emotional distress
is not considered a physical injury or physical sickness.
24 Thus, the exclusion from gross income does not apply to
any damages received (other than for medical expenses as
discussed below) based on a claim of employment discrimination
or injury to reputation accompanied by a claim of emotional
distress. Because all damages received on account of physical
injury or physical sickness are excludable from gross income,
the exclusion from gross income applies to any damages received
based on a claim of emotional distress that is attributable to
a physical injury or physical sickness. In addition, the
exclusion from gross income specifically applies to the amount
of damages received that is not in excess of the amount paid
for medical care attributable to emotional distress.
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\24\ The Committee intends that the term emotional distress
includes physical symptoms (e.g., insomnia, headaches, stomach
disorders) which may result from such emotional distress.
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The Committee intends no inference as to the application of
the exclusion to damages prior to the effective date of the
bill in connection with a case not involving a physical injury
or physical sickness.
Effective Date
The provisions generally are effective with respect to
amounts received after June 30, 1996. The provisions do not
apply to amounts received under a written binding agreement,
court decree, or mediation award in effect on (or issued on or
before) September 13, 1995.
6. Repeal advance refunds of diesel fuel tax for purchasers of diesel-
powered automobiles, vans, and light trucks (sec. 1606 of the
bill and sec. 6427(g) of the Code)
Present Law
Excise taxes are imposed on gasoline (14 cents per gallon)
and diesel fuel (20 cents per gallon) to fund the Federal
Highway Trust Fund. Before 1985, the gasoline and diesel fuel
tax rates were the same. The predominate highway use of diesel
fuel is by trucks. In 1984, the diesel excise tax rate was
increased above the gasoline tax as the revenue offset for a
reduction in the annual heavy truck use tax. Because
automobiles, vans, and light trucks, did not benefit from the
use tax reductions, a provision was enacted allowing first
purchasers of model year 1979 and later diesel-powered
automobiles and light trucks a tax credit to offset this
increased diesel fuel tax. The credit is $102 for automobiles,
and $198 for vans and light trucks.
Reasons for Change
Changed driving patterns, and vehicles currently being
marketed, have resulted in fewer diesel-powered automobiles,
vans, and light trucks today than was the case when this
advance refund was enacted. Additionally, the highway cost
allocation study on which the refund was based is now outdated.
The Committee believes, therefore, that this present-law tax
credit is obsolete and should be repealed.
Explanation of Provision
The tax credit for purchasers of diesel-powered automobiles
and light trucks is repealed.
Effective Date
This provision is effective for vehicles purchased after
the date of the bill's enactment.
TAX TECHNICAL CORRECTIONS PROVISIONS
The technical corrections subtitle contains clerical,
conforming and clarifying amendments to the provisions enacted
by the Revenue Reconciliation Act of 1990, the Revenue
Reconciliation Act of 1993, and other recently enacted
legislation. All amendments made by this title are meant to
carry out the intent of Congress in enacting the original
legislation. Therefore, no separate ``Reasons for Change'' is
set forth for each individual amendment. Except as otherwise
described, the amendments made by the technical corrections
title take effect as if included in the original legislation to
which each amendment relates.
A. Technical Corrections to the Revenue Reconciliation Act of 1990
1. Excise tax provisions
a. Application of the 2.5-cents-per-gallon tax on fuel used
in rail transportation to States and local
governments (sec. 1702(b)(2) of the bill, sec.
11211(b)(4) of the 1990 Act, and sec. 4093 of the
Code)
Present Law
The 1990 Act increased the highway and motorboat fuels
taxes by 5 cents per gallon, effective on December 1, 1990. The
1990 Act continued the exemption from these taxes for fuels
used by States and local governments.
The 1990 Act further imposed a 2.5-cents-per-gallon tax on
fuel used in rail transportation, also effective on December 1,
1990. Because of a drafting error, the 2.5-cents-per-gallon tax
on fuel used in rail transportation incorrectly applies to fuel
used by States and local governments.
Explanation of Provision
The bill clarifies that the 2.5-cents-per-gallon tax on
fuel used in rail transportation does not apply to such uses by
States and local governments.
b. Small winery production credit and bonding requirements
(secs. 1702(b)(5), (6), and (7) of the bill, sec.
11201 of the 1990 Act, and sec. 5041 of the Code)
Present Law
A 90-cents-per-gallon credit is allowed to wine producers
who produce no more than 250,000 gallons of wine in a year. The
credit may be claimed against the producers' excise or income
taxes.
Wine producers must post a bond in amounts determined by
reference to expected excise tax liability as a condition of
legally operating.
Explanation of Provision
The bill clarifies that wine produced by eligible small
wineries may be transferred without payment of tax to bonded
warehouses that become liable for payment of the wine excise
tax without losing credit eligibility. In such cases, the
bonded warehouse will be eligible for the credit to the same
extent as the producer otherwise would have been.
The bill further clarifies that the Treasury Department has
broad regulatory authority to prevent the benefit of the credit
from accruing (directly or indirectly) to wineries producing in
excess of 250,000 gallons in a calendar year.
It is intended that the Treasury regulatory authority will
extend to all circumstances in which wine production is
increased with a purpose of securing indirect credit
eligibility for wine produced by such large producers.
The bill also clarifies that the Treasury Department may
take the amount of credit expected to be claimed against a
producer's wine excise tax liability into account in
determining the amount of required bond.
2. Other revenue-increase provisions of the 1990 Act
a. Deposits of Railroad Retirement Tax Act taxes (sec.
1702(c)(3) of the bill, sec. 11334 of the 1990 Act,
and sec. 6302(g) of the Code)
Present Law
Employers must deposit income taxes withheld from
employees' wages and FICA taxes that are equal to or greater
than $100,000 by the close of the next banking day. Under the
Railroad Retirement Solvency Act of 1983, the deposit rules for
withheld income taxes and FICA taxes automatically apply to
Railroad Retirement Tax Act taxes (sec. 226 of P.L. 98-76).
Explanation of Provision
The bill conforms the Internal Revenue Code to the Railroad
Retirement Solvency Act of 1983 by stating in the Code that
these deposit rules for withheld income taxes and FICA taxes
apply to Railroad Retirement Tax Act taxes.
b. Treatment of salvage and subrogation of property and
casualty insurance companies (sec. 1702(c)(4) of
the bill and sec. 11305 of the 1990 Act)
Present Law
For taxable years beginning after December 31, 1989,
property and casualty insurance companies are required to
reduce the deduction allowed for losses incurred (both paid and
unpaid) by estimated recoveries of salvage and subrogation
attributable to such losses. In the case of any property and
casualty insurance company that took into account estimated
salvage and subrogation recoverable in determining losses
incurred for its last taxable year beginning before January 1,
1990, 87 percent of the discounted amount of the estimated
salvage and subrogation recoverable as of the close of the last
taxable year beginning before January 1, 1990, is allowed as a
deduction ratably over the first 4 taxable years beginning
after December 31, 1989. This special deduction was enacted in
order to provide such property and casualty insurance companies
with substantially the same Federal income tax treatment as
that provided to those property and casualty insurance
companies that prior to the Revenue Reconciliation Act of 1990
did not take into account estimated salvage and subrogation
recoverable in determining losses incurred.
Explanation of Provision
The bill provides that the earnings and profits of any
property and casualty insurance company that took into account
estimated salvage and subrogation recoverable in determining
losses incurred for its last taxable year beginning before
January 1, 1990, is to be determined without regard to the
special deduction that is allowed over the first 4 taxable
years beginning after December 31, 1989. The special deduction
is to be taken into account, however, in determining earnings
and profits for purposes of applying sections 56, 902, and
subpart F of part III of subchapter N of chapter 1 of the
Internal Revenue Code of 1986. This provision is considered
necessary in order to provide those property and casualty
insurance companies that took into account estimated salvage
and subrogation recoverable in determining losses incurred with
substantially the same Federal income tax treatment as that
provided to those property and casualty insurance companies
that prior to the 1990 Act did not take into account estimated
salvage and subrogation recoverable in determining losses
incurred.
c. Information with respect to certain foreign-owned or
foreign corporations: Suspension of the statute of
limitations during certain judicial proceedings
(sec. 1702(c)(5) of the bill, secs. 11314 and 11315
of the 1990 Act, and secs. 6038A and 6038C of the
Code)
Present Law
Any domestic corporation that is 25-percent owned by one
foreign person is subject to certain information reporting and
recordkeeping requirements with respect to transactions carried
out directly or indirectly with certain foreign persons treated
as related to the domestic corporation (``reportable
transactions'') (sec. 6038A(a)). In addition, the Code provides
procedures whereby an IRS examination request or summons with
respect to reportable transactions can be served on foreign
related persons through the domestic corporation (sec.
6038A(e)). Similar provisions apply to any foreign corporation
engaged in a trade or business within the United States, with
respect to information, records, examination requests, and
summonses pertaining to the computation of its liability for
tax in the United States (sec. 6038C). Certain noncompliance
rules may be applied by the Internal Revenue Service in the
case of the failure by a domestic corporation to comply with a
summons pertaining to a reportable transaction (a ``6038A
summons'') (sec. 6038A(e)), or the failure by a foreign
corporation engaged in a U.S. trade or business to comply with
a summons issued for purposes of determining the foreign
corporation's liability for tax in the United States (a ``6038C
summons'') (sec. 6038C(d)).
Any corporation that is subject to the provisions of
section 6038A or 6038C has the right to petition a Federal
district court to quash a 6038A or 6038C summons, or to review
a determination by the IRS that the corporation did not
substantially comply in a timely manner with the 6038A or 6038C
summons (sec. 6038A(e)(4)(A) and (B); sec. 6038C(d)(4)). During
the period that either such judicial proceeding is pending
(including appeals), and for up to 90 days thereafter, the
statute of limitations is suspended with respect to any
transaction (or item, in the case of a foreign corporation) to
which the summons relates (secs. 6038A(e)(4)(D), 6038C(d)(4)).
The legislative history of the 1989 Act amendments to
section 6038A states that the suspension of the statute of
limitations applies to ``the taxable year(s) at issue.''
25 The legislative history of the 1990 Act, which added
section 6038C to the Code, uses the same language. 26
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\25\ H. Rept. No. 247, 101st Cong., 1st Sess. 1301 (1989);
``Explanation of Provisions Approved by the Committee on October 3,
1989,'' Senate Finance Committee Print, 101st Cong., 1st Sess. 118
(October 12, 1989).
\26\ ``Legislative History of Ways and Means Democratic
Alternative,'' House Ways and Means Committee Print (WMCP: 101-37),
101st Cong., 2nd Sess. 58 (October 15, 1990); Report language submitted
by the Senate Finance Committee to the Senate Budget Committee on S.
3299, 136 Cong. Rec. S. 15629, S. 15700 (1990).
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Explanation of Provision
The bill modifies the provisions in sections 6038A and
6038C that suspend the statute of limitations to clarify that
the suspension applies to any taxable year the determination of
the amount of tax imposed for which is affected by the
transaction or item to which the summons relates.
It is intended that, under the provision, a transaction or
item would affect the determination of the amount of tax
imposed for the taxable year directly at issue, as well as for
any taxable year indirectly affected through, for example, net
operating loss carrybacks or carryforwards. It is not intended
that, under the provision, a transaction or item would affect
the determination of the amount of tax imposed for any taxable
year other than the taxable year directly at issue solely by
reason of any similarity of issues involved. Similarly, it is
not intended that, under the provision, a transaction or item
would affect the determination of the amount of tax imposed on
any taxpayer unrelated to the taxpayer to whom the summons is
directed.
d. Rate of interest for large corporate underpayments
(secs. 1702(c)(6) and (7) of the bill, sec. 11341
of the 1990 Act, and sec. 6621(c) of the Code)
Present Law
The rate of interest otherwise applicable to underpayments
of tax is increased by two percent in the case of large
corporate underpayments (generally defined to exceed $100,000),
applicable to periods after the 30th day following the earlier
of a notice of proposed deficiency, the furnishing of a
statutory notice of deficiency, or an assessment notice issued
in connection with a nondeficiency procedure.
Explanation of Provision
The bill provides that an IRS notice that is later
withdrawn because it was issued in error does not trigger the
higher rate of interest. The bill also corrects an incorrect
reference to ``this subtitle''.
3. Research credit provision: Effective date for repeal of special
proration rule (sec. 1702(d)(1) of the bill and sec. 11402 of
the 1990 Act)
Present Law
The Omnibus Budget Reconciliation Act of 1989 (``1989
Act'') effectively extended the research credit for nine months
by prorating certain qualified research expenses incurred
before January 1, 1991. The special rule to prorate qualified
research expenses applied in the case of any taxable year which
began before October 1, 1990, and ended after September 30,
1990. Under this special proration rule, the amount of
qualified research expenses incurred by a taxpayer prior to
January 1, 1991, was multiplied by the ratio that the number of
days in that taxable year before October 1, 1990, bears to the
total number of days in such taxable year before January 1,
1991. The amendments made by the 1989 Act to the research
credit (including the new method for calculating a taxpayer's
base amount) generally were effective for taxable years
beginning after December 31, 1989. However, this effective date
did not apply to the special proration rule (which applied to
any taxable year which began prior to October 1, 1990--
including some years which began before December 31, 1989--if
such taxable year ended after September 30, 1990).
Section 11402 of the Revenue Reconciliation Act of 1990
(``1990 Act'') extended the research credit through December
31, 1991, and repealed the special proration rule provided for
by the 1989 Act. Section 11402 of the 1990 Act was effective
for taxable years beginning after December 31, 1989. Thus, in
the case of taxable years beginning before December 31, 1989,
and ending after September 30, 1990 (e.g., a taxable year of
November 1, 1989 through October 31, 1990), the special
proration rule provided by the 1989 Act would continue to
apply.
Explanation of Provision
The bill repeals for all taxable years ending after
December 31, 1989, the special proration rule provided for by
the 1989 Act.
4. Energy tax provision: Alternative minimum tax adjustment based on
energy preferences (secs. 1702(e)(1) and (4) of the bill, sec.
11531(a) of the 1990 Act, and former sec. 56(h) of the Code)
Present Law
In computing alternative minimum taxable income (and the
adjusted current earnings (ACE) adjustment of the alternative
minimum tax), certain adjustments are made to the taxpayer's
regular tax treatment for intangible drilling costs (IDCs) and
depletion. For certain taxable years, a special energy
deduction is also allowed. The special energy deduction is
initially determined by determining the taxpayer's (1)
intangible drilling cost preference and (2) the marginal
production depletion preference. The intangible drilling cost
preference is the amount by which the taxpayer's alternative
minimum taxable income would be reduced if it were computed
without regard to the adjustments for IDCs. The marginal
production depletion preference is the amount by which the
taxpayer's alternative minimum taxable income would be reduced
if it were computed without regard to depletion adjustments
attributable to marginal production. The intangible drilling
cost preference is then apportioned between (1) the portion of
the preference related to qualified exploratory costs and (2)
the remaining portion of the preference. The portion of the
preference related to qualified exploratory costs is multiplied
by 75 percent and the remaining portion is multiplied by 15
percent. The marginal production depletion preference is
multiplied by 50 percent. The three products described above
are added together to arrive at the taxpayer's special energy
deduction (subject to certain limitations).
The special energy deduction is not allowed to the extent
that it exceeds 40 percent of alternative minimum taxable
income determined without regard to either this special energy
deduction or the alternative tax net operating loss deduction.
Any special energy deduction amount limited by the 40-percent
threshold may not be carried to another taxable year. In
addition, the combination of the special energy deduction, the
alternative minimum tax net operating loss and the alternative
minimum tax foreign tax credit cannot generally offset, in the
aggregate, more than 90 percent of a taxpayer's alternative
minimum tax determined without such attributes.
The special energy deduction was repealed for taxable years
beginning after December 31, 1992.
Explanation of Provision
Interaction of special energy deduction with net operating loss and
investment tax credit
The bill clarifies that the amount of alternative tax net
operating loss that is utilized in any taxable year is to be
appropriately adjusted to take into account the amount of
special energy deduction claimed for that year. This operates
to preserve a portion of the alternative tax net operating loss
carryover by reducing the amount of net operating loss utilized
to the extent of the special energy deduction claimed, which if
unused, could not be carried forward.
In addition, the bill contains a similar provision which
clarifies that the limitation on the utilization of the
investment tax credit for purposes of the alternative minimum
tax is to be determined without regard to the special energy
deduction.
Interaction of special energy deduction with adjustment based on
adjusted current earnings
The bill provides that the ACE adjustment for taxable years
beginning in 1991 and 1992 is to be computed without regard to
the special energy deduction. Thus, the bill specifies that the
ACE adjustment is equal to 75 percent of the excess of a
corporation's adjusted current earnings over its alternative
minimum taxable income computed without regard to either the
ACE adjustment, the alternative tax net operating loss
deduction, or the special energy deduction.
5. Estate tax freezes (sec. 1702(f) of the bill, sec. 11602 of the 1990
Act, and secs. 2701-2704 of the Code)
Present Law
Generally
The value of property transferred by gift or includible in
the decedent's gross estate is its fair market value. Fair
market value generally is the price at which the property would
change hands between a willing buyer and willing seller,
neither being under any compulsion to buy or sell and both
having reasonable knowledge of relevant facts (Treas. Reg. sec.
20.2031). Chapter 14 contains rules that supersede the willing
buyer, willing seller standard (Code secs. 2701-2704).
Preferred interests in corporations and partnerships
Valuation of retained interests
Scope.--Section 2701 provides special rules for valuing
certain rights retained in conjunction with the transfer to a
family member of an interest in a corporation or partnership.
These rules apply to any applicable retained interest held by
the transferor or an applicable family member immediately after
the transfer of an interest in such entity. An ``applicable
family member'' is, with respect to any transferor, the
transferor's spouse, ancestors of the transferor and the
spouse, and spouses of such ancestors.
An applicable retained interest is an interest with respect
to which there is one of two types of rights (``affected
rights''). The first type of affected right is a liquidation,
put, call, or conversion right, generally defined as any
liquidation, put, call, or conversion right, or similar right,
the exercise or nonexercise of which affects the value of the
transferred interest. The second type of affected right is a
distribution right 27 in an entity in which the transferor
and applicable family members hold control immediately before
the transfer. In determining control, an individual is treated
as holding any interest held by the individual's brothers,
sisters and lineal descendants. A distribution right does not
include any right with respect to a junior equity interest.
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\27\ Distribution right generally is a right to a distribution from
a corporation with respect to its stock, or from a partnership with
respect to a partner's interest in the partnership.
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Valuation.--Section 2701 contains two rules for valuing
applicable retained interests. Under the first rule, an
affected right other than a right to qualified payments is
valued at zero. Under the second rule, any retained interest
that confers (1) a liquidation, put, call or conversion right
and (2) a distribution right that consists of the right to
receive a qualified payment is valued on the assumption that
each right is exercised in a manner resulting in the lowest
value for all such rights (the ``lowest value rule''). There is
no statutory rule governing the treatment of an applicable
retained interest that confers a right to receive a qualified
payment, but with respect to which there is no liquidation,
put, call or conversion right.
A qualified payment is a dividend payable on a periodic
basis and at a fixed rate under cumulative preferred stock (or
a comparable payment under a partnership agreement). A
transferor or applicable family member may elect not to treat
such a dividend (or comparable payment) as a qualified payment.
A transferor or applicable family member also may elect to
treat any other distribution right as a qualified payment to be
paid in the amounts and at the times specified in the election.
Inclusion in transfer tax base.--Failure to make a
qualified payment valued under the lowest value rule within
four years of its due date generally results in an inclusion in
the transfer tax base equal to the difference between the
compounded value of the scheduled payments over the compounded
value of the payments actually made. The Treasury Department
has regulatory authority to make subsequent transfer tax
adjustments in the transfer of an applicable retained interest
to reflect the increase in a prior taxable gift by reason of
section 2701.
Generally, this inclusion occurs if the holder transfers by
sale or gift the applicable retained interest during life or at
death. In addition, the taxpayer may, by election, treat the
payment of the qualified payment as giving rise to an inclusion
with respect to prior periods.
The inclusion continues to apply if the applicable retained
interest is transferred to an applicable family member. There
is no inclusion on a transfer of an applicable retained
interest to a spouse for consideration or in a transaction
qualifying for the marital deduction, but subsequent transfers
by the spouse are subject to the inclusion. Other transfers to
applicable family members result in an immediate inclusion as
well as subjecting the transferee to subsequent inclusions.
Minimum value of residual interest
Section 2701 also establishes a minimum value for a junior
equity interest in a corporation or partnership. For
partnerships, a junior equity interest is an interest under
which the rights to income and capital are junior to the rights
of all other classes of equity interests.
Trusts and term interests in property
The value of a transfer in trust is the value of the entire
property less the value of rights in the property retained by
the grantor. Section 2702 provides that in determining the
extent to which a transfer of an interest in trust to a member
of the transferor's family is a gift, the value of an interest
retained by the transferor or an applicable family member is
zero unless such interest takes certain prescribed forms.
For a transfer with respect to a specified portion of
property, section 2702 applies only to such portion. The
section does not apply to the extent that the transfer is
incomplete.
Options and buy-sell agreements
A restriction upon the sale or transfer of property may
reduce its fair market value. Treasury regulations provide that
a restriction is to be disregarded unless the agreement
represents a bona fide business arrangement and not a device to
pass the decedent's shares to the natural objects of his bounty
for less than full and adequate consideration (Treas. Reg. sec.
20.2031-2(h)).
Section 2703 provides, that for transfer tax purposes, the
value of property is determined without regard to any option,
agreement or other right to acquire or use the property at less
than fair market value or any restriction on the right to sell
or use such property. Certain options are excepted from this
rule. To fall within the exception, the option, agreement,
right or restriction must (1) be a bona fide business
arrangement, (2) not be a device to transfer such property to
members of the decedent's family for less than full and
adequate consideration in money or money's worth, and (3) have
terms comparable to similar arrangements entered into by
persons in an arm's length transaction.
Explanation of Provision
Preferred interests in corporations and partnerships
Valuation
The bill provides that an applicable retained interest
conferring a distribution right to qualified payments with
respect to which there is no liquidation, put, call, or
conversion right is valued without regard to section 2701. The
bill also provides that the retention of such right gives rise
to potential inclusion in the transfer tax base. In making
these changes, it is understood that Treasury regulations could
provide, in appropriate circumstances, that a right to receive
amounts on liquidation of the corporation or partnership
constitutes a liquidation right within the meaning of section
2701 if the transferor, alone or with others, holds the right
to cause liquidation.
The bill modifies the definition of junior equity interest
by granting regulatory authority to treat a partnership
interest with rights that are junior with respect to either
income or capital as a junior equity interest. The bill also
modifies the definition of distribution right by replacing the
junior equity interest exception with an exception for a right
under an interest that is junior to the rights of the
transferred interest. As a result, section 2701 does not affect
the valuation of a transferred interest that is senior to the
retained interest, even if the retained interest is not a
junior equity interest.
The bill modifies the rules for electing into or out of
qualified payment treatment. A dividend payable on a periodic
basis and at a fixed rate under a cumulative preferred stock
held by the transferor is treated as a qualified payment unless
the transferor elects otherwise. If held by an applicable
family member, such stock is not treated as a qualified payment
unless the holder so elects. 28 In addition, a transferor
or applicable family member holding any other distribution
right may treat such right as a qualified payment to be paid in
the amounts and at the times specified in the election.
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\28\ With respect to gifts made prior to the date of enactment, the
provision provides that this election may be made by the due date
(including extensions) of the transferor's gift tax return due for the
first calendar year after the date of enactment.
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Inclusion in transfer tax base
The bill grants the Treasury Department regulatory
authority to make subsequent transfer tax adjustments to
reflect the inclusion of unpaid amounts with respect to a
qualified payment. This authority, for example, would permit
the Treasury Department to eliminate the double taxation that
might occur if, with respect to a transfer, both the inclusion
and the value of qualified payment arrearages were included in
the transfer tax base. It also would permit elimination of the
double taxation that might result from a transfer to a spouse,
who, under the statute, is both an applicable family member and
a member of the transferor's family.
The bill treats a transfer to a spouse falling under the
annual exclusion the same as a transfer qualifying for the
marital deduction. Thus, no inclusion would occur upon the
transfer of an applicable retained interest to a spouse, but
subsequent transfers by the spouse would be subject to
inclusion. The bill also clarifies that the inclusion continues
to apply if an applicable family member transfers a right to
qualified payments to the transferor.
The provision clarifies the consequences of electing to
treat a distribution as giving rise to an inclusion. Under the
bill, the election gives rise to an inclusion only with respect
to the payment for which the election is made. The inclusion
with respect to other payments is unaffected.
Trust and term interests in property
The bill conforms section 2702 to existing regulatory
terminology by substituting the term ``incomplete gift'' for
``incomplete transfer.'' In addition, the bill limits the
exception for incomplete gifts to instances in which the entire
gift is incomplete. The Treasury Department is granted
regulatory authority, however, to create additional exceptions
not inconsistent with the purposes of the section. This
authority, for example, could be used to except a charitable
remainder trust that meets the requirements of section 664 and
that does not otherwise create an opportunity for transferring
property to a family member free of transfer tax.
6. Miscellaneous provisions
a. Conforming amendments to the repeal of the General
Utilities doctrine (secs. 1702(g)(1) and (2) of the
bill, sec. 11702(e)(2) of the 1990 Act, and secs.
897(f) and 1248 of the Code)
Present Law
As a result of changes made by recent tax legislation, gain
is generally recognized on the distribution of appreciated
property by a corporation to its shareholders. The Technical
Corrections subtitle of the 1990 Act and technical correction
provisions in prior acts made various conforming amendments
arising out of these changes. For example, the 1990 Act made a
conforming change to section 355(c) to state the treatment of
distributions in section 355 transactions in the affirmative
rather than by reference to the provisions of section 311. In
addition, the Technical and Miscellaneous Revenue Act of 1988
(``1988 Act'') made a conforming change to section 1248(f) to
update the references to the nonrecognition provisions
contained in that subsection. One of the changes was to change
the reference to ``section 311(a)'' from ``section 311''.
Explanation of Provision
The bill makes three conforming changes to the Code with
respect to the repeal of the General Utilities doctrine.
First, section 1248(f) is amended to add a reference to
section 355(c)(1), which provides generally for the
nonrecognition of gain or loss on the distribution of stock or
securities in certain subsidiary corporations. This retains the
substance of the law as it existed before the conforming change
to section 355(c) made by the 1990 Act. This provision is not
intended to affect the authority of the Secretary of the
Treasury to issue regulations under section 1248(f) providing
exceptions to the rule recognizing gain in certain
distributions (cf. Notice 87-64, 1987-2 C.B. 375).
Second, section 1248 is amended to clarify that,
notwithstanding the conforming changes made by the 1988 Act,
with respect to any transaction in which a U.S. person is
treated as realizing gain from the sale or exchange of stock of
a controlled foreign corporation, the U.S. person shall be
treated as having sold or exchanged the stock for purposes of
applying section 1248. Thus, if a U.S. person distributes
appreciated stock of a controlled foreign corporation to its
shareholders in a transaction in which gain is recognized under
section 311(b), section 1248 shall be applied as if the stock
had been sold or exchanged at its fair market value. Under
section 1248(a), part or all of the gain may be treated as a
dividend. Under the bill, the rule treating the distribution
for purposes of section 1248 as a sale or exchange also applies
where the U.S. person is deemed to distribute the stock under
the provisions of section 1248(i). Under section 1248(i), gain
will be recognized only to the extent of the amount treated as
a dividend under section 1248.
Third, section 897(f), relating to the basis in a United
States real property interest distributed to a foreign person,
is repealed as deadwood. The basis of the distributed property
is its fair market value in accordance with section 301(d).
b. Prohibited transaction rules (sec. 1702(g)(3) of the
bill, sec. 11701(m) of the 1990 Act, and sec. 4975
of the Code)
Present Law
The Code and title I of the Employee Retirement Income
Security Act of 1974 (ERISA) prohibit certain transactions
between an employee benefit plan and certain persons related to
such plan. An exemption to the prohibited transaction rules of
title I of ERISA is provided in the case of sales of employer
securities the plan is required to dispose of under the Pension
Protection Act of 1987 (ERISA sec. 408(b)(12)). The 1990 Act
amended the Code to provide that certain transactions that are
exempt from the prohibited transaction rules of ERISA are
automatically exempt from the prohibited transaction rules of
the Code. The 1990 Act change was intended to be limited to
transactions exempt under section 408(b)(12) of ERISA.
Explanation of Provision
The bill conforms the statutory language to legislative
intent by providing that transactions that are exempt from the
prohibited transaction rules of ERISA by reason of ERISA
section 408(b)(12) are also exempt from the prohibited
transaction rules of the Code.
c. Effective date of LIFO adjustment for purposes of
computing adjusted current earnings (sec.
1702(g)(4) of the bill, sec. 11701 of the 1990 Act,
sec. 7611(b) of the 1989 Act, and sec. 56(g) of the
Code)
Present Law
For purposes of computing the adjusted current earnings
(ACE) component of the corporate alternative minimum tax,
taxpayers are required to make the LIFO inventory adjustments
provided in section 312(n)(4) of the Code. Section 312(n)(4)
generally is applicable for purposes of computing earnings and
profits in taxable years beginning after September 30, 1984.
The ACE adjustment generally is applicable to taxable years
beginning after December 31, 1989.
Explanation of Provision
The bill clarifies that the LIFO inventory adjustment
required for ACE purposes shall be computed by applying the
rules of section 312(n)(4) only with respect to taxable years
beginning after December 31, 1989. The effective date
applicable to the determination of earnings and profits
(September 30, 1984) is inapplicable for purposes of the ACE
LIFO inventory adjustment. Thus, the ACE LIFO adjustment shall
be computed with reference to increases (and decreases, to the
extent provided in Treasury regulations) in the ACE LIFO
reserve in taxable years beginning after December 31, 1989.
d. Low-income housing tax credit (sec. 1702(g)(5) of the
bill, sec. 11701(a)(11) of the 1990 Act, and sec.
42 of the Code)
Present Law
The amendments to the low-income housing tax credit
contained in the Omnibus Budget Reconciliation Act of 1989
(``1989 Act'') generally were effective for buildings placed in
service after December 31, 1989, to the extent the buildings
were financed by tax-exempt bonds (``bond-financed
buildings''). This rule applied regardless of when the bonds
were issued.
A technical correction enacted in the Revenue
Reconciliation Act of 1990 (``1990 Act'') limited this
effective date to buildings financed with bonds issued after
December 31, 1989. Thus, the technical correction applied pre-
1989 Act law to bond-financed buildings placed in service after
December 31, 1989, if the bonds were issued before January 1,
1990.
Explanation of Provision
The bill repeals the 1990 technical correction. The bill
provides, however, that pre-1989 Act law will apply to a bond-
financed building if the owner of the building establishes to
the satisfaction of the Secretary of the Treasury reasonable
reliance upon the 1990 technical correction. In the case of
buildings placed in service before the date of the bill's
enactment, reasonable reliance may be established by a showing
of compliance with the law as in effect for those buildings
before enactment of the amendments made by the bill.
7. Expired or obsolete provisions (``deadwood provisions'') (secs.
1702(h)(1)-(18) of the bill and secs. 11801-11816 of the 1990
Act)
Present Law
The 1990 Act repealed and amended numerous sections of the
Code by deleting obsolete provisions (``deadwood''). These
amendments were not intended to make substantive changes to the
tax law.
Explanation of Provision
The bill makes several amendments to restore the substance
of prior law which was inadvertently changed by the deadwood
provisions of the 1990 Act. These amendments include (1) a
provision that clarifies that solar or wind property owned by a
public utility may qualify as 5-year MACRS property (sec.
168(e)(3)(B)(vi)) and (2) a provision restoring the prior-law
rule providing that if any member of an affiliated group of
corporations elects the credit under section 901 for foreign
taxes paid or accrued, then all members of the group paying or
accruing such taxes must elect the credit in order for any
dividend paid by a member of the group to qualify for the 100-
percent dividends received deduction (sec. 243(b)).
The bill also makes several nonsubstantive clerical
amendments to conform the Code to the amendments made by the
deadwood provisions. None of these amendments is intended to
change the substance of pre-1990 law.
B. Technical Corrections to the Revenue Reconciliation Act of 1993
1. Treatment of full-time students under the low-income housing credit
(sec. 1703(b)(1) of the bill, sec. 13142 of the 1993 Act and
sec. 42 of the Code)
Present Law
The Revenue Reconciliation Act of 1993 (``1993 Act'')
codified prior law rules relating to the treatment of married
students filing joint returns. Further, it provided that a
housing unit occupied entirely by full-time students may
qualify for the credit if the full-time students are a single
parent and his or her minor children and none of the tenants is
a dependent of a third party.
Explanation of Provision
The bill provides that the full-time student provision is
effective on the date of enactment of the 1993 Act.
2. Indexation of threshold applicable to excise tax on luxury
automobiles (sec. 1703(c) of the bill, sec. 13161 of the 1993
Act, and sec. 4001(e)(1) of the Code)
Present Law
The 1993 Act indexed the threshold above which the excise
tax on luxury automobiles is to apply.
Explanation of Provision
The bill corrects the application of the indexing
adjustment so that the adjustment calculated for a given
calendar year applies for that calendar year rather than in the
subsequent calendar year. This conforms the indexation to that
described in the conference report to the 1993 Act. 29 The
intent of Congress, as reflected in the conference report, was
that current year indexation be effective on the date of
enactment of the 1993 Act. Under the bill, the provision would,
however, be effective on the date of enactment, to alleviate
the difficulties that both taxpayers and the Treasury would
experience in administering a retroactive refund effective to
August 10, 1993.
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\29\ See, H. Rept. 103-213, August 4, 1993, p. 558.
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3. Indexation of the limitation based on modified adjusted gross income
for income from United States Savings bonds used to pay higher
education tuition and fees (sec. 1703(d) of the bill, sec.
13201 of the 1993 Act, and sec. 135(b)(2)(B) of the Code)
Present Law
A taxpayer may exclude from gross income the proceeds from
the redemption of qualified United States savings bonds if the
proceeds are used to pay qualified higher education expenses
and the taxpayer's modified adjusted gross income is equal to
or less than $60,000 ($40,000 in the case of a single return).
The exclusion is phased out for incomes above these thresholds.
The $60,000 ($40,000) threshold is indexed for inflation
occurring after 1992.
Explanation of Provision
The bill corrects the indexing of the $60,000 ($40,000)
threshold to provide that the thresholds be indexed for
inflation after 1989, as was provided prior to the 1993 Act.
4. Reporting and notification requirements for lobbying and political
expenditures of tax-exempt organizations (sec. 1703(g) of the
bill, sec. 13222 of the 1993 Act and sec. 6033(e) of the Code)
Present Law
Tax-exempt organizations which incur political expenditures
are subject to tax under Code section 527(f). The tax is
calculated by applying the highest corporate rate to the lesser
of (a) the net investment income of the organization, or (b)
the amount of political expenditures incurred by the
organization during the taxable year. Expenditures covered by
Code section 527(f) are those expended for ``influencing or
attempting to influence the selection, nomination, election, or
appointment of any individual to any Federal, State, or local
public office or office in a political organization, or the
election of Presidential or Vice-Presidential electors, whether
of not such individual or electors are selected, nominated,
elected, or appointed.''
Code section 162(e), as amended by the 1993 Act, provides a
separate set of rules regarding the tax treatment of lobbying
and political expenditures. Political expenditures include
amounts paid or incurred in connection with ``participation in,
or intervention in, any political campaign on behalf of (or in
opposition to) any candidate for public office.'' Taxpayers may
not deduct the portion of dues or similar amounts paid to a
tax-exempt organization which the organization notifies the
taxpayer are allocable to lobbying or political expenditures.
Code section 6033(e) sets forth reporting and notification
requirements applicable to tax-exempt organizations (other than
charities) that incur lobbying or political expenditures within
the meaning of Code section 162(e). First, the organization
must report on its annual tax return both the total amount of
its lobbying and political expenditures, and the total amount
of dues (or similar payments) allocable to such expenditures.
Second, the organization must either provide notice to its
members of the portion of dues allocable to lobbying and
political expenditures (so that such amounts are not deductible
by members), or may elect to pay a proxy tax (at the highest
corporate rate) on its lobbying and political expenditures, up
to the amount of dues receipts.
Explanation of Provision
The bill amends Code section 6033(e) to clarify that any
political expenditures on which tax is paid pursuant to Code
section 527(f) are not subject to the reporting and
notification requirements of Code section 6033(e). In addition,
the bill clarifies that the reporting and notification
requirements of Code section 6033(e) apply to organizations
exempt from tax under Code section 501(a), other than charities
described in section 501(c)(3).
5. Estimated tax rules for certain tax-exempt organizations (sec.
1703(h) of the bill, sec. 13225 of the 1993 Act and sec.
6655(g)(3) of the Code)
Present Law
A tax-exempt organization is generally subject to an
addition to tax for any underpayment of estimated tax on its
unrelated business taxable income or its net investment income
(as the case may be). Under the 1993 Act, for years beginning
after December 31, 1993, a corporation or tax-exempt
organization does not have an underpayment of estimated tax if
it makes four timely estimated tax payments that total at least
100 percent of the tax liability shown on its return for the
current taxable year. A corporation or tax-exempt organization
may estimate its current year tax liability prior to year-end
by annualizing its income. The 1993 Act also changed the method
by which a corporation annualizes its current year tax
liability.
Explanation of Provision
The bill clarifies that the 1993 Act did not change the
method by which a tax-exempt organization annualizes its
current year tax liability.
6. Current taxation of certain earnings of controlled foreign
corporations--application of foreign tax credit limitation
(sec. 1703(i)(1) of the bill, sec. 13231(b) of the 1993 Act,
and sec. 904(d) of the Code)
Present Law
Present law requires U.S. shareholders of a controlled
foreign corporation to include in income the corporation's
subpart F income, certain earnings invested in U.S. property,
and, as modified by the 1993 Act, certain earnings invested in
excess passive assets. A U.S. shareholder's tax liability
attributable to the inclusion may be offset by foreign tax
credits for certain foreign taxes paid or deemed paid by the
shareholder.
The foreign tax credit limitation applies separately to
several categories of income. The separate limitations apply to
a dividend from a controlled foreign corporation to a U.S.
shareholder of that controlled foreign corporation by reference
to the character of the earnings and profits of the
distributing corporation.
An inclusion of a controlled foreign corporation's earnings
invested in U.S. property is treated like a dividend for
purposes of the foreign tax credit limitation. Although the
1993 Act provided that inclusions of earnings invested in
excess passive assets generally are determined in the same
manner as inclusions of earnings invested in U.S. property, the
1993 Act did not specify how the separate limitations of the
foreign tax credit should apply to inclusions of earnings
invested in excess passive assets.
Some have argued that the separate limitations of the
foreign tax credit do not apply to an inclusion of a controlled
foreign corporation's earnings invested in excess passive
assets; rather, that such an inclusion is allocated entirely to
the general foreign tax credit limitation, without regard to
the character of the underlying earnings and profits of the
controlled foreign corporation.
Explanation of Provision
The bill clarifies that a U.S. shareholder's inclusion of a
controlled foreign corporation's earnings invested in excess
passive assets is treated like a dividend for purposes of the
foreign tax credit limitation. Thus, the inclusion is
characterized by reference to the underlying earnings and
profits of the controlled foreign corporation. This treatment
is consistent with present law's application of the separate
limitations of the foreign tax credit to other amounts included
in income with respect to a controlled foreign corporation.
7. Current taxation of certain earnings of controlled foreign
corporations--measurement of accumulated earnings (sec.
1703(i)(2) of the bill, sec. 13231(b) of the 1993 Act, and sec.
956A(b) of the Code)
Present Law
Present law, as modified by the 1993 Act, limits the
availability of deferral of U.S. tax on certain earnings of
controlled foreign corporations by requiring U.S. shareholders
of a controlled foreign corporation to include in income the
corporation's accumulated 30 or current earnings invested
in excess passive assets. Some have argued that the Code's
definition of earnings subject to this treatment permits an
accumulated deficit in earnings to eliminate positive current
earnings, resulting in no income inclusion in a case where an
actual distribution would be treated as a dividend out of
current earnings. In addition, some have argued that the Code's
definition of earnings subject to this treatment takes current-
year earnings into account more than once.
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\30\ Accumulated earnings and profits are taken into account only
to the extent that they were accumulated in taxable years beginning
after September 30, 1993.
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Explanation of Provision
The bill clarifies that the accumulated earnings and
profits of a controlled foreign corporation taken into account
for purposes of determining the foreign corporation's earnings
invested in excess passive assets do not include any deficit in
accumulated earnings and profits, 31 and do not include
current earnings (which are taken into account separately).
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\31\ Incurred in taxable years beginning after September 30, 1993.
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8. Current taxation of certain earnings of controlled foreign
corporations--aggregation and look-through rules (sec.
1703(i)(3) of the bill, sec. 13231(b) of the 1993 Act, and sec.
956A(f) of the Code)
Present Law
Present law, as modified by the 1993 Act, provides certain
aggregation and look-through rules in connection with requiring
U.S. shareholders of a controlled foreign corporation to
include in income certain of the corporation's earnings
invested in excess passive assets. Under the aggregation rule,
certain groups of controlled foreign corporations that are
linked by stock ownership of more than 50 percent (CFC groups)
are treated as a single corporation for purposes of determining
their earnings invested in excess passive assets. Look-through
treatment applies to certain corporations whose stock is owned
at least 25 percent by a controlled foreign corporation. Some
have argued that these rules permit the assets of one foreign
corporation to be taken into account more than once through a
combination of CFC group treatment and look-through treatment.
In addition, some have argued that these rules permit the
assets of one foreign corporation to be taken into account more
than once through membership of the foreign corporation in more
than one CFC group.
Explanation of Provision
The bill clarifies that, within the regulatory authority
provided to the Secretary of the Treasury under the 1993 Act,
regulations are specifically authorized to coordinate the CFC
group treatment and look-through treatment applicable for
purposes of determining a foreign corporation's earnings
invested in excess passive assets. Pending the promulgation of
guidance by the Secretary, it is intended that taxpayers be
permitted to coordinate such treatment using any reasonable
method for taking assets into account only once, so long as the
method is consistently applied to all controlled foreign
corporations (whether or not members of any CFC group) in all
taxable years.
9. Treatment of certain leased assets for PFIC purposes (sec.
1703(i)(5) of the bill, sec. 13231(d)(4) of the 1993 Act, and
sec. 1297(d) of the Code)
Present Law
Under present law, as modified by the 1993 Act, certain
property leased by a foreign corporation may be treated as an
asset actually owned by the foreign corporation in measuring
the assets of the foreign corporation for purposes of the
passive foreign investment company (``PFIC'') asset test of
section 1296(a)(2). The 1993 Act provided a special measurement
rule, under which the adjusted basis of the leased asset for
this purpose is determined by reference to the unamortized
portion of the present value of the payments under the lease
for the use of the property. Some have argued, however, that
the special measurement rule does not apply to PFICs that are
permitted to measure their assets by fair market value, rather
than by adjusted basis. Under this argument, the entire fair
market value of the leased asset might be treated as owned by
the foreign corporation.
Explanation of Provision
The bill clarifies that, in the case of any item of
property leased by a foreign corporation and treated as an
asset actually owned by the foreign corporation in measuring
the assets of the foreign corporation for purposes of the PFIC
asset test, the amount taken into account with respect to the
leased property is the amount determined under the 1993 Act's
special measurement rule, which is based on the unamortized
portion of the present value of the payments under the lease
for the use of the property. That is, the provision clarifies
that the special measurement rule of the 1993 Act applies to
all PFICs, regardless of whether they are generally permitted
to measure their assets by fair market value rather than
adjusted basis.
10. Amortization of goodwill and certain other intangibles (sec.
1703(k) of the bill, sec. 13261(g) of the 1993 Act, and sec.
197 of the Code)
Present Law
The 1993 Act allows amortization deductions to certain
intangible assets acquired after the 1993 Act's effective date
that were not amortizable under prior law. The 1993 Act
contains ``antichurning'' rules that deny amortization to
intangible assets that were not amortizable under prior law if
such assets are acquired by the taxpayer after the effective
date from certain related parties.
The 1993 Act also contains an election under which a
taxpayer and certain related parties may elect to treat all
acquisitions after July 25, 1991 as subject to the provisions
of the 1993 Act.
Explanation of Provision
The bill clarifies that when a taxpayer and its related
parties have made an election to apply the 1993 Act to all
acquisitions after July 25, 1991, the antichurning rules will
not apply when property acquired from an unrelated party after
July 25, 1991 (and not subject to the antichurning rules in the
hands of the acquirer) is transferred to a taxpayer related to
the acquirer after the date of enactment of the 1993 Act.
11. Empowerment zones and eligibility of small farms for tax incentives
(sec. 1703(l) of the bill, sec. 13301 of the 1993 Act, and sec.
1397B(d)(5)(B) of the Code)
Present Law
Pursuant to the 1993 Act, on December 21, 1994, six
empowerment zones and 65 enterprise communities were designated
in eligible urban areas, and three empowerment zones and 30
enterprise communities were designated in rural areas. Special
tax incentives (i.e., a wage credit, additional section 179
expensing, and expanded tax-exempt financing) are available for
certain business activities conducted in urban and rural
empowerment zones. Expanded tax-exempt financing benefits are
available for certain facilities located in urban and rural
enterprise communities.
The empowerment zone wage credit is not available with
respect to any individual employed by a trade or business the
principal activity of which is farming (within the meaning of
subparagraphs (A) and (B) of section 2032A(e)(5)) if, as of the
close of the current taxable year, the sum of the aggregate
unadjusted bases (or, if greater, the fair market value) of
assets of the farm exceed $500,000 (sec. 1396(d)(2)(E)). In
contrast, the additional section 179 expensing (available in
empowerment zones) and expanded tax-exempt financing benefits
(available in both empowerment zones and enterprise
communities) are not allowed for any trade or business the
principal activity of which is farming if, as of the close of
the preceding taxable year, the sum of the aggregate bases (or,
if greater, the fair market value) of the assets of the farm
exceed $500,000 (sec. 1397B(d)(5)).
Explanation of Provision
The bill provides that the $500,000 asset test for
determining whether a farm is eligible for additional section
179 expensing (in an empowerment zone) and expanded tax-exempt
financing benefits (in an empowerment zone or enterprise
community) is applied based on the assets of the farm at the
end of the current taxable year. Thus, the $500,000 asset test
for determining farm eligibility is based on the same taxable
period (i.e., the current taxable year) for purposes of all tax
incentives available in empowerment zones and enterprise
communities.
C. Other Tax Technical Corrections
1. Hedge bonds (sec. 1704(b) of the bill, sec. 11701 of the 1989 Act,
and sec. 149(g) of the Code)
Present Law
The 1989 Act provided generally that interest on hedge
bonds is not tax-exempt unless prescribed minimum percentages
of the proceeds are reasonably expected to be spent at set
intervals during the five-year period after issuance of the
bonds (sec. 149(g)). A hedge bond is defined generally as a
bond (1) at least 85 percent of the proceeds of which is not
reasonably expected to be spent within three years following
issuance and (2) more than 50 percent of the proceeds of which
is invested at substantially guaranteed yields for four years
or more.
This restriction does not apply, however, if at least 95
percent of the bond proceeds is invested in other tax-exempt
bonds (not subject to the alternative minimum tax). The 95-
percent investment requirement is not violated if investment
earnings exceeding five percent of the proceeds are temporarily
invested for up to 30 days pending reinvestment in taxable
(including alternative minimum taxable) investments.
This provision is effective as if included in the Omnibus
Budget Reconciliation Act of 1989.
Explanation of Provision
The bill clarifies that the 30-day exception for temporary
investments of investment earnings applies to amounts (i.e.,
principal and earnings thereon) temporarily invested during the
30-day period immediately preceding redemption of the bonds as
well as such periods preceding reinvestment of the proceeds.
2. Withholding on distributions from U.S. real property holding
companies (sec. 1704(c) of the bill, sec. 129 of the Deficit
Reduction Act of 1984, and sec. 1445 of the Code)
Present Law
In general
Under the Foreign Investment in Real Property Tax Act of
1980 (``FIRPTA''), a foreign investor that disposes of a U.S.
real property interest generally is required to pay tax on any
gain on the disposition. For this purpose a U.S. real property
interest generally includes stock in a domestic corporation
that is a U.S. real property holding corporation (``USRPHC''),
or was a USRPHC at any time during the previous five years.
A sale or exchange of stock in a USRPHC is an example of a
disposition of a U.S. real property interest. In addition,
provisions of subchapter C of the Code treat amounts received
in certain corporate distributions as amounts received in sales
or exchanges, giving rise to tax liability under the FIRPTA
rules when a foreign person receives such a distribution from a
present or former USRPHC. Thus, amounts received by a foreign
shareholder in a USRPHC in a distribution in complete
liquidation of the USRPHC are treated as in full payment in
exchange for the USRPHC stock, and are therefore subject to tax
under FIRPTA (sec. 331; Treas. Reg. sec. 1.897-5T(b)(2)(iii)).
Similarly, amounts received by a foreign shareholder in a
USRPHC upon redemption of the USRPHC stock are treated as a
distribution in part or full payment in exchange for the stock,
and are therefore subject to tax under FIRPTA (sec. 302(a);
Treas. Reg. sec. 1.897-5T(b)(2)(ii)). Third, amounts received
by a foreign shareholder in a USRPHC, in a section 301
distribution from the USRPHC that exceeds the available
earnings and profits of the USRPHC, are treated as gain from
the sale or exchange of the shareholder's USRPHC stock to the
extent that they exceed the shareholder's adjusted basis in the
stock; such amounts are therefore also subject to tax under
FIRPTA (sec. 301(c)(3); Treas. Reg. sec. 1.897-5T(b)(2)(i)).
FIRPTA withholding
The Deficit Reduction Act of 1984 established a withholding
system to enforce the FIRPTA tax. Unless an exception applies,
a transferee of a U.S. real property interest from a foreign
person generally is required to withhold the lesser of 10
percent of the amount realized (purchase price), or the maximum
tax liability on disposition (as determined by the IRS) (sec.
1445). Such withholding may be reduced or eliminated pursuant
to a withholding certificate issued by the Internal Revenue
Service (Treas. Reg. sec. 1.1445-3).
Although the FIRPTA withholding requirement by its terms
generally applies to all dispositions of U.S. real property
interests, and subchapter C treats amounts received in certain
distributions as amounts received in sales or exchanges, the
FIRPTA withholding provisions also provide express rules for
withholding on certain distributions treated as sales or
exchanges. Generally, distributions in a transaction to which
section 302 (redemptions) or part II of subchapter C
(liquidations) applies are subject to 10-percent withholding.
32 Although a section 301 distribution in excess of
earnings and profits is also treated as a disposition for
purposes of computing the FIRPTA liability of a foreign
recipient of the distribution, there is no corresponding
withholding provision expressly addressed to the payor of such
a distribution.
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\32\ Under other rules, dividend distributions (i.e., distributions
to which sec. 301(c)(1) applies) to foreign persons by U.S.
corporations, including USRPHCs, are subject to 30-percent withholding
under the Code. Under treaties, the withholding on a dividend may be
reduced to as little as 5 or 15 percent.
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Explanation of Provision
The bill clarifies that FIRPTA withholding requirements
apply to any section 301 distribution to a foreign person by a
domestic corporation that is or was a USRPHC, which
distribution is not made out of the corporation's earnings and
profits and is therefore treated as an amount received in a
sale or exchange of a U.S. real property interest. (The bill
does not alter the withholding treatment of section 301
distributions by such a corporation that are out of earnings
and profits.) Under the bill, the FIRPTA withholding
requirements that apply to a section 301 distribution not out
of earnings and profits are similar to the requirements
applicable to redemption or liquidation distributions to a
foreign person by such a corporation. It is anticipated that
withholding certificates will be available to taxpayers that
expect to receive section 301 distributions not out of earnings
and profits.
The provision is effective for distributions made after the
date of enactment of the bill. No inference is intended to be
drawn from the provision as to the FIRPTA withholding
requirements applicable to such a distribution under present
law.
3. Treatment of credits attributable to working interests in oil and
gas properties (sec. 1704(d) of the bill, sec. 501 of the Tax
Reform Act of 1986, and sec. 469 of the Code)
Present Law
Under present law, a working interest in an oil and gas
property which does not limit the liability of the taxpayer is
not a ``passive activity'' for purposes of the passive loss
rules (sec. 469). However, if any loss from an activity is
treated as not being a passive loss by reason of being from a
working interest, any net income from the activity in
subsequent years is not treated as income from a passive
activity, notwithstanding that the activity may otherwise have
become passive with respect to the taxpayer.
Explanation of Provision
The bill clarifies that any credit attributable to a
working interest in an oil and gas property, in a taxable year
in which the activity is no longer treated as not being a
passive activity, will not be treated as attributable to a
passive activity to the extent of any tax allocable to the net
income from the activity for the taxable year. Any credits from
the activity in excess of this amount of tax will continue to
be treated as arising from a passive activity and will be
treated under the rules generally applicable to the passive
activity credit. The provision applies to taxable years
beginning after December 31, 1986.
4. Clarification of passive loss disposition rule (sec. 1704(e) of the
bill, sec. 501 of the Tax Reform Act of 1986, sec.
1005(a)(2)(A) of the Technical and Miscellaneous Revenue Act of
1988, and sec. 469(g)(1)(A) of the Code)
Present Law
The Tax Reform Act of 1986 (``1986 Act'') provided that if
a passive activity is disposed of in a transaction in which all
gain or loss is recognized, any overall loss from the activity
in the year of disposition is recognized and allowed against
income (whether active or passive income). 33 The language
of the 1986 Act provided that any loss was allowable, first,
against income or gain from the passive activity, second,
against income or gain from all passive activities, and
finally, against any other income or gain. This rule was
rewritten by the technical corrections portion of the Technical
and Miscellaneous Revenue Act of 1988 (``1988 Act''). The
statutory language (as amended by the 1988 Act) providing for
the computation of the overall loss for the taxable year of
disposition is not entirely clear where the activity is
disposed of at a gain.
Explanation of Provision
The bill clarifies the rule relating to the computation of
the overall loss allowed upon the disposition of a passive
activity. The bill provides that, in a transaction in which all
gain or loss is recognized on the disposition of a passive
activity, any loss from the activity for the taxable year
(taking into account all income, gain, and loss, including gain
or loss recognized on the disposition) in excess of any net
income or gain from other passive activities for the taxable
year is treated as a loss which is not from a passive activity.
The provision applies to taxable years beginning after December
31, 1986.
5. Estate tax unified credit allowed nonresident aliens under treaty
(sec. 1704(f)(1) of the bill, sec. 5032(b)(2) of the Technical
and Miscellaneous Revenue Act of 1988, and sec. 2102(c)(3)(A)
of the Code)
Present Law
Amount subject to tax
For U.S. citizens and residents, the amount subject to
Federal estate and gift tax is determined by reference to all
property, wherever situated. For nonresident aliens, the Code
provides that the amount subject to Federal estate and gift tax
is determined only by reference to property situated in the
United States.
The United States has entered into bilateral treaties
designed to avoid double transfer taxation. Early treaties
typically did this by providing rules for determining situs and
requiring that the State of domicile allow a credit for taxes
paid to the situs country. 34 In contrast, treaties signed
in the 1980s, and the U.S. and OECD model treaties, exempt most
property, wherever situated, from taxation outside the State of
domicile. 35
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\33\ See S. Rept. 99-313, p. 725.
\34\ See Staff of the Joint Committee on Taxation, 98th Cong., 2d
Sess., Explanation of Proposed Estate and Gift Tax Treaty Between the
United States and Sweden 8 (1984).
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\35\ See, e.g., U.S. Treasury Model Estate and Gift Tax Treaty
(1980), Article 7, paragraph 1: ``Transfers and deemed transfers by an
individual domiciled in a Contracting State of property other an
property referred to in Article 5 (Real Property) and 6 (Business
Property of a Permanent Establishment and Assets Pertaining to a Fixed
Base Used for the Performance of Independent Personal Services) shall
be taxable only in that State.''
Specific exemption and unified credit
Prior to the Tax Reform Act of 1976 (``1976 Act''), the
Code allowed a ``specific exemption'' against the estate tax.
The estate of a U.S. citizen or resident was allowed an
exemption of $60,000, while the estate of a nonresident alien
was allowed a lesser amount. A number of U.S. estate tax
treaties ratified in the 1950s allowed a nonresident alien a
``specific exemption'' equal to the exemption allowed a U.S.
citizen or resident multiplied by the percentage of the gross
estate subject to U.S. estate tax (the ``pro rata
exemption'').\36\
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\36\ See Rev. Rul. 81-303, 1981-2 C.B. 255.
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The 1976 Act replaced the specific exemption with a unified
credit of $47,000 for the estate of U.S. citizen or resident
and $3,600 for the estate of a nonresident alien. After 1976,
two courts interpreted the pro rata exemption allowed in the
1950s treaties as applying to the unified credit, i.e., as
allowing a unified credit no less than the unified credit
allowed a U.S. citizen or resident multiplied by the percentage
of the gross estate situated in the United States (and
therefore subject to U.S. estate tax under those treaties).\37\
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\37\ See Mudry v. United States, 11 Cl. Ct. 207 (1986) (Swiss
treaty); Burghardt v. Commissioner, 80 T.C. 705 (1983), affd., 734 F.2d
3 (3d Cir. 1984) (Italian treaty).
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The Technical and Miscellaneous Revenue Act of 1988 (``1988
Act'') increased the unified credit allowed an estate of a
nonresident alien to $13,000. In so doing, the 1988 Act
provided that, ``to the extent required by any treaty,'' the
estate of a nonresident alien is allowed a unified credit equal
to the unified credit allowed a U.S. citizen or resident
multiplied by the percentage of the gross estate situated in
the United States (Code sec. 2102(c)(3)(A)). Thus, the 1988 Act
did not override the ``specific exemption'' language of the
1950s treaties, as interpreted by the two courts, and could be
interpreted as encouraging the negotiation of pro rata unified
credits in future treaties.
Explanation of Provision
The bill clarifies that in determining the pro rata unified
credit required by treaty, property exempted by the treaty from
U.S. estate tax is not treated as situated in the United
States. Under this rule, a treaty granting a pro rata unified
credit would allow a nonresident alien the unified credit
allowed a U.S. citizen or resident multiplied by the percentage
of the gross estate subject to U.S. estate tax, as modified by
treaty.
The bill is not intended to affect existing treaties that
contain pro rata exemptions pursuant to which the assets
reserved for situs taxation by the non-domiciliary country are
specifically described. In the case of a treaty that contains
pro rata exemption but does not provide rules for determining
the situs for property (e.g., the treaty with Canada), the bill
clarifies that property exempted by the treaty from U.S. estate
tax is not treated as situated in the United States. For future
treaties, it is intended that any pro rata unified credit
negotiated not exceed the proportion of the gross worldwide
estate subject to U.S. estate and gift tax, as modified by
treaty.
The provision is effective upon the date of its enactment.
6. Limitation on deduction for certain interest paid by corporation to
related persons (sec. 1704(f)(2)(A) of the bill, sec. 7210(a)
of the 1989 Act, and sec. 163(j) of the Code)
Present Law
Subject to certain limitations, a taxpayer may deduct
interest paid or accrued on indebtedness within a taxable year
(sec. 163(a)). The 1989 Act added a so-called ``earnings
stripping'' limitation on interest deductibility with respect
to certain interest paid by corporations to related persons
(sec. 163(j)). If the provision applies to a corporation for a
taxable year, it disallows deductions for certain amounts of
``disqualified interest'' paid or accrued by the corporation
during that year. If in a taxable year a deduction is
disallowed, under the provision, for an amount of interest paid
or accrued in that year, the disallowed amount is treated under
the earnings stripping provision as disqualified interest paid
or accrued in the succeeding taxable year.\38\
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\38\ Disqualified interest is interest paid by a corporation to
related persons that are not subject to U.S. tax on the interest
received. (If, in accordance with a U.S. income tax treaty, interest
income of a related person is subject to a reduced rate of U.S. tax, a
portion of the interest paid to the related person is deemed to be
interest on which no tax is imposed.)
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In order for the earnings stripping provision to apply to a
corporation for a taxable year, two thresholds must be
exceeded. To exceed the first threshold, the corporation must
have ``excess interest expense'' as that term is defined in the
Code for this purpose. To exceed the second threshold, the
corporation must have a ratio of debt to equity as of the close
of the taxable year in question (or on any other day prescribed
by the Secretary in regulations) that exceeds 1.5 to 1. Excess
interest expense is the excess (if any) of the corporation's
net interest expense over the sum of 50 percent of the adjusted
taxable income of the corporation plus any excess limitation
carryforward from a prior year. Excess limitation is the excess
(if any) of 50 percent of adjusted taxable income over net
interest expense.
Explanation of Provision
The bill provides that the debt-equity threshold does not
apply for purposes of applying the earnings stripping provision
to a carryover of excess interest expense from a prior taxable
year. Thus, the bill clarifies that excess interest carried
forward from a year in which the debt-equity ratio threshold is
exceeded may be deducted in a subsequent year in which that
threshold is not exceeded, but only to the extent that such
interest would not otherwise be treated as excess interest
expense in the carryforward year.
For example, assume that in year 1 $20 of a corporation's
interest expense is nondeductible due to the operation of the
earnings stripping provision. The corporation carries forward
the $20 of interest deduction that it could not use in year 1.
Assume that in year 2 the corporation has a debt-equity ratio
of 1 to 1 and $50 of current net and gross interest expense,
all of which is disqualified interest, and that it earns $400
of adjusted taxable income. The bill is intended to clarify
that the $20 of interest carried forward from year 1 is
deductible in year 2. This is because $70, the sum of the
current net interest expense for year 2 ($50) plus the interest
expense carried over from year 1 ($20), does not exceed one-
half of adjusted taxable income in year 2.
As another example, assume that in year 2 the corporation
has a debt-equity ratio of 1 to 1 and $50 of current net and
gross interest expense, all of which is disqualified interest,
and that it earns $80 of adjusted taxable income. The bill is
intended to clarify that the $20 of interest carried forward
from year 1 is not deductible in year 2. This is because the
current net interest expense for year 2 ($50) exceeds by $10
one-half of adjusted taxable income in year 2 ($80 divided by
2, or $40). Therefore, treating the year 1 carryover as an
interest expense in year 2 causes the corporation to have
excess interest expense equal to $30. But for the debt-equity
safe harbor, the corporation would have a $30 interest expense
disallowance in year 2 if the carried over amount were treated
as having been paid in year 2. Under the bill, no actual year 2
interest can be disallowed. However, under these facts, none of
the interest carried over from year 1 can be deducted in year
2. Instead, the interest carried over from year 1 is carried
forward for potential deduction (subject to the same rules that
applied to the carryforward in year 2) in a year subsequent to
year 2.
As a third example, assume that in year 2 the corporation
has a debt-equity ratio of 1 to 1 and $50 of current net and
gross interest expense, all of which is disqualified interest,
and that it earns $110 of adjusted taxable income. The bill is
intended to clarify that $5 of interest carried forward from
year 1 is deductible in year 2, and the other $15 of interest
carried forward from year 1 is not deductible in year 2. This
is because the current net interest expense for year 2 ($50) is
$5 less than one-half of adjusted taxable income in year 2
(one-half of $110, or $55). Therefore, even if the debt-equity
safe harbor had not been met in year 2, the corporation would
have had $5 of excess limitation in year 2 had there been no
carryover amount from year 1. On the other hand, treating the
year 1 carryover as an interest expense in year 2 causes the
corporation to have excess interest expense equal to $15. This
$15 may be carried forward to a subsequent year.
The provision is effective as if included in the amendments
made by section 7210(a) of the Revenue Reconciliation Act of
1989.
7. Interaction between passive activity loss rules and earnings
stripping rules (secs. 1704(f)(2) (B) and (C) of the bill, sec.
7210(a) of the 1989 Act, and sec. 163(j) of the Code)
Present Law
The passive loss rules limit deductions and credits from
passive trade or business activities (sec. 469). Deductions
attributable to passive activities, to the extent they exceed
income from passive activities, generally may not be deducted
against other income, such as wages, portfolio income, or
business income that is not derived from a passive activity.
Deductions and credits that are suspended are carried forward
and treated as deductions and credits from passive activities
in the next year. Suspended losses from a passive activity are
allowed in full when a taxpayer disposes of his entire interest
in the passive activity to an unrelated person. The passive
loss rules apply to any taxpayer that is an individual, estate,
trust, closely held C corporation, or personal service
corporation. In determining passive activity deductions,
Treasury regulations provide that ``an item of deduction arises
in the taxable year in which the item would be allowable as a
deduction under the taxpayer's method of accounting if taxable
income for all taxable years were determined without regard to
sections 469, 613A(d) and 1211'' (Treas. Reg. sec. 1.469-
2(d)(8)). Thus, these regulations effectively require other
limitations to be applied before applying the passive loss
rules.
The at-risk rules limit deductible losses from an activity
to the amount that the taxpayer has at risk, in the case of an
individual or a closely-held corporation (sec. 465). The amount
at risk is generally the sum of (1) cash contributions, (2) the
adjusted basis of contributed property, and (3) amounts
borrowed for use in the activity with respect to which the
taxpayer has personal liability or has pledged as security
property not used in the activity. The amount at risk is
increased by income from the activity and decreased by losses
and withdrawals.
A taxpayer generally may deduct interest paid or accrued on
indebtedness within a taxable year (sec. 163(a)). The Revenue
Reconciliation Act of 1989 (the ``1989 Act'') added an
``earnings stripping'' limitation on interest deductibility
with respect to certain interest paid by corporations to
related persons (sec. 163(j)). If the provision applies to a
corporation for a taxable year, it disallows deductions for
certain amounts of ``disqualified interest'' paid or accrued by
the corporation during that year. Disqualified interest is
interest paid by a corporation to related persons that are not
subject to U.S. tax on the interest received. The disallowed
amount is treated under the earnings stripping provision as
disqualified interest paid or accrued in the succeeding taxable
year. Proposed Treasury regulations would provide that
``sections 465 and 469 shall be applied before applying section
163(j)'' (Prop. Treas. Reg. sec. 1.163(j)-7(b)(3)).
Explanation of Provision
The provision modifies section 163(j) of the Code to
clarify that the earnings stripping rules apply before the
passive loss rules and the at-risk rules.
The provision is effective as if included in the 1989 Act.
8. Branch-level interest tax (sec. 1704(f)(3) of the bill, sec. 1241 of
the 1986 Act, and sec. 884 of the Code)
Present Law
Interest paid (or treated as if paid) by a U.S. trade or
business (i.e., a U.S. branch) of a foreign corporation is
treated as if paid by a U.S. corporation and, hence, is U.S.
source and subject to U.S. withholding tax of 30 percent,
unless the tax is reduced or eliminated by a specific Code or
treaty provision. The Treasury has regulatory authority to
limit U.S. sourcing, and hence U.S. withholding, to the amount
of interest reasonably expected to be deducted in arriving at
the U.S. branch's effectively connected taxable income.
To the extent a U.S. branch of a foreign corporation has
allocated to it under Treasury Regulation section 1.882-5 an
interest deduction in excess of the interest actually paid by
the branch (this generally occurs where the indebtedness of the
U.S. branch is disproportionately small compared to the total
indebtedness of the foreign corporation), the excess is treated
as if it were interest paid on a notional loan to a U.S.
subsidiary (the U.S. branch, in actuality) from its foreign
corporate parent (the home office). This excess is subject to
the 30-percent tax, absent a specific Code exemption or treaty
reduction (sec. 884(f)(1)(B)).
These branch-level interest taxes, along with the branch
profits tax, were intended to reflect the view that a foreign
corporation doing business in the United States generally
should be subject to the same substantive tax rules that apply
to a foreign corporation operating in the United States through
a U.S. subsidiary. 39 Where a U.S. corporation pays
interest to its foreign corporate parent, that interest, like
the interest deducted by a U.S. branch of a foreign
corporation, is also generally subject to a 30-percent U.S.
withholding tax unless the tax is reduced by treaty. In the
case of a U.S. subsidiary of a foreign parent corporation, the
withholding tax applies without regard to whether the interest
payment is currently deductible by the U.S. subsidiary. For
example, deductions for interest may be delayed or denied under
section 163, 263, 263A, 266, 267, or 469, but it is still
subject (or not subject) to withholding when paid without
regard to the operation of those provisions.
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\39\ Staff of the Joint Committee on Taxation, 100th Cong., 1st
Sess. General Explanation of the Tax Reform Act of 1986, at 1036
(1987).
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Explanation of Provision
The bill provides that the branch level interest tax on
interest not actually paid by the branch applies to any
interest which is allocable to income which is effectively
connected with the conduct of a trade or business in the United
States. Similarly, in the case of interest paid by the U.S.
branch, the bill provides regulatory authority to limit U.S.
sourcing, and hence U.S. withholding, to the amount of interest
reasonably expected to be allocable to income which is
effectively connected with the conduct of a trade or business
in the United States. Thus, where an interest expense of a
foreign corporation is allocable to U.S. effectively connected
income, but that interest expense would not have been fully
deductible for tax purposes under another Code provision had it
been paid by a U.S. corporation, the bill clarifies that such
interest is nonetheless treated for branch level interest tax
purposes like a payment by a U.S. corporation to a foreign
corporate parent. Similarly, with regard to the Treasury's
regulatory authority to treat an interest payment by a foreign
corporation's U.S. branch as though not paid by a U.S. person
for source and withholding purposes, the bill clarifies that
the authority extends to interest payments in excess of those
reasonably expected to be allocable to U.S. effectively
connected income of the foreign corporation.
These provisions are effective as if they were made by the
Tax Reform Act of 1986.
9. Determination of source in case of sales of inventory property (sec.
1704(f)(4) of the bill, sec. 211 of the 1986 Act, and sec.
865(b) of the Code)
Present Law
Prior to the 1986 Act, the source of income derived from
the sale of personal property generally was determined by the
place of sale (commonly referred to as the ``title passage''
rule) (see, e.g., Treas. Reg. sec. 1.861-7, T.D. 6258, 1957-2
C.B. 368). While the 1986 Act generally replaced the place-of-
sale rule for sales of personal property with a residence-of-
the-seller rule (sec. 865(a)), the Act did not change the
place-of-sale rule for most sales of inventory property (sec.
865(b)).
Before and after the 1986 Act, statutory rules for sourcing
income from inventory sales have included those covering income
from (1) purchasing inventory property outside the United
States (other than within a U.S. possession) and selling it in
the United States (sec. 861(a)(6)); (2) purchasing inventory
property in the United States and selling it outside the United
States (sec. 862(a)(6)); (3) selling outside the United States
inventory property which has been produced by the taxpayer in
the United States (or selling in the United States inventory
property which has been produced by the taxpayer outside the
United States) (sec. 863(b)(2)); and (4) purchasing inventory
property in a U.S. possession and selling it in the United
States (sec. 863(b)(3)). Prior to the 1986 Act, these
provisions were not limited in application to income from sales
of inventory property, but rather covered sales of personal
property generally.
In addition to statutory rules for sourcing items of income
from transactions involving inventory property specified in the
Code, such as those listed above, the Code both before and
after the 1986 Act has contained other sourcing rules that do
not make specific reference to property sales, and includes
general regulatory authority to allocate and apportion between
U.S. and foreign sources items of gross income, expenses,
losses, and deductions other than those specified in sections
861(a) and 862(a) (sec. 863(a)). In carving income from the
sale inventory property out of the general residence-of-the-
seller rule of section 865, section 865(b) makes reference to
the above statutory rules making specific reference to
inventory property, but not to the general grant of regulatory
authority in section 863(a).
Explanation of Provision
The bill modifies the general provision relating to the
sourcing of income from the sale of personal property (sec.
865) so that the cross-reference to sourcing rules applicable
to inventory property includes a reference to all of section
863, rather than simply to section 863(b). The bill thus
clarifies that, to the extent that the Secretary of the
Treasury had general regulatory authority to provide rules for
the sourcing of income from the sales of personal property
prior to the 1986 Act, the Secretary of the Treasury retains
that authority under present law with respect to inventory
property.
The bill is not intended to increase the Treasury
Secretary's regulatory authority under section 863(a) beyond
the authority that he had under the law in effect prior to the
enactment of the 1986 Act. It is intended that no inference be
drawn from this provision either as to the correctness of, or
as to the post-1986 Act implications of, any judicial decision
interpreting the scope of that pre-1986 Act authority.
The provision is effective as if it were included in the
Tax Reform Act of 1986.
10. Repeal of obsolete provisions (sec. 1704(f)(5) of the bill, sec.
10202 of the Revenue Act of 1987, and secs. 6038(a)(1)(F) and
6038A(b)(4) of the Code)
Present Law
A U.S. person who controls a foreign corporation must
report certain information related to that foreign corporation
as may be required by the Treasury Secretary (sec. 6038).
Information reporting is also required with respect to certain
foreign-owned domestic corporations (sec. 6038A). Included
under each of these information reporting provisions is a
requirement to report such information as the Treasury
Secretary may require for purposes of carrying out the
provisions of section 453C. Section 453C, relating to certain
indebtedness treated as payment on installment obligations (the
so-called ``proportional disallowance rule''), was repealed in
the Revenue Act of 1987.
Explanation of Provision
The bill repeals as obsolete the information reporting
requirements of sections 6038 and 6038A relating to section
453C. The provision is effective upon the date of its
enactment.
11. Clarification of a certain stadium bond transition rule in Tax
Reform Act of 1986 (sec. 1704(g) of the bill and sec.
1317(3)(A) of the Tax Reform Act of 1986)
Present Law
The Tax Reform Act of 1986 included a transition rule
authorizing tax-exempt bonds not exceeding $200 million to be
issued by or on behalf of the City of Cleveland, Ohio, to
finance a stadium. The bonds were required to be issued before
January 1, 1991 (and were so issued). As enacted, the rule
required Cleveland to retain a residual interest in the stadium
following planned private business use.
Explanation of Provision
The bill permits the residual interest in the stadium
currently held by the City of Cleveland to be assigned to
Cuyahoga County, Ohio (the county in which both Cleveland and
the stadium are located) because of a change in Ohio State law
prior to issuance of the bonds. The bill does not extend the
time for issuing the bonds or otherwise affect the amount of
bonds or the location or design of the stadium.
This provision is effective as if included in the Tax
Reform Act of 1986.
12. Health care continuation rules (sec. 1704(h) of the bill, sec.
7862(c)(5) of the 1989 Act, sec. 4980B(f)(2)(B)(i) of the Code,
sec. 602(2)(A) of ERISA, and sec. 2202(2)(A) of the Public
Health Service Act)
Present Law
The Revenue Reconciliation Act of 1989 (``1989 Act'')
amended the health care continuation rules to provide that if a
covered employee is entitled to Medicare and within 18 months
of such entitlement separates from service or has a reduction
in hours, the duration of continuation coverage for the spouse
and dependents is 36 months from the date the covered employee
became entitled to Medicare. One possible interpretation of the
statutory language, however, would permit continuation coverage
for up to 54 months. This extension of the coverage period was
not intended.
Explanation of Provision
The bill amends the Code (sec. 4980B), title I of the
Employee Retirement Income Security Act (sec. 602), and the
Public Health Service Act (sec. 2202(2)(A)) to limit the
continuation coverage in such cases to no more than 36 months.
The provision is effective for plan years beginning after
December 31, 1989.
13. Taxation of excess inclusions of a residual interest in a REMIC for
taxpayers subject to alternative minimum tax with net operating
losses (sec. 1704(i) of the bill and sec. 860E(a)(6) of the
Code)
Present Law
Residual interests in a REMIC
A real estate mortgage investment conduit (``REMIC'') is an
entity that holds real estate mortgages. All interests in a
REMIC must be ``regular interests'' or ``residual interests.''
A regular interest is an interest the terms of which are fixed
on the start-up day, which unconditionally entitles the holder
to receive a specified principal amount, and which provides
that interest amounts are payable based on a fixed rate (or a
variable rate to the extent provided in the Treasury
regulations). A residual interest is any interest that is so
designated and that is not a regular interest in a REMIC.
Generally, the holder of a residual interest in a REMIC
takes into account his daily portion of the taxable income or
net loss of such REMIC for each day during which he held such
interest. The taxable income of any holder of a residual
interest in a REMIC for any taxable year cannot be less than
the excess inclusion for the year (sec. 860E). Thus, in
general, income from excess inclusions cannot be offset by a
net operating loss (or net operating loss carryover) in
computing the taxpayer's regular tax.
Alternative minimum tax
Taxpayers are subject to an alternative minimum tax which
is payable, in addition to all other tax liabilities, to the
extent it exceeds the taxpayer's regular tax. The tax is
imposed at rates of 26 and 28 percent (20 percent in the case
of a corporation) on alternative minimum taxable income in
excess of an exemption amount. Alternative minimum taxable
income generally is the taxpayer's taxable income, as increased
or decreased by certain adjustments and preferences. A taxpayer
may offset no more than ninety percent of its alternative
minimum taxable income with its alternative tax net operating
loss carryover.
Because the determination of a taxpayer's alternative
minimum taxable income begins with taxable income, a holder of
a residual interest in a REMIC may have positive alternative
minimum taxable income even where the taxpayer has a net
operating loss for the year.
Explanation of Provision
The bill provides that three rules for determining the
alternative minimum taxable income of a taxpayer that is not a
thrift institution that holds residual interests in a REMIC.
First, the alternative minimum taxable income of such a
taxpayer is computed without regard to the REMIC rule that
taxable income cannot be less than the amount of excess
inclusions. This provision prevents a taxpayer from having to
include in alternative minimum taxable income preference items
for which it received no tax benefit.
Second, the alternative minimum taxable income of such a
taxpayer for a taxable year cannot be less than the excess
inclusions of the residual interests for that year. In effect,
this provision prevents nonrefundable credits from reducing the
taxpayer's income tax below an amount equal to what the
tentative minimum tax would be if computed only on excess
inclusions.
Third, the amount of any alternative minimum tax net
operating loss deduction of such a taxpayer is computed without
regard to any excess inclusions. This provision insures that
the net operating losses will not reduce any income
attributable to any excess inclusions. Thus, all such taxpayers
subject to the alternative minimum tax will pay a tax on excess
inclusions at the alternative minimum tax rate, regardless of
whether the taxpayer has a net operating loss.
The provision is effective for all taxable years beginning
after December 31, 1986, unless the taxpayer elects to apply
the rules of the bill only to taxable years beginning after the
date of enactment.
14. Application of harbor maintenance tax to Alaska and Hawaii ship
passengers (sec. 1704(j) of the bill and sec. 4462(b) of the
Code)
Present Law
A harbor maintenance excise tax (``harbor tax'') of 0.125
percent of value applies generally to commercial cargo
(including passenger fares) loaded or unloaded at U.S. ports
(sec. 4461). The harbor tax does not apply to commercial cargo
(other than crude oil with respect to Alaska) loaded or
unloaded in Alaska, Hawaii, and U.S. possessions where such
cargo is transported to or from the U.S. mainland (for domestic
use) or where such cargo is loaded and unloaded in the same
State (Alaska or Hawaii) or possession (sec. 4462(b)).
Explanation of Provision
The bill clarifies that the harbor tax does not apply to
passenger fares where the passengers are transported on U.S.
flag vessels operating solely within the State waters of Alaska
or Hawaii and adjacent international waters (i.e., leaving and
returning to a port in the same State without stopping
elsewhere).
The provision applies as if included in the Harbor
Maintenance Revenue Act of 1986 (April 1, 1987).
15. Modify effective date provision relating to the Energy Policy Act
of 1992 (sec. 1704(k) of the bill and secs. 53 and 30 of the
Code)
Present Law
The nonconventional fuels production credit (sec. 29)
cannot reduce the taxpayer's tax liability to less than the
amount of the tentative minimum tax. The credit for prior year
minimum tax liability (sec. 53) is increased by the amount of
the nonconventional fuels credit not allowed for the taxable
year solely by reason of the limitation based on the taxpayer's
tentative minimum tax.
Explanation of Provision
The bill corrects a cross reference to section 29(b)(6)(B)
contained in section 53(d)(1)(B)(iv), and clarifies that the
correction applies to taxable years beginning after December
31, 1990. In addition, section 2(e)(5) of the bill clarifies
that a correction made in the Energy Policy Act of 1992 to a
similar cross reference in section 53(d)(1)(B)(iii) applies to
taxable years beginning after December 31, 1990.
The bill also clarifies the relationship between the basis
adjustment rules for the electric vehicle credit (sec.
30(d)(1)) and the alternative minimum tax.
16. Treat qualified football coaches plan as multiemployer pension plan
for purposes of the Internal Revenue Code (sec. 1704(l) of the
bill and sec. 1022 of ERISA)
Present Law
Section 3(37) of the Employee Retirement Income Security
Act of 1974 (``ERISA''), as amended by Public Law 100-202
(Continuing Appropriations for Fiscal Year 1988), provides
that, for purposes of Title I of ERISA, a qualified football
coaches plan generally is treated as a multiemployer plan and
may include a qualified cash or deferred arrangement. Under
section 3(37) of ERISA, a qualified football coaches plan is
defined as any defined contribution plan established and
maintained by an organization described in section 501(c) of
the Internal Revenue Code (the ``Code''), the membership of
which consists entirely of individuals who primarily coach
football as full-time employees of 4-year colleges or
universities, if the organization was in existence on September
18, 1986. This definition is generally intended to apply to the
American Football Coaches Association.
However, section 9343(a) of the Omnibus Budget
Reconciliation Act of 1987 (P.L. 100-203) provides that Titles
I and IV of ERISA are not applicable in interpreting Title II
of ERISA (the Code provisions relating to qualified plans),
except to the extent specifically provided in the Code or as
determined by the Secretary of the Treasury.
Explanation of Provision
The bill amends Title II of ERISA to provide that, for
purposes of determining the qualified plan status of a
qualified football coaches plan, section 3(37) of ERISA is
treated as part of Title II of ERISA and a qualified football
coaches plan is treated as a multiemployer collectively
bargained plan.
The provision is effective for years beginning after
December 22, 1987 (the date of enactment of P.L. 100-202).
17. Determination of unrecovered investment in annuity contract (sec.
1704(m) of the bill and sec. 72(b) and (c) of the Code)
Present Law
An exclusion is provided for amounts received as an annuity
under an annuity, endowment, or life insurance contract, as
determined under a statutory exclusion ratio (sec. 72(b)). The
exclusion ratio is determined as the ratio of (1) the
taxpayer's investment in the contract (as of the annuity
starting date) to (2) the expected return under the contract
(as of such date). In the case of a contract with a refund
feature, the amount of a taxpayer's investment in the contract
is reduced by the value of the refund feature (sec.72(c)).
This exclusion was modified by the Tax Reform Act of 1986
to limit the excludable amount to the taxpayer's unrecovered
investment in the contract, and to provide a deduction for the
unrecovered investment in the contract if payments as an
annuity under the contract cease by reason of the death of an
annuitant. In the case of a contract with a refund feature, the
1986 Act modifications reduce the exclusion ratio so that it is
possible that less than the entire investment in the contract
can be recovered tax-free.
Explanation of Provision
The bill modifies the definition of the unrecovered
investment in the contract, in the case of a contract with a
refund feature, so that the entire investment in the contract
can be recovered tax-free.
The provision is effective as if enacted in the Tax Reform
Act of 1986.
18. Election by parent to claim unearned income of certain children on
parent's return (sec. 1704(n) of the bill and secs. 1 and 59(j)
of the Code)
Present Law
The net unearned income of a child under 14 years of age is
taxed to the child at the parent's statutory rate. Net unearned
income means unearned income less the sum of $650 (for 1995)
and the greater of: (1) $650 (for 1995) or, (2) if the child
itemizes deductions, the amount of allowable deductions
directly connected with the production of the unearned income.
The dollar amounts are adjusted for inflation.
In certain circumstances, a parent may elect to include a
child's unearned income on the parent's income tax return if
the child's income is less than $5,000. A parent making this
election must include the gross income of the child in excess
of $1,000 in income for the taxable year. In addition, the
parent must report an additional tax liability equal to the
lesser of (1) $75 or (2) 15 percent of the excess of the
child's income over $500. The dollar amounts for the election
are not adjusted for inflation.
A person claimed as a dependent cannot claim a standard
deduction exceeding the greater of $650 (for 1995) or such
person's earned income. For alternative minimum tax purposes,
the exemption of a child under 14 years of age generally cannot
exceed the sum of such child's earned income plus $1,000. The
$650 amount is adjusted for inflation but the $1,000 amount is
not.
Explanation of Provision
The bill adjusts for inflation the dollar amounts involved
in the election to claim unearned income on the parent's
return. It likewise indexes the $1,000 amount used in computing
the child's alternative minimum tax.
The provision is effective for taxable years beginning
after December 31, 1995.
19. Treatment of certain veterans' reemployment rights (sec. 1704(o) of
the bill and new sec. 414(u) of the Code)
Present Law
Under the Uniformed Services Employment and Reemployment
Rights Act of 1994 (``USERRA''), Pub. L. No. 103-353, 38 U.S.C.
Sec. Sec. 4301, ff., which revised and restated the Federal law
protecting veterans' reemployment rights, an employee who
leaves a civilian job for qualified military service generally
is entitled to be reemployed by the civilian employer if the
individual returns to employment within a specified time
period. In addition to reemployment rights, a returning veteran
also is entitled to the restoration of certain pension, profit
sharing and similar benefits that would have accrued, but for
the employee's absence due to the qualified military service.
USERRA generally provides that for a reemployed veteran
service in the uniformed services is considered service with
the employer for retirement plan benefit accrual purposes, and
the employer that reemploys the returning veteran is liable for
funding any resulting obligation. USERRA also provides that the
reemployed veteran is entitled to any accrued benefits that are
contingent on the making of, or derived from, employee
contributions or elective deferrals only to the extent the
reemployed veteran makes payment to the plan with respect to
such contributions or deferrals. No such payment may exceed the
amount the reemployed veteran would have been permitted or
required to contribute had the person remained continuously
employed by the employer throughout the period of uniformed
service. Under USERRA, any such payment to the plan must be
made during the period beginning with the date of reemployment
and whose duration is three times the reemployed veteran's
period of uniform service, not to exceed five years.
Under the Internal Revenue Code, overall limits are
provided on contributions and benefits under certain retirement
plans. For example, the maximum amount of elective deferrals
that can be made by an individual into a qualified cash or
deferred arrangement in any taxable year is limited to $9,500
for 1996 (sec. 402(g)). Annual additions with respect to each
participant under a qualified defined contribution plan
generally are limited to the lesser of $30,000 (for 1996) or 25
percent of compensation (sec 415(c)). Annual deferrals with
respect to each participant under an eligible deferred
compensation plan (sec. 457) generally are limited to the
lesser of $7,500 or 33\1/3\ percent of includible compensation.
There is no provision under present law that permits
contributions or deferrals to exceed these and other annual
limits in the case of contributions with respect to a
reemployed veteran.
Other requirements for which there is no special provision
for contributions with respect to a reemployed veteran include
the limit on deductible contributions and the qualified plan
nondiscrimination, coverage, minimum participation, and top
heavy rules.
Explanation of Provision
The bill provides special rules in the case of certain
contributions (``make-up contributions'') with respect to a
reemployed veteran that are required or authorized under
USERRA. The bill applies to contributions made by an employer
or employee to an individual account plan or to contributions
made by an employee to a defined benefit plan that provides for
employee contributions.
Under the bill, if any make-up contribution is made by an
employer or employee with respect to a reemployed veteran, then
such contributions are not subject to the generally applicable
plan contributions limits (i.e., secs. 402(g), 402(h), 403(b),
408, 415, or 457) or the limit on deductible contributions
(i.e., secs. 404(a) or 404(h)) as applied with respect to the
year in which the contribution is made. In addition, the make-
up contribution are not taken into account in applying the plan
contribution or deductible contribution limits to any other
contribution made during the year. However, the amount of any
make-up contribution could not exceed the aggregate amount of
contributions that would have been permitted under the plan
contribution and deductible contribution limits for the year to
which the contribution relates had the individual continued to
be employed by the employer during the period of uniformed
service.
Under the bill, a plan to which a make-up contribution is
made on account of a reemployed veteran is not treated as
failing to meet the qualified plan nondiscrimination, coverage,
minimum participation, and top heavy rules (i.e., secs.
401(a)(4), 401(a)(26), 401(k)(3), 401(k)(11), 401(k)(12),
401(m), 403(b)(12), 408(k)(3), 408(k)(6), 408(p), 410(b), or
416) by reason of the making of such contribution.
Consequently, for purposes of applying the requirements and
tests associated with these rules, make-up contributions are
not taken into account either for the year in which they are
made or for the year to which they relate.
Under the bill, a special rule applies in the case of make-
up contributions of salary reduction, employer matching, and
after-tax employee amounts. A plan that provides for elective
deferrals or employee contributions is treated as meeting the
requirements of USERRA if the employer permits reemployed
veterans to make additional elective deferrals or employee
contributions under the plan during the period which begins on
the date of reemployment and has the same length as the lesser
of (1) the period of the individual's absence due to uniformed
service multiplied by three or (2) five years.
The employer is required to match any additional elective
deferrals or employee contributions at the same rate that would
have been required had the deferrals or contributions actually
been made during the period of uniformed service. Additional
elective deferrals, employer matching contributions, and
employee contributions is treated as make-up contributions for
purposes of the rule exempting such contributions from
qualified plan nondiscrimination, coverage, minimum
participation, and top heavy rules as described above.
The bill clarifies that USERRA does not require (1) any
earnings to be credited to an employee with respect to any
contribution before such contribution is actually made or (2)
any make-up allocation of any forfeiture that occurred during
the period of uniformed service.
The bill also provides that the plan loan, plan
qualification, and prohibited transaction rules will not be
violated merely because a plan suspends the repayment of a plan
loan during a period of uniformed service.
The bill also defines compensation to be used for purposes
of determining make-up contributions and would conform the
rules contained in the Code with certain rights of reemployed
veterans contained in USERRA pertaining to employee benefit
plans.
The provision is effective as of December 12, 1994, the
effective date of the benefits-related provisions of USERRA.
20. Reporting of real estate transactions (sec. 1704(p) of the bill and
sec. 6045(e)(3) of the Code)
Present Law
It is unlawful for any real estate reporting person to
charge separately any customer for complying with the
information reporting requirements with respect to real estate
transactions.
Explanation of Provision
The bill clarifies that real estate reporting persons may
take into account the cost of complying with the reporting
requirements of Code section 6045 in establishing charges for
their services, so long as a separately listed charge for such
costs is not made.
The provision is effective on November 11, 1988 (as if
originally enacted as part of the amendment to the Code
relating to separate charges).
21. Clarification of denial of deductions for stock redemption expenses
(sec. 1704(q) of the bill and sec. 162(k)(2) of the Code)
Present Law
Section 162(k), added by the Tax Reform Act of 1986, denies
a deduction for any amount paid or incurred by a corporation in
connection with the redemption of its stock. An exception is
provided for any deduction allowable under section 163
(relating to interest). The Internal Revenue Service has taken
the position that costs properly allocable to a borrowing the
interest on which is deductible under the exception may not be
amortized over the period of the loan, due to section 162(k).
Different courts have reached differing conclusions when
taxpayers have litigated the question. 40
---------------------------------------------------------------------------
\40\ See e.g., Fort Howard Corp. v. Commissioner, 103 T.C. 345
(1994)(upholding the IRS position); compare U.S. v. Kroy (Europe)
Limited, 27 F.3d 367 (9th Cir. 1994)(to the contrary).
---------------------------------------------------------------------------
Explanation of Provision
The bill clarifies that amounts properly allocable to
indebtedness on which interest is deductible and properly
amortized over the term of that indebtedness are not subject to
the provision of section 162(k) denying a deduction for any
amount paid or incurred by a corporation in connection with the
redemption of its stock.
In addition, the bill clarifies that the rules of section
162(k) apply to any acquisition of its stock by a corporation
or by a party that has a relationship to the corporation
described in section 465(b)(3)(C) (which applies a more than 10
percent relationship test in certain cases).
Thus, for example, it is clarified that the denial of a
deduction applies to any reacquisition (i.e., any transaction
that is in effect an acquisition of previously outstanding
stock) regardless of whether the transaction is treated as a
redemption for purposes of subchapter C of the Code, regardless
of whether it is treated for tax purposes as a sale of the
stock or as a dividend, and regardless of whether the
transaction is a reorganization or other transaction.
Apart from the clarification relating to amounts properly
allocable to indebtedness, it is not intended that application
of the 1986 Act deduction denial to any amount or transaction
be limited under the bill.
The provision clarifying that amounts properly allocable to
indebtedness and amortized over the term of that indebtedness
are not subject to the denial under section 162(k), is
effective as if included in the Tax Reform Act of 1986.
The other clarifications apply to amounts paid or incurred
after September 13, 1995. No inference is intended that any
amounts described in these other clarifications are deductible
under present law.
22. Definition of passive income in determining passive foreign
investment company status (sec. 1704(s) of the bill, sec. 1235
of the 1986 Act and sec. 1296(b)(2) of the Code)
Present Law
Under the export trade corporation (ETC) provisions, a
controlled foreign corporation (CFC) that qualifies as an ETC
is not subject to current U.S. tax on certain export trade
income. In 1971, the ETC provisions were replaced by rules
applicable to domestic international sales corporations
(DISCs). Only those ETCs in existence at that time are allowed
to continue operating as ETCs. In 1984, the DISC provisions
were largely replaced by the rules applicable to foreign sales
corporations (FSCs). Certain foreign trade income of a FSC is
exempt from U.S. income tax. In addition, a domestic
corporation is allowed a 100-percent dividends-received
deduction for dividends distributed from the FSC out of
earnings attributable to certain foreign trade income.
The Tax Reform Act of 1986 established an anti-deferral
regime for passive foreign investment companies (PFICs). A
foreign corporation is a PFIC if (1) 75 percent or more of its
gross income for the taxable year consists of passive income,
or (2) 50 percent or more of the average amount of its assets
consists of assets that produce, or are held for the production
of passive income. Passive income for this purpose generally
means income that satisfies the definition of foreign personal
holding company income under subpart F. Foreign personal
holding company income generally includes interest, dividends,
and annuities; certain rents and royalties; related party
factoring income; net commodities gains; net foreign currency
gains; and net gains from sales or exchanges of certain other
property. In determining whether a foreign corporation is a
PFIC, passive income does not include certain active-business
banking, insurance, or (in the case of the U.S. shareholders of
a CFC) securities income, or certain amounts received from a
related party (to the extent that the amounts are allocable to
income of the related party which is not passive income).
Explanation of Provision
The bill clarifies that foreign trade income of a FSC and
export trade income of an ETC do not constitute passive income
for purposes of the PFIC definition.
The provision is effective as if it were included in the
Tax Reform Act of 1986.
23. Exclusion from income for combat zone compensation (sec. 1704(t)(4)
of the bill and sec. 112 of the Code)
Present Law
The Code provides that gross income does not include
compensation received by a taxpayer for active service in the
Armed Forces of the United States for any month during any part
of which the taxpayer served in a combat zone (or was
hospitalized as a result of injuries, wounds or disease
incurred while serving in a combat zone) (limited to $500 per
month for commissioned officers). The heading refers to
``combat pay,'' although that term is no longer used to refer
to special pay provisions for members of the Armed Forces, nor
is the exclusion limited to those special pay provisions
(hazardous duty pay (37 U.S.C. sec. 301) and hostile fire or
imminent danger pay (37 U.S.C. sec. 310)).
Explanation of Provision
The bill modifies the heading of Code section 112 to refer
to ``combat zone compensation'' instead of ``combat pay.'' The
bill also makes conforming changes to cross-references
elsewhere in the Code. This provision is effective on the date
of enactment.
24. Certain property not treated as section 179 property (sec. 1704(u)
of the bill and sec. 179 of the Code)
Present Law
Section 179 allows a qualified taxpayer (generally, a small
business) to elect to expense and deduct, rather than
capitalize and depreciate, a limited amount of the cost of
property placed in service in the taxpayer's trade or business.
One of the ``deadwood provisions'' of the Omnibus Budget
Reconciliation Act of 1990 (``1990 Act'') inadvertently
expanded the scope of section 179 to include property described
in section 50(b), air conditioning or heating units, and
horses. According to legislative history, these 1990 Act
provisions were ``an attempt to simplify the Code by deleting
`deadwood,' without making substantive changes in the tax
law.''
Explanation of Provision
The bill restores pre-1990 law to deny the expensing
allowance for the following property placed in service after
May 14, 1996: (1) property described in section 50(b)
(generally, property used outside the U.S., property used in
connection with furnishing lodging, property used by tax-exempt
organizations, and property used by governments and foreign
persons); (2) air conditioning or heating units; and (3)
horses.
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 roll call votes of the Committee in its
consideration of the bill.
Motion to report the bill
The bill, H.R. 3448, as amended, was ordered favorably
reported on May 14, 1996, by a roll call vote of 33 yeas and 3
nays, with a quorum present. 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...................... ........ ........ ........ Mr. Lewis......... X ........ ........
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.................... ........
Mr. English..................... X
Mr. Ensign...................... X
Mr. Christensen................. X
----------------------------------------------------------------------------------------------------------------
Votes on amendments
An amendment by Messrs. Levin and Ramstad to the Archer
amendment in the nature of a substitute to strike section 1602,
which would repeal the exclusion for interest on loans used to
acquire employer securities, and add in subtitle F of Title I
provisions regarding foreign trust tax compliance, was defeated
by a roll call vote of 14 yeas to 17 nays. The vote was as
follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer...................... ........ X ........ Mr. Gibbons....... ........ ........ ........
Mr. Crane....................... ........ X ........ Mr. Rangel........ X ........ ........
Mr. Thomas...................... ........ X ........ Mr. Stark......... X ........ ........
Mr. Shaw........................ ........ X ........ Mr. Jacobs........ ........ ........ ........
Mrs. Johnson.................... ........ X ........ Mr. Ford.......... ........ ........ ........
Mr. Bunning..................... ........ X ........ Mr. Matsui........ X ........ ........
Mr. Houghton.................... ........ ........ ........ 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...................... ........ ........ ........ 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.................... ........
Mr. English..................... ........ X
Mr. Ensign...................... ........ X
Mr. Christensen................. ........ X
----------------------------------------------------------------------------------------------------------------
An amendment by Mr. Matsui to the Archer amendment in the
nature of a substitute to add at the end of Subtitle A of Title
I a new section to extend and modify the research credit, and
add at the end of Subtitle F a new section on the temporary
restoration of airport and airway trust fund taxes, was
defeated by a roll call vote of 14 yeas to 19 nays. The vote
was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer...................... ........ X ........ Mr. Gibbons....... ........ ........ ........
Mr. Crane....................... ........ X ........ Mr. Rangel........ X ........ ........
Mr. Thomas...................... ........ X ........ Mr. Stark......... ........ X ........
Mr. Shaw........................ ........ X ........ Mr. Jacobs........ ........ ........ ........
Mrs. Johnson.................... X ........ ........ Mr. Ford.......... ........ ........ ........
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...................... ........ ........ ........ Mr. Lewis......... X ........ ........
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.................... ........
Mr. English..................... X ........
Mr. Ensign...................... ........ X
Mr. Christensen................. ........ X
----------------------------------------------------------------------------------------------------------------
An amendment by Mr. McDermott to the Archer amendment in
the nature of a substitute to add at the end of Chapter 4 of
Subtitle D a new section to provide that distributions from
certain plans may be used without penalty during periods of
unemployment, and add at the end of Subtitle F of Title I a new
section on the temporary restoration of airport and airway
trust fund taxes, was defeated by a roll call vote of 14 yeas
to 19 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer...................... ........ X ........ Mr. Gibbons....... ........ ........ ........
Mr. Crane....................... ........ X ........ Mr. Rangel........ X ........ ........
Mr. Thomas...................... ........ X ........ Mr. Stark......... X ........ ........
Mr. Shaw........................ ........ X ........ Mr. Jacobs........ ........ ........ ........
Mrs. Johnson.................... ........ X ........ Mr. Ford.......... ........ ........ ........
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...................... ........ ........ ........ Mr. Lewis......... X ........ ........
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.................... ........
Mr. English..................... X ........
Mr. Ensign...................... ........ X
Mr. Christensen................. ........ X
----------------------------------------------------------------------------------------------------------------
An amendment by Mr. Neal to the Archer amendment in the
nature of a substitute to add at the end of Subtitle A of Title
I a new section for the deduction for higher education
expenses, and at the end of Subtitle F of Title I a new section
on the temporary restoration of airport and airway trust fund
taxes, was defeated by a roll call vote of 13 yeas to 20 nays.
The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer...................... ........ X ........ Mr. Gibbons....... ........ ........ ........
Mr. Crane....................... ........ X ........ Mr. Rangel........ X ........ ........
Mr. Thomas...................... ........ X ........ Mr. Stark......... X ........ ........
Mr. Shaw........................ ........ X ........ Mr. Jacobs........ ........ ........ ........
Mrs. Johnson.................... ........ X ........ Mr. Ford.......... ........ ........ ........
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...................... ........ ........ ........ Mr. Lewis......... X ........ ........
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.................... ........
Mr. English..................... ........ X
Mr. Ensign...................... ........ X
Mr. Christensen................. ........ X
----------------------------------------------------------------------------------------------------------------
An amendment by Mr. Levin to the Archer amendment in the
nature of a substitute to strike subsections (b) and (c)(2) of
section 1202 (relating to limitation to education below
graduate level), and insert at the end of Subtitle F a new
section on expansion of the requirement that involuntarily
converted property be replaced with property acquired from an
unrelated person, and a new section on financial asset
securitization investment trusts, was agreed to by a roll call
vote of 18 yeas to 15 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer...................... ........ X ........ Mr. Gibbons....... ........ ........ ........
Mr. Crane....................... ........ X ........ Mr. Rangel........ X ........ ........
Mr. Thomas...................... ........ X ........ Mr. Stark......... X ........ ........
Mr. Shaw........................ X ........ ........ Mr. Jacobs........ X ........ ........
Mrs. Johnson.................... ........ X ........ Mr. Ford.......... ........ ........ ........
Mr. Bunning..................... ........ X ........ Mr. Matsui........ X ........ ........
Mr. Houghton.................... X ........ ........ Mrs. Kennelly..... X ........ ........
Mr. Herger...................... ........ X ........ Mr. Coyne......... ........ ........ ........
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...................... ........ ........ ........ Mr. Lewis......... X ........ ........
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.................... ........
Mr. English..................... ........ X
Mr. Ensign...................... X ........
Mr. Christensen................. ........ X
----------------------------------------------------------------------------------------------------------------
An amendment by Mr. Kleczka to the Archer amendment in the
nature of a substitute to strike subsection (a)(2) of section
1112 (relating to the effective date of the employer tax credit
for FICA taxes paid on tip income) was defeated by a roll call
vote of 13 yeas to 20 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer...................... ........ X ........ Mr. Gibbons....... ........ ........ ........
Mr. Crane....................... ........ X ........ Mr. Rangel........ X ........ ........
Mr. Thomas...................... ........ X ........ Mr. Stark......... X ........ ........
Mr. Shaw........................ ........ X ........ Mr. Jacobs........ X ........ ........
Mrs. Johnson.................... ........ X ........ Mr. Ford.......... ........ ........ ........
Mr. Bunning..................... ........ X ........ Mr. Matsui........ X ........ ........
Mr. Houghton.................... ........ X ........ Mrs. Kennelly..... X ........ ........
Mr. Herger...................... ........ X ........ Mr. Coyne......... ........ ........ ........
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...................... ........ ........ ........ Mr. Lewis......... X ........ ........
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.................... ........ ........ ........
Mr. English..................... ........ X ........
Mr. Ensign...................... ........ X ........
Mr. Christensen................. ........ X ........
----------------------------------------------------------------------------------------------------------------
Reconsideration of an amendment by Mr. Levin to the Archer
amendment in the nature of a substitute to strike subsections
(b) and (c)(2) of section 1202 (relating to limitation to
education below graduate level), and insert at the end of
Subtitle F a new section on expansion of the requirement that
involuntarily converted property be replaced with property
acquired from an unrelated person, and a new section on
financial asset securitization investment trusts, was defeated
by a roll call vote of 16 yeas to 20 nays. The vote was as
follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer...................... ........ X ........ Mr. Gibbons....... ........ ........ ........
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...................... ........ ........ ........ Mr. Lewis......... X ........ ........
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.................... ........ ........ ........
Mr. English..................... ........ X ........
Mr. Ensign...................... ........ X ........
Mr. Christensen................. ........ X ........
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimates 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 budget effects of the bill, H.R. 3448, as
reported.
The bill is estimated to have the following effects on the
budget for fiscal years 1996-2003:
Estimated Budget Effects of H.R. 3448, the ``Small Business Job Protection Act of 1996,'' As Approved by the Committee on Ways and Means
[Fiscal Years 1996-2003, in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996- 1996-
Provision Effective 1996 1997 1998 1999 2000 2001 2002 2003 2000 2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
I. Small Business Provisions:
1. Increase in expensing
limitations for small
businesses to $18,500 for
1996, $19,000 for 1997,
$20,000 for 1998, $21,000
for 1999, $22,000 for 2000,
$23,000 for 2001, $23,500
for 2002, $25,000 for 2003
and thereafter.............. tyba 12/31/95 -129 -311 -337 -479 -581 -590 -547 -625 -1,837 -3,599
2. FICA tip credit:
a. Provided for off-
premises employees...... 1/1/97 ........ -6 -14 -15 -16 -17 -18 -18 -51 -104
b. Clarification......... .................
(9)Negligible Revenue Effect
3. Treatment of storage of
product samples............. tyba 12/31/95 (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) -2
4. Provide that certain
charitable risk pools would
qualify as charitable
organizations under section
501(c)(3)................... tyba DOE ........ (\1\) -1 -1 -1 -1 -2 -2 -3 -8
5. Treatment of certain dues
paid to agricultural or
horticultural organizations. tyba 12/31/94
(9)Negligible Revenue Effect
6. Fishermen--treat ``pers''
payments as wages rather
than self-employment income. ................. -1 -10 (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) -11 -12
7. Require purchasers of fish
in excess of $600 in cash to
provide information reports. 12/31/96 ........ 5 9 9 10 10 11 11 33 65
---------------------------------------------------------------------------------------------------
Subtotal of Small Business
Provisions................ ................. -130 -322 -343 -486 -588 -598 -556 -634 -1,869 -3,657
===================================================================================================
II. Extension of Certain Expiring
Provisions:
1. Extend the work
opportunity tax credit, with
modifications through 6/30/
97 \2\...................... 7/1/96 -33 -90 -91 -48 -19 -6 -1 ........ -281 -288
2. Employer-provided
educational assistance;
applies to undergraduate
education only after 1995;
sunset after 12/31/96....... 1/1/95 -136 -608 ........ ........ ........ ........ ........ ........ -744 -744
3. Permanent extension of
FUTA exemption for alien
agricultural workers \3\.... 1/1/95 -5 -3 -3 -3 -3 -3 -3 -3 -17 -26
---------------------------------------------------------------------------------------------------
Subtotal of Expiring
Provisions................ ................. -174 -701 -94 -51 -22 -9 -4 -3 -1,042 -1,058
===================================================================================================
III. Provisions Relating to S
Corporations:
1. Increase number of
eligible sharholders........ tyba 12/31/96 ........ -5 -14 -16 -20 -22 -25 -28 -55 -130
2. Permit certain trusts to
hold stock in S corporations tyba 12/31/96 ........ -2 -2 -2 -2 -2 -2 -2 -8 -14
3. Extend holding period for
certain trusts.............. tyba 12/31/96 ........ (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\5\) (\6\)
4. Financial institutions
permitted to hold safe-
harbor debt................. tyba 12/31/96 ........ (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) -1
5. Authority to validate
certain invalid elections... tyba 12/31/82 ........ (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) -1
6. Allow interim closing of
the books................... tyba 12/31/96
(9)Negligible Revenue Effect
7. Expand post-termination
period and amend subchapter
S audit procedures.......... tyba 12/31/96 ........ (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) -1
8. S corporations permitted
to hold S or C subsidiaries. tyba 12/31/96 ........ -5 -9 -11 -13 -15 -17 -20 -38 -90
9. Treatment of distributions
during loss years........... tyba 12/31/96 ........ (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) -1
10. Treatment of S
corporations as shareholders
in C corporations........... tyba 12/31/96 ........ (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\5\) (\6\)
11. Elimination of certain
earnings and profits of S
corporations................ tyba 12/31/96 ........ (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\5\) (\6\)
12. Treatment of certain
losses carried over under at-
risk rules.................. tyba 12/31/96 ........ (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\5\) (\6\)
13. Adjustments to basis of
inherited S stock........... dda DOE ........ (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\) (\7\)
14. Treatment of certain real
estate held by an S
corporation................. tyba 12/31/96 ........ -1 -1 -2 -2 -2 -2 -2 -6 -12
15. Transition rule for
elections after termination. tyba 12/31/96 ........ (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\4\) (\5\) (\6\)
---------------------------------------------------------------------------------------------------
Subtotal of Subchapter S
Corporations Provisions... ................. -3 -31 -67 -78 -89 -94 -100 -107 -268 -569
===================================================================================================
IV. Pension Simplification
Provisions:
A. Simplified Distribution
Rules:
1. Repeal of 5-year
income averaging for
lump-sum distributions.. tyba 12/31/98 ........ 67 63 94 65 56 32 17 289 394
2. Repeal of $5,000
exclusion of employees'
death benefits.......... dda DOE ........ 28 49 52 54 55 55 56 183 349
3. Simplified method for
taxing annuity
distributions under
certain employer plans.. asda 90 da DOE ........ 22 28 28 29 29 29 30 107 195
4. Minimum required
distributions........... yba 12/31/96 ........ -1 -4 -4 -4 -4 -4 -4 -13 -25
B. Increased Access to
Pension Plans:
1. Establish SIMPLE
pension plan, but repeal
salary reduction SEPs... yba 12/31/96 ........ -53 -81 -84 -87 -90 -93 -97 -305 -585
2. Tax-exempt
organization eligible
under section 401(k).... yba 12/31/96 ........ -8 -22 -24 -25 -26 -28 -29 -79 -162
C. Nondiscrimination
Provisions:
1. Simplified definition
of highly compensated
employees [8]........... yba 12/31/96 ........ (\9\) (\9\)
(6)Considered in Other Provisions
2. Repeal of family
aggregation rules\8\.... yba 12/31/96 ........ (\10\) (\10\)
(6) Considered in Other
Provisions
3. Modification of
additional participation
requirements............ yba 12/31/96
(9) Negligible Revenue Effect
4. Safe-harbor
nondiscrimination rules
for qualified cash or
deferred arrangements
and matching
contributions \11\...... yba 12/31/98 ........ ........ ........ -42 -162 -167 -171 -176 -204 -718
5. Definition of
compensation for section
415 purposes............ yba 12/31/97 ........ ........ -1 -1 -2 -2 -2 -2 -4 -10
D. Miscellaneous Provision:
1. Plans covering self-
employed individuals.... yba 12/31/96
(9)Negligible Revenue Effect
2. Elimination of special
vesting rule for
multiemployer plans..... yba 12/31/96 ........ (\1\) -1 -1 -1 -1 -1 -1 -3 -4
3. Distributions under
rural cooperative plans. DOE
(9)Negligible Revenue Effect
4. Treatment of
governmental plans under
section 415............. yba 12/31/94
(9)Negligible Revenue Effect
5. Uniform retirement age
\8\..................... yba 12/31/96 ........ (\10\) (\10\)
(6) Considered in Other
Provisions
6. Contributions on
behalf of disabled
employees............... yba 12/31/96
(9)Negligible Revenue Effect
7. Treatment of deferred
compensation plans of
State and local
governments and tax-
exempt organizations.... tyba 12/31/96 ........ (\1\) -1 -1 -1 -2 -2 -2 -3 -9
8. Require individual
ownership of section 457
plan assets............. DOE ........ -7 -21 -24 -25 -25 -26 -27 -77 -155
9. Correction of GATT
interest and mortality
rate provisions in the
Retirement Protection
Act permanent change.... eaii GATT ........ -4 -4 -4 ........ ........ ........ ........ -12 -12
10. Multiple salary
reduction agreements
permitted under section
403(b).................. tyba 12/31/95
(9)Negligible Revenue Effect
11. Application of
elective deferred limit
to section 403(b) plans. tyba 12/31/95
(9)Negligible Revenue Effect
12. Treatment of Indian
tribal governments under
section 403(b).......... pybb 1/1/95
(9)Negligible Revenue Effect
13. Repeal of combined
plan limit.............. lyba 12/31/98 ........ ........ ........ -70 -189 -195 -201 -207 -259 -862
14. 3-year waiver of
excess distribution tax. 1/1/96 ........ 49 43 3 ........ ........ ........ ........ 95 95
15. Increase section 4975
excise tax on prohibited
transactions from 5% to
10%..................... ptoa DOE ........ 2 4 4 4 4 4 4 14 26
16. Modify notice
required of right to
qualified joint and
survivor annuity........ pyba 12/31/96
(9)Negligible Revenue Effect
17. Treatment of leased
employees............... yba 12/31/96
(9)Negligible Revenue Effect
18. Uniform penalty
provision to apply to
certain pension
reporting requirements.. 1/1/97
(9)No Revenue Effect
19. Clarify that SECA
does not apply to
certain parsonage
allowance income........ ybbo/a 12/31/94
(9)Negligible Revenue Effect
20. Date of adoption of
plan amendments......... DOE
(9)No Revenue Effect
---------------------------------------------------------------------------------------------------
Subtotal of Pension
Simplification Provisions. ................. ........ 90 47 -74 -344 -368 -408 -438 -281 -1,495
===================================================================================================
V. Foreign Simplification--Repeal
of excess passive assets
provision (section 956A)........ tyba 12/31/96 ........ -11 -22 -29 -36 -41 -45 -51 -98 -235
===================================================================================================
VI. Revenue Offsets:.............
1. Possessions tax credit:
Wage credit companies--6
years of present law,
followed by 4-year phaseout
with modified base period;
Income companies--2 years of
present law followed by 8-
year phaseout with modified
base period; QPSII--repealed
1/1/96...................... tyba 12/31/95 255 605 552 596 498 516 746 1,116 2,506 4,884
2. Repeal 50 % interest
income exclusion for
financial institution loans
to ESOPs.................... Ima 10/13/95 12 68 108 148 186 223 260 295 521 1,299
3. Apply look-through rule
for purposes of
characterizing certain
subpart F insurance income
as UBTI..................... gira 12/31/95 7 23 24 27 30 32 34 37 111 214
4. Corporate accounting--
reform of income forecast
method...................... ppisa 9/13/95 32 69 29 13 14 16 19 22 157 214
5. Modify exclusion of
damages received on account
of personal injury or
sickness.................... ara 6/30/96 5 50 55 59 61 64 68 71 230 433
6. Repeal advance refunds of
diesel fuel tax for diesel
cars and light trucks....... vpa DOE 3 17 19 19 19 19 19 19 76 133
---------------------------------------------------------------------------------------------------
Subtotal of Revenue Offsets ................. 314 832 787 862 808 870 1,146 1,560 3,601 7,177
===================================================================================================
VII. Technical Corrections--
Luxury excise tax, expensing
modification, and other
technical corrections........... ................. 14 (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 13 13
===================================================================================================
Net Total.................. ................. 21 -143 308 144 -271 -240 33 327 56 176
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
\2\ Credit rate at 35% on first $6,000 of income; eligible workers expanded to include welfare cash recipients and veterans foodstamp recipients; 500
hour work requirement.
\3\ Estimates provided by the Congressional Budget Office (CBO).
\4\ Loss of less than $5 million.
\5\ Loss of less than $15 million.
\6\ Loss of less than $20 million.
\7\ Gain of less than $1 million.
\8\ Revenue effect after 1/1/99 included in the revenue estimate for the safe harbor provision due to interactions between this provision and item
II.C.4.
\9\ Loss of less than $10 million.
\10\ Negligible revenue effect.
\11\ This provision considers interaction effects of SIMPLE retirement plan provisions (items IV.C.1,IV.C.2, and IV.D.5).
Legend for ``Effective'' column: ara=amounts received after; asda=annuity starting date after; dda=decedents dying after; DOE=data of enactment; eali
GATT=effective as if included in GATT; gira=gross income received in taxable years beginning after; lma=loans made after; lyba=limitation years
beginning after; ppisa=property placed in service after; ptoa=prohibited transactions occurring after; pyba=plan years beginning after; pybb=plan
years beginning before; tyba=taxable years beginning after; vpa DOE=vehicles purchased after date of enactment; yba=years beginning after; ybbo/
a=years beginning before, on, or after; 90 da DOE=90 days after date of enactment.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
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 provisions of the bill involve 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 provisions involving income tax
reductions generally involve increased tax expenditures and
that the provisions involving increased income as revenues (see
revenue table above) generally involve reduced tax
expenditures. Non-income tax provisions are not classified as
tax expenditures under the Budget Act. Also, certain reporting
and other compliance provisions and technical corrections
provisions do not involve tax expenditures.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with subdivisions (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 20, 1996.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office and the
Joint Committee on Taxation (JCT) have reviewed H.R. 3448, the
``Small Business Job Protection Act of 1996,'' as ordered
reported by the House Committee on Ways and Means on May 14,
1996. The JCT estimates that this bill would increase
governmental receipts by $21 million in fiscal year 1996 and by
$171 million over fiscal years 1996 through 2003. CBO concurs
with this estimate.
H.R. 3448 would increase the expensing limitation for small
businesses, extend certain expiring provisions, simplify
pension and foreign asset provisions, modify the tax treatment
of Subchapter S Corporations and make technical corrections. In
addition, the bill would repeal the possessions tax credit and
the 50 percent interest income exclusion for financial
institution loans to ESOPs, and make other changes that would
increase taxes on corporations and other businesses. The
revenue effects of H.R. 3448 are summarized in the table below.
Please refer to the enclosed table for a more detailed estimate
of the bill.
Revene Effects of H.R. 3448
[By fiscal year, in billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
Projected revenues under current law \1\................ 1,417.583 1,475.572 1,547.285 1,619.979 1,699.866 1,789.771 1,882.950 1,984.272
Proposed changes........................................ 0.021 -0.143 0.308 0.144 -0.271 -0.240 0.033 0.327
Projected revenues under H.R. 3448...................... 1,417.604 1,475.429 1,547.593 1,620.123 1,699.595 1,789.531 1,882.983 1,984.599
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Includes the revenue effects of P.L. 104-7 (H.R. 831), P.L. 104-104 (S. 652), P.L. 104-117 (H.R. 2778), P.L. 104-121 (H.R. 3136), P.L. 104-132 (S.
735), and P.L. 104-134 (H.R. 3019).
In accordance with the requirements of Public Law 104-4,
the Unfunded Mandates Reform Act of 1995, JCT has determined
that the bill contains no intergovernmental mandates, but does
contain several private sector mandates. These provisions would
impose direct costs on the private sector of more than $100
million in each year from 1996-2000. The JCT estimates the
direct mandate cost of tax increases in H.R. 3448 would total
$314 million in 1996, and about $4.215 billion over the 1996-
2000 period, as shown below:
Federal Private Sector Mandates
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------------------------------------------------------------------------------------------------------------
Direct cost of tax increases.................................. 314 954 936 1,045 966
----------------------------------------------------------------------------------------------------------------
Please refer to the enclosed letter for a more detailed
account of these provisions.
In addition to these mandates, the bill also provides for
reductions in taxes. At this point, it is unclear to CBO
whether these tax reductions should be viewed as offsets to the
direct costs of the mandates in the bill. JCT estimates that
the savings to the private sector associated with the tax
reductions in H.R. 3448 would total $310 million in 1996, and
about $4.477 billion over the 1996-2000 period, as shown below:
Federal Private Sector Savings
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------------------------------------------------------------------------------------------------------------
Reductions in taxes........................................... -310 -1,159 -722 -971 -1,315
----------------------------------------------------------------------------------------------------------------
Section 252 of the Balanced Budget and Emergency Deficit
Control Act of 1985 sets up pay-as-you-go procedures for
legislation affecting receipts or direct spending through 1998.
Because the bill would affect receipts, pay-as-you-go
procedures would apply to the bill. These effects are
summarized in the table below.
Pay-as-You-Go Considerations
[By fiscal year, in millions of dollars]
------------------------------------------------------------------------
1996 1997 1998
------------------------------------------------------------------------
Changes in receipts....................... 21 -143 308
Changes in outlays........................
(2) Not applicable
------------------------------------------------------------------------
If you wish further details, please feel free to contact me
or your staff may wish to contact Stephanie Weiner.
Sincerely,
James L. Blum
(For June E. O'Neill, Director).
Congress of the United States,
Joint Committee on Taxation,
Washington, DC, May 17, 1996.
Mrs. June O'Neill,
Director, Congressional Budget Office,
U.S. Congress, Washington, DC.
Dear Mrs. O'Neill: We have reviewed H.R. 3448, the ``Small
Business Job Protection Act,'' as amended and ordered to be
reported by the House Committee on Ways and Means on May 14,
1996. In accordance with the requirements of Public Law 104-4,
the Unfunded Mandates Reform Act of 1995 (the ``Unfunded
Mandates Act''), we have determined that the following revenue
provisions of the bill contain Federal private sector mandates:
(1) the provision to repeal 5-year averaging for lump-sum
distributions from qualified pension plans; (2) the provision
to repeal the $5,000 exclusion for employee death benefits; (3)
the provision that would provide a simplified method for taxing
annuity distributions under qualified pension plans; (4) the
provision relating to adjustments to basis of inherited S
corporation stock; (5) the provision to phase out the section
936 credit; (6) the provision to repeal the 50 percent interest
income exclusion for financial institution loans to ESOPs; (7)
the provision to modify the exclusion of damages received on
account of personal injury or sickness; (8) the provision to
reform the income forecast method of accounting; (9) the
provision to apply a look-through the rule for purposes of
characterizing certain subpart F insurance income as unrelated
business taxable income; (10) the provision to repeal advance
refunds of diesel fuel tax for diesel cars and light trucks;
and (11) the provision to lower the reporting threshold for
purchasers of fish from $10,000 to $600. The attached revenue
table (items I.7., III.13., IV.A. 1, 2, and 3, and VI. 1., 2.,
3., 4., 5., and 6.) generally reflects amounts that are no
greater than the aggregate estimated amounts that the private
sector will be required to spend in order to comply with these
Federal private sector mandates. [See Part IV.A of the report
for a copy of the revenue table.]
The revenue provisions of the bill, as amended, contain no
intergovernmental mandates.
If you would like to discuss this matter in further detail,
please feel free to contact me at 225-3621. Thank you for your
cooperation in this matter.
Sincerely,
Kenneth J. Kies, Chief of Staff.
V. OTHER MATTERS TO BE DISCUSSED UNDER 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
tax impact on small businesses and their workers, extension of
certain expired tax provisions, tax treatment of subchapter S
corporations, pension simplification, inclusion of certain
earnings invested in excess passive assets, tax technical
corrections, and certain revenue offsets necessary to make the
bill budget neutral that the Committee concluded that it is
appropriate and timely to enact the provisions contained in the
bill as reported.
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 the 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
tax reductions benefiting small businesses and workers are
offset by certain revenue increases over the fiscal year period
1996-2003, and therefore the bill will not add to the budget
deficit. Thus, the bill will not have any inflationary impact
on costs and prices in the overall 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 the followings provisions
of the bill contain Federal mandates on the private sector: (1)
the provision to repeal 5-year averaging for lump-sum
distributions from qualified pension plans; (2) the provision
to repeal the $5,000 exclusion for employee death benefits; (3)
the provision that would provide a simplified method for taxing
annuity distributions under qualified pension plans; (4) the
provision relating to adjustments to basis of inherited S
corporation stock; (5) the provision to phase out the section
936 credit; (6) the provision to repeal the 50 percent interest
income exclusion for financial institution loans to ESOPs; (7)
the provision to modify the exclusion of damages received on
account of personal injury or sickness; (8) the provision to
reform the income forecast method of accounting; (9) the
provision to apply a look-through rule for purposes of
characterizing certain subpart F insurance income as unrelated
business taxable income; (10) the provision to repeal advance
refunds of diesel fuel tax for diesel cars and light trucks;
and (11) the provision to lower the reporting threshold for
purchasers of fish from $10,000 to $600.
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, simplification for individual
taxpayers, 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 to repeal five-year averaging for lump-sum
distributions from qualified pension plans results in a better
measurement of gross income for Federal income tax purposes and
encourages taxpayers to take qualified pension plan
distributions in a form other than a lump-sum distribution. The
provision to repeal the $5,000 exclusion for employee death
benefits results in a better measurement of gross income for
Federal income tax purposes. The provision to provide a
simplified method for taxing annuity distributions under
qualified pension plans generally adopts an alternative method
for taxing such distributions contained in Treasury regulations
as the sole method for taxing such distributions and, thereby,
simplifies the determination for individual taxpayers.
The provision relating to the adjustment to basis of
inherited S corporation stock provides that a person acquiring
stock in an S corporation from a decedent will treat as income
in respect of a decedent (``IRD'') his or her pro rata share of
any item of income of the corporation that would have been IRD
if that item had been acquired directly from the decedent,
thereby improving the measurement of income for tax purposes.
The provision to phase out the section 936 credit with
transition for companies that have existing operations in the
possessions will result in the better measurement of gross
income for Federal income tax purposes by eliminating a tax
benefit enjoyed by only a small number of U.S. corporations
operating in possessions.
The provision to repeal the 50-percent interest income
exclusion for financial institution loans to ESOPs will result
in a better measurement of the income of such financial
institutions.
The provision to modify the exclusion of damages received
on account of personal injury or sickness will simplify the
administration of the Federal income tax laws by clarifying the
taxation of damage awards and eliminating the need for
additional litigation.
The provision to reform the income forecast method of
accounting results in a better matching between income and
depreciation deductions with respect to certain types of
depreciable property.
The provision to apply a look-through rule for purposes of
characterizing certain subpart F insurance income as unrelated
business taxable income results in a better measurement of
income by preventing unfair competition where operations
involving the insurance of third-party risks are conducted
through a controlled foreign corporation that generally is
subject to little tax relative to competing U.S. businesses.
The provision to repeal advance refunds of diesel fuel tax
for diesel cars and light trucks results in a better
measurement of income by repealing an obsolete credit for
diesel fuel tax.
The provision to lower the reporting threshold for
purchasers of fish from $10,000 to $600 will result in a better
administration of the Federal tax laws by ensuring that the
Internal Revenue Service has information reports with respect
to more sales of fish.
The revenue-raising provisions of the bill are used to
offset the cost of certain small business initiatives
(including increased expensing, extension of the FICA tip
credit to certain delivery persons, and pension and S
corporation simplification provisions) and the extension of
certain expiring provisions. These provisions are generally
designed to relieve the burdens of Federal income taxation on
individuals and small business and the revenue-raising
provisions of the bill are critical to achieving these goals.
The revenue provisions of the bill do not contain any
intergovernmental mandates.
The revenue provisions of the bill generally 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 I--TAX ON INDIVIDUALS
* * * * * * *
SEC. 1. TAX IMPOSED.
(a) * * *
* * * * * * *
(g) Certain Unearned Income of Minor Children Taxed as if
Parent's Income.--
(1) * * *
* * * * * * *
(7) Election to claim certain unearned income of
child on parent's return.--
(A) In general.--
If--
(i) any child to whom this subsection
applies has gross income for the
taxable year only from interest and
dividends (including Alaska Permanent
Fund dividends),
[(ii) such gross income is more than
$500 and less than $5,000,]
(ii) such gross income is more than
the amount described in paragraph
(4)(A)(ii)(I) and less than 10 times
the amount so described,
* * * * * * *
(B) Income included on parent's return.--In
the case of a parent making the election under
this paragraph--
(i) the gross income of each child to
whom such election applies (to the
extent the gross income of such child
exceeds [$1,000] twice the amount
described in paragraph (4)(A)(ii)(I))
shall be included in such parent's
gross income for the taxable year,
(ii) the tax imposed by this section
for such year with respect to such
parent shall be the amount equal to the
sum of--
(I) the amount determined
under this section after the
application of clause (i), plus
[(II) for each such child,
the lesser of $75 or 15 percent
of the excess of the gross
income of such child over $500,
and]
(II) for each such child, 15
percent of the lesser of the
amount described in paragraph
(4)(A)(ii)(I) or the excess of
the gross income of such child
over the amount so described,
and
* * * * * * *
PART IV--CREDITS AGAINST TAX
Subpart A. Nonrefundable personal credits.
* * * * * * *
Subpart F. Rules for computing [targeted jobs credit] work
opportunity credit.
* * * * * * *
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart B--Foreign Tax Credit, Etc.
Sec. 27. Taxes of foreign countries and possessions of the
United States; possession tax credit.
* * * * * * *
Sec. 30A. Puerto Rican economic activity credit.
* * * * * * *
SEC. 30. CREDIT FOR QUALIFIED ELECTRIC VEHICLES.
(a) * * *
* * * * * * *
(d) Special Rules.--
(1) Basis reduction.--The basis of any property for
which a credit is allowable under subsection (a) shall
be reduced by the amount of such credit (determined
without regard to subsection (b)(3)).
* * * * * * *
(4) Election to not take credit.--No credit shall be
allowed under subsection (a) for any vehicle if the
taxpayer elects to not have this section apply to such
vehicle.
* * * * * * *
SEC. 30A. PUERTO RICAN ECONOMIC ACTIVITY CREDIT.
(a) Allowance of Credit.--
(1) In general.--Except as otherwise provided in this
section, if the conditions of both paragraph (1) and
paragraph (2) of subsection (b) are satisfied with
respect to a qualified domestic corporation, there
shall be allowed as a credit against the tax imposed by
this chapter an amount equal to the portion of the tax
which is attributable to the taxable income, from
sources without the United States, from--
(A) the active conduct of a trade or business
within Puerto Rico, or
(B) the sale or exchange of substantially all
of the assets used by the taxpayer in the
active conduct of such trade or business.
In the case of any taxable year beginning after
December 31, 2001, the aggregate amount of taxable
income taken into account under the preceding sentence
(and in applying subsection (d)) shall not exceed the
adjusted base period income of such corporation, as
determined in the same manner as under section 936(j).
(2) Qualified domestic corporation.--For purposes of
paragraph (1), the term ``qualified domestic
corporation'' means a domestic corporation--
(A) which is an existing credit claimant with
respect to Puerto Rico, and
(B) with respect to which section
936(a)(4)(B) does not apply for the taxable
year.
(3) Separate application.--For purposes of
determining--
(A) whether a taxpayer is an existing credit
claimant with respect to Puerto Rico, and
(B) the amount of the credit allowed under
this section,
this section (and so much of section 936 as relates to
this section) shall be applied separately with respect
to Puerto Rico.
(b) Conditions Which Must Be Satisfied.--The conditions
referred to in subsection (a) are--
(1) 3-year period.--If 80 percent or more of the
gross income of the qualified domestic corporation for
the 3-year period immediately preceding the close of
the taxable year (or for such part of such period
immediately preceding the close of such taxable year as
may be applicable) was derived from sources within a
possession (determined without regard to section
904(f)).
(2) Trade or business.--If 75 percent or more of the
gross income of the qualified domestic corporation for
such period or such part thereof was derived from the
active conduct of a trade or business within a
possession.
(c) Credit Not Allowed Against Certain Taxes.--The credit
provided by subsection (a) shall not be allowed against the tax
imposed by--
(1) section 59A (relating to environmental tax),
(2) section 531 (relating to the tax on accumulated
earnings),
(3) section 541 (relating to personal holding company
tax), or
(4) section 1351 (relating to recoveries of foreign
expropriation losses).
(d) Limitations on Credit for Active Business Income.--The
amount of the credit determined under subsection (a) for any
taxable year shall not exceed the sum of the following amounts:
(1) 60 percent of the sum of--
(A) the aggregate amount of the qualified
domestic corporation's qualified possession
wages for such taxable year, plus
(B) the allocable employee fringe benefit
expenses of the qualified domestic corporation
for such taxable year.
(2) The sum of--
(A) 15 percent of the depreciation allowances
for the taxable year with respect to short-life
qualified tangible property,
(B) 40 percent of the depreciation allowances
for the taxable year with respect to medium-
life qualified tangible property, and
(C) 65 percent of the depreciation allowances
for the taxable year with respect to long-life
qualified tangible property.
(3) If the qualified domestic corporation does not
have an election to use the method described in section
936(h)(5)(C)(ii) (relating to profit split) in effect
for the taxable year, the amount of the qualified
possession income taxes for the taxable year allocable
to nonsheltered income.
(e) Administrative Provisions.--For purposes of this title--
(1) the provisions of section 936 (including any
applicable election thereunder) shall apply in the same
manner as if the credit under this section were a
credit under section 936(a)(1)(A) for a domestic
corporation to which section 936(a)(4)(A) applies,
(2) the credit under this section shall be treated in
the same manner as the credit under section 936, and
(3) a corporation to which this section applies shall
be treated in the same manner as if it were a
corporation electing the application of section 936.
(f) Definitions.--For purposes of this section, any term used
in this section which is also used in section 936 shall have
the same meaning given such term by section 936.
(g) Application of Section.--This section shall apply to
taxable years beginning after December 31, 1995, and before
January 1, 2006.
Subpart C--Refundable Credits
* * * * * * *
SEC. 34. CERTAIN USES OF GASOLINE AND SPECIAL FUELS.
(a) General Rule.--There shall be allowed as a credit against
the tax imposed by this subtitle for the taxable year an amount
equal to the sum of the amounts payable to the taxpayer--
(1) * * *
* * * * * * *
[(3) under section 6427--
[(A) with respect to fuels used for
nontaxable purposes or resold, or
[(B) with respect to any qualified diesel-
powered highway vehicle purchased (or deemed
purchased under section 6427(g)(6)), during the
taxable year (determined without regard to
section 6427(k)).]
(3) under section 6427 with respect to fuels used for
nontaxable purposes or resold during the taxable year
(determined without regard to section 6427(k)).
* * * * * * *
Subpart D--Business Related Credits
* * * * * * *
SEC. 38. GENERAL BUSINESS CREDIT.
(a) * * *
(b) Current Year Business Credit.--For purposes of this
subpart, the amount of the current year business credit is the
sum of the following credits determined for the taxable year:
(1) the investment credit determined under section
46,
(2) the [targeted jobs credit] work opportunity
credit determined under section 51(a),
* * * * * * *
SEC. 39. CARRYBACK AND CARRYFORWARD OF UNUSED CREDITS.
(a) * * *
* * * * * * *
(d) Transitional Rules.--
(1) * * *
* * * * * * *
(5) No carryback of section [45] 45a credit before
enactment.--No portion of the unused business credit
for any taxable year which is attributable to the
Indian employment credit determined under section 45A
may be carried to a taxable year ending before the date
of the enactment of section 45A.
(6) No carryback of section [45] 45b credit before
enactment.--No portion of the unused business credit
for any taxable year which is attributable to the
employer social security credit determined under
section 45B may be carried back to a taxable year
ending before the date of the enactment of section 45B.
SEC. 40. ALCOHOL USED AS FUEL.
(a) * * *
* * * * * * *
(e) Termination.--
(1) In general.--This section shall not apply to any
sale or use--
(A) for any period after December 31, 2000,
or
[(B) for any period before January 1, 2001,
during which the Highway Trust Fund financing
rate under section 4081(a)(2) is not in
effect.]
(B) for any period before January 1, 2001,
during which the rates of tax under section
4081(a)(2)(A) are 4.3 cents per gallon.
* * * * * * *
SEC. 42. LOW-INCOME HOUSING CREDIT.
(a) * * *
* * * * * * *
(c) Qualified Basis; Qualified Low-Income Building.--For
purposes of this section--
(1) * * *
(2) Qualified low-income building.--The term
``qualified low-income building'' means any building--
(A) which is part of a qualified low-income
housing project at all times during the
period--
(i) beginning on the 1st day in the
compliance period on which such
building is part of such a project, and
(ii) ending on the last day of the
compliance period with respect to such
building, and
(B) to which the amendments made by section
201(a) of the Tax Reform Act of 1986 apply.
Such term does not include any building with respect to which
moderate rehabilitation assistance is provided, at any time
during the compliance period, under section 8(e)(2) of the
United States Housing Act of 1937 (other than assistance under
the Stewart B. McKinney Homeless Assistance Act [of 1988] (as
in effect on the date of the enactment of this sentence)).
* * * * * * *
SEC. 45B. CREDIT FOR PORTION OF EMPLOYER SOCIAL SECURITY TAXES PAID
WITH RESPECT TO EMPLOYEE CASH TIPS.
(a) * * *
(b) Excess Employer Social Security Tax--For purposes of this
section--
(1) In general.--The term ``excess employer social
security tax'' means any tax paid by an employer under
section 3111 with respect to tips received by an
employee during any month, to the extent such tips--
(A) are deemed to have been paid by the
employer to the employee pursuant to section
3121(q) (without regard to whether such tips
are reported under section 6053), and
* * * * * * *
[(2) Only tips received at food and beverage
establishments taken into account.--In applying
paragraph (1), there shall be taken into account only
tips received from customers in connection with the
provision of food or beverages for consumption on the
premises of an establishment with respect to which the
tipping of employees serving food or beverages by
customers is customary.]
(2) Only tips received for food or beverages taken
into account.--In applying paragraph (1), there shall
be taken into account only tips received from customers
in connection with the delivering or serving of food or
beverages for consumption if the tipping of employees
delivering or serving food or beverages by customers is
customary.
* * * * * * *
Subpart E--Rules for Computing Investment Credit
* * * * * * *
SEC. 50. OTHER SPECIAL RULES.
(a) Recapture In Case of Dispositions, Etc.--Under
regulations prescribed by the Secretary--
(1) * * *
(2) Property ceases to qualify for progress
expenditures.--
(A) * * *
(C) Certain sales and leasebacks.--Under
regulations prescribed by the Secretary, a sale
by, and leaseback to, a taxpayer who, when the
property is placed in service, will be a lessee
to whom the rules referred to in [subsection
(c)(4)] subsection (d)(5) apply shall not be
treated as a cessation described in
subparagraph (A) to the extent that the amount
which will be passed through to the lessee
under such rules with respect to such property
is not less than the qualified rehabilitation
expenditures properly taken into account by the
lessee under section 47(d) with respect to such
property.
* * * * * * *
(E) Special rules.--Rules similar to the
rules of this paragraph shall apply in cases
where qualified progress expenditures were
taken into account under the rules referred to
in [section 48(a)(5)(A)] section 48(a)(5).
* * * * * * *
Subpart F--Rules for Computing [Targeted Jobs Credit] Work Opportunity
Credit
* * * * * * *
SEC. 51. AMOUNT OF CREDIT.
(a) Determination of Amount.--For purposes of section 38, the
amount of the [targeted jobs credit] work opportunity credit
determined under this section for the taxable year shall be
equal to [40 percent] 35 percent of the qualified first-year
wages for such year.
* * * * * * *
(c) Wages Defined.--For purposes of this subpart--
(1) In general.---Except as otherwise provided in
this subsection[, subsection (d)(8)(D),] and subsection
(h)(2), the term ``wages'' has the meaning given to
such term by subsection (b) of section 3306 (determined
without regard to any dollar limitation contained in
such section).
* * * * * * *
[(4) Termination.--The term ``wages'' shall not
include any amount paid or incurred to an individual
who begins work for the employer after December 31,
1994.]
(4) Termination.--The term ``wages'' shall not
include any amount paid or incurred to an individual
who begins work for the employer--
(A) after December 31, 1994, and before July
1, 1996, or
(B) after June 30, 1997.
[(d) Members of Targeted Groups.--For purposes of this
subpart--
[(1) In general.--An individual is a member of a
targeted group if such individual is--
[(A) a vocational rehabilitation referral,
[(B) an economically disadvantaged youth,
[(C) an economically disadvantaged Vietnam-
era veteran,
[(D) an SSI recipient,
[(E) a general assistance recipient,
[(F) a youth participating in a cooperative
education program,
[(G) an economically disadvantaged ex-
convict,
[(H) an eligible work incentive employee,
[(I) an involuntarily terminated CETA
employee, or
[(J) a qualified summer youth employee.
[(2) Vocational rehabilitation referral.--The term
``vocational rehabilitation referral'' means any
individual who is certified by the designated local
agency as--
[(A) having a physical or mental disability
which, for such individual, constitutes or
results in a substantial handicap to
employment, and
[(B) having been referred to the employer
upon completion of (or while receiving)
rehabilitative services pursuant to--
[(i) an individualized written
rehabilitation plan under a State plan
for vocational rehabilitation services
approved under the Rehabilitation Act
of 1973, or
[(ii) a program of vocational
rehabilitation carried out under
chapter 31 of title 38, United States
Code.
[(3) Economically disadvantaged youth.--
[(A) In general.--The term ``economically
disadvantaged youth'' means any individual who
is certified by the designated local agency
as--
[(i) meeting the age requirements of
subparagraph (B), and
[(ii) being a member of an
economically disadvantaged family (as
determined under paragraph (11)).
[(B) Age requirements.--An individual meets
the age requirements of this subparagraph if
such individual has attained age 18 but not age
23 on the hiring date.
[(4) Vietnam veteran who is a member of an
economically disadvantaged family.--The term ``Vietnam
veteran who is a member of an economically
disadvantaged family'' means any individual who is
certified by the designated local agency as---
[(A)(i) having served on active duty (other
than active duty for training) in the Armed
Forces of the United States for a period of
more than 180 days, any part of which occurred
after August 4, 1964, and before May 8, 1975,
or
[(ii) having been discharged or released from
active duty in the Armed Forces of the United
States for a service-connected disability if
any part of such active duty was performed
after August 4, 1964, and before May 8, 1975,
[(B) not having any day during the
preemployment period which was a day of
extended active duty in the Armed Forces of the
United States, and
[(C) being a member of an economically
disadvantaged family (determined under
paragraph (11)).
For purposes of subparagraph (B), the term ``extended
active duty'' means a period of more than 90 days
during which the individual was on active duty (other
than active duty for training).
[(5) SSI recipients.--The term ``SSI recipient''
means any individual who is certified by the designated
local agency as receiving supplemental security income
benefits under title XVI of the Social Security Act
(including supplemental security income benefits of the
type described in section 1616 of such Act or section
212 of Public Law 93-66) for any month ending in the
pre-employment period.
[(6) General assistance recipients.--
[(A) In general.--The term ``general
assistance recipient'' means any individual who
is certified by the designated local agency as
receiving assistance under a qualified general
assistance program for any period of not less
than 30 days ending within the preemployment
period.
[(B) Qualified general assistance program.--
The term ``qualified general assistance
program'' means any program of a State or a
political subdivision of a State--
[(i) which provides general
assistance or similar assistance
which--
[(I) is based on need, and
[(II) consists of money
payments or voucher or scrip,
and
[(ii) which is designated by the
Secretary (after consultation with the
Secretary of Health and Human Services)
as meeting the requirements of clause
(i).
[(7) Economically disadvantaged ex-convict.--The term
``economically disadvantaged ex-convict'' means any
individual who is certified by the designated local
agency--
[(A) as having been convicted of a felony
under any statute of the United States or any
State,
[(B) as being a member of an economically
disadvantaged family (as determined under
paragraph (11)), and
[(C) as having a hiring date which is not
more than 5 years after the last date on which
such individual was so convicted or was
released from prison.
[(8) Youth participating in a qualified cooperative
education program.--
[(A) In general.--The term ``youth participating in a
qualified cooperative education program'' means any
individual who is certified by the school participating
in the program as--
[(i) having attained age 16 and not having
attained age 20,
[(ii) not having graduated from a high school
or vocational school,
[(iii) being enrolled in and actively
pursuing a qualified cooperative education
program, and
[(iv) being a member of an economically
disadvantaged family (as determined under
paragraph (11)).
[(B) Qualified cooperative education program
defined.--The term ``qualified cooperative education
program'' means a program of vocational education for
individuals who (through written cooperative
arrangements between a qualified school and 1 or more
employers) receive instruction (including required
academic instruction) by alternation of study and
school with a job in any occupational field (but only
if these 2 experiences are planned by the school and
employer so that each contributes to the student's
education and employability).
[(C) Qualified school defined.--The term ``qualified
school'' means--
[(i) a specialized high school used
exclusively or principally for the provision of
vocational education to individuals who are
available for study in preparation for entering
the labor market,
[(ii) the department of a high school
exclusively or principally used for providing
vocational education to persons who are
available for study in preparation for entering
the labor market, or
[(iii) a technical or vocational school used
exclusively or principally for the provision of
vocational education to persons who have
completed or left high school and who are
available for study in preparation for entering
the labor market.
A school which is not a public school shall be treated
as a qualified school only if it is exempt from tax
under section 501(a).
[(D) Wages.--In the case of remuneration attributable
to services performed while the individual meets the
requirements of clauses (i), (ii), and (iii) of
subparagraph (A), wages, and unemployment insurance
wages, shall be determined without regard to section
3306(c)(10)(C).
[(9) Eligible work incentive employees.--The term
``eligible work incentive employee'' means an
individual who has been certified by the designated
local agency as--
[(A) being eligible for financial assistance
under part A of title IV of the Social Security
Act and as having continually received such
financial assistance during the 90-day period
which immediately precedes the date on which
such individual is hired by the employer, or
[(B) having been placed in employment under a
work incentive program established under
section 432(b)(1) or 445 of the Social Security
Act.
[(10) Involuntarily terminated ceta employee.--The
term ``involuntarily terminated CETA employee'' means
an individual who is certified by the designated local
agency as having been involuntarily terminated after
December 31, 1980, from employment financed in whole or
in part under a program under part D of title II or
title VI of the Comprehensive Employment and Training
Act. This paragraph shall not apply to any individual
who begins work for the employer after December 31,
1982.
[(11) Members of economically disadvantaged
families.---An individual is a member of an
economically disadvantaged family if the designated
local agency determines that such individual was a
member of a family which had an income during the 6
months immediately preceding the earlier of the month
in which such determination occurs or the month in
which the hiring date occurs, which, on an annual
basis, would be 70 percent or less of the Bureau of
Labor Statistics lower living standard. Any such
determination shall be valid for the 45-day period
beginning on the date such determination is made. Any
such determination with respect to an individual who is
a qualified summer youth employee or youth
participating in a qualified cooperative education
program with respect to any employer shall also apply
for purposes of determining whether such individual is
a member of another targeted group with respect to such
employer.
[(12) Qualified summer youth employee.--
[(A) In general.--The term ``qualified summer
youth employee'' means an individual--
[(i) who performs services for the
employer between May 1 and September
15,
[(ii) who is certified by the
designated local agency as having
attained age 16 but not 18 on the
hiring date (or if later, on May 1 of
the calendar year involved),
[(iii) who has not been an employee
of the employer during any period prior
to the 90-day period described in
subparagraph (B)(iii), and
[(iv) who is certified by the
designated local agency as being a
member of an economically disadvantaged
family (as determined under paragraph
(11)).
[(B) Special rules for determining amount of
credit.--For purposes of applying this subpart
to wages paid or incurred to any qualified
summer youth employee--
[(i) subsection (b)(2) shall be
applied by substituting ``any 90-day
period between May 1 and September 15''
for ``the 1-year period beginning with
the day the individual begins work for
the employer'', and
[(ii) subsection (b)(3) shall be
applied by substituting ``$3,000'' for
``$6,000''.
[(C) Special rule for continued employment
for same employer.---In the case of an
individual who, with respect to the same
employer, is certified as a member of another
targeted group after such individual has been a
qualified summer youth employee, paragraph (14)
shall be applied by substituting ``certified''
for ``hired by the employer''.
[(13) Preemployment period.--The term ``preemployment
period'' means the 60-day period ending on the hiring
date.
[(14) Hiring date.--The term ``hiring date'' means
the day the individual is hired by the employer.
[(15) Designated local agency.--The term ``designated
local agency'' means a State employment security agency
established in accordance with the Act of June 6, 1933,
as amended (29 U.S.C. 49-49n).
[(16) Special rules for certifications.--
[(A) In general.--An individual shall not be
treated as a member of a targeted group unless,
on or before the day on which such individual
begins work for the employer, the employer--
[(i) has received a certification
from a designated local agency that
such individual is a member of a
targeted group, or
[(ii) has requested in writing such
certification from the designated local
agency.
For purposes of the preceding sentence, if on
or before the day on which such individual
begins work for the employer, such individual
has received from a designated local agency (or
other agency or organization designated
pursuant to a written agreement with such
designated local agency) a written preliminary
determination that such individual is a member
of a targeted group, then ``the fifth day''
shall be substituted for ``the day'' in such
sentence.
[(B) Incorrect certifications.--If--
[(i) an individual has been certified
as a member of a targeted group, and
[(ii) such certification is incorrect
because it was based on false
information provided by such
individual, the certification shall be
revoked and wages paid by the employer
after the date on which notice of
revocation is received by the employer
shall not be treated as qualified
wages.
[(C) Employer request must specify potential
basis for eligibility.--In any request for a
certification of an individual as a member of a
targeted group, the employer shall--
[(i) specify each subparagraph (but
not more than 2) of paragraph (1) by
reason of which the employer believes
that such individual is such a member,
and
[(ii) certify that a good faith
effort was made to determine that such
individual is such a member.]
(d) Members of Targeted Groups.--For purposes of this
subpart--
(1) In general.--An individual is a member of a
targeted group if such individual is--
(A) a qualified IV-A recipient,
(B) a qualified veteran,
(C) a qualified ex-felon,
(D) a high-risk youth,
(E) a vocational rehabilitation referral, or
(F) a qualified summer youth employee.
(2) Qualified IV-A recipient.--
(A) In general.--The term ``qualified IV-A
recipient'' means any individual who is
certified by the designated local agency as
being a member of a family receiving assistance
under a IV-A program for at least a 9-month
period ending during the 9-month period ending
on the hiring date.
(B) IV-A program.--For purposes of this
paragraph, the term ``IV-A program'' means any
program providing assistance under a State plan
approved under part A of title IV of the Social
Security Act (relating to assistance for needy
families with minor children) and any successor
of such program.
(3) Qualified veteran.--
(A) In general.--The term ``qualified
veteran'' means any veteran who is certified by
the designated local agency as being--
(i) a member of a family receiving
assistance under a IV-A program (as
defined in paragraph (2)(B)) for at
least a 9-month period ending during
the 12-month period ending on the
hiring date, or
(ii) a member of a family receiving
assistance under a food stamp program
under the Food Stamp Act of 1977 for at
least a 3-month period ending during
the 12-month period ending on the
hiring date.
(B) Veteran.--For purposes of subparagraph
(A), the term ``veteran'' means any individual
who is certified by the designated local agency
as--
(i)(I) having served on active duty
(other than active duty for training)
in the Armed Forces of the United
States for a period of more than 180
days, or
(II) having been discharged or
released from active duty in the Armed
Forces of the United States for a
service-connected disability, and
(ii) not having any day during the
60-day period ending on the hiring date
which was a day of extended active duty
in the Armed Forces of the United
States.
For purposes of clause (ii), the term
``extended active duty'' means a period of more
than 90 days during which the individual was on
active duty (other than active duty for
training).
(4) Qualified ex-felon.--The term ``qualified ex-
felon'' means any individual who is certified by the
designated local agency--
(A) as having been convicted of a felony
under any statute of the United States or any
State,
(B) as having a hiring date which is not more
than 1 year after the last date on which such
individual was so convicted or was released
from prison, and
(C) as being a member of a family which had
an income during the 6 months immediately
preceding the earlier of the month in which
such income determination occurs or the month
in which the hiring date occurs, which, on an
annual basis, would be 70 percent or less of
the Bureau of Labor Statistics lower living
standard.
Any determination under subparagraph (C) shall be valid
for the 45-day period beginning on the date such
determination is made.
(5) High-risk youth.--
(A) In general.--The term ``high-risk youth''
means any individual who is certified by the
designated local agency--
(i) as having attained age 18 but not
age 25 on the hiring date, and
(ii) as having his principal place of
abode within an empowerment zone or
enterprise community.
(B) Youth must continue to reside in zone.--
In the case of a high-risk youth, the term
``qualified wages'' shall not include wages
paid or incurred for services performed while
such youth's principal place of abode is
outside an empowerment zone or enterprise
community.
(6) Vocational rehabilitation referral.--The term
``vocational rehabilitation referral'' means any
individual who is certified by the designated local
agency as--
(A) having a physical or mental disability
which, for such individual, constitutes or
results in a substantial handicap to
employment, and
(B) having been referred to the employer upon
completion of (or while receiving)
rehabilitative services pursuant to--
(i) an individualized written
rehabilitation plan under a State plan
for vocational rehabilitation services
approved under the Rehabilitation Act
of 1973, or
(ii) a program of vocational
rehabilitation carried out under
chapter 31 of title 38, United States
Code.
(7) Qualified summer youth employee.--
(A) In general.--The term ``qualified summer
youth employee'' means any individual--
(i) who performs services for the
employer between May 1 and September
15,
(ii) who is certified by the
designated local agency as having
attained age 16 but not 18 on the
hiring date (or if later, on May 1 of
the calendar year involved),
(iii) who has not been an employee of
the employer during any period prior to
the 90-day period described in
subparagraph (B)(i), and
(iv) who is certified by the
designated local agency as having his
principal place of abode within an
empowerment zone or enterprise
community.
(B) Special rules for determining amount of
credit.--For purposes of applying this subpart
to wages paid or incurred to any qualified
summer youth employee--
(i) subsection (b)(2) shall be
applied by substituting ``any 90-day
period between May 1 and September 15''
for ``the 1-year period beginning with
the day the individual begins work for
the employer'', and
(ii) subsection (b)(3) shall be
applied by substituting ``$3,000'' for
``$6,000''.
The preceding sentence shall not apply to an
individual who, with respect to the same
employer, is certified as a member of another
targeted group after such individual has been a
qualified summer youth employee.
(C) Youth must continue to reside in zone.--
Paragraph (5)(B) shall apply for purposes of
this paragraph.
(8) Hiring date.--The term ``hiring date'' means the
day the individual is hired by the employer.
(9) Designated local agency.--The term ``designated
local agency'' means a State employment security agency
established in accordance with the Act of June 6, 1933,
as amended (29 U.S.C. 49-49n).
(10) Special rules for certifications.--
(A) In general.--An individual shall not be
treated as a member of a targeted group
unless--
(i) on or before the day on which
such individual begins work for the
employer, the employer has received a
certification from a designated local
agency that such individual is a member
of a targeted group, or
(ii)(I) on or before the day the
individual is offered employment with
the employer, a pre-screening notice is
completed by the employer with respect
to such individual, and
(II) not later than the 14th day
after the individual begins work for
the employer, the employer submits such
notice, signed by the employer and the
individual under penalties of perjury,
to the designated local agency as part
of a written request for such a
certification from such agency.
For purposes of this paragraph, the term ``pre-
screening notice'' means a document (in such
form as the Secretary shall prescribe) which
contains information provided by the individual
on the basis of which the employer believes
that the individual is a member of a targeted
group.
(B) Incorrect certifications.--If--
(i) an individual has been certified
by a designated local agency as a
member of a targeted group, and
(ii) such certification is incorrect
because it was based on false
information provided by such
individual,
the certification shall be revoked and wages
paid by the employer after the date on which
notice of revocation is received by the
employer shall not be treated as qualified
wages.
(C) Explanation of denial of request.--If a
designated local agency denies a request for
certification of membership in a targeted
group, such agency shall provide to the person
making such request a written explanation of
the reasons for such denial.
* * * * * * *
(i) Certain Individuals Ineligible.--
(1) * * *
* * * * * * *
[(3) Individuals not meeting minimum employment
period.--No wages shall be taken into account under
subsection (a) with respect to any individual unless
such individual either--
[(A) is employed by the employer at least 90
days (14 days in the case of an individual
described in subsection (d)(12)), or
[(B) has completed at least 120 hours (20
hours in the case of an individual described in
subsection (d)(12)) of services performed for
the employer.]
(3) Individuals not meeting minimum employment
period.--No wages shall be taken into account under
subsection (a) with respect to any individual unless
such individual either--
(A) is employed by the employer at least 180
days (20 days in the case of a qualified summer
youth employee), or
(B) has completed at least 500 hours (120
hours in the case of a qualified summer youth
employee) of services performed for the
employer.
* * * * * * *
Subpart G--Credit Against Regular Tax for Prior Year Minimum Tax
Liability
* * * * * * *
SEC. 53. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY.
(a) * * *
* * * * * * *
(d) Definitions.--For purposes of this section--
(1) Net minimum tax.--
(A) In general.--The term ``net minimum tax''
means the tax imposed by section 55.
(B) Credit not allowed for exclusion
preferences.--
(i) * * *
* * * * * * *
(iv) Credit allowable for exclusion
preferences of corporations.--In the
case of a corporation---
(I) the preceding provisions
of this subparagraph shall not
apply, and
[(II) the adjusted net
minimum tax for any taxable
year is the amount of the net
minimum tax for such year
increased by the amount of any
credit not allowed under
section 29 solely by reason of
the application of section
29(b)(5)(B) or not allowed
under section 28 solely by
reason of the application of
section 28(d)(2)(B).]
(II) the adjusted net minimum
tax for any taxable year is the
amount of the net minimum tax
for such year increased in the
manner provided in clause
(iii).
* * * * * * *
PART VI--ALTERNATIVE MINIMUM WAGE
* * * * * * *
SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED.
(a) * * *
* * * * * * *
(c) Regular Tax.--
(1) In general.--For purposes of this section, the
term ``regular tax'' means the regular tax liability
for the taxable year (as defined in section 26(b))
reduced by the foreign tax credit allowable under
section 27(a) [and the section 936 credit allowable
under section 27(b)], the section 936 credit allowable
under section 27(b), and the Puerto Rican economic
activity credit under section 30A. Such term [shall not
include any tax imposed by section 402(d) and] shall
not include any increase in tax under section 49(b) or
50(a) or subsection (j) or (k) of section 42.
* * * * * * *
SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAXABLE INCOME.
(a) * * *
* * * * * * *
(d) Alternative Tax Net Operating Loss Deduction Defined.--
(1) In general.--For purposes of subsection (a)(4),
the term ``alternative tax net operating loss
deduction'' means the net operating loss deduction
allowable for the taxable year under section 172,
except that--
(A) * * *
(B) in determining the amount of such
deduction--
(i) the net operating loss (within
the meaning of section 172(c)) for any
loss year shall be adjusted as provided
in paragraph (2), and
[(ii) in the case of taxable years
beginning after December 31, 1986,
section 172(b)(2) shall be applied by
substituting ``90 percent of
alternative minimum taxable income
determined without regard to the
alternative tax net operating loss
deduction'' for ``taxable income'' each
place it appears.]
(ii) appropriate adjustments in the
application of section 172(b)(2) shall
be made to take into account the
limitation of subparagraph (A).
* * * * * * *
(g) Adjustments Based on Adjusted Current Earnings.--
(1) * * *
* * * * * * *
(4) Adjustments.---In determining adjusted current
earnings, the following adjustments shall apply:
(A) * * *
* * * * * * *
(C) Disallowance of items not deductible in
computing earnings and profits.--
(i) * * *
(ii) Special Rule for Certain
Dividends.--
(I) In General.--Clause (i)
shall not apply to any
deduction allowable under
section 243 or 245 for any
dividend which is a 100-percent
dividend or which is received
from a 20-percent owned
corporation (as defined in
section 243(c)(2)), but only to
the extent such dividend is
attributable to income of the
paying corporation which is
subject to tax under this
chapter determined after the
application of sections 30A,
936 (including subsections
(a)(4) [and (i)], (i), and (j)
thereof) and 921.
(II) 100-percent dividend.--
For purposes [of the subclause]
of subclause (I), the term
``100 percent dividend'' means
any dividend if the percentage
used for purposes of
determining the amount
allowable as a deduction under
section 243 or 245 with respect
to such dividend is 100
percent.
(iii) Treatment of taxes on dividends
from 936 corporations.--
(I) * * *
* * * * * * *
(VI) Application to section
30a corporations.--References
in this clause to section 936
shall be treated as including
references to section 30A.
(D) Certain other earnings and profits
adjustments.--
(i) * * *
* * * * * * *
(iii) LIFO inventory adjustments.--
The adjustments provided in section
312(n)(4) shall apply, but only with
respect to taxable years beginning
after December 31, 1989.
* * * * * * *
[(I)] (H) Adjusted basis.--The adjusted basis
of any property with respect to which an
adjustment under this paragraph applies shall
be determined by applying the treatment
prescribed in this paragraph.
[(J)] (I) Treatment of charitable
contributions.--Notwithstanding subparagraphs
(B) and (C), no adjustment related to the
earnings and profits effects of any charitable
contribution shall be made in computing
adjusted current earnings.
* * * * * * *
SEC. 59. OTHER DEFINITIONS AND SPECIAL RULES.
(a) Alternative Minimum Tax Foreign Tax Credit.--For purposes
of this part--
(1) In general.--The alternative minimum tax foreign
tax credit for any taxable year shall be the credit
which would be determined under section 27(a) for such
taxable year if--
(A) [the amount determined under section
55(b)(1)(A)] the pre-credit tentative minimum
tax were the tax against which such credit was
taken for purposes of section 904 for the
taxable year and all prior taxable years
beginning after December 31, 1986,
(B) section 904 were applied on the basis of
alternative minimum taxable income instead of
taxable income, and
(C) the determination of whether any income
is high-taxed income for purposes of section
904(d)(2) were made on the basis of the
applicable rate [specified in section
55(b)(1)(A)] specified in subparagraph (A)(i)
or (B)(i) of section 55(b)(1) (whichever
applies) in lieu of the highest rate of tax
specified in section 1 or 11 (whichever
applies).
(2) Limitation to 90 percent of tax.--
(A) In general.--The alternative minimum tax
foreign tax credit for any taxable year shall
not exceed the excess (if any) of--
(i) [the amount determined under
section 55(b)(1)(A)] the pre-credit
tentative minimum tax for the taxable
year, over
(ii) 10 percent of the amount [which
would be determined under section
55(b)(1)(A)] which would be the pre-
credit tentative minimum tax without
regard to the alternative tax net
operating loss deduction and section
57(a)(2)(E).
* * * * * * *
(3) Pre-credit tentative minimum tax.--For purposes
of this subsection, the term ``pre-credit tentative
minimum tax'' means--
(A) in the case of a taxpayer other than a
corporation, the amount determined under the
first sentence of section 55(b)(1)(A)(i), or
(B) in the case of a corporation, the amount
determined under section 55(b)(1)(B)(i).
* * * * * * *
(b) Minimum Tax Not To Apply to Income Eligible for Section
936 Credit.--In the case of any corporation for which a credit
is allowable for the taxable year under [section 936,
alternative minimum taxable income shall not include any amount
with respect to which the requirements of subparagraph (A) or
(B) of section 936(a)(1) are met.] section 30A or 936,
alternative minimum taxable income shall not include any income
with respect to which a credit is determined under section 30A
or 936.
* * * * * * *
(d) Apportionment of Differently Treated Items in Case of
Certain Entities.--
(1) In general. The differently treated items for the
taxable year shall be apportioned (in accordance with
regulations prescribed by the Secretary)--
(A) * * *
(B) Common trust funds.--In the case of a
common trust fund (as defined in section
584(a)), pro rata among the participants of
such fund.
* * * * * * *
(j) Treatment of Unearned Income of Minor Children.--
(1) Limitation on exemption amount.--In the case of a
child to whom section 1(g) applies, the exemption
amount for purposes of section 55 shall not exceed the
sum of--
(A) such child's earned income (as defined in
section 911(d)(2)) for the taxable year, plus
(B) [$1,000] twice the amount in effect for
the taxable year under section 63(c)(5)(A) (or,
if greater, the child's share of the unused
parental minimum tax exemption).
* * * * * * *
(3) Unused parental minimum tax exemption.--
(A) * * *
(B) Certain rules made applicable.--A child's
share of any unused parental minimum tax
exemption shall be determined under rules
similar to the rules of [section 1(g)(3)(B),
and rules similar to the rules of paragraphs
(3)(D) and (5) of section 1(g) shall apply for
purposes of this paragraph.
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC.
* * * * * * *
SEC. 62. ADJUSTED GROSS INCOME DEFINED.
(a) General Rule.--For purposes of this subtitle, the term
``adjusted gross income'' means, in the case of an individual,
gross income minus the following deductions:
(1) * * *
* * * * * * *
[(8) Certain portion of lump-sum distributions from
pension plans taxed under section 402(d).--The
deduction allowed by section 402(d)(3).]
* * * * * * *
PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
* * * * * * *
SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE
CONTRACTS.
(a) * * *
(b) Exclusion Ratio.--
(1) * * *
* * * * * * *
(4) Unrecovered investment.--For purposes of this
subsection, the unrecovered investment in the contract
as of any date is--
(A) the investment in the contract
(determined without regard to subsection
(c)(2)) as of the annuity starting date,
reduced by
(B) the aggregate amount received under the
contract on or after such annuity starting date
and before the date as of which the
determination is being made, to the extent such
amount was excludable from gross income under
this subtitle.
* * * * * * *
[(d) Treatment of Employee Contributions Under Defined
Contribution Plans as Separate Contracts.--For purposes of this
section, employee contributions (and any income allocable
thereto) under a defined contribution plan may be treated as a
separate contract.]
(d) Special Rules for Qualified Employer Retirement Plans.--
(1) Simplified method of taxing annuity payments.--
(A) In general.--In the case of any amount
received as an annuity under a qualified
employer retirement plan--
(i) subsection (b) shall not apply,
and
(ii) the investment in the contract
shall be recovered as provided in this
paragraph.
(B) Method of recovering investment in
contract.--
(i) In general.--Gross income shall
not include so much of any monthly
annuity payment under a qualified
employer retirement plan as does not
exceed the amount obtained by
dividing--
(I) the investment in the
contract (as of the annuity
starting date), by
(II) the number of
anticipated payments determined
under the table contained in
clause (iii) (or, in the case
of a contract to which
subsection (c)(3)(B) applies,
the number of monthly annuity
payments under such contract).
(ii) Certain rules made applicable.--
Rules similar to the rules of
paragraphs (2) and (3) of subsection
(b) shall apply for purposes of this
paragraph.
(iii) Number of anticipated
payments.--
If the age of the
primary annuitant on The number
the annuity starting of anticipated
date is: payments is:
Not more than 55....................... 360
More than 55 but not more than 60...... 310
More than 60 but not more than 65...... 260
More than 65 but not more than 70...... 210
More than 70........................... 160.
(C) Adjustment for refund feature not
applicable.--For purposes of this paragraph,
investment in the contract shall be determined
under subsection (c)(1) without regard to
subsection (c)(2).
(D) Special rule where lump sum paid in
connection with commencement of annuity
payments.--If, in connection with the
commencement of annuity payments under any
qualified employer retirement plan, the
taxpayer receives a lump sum payment--
(i) such payment shall be taxable
under subsection (e) as if received
before the annuity starting date, and
(ii) the investment in the contract
for purposes of this paragraph shall be
determined as if such payment had been
so received.
(E) Exception.--This paragraph shall not
apply in any case where the primary annuitant
has attained age 75 on the annuity starting
date unless there are fewer than 5 years of
guaranteed payments under the annuity.
(F) Adjustment where annuity payments not on
monthly basis.--In any case where the annuity
payments are not made on a monthly basis,
appropriate adjustments in the application of
this paragraph shall be made to take into
account the period on the basis of which such
payments are made.
(G) Qualified employer retirement plan.--For
purposes of this paragraph, the term
``qualified employer retirement plan'' means
any plan or contract described in paragraph
(1), (2), or (3) of section 4974(c).
(2) Treatment of employee contributions under defined
contribution plans.--For purposes of this section,
employee contributions (and any income allocable
thereto) under a defined contribution plan may be
treated as a separate contract.
* * * * * * *
(m) Special Rules Applicable to Employee Annuities and
Distributions Under Employee Plans.--
(2) Computation of consideration paid by the
employee.--In computing--
(A) the aggregate amount of premiums or other
consideration paid for the contract for
purposes of subsection (c)(1)(A) (relating to
the investment in the contract), and
[(B) the consideration for the contract
contributed by the employee for purposes of
subsection (d)(1) (relating to employee's
contributions recoverable in 3 years) and
subsection (e)(7) (relating to plans where
substantially all contributions are employee
contributions), and]
[(C)] (B) the aggregate premiums or other
consideration paid for purposes of subsection
(e)(6) (relating to certain amounts not
received as an annuity),
any amount allowed as a deduction with respect to the
contract under section 404 which was paid while the
employee was an employee within the meaning of section
401(c)(1) shall be treated as consideration contributed
by the employer, and there shall not be taken into
account any portion of the premiums or other
consideration for the contract paid while the employee
was an owner-employee which is properly allocable (as
determined under regulations prescribed by the
Secretary) to the cost of life, accident, health, or
other insurance.
* * * * * * *
(p) Loans Treated as Distributions.--For purposes of this
section--
(1) * * *
* * * * * * *
(4) Qualified employer plan, etc.-- For purposes of
this subsection--
(A) Qualified employer plan.--
(i) * * *
[(ii) Special rules.--The term
``qualified employer plan''--
[(I) shall include any plan
which was (or was determined to
be) a qualified employer plan
or a government plan, but
[(II) shall not include a
plan described in subsection
(e)(7).]
(ii) Special rule.--The term
``qualified employer plan'' shall not
include any plan which was (or was
determined to be) a qualified employer
plan or a government plan.
* * * * * * *
(t) 10-Percent Additional Tax on Early Distributions From
Qualified Retirement Plans.--
(1) * * *
* * * * * * *
(6) Special rules for simple retirement accounts.--In
the case of any amount received from a simple
retirement account (within the meaning of section
408(p)) during the 2-year period beginning on the date
such individual first participated in any qualified
salary reduction arrangement maintained by the
individual's employer under section 408(p)(2),
paragraph (1) shall be applied by substituting ``25
percent'' for ``10 percent''.
* * * * * * *
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] adjusted 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 IN GROSS INCOME
Sec. 101. Certain death benefits.
* * * * * * *
Sec. 112. Certain [combat pay] combat zone compensation of
members of the armed forces.
* * * * * * *
[Sec. 133. Interest on certain loans used to acquire employer
securities.]
* * * * * * *
SEC. 101. CERTAIN DEATH BENEFITS.
(a) * * *
[(b) Employees' Death Benefits.--
[(1) General rule.--Gross income does not include
amounts received (whether in a single sum or otherwise)
by the beneficiaries or the estate of an employee, if
such amounts are paid by or on behalf of an employer
and are paid by reason of the death of the employee.
[(2) Special rules for paragraph (1).--
[(A) $5,000 limitation.--The aggregate
amounts excludable under paragraph (1) with
respect to the death of any employee shall not
exceed $5,000.
[(B) Nonforfeitable rights.--Paragraph (1)
shall not apply to amounts with respect to
which the employee possessed, immediately
before his death, a nonforfeitable right to
receive the amounts while living. This
subparagraph shall not apply to a lump sum
distribution (as defined in section
402(e)(4))--
[(i) by a stock bonus, pension, or
profit-sharing trust described in
section 401(a) which is exempt from tax
under section 501(a),
[(ii) under an annuity contract under
a plan described in section 403(a), or
[(iii) under an annuity contract
purchased by an employer which is an
organization referred to in section
170(b)(1)(A) (ii) or (vi) or which is a
religious organization (other than a
trust) and which is exempt from tax
under section 501(a), but only with
respect to that portion of such total
distributions payable which bears the
same ratio to the amount of such total
distributions payable which is (without
regard to this subsection) includible
in gross income, as the amounts
contributed by the employer for such
annuity contract which are excludable
from gross income under section 403(b)
bear to the total amounts contributed
by the employer for such annuity
contract.
[(C) Joint and survivor annuities.--Paragraph
(1) shall not apply to amounts received by a
surviving annuitant under a joint and
survivor's annuity contract after the first day
of the first period for which an amount was
received as an annuity by the employee (or
would have been received if the employee had
lived).
[(D) Other annuities.--In the case of any
amount to which section 72 (relating to
annuities, etc.) applies, the amount which is
excludable under paragraph (1) (as modified by
the preceding subparagraphs of this paragraph)
shall be determined by reference to the value
of such amount as of the day on which the
employee died. Any amount so excludable under
paragraph (1) shall, for purposes of section
72, be treated as additional consideration paid
by the employee. Paragraph (1) shall not apply
in the case of an annuity under chapter 73 of
title 10 of the United States Code if the
member or former member of the uniformed
services by reason of whose death such annuity
is payable died after attaining retirement age.
[(3) Treatment of self-employed individuals.--For
purposes of this subsection--
[(A) Self-employed individual not considered
employee.--Except as provided in subparagraph
(B), the term ``employee'' does not include a
self-employed individual described in section
401(c)(1).
[(B) Special rule for certain
distributions.--In the case of any amount paid
or distributed--
[(i) by a trust described in section
401(a) which is exempt from tax under
section 501(a), or
[(ii) under a plan described in
section 403(a), the term ``employee''
includes a self-employed individual
described in section 401(c)(1).]
(c) Interest.--If any amount excluded from gross income by
[subsection (a) or (b)] subsection (a) is held under an
agreement to pay interest thereon, the interest payments shall
be included in gross income.
* * * * * * *
SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.
(a) In General.--Except in the case of amounts attributable
to (and not in excess of) deductions allowed under section 213
(relating to medical, etc., expenses) for any prior taxable
year, gross income does not include--
(1) amounts received under workmen's compensation
acts as compensation for personal injuries or sickness;
[(2) the amount of any damages received (whether by
suit or agreement and whether as lump sums or as
periodic payments) on account of personal injuries or
sickness;]
(2) the amount of any damages (other than punitive
damages) received (whether by suit or agreement and
whether as lump sums or as periodic payments) on
account of personal physical injuries or physical
sickness;
(3) * * *
* * * * * * *
For purposes of paragraph (3), in the case of an individual who
is, or has been, an employee within the meaning of section
401(c)(1) (relating to self-employed individuals),
contributions made on behalf of such individual while he was
such an employee to a trust described in section 401(a) which
is exempt from tax under section 501(a), or under a plan
described in section 403(a), shall, to the extent allowed as
deductions under section 404, be treated as contributions by
the employer which were not includible in the gross income of
the employee. [Paragraph (2) shall not apply to any punitive
damages in connection with a case not involving physical injury
or physical sickness.] For purposes of paragraph (2), emotional
distress shall not be treated as a physical injury or physical
sickness. The preceding sentence shall not apply to an amount
of damages not in excess of the amount paid for medical care
(described in subparagraph (A) or (B) of section 213(d)(1))
attributable to emotional distress.
* * * * * * *
(c) Restriction on Punitive Damages Not to Apply in Certain
Cases.--The restriction on the application of subsection (a)(2)
to punitive damages shall not apply to punitive damages awarded
in a civil action--
(1) which is a wrongful death action, and
(2) with respect to which applicable State law (as in
effect on September 13, 1995 and without regard to any
modification after such date) provides, or has been
construed to provide by a court of competent
jurisdiction pursuant to a decision issued on or before
September 13, 1995, that only punitive damages may be
awarded in such an action.
This subsection shall cease to apply to any civil action filed
on or after the first date on which the applicable State law
ceases to provide (or is no longer construed to provide) the
treatment described in paragraph (2).
[(c)] (d) Cross References.--
(1) For exclusion from employee's gross income of employer
contributions to accident and health plans, see section 106.
(2) For exclusion of part of disability retirement pay from
the application of subsection (a)(4) of this section, see
section 1403 of title 10, United States Code (relating to career
compensation laws).
* * * * * * *
SEC. 108. INCOME FROM DISCHARGE OF INDEBTEDNESS.
(a) * * *
* * * * * * *
(d) Meaning of Terms; Special Rules Relating to Certain
Provisions.--
(1) * * *
* * * * * * *
(9) Time for making election, etc.--
(A) Time.--An election under paragraph (5) of
subsection (b) or under [paragraph (3)(B)]
paragraph (3)(C) of subsection (c) shall be
made on the taxpayer's return for the taxable
year in which the discharge occurs or at such
other time as may be permitted in regulations
prescribed by the Secretary.
* * * * * * *
SEC. 112. CERTAIN [COMBAT PAY] COMBAT ZONE COMPENSATION OF MEMBERS OF
THE ARMED FORCES.
(a) * * *
* * * * * * *
SEC. 117. QUALIFIED SCHOLARSHIPS.
(a) * * *
* * * * * * *
(d) Qualified Tuition Reduction.--
(1) * * *
(2) Qualified tuition reduction.--For purposes of
this subsection, the term ``qualified tuition
reduction'' means the amount of any reduction in
tuition provided to an employee of an organization
described in section 170(b)(1)(A)(ii) for the education
(below the graduate level) at such organization (or
another organization described in section
170(b)(1)(A)(ii)) of--
(A) such employee, or
(B) any person treated as an employee (or
whose use is treated as an employee use) under
the rules of [section 132(f)] section 132(h).
* * * * * * *
SEC. 127. EDUCATIONAL ASSISTANCE PROGRAMS.
(a) * * *
* * * * * * *
(c) Definitions; Special Rules.--For purposes of this
section--
(1) Educational assistance.--The term ``educational
assistance'' means--
(A) the payment, by an employer, of expenses
incurred by or on behalf of an employee for
education of the employee (including, but not
limited to, tuition, fees, and similar
payments, books, supplies, and equipment), and
(B) the provision, by an employer, of courses
of instruction for such employee (including
books, supplies, and equipment),but does not
include payment for, or the provision of, tools
or supplies which may be retained by the
employee after completion of a course of
instruction, or meals, lodging, or
transportation. The term ``educational
assistance'' also does not include any payment
for, or the provision of any benefits with
respect to, any course or other education
involving sports, games, or hobbies or at the
graduate level.
* * * * * * *
(d) Termination.--This section shall not apply to taxable
years beginning after [December 31, 1994] December 31, 1996.
* * * * * * *
SEC. 129. DEPENDENT CARE ASSISTANCE PROGRAMS.
(a) * * *
* * * * * * *
(d) Dependent Care Assistance Program.--
(1) * * *
* * * * * * *
(8) Benefits.--
(A) * * *
(B) Salary reduction agreements.--For
purposes of subparagraph (A), in the case of
any benefits provided through a salary
reduction agreement, a plan may disregard any
employees whose compensation is less than
$25,000. For purposes of this subparagraph, the
term ``compensation'' has the meaning given
such term by [section 414(q)(7)] section
414(q)(4), except that, under rules prescribed
by the Secretary, an employer may elect to
determine compensation on any other basis which
does not discriminate in favor of highly
compensated employees.
* * * * * * *
[SEC. 133. INTEREST ON CERTAIN LOANS USED TO ACQUIRE EMPLOYER
SECURITIES.
[(a) In General.--Gross income does not include 50 percent of
the interest received by--
[(1) a bank (within the meaning of section 581),
[(2) an insurance company to which subchapter L
applies,
[(3) a corporation actively engaged in the business
of lending money, or
[(4) a regulated investment company (as defined in
section 851),
with respect to a securities acquisition loan.
[(b) Securities Acquisition Loan.--
[(1) In general.--For purposes of this section, the
term ``securities acquisition loan'' means--
[(A) any loan to a corporation or to an
employee stock ownership plan to the extent
that the proceeds are used to acquire employer
securities for the plan, or
[(B) any loan to a corporation to the extent
that, within 30 days, employer securities are
transferred to the plan in an amount equal to
the proceeds of such loan and such securities
are allocable to accounts of plan participants
within 1 year of the date of such loan.
For purposes of this paragraph, the term ``employer
securities'' has the meaning given such term by section 409(l).
The term ``securities acquisition loan'' shall not include a
loan with a term greater than 15 years.
[(2) Loans between related persons.--The term
``securities acquisition loan'' shall not include--
[(A) any loan made between corporations which
are members of the same controlled group of
corporations, or
[(B) any loan made between an employee stock
ownership plan and any person that is--
[(i) the employer of any employees
who are covered by the plan; or
[(ii) a member of a controlled group
of corporations which includes such
employer.
For purposes of this paragraph, subparagraphs (A) and (B) shall
not apply to any loan which, but for such subparagraphs, would
be a securities acquisition loan if such loan was not
originated by the employer of any employees who are covered by
the plan or by any member of the controlled group of
corporations which includes such employer, except that this
section shall not apply to any interest received on such loan
during such time as such loan is held by such employer (or any
member of such controlled group).
[(3) Terms applicable to certain securities
acquisition loans.--A loan to a corporation shall not
fail to be treated as a securities acquisition loan
merely because the proceeds of such loan are lent to an
employee stock ownership plan sponsored by such
corporation (or by any member of the controlled group
of corporations which includes such corporation) if
such loan includes--
[(A) repayment terms which are substantially
similar to the terms of the loan of such
corporation from a lender described in
subsection (a), or
[(B) repayment terms providing for more rapid
repayment of principal or interest on such
loan, but only if allocations under the plan
attributable to such repayment do not
discriminate in favor of highly compensated
employees (within the meaning of section
414(q)).
[(4) Controlled group of corporations.--For purposes
of this paragraph, the term ``controlled group of
corporations'' has the meaning given such term by
section 409(l)(4).
[(5) Treatment of refinancings.--The term
``securities acquisition loan'' shall include any loan
which--
[(A) is (or is part of a series of loans)
used to refinance a loan described in
subparagraph (A) or (B) of paragraph (1), and
[(B) meets the requirements of paragraphs (2)
and (3).
[(6) PLAN must hold more than 50 percent of stock
after acquisition or transfer.--
[(A) In general.--A loan shall not be treated
as a securities acquisition loan for purposes
of this section unless, immediately after the
acquisition or transfer referred to in
subparagraph (A) or (B) of paragraph (1),
respectively, the employee stock ownership plan
owns more than 50 percent of--
[(i) each class of outstanding stock
of the corporation issuing the employer
securities, or
[(ii) the total value of all
outstanding stock of the corporation.
[(B) Failure to retain minimum stock
interest.--
[(i) In general.--Subsection (a)
shall not apply to any interest
received with respect to a securities
acquisition loan which is allocable to
any period during which the employee
stock ownership plan does not own stock
meeting the requirements of
subparagraph (A).
[(ii) Exception.--To the extent
provided by the Secretary, clause (i)
shall not apply to any period if,
within 90 days of the first date on
which the failure occurred (or such
longer period not in excess of 180 days
as the Secretary may prescribe), the
plan acquires stock which results in
its meeting the requirements of
subparagraph (A).
[(C) Stock.--For purposes of subparagraph
(A)--
[(i) In general.--The term ``stock''
means stock other than stock described
in section 1504(a)(4).
[(ii) Treatment of certain rights.--
The Secretary may provide that
warrants, options, contracts to acquire
stock, convertible debt interests and
other similar interests be treated as
stock for 1 or more purposes under
subparagraph (A).
[(D) Aggregation rule.--For purposes of
determining whether the requirements of
subparagraph (A) are met, an employee stock
ownership plan shall be treated as owning stock
in the corporation issuing the employer
securities which is held by any other employee
stock ownership plan which is maintained by--
[(i) the employer maintaining the
plan, or
[(ii) any member of a controlled
group of corporations (within the
meaning of section 409(l)(4)) of which
the employer described in clause (i) is
a member.
[(7) Voting rights of employer securities.--A loan
shall not be treated as a securities acquisition loan
for purposes of this section unless--
[(A) the employee stock ownership plan meets
the requirements of section 409(e)(2) with
respect to all employer securities acquired by,
or transferred to, the plan in connection with
such loan (without regard to whether or not the
employer has a registration-type class of
securities), and
[(B) no stock described in section 409(l)(3)
is acquired by, or transferred to, the plan in
connection with such loan unless--
[(i) such stock has voting rights
equivalent to the stock to which it may
be converted, and
[(ii) the requirements of
subparagraph (A) are met with respect
to such voting rights.
[(c) Employee Stock Ownership Plan.--For purposes of this
section, the term ``employee stock ownership plan'' has the
meaning given to such term by section 4975(e)(7).
[(d) Application with Section 483 and Original Issue Discount
Rules.--In applying section 483 and subpart A of part V of
subchapter P to any obligation to which this section applies,
appropriate adjustments shall be made to the applicable Federal
rate to take into account the exclusion under subsection (a).
[(e) Period to Which Interest Exclusion Applies.--
[(1) In general.--In the case of--
[(A) an original securities acquisition loan,
and
[(B) any securities acquisition loan (or
series of such loans) used to refinance the
original securities acquisition loan,
subsection (a) shall apply only to interest
accruing during the excludable period with
respect to the original securities acquisition
loan.
[(2) Excludable period.--For purposes of this
subsection, the term ``excludable period'' means, with
respect to any original securities acquisition loan--
[(A) In general.--The 7-year period beginning
on the date of such loan.
[(B) Loans described in subsection
(b)(1)(A).--If the term of an original
securities acquisition loan described in
subsection (b)(1)(A) is greater than 7 years,
the term of such loan. This subparagraph shall
not apply to a loan described in subsection
(b)(3)(B).
[(3) Original securities acquisition loan.--For the
purposes of this subsection, the term ``original
securities acquisition loan'' means a securities
acquisition loan described in subparagraph (A) or (B)
of subsection (b)(1).]
* * * * * * *
SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER
EDUCATION TUITION AND FEES.
(a) * * *
(b) Limitations.--
(1) * * *
(2) Limitation based on modified adjusted gross
income.--
(A) * * *
(B) Inflation adjustment.--In the case of any
taxable year beginning in a calendar year after
1990, the $40,000 and $60,000 amounts contained
in subparagraph (A) shall be increased by an
amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
under section 1(f)(3) for the calendar
year in which the taxable year begins,
determined by substituting ``calendar
year 1989'' for ``calendar year 1992''
in subparagraph (B) thereof.
* * * * * * *
PART IV--TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS
* * * * * * *
Subpart A--Private Activity Bonds
* * * * * * *
SEC. 143. MORTGAGE REVENUE BONDS: QUALIFIED MORTGAGE BOND AND QUALIFIED
VETERANS' MORTGAGE BOND.
(a) * * *
* * * * * * *
(d) 3-Year Requirement.--
(1) * * *
(2) Exceptions.--For purposes of paragraph (1), the
proceeds of an issue which are used to provide--
(A) financing with respect to targeted area
residences,
(B) qualified home improvement loans and
qualified rehabilitation loans, and
(C) financing with respect to land described
in subsection (i)(1)(C) and the construction of
any residence thereon[.],
shall be treated as used as described in paragraph (1).
* * * * * * *
(m) Recapture of Portion of Federal Subsidy From Use of
Qualified Mortgage Bonds and Mortgage Credit Certificates.--
(1) * * *
* * * * * * *
(4) Recapture amount.--For purposes of this
subsection--
(A) * * *
* * * * * * *
(C) Holding period percentage.--
(i) * * *
(ii) Retirements of indebtedness.--If
the federally-subsidized indebtedness
is completely repaid during [any month
of the 10-year period] any year of the
4-year period beginning on the testing
date, the holding period percentage for
[succeeding months] succeeding years
shall be determined by reducing ratably
[over the remainder of such period (or,
if lesser, 5 years)] to zero over the
succeeding 5 years the holding period
percentage which would have been
determined under this subparagraph had
the taxpayer disposed of his interest
in the residence on the date of the
repayment.
* * * * * * *
SEC. 149. BONDS MUST BE REGISTERED TO BE TAX EXEMPT; OTHER
REQUIREMENTS.
(a) * * *
* * * * * * *
(g) Treatment of Hedge Bonds.--
(1) * * *
* * * * * * *
(3) Hedge bond.--
(A) * * *
(B) Exception for investment in tax-exempt
bonds not subject to minimum tax.--
(i) * * *
* * * * * * *
[(iii) Investment earnings held
pending reinvestment.--Investment
earnings held for not more than 30 days
pending reinvestment shall be treated
as invested in bonds described in
clause (i).]
(iii) Amounts held pending
reinvestment or redemption.--Amounts
held for not more than 30 days pending
reinvestment or bond redemption shall
be treated as invested in bonds
described in clause (i).
* * * * * * *
PART V--DEDUCTIONS FOR PERSONAL EXEMPTIONS
* * * * * * *
SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS.
(a) * * *
* * * * * * *
(d) Exemption Amount.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Phaseout.--
(A) * * *
* * * * * * *
(C) Threshold amount.--For purposes of this
paragraph, the term ``threshold amount''
means--
(i) $150,000 in the case of a [joint
of a return] joint return or a
surviving spouse (as defined in section
2(a)),
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) * * *
* * * * * * *
(k) Stock [Redemption] Reacquisition Expenses.--
(1) In general.--Except as provided in paragraph (2),
no deduction otherwise allowable shall be allowed under
this chapter for any amount paid or incurred by a
corporation in connection with [the redemption of its
stock] the reacquisition of its stock or of the stock
of any related person (as defined in section
465(b)(3)(C)).
(2) Exceptions.--Paragraph (1) shall not apply to--
(A) Certain specific deductions.--Any--
(i) deduction allowable under section
163 (relating to interest), [or]
(ii) deduction for amounts which are
properly allocable to indebtedness and
amortized over the term of such
indebtedness, or
[(ii)] (iii) deduction for dividends
paid (within the meaning of section
561).
(B) Stock of certain regulated investment
companies.--Any amount paid or incurred in
connection with the redemption of any stock in
a regulated investment company which issues
only stock which is redeemable upon the demand
of the shareholder.
* * * * * * *
SEC. 163. INTEREST.
(a) * * *
* * * * * * *
(j) Limitation of Deduction for Interest on Certain
Indebtedness.--
(1) Limitation.--
(A) * * *
(B) Disallowed amount carried to succeeding
taxable year.--Any amount disallowed under
subparagraph (A) for any taxable year shall be
treated as disqualified interest paid or
accrued in the succeeding taxable year (and
clause (ii) of paragraph (2)(A) shall not apply
for purposes of applying this subsection to the
amount so treated).
* * * * * * *
(6) Other definitions and special rules.--For
purposes of this subsection--
(A) * * *
* * * * * * *
(E) Gross basis and net basis taxation.--
(i) Gross basis tax.--The term
``gross basis tax'' means any tax
imposed by this subtitle which is
determined by reference to the gross
amount of any item of income without
any reduction for any deduction allowed
by this subtitle.
(ii) Net basis tax.--The term ``net
basis tax'' means any tax imposed by
this subtitle which is [a] not a gross
basis tax.
(7) Coordination with passive loss rules, etc.--This
subsection shall be applied before sections 465 and
469.
[(7)] (8) Regulations.--The Secretary shall prescribe
such regulations as may be appropriate to carry out the
purposes of this subsection, including--
(A) such regulations as may be appropriate to
prevent the avoidance of the purposes of this
subsection,
* * * * * * *
SEC. 164. TAXES.
(a) General Rule.--Except as otherwise provided in this
section, the following taxes shall be allowed as a deduction
for the taxable year within which paid or accrued:
(1) State and local, and foreign, real property
taxes.
(2) State and local personal property taxes.
(3) State and local, and foreign, income, war
profits, and excess profits taxes.
[(4) The environmental tax imposed by section 59A.
[(5) The GST tax imposed on income distributions.]
(4) The GST tax imposed on income distributions.
(5) The environmental tax imposed by section 59A.
In addition, there shall be allowed as a deduction State and
local, and foreign, taxes not described in the preceding
sentence which are paid or accrued within the taxable year in
carrying on a trade or business or an activity described in
section 212 (relating to expenses for production of income).
Notwithstanding the preceding sentence, any tax (not described
in the first sentence of this subsection) which is paid or
accrued by the taxpayer in connection with an acquisition or
disposition of property shall be treated as part of the cost of
the acquired property or, in the case of a disposition, as a
reduction in the amount realized on the disposition.
* * * * * * *
SEC. 167. DEPRECIATION.
(a) * * *
* * * * * * *
(g) Depreciation Under Income Forecast Method.--
(1) In general.--If the depreciation deduction
allowable under this section to any taxpayer with
respect to any property is determined under the income
forecast method or any similar method--
(A) the income from the property to be taken
into account in determining the depreciation
deduction under such method shall be equal to
the amount of income earned in connection with
the property before the close of the 10th
taxable year following the taxable year in
which the property was placed in service,
(B) the adjusted basis of the property shall
only include amounts with respect to which the
requirements of section 461(h) are satisfied,
(C) the depreciation deduction under such
method for the 10th taxable year beginning
after the taxable year in which the property
was placed in service shall be equal to the
adjusted basis of such property as of the
beginning of such 10th taxable year, and
(D) such taxpayer shall pay (or be entitled
to receive) interest computed under the look-
back method of paragraph (2) for any
recomputation year.
(2) Look-back method.--The interest computed under
the look-back method of this paragraph for any
recomputation year shall be determined by--
(A) first determining the depreciation
deductions under this section with respect to
such property which would have been allowable
for prior taxable years if the determination of
the amounts so allowable had been made on the
basis of the sum of the following (instead of
the estimated income from such property)--
(i) the actual income earned in
connection with such property for
periods before the close of the
recomputation year, and
(ii) an estimate of the future income
to be earned in connection with such
property for periods after the
recomputation year and before the close
of the 10th taxable year following the
taxable year in which the property was
placed in service,
(B) second, determining (solely for purposes
of computing such interest) the overpayment or
underpayment of tax for each such prior taxable
year which would result solely from the
application of subparagraph (A), and
(C) then using the adjusted overpayment rate
(as defined in section 460(b)(7)), compounded
daily, on the overpayment or underpayment
determined under subparagraph (B).
For purposes of the preceding sentence, any cost
incurred after the property is placed in service (which
is not treated as a separate property under paragraph
(5)) shall be taken into account by discounting (using
the Federal mid-term rate determined under section
1274(d) as of the time such cost is incurred) such cost
to its value as of the date the property is placed in
service. The taxpayer may elect with respect to any
property to have the preceding sentence not apply to
such property.
(3) Exception from look-back method.--Paragraph
(1)(D) shall not apply with respect to any property
which, when placed in service by the taxpayer, had a
basis of $100,000 or less.
(4) Recomputation year.--For purposes of this
subsection, except as provided in regulations, the term
``recomputation year'' means, with respect to any
property, the 3d and the 10th taxable years beginning
after the taxable year in which the property was placed
in service, unless the actual income earned in
connection with the property for the period before the
close of such 3d or 10th taxable year is within 10
percent of the income earned in connection with the
property for such period which was taken into account
under paragraph (1)(A).
(5) Special rules.--
(A) Certain costs treated as separate
property.--For purposes of this subsection, the
following costs shall be treated as separate
properties:
(i) Any costs incurred with respect
to any property after the 10th taxable
year beginning after the taxable year
in which the property was placed in
service.
(ii) Any costs incurred after the
property is placed in service and
before the close of such 10th taxable
year if such costs are significant and
give rise to a significant increase in
the income from the property which was
not included in the estimated income
from the property.
(B) Syndication income from television
series.--In the case of property which is an
episode in a television series, income from
syndicating such series shall not be required
to be taken into account under this subsection
before the earlier of--
(i) the 4th taxable year beginning
after the date the first episode in
such series is placed in service, or
(ii) the earliest taxable year in
which the taxpayer has an arrangement
relating to the future syndication of
such series.
(C) Special rules for financial exploitation
of characters, etc.--For purposes of this
subsection, in the case of television and
motion picture films, the income from the
property shall include income from the
exploitation of characters, designs, scripts,
scores, and other incidental income associated
with such films, but only to the extent that
such income is earned in connection with the
ultimate use of such items by, or the ultimate
sale of merchandise to, persons who are not
related persons (within the meaning of section
267(b)) to the taxpayer.
(D) Collection of interest.--For purposes of
subtitle F (other than sections 6654 and 6655),
any interest required to be paid by the
taxpayer under paragraph (1) for any
recomputation year shall be treated as an
increase in the tax imposed by this chapter for
such year.
(E) Determinations.--For purposes of
paragraph (2), determinations of the amount of
income earned in connection with any property
shall be made in the same manner as for
purposes of applying the income forecast
method; except that any income from the
disposition of such property shall be taken
into account.
(F) Treatment of pass-thru entities.--Rules
similar to the rules of section 460(b)(4) shall
apply for purposes of this subsection.
[(g)] (h) Cross References.--
(1) * * *
* * * * * * *
SEC. 168. ACCELERATED COST RECOVERY SYSTEM.
(a) * * *
* * * * * * *
(e) Classification of Property.--For purposes of this
section--
(1) * * *
* * * * * * *
(3) Classification of certain property.--
(A) * * *
(B) 5-year property.--The term ``5-year
property'' includes--
(i) any automobile or light general
purpose truck,
(ii) any semi-conductor manufacturing
equipment,
(iii) any computer-based telephone
central office switching equipment,
(iv) any qualified technological
equipment,
(v) any section 1245 property used in
connection with research and
experimentation, and
(vi) any property which--
(I) is described in
subparagraph (A) of section
48(a)(3) (or would be so
described if ``solar and wind''
were substituted for ``solar''
in clause (i) thereof, [or]
(II) is described in
paragraph (15) of section 48(l)
(as in effect on the day before
the date of the enactment of
the Revenue Reconciliation Act
of 1990) and is a qualifying
small power production facility
within the meaning of section
3(17)(C) of the Federal Power
Act (16 U.S.C. 796(17)(C)), as
in effect on September 1,
1986[.], or
(III) is described in section
48(l)(3)(A)(ix) (as in effect
on the day before the date of
the enactment of the Revenue
Reconciliation Act of 1990).
Nothing in any provision of law shall be
construed to treat property as not being
described in clause (vi)(I) (or the
corresponding provisions of prior law) by
reason of being public utility property (within
the meaning of section 48(a)(3)).
* * * * * * *
(g) Alternative Depreciation System for Certain Property
(1) * * *
* * * * * * *
(4) Exception for certain property used outside
united states.--Subparagraph (A) of paragraph (1) shall
not apply to--
(A) * * *
* * * * * * *
(K) any property described in [section
48(a)(3)(A)(iii)] section 48(l)(3)(A)(ix) (as
in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1990) which is owned by a United States person
and which is used in international or
territorial waters to generate energy for use
in the United States; and
* * * * * * *
SEC. 172. NET OPERATING LOSS DEDUCTION.
(a) * * *
(b) Net Operating Loss Carrybacks and Carryovers.--
(1) Years to which loss may be carried.--
(A) * * *
* * * * * * *
(E) Excess interest loss.--
(i) * * *
(ii) Loss limitation year.--For
purposes of clause (i) and [subsection
(m)] subsection (h), the term ``loss
limitation year'' means, with respect
to any corporate equity reduction
transaction, the taxable year in which
such transaction occurs and each of the
2 succeeding taxable years.
* * * * * * *
(h) Corporate Equity Reduction Interest Losses.--For purposes
of this section--
(1) * * *
* * * * * * *
(3) Corporate equity reduction transaction.--
(A) * * *
(B) Major stock acquisition.--
(i) In general.--The term ``major
stock acquisition'' means the
acquisition by a corporation pursuant
to a plan of such corporation (or any
group of persons acting in concert with
such corporation) of stock in another
corporation representing 50 percent or
more (by vote or value) of the stock in
such other corporation[,].
* * * * * * *
(4) Other rules.--
(A) * * *
(B) Coordination with subsection (b)(2).--
[For purposes of subsection (b)(2)--] For
purposes of subsection (b)(2)--
(i) a corporate equity reduction
interest loss shall be treated in a
manner similar to the manner in which a
specified liability loss is treated,
and
(ii) in determining the net operating
loss deduction for any prior taxable
year referred to in the 3rd sentence of
subsection (b)(2), the portion of any
net operating loss which may not be
carried to such taxable year under
subsection (b)(1)(E) shall not be taken
into account.
(C) Members of affiliated groups.--Except as
provided by regulations, all members of an
affiliated group filing a consolidated return
under section 1501 shall be treated as 1
taxpayer for purposes of this subsection and
[subsection (b)(1)(M)] subsection (b)(1)(E).
* * * * * * *
SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.
(a) * * *
(b) Limitations.--
[(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed $17,500.]
(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed the following applicable
amount:
If the taxable year The applicable
begins in: amount is:
1996.......................................... $18,500
1997.......................................... 19,000
1998.......................................... 20,000
1999.......................................... 21,000
2000.......................................... 22,000
2001.......................................... 23,000
2002.......................................... 23,500
2003 or thereafter............................ 25,000.
* * * * * * *
(d) Definitions and special rules.--
(1) Section 179 property.--For purposes of this
section, the term ``section 179 property'' means any
tangible property (to which section 168 applies) which
is section 1245 property (as defined in section
1245(a)(3)) and which is acquired by purchase for use
in the active conduct of [in a trade or business] a
trade or business. Such term shall not include any
property described in section 50(b) and shall not
include air conditioning or heating units and horses.
* * * * * * *
SEC. 179A. DEDUCTION FOR CLEAN-FUEL VEHICLES AND CERTAIN REFUELING
PROPERTY.
(a) * * *
* * * * * * *
[(g)] (f) Termination.--This section shall not apply to any
property placed in service after December 31, 2004.
* * * * * * *
PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS
* * * * * * *
SEC. 219. RETIREMENT SAVINGS.
(a) * * *
(b) Maximum Amount of Deduction.--
(1) * * *
* * * * * * *
(4) Special rule for simple retirement accounts.--
This section shall not apply with respect to any amount
contributed to a simple retirement account established
under section 408(p).
* * * * * * *
(g) Limitation on Deduction for Active Participants in
Certain Pension Plans.--
(1) * * *
* * * * * * *
(5) Active participant.--For purposes of this
subsection, the term ``active participant'' means, with
respect to any plan year, an individual--
(A) who is an active participant in--
(i) a plan described in section
401(a) which includes a trust exempt
from tax under section 501(a),
(ii) an annuity plan described in
section 403(a),
(iii) a plan established for its
employees by the United States, by a
State or political subdivision thereof,
or by an agency or instrumentality of
any of the foregoing,
(iv) an annuity contract described in
section 403(b), or
(v) a simplified employee pension
(within the meaning of section 408(k)),
[or]
(vi) any simple retirement account
(within the meaning of section 408(p)),
or
* * * * * * *
PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS
* * * * * * *
SEC. 243. DIVIDENDS RECEIVED BY CORPORATIONS.
(a) * * *
(b) Qualifying Dividends.--
(1) * * *
[(2) Affiliated group.--For purposes of this
subsection, the term ``affiliated group'' has the
meaning given such term by section 1504(a), except that
for such purposes sections 1504(b)(2), 1504(b)(4), and
1504(c) shall not apply.]
(2) Affiliated group.--For purposes of this
subsection:
(A) In general.--The term ``affiliated
group'' has the meaning given such term by
section 1504(a), except that for such purposes
sections 1504(b)(2), 1504(b)(4), and 1504(c)
shall not apply.
(B) Group must be consistent in foreign tax
treatment.--The requirements of paragraph
(1)(A) shall not be treated as being met with
respect to any dividend received by a
corporation if, for any taxable year which
includes the day on which such dividend is
received--
(i) 1 or more members of the
affiliated group referred to in
paragraph (1)(A) choose to any extent
to take the benefits of section 901,
and
(ii) 1 or more other members of such
group claim to any extent a deduction
for taxes otherwise creditable under
section 901.
* * * * * * *
(3) Special rule for groups which include life
insurance companies.--
(A) In general.--In the case of an affiliated
group which includes 1 or more insurance
companies under section 801, no dividend by any
member of such group shall be treated as a
qualifying dividend unless an election under
this paragraph is in effect for the taxable
year in which the dividend is received. The
preceding sentence shall not apply in the case
of a dividend described in paragraph
(1)(B)(ii).
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 280A. DISALLOWANCE OF CERTAIN EXPENSES IN CONNECTION WITH BUSINESS
USE OF HOME, RENTAL OF VACATION HOMES, ETC.
(a) * * *
* * * * * * *
(c) Exceptions for Certain Business or Rental Use; Limitation
on Deductions for Such Use.--
(1) Certain business use.--Subsection (a) shall not
apply to any item to the extent such item is allocable
to a portion of the dwelling unit which is exclusively
used on a regular basis--
[(A) the principal place of business for any
trade or business of the taxpayer.]
(A) as the principal place of business for
any trade or business of the taxpayer.
* * * * * * *
(2) Certain storage use.---Subsection (a) shall not
apply to any item to the extent such item is allocable
to space within the dwelling unit which is used on a
regular basis as a storage unit for the [inventory]
inventory or product samples of the taxpayer held for
use in the taxpayer's trade or business of selling
products at retail or wholesale, but only if the
dwelling unit is the sole fixed location of such trade
or business.
* * * * * * *
SEC. 280F. LIMITATION ON DEPRECIATION FOR LUXURY AUTOMOBILES;
LIMITATION WHERE CERTAIN PROPERTY USED FOR PERSONAL
PURPOSES.
(a) Limitation on Amount of [Investment Tax Credit and]
Depreciation for Luxury Automobiles.--
(1) * * *
* * * * * * *
SEC. 280G. GOLDEN PARACHUTE PAYMENTS.
(a) * * *
(b) Excess Parachute Payment.--For purposes of this section--
(1) * * *
* * * * * * *
(6) Exemption for payments under qualified plans.--
Notwithstanding paragraph (2), the term ``parachute
payment'' shall not include any payment to or from--
(A) a plan described in section 401(a) which
includes a trust exempt from tax under section
501(a),
(B) an annuity plan described in section
403(a), [or]
(C) a simplified employee pension (as defined
in section 408(k))[.], or
(D) a simple retirement account described in
section 408(p).
* * * * * * *
PART XI--SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS
* * * * * * *
SEC. 291. SPECIAL RULES RELATING TO CORPORATE PREFERENCE ITEMS.
(a) * * *
* * * * * * *
(e) Definitions.--For purposes of this section--
(1) Financial institution preference item.--The term
``financial institution preference item'' includes the
following:
(B) Interest on debt to carry tax-exempt
obligations acquired after december 31, 1982,
and before august 8, 1986.--
(i) * * *
* * * * * * *
[(iv) Special rules for obligations
to which section 133 applies.--In the
case of an obligation to which section
133 applies, interest on such
obligation shall not be treated as
exempt from taxes for purposes of this
subparagraph.]
[(v)] (iv) Application of
subparagraph to certain obligations
issued after august 7, 1986.--For
application of this subparagraph to
certain obligations issued after August
7, 1986, see section 265(b)(3).
* * * * * * *
SUBCHAPTER C--CORPORATE DISTRIBUTIONS AND ADJUSTMENTS
* * * * * * *
PART II--CORPORATE LIQUIDATIONS
* * * * * * *
Subpart C--Collapsible Corporations
* * * * * * *
SEC. 341. COLLAPSIBLE CORPORATIONS.
(a) * * *
* * * * * * *
(f) Certain Sales of Stock of Consenting Corporations.--
(1) * * *
* * * * * * *
(3) Exception for certain tax-free transactions.--If
the basis of a subsection (f) asset in the hands of a
transferee is determined by reference to its basis in
the hands of the transferor by reason of the
application of section 332, [351, 361, 371(a), or
374(a)] 351, or 361, then the amount of gain taken into
account by the transferor under paragraph (2) shall not
exceed the amount of gain recognized to the transferor
on the transfer of such asset (determined without
regard to this subsection). This paragraph shall apply
only if the transferee--
(A) is not an organization which is exempt
from tax imposed by this chapter, and
(B) agrees (at such time and in such manner
as the Secretary may by regulations prescribe)
to have the provisions of paragraph (2) apply
to any disposition by it of such subsection (f)
asset.
* * * * * * *
PART III--CORPORATE ORGANIZATIONS AND REORGANIZATIONS
* * * * * * *
Subpart A--Corporate Organization
* * * * * * *
SEC. 355. DISTRIBUTION OF STOCK AND SECURITIES OF A CONTROLLED
CORPORATION.
(a) * * *
* * * * * * *
(d) Recognition of Gain on Certain Distributions of Stock or
Securities in Controlled Corporation.--
(1) * * *
* * * * * * *
(7) Aggregation rules.--
(A) In general.--For purposes of this
subsection, a person and all persons related to
such person (within the meaning of section
267(b) or 707(b)(1)) shall be treated as one
person.
* * * * * * *
Subchapter D--Deferred Compensation, Etc.
* * * * * * *
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.
* * * * * * *
Subpart A--General Rule
* * * * * * *
SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS.
(a) Requirements for Qualification.--A trust created or
organized in the United States and forming part of a stock
bonus, pension, or profit-sharing plan of an employer for the
exclusive benefit of his employees or their beneficiaries shall
constitute a qualified trust under this section--
(1) * * *
* * * * * * *
(5) Special rules relating to nondiscrimination
requirements.--
(A) * * *
* * * * * * *
(D) Integrated defined benefit plan.--
(i) * * *
(ii) Final pay.--For purposes of this
subparagraph, the participant's final
pay is the compensation (as defined in
section [414(q)(7)] 414(q)(4)) paid to
the participant by the employer for any
year--
(I) which ends during the 5-
year period ending with the
year in which the participant
separated from service for the
employer, and
(II) for which the
participant's total
compensation from the employer
was highest.
* * * * * * *
(F) Social security retirement age.--For
purposes of testing for discrimination under
paragraph (4)--
(i) the social security retirement
age (as defined in section 415(b)(8))
shall be treated as a uniform
retirement age, and
(ii) subsidized early retirement
benefits and joint and survivor
annuities shall not be treated as being
unavailable to employees on the same
terms merely because such benefits or
annuities are based in whole or in part
on an employee's social security
retirement age (as so defined).
* * * * * * *
(9) Required distributions.--
(A) * * *
* * * * * * *
[(C) Required beginning date.--For purposes
of this paragraph, the term ``required
beginning date'' means April 1 of the calendar
year following the calendar year in which the
employee attains age 70-1/2. In the case of a
governmental plan or church plan, the required
beginning date shall be the later of the date
determined under the preceding sentence or
April 1 of the calendar year following the
calendar year in which the employee retires.
For purposes of this subparagraph, the term
``church plan'' means a plan maintained by a
church for church employees, and the term
``church'' means any church (as defined in
section 3121(w)(3)(A)) or qualified church
controlled organization (as defined in section
3121(w)(3)(B)).]
(C) Required beginning date.--For purposes of
this paragraph--
(i) In general.--The term ``required
beginning date'' means April 1 of the
calendar year following the later of--
(I) the calendar year in
which the employee attains age
70\1/2\, or
(II) the calendar year in
which the employee retires.
(ii) Exception.--Subclause (II) of
clause (i) shall not apply--
(I) except as provided in
section 409(d), in the case of
an employee who is a 5-percent
owner (as defined in section
416) with respect to the plan
year ending in the calendar
year in which the employee
attains age 70\1/2\, or
(II) for purposes of section
408 (a)(6) or (b)(3).
(iii) Actuarial adjustment.--In the
case of an employee to whom clause
(i)(II) applies who retires in a
calendar year after the calendar year
in which the employee attains age 70\1/
2\, the employee's accrued benefit
shall be actuarially increased to take
into account the period after age 70\1/
2\ in which the employee was not
receiving any benefits under the plan.
(iv) Exception for governmental and
church plans.--Clauses (ii) and (iii)
shall not apply in the case of a
governmental plan or church plan. For
purposes of this clause, the term
``church plan'' means a plan maintained
by a church for church employees, and
the term ``church'' means any church
(as defined in section 3121(w)(3)(A))
or qualified church-controlled
organization (as defined in section
3121(w)(3)(B)).
* * * * * * *
(17) Compensation limit.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless,
under the plan of which such trust is a part,
the annual compensation of each employee taken
into account under the plan for any year does
not exceed $150,000. [In determining the
compensation of an employee, the rules of
section 414(q)(6) shall apply, except that in
applying such rules, the term ``family'' shall
include only the spouse of the employee and any
lineal descendants of the employee who have not
attained age 19 before the close of the year.]
* * * * * * *
(20) A trust forming part of a pension plan shall not
be treated as failing to constitute a qualified trust
under this section merely because the pension plan of
which such trust is a part makes 1 or more
distributions within 1 taxable year to a distributee on
account of a termination of the plan of which the trust
is a part, or in the case of a profit-sharing or stock
bonus plan, a complete discontinuance of contributions
under such plan. This paragraph shall not apply to a
defined benefit plan unless the employer maintaining
such plan files a notice with the Pension Benefit
Guaranty Corporation (at the time and in the manner
prescribed by the Pension Benefit Guaranty Corporation)
notifying the Corporation of such payment or
distribution and the Corporation has approved such
payment or distribution or, within 90 days after the
date on which such notice was filed, has failed to
disapprove such payment or distribution. For purposes
of this paragraph, rules similar to the rules of
section 402(a)(6)(B) (as in effect before its repeal by
section [211] 521 of the Unemployment Compensation
Amendments of 1992) shall apply.
* * * * * * *
(26) Additional participation requirements.--
[(A) In general.--A trust shall not
constitute a qualified trust under this
subsection unless such trust is part of a plan
which on each day of the plan year benefits the
lesser of--
[(i) 50 employees of the employer, or
[(ii) 40 percent or more of all
employees of the employer.]
(A) In general.--In the case of a trust which
is a part of a defined benefit plan, such trust
shall not constitute a qualified trust under
this subsection unless on each day of the plan
year such trust benefits at least the lesser
of--
(i) 50 employees of the employer, or
(ii) the greater of--
(I) 40 percent of all
employees of the employer, or
(II) 2 employees (or if there
is only 1 employee, such
employee).
* * * * * * *
(G) Separate lines of business.--At the
election of the employer and with the consent
of the Secretary, this paragraph may be applied
separately with respect to each separate line
of business of the employer. For purposes of
this paragraph, the term ``separate line of
business'' has the meaning given such term by
section 414(r) (without regard to [paragraph
(7)] paragraph (2)(A) or (7) thereof).
* * * * * * *
(28) Additional requirements relating to employee
stock ownership plans.--
(A) * * *
(B) Diversification of investments.--
(i) * * *
* * * * * * *
[(v) Coordination with distribution
rules.--Any distribution required by
this subparagraph shall not be taken
into account in determining whether a
subsequent distribution is a lump sum
distribution under section 402(d)(4)(A)
or in determining whether section
402(c)(10) applies.]
* * * * * * *
[(d) Additional Requirements for Qualification of Trusts and
Plans Benefiting Owner-Employees.--A trust forming part of a
pension or profit-sharing plan which provides contributions or
benefits for employees some or all of whom are owner-employees
shall constitute a qualified trust under this section only if,
in addition to meeting the requirements of subsection (a), the
following requirements of this subsection are met by the trust
and by the plan of which such trust is a part:
[(1)(A) If the plan provides contributions or
benefits for an owner-employee who controls, or for two
or more owner-employees who together control, the trade
or business with respect to which the plan is
established, and who also control as an owner-employee
or as owner-employees one or more other trades or
businesses, such plan and the plans established with
respect to such other trades or businesses, when
coalesced, constitute a single plan which meets the
requirements of subsection (a) (including paragraph
(10) thereof) and of this subsection with respect to
the employees of all such trades or businesses
(including the trade or business with respect to which
the plan intended to qualify under this section is
established).
[(B) For purposes of subparagraph (A), an
owner-employee, or two or more owner-employees,
shall be considered to control a trade or
business if such owner-employee, or such two or
more owner-employees together--
[(i) own the entire interest in an
unincorporated trade or business, or
[(ii) in the case of a partnership,
own more than 50 percent of either the
capital interest or the profits
interest in such partnership.
For purposes of the preceding sentence, an owner-employee, or
two or more owner-employees, shall be treated as owning any
interest in a partnership which is owned, directly or
indirectly, by a partnership which such owner-employee, or such
two or more owner-employees, are considered to control within
the meaning of the preceding sentence.
[(2) The plan does not provide contributions or
benefits for any owner-employee who controls (within
the meaning of paragraph (1)(B)), or for two or more
owner-employees who together control, as an owner-
employee or as owner-employees, any other trade or
business, unless the employees of each trade or
business which such owner-employee or such owner-
employees control are included under a plan which meets
the requirements of subsection (a) (including paragraph
(10) thereof) and of this subsection, and provides
contributions and benefits for employees which are not
less favorable than contributions and benefits provided
for owner-employees under the plan.
[(3) Under the plan, contributions on behalf of any
owner-employee may be made only with respect to the
earned income of such owner-employee which is derived
from the trade or business with respect to which such
plan is established.]
(d) Contribution Limit on Owner-Employees.--A trust forming
part of a pension or profit-sharing plan which provides
contributions or benefits for employees some or all of whom are
owner-employees shall constitute a qualified trust under this
section only if, in addition to meeting the requirements of
subsection (a), the plan provides that contributions on behalf
of any owner-employee may be made only with respect to the
earned income of such owner-employee which is derived from the
trade or business with respect to which such plan is
established.
* * * * * * *
(k) Cash or Deferred Arrangements.--
(1) * * *
* * * * * * *
(3) Application of participation and discrimination
standards.--
(A) A cash or deferred arrangement shall not
be treated as a qualified cash or deferred
arrangement unless--
(i) those employees eligible to
benefit under the arrangement satisfy
the provisions of section 410(b)(1),
and
(ii) the actual deferral percentage
for eligible highly compensated
employees (as defined in paragraph (5))
for [such year] the plan year bears a
relationship to the actual deferral
percentage for all other eligible
employees [for such plan year] for the
preceding plan year which meets either
of the following tests:
(I) The actual deferral
percentage for the group of
eligible highly compensated
employees is not more than the
actual deferral percentage of
all other eligible employees
multiplied by 1.25.
(II) The excess of the actual
deferral percentage for the
group of eligible highly
compensated employees over that
of all other eligible employees
is not more than 2 percentage
points, and the actual deferral
percentage for the group of
eligible highly compensated
employees is not more than the
actual deferral percentage of
all other eligible employees
multiplied by 2.
If 2 or more plans which include cash
or deferred arrangements are considered
as 1 plan for purposes of section
401(a)(4) or 410(b), the cash or
deferred arrangements included in such
plans shall be treated as 1 arrangement
for purposes of this subparagraph. An
arrangement may apply this clause by
using the plan year rather than the
preceding plan year if the employer so
elects, except that if such an election
is made, it may not be changed except
as provided by the Secretary.
If any highly compensated employee is a
participant under 2 or more cash or deferred
arrangements of the employer, for purposes of
determining the deferral percentage with
respect to such employee, all such cash or
deferred arrangements shall be treated as 1
cash or deferred arrangement.
* * * * * * *
(E) For purposes of this paragraph, in the
case of the first plan year of any plan (other
than a successor plan), the amount taken into
account as the actual deferral percentage of
nonhighly compensated employees for the
preceding plan year shall be--
(i) 3 percent, or
(ii) if the employer makes an
election under this subclause, the
actual deferral percentage of nonhighly
compensated employees determined for
such first plan year.
* * * * * * *
(4) Other requirements.--
(A) * * *
[(B) State and local governments and tax-
exempt organizations not eligible.--A cash or
deferred arrangement shall not be treated as a
qualified cash or deferred arrangement if it is
part of a plan maintained by--
[(i) a State or local government or
political subdivision thereof, or any
agency or instrumentality thereof, or
[(ii) any organization exempt from
tax under this subtitle.
This subparagraph shall not apply to a rural
cooperative plan.]
(B) Eligibility of state and local
governments and tax-exempt organizations.--
(i) Tax-exempts eligible.--Except as
provided in clause (ii), any
organization exempt from tax under this
subtitle may include a qualified cash
or deferred arrangement as part of a
plan maintained by it.
(ii) Governments ineligible.--A cash
or deferred arrangement shall not be
treated as a qualified cash or deferred
arrangement if it is part of a plan
maintained by a State or local
government or political subdivision
thereof, or any agency or
instrumentality thereof. This clause
shall not apply to a rural cooperative
plan or to a plan of an employer
described in clause (iii).
(iii) Treatment of indian tribal
governments.--An employer which is an
Indian tribal government (as defined in
section 7701(a)(40)), a subdivision of
an Indian tribal government (determined
in accordance with section 7871(d)), an
agency or instrumentality of an Indian
tribal government or subdivision
thereof, or a corporation chartered
under Federal, State, or tribal law
which is owned in whole or in part by
any of the foregoing shall be treated
as an organization exempt from tax
under this subtitle for purposes of
clause (i).
* * * * * * *
(7) Rural cooperative plan.--For purposes of this
subsection--
(A) * * *
(B) Rural cooperative defined.--For purposes
of subparagraph (A), the term ``rural
cooperative'' means--
[(i) any organization which--
[(I) is exempt from tax under
this subtitle or which is a
State or local government or
political subdivision thereof
(or agency or instrumentality
thereof), and
[(II) is engaged primarily in
providing electric service on a
mutual or cooperative basis,]
(i) any organization which--
(I) is engaged primarily in
providing electric service on a
mutual or cooperative basis, or
(II) is engaged primarily in
providing electric service to
the public in its area of
service and which is exempt
from tax under this subtitle or
which is a State or local
government (or an agency or
instrumentality thereof), other
than a municipality (or an
agency or instrumentality
thereof),
* * * * * * *
(C) Special rule for certain distributions.--
A rural cooperative plan which includes a
qualified cash or deferred arrangement shall
not be treated as violating the requirements of
section 401(a) or of paragraph (2) merely by
reason of a hardship distribution or a
distribution to a participant after attainment
of age 59\1/2\. For purposes of this section,
the term ``hardship distribution'' means a
distribution described in paragraph
(2)(B)(i)(IV) (without regard to the limitation
of its application to profit-sharing or stock
bonus plans).
(8) Arrangement not disqualified if excess
contributions distributed.--
(A) * * *
* * * * * * *
(C) Method of distributing excess
contributions.--Any distribution of the excess
contributions for any plan year shall be made
to highly compensated employees [on the basis
of the respective portions of the excess
contributions attributable to each of such
employees] on the basis of the amount of
contributions by, or on behalf of, each of such
employees.
* * * * * * *
(10) Distributions upon termination of plan or
disposition of assets or subsidiary.--
(A) * * *
(B) Distributions must be lump sum
distributions.--
(i) In general.--An event shall not
be treated as described in subparagraph
(A) with respect to any employee unless
the employee receives a lump sum
distribution by reason of the event.
[(ii) Lump sum distribution.--For
purposes of this subparagraph, the term
``lump sum distribution'' has the
meaning given such term by section
402(d)(4), without regard to clauses
(i), (ii), (iii), and (iv) of
subparagraph (A), subparagraph (B), or
subparagraph (F) thereof.]
(ii) Lump-sum distribution.--For
purposes of this subparagraph, the term
``lump-sum distribution'' has the
meaning given such term by section
402(e)(4)(D) (without regard to
subclauses (I), (II), (III), and (IV)
of clause (i) thereof).
* * * * * * *
(11) Adoption of simple plan to meet
nondiscrimination tests.--
(A) In general.--A cash or deferred
arrangement maintained by an eligible employer
shall be treated as meeting the requirements of
paragraph (3)(A)(ii) if such arrangement
meets--
(i) the contribution requirements of
subparagraph (B),
(ii) the exclusive benefit
requirements of subparagraph (C), and
(iii) the vesting requirements of
section 408(p)(3).
(B) Contribution requirements.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement--
(I) an employee may elect to
have the employer make elective
contributions for the year on
behalf of the employee to a
trust under the plan in an
amount which is expressed as a
percentage of compensation of
the employee but which in no
event exceeds $6,000,
(II) the employer is required
to make a matching contribution
to the trust for the year in an
amount equal to so much of the
amount the employee elects
under subclause (I) as does not
exceed 3 percent of
compensation for the year, and
(III) no other contributions
may be made other than
contributions described in
subclause (I) or (II).
(ii) Employer may elect 2-percent
nonelective contribution.--An employer
shall be treated as meeting the
requirements of clause (i)(II) for any
year if, in lieu of the contributions
described in such clause, the employer
elects (pursuant to the terms of the
arrangement) to make nonelective
contributions of 2 percent of
compensation for each employee who is
eligible to participate in the
arrangement and who has at least $5,000
of compensation from the employer for
the year. If an employer makes an
election under this subparagraph for
any year, the employer shall notify
employees of such election within a
reasonable period of time before the
30th day before the beginning of such
year.
(C) Exclusive benefit.--The requirements of
this subparagraph are met for any year to which
this paragraph applies if no contributions were
made, or benefits were accrued, for services
during such year under any qualified plan of
the employer on behalf of any employee eligible
to participate in the cash or deferred
arrangement, other than contributions described
in subparagraph (B).
(D) Definitions and special rule.--
(i) Definitions.--For purposes of
this paragraph, any term used in this
paragraph which is also used in section
408(p) shall have the meaning given
such term by such section.
(ii) Coordination with top-heavy
rules.--A plan meeting the requirements
of this paragraph for any year shall
not be treated as a top-heavy plan
under section 416 for such year.
(12) Alternative methods of meeting nondiscrimination
requirements.--
(A) In general.--A cash or deferred
arrangement shall be treated as meeting the
requirements of paragraph (3)(A)(ii) if such
arrangement--
(i) meets the contribution
requirements of subparagraph (B) or
(C), and
(ii) meets the notice requirements of
subparagraph (D).
(B) Matching contributions.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, the employer makes
matching contributions on behalf of
each employee who is not a highly
compensated employee in an amount equal
to--
(I) 100 percent of the
elective contributions of the
employee to the extent such
elective contributions do not
exceed 3 percent of the
employee's compensation, and
(II) 50 percent of the
elective contributions of the
employee to the extent that
such elective contributions
exceed 3 percent but do not
exceed 5 percent of the
employee's compensation.
(ii) Rate for highly compensated
employees.--The requirements of this
subparagraph are not met if, under the
arrangement, the rate of matching
contribution with respect to any
elective contribution of a highly
compensated employee at any rate of
elective contribution is greater than
that with respect to an employee who is
not a highly compensated employee.
(iii) Alternative plan designs.--If
the rate of any matching contribution
with respect to any rate of elective
contribution is not equal to the
percentage required under clause (i),
an arrangement shall not be treated as
failing to meet the requirements of
clause (i) if--
(I) the rate of an employer's
matching contribution does not
increase as an employee's rate
of elective contributions
increase, and
(II) the aggregate amount of
matching contributions at such
rate of elective contribution
is at least equal to the
aggregate amount of matching
contributions which would be
made if matching contributions
were made on the basis of the
percentages described in clause
(i).
(C) Nonelective contributions.--The
requirements of this subparagraph are met if,
under the arrangement, the employer is
required, without regard to whether the
employee makes an elective contribution or
employee contribution, to make a contribution
to a defined contribution plan on behalf of
each employee who is not a highly compensated
employee and who is eligible to participate in
the arrangement in an amount equal to at least
3 percent of the employee's compensation.
(D) Notice requirement.--An arrangement meets
the requirements of this paragraph if, under
the arrangement, each employee eligible to
participate is, within a reasonable period
before any year, given written notice of the
employee's rights and obligations under the
arrangement which--
(i) is sufficiently accurate and
comprehensive to appraise the employee
of such rights and obligations, and
(ii) is written in a manner
calculated to be understood by the
average employee eligible to
participate.
(E) Other requirements.--
(i) Withdrawal and vesting
restrictions.--An arrangement shall not
be treated as meeting the requirements
of subparagraph (B) or (C) of this
paragraph unless the requirements of
subparagraphs (B) and (C) of paragraph
(2) are met with respect to all
employer contributions (including
matching contributions) taken into
account in determining whether the
requirements of subparagraphs (B) and
(C) of this paragraph are met.
(ii) Social security and similar
contributions not taken into account.--
An arrangement shall not be treated as
meeting the requirements of
subparagraph (B) or (C) unless such
requirements are met without regard to
subsection (l), and, for purposes of
subsection (l), employer contributions
under subparagraph (B) or (C) shall not
be taken into account.
(F) Other plans.--An arrangement shall be
treated as meeting the requirements under
subparagraph (A)(i) if any other plan
maintained by the employer meets such
requirements with respect to employees eligible
under the arrangement.
* * * * * * *
(m) Nondiscrimination Test for Matching Contributions and
Employee Contributions.--
(1) * * *
(2) Requirements.--
(A) Contribution percentage requirement.--A
plan meets the contribution percentage
requirement of this paragraph for any plan year
only if the contribution percentage for
eligible highly compensated employees for such
plan year does not exceed the greater of--
(i) 125 percent of such percentage
for all other eligible employees for
the preceding plan year, or
(ii) the lesser of 200 percent of
such percentage for all other eligible
employees for the preceding plan year,
or such percentage for all other
eligible employees for the preceding
plan year plus 2 percentage points.
This subparagraph may be applied by using the
plan year rather than the preceding plan year
if the employer so elects, except that if such
an election is made, it may not be changed
except as provided the Secretary.
* * * * * * *
(3) Contribution percentage.--For purposes of
paragraph (2), the contribution percentage for a
specified group of employees for a plan year shall be
the average of the ratios (calculated separately for
each employee in such group) of--
(A) the sum of the matching contributions and
employee contributions paid under the plan on
behalf of each such employee for such plan
year, to
(B) the employee's compensation (within the
meaning of section 414(s)) for such plan year.
Under regulations, an employer may elect to take into
account (in computing the contribution percentage)
elective deferrals and qualified nonelective
contributions under the plan or any other plan of the
employer. If matching contributions are taken into
account for purposes of subsection (k)(3)(A)(ii) for
any plan year, such contributions shall not be taken
into account under subparagraph (A) for such year.
Rules similar to the rules of subsection (k)(3)(E)
shall apply for purposes of this subsection.
* * * * * * *
(6) Plan not disqualified if excess aggregate
contributions distributed before end of following plan
year.--
(A) * * *
* * * * * * *
(C) Method of distributing excess aggregate
contributions.--Any distribution of the excess
aggregate contributions for any plan year shall
be made to highly compensated employees [on the
basis of the respective portions of such
amounts attributable to each of such employees]
on the basis of the amount of contributions on
behalf of, or by, each such employee.
Forfeitures of excess aggregate contributions
may not be allocated to participants whose
contributions are reduced under this paragraph.
* * * * * * *
(10) Alternative method of satisfying tests.--A
defined contribution plan shall be treated as meeting
the requirements of paragraph (2) with respect to
matching contributions if the plan--
(A) meets the contribution requirements of
subparagraph (B) of subsection (k)(11),
(B) meets the exclusive benefit requirements
of subsection (k)(11)(C), and
(C) meets the vesting requirements of section
408(p)(3).
(11) Alternative method of satisfying tests.--
(A) In general.--A defined contribution plan
shall be treated as meeting the requirements of
paragraph (2) with respect to matching
contributions if the plan--
(i) meets the contribution
requirements of subparagraph (B) or (C)
of subsection (k)(12),
(ii) meets the notice requirements of
subsection (k)(12)(D), and
(iii) meets the requirements of
subparagraph (B).
(B) Limitation on matching contributions.--
The requirements of this subparagraph are met
if--
(i) matching contributions on behalf
of any employee may not be made with
respect to an employee's contributions
or elective deferrals in excess of 6
percent of the employee's compensation,
(ii) the rate of an employer's
matching contribution does not increase
as the rate of an employee's
contributions or elective deferrals
increase, and
(iii) the matching contribution with
respect to any highly compensated
employee at any rate of an employee
contribution or rate of elective
deferral is not greater than that with
respect to an employee who is not a
highly compensated employee.
[(10)] (12) Cross reference.--
For excise tax on certain excess contributions, see section
4979.
* * * * * * *
SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST.
(a) * * *
* * * * * * *
(c) Rules Applicable to Rollovers From Exempt Trusts.--
(1) * * *
* * * * * * *
[(10) Denial of averaging for subsequent
distributions.--If paragraph (1) applies to any
distribution paid to any employee, paragraphs (1) and
(3) of subsection (d) shall not apply to any
distribution (paid after such distribution) of the
balance to the credit of the employee under the plan
under which the preceding distribution was made (or
under any other plan which, under subsection (d)(4)(C),
would be aggregated with such plan).]
* * * * * * *
[(d) Tax on Lump Sum Distributions.--
[(1) Imposition of separate tax on lump sum
distributions.--
[(A) Separate tax.--There is hereby imposed a
tax (in the amount determined under
subparagraph (B)) on a lump sum distribution.
[(B) Amount of tax.--The amount of tax
imposed by subparagraph (A) for any taxable
year is an amount equal to 5 times the tax
which would be imposed by subsection (c) of
section 1 if the recipient were an individual
referred to in such subsection and the taxable
income were an amount equal to \1/5\ of the
excess of--
[(i) the total taxable amount of the
lump sum distribution for the taxable
year, over
[(ii) the minimum distribution
allowance.
[(C) Minimum distribution allowance.--For
purposes of this paragraph, the minimum
distribution allowance for any taxable year is
an amount equal to--
[(i) the lesser of $10,000 or one-
half of the total taxable amount of the
lump sum distribution for the taxable
year, reduced (but not below zero) by
[(ii) 20 percent of the amount (if
any) by which such total taxable amount
exceeds $20,000.
[(D) Liability for tax.--The recipient shall
be liable for the tax imposed by this
paragraph.
[(2) Distributions of annuity contracts.--
[(A) In general.--In the case of any
recipient of a lump sum distribution for any
taxable year, if the distribution (or any part
thereof) is an annuity contract, the total
taxable amount of the distribution shall be
aggregated for purposes of computing the tax
imposed by paragraph (1)(A), except that the
amount of tax so computed shall be reduced (but
not below zero) by that portion of the tax on
the aggregate total taxable amount which is
attributable to annuity contracts.
[(B) Beneficiaries.--For purposes of this
paragraph, a beneficiary of a trust to which a
lump sum distribution is made shall be treated
as the recipient of such distribution if the
beneficiary is an employee (including an
employee within the meaning of section
401(c)(1)) with respect to the plan under which
the distribution is made or if the beneficiary
is treated as the owner of such trust for
purposes of subpart E of part I of subchapter
J.
[(C) Annuity contracts.--For purposes of this
paragraph, in the case of the distribution of
an annuity contract, the taxable amount of such
distribution shall be deemed to be the current
actuarial value of the contract, determined on
the date of such distribution.
[(D) Trusts.--In the case of a lump sum
distribution with respect to any individual
which is made only to 2 or more trusts, the tax
imposed by paragraph (1)(A) shall be computed
as if such distribution was made to a single
trust, but the liability for such tax shall be
apportioned among such trusts according to the
relative amounts received by each.
[(E) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
to carry out the purposes of this paragraph.
[(3) Allowance of deduction.--The total taxable
amount of a lump sum distribution for any taxable year
shall be allowed as a deduction from gross income for
such taxable year, but only to the extent included in
the taxpayer's gross income for such taxable year.
[(4) Definitions and special rules.--
[(A) Lump sum distribution.--For purposes of
this section and section 403, the term ``lump
sum distribution'' means the distribution or
payment within 1 taxable year of the recipient
of the balance to the credit of an employee
which becomes payable to the recipient--
[(i) on account of the employee's
death,
[(ii) after the employee attains age
59\1/2\,
[(iii) on account of the employee's
separation from the service, or
[(iv) after the employee has become
disabled (within the meaning of section
72(m)(7)),
from a trust which forms a part of a plan described in
section 401(a) and which is exempt from tax under
section 501 or from a plan described in section 403(a).
Clause (iii) of this subparagraph shall be applied only
with respect to an 401(c)(1), and clause (iv) shall be
applied only with respect to an employee within the
meaning of section 401(c)(1). A distribution of an
annuity contract from a trust or annuity plan referred
to in the first sentence of this subparagraph shall be
treated as a lump sum distribution. For purposes of
this subparagraph, a distribution to 2 or more trusts
shall be treated as a distribution to 1 recipient. For
purposes of this subsection, the balance to the credit
of the employee does not include the accumulated
deductible employee contributions under the plan
(within the meaning of section 72(o)(5)).
[(B) Averaging to apply to 1 lump sum
distribution after age 59\1/2\.--Paragraph (1)
shall apply to a lump sum distribution with
respect to an employee under subparagraph (A)
only if--
[(i) such amount is received on or
after the date on which the employee
has attained age 59\1/2\, and
[(ii) the taxpayer elects for the
taxable year to have all such amounts
received during such taxable year so
treated.
Not more than 1 election may be made under this
subparagraph by any taxpayer with respect to
any employee. No election may be made under
this subparagraph by any taxpayer other than an
individual, an estate, or a trust. In the case
of a lump sum distribution made with respect to
an employee to 2 or more trusts, the election
under this subparagraph shall be made by the
personal representative of the taxpayer.
[(C) Aggregation of certain trusts and
plans.--For purposes of determining the balance
to the credit of an employee under subparagraph
(A)--
[(i) all trusts which are part of a
plan shall be treated as a single
trust, all pension plans maintained by
the employer shall be treated as a
single plan, all profit-sharing plans
maintained by the employer shall be
treated as a single plan, and all stock
bonus plans maintained by the employer
shall be treated as a single plan, and
[(ii) trusts which are not qualified
trusts under section 401(a) and annuity
contracts which do not satisfy the
requirements of section 404(a)(2) shall
not be taken into account.
[(D) Total taxable amount.--For purposes of
this section and section 403, the term ``total
taxable amount'' means, with respect to a lump
sum distribution, the amount of such
distribution which exceeds the sum of--
[(i) the amounts considered
contributed by the employee (determined
by applying section 72(f)), reduced by
any amounts previously distributed
which were not includible in gross
income, and
[(ii) the net unrealized appreciation
attributable to that part of the
distribution which consists of the
securities of the employer corporation
so distributed.
[(E) Community property laws.--The provisions
of this subsection, other than paragraph (3),
shall be applied without regard to community
property laws.
[(F) Minimum period of service.--For purposes
of this subsection, no amount distributed to an
employee from or under a plan may be treated as
a lump sum distribution under subparagraph (A)
unless the employee has been a participant in
the plan for 5 or more taxable years before the
taxable year in which such amounts are
distributed.
[(G) Amounts subject to penalty.--This
subsection shall not apply to amounts described
in subparagraph (A) of section 72(m)(5) to the
extent that section 72(m)(5) applies to such
amounts.
[(H) Balance to credit of employee not to
include amounts payable under qualified
domestic relations order.--For purpose of this
subsection, the balance to the credit of an
employee shall not include any amount payable
to an alternate payee under a qualified
domestic relations order (within the meaning of
section 414(p)).
[(I) Transfers to cost-of-living arrangement
not treated as distribution.--For purposes of
this subsection, the balance to the credit of
an employee under a defined contribution plan
shall not include any amount transferred from
such defined contribution plan to a qualified
cost-of- living arrangement (within the meaning
of section 415(k)(2)) under a defined benefit
plan.
[(J) Lump sum distributions of alternate
payees.--If any distribution or payment of the
balance to the credit of an employee would be
treated as a lump sum distribution, then, for
purposes of this subsection, the payment under
a qualified domestic relations order (within
the meaning of section 414(p)) of the balance
to the credit of an alternate payee who is the
spouse or former spouse of the employee shall
be treated as a lump sum distribution. For
purposes of this subparagraph, the balance to
the credit of the alternate payee shall not
include any amount payable to the employee.
[(K) Treatment of portion not rolled over.--
If any portion of a lump sum distribution is
transferred in a transfer to which subsection
(c) applies, paragraphs (1) and (3) shall not
apply with respect to the distribution.
[(L) Securities.--For purposes of this
subsection, the terms ``securities'' and
``securities of the employer corporation'' have
the respective meanings provided by subsection
(e)(4)(E).
[(5) Special rule where portions of lump sum
distribution attributable to rollover of bond purchased
under qualified bond purchase plan.--If any portion of
a lump sum distribution is attributable to a transfer
described in section 405(d)(3)(A)(ii) (as in effect
before its repeal by the Tax Reform Act of 1984),
paragraphs (1) and (3) of this subsection shall not
apply to such portion.
[(6) Treatment of potential future vesting.--
[(A) In general.--For purposes of determining
whether any distribution which becomes payable
to the recipient on account of the employee's
separation from service is a lump sum
distribution, the balance to the credit of the
employee shall be determined without regard to
any increase in vesting which may occur if the
employee is reemployed by the employer.
[(B) Recapture in certain cases.--If--
[(i) an amount is treated as a lump
sum distribution by reason of
subparagraph (A),
[(ii) special lump sum treatment
applies to such distribution,
[(iii) the employee is subsequently
reemployed by the employer, and
[(iv) as a result of services
performed after being so reemployed,
there is an increase in the employee's
vesting for benefits accrued before the
separation referred to in subparagraph
(A),
under regulations prescribed by the Secretary,
the tax imposed by this chapter for the taxable
year (in which the increase in vesting first
occurs) shall be increased by the reduction in
tax which resulted from the special lump
treatment (and any election under paragraph
4(B) shall not be taken into account for
purposes of determining whether the employee
may make another election under paragraph
(4)(B)).
[(C) Special lump sum treatment.--For
purposes of this paragraph, special lump
treatment applies to any distribution if any
portion of such distribution is taxed under the
subsection by reason of any election under
paragraph (4)(B).
[(D) Vesting.--For purposes of this
paragraph, the term ``vesting'' means the
portion of the accrued benefits derived from
employer contributions to which the participant
has a nonforfeitable right.
[(7) Coordination with foreign tax credit
limitations.--Subsections (a), (b), and (c) of section
904 shall be applied separately with respect to any
lump sum distribution on which tax is imposed under
paragraph (1), and the amount of such distribution
shall be treated as the taxable income for purposes of
such separate application.]
(d) Taxability of Beneficiary of Certain Foreign Situs
Trusts.--For purposes of subsections (a), (b), and (c), a stock
bonus, pension, or profit-sharing trust which would qualify for
exemption from tax under section 501(a) except for the fact
that it is a trust created or organized outside the United
States shall be treated as if it were a trust exempt from tax
under section 501(a).
(e) Other Rules Applicable to Exempt Trusts.--
(1) * * *
* * * * * * *
(4) Net unrealized appreciation.--
(A) * * *
* * * * * * *
[(D) Lump sum distribution.--For purposes of
this paragraph, the term ``lump sum
distribution'' has the meaning given such term
by subsection (d)(4)(A) (without regard to
subsection (d)(4)(F)).]
(D) Lump-sum distribution.--For purposes of
this paragraph--
(i) In general.--The term ``lump sum
distribution'' means the distribution
or payment within one taxable year of
the recipient of the balance to the
credit of an employee which becomes
payable to the recipient--
(I) on account of the
employee's death,
(II) after the employee
attains age 59\1/2\,
(III) on account of the
employee's separation from
service, or
(IV) after the employee has
become disabled (within the
meaning of section 72(m)(7)),
from a trust which forms a part of a
plan described in section 401(a) and
which is exempt from tax under section
501 or from a plan described in section
403(a). Subclause (III) of this clause
shall be applied only with respect to
an individual who is an employee
without regard to section 401(c)(1),
and subclause (IV) shall be applied
only with respect to an employee within
the meaning of section 401(c)(1). For
purposes of this clause, a distribution
to two or more trusts shall be treated
as a distribution to one recipient. For
purposes of this paragraph, the balance
to the credit of the employee does not
include the accumulated deductible
employee contributions under the plan
(within the meaning of section
72(o)(5)).
(ii) Aggregation of certain trusts
and plans.--For purposes of determining
the balance to the credit of an
employee under clause (i)--
(I) all trusts which are part
of a plan shall be treated as a
single trust, all pension plans
maintained by the employer
shall be treated as a single
plan, all profit-sharing plans
maintained by the employer
shall be treated as a single
plan, and all stock bonus plans
maintained by the employer
shall be treated as a single
plan, and
(II) trusts which are not
qualified trusts under section
401(a) and annuity contracts
which do not satisfy the
requirements of section
404(a)(2) shall not be taken
into account.
(iii) Community property laws.--The
provisions of this paragraph shall be
applied without regard to community
property laws.
(iv) Amounts subject to penalty.--
This paragraph shall not apply to
amounts described in subparagraph (A)
of section 72(m)(5) to the extent that
section 72(m)(5) applies to such
amounts.
(v) Balance to credit of employee not
to include amounts payable under
qualified domestic relations order.--
For purposes of this paragraph, the
balance to the credit of an employee
shall not include any amount payable to
an alternate payee under a qualified
domestic relations order (within the
meaning of section 414(p)).
(vi) Transfers to cost-of-living
arrangement not treated as
distribution.--For purposes of this
paragraph, the balance to the credit of
an employee under a defined
contribution plan shall not include any
amount transferred from such defined
contribution plan to a qualified cost-
of-living arrangement (within the
meaning of section 415(k)(2)) under a
defined benefit plan.
(vii) Lump-sum distributions of
alternate payees.--If any distribution
or payment of the balance to the credit
of an employee would be treated as a
lump-sum distribution, then, for
purposes of this paragraph, the payment
under a qualified domestic relations
order (within the meaning of section
414(p)) of the balance to the credit of
an alternate payee who is the spouse or
former spouse of the employee shall be
treated as a lump-sum distribution. For
purposes of this clause, the balance to
the credit of the alternate payee shall
not include any amount payable to the
employee.
[(5) Taxability of beneficiary of certain foreign
situs trusts.--For purposes of subsections (a), (b),
and (c), a stock bonus, pension, or profit-sharing
trust which would qualify for exemption from tax under
section 501(a) except for the fact that it is a trust
created or organized outside the United States shall be
treated as if it were a trust exempt from tax under
section 501(a).]
* * * * * * *
(g) Limitation on Exclusion for Elective Deferrals.--
(1) * * *
* * * * * * *
(3) Elective deferrals.--For purposes of this
subsection, the term ``elective deferrals'' means, with
respect to any taxable year, the sum of--
(A) any employer contribution under a
qualified cash or deferred arrangement (as
defined in section 401(k)) to the extent not
includible in gross income for the taxable year
under subsection [(a)(8)] (e)(3) (determined
without regard to this subsection),
(B) any employer contribution to the extent
not includible in gross income for the taxable
year under subsection (h)(1)(B) (determined
without regard to this subsection), [and]
(C) any employer contribution to purchase an
annuity contract under section 403(b) under a
salary reduction agreement (within the meaning
of section 3121(a)(5)(D))[.], and
(D) any elective employer contribution under
section 408(p)(2)(A)(i).
An employer contribution shall not be treated as an
elective deferral described in subparagraph (C) if
under the salary reduction agreement such contribution
is made pursuant to a one-time irrevocable election
made by the employee at the time of initial eligibility
to participate in the agreement or is made pursuant to
a similar arrangement involving a one-time irrevocable
election specified in regulations.
* * * * * * *
(k) Treatment of Simple Retirement Accounts.--Rules similar
to the rules of paragraphs (1) and (3) of subsection (h) shall
apply to contributions and distributions with respect to a
simple retirement account under section 408(p).
SEC. 403. TAXATION OF EMPLOYEE ANNUITIES.
(a) * * *
(b) Taxability of Beneficiary Under Annuity Purchased By
Section 501(c)(3) Organization or Public School.--
(1) General rule.--If--
(A) * * *
* * * * * * *
[(E) in the case of a contract purchased
under a plan which provides a salary reduction
agreement, the plan meets the requirements of
section 401(a)(30),]
(E) in the case of a contract purchased under
a salary reduction agreement, the contract
meets the requirements of section 401(a)(30),
then amounts contributed by such employer for such
annuity contract on or after such rights become
nonforfeitable shall be excluded from the gross income
of the employee for the taxable year to the extent that
the aggregate of such amounts does not exceed the
exclusion allowance for such taxable year. The amount
actually distributed to any distributee under such
contract shall be taxable to the distributee (in the
year in which so distributed) under section 72
(relating to annuities). For purposes of applying the
rules of this subsection to amounts contributed by an
employer for a taxable year, amounts transferred to a
contract described in this paragraph by reason of a
rollover contribution described in paragraph (8) of
this subsection or section 408(d)(3)(A)(iii) shall not
be considered contributed by such employer.
* * * * * * *
(10) Distribution requirements.--Under regulations
prescribed by the Secretary, this subsection shall not
apply to any annuity contract (or to any custodial
account described in paragraph (7) or retirement income
account described in paragraph (9)) unless requirements
similar to the requirements of section 401(a)(9) and
401(a)(31) are met (and requirements similar to the
incidental death benefit requirements of section 401(a)
are met) with respect to such annuity contract (or
custodial account or retirement income account). Any
amount transferred in [an] a direct trustee-to-trustee
transfer in accordance with section 401(a)(31) shall
not be includible in gross income for the taxable year
of the transfer.
* * * * * * *
SEC. 404. DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES'
TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A
DEFERRED PAYMENT PLAN.
(a) General Rule.--If contributions are paid by an employer
to or under a stock bonus, pension, profit-sharing, or annuity
plan, or if compensation is paid or accrued on account of any
employee under a plan deferring the receipt of such
compensation, such contributions or compensation shall not be
deductible under this chapter; but, if they would otherwise be
deductible, they shall be deductible under this section,
subject, however, to the following limitations as to the
amounts deductible in any year:
(1) * * *
(2) Employees' annuities.--In the taxable year when
paid, in an amount determined in accordance with
paragraph (1), if the contributions are paid toward the
purchase of retirement annuities, or retirement
annuities and medical benefits as described in section
401(h), and such purchase is part of a plan which meets
the requirements of section 401(a) (3), (4), (5), (6),
(7), (8), (9), (11), (12), (13), (14), (15), (16),
(17), [(18),] (19), (20), (22), (26), (27) and (31)
and, if applicable, the requirements of section
401(a)(10) and of section 401(d), and if refunds of
premiums, if any, are applied within the current
taxable year or next succeeding taxable year toward the
purchase of such retirement annuities, or such
retirement annuities and medical benefits.
* * * * * * *
(j) Special Rules Relating to Application With Section 415.--
(1) No deduction in excess of section 415
limitation.--In computing the amount of any deduction
allowable under paragraph (1), (2), (3), (4), (7), or
[(10)] (9) of subsection (a) for any year--
(A) in the case of a defined benefit plan,
there shall not be taken into account any
benefits for any year in excess of any
limitation on such benefits under section 415
for such year, or
(B) in the case of a defined contribution
plan, the amount of any contributions otherwise
taken into account shall be reduced by any
annual additions in excess of the limitation
under section 415 for such year.
* * * * * * *
(l) Limitation on Amount of Annual Compensation Taken Into
Account.--For purposes of applying the limitations of this
section, the amount of annual compensation of each employee
taken into account under the plan for any year shall not exceed
$150,000. The Secretary shall adjust the $150,000 amount at the
same time, and by the same amount, as any adjustment under
section 401(a)(17)(B). For purposes of clause (i), (ii), or
(iii) of subsection (a)(1)(A), and in computing the full
funding limitation, any adjustment under the preceding sentence
shall not be taken into account for any year before the year
for which such adjustment first takes effect. [In determining
the compensation of an employee, the rules of section 414(q)(6)
shall apply, except that in applying such rules, the term
``family'' shall include only the spouse of the employee and
any lineal descendants of the employee who have not attained
age 19 before the close of the year.]
(m) Special Rules for Simple Retirement Accounts.--
(1) In general.--Employer contributions to a simple
retirement account shall be treated as if they are made
to a plan subject to the requirements of this section.
(2) Timing.--
(A) Deduction.--Contributions described in
paragraph (1) shall be deductible in the
taxable year of the employer with or within
which the calendar year for which the
contributions were made ends.
(B) Contributions after end of year.--For
purposes of this subsection, contributions
shall be treated as made for a taxable year if
they are made on account of the taxable year
and are made not later than the time prescribed
by law for filing the return for the taxable
year (including extensions thereof).
* * * * * * *
SEC. 406. EMPLOYEES OF FOREIGN AFFILIATES COVERED BY SECTION 3121(l)
AGREEMENTS.
(a) * * *
* * * * * * *
[(c) Termination of Status as Deemed Employee Not To Be
Treated as Separation From Service for Purposes of Limitation
of Tax.--For purposes of applying section 402(d) with respect
to an individual who is treated as an employee of an American
employer under subsection (a), such individual shall not be
considered as separated from the service of such American
employer solely by reason of the fact that--
[(1) the agreement entered into by such American
employer under section 3121(l) which covers the
employment of such individual is terminated under the
provisions of such section,
[(2) such individual becomes an employee of a foreign
affiliate with respect to which such agreement does not
apply,
[(3) such individual ceases to be an employee of the
foreign affiliate by reason of which he is treated as
an employee of such American employer, if he becomes an
employee of another entity in which such American
employer has not less than a 10-percent interest
(within the meaning of section 3121(l)(8)(B)), or
[(4) the provision of the plan described in
subsection (a)(2) is terminated.]
* * * * * * *
(e) Treatment as Employee Under Related Provisions.--An
individual who is treated as an employee of an American
employer under subsection (a) shall also be treated as an
employee of such American employer, with respect to the plan
described in subsection (a)(2), for purposes of applying the
following provisions of this title:
(1) Section 72(f) (relating to special rules for
computing employees' contributions).
[(2) Section 101(b) (relating to employees' death
benefits).]
[(3)] (2) Section 2039 (relating to annuities).
* * * * * * *
SEC. 407. CERTAIN EMPLOYEES OF DOMESTIC SUBSIDIARIES ENGAGED IN
BUSINESS OUTSIDE THE UNITED STATES.
(a) * * *
* * * * * * *
[(c) Termination of Status as Deemed Employee Not To Be
Treated as Separation From Service for Purposes of Limitations
of Tax.--For purposes of applying section 402(d) with respect
to an individual who is treated as an employee of a domestic
parent corporation under subsection (a), such individual shall
not be considered as separated from the service of such
domestic parent corporation solely by reason of the fact that--
[(1) the corporation of which such individual is an
employee ceases, for any taxable year, to be a domestic
subsidiary within the meaning of subsection (a)(2)(A),
[(2) such individual ceases to be an employee of a
domestic subsidiary of such domestic parent
corporation, if he becomes an employee of another
corporation controlled by such domestic parent
corporation, or
[(3) the provision of the plan described in
subsection (a)(1)(A) is terminated.]
* * * * * * *
(e) Treatment as Employee Under Related Provisions.--An
individual who is treated as an employee of a domestic parent
corporation under subsection (a) shall also be treated as an
employee of such domestic parent corporation, with respect to
the plan described in subsection (a)(1)(A), for purposes of
applying the following provisions of this title:
(1) Section 72(f) (relating to special rules for
computing employees' contributions).
[(2) Section 101(b) (relating to employees' death
benefits).]
[(3)] (2) Section 2039 (relating to annuities).
* * * * * * *
SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS.
(a) * * *
* * * * * * *
(d) Tax Treatment of Distributions.--
(1) * * *
* * * * * * *
(3) Rollover contribution.--An amount is described in
this paragraph as a rollover contribution if it meets
the requirements of subparagraphs (A) and (B).
(A) * * *
* * * * * * *
(G) Simple retirement accounts.--This
paragraph shall not apply to any amount paid or
distributed out of a simple retirement account
(as defined in section 408(p)) unless--
(i) it is paid into another simple
retirement account, or
(ii) in the case of any payment or
distribution to which section 72(t)(8)
does not apply, it is paid into an
individual retirement plan.
* * * * * * *
(i) Reports.--The trustee of an individual retirement account
and the issuer of an endowment contract described in subsection
(b) or an individual retirement annuity shall make such reports
regarding such account, contract, or annuity to the Secretary
and to the individuals for whom the account, contract, or
annuity is, or is to be, maintained with respect to
contributions (and the years to which they relate),
distributions aggregating $10 or more in any calendar year, and
such other matters as the Secretary may require under
regulations. The reports required by this subsection--
(1) shall be filed at such time and in such manner as
the Secretary prescribes in such regulations, and
(2) shall be furnished to individuals--
(A) not later than January 31 of the calendar
year following the calendar year to which such
reports relate, and
(B) in such manner as the Secretary
prescribes in such regulations.
In the case of a simple retirement account under subsection
(p), only one report under this subsection shall be required to
be submitted each calendar year to the Secretary (at the time
provided under paragraph (2)) but, in addition to the report
under this subsection, there shall be furnished, within 30 days
after each calendar year, to the individual on whose behalf the
account is maintained a statement with respect to the account
balance as of the close of, and the account activity during,
such calendar year.
* * * * * * *
(k) Simplified Employee Pension Defined.--
(1) * * *
(2) Participation requirements.--This paragraph is
satisfied with respect to a simplified employee pension
for a year only if for such year the employer
contributes to the simplified employee pension of each
employee who--
(A) has attained age 21,
(B) has performed service for the employer
during at least 3 of the immediately preceding
5 years, and
(C) received at least $300 in compensation
(within the meaning of section [414(q)(7)]
414(q)(4)) from the employer for the year.
For purposes of this paragraph, there shall be excluded from
consideration employees described in subparagraph (A) or (C) of
section 410(b)(3). For purposes of any arrangement described in
subsection (k)(6), any employee who is eligible to have
employer contributions made on the employee's behalf under such
arrangement shall be treated as if such a contribution was
made.
* * * * * * *
(6) Employee may elect salary reduction
arrangement.--
(A) * * *
* * * * * * *
(H) Termination.--This paragraph shall not
apply to years beginning after December 31,
1996. The preceding sentence shall not apply to
a simplified employee pension if the terms of
such pension, as in effect on December 31,
1996, provide that an employee may make the
election described in subparagraph (A).
(l) Simplified employer reports.--[An employer]
(1) In general.--An employer who makes a contribution
on behalf of an employee to a simplified employee
pension shall provide such simplified reports with
respect to such contributions as the Secretary may
require by regulations. The reports required by this
subsection shall be filed at such time and in such
manner, and information with respect to such
contributions shall be furnished to the employee at
such time and in such manner, as may be required by
regulations.
(2) Simple retirement accounts.--
(A) No employer reports.--Except as provided
in this paragraph, no report shall be required
under this section by an employer maintaining a
qualified salary reduction arrangement under
subsection (p).
(B) Summary description.--The trustee of any
simple retirement account established pursuant
to a qualified salary reduction arrangement
under subsection (p) shall provide to the
employer maintaining the arrangement, each year
a description containing the following
information:
(i) The name and address of the
employer and the trustee.
(ii) The requirements for eligibility
for participation.
(iii) The benefits provided with
respect to the arrangement.
(iv) The time and method of making
elections with respect to the
arrangement.
(v) The procedures for, and effects
of, withdrawals (including rollovers)
from the arrangement.
(C) Employee notification.--The employer
shall notify each employee immediately before
the period for which an election described in
subsection (p)(5)(C) may be made of the
employee's opportunity to make such election.
Such notice shall include a copy of the
description described in subparagraph (B).
* * * * * * *
(p) Simple Retirement Accounts.--
(1) In general.--For purposes of this title, the term
``simple retirement account'' means an individual
retirement plan (as defined in section 7701(a)(37))--
(A) with respect to which the requirements of
paragraphs (3), (4), and (5) are met; and
(B) with respect to which the only
contributions allowed are contributions under a
qualified salary reduction arrangement.
(2) Qualified salary reduction arrangement.--
(A) In general.--For purposes of this
subsection, the term ``qualified salary
reduction arrangement'' means a written
arrangement of an eligible employer under
which--
(i) an employee eligible to
participate in the arrangement may
elect to have the employer make
payments--
(I) as elective employer
contributions to a simple
retirement account on behalf of
the employee, or
(II) to the employee directly
in cash,
(ii) the amount which an employee may
elect under clause (i) for any year is
required to be expressed as a
percentage of compensation and may not
exceed a total of $6,000 for any year,
(iii) the employer is required to
make a matching contribution to the
simple retirement account for any year
in an amount equal to so much of the
amount the employee elects under clause
(i)(I) as does not exceed the
applicable percentage of compensation
for the year, and
(iv) no contributions may be made
other than contributions described in
clause (i) or (iii).
(B) Employer may elect 2-percent nonelective
contribution.--An employer shall be treated as
meeting the requirements of subparagraph
(A)(iii) for any year if, in lieu of the
contributions described in such clause, the
employer elects to make nonelective
contributions of 2 percent of compensation for
each employee who is eligible to participate in
the arrangement and who has at least $5,000 of
compensation from the employer for the year. If
an employer makes an election under this
subparagraph for any year, the employer shall
notify employees of such election within a
reasonable period of time before the 30-day
period for such year under paragraph (5)(C).
(C) Definitions.--For purposes of this
subsection--
(i) Eligible employer.--The term
``eligible employer'' means an employer
who employs 100 or fewer employees on
any day during the year.
(ii) Applicable percentage.--
(I) In general.--The term
``applicable percentage'' means
3 percent.
(II) Election of lower
percentage.--An employer may
elect to apply a lower
percentage (not less than 1
percent) for any year for all
employees eligible to
participate in the plan for
such year if the employer
notifies the employees of such
lower percentage within a
reasonable period of time
before the 30-day election
period for such year under
paragraph (5)(C). An employer
may not elect a lower
percentage under this subclause
for any year if that election
would result in the applicable
percentage being lower than 3
percent in more than 2 of the
years in the 5-year period
ending with such year.
(III) Special rule for years
arrangement not in effect.--If
any year in the 5-year period
described in subclause (II) is
a year prior to the first year
for which any qualified salary
reduction arrangement is in
effect with respect to the
employer (or any predecessor),
the employer shall be treated
as if the level of the employer
matching contribution was at 3
percent of compensation for
such prior year.
(D) Arrangement may be only plan of
employer.--
(i) In general.--An arrangement shall
not be treated as a qualified salary
reduction arrangement for any year if
the employer (or any predecessor
employer) maintained a qualified plan
with respect to which contributions
were made, or benefits were accrued,
for service in any year in the period
beginning with the year such
arrangement became effective and ending
with the year for which the
determination is being made.
(ii) Qualified plan.--For purposes of
this subparagraph, the term ``qualified
plan'' means a plan, contract, pension,
or trust described in subparagraph (A)
or (B) of section 219(g)(5).
(E) Cost-of-living adjustment.--The Secretary
shall adjust the $6,000 amount under
subparagraph (A)(ii) at the same time and in
the same manner as under section 415(d), except
that the base period taken into account shall
be the calendar quarter ending September 30,
1995, and any increase under this subparagraph
which is not a multiple of $500 shall be
rounded to the next lower multiple of $500.
(3) Vesting requirements.--The requirements of this
paragraph are met with respect to a simple retirement
account if the employee's rights to any contribution to
the simple retirement account are nonforfeitable. For
purposes of this paragraph, rules similar to the rules
of subsection (k)(4) shall apply.
(4) Participation requirements.--
(A) In general.--The requirements of this
paragraph are met with respect to any simple
retirement account for a year only if, under
the qualified salary reduction arrangement, all
employees of the employer who--
(i) received at least $5,000 in
compensation from the employer during
any 2 preceding years, and
(ii) are reasonably expected to
receive at least $5,000 in compensation
during the year,
are eligible to make the election under
paragraph (2)(A)(i) or receive the nonelective
contribution described in paragraph (2)(B).
(B) Excludable employees.--An employer may
elect to exclude from the requirement under
subparagraph (A) employees described in section
410(b)(3).
(5) Administrative requirements.--The requirements of
this paragraph are met with respect to any simplified
retirement account if, under the qualified salary
reduction arrangement--
(A) an employer must--
(i) make the elective employer
contributions under paragraph (2)(A)(i)
not later than the close of the 30-day
period following the last day of the
month with respect to which the
contributions are to be made, and
(ii) make the matching contributions
under paragraph (2)(A)(iii) or the
nonelective contributions under
paragraph (2)(B) not later than the
date described in section 404(m)(2)(B),
(B) an employee may elect to terminate
participation in such arrangement at any time
during the year, except that if an employee so
terminates, the arrangement may provide that
the employee may not elect to resume
participation until the beginning of the next
year, and
(C) each employee eligible to participate may
elect, during the 30-day period before the
beginning of any year (and the 30-day period
before the first day such employee is eligible
to participate), to participate in the
arrangement, or to modify the amounts subject
to such arrangement, for such year.
(6) Definitions.--For purposes of this subsection--
(A) Compensation.--
(i) In general.--The term
``compensation'' means amounts
described in paragraphs (3) and (8) of
section 6051(a).
(ii) Self-employed.--In the case of
an employee described in subparagraph
(B), the term ``compensation'' means
net earnings from self-employment
determined under section 1402(a)
without regard to any contribution
under this subsection.
(B) Employee.--The term ``employee'' includes
an employee as defined in section 401(c)(1).
(C) Year.--The term ``year'' means the
calendar year.
[(p)] (q) Cross References.--
(1) * * *
* * * * * * *
Subpart B--Special Rules
* * * * * * *
SEC. 411. MINIMUM VESTING STANDARDS.
(a) General Rule.--A trust shall not constitute a qualified
trust under section 401(a) unless the plan of which such trust
is a part provides that an employee's right to his normal
retirement benefit is nonforfeitable upon the attainment of
normal retirement age (as defined in paragraph (8)) and in
addition satisfies the requirements of paragraphs (1), (2), and
(11) of this subsection and the requirements of subsection
(b)(3), and also satisfies, in the case of a defined benefit
plan, the requirements of subsection (b)(1) and, in the case of
a defined contribution plan, the requirements of subsection
(b)(2).
(1) * * *
(2) Employer contributions.--A plan satisfies the
requirements of this paragraph if it satisfies the
requirements of [subparagraph (A), (B), or (C)]
subparagraph (A) or (B).
(A) 5-year vesting.--A plan satisfies the
requirements of this subparagraph if an
employee who has completed at least 5 years of
service has a nonforfeitable right to 100
percent of the employee's accrued benefit
derived from employer contributions.
* * * * * * *
[(C) Multiemployer plans.--A plan satisfies
the requirements of this subparagraph if--
[(i) the plan is a multiemployer plan
(within the meaning of section 414(f)),
and
[(ii) under the plan--
[(I) an employee who is
covered pursuant to a
collective bargaining agreement
described in section
414(f)(1)(B) and who has
completed at least 10 years of
service has a nonforfeitable
right to 100 percent of the
employee's accrued benefit
derived from employer
contributions, and
[(II) the requirements of
subparagraph (A) or (B) are met
with respect to employees not
described in subclause (I).]
* * * * * * *
SEC. 414. DEFINITIONS AND SPECIAL RULES.
(a) * * *
(b) Employees of Controlled Group of Corporations.--For
purposes of sections 401, 408(k), 408(p), 410, 411, 415, and
416, all employees of all corporations which are members of a
controlled group of corporations (within the meaning of section
1563(a), determined without regard to section 1563(a)(4) and
(e)(3)(C)) shall be treated as employed by a single employer.
With respect to a plan adopted by more than one such
corporation, the applicable limitations provided by section
404(a) shall be determined as if all such employers were a
single employer, and allocated to each employer in accordance
with regulations prescribed by the Secretary.
(c) Employees of Partnerships, Proprietorships, Etc., Which
Are Under Common Control.--For purposes of sections 401,
408(k), 408(p), 410, 411, 415, and 416, under regulations
prescribed by the Secretary, all employees of trades or
businesses (whether or not incorporated) which are under common
control shall be treated as employed by a single employer. The
regulations prescribed under this subsection shall be based on
principles similar to the principles which apply in the case of
subsection (b).
* * * * * * *
(m) Employees of an Affiliated Service Group.--
(1) * * *
* * * * * * *
(4) Employee benefit requirements.--For purposes of
this subsection, the employee benefit requirements
listed in this paragraph are--
(A) paragraphs (3), (4), (7), (16), (17), and
(26) of section 401(a), and
(B) sections 408(k), 408(p), 410, 411, 415,
and 416.
* * * * * * *
(n) Employee Leasing.--
(1) * * *
(2) Leased employee.--For purposes of paragraph (1),
the term ``leased employee'' means any person who is
not an employee of the recipient and who provides
services to the recipient if--
(A) * * *
* * * * * * *
[(C) such services are of a type historically
performed, in the business field of the
recipient, by employees.]
(C) such services are performed under primary
direction or control by the recipient.
(3) Requirements.--For purposes of this subsection,
the requirements listed in this paragraph are--
(A) paragraphs (3), (4), (7), (16), (17), and
(26) of section 401(a),
(B) sections 408(k), 408(p), 410, 411, 415,
and 416, and
(C) sections 79, 106, 117(d), 120, 125, 127,
129, 132, 274(j), 505, and 4980B.
* * * * * * *
(q) Highly Compensated Employee.--
[(1) In general.--The term ``highly compensated
employee'' means any employee who, during the year or
the preceding year--
[(A) was at any time a 5-percent owner,
[(B) received compensation from the employer
in excess of $75,000,
[(C) received compensation from the employer
in excess of $50,000 and was in the top-paid
group of employees for such year, or
[(D) was at any time an officer and received
compensation greater than 50 percent of the
amount in effect under section 415(b)(1)(A) for
such year.
The Secretary shall adjust the $75,000 and $50,000
amounts under this paragraph at the same time and in
the same manner as under section 415(d).
[(2) Special rule for current year.--In the case of
the year for which the relevant determination is being
made, an employee not described in subparagraph (B),
(C), or (D) of paragraph (1) for the preceding year
(without regard to this paragraph) shall not be treated
as described in subparagraph (B), (C), or (D) of
paragraph (1) unless such employee is a member of the
group consisting of the 100 employees paid the greatest
compensation during the year for which such
determination is being made.]
(1) In general.--The term ``highly compensated
employee'' means any employee who--
(A) was a 5-percent owner at any time during
the year or the preceding year, or
(B) for the preceding year--
(i) had compensation from the
employer in excess of $80,000, and
(ii) was in the top-paid group of the
employer.
The Secretary shall adjust the $80,000 amount under
subparagraph (B) at the same time and in the same
manner as under section 415(d), except that the base
period shall be the calendar quarter ending September
30, 1996.
[(3)] (2) 5-percent owner.--An employee shall be
treated as a 5-percent owner for any year if at any
time during such year such employee was a 5-percent
owner (as defined in section 416(i)(1)) of the
employer.
[(4)] (3) Top-paid group.--An employee is in the top-
paid group of employees for any year if such employee
is in the group consisting of the top 20 percent of the
employees when ranked on the basis of compensation paid
during such year.
[(5) Special rules for treatment of officers.--
[(A) Not more than 50 officers taken into
account.--For purposes of paragraph (1)(D), no
more than 50 employees (or, if lesser, the
greater of 3 employees or 10 percent of the
employees) shall be treated as officers.
[(B) At least 1 officer taken into account.--
If for any year no officer of the employer is
described in paragraph (1)(D), the highest paid
officer of the employer for such year shall be
treated as described in such paragraph.
[(6) Treatment of certain family members.--
[(A) In general.--If any individual is a
member of the family of a 5-percent owner or of
a highly compensated employee in the group
consisting of the 10 highly compensated
employees paid the greatest compensation during
the year, then--
[(i) such individual shall not be
considered a separate employee, and
[(ii) any compensation paid to such
individual (and any applicable
contribution or benefit on behalf of
such individual) shall be treated as if
it were paid to (or on behalf of) the
5-percent owner or highly compensated
employee.
[(B) Family.--For purposes of subparagraph
(A), the term ``family'' means, with respect to
any employee, such employee's spouse and lineal
ascendants or descendants and the spouses of
such lineal ascendants or descendants.
[(C) Rules to apply to other provisions.--
[(i) In general.--Except as provided
in regulations and in clause (ii), the
rules of subparagraph (A) shall be
applied in determining the compensation
of (or any contributions or benefits on
behalf of) any employee for purposes of
any section with respect to which a
highly compensated employee is defined
by reference to this subsection.
[(ii) Exception for determining
integration levels.--Clause (i) shall
not apply in determining the portion of
the compensation of a participant which
is under the integration level for
purposes of section 401(l).
[(7) Compensation.--For purposes of this subsection--
[(A) In general.--The term ``compensation''
means compensation within the meaning of
section 415(c)(3).
[(B) Certain provisions not taken into
account.--The determination under subparagraph
(A) shall be made--
[(i) without regard to sections 125,
402(e)(3), and 402(h)(1)(B), and
[(ii) in the case of employer
contributions made pursuant to a salary
reduction agreement, without regard to
section 403(b).
[(8) Excluded employees.--For purposes of subsection
(r) and for purposes of determining the number of
employees in the top-paid group under paragraph (4) or
the number of officers taken into account under
paragraph (5), the following employees shall be
excluded--
[(A) employees who have not completed 6
months of service,
[(B) employees who normally work less than
17-1/2 hours per week,
[(C) employees who normally work during not
more than 6 months during any year,
[(D) employees who have not attained age 21,
and
[(E) except to the extent provided in
regulations, employees who are included in a
unit of employees covered by an agreement which
the Secretary of Labor finds to be a collective
bargaining agreement between employee
representatives and the employer.
Except as provided by the Secretary, the employer may
elect to apply subparagraph (A), (B), (C), or (D) by
substituting a shorter period of service, smaller
number of hours or months, or lower age for the period
of service, number of hours or months, or age (as the
case may be) than that specified in such subparagraph.]
(4) Compensation.--For purposes of this subsection,
the term ``compensation'' has the meaning given such
term by section 415(c)(3).
[(9)] (5) Former employees.--A former employee shall
be treated as a highly compensated employee if--
(A) such employee was a highly compensated
employee when such employee separated from
service, or
(B) such employee was a highly compensated
employee at any time after attaining age 55.
[(10)] (6) Coordination with other provisions.--
Subsections (b), (c), (m), (n), and (o) shall be
applied before the application of this section.
[(11)] (7) Special rule for nonresident aliens.--For
purposes of this subsection and subsection (r),
employees who are nonresident aliens and who receive no
earned income (within the meaning of section 911(d)(2))
from the employer which constitutes income from sources
within the United States (within the meaning of section
861(a)(3)) shall not be treated as employees.
[(12) Simplified method for determining highly
compensated employees.--
[(A) In general.--If an election by the
employer under this paragraph applies to any
year, in determining whether an employee is a
highly compensated employee for such year--
[(i) subparagraph (B) of paragraph
(1) shall be applied by substituting
``$50,000'' for ``$75,000'', and
[(ii) subparagraph (C) of paragraph
(1) shall not apply.
[(B) Requirement for election.--An election
under this paragraph shall not apply to any
year unless--
[(i) at all times during such year,
the employer maintained significant
business activities (and employed
employees) in at least 2 significantly
separate geographic areas, and
[(ii) the employer satisfies such
other conditions as the Secretary may
prescribe.]
(r) Special Rules for Separate Line of Business.--
(1) * * *
(2) Line of business must have 50 employees, etc.--A
line of business shall not be treated as separate under
paragraph (1) unless--
(A) such line of business has at least 50
employees who are not excluded under
[subsection (q)(8)] paragraph (9),
* * * * * * *
(9) Excluded employees.--For purposes of this
subsection, the following employees shall be excluded:
(A) Employees who have not completed 6 months
of service.
(B) Employees who normally work less than
17\1/2\ hours per week.
(C) Employees who normally work not more than
6 months during any year.
(D) Employees who have not attained the age
of 21.
(E) Except to the extent provided in
regulations, employees who are included in a
unit of employees covered by an agreement which
the Secretary of Labor finds to be a collective
bargaining agreement between employee
representatives and the employer.
Except as provided by the Secretary, the employer may
elect to apply subparagraph (A), (B), (C), or (D) by
substituting a shorter period of service, smaller
number of hours or months, or lower age for the period
of service, number of hours or months, or age (as the
case may be) specified in such subparagraph.
(s) Compensation.--For purposes of any applicable provision--
(1) * * *
(2) Employer may elect not to treat certain deferrals
as compensation.--An employer may elect not to include
as compensation any amount which is contributed by the
employer pursuant to a salary reduction agreement and
which is not includible in the gross income of an
employee under section 125, 402(e)(3), 402(h), or
403(b).
* * * * * * *
(u) Special Rules Relating to Veterans' Reemployment Rights
Under USERRA.--
(1) Treatment of certain contributions made pursuant
to veterans' reemployment rights.--If any contribution
is made by an employer or an employee under an
individual account plan with respect to an employee, or
by an employee to a defined benefit plan that provides
for employee contributions, and such contribution is
required by reason of such employee's rights under
chapter 43 of title 38, United States Code, resulting
from qualified military service, then--
(A) such contribution shall not be subject to
any otherwise applicable limitation contained
in section 402(g), 402(h), 403(b), 404(a),
404(h), 408, 415, or 457, and shall not be
taken into account in applying such limitations
to other contributions or benefits under such
plan or any other plan, with respect to the
year in which the contribution is made,
(B) such contribution shall be subject to the
limitations referred to in subparagraph (A)
with respect to the year to which the
contribution relates (in accordance with rules
prescribed by the Secretary), and
(C) such plan shall not be treated as failing
to meet the requirements of section 401(a)(4),
401(a)(26), 401(k)(3), 401(k)(11), 401(k)(12),
401(m), 403(b)(12), 408(k)(3), 408(k)(6),
408(p), 410(b), or 416 by reason of the making
of (or the right to make) such contribution.
For purposes of the preceding sentence, any elective
deferral or employee contribution made under paragraph
(2) shall be treated as required by reason of the
employee's rights under such chapter 43.
(2) Reemployment rights under userra with respect to
elective deferrals.--
(A) In general.--For purposes of this
subchapter and section 457, if an employee is
entitled to the benefits of chapter 43 of title
38, United States Code, with respect to any
plan which provides for elective deferrals, the
employer sponsoring the plan shall be treated
as meeting the requirements of such chapter 43
with respect to such elective deferrals only if
such employer--
(i) permits such employee to make
additional elective deferrals under
such plan (in the amount determined
under subparagraph (B) or such lesser
amount as is elected by the employee)
during the period which begins on the
date of the reemployment of such
employee with such employer and has the
same length as the lesser of--
(I) the product of 3 and the
period of qualified military
service which resulted in such
rights, and
(II) 5 years, and
(ii) makes a matching contribution
with respect to any additional elective
deferral made pursuant to clause (i)
which would have been required had such
deferral actually been made during the
period of such qualified military
service.
(B) Amount of makeup required.--The amount
determined under this subparagraph with respect
to any plan is the maximum amount of the
elective deferrals that the individual would
have been permitted to make under the plan in
accordance with the limitations referred to in
paragraph (1)(A) during the period of qualified
military service if the individual had
continued to be employed by the employer during
such period and received compensation as
determined under paragraph (7). Proper
adjustment shall be made to the amount
determined under the preceding sentence for any
elective deferrals actually made during the
period of such qualified military service.
(C) Elective deferral.--For purposes of this
paragraph, the term ``elective deferral'' has
the meaning given such term by section
402(g)(3); except that such term shall include
any deferral of compensation under an eligible
deferred compensation plan (as defined in
section 457(b)).
(D) After-tax employee contributions.--
References in subparagraphs (A) and (B) to
elective deferrals shall be treated as
including references to employee contributions.
(3) Certain retroactive adjustments not required.--
For purposes of this subchapter and subchapter E, no
provision of chapter 43 of title 38, United States
Code, shall be construed as requiring--
(A) any crediting of earnings to an employee
with respect to any contribution before such
contribution is actually made, or
(B) any allocation of any forfeiture with
respect to the period of qualified military
service.
(4) Loan repayment suspensions permitted.--If any
plan suspends the obligation to repay any loan made to
an employee from such plan for any part of any period
during which such employee is performing service in the
uniformed services (as defined in chapter 43 of title
38, United States Code), whether or not qualified
military service, such suspension shall not be taken
into account for purposes of section 72(p), 401(a), or
4975(d)(1).
(5) Qualified military service.--For purposes of this
subsection, the term ``qualified military service''
means any service in the uniformed services (as defined
in chapter 43 of title 38, United States Code) by any
individual if such individual is entitled to
reemployment rights under such chapter with respect to
such service.
(6) Individual account plan.--For purposes of this
subsection, the term ``individual account plan'' means
any defined contribution plan (including any tax-
sheltered annuity plan under section 403(b), any
simplified employee pension under section 408(k), any
qualified salary reduction arrangement under section
408(p), and any eligible deferred compensation plan (as
defined in section 457(b)).
(7) Compensation.--For purposes of sections
403(b)(3), 415(c)(3), and 457(e)(5), an employee who is
in qualified military service shall be treated as
receiving compensation from the employer during such
period of qualified military service equal to--
(A) the compensation the employee would have
received during such period if the employee
were not in qualified military service,
determined based on the rate of pay the
employee would have received from the employer
but for absence during the period of qualified
military service, or
(B) if the compensation the employee would
have received during such period was not
reasonably certain, the employee's average
compensation from the employer during the 12-
month period immediately preceding the
qualified military service (or, if shorter, the
period of employment immediately preceding the
qualified military service).
(8) USERRA requirements for qualified retirement
plans.--For purposes of this subchapter and section
457, an employer sponsoring a retirement plan shall be
treated as meeting the requirements of chapter 43 of
title 38, United States Code, only if each of the
following requirements is met:
(A) An individual reemployed under such
chapter is treated with respect to such plan as
not having incurred a break in service with the
employer maintaining the plan by reason of such
individual's period of qualified military
service.
(B) Each period of qualified military service
served by an individual is, upon reemployment
under such chapter, deemed with respect to such
plan to constitute service with the employer
maintaining the plan for the purpose of
determining the nonforfeitability of the
individual's accrued benefits under such plan
and for the purpose of determining the accrual
of benefits under such plan.
(C) An individual reemployed under such
chapter is entitled to accrued benefits that
are contingent on the making of, or derived
from, employee contributions or elective
deferrals only to the extent the individual
makes payment to the plan with respect to such
contributions or deferrals. No such payment may
exceed the amount the individual would have
been permitted or required to contribute had
the individual remained continuously employed
by the employer throughout the period of
qualified military service. Any payment to such
plan shall be made during the period beginning
with the date of reemployment and whose
duration is 3 times the period of the qualified
military service (but not greater than 5
years).
(9) Plans not subject to title 38.--This subsection
shall not apply to any retirement plan to which chapter
43 of title 38, United States Code, does not apply.
(10) References.--For purposes of this section, any
reference to chapter 43 of title 38, United States
Code, shall be treated as a reference to such chapter
as in effect on December 12, 1994 (without regard to
any subsequent amendment).
SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER QUALIFIED
PLANS.
(a) General Rule.--
(1) Trusts.--A trust which is a part of a pension,
profitsharing, or stock bonus plan shall not constitute
a qualified trust under section 401(a) if--
(A) in the case of a defined benefit plan,
the plan provides for the payment of benefits
with respect to a participant which exceed the
limitation of subsection (b), or
(B) in the case of a defined contribution
plan, contributions and other additions under
the plan with respect to any participant for
any taxable year exceed the limitation of
subsection (c)[, or].
[(C) in any case in which an individual is a
participant in both a defined benefit plan and
a defined contribution plan maintained by the
employer, the trust has been disqualified under
subsection (g).]
* * * * * * *
(b) Limitation for Defined Benefit Plans.--
(1) * * *
(2) Annual benefit.--
(A) * * *
* * * * * * *
(E) Limitation on certain assumptions.--
(i) [Except as provided in clause
(ii), for purposes of adjusting any
benefit or limitation under
subparagraph (B) or (C),] For purposes
of adjusting any limitation under
subparagraph (C) and, except as
provided in clause (ii), for purposes
of adjusting any benefit under
subparagraph (B), the interest rate
assumption shall not be less than the
greater of 5 percent or the rate
specified in the plan.
(ii) [For purposes of adjusting the
benefit or limitation of any form of
benefit subject to section 417(e)(3),]
For purposes of adjusting any benefit
under subparagraph (B) for any form of
benefit subject to section 417(e)(3),
the applicable interest rate (as
defined in section 417(e)(3)) shall be
substituted for ``5 percent'' in clause
(i).
* * * * * * *
(I) Exemption for survivor and disability
benefits provided under governmental plans.--
Subparagraph (C) of this paragraph and
paragraph (5) shall not apply to--
(i) income received from a
governmental plan (as defined in
section 414(d)) as a pension, annuity,
or similar allowance as the result of
the recipient becoming disabled by
reason of personal injuries or
sickness, or
(ii) amounts received from a
governmental plan by the beneficiaries,
survivors, or the estate of an employee
as the result of the death of the
employee.
* * * * * * *
(5) Reduction for participation or service of less
than 10 years.--
(A) * * *
(B) Compensation and benefits limitations.--
The provisions of subparagraph (A) shall apply
to the limitations under paragraphs (1)(B) and
(4) [and subsection (e)], except that such
subparagraph shall be applied with respect to
years of service with an employer rather than
years of participation in a plan.
* * * * * * *
(10) Special rule for state and local government
plans.--
(A) * * *
* * * * * * *
(C) Election.--[This]
(i) In general.--This paragraph shall
not apply to any plan unless each
employer maintaining the plan elects
before the close of the 1st plan year
beginning after December 31, 1989, to
have this subsection (other than
paragraph (2)(G)) applied without
regard to paragraph (2)(F).
(ii) Revocation of election.--An
election under clause (i) may be
revoked not later than the last day of
the third plan year beginning after the
date of the enactment of this clause.
The revocation shall apply to all plan
years to which the election applied and
to all subsequent plan years. Any
amount paid by a plan in a taxable year
ending after the revocation shall be
includible in income in such taxable
year under the rules of this chapter in
effect for such taxable year, except
that, for purposes of applying the
limitations imposed by this section,
any portion of such amount which is
attributable to any taxable year during
which the election was in effect shall
be treated as received in such taxable
year.
(11) Special limitation rule for governmental
plans.--In the case of a governmental plan (as defined
in section 414(d)), subparagraph (B) of paragraph (1)
shall not apply.
(c) Limitation for Defined Contribution Plans.--
(1) * * *
* * * * * * *
(3) Participant's compensation.--For purposes of
paragraph (1)--
(A) * * *
* * * * * * *
(C) Special rules for permanent and total
disability.--In the case of a participant in
any defined contribution plan--
(i) who is permanently and totally
disabled (as defined in section
22(e)(3)),
(ii) who is not a highly compensated
employee (within the meaning of section
414(q)), and
(iii) with respect to whom the
employer elects, at such time and in
such manner as the Secretary may
prescribe, to have this subparagraph
apply,
the term ``participant's compensation'' means
the compensation the participant would have
received for the year if the participant was
paid at the rate of compensation paid
immediately before becoming permanently and
totally disabled. This subparagraph shall apply
only if contributions made with respect to
amounts treated as compensation under this
subparagraph are nonforfeitable when made. If a
defined contribution plan provides for the
continuation of contributions on behalf of all
participants described in clause (i) for a
fixed or determinable period, this subparagraph
shall be applied without regard to clauses (ii)
and (iii).
(D) Certain deferrals included.--The term
``participant's compensation'' shall include--
(i) any elective deferral (as defined
in section 402(g)(3)), and
(ii) any amount which is contributed
by the employer at the election of the
employee and which is not includible in
the gross income of the employee under
section 125 or 457.
* * * * * * *
[(e) Limitation in Case of Defined Benefit Plan and Defined
Contribution Plan for Same Employee.--
[(1) In general.--In any case in which an individual
is a participant in both a defined benefit plan and a
defined contribution plan maintained by the same
employer, the sum of the defined benefit plan fraction
and the defined contribution plan fraction for any year
may not exceed 1.0.
[(2) Defined benefit plan fraction.--For purposes of
this subsection, the defined benefit plan fraction for
any year is a fraction--
[(A) the numerator of which is the projected
annual benefit of the participant under the
plan (determined as of the close of the year),
and
[(B) the denominator of which is the lesser
of--
[(i) the product of 1.25, multiplied
by the dollar limitation in effect
under subsection (b)(1)(A) for such
year, or
[(ii) the product of--
[(I) 1.4, multiplied by
[(II) the amount which may be
taken into account under
subsection (b)(1)(B) with
respect to such individual
under the plan for such year.
[(3) Defined contribution plan fraction.--For
purposes of this subsection, the defined contribution
plan fraction for any year is a fraction--
[(A) the numerator of which is the sum of the
annual additions to the participant's account
as of the close of the year, and
[(B) the denominator of which is the sum of
the lesser of the following amounts determined
for such year and for each prior year of
service with the employer:
[(i) the product of 1.25, multiplied
by the dollar limitation in effect
under subsection (c)(1)(A) for such
year (determined without regard to
subsection (c)(6)), or
[(ii) the product of--
[(I) 1.4, multiplied by--
[(II) the amount which may be
taken into account under
subsection (c)(1)(B) (or
subsection (c)(7), if
applicable) with respect to
such individual under such plan
for such year.
[(4) Special transition rules for defined
contribution fraction.--In applying paragraph (3) with
respect to years beginning before January 1, 1976--
[(A) the aggregate amount taken into account
under paragraph (3)(A) may not exceed the
aggregate amount taken into account under
paragraph (3)(B), and
[(B) the amount taken into account under
subsection (c)(2)(B)(i) for any year concerned
is an amount equal to--
[(i) the excess of the aggregate
amount of employee contributions for
all years beginning before January 1,
1976, during which the employee was an
active participant of the plan, over 10
percent of the employee's aggregate
compensation for all such years,
multiplied by
[(ii) a fraction the numerator of
which is 1 and the denominator of which
is the number of years beginning before
January 1, 1976, during which the
employee was an active participant in
the plan.
Employee contributions made on or after October 2,
1973, shall be taken into account under subparagraph
(B) of the preceding sentence only to the extent that
the amount of such contributions does not exceed the
maximum amount of contributions permissible under the
plan as in effect on October 2, 1973.
[(5) Special rules for sections 403(b) and 408.--For
purposes of this section, any annuity contract
described in section 403(b) (except in the case of a
participant who has elected under subsection (c)(4)(D)
to have the provisions of subsection (c)(4)(C) apply)
for the benefit of a participant shall be treated as a
defined contribution plan maintained by each employer
with respect to which the participant has the control
required under subsection (b) or (c) of section 414 (as
modified by subsection (h)). For purposes of this
section, any contribution by an employer to a
simplified employee pension for an individual for a
taxable year shall be treated as an employer
contribution to a defined contribution plan for such
individual for such year. In the case of any annuity
contract described in section 403(b), the amount of the
contribution disqualified by reason of subsection (g)
shall reduce the exclusion allowance as provided in
section 403(b)(2).
[(6) Special transition rule for defined contribution
fraction for years ending after december 31, 1982.--
[(A) In general.--At the election of the plan
administrator, in applying paragraph (3) with
respect to any year ending after December 31,
1982, the amount taken into account under
paragraph (3)(B) with respect to each
participant for all years ending before January
1, 1983, shall be an amount equal to the
product of--
[(i) the amount determined under
paragraph (3)(B) (as in effect for the
year ending in 1982) for the year
ending in 1982, multiplied by
[(ii) the transition fraction.
[(B) Transition fraction.--The term
``transition fraction'' means a fraction--
[(i) the numerator of which is the
lesser of--
[(I) $51,875, or
[(II) 1.4, multiplied by 25
percent of the compensation of
the participant for the year
ending in 1981, and
[(ii) the denominator of which is the
lesser of--
[(I) $41,500, or
[(II) 25 percent of the
compensation of the participant
for the year ending in 1981.
[(C) Plan must have been in existence on or
before July 1, 1982.--This paragraph shall
apply only to plans which were in existence on
or before July 1, 1982.]
(f) Combining of Plans.--
(1) In general.--For purposes of applying the
limitations of [subsections (b), (c), and (e)]
subsections (b) and (c)--
(A) all defined benefit plans (whether or not
terminated) of an employer are to be treated as
one defined benefit plan, and
(B) all defined contribution plans (whether
or not terminated) of an employer are to be
treated as one defined contribution plan.
* * * * * * *
(g) Aggregation of Plans.--The Secretary, in applying the
provisions of this section to benefits or contributions under
more than one plan maintained by the same employer, and to any
trusts, contracts, accounts, or bonds referred to in subsection
(a)(2), with respect to which the participant has the control
required under section 414(b) or (c), as modified by subsection
(h), shall, under regulations prescribed by the Secretary,
disqualify one or more trusts, plans, contracts, accounts, or
bonds, or any combination thereof until such benefits or
contributions do not exceed the limitations contained in this
section. In addition to taking into account such other factors
as may be necessary to carry out the purposes of [subsections
(e) and (f)] subsection (f), the regulations prescribed under
this paragraph shall provide that no plan which has been
terminated shall be disqualified until all other trusts, plans,
contracts, accounts, or bonds have been disqualified.
* * * * * * *
(k) Special Rules.--
(1) Defined benefit plan and defined contribution
plan.--For purposes of this title, the term ``defined
contribution plan'' or ``defined benefit plan'' means a
defined contribution plan (within the meaning of
section 414(i)) or a defined benefit plan (within the
meaning of section 414(j)), whichever applies, which
is--
(A) a plan described in section 401(a) which
includes a trust which is exempt from tax under
section 501(a),
(B) an annuity plan described in section
403(a),
(C) an annuity contract described in section
403(b), or
[(D) an individual retirement account
described in section 408(a),
[(E) an individual retirement annuity
described in section 408(b), or]
[(F)] (D) a simplified employee pension.
(2) Contributions to provide cost-of-living
protection under defined benefit plans.--
(A) In general.--In the case of a defined
benefit plan which maintains a qualified cost-
of-living arrangement--
[(i) any contribution made directly
by an employee under such arrangement--
[(I) shall not be treated as
an annual addition for purposes
of subsection (c), but
[(II) shall be so treated for
purposes of subsection (e),
and]
(i) any contribution made directly by
an employee under such an arrangement
shall not be treated as an annual
addition for purposes of subsection
(c), and
(ii) any benefit under such
arrangement which is allocable to an
employer contribution which was
transferred from a defined contribution
plan and to which the requirements of
subsection (c) were applied shall, for
purposes of subsection (b), be treated
as a benefit derived from an employee
contribution (and [subsections (c) and
(e)] subsection (c) shall not again
apply to such contribution by reason of
such transfer).
* * * * * * *
(m) Treatment of Qualified Governmental Excess Benefit
Arrangements.--
(1) Governmental plan not affected.--In determining
whether a governmental plan (as defined in section
414(d)) meets the requirements of this section,
benefits provided under a qualified governmental excess
benefit arrangement shall not be taken into account.
Income accruing to a governmental plan (or to a trust
that is maintained solely for the purpose of providing
benefits under a qualified governmental excess benefit
arrangement) in respect of a qualified governmental
excess benefit arrangement shall constitute income
derived from the exercise of an essential governmental
function upon which such governmental plan (or trust)
shall be exempt from tax under section 115.
(2) Taxation of participant.--For purposes of this
chapter--
(A) the taxable year or years for which
amounts in respect of a qualified governmental
excess benefit arrangement are includible in
gross income by a participant, and
(B) the treatment of such amounts when so
includible by the participant,
shall be determined as if such qualified governmental
excess benefit arrangement were treated as a plan for
the deferral of compensation which is maintained by a
corporation not exempt from tax under this chapter and
which does not meet the requirements for qualification
under section 401.
(3) Qualified governmental excess benefit
arrangement.--For purposes of this subsection, the term
``qualified governmental excess benefit arrangement''
means a portion of a governmental plan if--
(A) such portion is maintained solely for the
purpose of providing to participants in the
plan that part of the participant's annual
benefit otherwise payable under the terms of
the plan that exceeds the limitations on
benefits imposed by this section,
(B) under such portion no election is
provided at any time to the participant
(directly or indirectly) to defer compensation,
and
(C) benefits described in subparagraph (A)
are not paid from a trust forming a part of
such governmental plan unless such trust is
maintained solely for the purpose of providing
such benefits.
SEC. 416. SPECIAL RULES FOR TOP-HEAVY PLANS.
(a) * * *
* * * * * * *
(g) Top-Heavy Plan Defined.--For purposes of this section--
(1) * * *
* * * * * * *
(4) Other special rules.--For purposes of this
subsection--
(A) * * *
* * * * * * *
(G) Simple retirement accounts.--The term
``top-heavy plan'' shall not include a simple
retirement account under section 408(p).
[(h) Adjustments in Section 415 Limits for Top-Heavy Plans.--
[(1) In general.--In the case of any top-heavy plan,
paragraphs (2)(B) and (3)(B) of section 415(e) shall be
applied by substituting ``1.0'' for ``1.25''.
[(2) Exception where benefits for key employees do
not exceed 90 percent of total benefits and additional
contributions are made for non-key employees.--
Paragraph (1) shall not apply with respect to any top-
heavy plan if the requirements of subparagraphs (A) and
(B) of this paragraph are met with respect to such
plan.
[(A) Minimum benefit requirements.--
[(i) In general.--The requirements of
this subparagraph are met with respect
to any top-heavy plan if such plan (and
any plan required to be included in an
aggregation group with such plan) meets
the requirements of subsection (c) as
modified by clause (ii).
[(ii) Modifications.--For purposes of
clause (i)--
[(I) paragraph (1)(B) of
subsection (c) shall be applied
by substituting ``3 percent''
for ``2 percent'', and by
increasing (but not by more
than 10 percentage points) 20
percent by 1 percentage point
for each year for which such
plan was taken into account
under this subsection, and
[(II) paragraph (2)(A) shall
be applied by substituting ``4
percent'' for ``3 percent''.
[(B) Benefits for key employees cannot exceed
90 percent of total benefits.--A plan meets the
requirements of this subparagraph if such plan
would not be a top-heavy plan if ``90 percent''
were substituted for ``60 percent'' each place
it appears in paragraphs (1)(A) and (2)(B) of
subsection (g).
[(3) Transition rule.--If, but for this paragraph,
paragraph (1) would begin to apply with respect to any
top-heavy plan, the application of paragraph (1) shall
be suspended with respect to any individual so long as
there are no--
[(A) employer contributions, forfeitures, or
voluntary nondeductible contributions allocated
to such individual, or
[(B) accruals for such individual under the
defined benefit plan.
[(4) Coordination with transitional rule under
section 415.--In the case of any top-heavy plan to
which paragraph (1) applies, section 415(e)(6)(B)(i)
shall be applied by substituting ``$41,500'' for
``$51,875''.]
(i) Definitions.--For purposes of this section--
(1) Key employee.--
(A) In general.--The term ``key employee''
means an employee who, at any time during the
plan year or any of the 4 preceding plan years,
is--
(i) * * *
* * * * * * *
For purposes of clause (i), no more than 50 employees
(or, if lesser, the greater of 3 or 10 percent of the
employees) shall be treated as officers. For purposes
of clause (ii), if 2 employees have the same interest
in the employer, the employee having greater annual
compensation from the employer shall be treated as
having a larger interest. Such term shall not include
any officer or employee of an entity referred to in
section 414(d) (relating to governmental plans). For
purposes of determining the number of officers taken
into account under clause (i), employees described in
section [414(q)(8)] 414(r)(9) shall be excluded.
* * * * * * *
(D) Compensation.--For purposes of this
paragraph, the term ``compensation'' has the
meaning given such term by section [414(q)(7)]
414(q)(4).
* * * * * * *
Subpart D--Treatment of Welfare Benefit Funds
* * * * * * *
SEC. 419A. QUALIFIED ASSET ACCOUNT; LIMITATION ON ADDITIONS TO ACCOUNT.
(a) * * *
* * * * * * *
(c) Account Limit.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Amount taken into account for SUB or [severence]
severance pay benefits.--
(A) In general.--The account limit for any
taxable year with respect to SUB or severance
pay benefits is 75 percent of the average
annual qualified direct costs for SUB or
severance pay benefits for any 2 of the
immediately preceding 7 taxable years (as
selected by the fund).
* * * * * * *
Subpart E--Treatment of Transfers to Retiree Health Accounts
* * * * * * *
SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE HEALTH
ACCOUNTS.
(a) * * *
* * * * * * *
(e) Definition and Special Rules.--For purposes of this
section--
(1) Qualified current retiree health liabilities.--
For purposes of this section--
(A) * * *
* * * * * * *
(C) Applicable health benefits.--The term
``applicable health benefits'' [mean] means
health benefits or coverage which are provided
to--
(i) * * *
* * * * * * *
PART II--CERTAIN STOCK OPTIONS
* * * * * * *
SEC. 424. DEFINITIONS AND SPECIAL RULES.
(a) * * *
* * * * * * *
(c) Disposition.--
(1) * * *
* * * * * * *
(3) Special rule where incentive stock is acquired
through use of other statutory option stock.--
(A) * * *
(B) Statutory option stock.--For purpose of
subparagraph (A), the term ``statutory option
stock'' means any stock acquired through the
exercise of [a qualified stock option, an
incentive stock option, an option granted under
an employee stock purchase plan, or a
restricted stock option] an incentive stock
option or an option granted under an employee
stock purchase plan.
* * * * * * *
Subchapter E--Accounting Periods and Methods of Accounting
* * * * * * *
PART II--METHODS OF ACCOUNTING
* * * * * * *
Subpart B--Taxable Year for Which Items of Gross Income Included
* * * * * * *
SEC. 457. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS
AND TAX-EXEMPT ORGANIZATIONS.
(a) * * *
(b) Eligible Deferred Compensation Plan Defined.--For
purposes of this section, the term ``eligible deferred
compensation plan'' means a plan established and maintained by
an eligible employer--
(1) * * *
* * * * * * *
(6) except as provided in subsection (g), which
provides that--
(A) * * *
* * * * * * *
(c) Individuals Who are Participants in More Than 1 Plan.--
(1) * * *
(2) Coordination with certain other deferrals.--In
applying paragraph (1) of this subsection--
(A) * * *
(B) any amount--
(i) excluded from gross income under
section 402(e)(3) or section
[402(h)(1)(B)] 402(h)(1)(B) or (k) for
the taxable year, or
* * * * * * *
(e) Other Definitions and Special Rules.--For purposes of
this section--
(1) * * *
* * * * * * *
[(9) Benefits not treated as made available by reason
of certain elections.--If--
[(A) the total amount payable to a
participant under the plan does not exceed
$3,500, and
[(B) no additional amounts may be deferred
under the plan with respect to the participant,
the amount payable to the participant under the
plan shall not be treated as made available
merely because such participant may elect to
receive a lump sum payable after separation
from service and within 60 days of the
election.]
(9) Benefits not treated as made available by reason
of certain elections, etc.--
(A) Total amount payable is $3,500 or less.--
The total amount payable to a participant under
the plan shall not be treated as made available
merely because the participant may elect to
receive such amount (or the plan may distribute
such amount without the participant's consent)
if--
(i) such amount does not exceed
$3,500, and
(ii) such amount may be distributed
only if--
(I) no amount has been
deferred under the plan with
respect to such participant
during the 2-year period ending
on the date of the
distribution, and
(II) there has been no prior
distribution under the plan to
such participant to which this
subparagraph applied.
A plan shall not be treated as failing to meet
the distribution requirements of subsection (d)
by reason of a distribution to which this
subparagraph applies.
(B) Election to defer commencement of
distributions.--The total amount payable to a
participant under the plan shall not be treated
as made available merely because the
participant may elect to defer commencement of
distributions under the plan if--
(i) such election is made after
amounts may be available under the plan
in accordance with subsection (d)(1)(A)
and before commencement of such
distributions, and
(ii) the participant may make only 1
such election.
* * * * * * *
(14) Treatment of qualified governmental excess
benefit arrangements.--Subsections (b)(2) and (c)(1)
shall not apply to any qualified governmental excess
benefit arrangement (as defined in section 415(m)(3)),
and benefits provided under such an arrangement shall
not be taken into account in determining whether any
other plan is an eligible deferred compensation plan.
(15) Cost-of-living adjustment of maximum deferral
amount.--The Secretary shall adjust the $7,500 amount
specified in subsections (b)(2) and (c)(1) at the same
time and in the same manner as under section 415(d),
except that the base period shall be the calendar
quarter ending September 30, 1994, and any increase
under this paragraph which is not a multiple of $500
shall be rounded to the next lowest multiple of $500.
(f) Tax Treatment of Participants Where Plan or Arrangement
of Employer is Not Eligible.--
(1) * * *
(2) Exceptions.---Paragraph (1) shall not apply to--
(A) * * *
* * * * * * *
(C) that portion of any plan which consists
of a transfer of property described in section
83, [and]
(D) that portion of any plan which consists
of a trust to which section 402(b) applies[.],
and
(E) a qualified governmental excess benefit
arrangement described in section 415(m).
* * * * * * *
(g) Governmental Plans Must Maintain Set-Asides for Exclusive
Benefit of Participants.--
(1) In general.--A plan maintained by an eligible
employer described in subsection (e)(1)(A) shall not be
treated as an eligible deferred compensation plan
unless all assets and income of the plan described in
subsection (b)(6) are held in trust for the exclusive
benefit of participants and their beneficiaries.
(2) Taxability of trusts and participants.--For
purposes of this title--
(A) a trust described in paragraph (1) shall
be treated as an organization exempt from
taxation under section 501(a), and
(B) notwithstanding any other provision of
this title, amounts in the trust shall be
includible in the gross income of participants
and beneficiaries only to the extent, and at
the time, provided in this section.
(3) Custodial accounts and contracts.--For purposes
of this subsection, custodial accounts and contracts
described in section 401(f) shall be treated as trusts
under rules similar to the rules under section 401(f).
* * * * * * *
SEC. 460. SPECIAL RULES FOR LONG-TERM CONTRACTS.
(a) * * *
* * * * * * *
(b) Percentage of Completion Method.--
(1) * * *
* * * * * * *
In the case of any long-term contract with respect to which the
percentage of completion method is used, except for purposes of
applying [the look-back method of paragraph (3)] the look-back
method of paragraph (2), any income under the contract (to the
extent not previously includible in gross income) shall be
included in gross income for the taxable year following the
taxable year in which the contract was completed.
* * * * * * *
(e) Exception for Certain Construction Contracts.--
(1) * * *
* * * * * * *
(6) Definitions relating to residential construction
contracts.--For purposes of this subsection--
(A) * * *
(B) Residential construction contract.--The
term ``residential construction contract''
means any contract which would be described in
subparagraph (A) if clause (i) of such
subparagraph reads as follows:
``(i) dwelling units (as defined in
section [167(k)] 168(e)(2)(A)(ii)),
and''.
* * * * * * *
Subpart C--Taxable Year for Which Deductions Taken
* * * * * * *
SEC. 461. GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION.
(a) * * *
* * * * * * *
(i) Special Rules for Tax Shelters.--
(1) * * *
* * * * * * *
(3) Tax shelter defined.--For purposes of this
subsection, the term ``tax shelter'' means--
(A) * * *
* * * * * * *
(C) any tax shelter (as defined in [section
6662(d)(2)(C)(ii)] section 6662(d)(2)(C)(iii)).
* * * * * * *
SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.
(a) * * *
* * * * * * *
(c) Passive Activity Defined.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Working interests in oil and gas property.--
(A) * * *
(B) Income in subsequent years.--If any
taxpayer has any loss for any taxable year from
a working interest in any oil or gas property
which is treated as a loss which is not from a
passive activity, then any net income from such
property (or any property the basis of which is
determined in whole or in part by reference to
the basis of such property) for any succeeding
taxable year shall be treated as income of the
taxpayer which is not from a passive activity.
If the preceding sentence applies to the net
income from any property for any taxable year,
any credits allowable under subpart B (other
than section 27(a)) or D of part IV of
subchapter A for such taxable year which are
attributable to such property shall be treated
as credits not from a passive activity to the
extent the amount of such credits does not
exceed the regular tax liability of the
taxpayer for the taxable year which is
allocable to such net income.
* * * * * * *
(g) Dispositions of Entire Interest in Passive Activity.--If
during the taxable year a taxpayer disposes of his entire
interest in any passive activity (or former passive activity),
the following rules shall apply:
(1) Fully taxable transaction.--
[(A) In general.--If all gain or loss
realized on such disposition is recognized, the
excess of--
[(i) the sum of--
[(I) any loss from such
activity for such taxable year
(determined after application
of subsection (b)), plus
[(II) any loss realized on
such disposition, over
[(ii) net income or gain for such
taxable year from all passive
activities (determined without regard
to losses described in clause (i)),
shall be treated as a loss which is not
from a passive activity.]
(A) In general.--If all gain or loss realized
on such disposition is recognized, the excess
of--
(i) any loss from such activity for
such taxable year (determined after the
application of subsection (b)), over
(ii) any net income or gain for such
taxable year from all other passive
activities (determined after the
application of subsection (b)),
shall be treated as a loss which is not from a
passive activity.
* * * * * * *
Subchapter F--Exempt Organizations
* * * * * * *
PART I--GENERAL RULE
* * * * * * *
SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.
(a) * * *
* * * * * * *
(c) List of Exempt Organizations.--The following
organizations are referred to in subsection (a):
(1) * * *
* * * * * * *
(21)(A) * * *
* * * * * * *
(D) For purposes of this paragraph:
(i) * * *
(ii) The term ``qualified investments''
means--
(I) * * *
* * * * * * *
(III) time or demand deposits in a
bank (as defined in section 581) or an
insured credit union (within the
meaning of section [101(6)] 101(7) of
the Federal Credit Union Act, 12 U.S.C.
[1752(6)] 1752(7)) located in the
United States.
* * * * * * *
(n) Charitable Risk Pools.--
(1) In general.--For purposes of this title--
(A) a qualified charitable risk pool shall be
treated as an organization organized and
operated exclusively for charitable purposes,
and
(B) subsection (m) shall not apply to a
qualified charitable risk pool.
(2) Qualified charitable risk pool.--For purposes of
this subsection, the term ``qualified charitable risk
pool'' means any organization--
(A) which is organized and operated solely to
pool insurable risks of its members (other than
risks related to medical malpractice) and to
provide information to its members with respect
to loss control and risk management,
(B) which is comprised solely of members that
are organizations described in subsection
(c)(3) and exempt from tax under subsection
(a), and
(C) which meets the organizational
requirements of paragraph (3).
(3) Organizational requirements.--An organization
(hereinafter in this subsection referred to as the
``risk pool'') meets the organizational requirements of
this paragraph if--
(A) such risk pool is organized as a
nonprofit organization under State law
provisions authorizing risk pooling
arrangements for charitable organizations,
(B) such risk pool is exempt from any income
tax imposed by the State (or will be so exempt
after such pool qualifies as an organization
exempt from tax under this title),
(C) such risk pool has obtained at least
$1,000,000 in startup capital from nonmember
charitable organizations,
(D) such risk pool is controlled by a board
of directors elected by its members, and
(E) the organizational documents of such risk
pool require that--
(i) each member of such pool shall at
all times be an organization described
in subsection (c)(3) and exempt from
tax under subsection (a),
(ii) any member which receives a
final determination that it no longer
qualifies as an organization described
in subsection (c)(3) shall immediately
notify the pool of such determination
and the effective date of such
determination, and
(iii) each policy of insurance issued
by the risk pool shall provide that
such policy will not cover the insured
with respect to events occurring after
the date such final determination was
issued to the insured.
An organization shall not cease to qualify as a
qualified charitable risk pool solely by reason of the
failure of any of its members to continue to be an
organization described in subsection (c)(3) if, within
a reasonable period of time after such pool is notified
as required under subparagraph (C)(ii), such pool takes
such action as may be reasonably necessary to remove
such member from such pool.
(4) Other definitions.--For purposes of this
subsection--
(A) Startup capital.--The term ``startup
capital'' means any capital contributed to, and
any program-related investments (within the
meaning of section 4944(c)) made in, the risk
pool before such pool commences operations.
(B) Nonmember charitable organization.--The
term ``nonmember charitable organization''
means any organization which is described in
subsection (c)(3) and exempt from tax under
subsection (a) and which is not a member of the
risk pool and does not benefit (directly or
indirectly) from the insurance coverage
provided by the pool to its members.
[(n)] (o) Cross Reference.--
For nonexemption of Communist-controlled organizations, see
section 11(b) of the Internal Security Act of 1950 (64 Stat.
997; 50 U.S.C. 790(b)).
* * * * * * *
PART III--TAXATION OF BUSINESS INCOME OF CERTAIN EXEMPT ORGANIZATIONS
* * * * * * *
SEC. 512. UNRELATED BUSINESS TAXABLE INCOME.
(a) * * *
(b) Modifications.--The modifications referred to in
subsection (a) are the following:
(1) * * *
* * * * * * *
(17) Treatment of certain amounts derived from
foreign corporations.--
(A) In general.--Notwithstanding paragraph
(1), any amount included in gross income under
section 951(a)(1)(A) shall be included as an
item of gross income derived from an unrelated
trade or business to the extent the amount so
included is attributable to insurance income
(as defined in section 953) which, if derived
directly by the organization, would be treated
as gross income from an unrelated trade or
business. There shall be allowed all deductions
directly connected with amounts included in
gross income under the preceding sentence.
(B) Exception.--Subparagraph (A) shall not
apply to income attributable to a policy of
insurance or reinsurance with respect to which
the person (directly or indirectly) insured
is--
(i) such organization,
(ii) an affiliate of such
organization which is exempt from tax
under section 501(a), or
(iii) a director or officer of, or an
individual who (directly or indirectly)
performs services for, such
organization or affiliate but only if
the insurance covers primarily risks
associated with the performance of
services in connection with such
organization or affiliate.
For purposes of this subparagraph, the
determination as to whether an entity is an
affiliate of an organization shall be made
under rules similar to the rules of section
168(h)(4)(B).
(C) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
this paragraph, including regulations for the
application of this paragraph in the case of
income paid through 1 or more entities or
between 2 or more chains of entities.
* * * * * * *
(d) Treatment of Dues of Agricultural or Horticultural
Organizations.--
(1) In general.--If--
(A) an agricultural or horticultural
organization described in section 501(c)(5)
requires annual dues to be paid in order to be
a member of such organization, and
(B) the amount of such required annual dues
does not exceed $100,
in no event shall any portion of such dues be treated
as derived by such organization from an unrelated trade
or business by reason of any benefits or privileges to
which members of such organization are entitled.
(2) Indexation of $100 amount.--In the case of any
taxable year beginning in a calendar year after 1995,
the $100 amount in paragraph (1) shall be increased by
an amount equal to--
(A) $100, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, by substituting
``calendar year 1994'' for ``calendar year
1992'' in subparagraph (B) thereof.
(3) Dues.--For purposes of this subsection, the term
``dues'' includes any payment required to be made in
order to be recognized by the organization as a member
of the organization.
Subchapter G--Corporations Used to Avoid Income tax on Shareholders
* * * * * * *
PART I--CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS
* * * * * * *
SEC. 537. REASONABLE NEEDS OF THE BUSINESS.
(a) * * *
(b) Special Rules.--For purposes of subsection (a)--
(1) * * *
* * * * * * *
(4) Product liability loss reserves.--The
accumulation of reasonable amounts for the payment of
reasonably anticipated product liability losses (as
defined in section [172(i)] 172(f)), as determined
under regulations prescribed by the Secretary, shall be
treated as accumulated for the reasonably anticipated
needs of the business.
* * * * * * *
PART II--PERSONAL HOLDING COMPANIES
* * * * * * *
SEC. 543. PERSONAL HOLDING COMPANY INCOME.
(a) General Rule.--For purposes of this subtitle, the term
``personal holding company income'' means the portion of the
adjusted ordinary gross income which consists of:
(1) * * *
(2) Rents.--The adjusted income from rents; except
that such adjusted income shall not be included if--
(A) such adjusted income constitutes 50
percent or more of the adjusted ordinary gross
income, and
(B) the sum of--
(i) the dividends paid during the
taxable year (determined under section
562),
(ii) the dividends considered as paid
on the last day of the taxable year
under section [563(c)] 563(d) (as
limited by the second sentence of
section 563(b)), and
* * * * * * *
Subchapter I--Natural Resources
* * * * * * *
PART I--DEDUCTIONS
* * * * * * *
SEC. 613. PERCENTAGE DEPLETION.
(a) * * *
* * * * * * *
(e) Percentage Depletion for Geothermal Deposits.--
(1) In general.--In the case of geothermal deposits
located in the United States or in a possession of the
United States, for purposes of subsection (a)--
(A) such deposits shall be treated as listed
in subsection (b), and
(B) 15 percent shall be deemed to be the
percentage specified in paragraph (b)[.],
* * * * * * *
SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL AND GAS
WELLS.
(a) * * *
* * * * * * *
(c) Exemption for Independent Producers and Royalty owners.--
(1) * * *
* * * * * * *
(3) Depletable oil quantity.--
(A) In general.--For purposes of paragraph
(1), the taxpayer's depletable oil quantity
shall be equal to--
(i) the tentative quantity determined
under [the table contained in]
subparagraph (B), reduced (but not
below zero) by
(ii) except in the case of a taxpayer
making an election under paragraph
(6)(B), the taxpayer's average daily
marginal production for the taxable
year.
* * * * * * *
Subchapter J--Estates, Trusts, Beneficiaries, and Decedents
* * * * * * *
PART I--ESTATES, TRUSTS, AND BENEFICIARIES
* * * * * * *
Subpart A--General Rules for Taxation of Estates and Trusts
* * * * * * *
SEC. 641. IMPOSITION OF TAX.
(a) * * *
* * * * * * *
(d) Special Rules for Taxation of Electing Small Business
Trusts.--
(1) In general.--For purposes of this chapter--
(A) the portion of any electing small
business trust which consists of stock in 1 or
more S corporations shall be treated as a
separate trust, and
(B) the amount of the tax imposed by this
chapter on such separate trust shall be
determined with the modifications of paragraph
(2).
(2) Modifications.--For purposes of paragraph (1),
the modifications of this paragraph are the following:
(A) Except as provided in section 1(h), the
amount of the tax imposed by section 1(e) shall
be determined by using the highest rate of tax
set forth in section 1(e).
(B) The exemption amount under section 55(d)
shall be zero.
(C) The only items of income, loss,
deduction, or credit to be taken into account
are the following:
(i) The items required to be taken
into account under section 1366.
(ii) Any gain or loss from the
disposition of stock in an S
corporation.
(iii) To the extent provided in
regulations, State or local income
taxes or administrative expenses to the
extent allocable to items described in
clauses (i) and (ii).
No deduction or credit shall be allowed for any
amount not described in this paragraph, and no
item described in this paragraph shall be
apportioned to any beneficiary.
(D) No amount shall be allowed under
paragraph (1) or (2) of section 1211(b).
(3) Treatment of remainder of trust and
distributions.--For purposes of determining--
(A) the amount of the tax imposed by this
chapter on the portion of any electing small
business trust not treated as a separate trust
under paragraph (1), and
(B) the distributable net income of the
entire trust,
the items referred to in paragraph (2)(C) shall be
excluded. Except as provided in the preceding sentence,
this subsection shall not affect the taxation of any
distribution from the trust.
(4) Treatment of unused deductions where termination
of separate trust.--If a portion of an electing small
business trust ceases to be treated as a separate trust
under paragraph (1), any carryover or excess deduction
of the separate trust which is referred to in section
642(h) shall be taken into account by the entire trust.
(5) Electing small business trust.--For purposes of
this subsection, the term ``electing small business
trust'' has the meaning given such term by section
1361(e)(1).
SEC. 642. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.
(a) * * *
* * * * * * *
(g) Disallowance of Double Deductions.--Amounts allowable
under section 2053 or 2054 as a deduction in computing the
taxable estate of a decedent shall not be allowed as a
deduction (or as an offset against the sales price of property
in determining gain or loss) in computing the taxable income of
the estate or of any other person, unless there is filed,
within the time and in the manner and form prescribed by the
Secretary, a statement that the amounts have not been allowed
as deductions under section 2053 or 2054 and a waiver of the
right to have such amounts allowed at any time as deductions
under section 2053 or 2054. Rules similar to the rules of the
preceding sentence shall apply to amounts which may be taken
into account under section 2621(a)(2) or 2622(b). This
subsection shall not apply with respect to deductions allowed
under part II (relating to income in respect of decedents).
* * * * * * *
PART II--INCOME IN RESPECT OF DECEDENTS
* * * * * * *
SEC. 691. RECIPIENTS OF INCOME IN RESPECT OF DECEDENTS.
(a) * * *
* * * * * * *
(c) Deduction for Estate Tax.--
(1) * * *
* * * * * * *
[(5) Coordination with section 402(d).--For purposes
of section 402(d) (other than paragraph (1)(C)
thereof), the total taxable amount of any lump sum
distribution shall be reduced by the amount of the
deduction allowable under paragraph (1) of this
subsection which is attributable to the total taxable
amount (determined without regard to this paragraph).]
* * * * * * *
Subchapter K--Partners and Partnerships
* * * * * * *
PART II--CONTRIBUTIONS, DISTRIBUTIONS, AND TRANSFERS
* * * * * * *
Subpart A--Contributions to a Partnership
* * * * * * *
SEC. 724. CHARACTER OF GAIN OR LOSS ON CONTRIBUTED UNREALIZED
RECEIVABLES, INVENTORY ITEMS, AND CAPITAL LOSS
PROPERTY.
(a) * * *
* * * * * * *
(d) Definitions.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Substituted basis property.--
(A) In general.--If any property described in
subsection (a), (b), or (c) is disposed of in a
nonrecognition transaction, the tax treatment
which applies to such property under such
subsection shall also apply to any substituted
basis property resulting from such transaction.
A similar rule shall also apply in the case of
a series of non-recognition transactions.
(B) Exception for stock in c corporation.--
[Subparagaph] Subparagraph (A) shall not apply
to any stock in a C corporation received in an
exchange described in section 351.
* * * * * * *
Subchapter L--Insurance Companies
* * * * * * *
PART I--LIFE INSURANCE COMPANIES
* * * * * * *
Subpart C--Life Insurance Deductions
* * * * * * *
SEC. 805. GENERAL DEDUCTIONS.
(a) General Rule.--For purposes of this part, there shall be
allowed the following deductions:
(1) * * *
* * * * * * *
(4) Dividends received by company.--
(A) * * *
* * * * * * *
(E) Certain dividends received by foreign
corporations.--Subparagraph (A)(i) (and not
subparagraph (A)(ii)) shall apply to any
dividend received by a foreign corporation from
a domestic corporation which would be a 100
percent dividend if section 1504(b)(3) did not
apply for purposes of applying section
[243(b)(5)] 243(b)(2).
* * * * * * *
SEC. 807. RULES FOR CERTAIN RESERVES.
(a) * * *
* * * * * * *
(d) Method of Computing Reserves for Purposes of Determining
Income.--
(1) * * *
* * * * * * *
(3) Tax reserve method.--For purposes of this
subsection--
(A) * * *
(B) Definition of crvm and carvm.--For
purposes of this paragraph--
(i) CRVM.--The term ``CRVM'' means
the Commissioners' Reserve Valuation
Method prescribed by the National
Association of Insurance Commissioners
which is in effect on the date of the
issuance of the contract.
(ii) CARVM.--The term ``CARVM'' means
the [Commissoners'] Commissioners'
Annuities Reserve Valuation Method
prescribed by the National Association
of Insurance Commissioners which is in
effect on the date of the issuance of
the contract.
* * * * * * *
Subpart D--Accounting, Allocation, and Foreign Provisions
* * * * * * *
SEC. 812. DEFINITION OF COMPANY'S SHARE AND POLICYHOLDERS' SHARE.
(a) * * *
* * * * * * *
[(g) Treatment of Interest Partially Tax-Exempt Under Section
133.--For purposes of this section and subsections (a) and (b)
of section 807, the terms ``gross investment income'' and
``tax-exempt interest'' shall not include any interest received
with respect to a securities acquisition loan (as defined in
section 133(b)). Such interest shall not be included in life
insurance gross income for purposes of subsection (b)(3).]
* * * * * * *
PART II--OTHER INSURANCE COMPANIES
* * * * * * *
SEC. 832. INSURANCE COMPANY TAXABLE INCOME.
(a) * * *
(b) Definitions.--In the case of an insurance company subject
to the tax imposed by section 831--
(1) * * *
* * * * * * *
(5) Losses incurred.--
(A) * * *
* * * * * * *
(C) Exception for investments made before
august 8, 1986.--
(i) In general.--Except as provided
in clause (ii), subparagraph (B) shall
not apply to any dividend or interest
received or accrued on any stock or
obligation acquired before August 8,
1986.
(ii) Special rule for 100 percent
dividends.--For purposes of clause (i),
the portion of any 100 percent dividend
which is attributable to prorated
amounts shall be treated as received
with respect to stock acquired on the
later of--
(I) the date the payor
acquired the stock or
obligation to which the
prorated amounts are
attributable, or
(II) the 1st day on which the
payor and payee were members of
the same affiliated group (as
defined in section [243(b)(5)]
243(b)(2)).
(D) Definitions.--For purposes of this
paragraph--
(i) Prorated amounts.--The term
``prorated amounts'' means tax-exempt
interest and dividends with respect to
which a deduction is allowable under
section 243, 244, or 245 (other than
100 percent dividends).
(ii) 100 percent dividend.--
(I) In general.--The term
``100 percent dividend'' means
any dividend if the percentage
used for purposes of
determining the deduction
allowable under section 243,
244, or 245(b) is 100 percent.
(II) Certain dividends
received by foreign
corporations.--A dividend
received by a foreign
corporation from a domestic
corporation which would be a
100 percent dividend if section
1504(b)(3) did not apply for
purposes of applying section
[243(b)(5)] 243(b)(2) shall be
treated as a 100 percent
dividend.
* * * * * * *
Subchapter M--Regulated Investment Companies and Real Estate Investment
Trusts
* * * * * * *
PART I--REGULATED INVESTMENT COMPANIES
* * * * * * *
SEC. 852. TAXATION OF REGULATED INVESTMENT COMPANIES AND THEIR
SHAREHOLDERS.
(a) * * *
* * * * * * *
(b) Method of Taxation of Companies and Shareholders.--
(1) * * *
* * * * * * *
(5) Exempt-interest dividends.--If, at the close of
each quarter of its taxable year, at least 50 percent
of the value (as defined in section 851(c)(4)) of the
total assets of the regulated investment company
consists of obligations described in section 103(a),
such company shall be qualified to pay exempt-interest
dividends, as defined herein, to its shareholders.
(A) * * *
* * * * * * *
[(C) Interest on certain loans used to
acquire employer securities.--For purposes of
this section--
[(i) 50 percent of the amount of any
loan of the regulated investment
company which qualifies as a securities
acquisition loan (as defined in section
133) shall be treated as an obligation
described in section 103(a), and
[(ii) 50 percent of the interest
received on such loan shall be treated
as interest excludable from gross
income under section 103.]
* * * * * * *
PART II--REAL ESTATE INVESTMENT TRUSTS
* * * * * * *
SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRUST.
(a) In General.--For purposes of this title, the term ``real
estate investment trust'' means a corporation, trust, or
association--
(1) * * *
* * * * * * *
(4) which is neither (A) a financial institution
referred to in section [582(c)(5)] 582(c)(2), nor (B)
an insurance company to which subchapter L applies;
* * * * * * *
PART IV--REAL ESTATE MORTGAGE INVESTMENT CONDUITS
* * * * * * *
SEC. 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON RESIDUAL
INTERESTS.
(a) Excess Inclusions May Not Be Offset by Net Operating
Losses.--
(1) * * *
* * * * * * *
(6) Coordination with minimum tax.--For purposes of
part VI of subchapter A of this chapter--
(A) the reference in section 55(b)(2) to
taxable income shall be treated as a reference
to taxable income determined without regard to
this subsection,
(B) the alternative minimum taxable income of
any holder of a residual interest in a REMIC
for any taxable year shall in no event be less
than the excess inclusion for such taxable
year, and
(C) any excess inclusion shall be disregarded
for purposes of computing the alternative tax
net operating loss deduction.
The preceding sentence shall not apply to any
organization to which section 593 applies, except to
the extent provided in regulations prescribed by the
Secretary under paragraph (2).
* * * * * * *
SEC. 860F. OTHER RULES.
(a) 100 Percent Tax on Prohibited Transactions.--
(1) * * *
* * * * * * *
(5) Exceptions.--Notwithstanding subparagraphs (A)
and (D) of paragraph [(1)] (2), the term ``prohibited
transaction'' shall not include any disposition--
(A) required to prevent default on a regular
interest where the threatened default resulted
from a default on 1 or more qualified
mortgages, or
(B) to facilitate a clean-up call (as defined
in regulations).
* * * * * * *
Subchapter N--Tax Bases on Income from Sources Within or Without the
United States
* * * * * * *
PART I--DETERMINATION OF SOURCES OF INCOME
* * * * * * *
SEC. 865. SOURCE RULES FOR PERSONAL PROPERTY SALES.
(a) * * *
(b) Exception for Inventory Property.--In the case of income
derived from the sale of inventory property--
(1) this section shall not apply, and
(2) such income shall be sourced under the rules of
sections 861(a)(6), 862(a)(6), and 863(b).
Notwithstanding the preceding sentence, any income from the
sale of any unprocessed timber which is a softwood and was cut
from an area in the United States shall be sourced in the
United States and the rules of sections 862(a)(6) and 863[(b)]
shall not apply to any such income. For purposes of the
preceding sentence, the term ``unprocessed timber'' means any
log, cant, or similar form of timber.
* * * * * * *
PART II--NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
* * * * * * *
Subpart A--Nonresident Alien Individuals
* * * * * * *
SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS.
(a) * * *
(b) Income Connected With United States Business--Graduated
Rate of Tax.--
(1) Imposition of tax.--A nonresident alien
individual engaged in trade or business within the
United States during the taxable year shall be taxable
as provided in [section 1, 55, or 402(d)(1)] section 1
or 55 on his taxable income which is effectively
connected with the conduct of a trade or business
within the United States.
* * * * * * *
SEC. 877. EXPATRIATION TO AVOID TAX.
(a) * * *
(b) Alternative Tax.--A nonresident alien individual
described in subsection (a) shall be taxable for the taxable
year as provided in [section 1, 55, or 402(d)(1)] section 1 or
55, except that--
(1) * * *
* * * * * * *
Subpart B--Foreign Corporations
* * * * * * *
SEC. 884. BRANCH PROFITS TAX.
(a) * * *
* * * * * * *
(f) Treatment of Interest Allocable to Effectively Connected
Income.--
(1) In general.--In the case of a foreign corporation
engaged in a trade or business in the United States (or
having gross income treated as effectively connected
with the conduct of a trade or business in the United
States), for purposes of this subtitle--
(A) any interest paid by such trade or
business in the United States shall be treated
as if it were paid by a domestic corporation,
and
(B) [to the extent the amount of interest
allowable as a deduction under section 882 in
computing the effectively connected taxable
income of such foreign corporation exceeds the
interest described in subparagraph (A)] to the
extent that the allocable interest exceeds the
interest described in subparagraph (A), such
foreign corporation shall be liable for tax
under section 881(a) in the same manner as if
such excess were interest paid to such foreign
corporation by a wholly owned domestic
corporation on the last day of such foreign
corporation's taxable year.
To the extent provided in regulations, subparagraph (A)
shall not apply to interest in excess of the amounts
[reasonably expected to be deductible under section 882
in computing the effectively connected taxable income
of such foreign corporation.] reasonably expected to be
allocable interest.
[(2) Effectively connected taxable income.--For
purposes of this subsection, the term ``effectively
connected taxable income'' means taxable income which
is effectively connected (or treated as effectively
connected) with the conduct of a trade or business
within the United States.]
(2) Allocable interest.--For purposes of this
subsection, the term ``allocable interest'' means any
interest which is allocable to income which is
effectively connected (or treated as effectively
connected) with the conduct of a trade or business in
the United States.
* * * * * * *
Subpart D--Miscellaneous Provisions
* * * * * * *
SEC. 897. DISPOSITION OF INVESTMENT IN UNITED STATES REAL PROPERTY.
(a) * * *
* * * * * * *
[(f) Distributions by Domestic Corporations to Foreign
Shareholders.--If a domestic corporation distributes a United
States real property interest to a nonresident alien individual
or a foreign corporation in a distribution to which section 301
applies, notwithstanding any other provision of this chapter,
the basis of such United States real property interest in the
hands of such nonresident alien individual or foreign
corporation shall not exceed--
[(1) the adjusted basis of such property before the
distribution, increased by
[(2) the sum of--
[(A) any gain recognized by the distributing
corporation on the distribution, and
[(B) any tax paid under this chapter by the
distributee on such distribution.]
* * * * * * *
PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES
* * * * * * *
Subpart A--Foreign Tax Credit
* * * * * * *
SEC. 904. LIMITATION ON CREDIT.
(a) * * *
* * * * * * *
(d) Separate Application of Section With Respect to Certain
Categories of Income.--
(1) * * *
* * * * * * *
(3) Look-thru in case of controlled foreign
corporations.--
(A) * * *
* * * * * * *
(G) Dividend.--For purposes of this
paragraph, the term ``dividend'' includes any
amount included in gross income in [section
951(a)(1)(B)] subparagraph (B) or (C) of
section 951(a)(1). Any amount included in gross
income under section 78 to the extent
attributable to amounts included in gross
income in section 951(a)(1)(A) shall not be
treated as a dividend but shall be treated as
included in gross income under section
951(a)(1)(A).
* * * * * * *
(f) Recapture of Overall Foreign Loss.--
(1) * * *
(2) Overall foreign loss defined.--For purposes of
this subsection, the term ``overall foreign loss''
means the amount by which the gross income for the
taxable year from sources without the United States
(whether or not the taxpayer chooses the benefits of
this subpart for such taxable year) for such year is
exceeded by the sum of the deductions properly
apportioned or allocated thereto, except that there
shall not be taken into account--
(A) any net operating loss deduction
allowable for such year under section 172(a),
and
(B) any--
(i) foreign expropriation loss for
such year, as defined in section 172(h)
(as in effect on the day before the
date of the enactment of the Revenue
Reconciliation Act of 1990), or
(ii) loss for such year which arises
from fire, storm, shipwreck, or other
casualty, or from theft,
to the extent such loss is not compensated for by
insurance or otherwise.
* * * * * * *
SEC. 907. SPECIAL RULES IN CASE OF FOREIGN OIL AND GAS INCOME. * * *
* * * * * * *
(c) Foreign Income Definitions and Special Rules.--For
purposes of this section--
(1) * * *
* * * * * * *
(4) Recapture of foreign oil and gas extraction
losses by recharacterizing later extraction income.--
(A) * * *
(B) Foreign oil extraction loss defined.--
(i) * * *
* * * * * * *
(iii) Expropriation and casualty
losses not taken into account.--For
purposes of clause (i), there shall not
be taken into account--
(I) any foreign expropriation
loss (as defined in section
172(h) (as in effect on the day
before the date of the
enactment of the Revenue
Reconciliation Act of 1990))
for the taxable year, or
(II) any loss for the taxable
year which arises from fire,
storm, shipwreck, or other
casualty, or from theft,
to the extent such loss is not compensated for by
insurance or otherwise.
Subpart D--Possessions of the United States
* * * * * * *
SEC. 936. PUERTO RICO AND POSSESSION TAX CREDIT.
(a) * * *
(b) Amounts Received in United States.--In determining
taxable income for purposes of subsection (a), there shall not
be taken into account as income from sources without the United
States any gross income which was received by such domestic
corporation within the United States, whether derived from
sources within or without the United States. This subsection
shall not apply to any amount described in subsection
(a)(1)(A)(i) received from a person who is not a related person
(within the meaning of subsection (h)(3) but without regard to
subparagraphs (D)(ii)[(I)] and (E)(i) thereof) with respect to
the domestic corporation.
* * * * * * *
(j) Termination.--
(1) In general.--Except as otherwise provided in this
subsection, this section shall not apply to any taxable
year beginning after December 31, 1995.
(2) Transition rules for active business income
credit.--Except as provided in paragraph (3)--
(A) Economic activity credit.--In the case of
an existing credit claimant--
(i) with respect to a possession
other than Puerto Rico, and
(ii) to which subsection (a)(4)(B)
does not apply,
the credit determined under subsection
(a)(1)(A) shall be allowed for taxable years
beginning after December 31, 1995, and before
January 1, 2002.
(B) Special rule for reduced credit.--
(i) In general.--In the case of an
existing credit claimant to which
subsection (a)(4)(B) applies, the
credit determined under subsection
(a)(1)(A) shall be allowed for taxable
years beginning after December 31,
1995, and before January 1, 1998.
(ii) Election irrevocable after
1997.--An election under subsection
(a)(4)(B)(iii) which is in effect for
the taxpayer's last taxable year
beginning before 1997 may not be
revoked unless it is revoked for the
taxpayer's first taxable year beginning
in 1997 and all subsequent taxable
years.
(C) Economic activity credit for Puerto
Rico.--
For economic activity credit for Puerto Rico, see section 30A.
(3) Additional restricted credit.--
(A) In general.--In the case of an existing
credit claimant--
(i) the credit under subsection
(a)(1)(A) shall be allowed for the
period beginning with the first taxable
year after the last taxable year to
which subparagraph (A) or (B) of
paragraph (2), whichever is
appropriate, applied and ending with
the last taxable year beginning before
January 1, 2006, except that
(ii) the aggregate amount of taxable
income taken into account under
subsection (a)(1)(A) for any such
taxable year shall not exceed the
adjusted base period income of such
claimant.
(B) Coordination with subsection (a)(4).--The
amount of income described in subsection
(a)(1)(A) which is taken into account in
applying subsection (a)(4) shall be such income
as reduced under this paragraph.
(4) Adjusted base period income.--For purposes of
paragraph (3)--
(A) In general.--The term ``adjusted base
period income'' means the average of the
inflation-adjusted possession incomes of the
corporation for each base period year.
(B) Inflation-adjusted possession income.--
For purposes of subparagraph (A), the
inflation-adjusted possession income of any
corporation for any base period year shall be
an amount equal to the sum of--
(i) the possession income of such
corporation for such base period year,
plus
(ii) such possession income
multiplied by the inflation adjustment
percentage for such base period year.
(C) Inflation adjustment percentage.--For
purposes of subparagraph (B), the inflation
adjustment percentage for any base period year
means the percentage (if any) by which--
(i) the CPI for 1995, exceeds
(ii) the CPI for the calendar year in
which the base period year for which
the determination is being made ends.
For purposes of the preceding sentence, the CPI
for any calendar year is the CPI (as defined in
section 1(f)(5)) for such year under section
1(f)(4).
(D) Increase in inflation adjustment
percentage for growth during base years.--The
inflation adjustment percentage (determined
under subparagraph (C) without regard to this
subparagraph) for each of the 5 taxable years
referred to in paragraph (5)(A) shall be
increased by--
(i) 5 percentage points in the case
of a taxable year ending during the 1-
year period ending on October 13, 1995;
(ii) 10.25 percentage points in the
case of a taxable year ending during
the 1-year period ending on October 13,
1994;
(iii) 15.76 percentage points in the
case of a taxable year ending during
the 1-year period ending on October 13,
1993;
(iv) 21.55 percentage points in the
case of a taxable year ending during
the 1-year period ending on October 13,
1992; and
(v) 27.63 percentage points in the
case of a taxable year ending during
the 1-year period ending on October 13,
1991.
(5) Base period year.--For purposes of this
subsection--
(A) In general.--The term ``base period
year'' means each of 3 taxable years which are
among the 5 most recent taxable years of the
corporation ending before October 14, 1995,
determined by disregarding--
(i) one taxable year for which the
corporation had the largest inflation-
adjusted possession income, and
(ii) one taxable year for which the
corporation had the smallest inflation-
adjusted possession income.
(B) Corporations not having significant
possession income throughout 5-year period.--
(i) In general.--If a corporation
does not have significant possession
income for each of the most recent 5
taxable years ending before October 14,
1995, then, in lieu of applying
subparagraph (A), the term ``base
period year'' means only those taxable
years (of such 5 taxable years) for
which the corporation has significant
possession income; except that, if such
corporation has significant possession
income for 4 of such 5 taxable years,
the rule of subparagraph (A)(ii) shall
apply.
(ii) Special rule.--If there is no
year (of such 5 taxable years) for
which a corporation has significant
possession income--
(I) the term ``base period
year'' means the first taxable
year ending on or after October
14, 1995, but
(II) the amount of possession
income for such year which is
taken into account under
paragraph (4) shall be the
amount which would be
determined if such year were a
short taxable year ending on
September 30, 1995.
(iii) Significant possession
income.--For purposes of this
subparagraph, the term ``significant
possession income'' means possession
income which exceeds 2 percent of the
possession income of the taxpayer for
the taxable year (of the period of 6
taxable years ending with the first
taxable year ending on or after October
14, 1995) having the greatest
possession income.
(C) Election to use one base period year.--
(i) In general.--At the election of
the taxpayer, the term ``base period
year'' means--
(I) only the last taxable
year of the corporation ending
in calendar year 1992, or
(II) a deemed taxable year
which includes the first ten
months of calendar year 1995.
(ii) Base period income for 1995.--In
determining the adjusted base period
income of the corporation for the
deemed taxable year under clause
(i)(II), the possession income shall be
annualized and shall be determined
without regard to any extraordinary
item.
(iii) Election.--An election under
this subparagraph by any possession
corporation may be made only for the
corporation's first taxable year
beginning after December 31, 1995, for
which it is a possession corporation.
The rules of subclauses (II) and (III)
of subsection (a)(4)(B)(iii) shall
apply to the election under this
subparagraph.
(D) Acquisitions and dispositions.--Rules
similar to the rules of subparagraphs (A) and
(B) of section 41(f)(3) shall apply for
purposes of this subsection.
(6) Possession income.--For purposes of this
subsection, the term ``possession income'' means, with
respect to any possession, the income referred to in
subsection (a)(1)(A) determined with respect to that
possession. In no event shall possession income be
treated as being less than zero.
(7) Short years.--If the current year or a base
period year is a short taxable year, the application of
this subsection shall be made with such annualizations
as the Secretary shall prescribe.
(8) Special rules for certain possessions.--
(A) In general.--In the case of an existing
credit claimant with respect to an applicable
possession, this section (other than the
preceding paragraphs of this subsection) shall
apply to such claimant with respect to such
applicable possession for taxable years
beginning after December 31, 1995, and before
January 1, 2006.
(B) Applicable possession.--For purposes of
this paragraph, the term ``applicable
possession'' means Guam, American Samoa, and
the Commonwealth of the Northern Mariana
Islands.
(9) Existing credit claimant.--For purposes of this
subsection--
(A) In general.--The term ``existing credit
claimant'' means a corporation--
(i) which was actively conducting a
trade or business in a possession on
October 13, 1995, and
(ii) with respect to which an
election under this section is in
effect for the corporation's taxable
year which includes October 13, 1995.
(B) New lines of business prohibited.--If,
after October 13, 1995, a corporation which
would (but for this subparagraph) be an
existing credit claimant adds a substantial new
line of business, such corporation shall cease
to be treated as an existing credit claimant as
of the close of the taxable year ending before
the date of such addition.
(C) Binding contract exception.--If, on
October 13, 1995, and at all times thereafter,
there is in effect with respect to a
corporation a binding contract for the
acquisition of assets to be used in, or for the
sale of assets to be produced from, a trade or
business, the corporation shall be treated for
purposes of this paragraph as actively
conducting such trade or business on October
13, 1995. The preceding sentence shall not
apply if such trade or business is not actively
conducted before January 1, 1996.
(10) Separate application to each possession.--In the
case of any taxpayer, this subsection (and so much of
this section as relates to this subsection) shall be
applied separately with respect to each possession.
* * * * * * *
Subpart F--Controlled Foreign Corporations
Sec. 951. Amounts included in gross income of United States
shareholders.
* * * * * * *
[Sec. 956A. Earnings invested in excess passive assets.]
* * * * * * *
SEC. 951. AMOUNTS INCLUDED IN GROSS INCOME OF UNITED STATES
SHAREHOLDERS.
(a) Amounts Included.--
(1) In general.--If a foreign corporation is a
controlled foreign corporation for an uninterrupted
period of 30 days or more during any taxable year,
every person who is a United States shareholder (as
defined in subsection (b)) of such corporation and who
owns (within the meaning of section 958(a)) stock in
such corporation on the last day, in such year, on
which such corporation is a controlled foreign
corporation shall include in his gross income, for his
taxable year in which or with which such taxable year
of the corporation ends--
(A) the sum of--
(i) his pro rata share (determined
under paragraph (2)) of the
corporation's subpart F income for such
year,
(ii) his pro rata share (determined
under section 955(a)(3) as in effect
before the enactment of the Tax
Reduction Act of 1975) of the
corporation's previously excluded
subpart F income withdrawn from
investment in less developed countries
for such year, and
(iii) his pro rata share (determined
under section 955(a)(3)) of the
corporation's previously excluded
subpart F income withdrawn from foreign
base company shipping operations for
such year, and
(B) the amount determined under section 956
with respect to such shareholder for such year
(but only to the extent not excluded from gross
income under section 959(a)(2))[; and].
[(C) the amount determined under section 956A
with respect to such shareholder for such year
(but only to the extent not excluded from gross
income under section 959(a)(3)).]
* * * * * * *
[SEC. 956A. EARNINGS INVESTED IN EXCESS PASSIVE ASSETS.
[(a) General Rule.--In the case of any controlled foreign
corporation, the amount determined under this section with
respect to any United States shareholder for any taxable year
is the lesser of--
[(1) the excess (if any) of--
[(A) such shareholder's pro rata share of the
amount of the controlled foreign corporation's
excess passive assets for such taxable year,
over
[(B) the amount of earnings and profits
described in section 959(c)(1)(B) with respect
to such shareholder, or
[(2) such shareholder's pro rata share of the
applicable earnings of such controlled foreign
corporation determined after the application of section
951(a)(1)(B).
[(b) Applicable Earnings.--For purposes of this section, the
term ``applicable earnings'' means, with respect to any
controlled foreign corporation, the sum of--
[(1) the amount (not including a deficit) referred to
in section 316(a)(1) to the extent such amount was
accumulated in prior taxable years beginning after
September 30, 1993, and
[(2) the amount referred to in section 316(a)(2),
but reduced by distributions made during the taxable year and
reduced by the earnings and profits described in section
959(c)(1) to the extent that the earnings and profits so
described were accumulated in taxable years beginning after
September 30, 1993.
[(c) Excess passive assets.--For purposes of this section--
[(1) In general.--The excess passive assets of any
controlled foreign corporation for any taxable year is
the excess (if any) of--
[(A) the average of the amounts of passive
assets held by such corporation as of the close
of each quarter of such taxable year, over
[(B) 25 percent of the average of the amounts
of total assets held by such corporation as of
the close of each quarter of such taxable year.
For purposes of the preceding sentence, the amount
taken into account with respect to any asset shall be
its adjusted basis as determined for purposes of
computing earnings and profits.
[(2) Passive asset.--
[(A) In general.--Except as otherwise
provided in this section, the term ``passive
asset'' means any asset held by the controlled
foreign corporation which produces passive
income (as defined in section 1296(b)) or is
held for the production of such income.
[(B) Coordination with section 956.--The term
``passive asset'' shall not include any United
States property (as defined in section 956).
[(3) Certain rules to apply.---For purposes of this
subsection, the rules of the following provisions shall
apply:
[(A) Section 1296(c) (relating to look-thru
rules).
[(B) Section 1297(d) (relating to leasing
rules).
[(C) Section 1297(e) (relating to intangible
property).
[(d) Treatment of Certain Groups of Controlled Foreign
Corporations.--
[(1) In general.--For purposes of applying subsection
(c)--
[(A) all controlled foreign corporations
which are members of the same CFC group shall
be treated as 1 controlled foreign corporation,
and
[(B) the amount of the excess passive assets
determined with respect to such 1 corporation
shall be allocated among the controlled foreign
corporations which are members of such group in
proportion to their respective amounts of
applicable earnings.
[(2) CFC group.--For purposes of paragraph (1), the
term ``CFC group'' means 1 or more chains of controlled
foreign corporations connected through stock ownership
with a top tier corporation which is a controlled
foreign corporation, but only if--
[(A) the top tier corporation owns directly
more than 50 percent (by vote or value) of the
stock of at least 1 of the other controlled
foreign corporations, and
[(B) more than 50 percent (by vote or value)
of the stock of each of the controlled foreign
corporations (other than the top tier
corporation) is owned (directly or indirectly)
by one or more other members of the group.
[(e) Special Rule Where Corporation Ceases To Be Controlled
Foreign Corporation During Taxable Year.--If any foreign
corporation ceases to be a controlled foreign corporation
during any taxable year--
[(1) the determination of any United States
shareholder's pro rata share shall be made on the basis
of stock owned (within the meaning of section 958(a))
by such shareholder on the last day during the taxable
year on which the foreign corporation is a controlled
foreign corporation, and
[(2) the amount of such corporation's excess passive
assets for such taxable year shall be determined by
only taking into account quarters ending on or before
such last day, and
[(3) in determining applicable earnings, the amount
taken into account by reason of being described in
paragraph (2) of section 316(a) shall be the portion of
the amount so described which is allocable (on a pro
rata basis) to the part of such year during which the
corporation is a controlled foreign corporation.
[(f) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section, including regulations to prevent the avoidance of
the provisions of this section through reorganizations or
otherwise and regulations coordinating the provisions of
subsections (c)(3)(A) and (d).]
SEC. 958. RULES FOR DETERMINING STOCK OWNERSHIP.
(a) Direct and Indirect Ownership.--
(1) General rule.--For purposes of this subpart
(other than [sections 955(b)(1)(A) and (B),
955(c)(2)(A)(ii), and 960(a)(1)] section 960(a)(1)),
stock owned means--
(A) stock owned directly, and
(B) stock owned with the application of
paragraph (2).
* * * * * * *
(b) Constructive Ownership.--For purposes of sections 951(b),
954(d)(3), [956(b)(2)] 956(c)(2), and 957, section 318(a)
(relating to constructive ownership of stock) shall apply to
the extent that the effect is to treat any United States person
as a United States shareholder within the meaning of section
951(b), to treat a person as a related person within the
meaning of section 954(d)(3), to treat the stock of a domestic
corporation as owned by a United States shareholder of the
controlled foreign corporation for purposes of section
[956(b)(2)] 956(c)(2), or to treat a foreign corporation as a
controlled foreign corporation under section 957, except that--
(1) In applying paragraph (1)(A) of section 318(a),
stock owned by a nonresident alien individual (other
than a foreign trust or foreign estate) shall not be
considered as owned by a citizen or by a resident alien
individual.
(2) In applying subparagraphs (A), (B), and (C) of
section 318(a)(2), if a partnership, estate, trust, or
corporation owns, directly or indirectly, more than 50
percent of the total combined voting power of all
classes of stock entitled to vote of a corporation, it
shall be considered as owning all the stock entitled to
vote.
(3) In applying subparagraph (C) of section
318(a)(2), the phrase ``10 percent'' shall be
substituted for the phrase ``50 percent'' used in
subparagraph (C).
(4) Subparagraph (A), (B), and (C) of section
318(a)(3) shall not be applied so as to consider a
United States person as owning stock which is owned by
a person who is not a United States person.
Paragraphs (1) and (4) shall not apply for purposes of section
[956(b)(2)] 956(c)(2) to treat stock of a domestic corporation
as not owned by a United States shareholder.
* * * * * * *
SEC. 959. EXCLUSION FROM GROSS INCOME OF PREVIOUSLY TAXED EARNINGS AND
PROFITS.
(a) Exclusion From Gross income of United States Persons.--
For purposes of this chapter, the earnings and profits of a
foreign corporation attributable to amounts which are, or have
been, included in the gross income of a United States
shareholder under section 951(a) shall not, when--
(1) such amounts are distributed to, or
(2) such amounts would, but for this subsection, be
included under section 951(a)(1)(B) in the gross income
of, [or]
[(3) such amounts would, but for this subsection, be
included under section 951(a)(1)(C) in the gross income
of,]
such shareholder (or any other United States person who
acquires from any person any portion of the interest of such
United States shareholder in such foreign corporation, but only
to the extent of such portion, and subject to such proof of the
identity of such interest as the Secretary may by regulations
prescribe) directly or indirectly through a chain of ownership
described under section 958(a), be again included in the gross
income of such United States shareholder (or of such other
United States person). The rules of subsection (c) shall apply
for purposes of paragraph (1) of this subsection and the rules
of subsection (f) shall apply for purposes of [paragraphs (2)
and (3)] paragraph (2) of this subsection.
* * * * * * *
(c) Allocation of Distributions.--For purposes of subsections
(a) and (b), section 316(a) shall be applied by applying
paragraph (2) thereof, and then paragraph (1) thereof--
(1) * * *
* * * * * * *
(3) then to other earnings and profits.
References in this subsection to section 951(a)(1)(C) and
subsection (a)(3) shall be treated as references to such
provisions as in effect on the day before the date of the
enactment of the Small Business Job Protection Act of 1996.
* * * * * * *
(f) Allocation Rules for Certain Inclusions.--
[(1) In general.--For purposes of this section--
[(A) amounts that would be included under
subparagraph (B) of section 951(a)(1)
(determined without regard to this section)
shall be treated as attributable first to
earnings described in subsection (c)(2), and
then to earnings described in subsection
(c)(3), and
[(B) amounts that would be included under
subparagraph (C) of section 951(a)(1)
(determined without regard to this section)
shall be treated as attributable first to
earnings described in subsection (c)(2) to the
extent the earnings so described were
accumulated in taxable years beginning after
September 30, 1993, and then to earnings
described in subsection (c)(3).]
(1) In general.--For purposes of this section,
amounts that would be included under subparagraph (B)
of section 951(a)(1) (determined without regard to this
section) shall be treated as attributable first to
earnings described in subsection (c)(2), and then to
earnings described in subsection (c)(3).
(2) Treatment of distributions.--In applying this
section, actual distributions shall be taken into
account before amounts that would be included under
[subparagraphs (B) and (C) of section 951(a)(1)]
section 951(a)(1)(B) (determined without regard to this
section).
* * * * * * *
Subpart J--Foreign Currency Transactions
* * * * * * *
SEC. 989. OTHER DEFINITIONS AND SPECIAL RULES.
(a) * * *
(b) Appropriate Exchange Rate.--Except as provided in
regulations, for purposes of this subpart, the term
``appropriate exchange rate'' means--
(1) * * *
* * * * * * *
(4) in the case of any other qualified business unit
of a taxpayer, the weighted average exchange rate for
the taxable year of such qualified business unit.
For purposes of the preceding sentence, any amount included in
income under [subparagraph (B) or (C) of section 951(a)(1)]
section 951(a)(1)(B) shall be treated as an actual distribution
made on the last day of the taxable year for which such amount
was so included.
* * * * * * *
Subchapter O--Gain or Loss on Disposition of Property
* * * * * * *
PART II--BASIS RULES OF GENERAL APPLICATION
* * * * * * *
SEC. 1017. DISCHARGE OF INDEBTEDNESS.
(a) * * *
(b) Amount and Properties Determined Under Regulations.--
(1) * * *
* * * * * * *
(4) Special rules for qualified farm indebtedness.--
(A) In general.--Any amount which under
subsection [(b)(2)(D)] (b)(2)(E) of section 108
is to be applied to reduce basis and which is
attributable to an amount excluded under
subsection (a)(1)(C) of section 108--
(i) * * *
* * * * * * *
PART III--COMMON NONTAXABLE EXCHANGE
* * * * * * *
SEC. 1042. SALES OF STOCK TO EMPLOYEE STOCK OWNERSHIP PLANS OR CERTAIN
COOPERATIVES.
(a) * * *
* * * * * * *
(c) Definitions; Special Rules.--
For purposes of this section--
(1) * * *
* * * * * * *
(4) Qualified replacement property.--
(A) In general.--The term ``qualified
replacement property'' means any security
issued by a domestic operating corporation
which--
(i) did not, for the taxable year
preceding the taxable year in which
such security was purchased, have
passive investment income (as defined
in section [1362(d)(3)(D)]
1362(d)(3)(C)) in excess of 25 percent
of the gross receipts of such
corporation for such preceding taxable
year, and
* * * * * * *
SEC. 1044. ROLLOVER OF PUBLICLY TRADED SECURITIES GAIN INTO SPECIALIZED
SMALL BUSINESS INVESTMENT COMPANIES.
(a) * * *
* * * * * * *
(c) Definitions and Special Rules.--For purposes of this
section--
(1) * * *
[(2) Purchase.--The term ``purchase'' has the meaning
given such term by section 1043(b)(4).]
(2) Purchase.--The taxpayer shall be considered to
have purchased any property if, but for subsection (d),
the unadjusted basis of such property would be its cost
within the meaning of section 1012.
* * * * * * *
Subchapter P--Capital Gains and Losses
PART I--TREATMENT OF CAPITAL GAINS
* * * * * * *
SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
(a) General Rule.--If for any taxable year a corporation has
a net capital gain and any rate of tax imposed by section 11,
511, or 831(a) or (b) (whichever is applicable) exceeds 35
percent (determined without regard to the [last sentence] last
2 sentences of section 11(b)(1)), then, in lieu of any such
tax, there is hereby imposed a tax (if such tax is less than
the tax imposed by such sections) which shall consist of the
sum of--
(1) a tax computed on the taxable income reduced by
the amount of the net capital gain, at the rates and in
the manner as if this subsection had not been enacted,
plus
(2) a tax of 34 percent of the net capital gain.
* * * * * * *
PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
* * * * * * *
SEC. 1237. REAL PROPERTY SUBDIVIDED FOR SALE.
(a) General.--Any lot or parcel which is part of a tract of
real property in the hands of a taxpayer [other than a
corporation] other than a C corporation shall not be deemed to
be held primarily for sale to customers in the ordinary course
of trade or business at the time of sale solely because of the
taxpayer having subdivided such tract for purposes of sale or
because of any activity incident to such subdivision or sale,
if--
(1) such tract, or any lot or parcel thereof, had not
previously been held by such taxpayer primarily for
sale to customers in the ordinary course of trade or
business (unless such tract at such previous time would
have been covered by this section) and, in the same
taxable year in which the sale occurs, such taxpayer
does not so hold any other real property; and
(2) no substantial improvement that substantially
enhances the value of the lot or parcel sold is made by
the taxpayer on such tract while held by the taxpayer
or is made pursuant to a contract of sale entered into
between the taxpayer and the buyer. For purposes of
this paragraph, an improvement shall be deemed to be
made by the taxpayer if such improvement was made by--
(A) the taxpayer or members of his family (as
defined in section 267(c)(4)), by a corporation
controlled by the taxpayer, an S corporation
which included the taxpayer as a shareholder,
or by a partnership which included the taxpayer
as a partner; or
* * * * * * *
SEC. 1245. GAIN FROM DISPOSITIONS OF CERTAIN DEPRECIABLE PROPERTY.
(a) General Rule.--
(1) * * *
* * * * * * *
[(3) Section 1245 property.--For purposes of this
section, the term ``section 1245 property'' means any
property which is or has been property of a character
subject to the allowance for depreciation provided in
section 167 (or subject to the allowance of
amortization provided in ) and is either--]
(3) Section 1245 property.--For purposes of this
section, the term ``section 1245 property'' means any
property which is or has been property of a character
subject to the allowance for depreciation provided in
section 167 and is either--
(A) * * *
* * * * * * *
SEC. 1248. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN
FOREIGN CORPORATIONS.
(a) General Rule.--If--
(1) a United States person sells or exchanges stock
in a foreign corporation[, or if a United States person
receives a distribution from a foreign corporation
which, under section 302 or 331, is treated as an
exchange of stock], and
* * * * * * *
then the gain recognized on the sale or exchange of such stock
shall be included in the gross income of such person as a
dividend, to the extent of the earnings and profits of the
foreign corporation attributable (under regulations prescribed
by the Secretary) to such stock which were accumulated in
taxable years of such foreign corporation beginning after
December 31, 1962, and during the period or periods the stock
sold or exchanged was held by such person while such foreign
corporation was a controlled foreign corporation. For purposes
of this section, a United States person shall be treated as
having sold or exchanged any stock if, under any provision of
this subtitle, such person is treated as realizing gain from
the sale or exchange of such stock.
* * * * * * *
(e) Sales or Exchanges of Stock in Certain Domestic
Corporations.--Except as provided in regulations prescribed by
the Secretary, if--
(1) a United States person sells or exchanges stock
of a domestic corporation[, or receives a distribution
from a domestic corporation which, under section 302 or
331, is treated as an exchange of stock], and
* * * * * * *
(f) Certain Nonrecognition Transactions.--Except as provided
in regulations prescribed by the Secretary--
(1) In general.--If--
(A) a domestic corporation satisfies the
stock ownership requirements of subsection
(a)(2) with respect to a foreign corporation,
and
(B) such domestic corporation distributes
stock of such foreign corporation in a
distribution to which section 311(a), 337, [or
361(c)(1)] 355(c)(1), or 361(c)(1) applies,
then, notwithstanding any other provision of this subtitle, an
amount equal to the excess of the fair market value of such
stock over its adjusted basis in the hands of the domestic
corporation shall be included in the gross income of the
domestic corporation as a dividend to the extent of the
earnings and profits of the foreign corporation attributable
(under regulations prescribed by the Secretary) to such stock
which were accumulated in taxable years of such foreign
corporation beginning after December 31, 1962, and during the
period or periods the stock was held by such domestic
corporation while such foreign corporation was a controlled
foreign corporation. For purposes of subsections (c)(2), (d),
and (h), a distribution of stock to which this subsection
applies shall be treated as a sale of stock to which subsection
(a) applies.
* * * * * * *
(i) Treatment of Certain Indirect Transfers.--
[(1) In general.--If any shareholder of a 10-percent
corporate shareholder of a foreign corporation
exchanges stock of the 10-percent corporate shareholder
for stock of the foreign corporation, for purposes of
this section, the stock of the foreign corporation
received in such exchange shall be treated as if it had
been--
[(A) issued to the 10-percent corporate
shareholder, and
[(B) then distributed by the 10-percent
corporate shareholder to such shareholder in
redemption or liquidation (whichever is
appropriate).]
(1) In general.--If any shareholder of a 10-percent
corporate shareholder of a foreign corporation
exchanges stock of the 10-percent corporate shareholder
for stock of the foreign corporation, such 10-percent
corporate shareholder shall recognize gain in the same
manner as if the stock of the foreign corporation
received in such exchange had been--
(A) issued to the 10-percent corporate
shareholder, and
(B) then distributed by the 10-percent
corporate shareholder to such shareholder in
redemption or liquidation (whichever is
appropriate).
The amount of gain recognized by such 10-percent
corporate shareholder under the preceding sentence
shall not exceed the amount treated as a dividend under
this section.
* * * * * * *
SEC. 1250. GAIN FROM DISPOSITIONS OF CERTAIN DEPRECIABLE REALTY.
(a) * * *
* * * * * * *
(e) Holding Period.--For purposes of determining the
applicable percentage under this section, the provisions of
section 1223 shall not apply, and the holding period of section
1250 property shall be determined under the following rules:
(1) * * *
* * * * * * *
[(4) Qualified low-income housing.--The holding
period of any section 1250 property acquired which is
described in subsection (d)(8)(E)(i) shall include the
holding period of the corresponding element of section
1250 property disposed of.]
* * * * * * *
PART V--SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS
* * * * * * *
Subpart A--Original Issue Discount
* * * * * * *
SEC. 1274. DETERMINATION OF ISSUE PRICE IN THE CASE OF CERTAIN DEBT
INSTRUMENTS ISSUED FOR PROPERTY.
(a) * * *
(b) Imputed Principal Amount.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Fair market value rule in potentially abusive
situations.--
(A) * * *
(B) Potentially abusive situation defined.--
For purposes of subparagraph (A), the term
``potentially abusive situation'' means--
(i) a tax shelter (as defined in
section [6662(d)(2)(C)(ii)]
6662(d)(2)(C)(iii)), and
* * * * * * *
SEC. 1274A. SPECIAL RULES FOR CERTAIN TRANSACTIONS WHERE STATED
PRINCIPAL AMOUNT DOES NOT EXCEED $2,800,000.
(a) * * *
* * * * * * *
(c) Election To Use Cash Method Where Stated Principal Amount
Does Not Exceed $2,000,000.--
(1) In general.--In the case of any cash method debt
instrument--
(A) section 1274 shall not apply, and
(B) interest on such debt [instument]
instrument shall be taken into account by both
the borrower and the lender under the cash
receipts and disbursements method of
accounting.
* * * * * * *
PART VI--TREATMENT OF CERTAIN PASSIVE FOREIGN INVESTMENT COMPANIES
* * * * * * *
Subpart C--General Provisions
* * * * * * *
SEC. 1296. PASSIVE FOREIGN INVESTMENT COMPANY.
(a) * * *
(b) Passive Income.--For purposes of this section--
(1) * * *
(2) Exceptions.--Except as provided in regulations,
the term ``passive income'' does not include any
income--
(A) derived in the active conduct of a
banking business by an institution licensed to
do business as a bank in the United States (or,
to the extent provided in regulations, by any
other corporation),
(B) derived in the active conduct of an
insurance business by a corporation which is
predominantly engaged in an insurance business
and which would be subject to tax under
subchapter L if it were a domestic corporation,
[or]
(C) which is interest, a dividend, or a rent
or royalty, which is received or accrued from a
related person (within the meaning of section
954(d)(3)) to the extent such amount is
properly allocable (under regulations
prescribed by the Secretary) to income of such
related person which is not passive income[.],
or
(D) which is foreign trade income of a FSC or
export trade income of an export trade
corporation (as defined in section 971).
For purposes of subparagraph (C), the term ``related
person'' has the meaning given such term by section
954(d)(3) determined by substituting ``foreign
corporation'' for ``controlled foreign corporation''
each place it appears in section 954(d)(3).
* * * * * * *
SEC. 1297. SPECIAL RULES.
(a) * * *
* * * * * * *
(d) Treatment of Certain Leased Property.--For purposes of
this part--
(1) * * *
[(2) Determination of adjusted basis.--]
(2) Amount taken into account.--
(A) In general.--[The adjusted basis of any
asset] The amount taken into account under
section 1296(a)(2) with respect to any asset to
which paragraph (1) applies shall be the
unamortized portion (as determined under
regulations prescribed by the Secretary) of the
present value of the payments under the lease
for the use of such property.
* * * * * * *
(e) Special Rules for Certain Intangibles.--For purposes of
this part--
(1) * * *
* * * * * * *
Subchapter S--Tax Treatment of S Corporations
* * * * * * *
PART I--IN GENERAL
* * * * * * *
SEC. 1361. S CORPORATION DEFINED.
(a) * * *
(b) Small Business Corporation.--
(1) In general.--For purposes of this subchapter, the
term ``small business corporation'' means a domestic
corporation which is not an ineligible corporation and
which does not--
(A) have more than [35] 75 shareholders,
* * * * * * *
(2) Ineligible corporation defined.--For purposes of
paragraph (1), the term ``ineligible corporation''
means any corporation which is--
[(A) a member of an affiliated group
(determined under section 1504 without regard
to the exceptions contained in subsection (b)
thereof),]
[(B)] (A) a financial institution to which
section 585 applies (or would apply but for
subsection (c) thereof) or to which section 593
applies,
[(C)] (B) an insurance company subject to tax
under subchapter L,
[(D)] (C) a corporation to which an election
under section 936 applies, or
[(E)] (D) a DISC or former DISC.
(3) Treatment of certain wholly owned subsidiaries.--
(A) In general.--For purposes of this title--
(i) a corporation which is a
qualified subchapter S subsidiary shall
not be treated as a separate
corporation, and
(ii) all assets, liabilities, and
items of income, deduction, and credit
of a qualified subchapter S subsidiary
shall be treated as assets,
liabilities, and such items (as the
case may be) of the S corporation.
(B) Qualified subchapter s subsidiary.--For
purposes of this paragraph, the term `qualified
subchapter S subsidiary' means any domestic
corporation which is not an ineligible
corporation (as defined in paragraph (2)), if--
(i) 100 percent of the stock of such
corporation is held by the S
corporation, and
(ii) the S corporation elects to
treat such corporation as a qualified
subchapter S subsidiary.
(C) Treatment of terminations of qualified
subchapter s subsidiary status.--For purposes
of this title, if any corporation which was a
qualified subchapter S subsidiary ceases to
meet the requirements of subparagraph (B), such
corporation shall be treated as a new
corporation acquiring all of its assets (and
assuming all of its liabilities) immediately
before such cessation from the S corporation in
exchange for its stock.
(c) Special Rules for Applying Subsection (b).--
(1) * * *
(2) Certain trusts permitted as shareholders.--
(A) In general.--For purposes of subsection
(b)(1)(B), the following trusts may be
shareholders:
(i) A trust all of which is treated
(under subpart E of part I of
subchapter J of this chapter) as owned
by an individual who is a citizen or
resident of the United States.
(ii) A trust which was described in
clause (i) immediately before the death
of the deemed owner and which continues
in existence after such death, but only
for the [60-day period] 2-year period
beginning on the day of the deemed
owner's death. [If a trust is described
in the preceding sentence and if the
entire corpus of the trust is
includible in the gross estate of the
deemed owner, the preceding sentence
shall be applied by substituting ``2-
year period'' for ``60-day period''.]
(iii) A trust with respect to stock
transferred to it pursuant to the terms
of a will, but only for the [60-day
period] 2-year period beginning on the
day on which such stock is transferred
to it.
(iv) A trust created primarily to
exercise the voting power of stock
transferred to it.
(v) An electing small business trust.
This subparagraph shall not apply to any
foreign trust.
(B) Treatment as shareholders.--For purposes
of subsection (b)(1)--
(i) In the case of a trust described
in clause (i) of subparagraph (A), the
deemed owner shall be treated as the
shareholder.
(ii) In the case of a trust described
in clause (ii) of subparagraph (A), the
estate of the deemed owner shall be
treated as the shareholder.
(iii) In the case of a trust
described in clause (iii) of
subparagraph (A), the estate of the
testator shall be treated as the
shareholder.
(iv) In the case of a trust described
in clause (iv) of subparagraph (A),
each beneficiary of the trust shall be
treated as a shareholder.
(v) In the case of a trust described
in clause (v) of subparagraph (A), each
potential current beneficiary of such
trust shall be treated as a
shareholder; except that, if for any
period there is no potential current
beneficiary of such trust, such trust
shall be treated as the shareholder
during such period.
* * * * * * *
(5) Straight debt safe harbor.--
(A) * * *
(B) Straight debt defined.--For purposes of
this paragraph, the term ``straight debt''
means any written unconditional promise to pay
on demand or on a specified date a sum certain
in money if--
(i) * * *
* * * * * * *
(iii) the creditor is an individual
(other than a nonresident alien), an
estate, [or a trust described in
paragraph (2)] a trust described in
paragraph (2), or a person which is
actively and regularly engaged in the
business of lending money.
[(6) Ownership of stock in certain inactive
corporations.--For purposes of subsection (b)(2)(A), a
corporation shall not be treated as a member of an
affiliated group during any period within a taxable
year by reason of the ownership of stock in another
corporation if such other corporation--
[(A) has not begun business at any time on or
before the close of such period, and
[(B) does not have gross income for such
period.]
* * * * * * *
(e) Electing Small Business Trust Defined.--
(1) Electing small business trust.--For purposes of
this section--
(A) In general.--Except as provided in
subparagraph (B), the term ``electing small
business trust'' means any trust if--
(i) such trust does not have as a
beneficiary any person other than (I)
an individual, (II) an estate, or (III)
an organization described in paragraph
(2), (3), (4), or (5) of section 170(c)
which holds a contingent interest and
is not a potential current beneficiary,
(ii) no interest in such trust was
acquired by purchase, and
(iii) an election under this
subsection applies to such trust.
(B) Certain trusts not eligible.--The term
``electing small business trust'' shall not
include--
(i) any qualified subchapter S trust
(as defined in subsection (d)(3)) if an
election under subsection (d)(2)
applies to any corporation the stock of
which is held by such trust, and
(ii) any trust exempt from tax under
this subtitle.
(C) Purchase.--For purposes of subparagraph
(A), the term ``purchase'' means any
acquisition if the basis of the property
acquired is determined under section 1012.
(2) Potential current beneficiary.--For purposes of
this section, the term ``potential current
beneficiary'' means, with respect to any period, any
person who at any time during such period is entitled
to, or at the discretion of any person may receive, a
distribution from the principal or income of the trust.
If a trust disposes of all of the stock which it holds
in an S corporation, then, with respect to such
corporation, the term ``potential current beneficiary''
does not include any person who first met the
requirements of the preceding sentence during the 60-
day period ending on the date of such disposition.
(3) Election.--An election under this subsection
shall be made by the trustee. Any such election shall
apply to the taxable year of the trust for which made
and all subsequent taxable years of such trust unless
revoked with the consent of the Secretary.
(4) Cross reference.--
For special treatment of electing small business trusts, see
section 641(d).
* * * * * * *
SEC. 1362. ELECTION; REVOCATION; TERMINATION.
(a) * * *
(b) When Made.--
(1) * * *
* * * * * * *
(5) Authority to treat late elections, etc., as
timely.--If--
(A) an election under subsection (a) is made
for any taxable year (determined without regard
to paragraph (3)) after the date prescribed by
this subsection for making such election for
such taxable year or no such election is made
for any taxable year, and
(B) the Secretary determines that there was
reasonable cause for the failure to timely make
such election,
the Secretary may treat such an election as timely made
for such taxable year (and paragraph (3) shall not
apply).
* * * * * * *
(d) Termination.--
(1) * * *
* * * * * * *
(3) Where passive investment income exceeds 25
percent of gross receipts for 3 consecutive taxable
years and corporation has [subchapter c] accumulated
earnings and profits.--
(A) Termination.--
(i) In general.--An election under
subsection (a) shall be terminated
whenever the corporation--
(I) has [subchapter C]
accumulated earnings and
profits at the close of each of
3 consecutive taxable years,
and
[(B) Subchapter c earnings and profits.--For
purposes of subparagraph (A), the term
``subchapter C earnings and profits'' means
earnings and profits of any corporation for any
taxable year with respect to which an election
under section 1362(a) (or under section 1372 of
prior law) was not in effect.]
[(C)] (B) Gross receipts from sales of
capital assets (other than stock and
securities).--For purposes of this paragraph,
in the case of dispositions of capital assets
(other than stock and securities), gross
receipts from such dispositions shall be taken
into account only to the extent of the capital
gain net income therefrom.
[(D)] (C) Passive investment income
defined.--For purposes of this paragraph--
(i) * * *
* * * * * * *
[(E)] (D) Special rule for options and
commodity dealings.--
(i) * * *
* * * * * * *
(F) Treatment of certain dividends.--If an S
corporation holds stock in a C corporation
meeting the requirements of section 1504(a)(2),
the term ``passive investment income'' shall
not include dividends from such C corporation
to the extent such dividends are attributable
to the earnings and profits of such C
corporation derived from the active conduct of
a trade or business.
* * * * * * *
[(f) Inadvertent Terminations.--If--
[(1) an election under subsection (a) by any
corporation was terminated under paragraph (2) or (3)
of subsection (d),
[(2) the Secretary determines that the termination
was inadvertent,
[(3) no later than a reasonable period of time after
discovery of the event resulting in such termination,
steps were taken so that the corporation is once more a
small business corporation, and
[(4) the corporation, and each person who was a
shareholder of the corporation at any time during the
period specified pursuant to this subsection, agrees to
make such adjustments (consistent with the treatment of
the corporation as an S corporation) as may be required
by the Secretary with respect to such period,
then, notwithstanding the terminating event, such corporation
shall be treated as continuing to be an S corporation during
the period specified by the Secretary.]
(f) Inadvertent Invalid Elections or Terminations.--If--
(1) an election under subsection (a) by any
corporation--
(A) was not effective for the taxable year
for which made (determined without regard to
subsection (b)(2)) by reason of a failure to
meet the requirements of section 1361(b) or to
obtain shareholder consents, or
(B) was terminated under paragraph (2) or (3)
of subsection (d),
(2) the Secretary determines that the circumstances
resulting in such ineffectiveness or termination were
inadvertent,
(3) no later than a reasonable period of time after
discovery of the circumstances resulting in such
ineffectiveness or termination, steps were taken--
(A) so that the corporation is a small
business corporation, or
(B) to acquire the required shareholder
consents, and
(4) the corporation, and each person who was a
shareholder in the corporation at any time during the
period specified pursuant to this subsection, agrees to
make such adjustments (consistent with the treatment of
the corporation as an S corporation) as may be required
by the Secretary with respect to such period,
then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be
treated as an S corporation during the period specified by the
Secretary.
* * * * * * *
PART II--TAX TREATMENT OF SHAREHOLDERS
* * * * * * *
SEC. 1366. PASS-THRU OF ITEMS TO SHAREHOLDERS.
(a) Determination of Shareholder's Tax Liability.--
(1) In general.--In determining the tax under this
chapter of a shareholder for the shareholder's taxable
year in which the taxable year of the S corporation
ends (or for the final taxable year of a shareholder
who dies, or of a trust or estate which terminates,
before the end of the corporation's taxable year),
there shall be taken into account the shareholder's pro
rata share of the corporation's--
(A) * * *
* * * * * * *
(d) Special Rules for Losses and Deductions.--
(1) Cannot exceed shareholder's basis in stock and
debt.--The aggregate amount of losses and deductions
taken into account by a shareholder under subsection
(a) for any taxable year shall not exceed the sum of--
(A) the adjusted basis of the shareholder's
stock in the S corporation (determined with
regard to [paragraph (1)] paragraphs (1) and
(2)(A) of section 1367(a) for the taxable
year), and
* * * * * * *
(3) Carryover of disallowed losses and deductions to
post-termination transition period.--
(A) * * *
* * * * * * *
(D) At-risk limitations.--To the extent that
any increase in adjusted basis described in
subparagraph (B) would have increased the
shareholder's amount at risk under section 465
if such increase had occurred on the day
preceding the commencement of the post-
termination transition period, rules similar to
the rules described in subparagraphs (A)
through (C) shall apply to any losses
disallowed by reason of section 465(a).
* * * * * * *
[(g) Cross Reference.--
[For rules relating to procedures for determining the tax
treatment of subchapter S items, see subchapter D of chapter
63.]
* * * * * * *
SEC. 1367. ADJUSTMENTS TO BASIS OF STOCK OF SHAREHOLDERS, ETC.
(a) General Rule.--
(1) * * *
(2) Decreases in basis.--The basis of each
shareholder's stock in an S corporation shall be
decreased for any period (but not below zero) by the
sum of the following items determined with respect to
the shareholder for such period:
(A) * * *
* * * * * * *
(E) the amount of the shareholder's deduction
for depletion for any oil and gas property held
by the S corporation to the extent such
deduction does not exceed the proportionate
share of the adjusted basis of such property
allocated to such shareholder under [section
613A(c)(13)(B)] section 613A(c)(11)(B).
(b) Special Rules.--
(1) * * *
* * * * * * *
(4) Adjustments in case of inherited stock.--
(A) In general.--If any person acquires stock
in an S corporation by reason of the death of a
decedent or by bequest, devise, or inheritance,
section 691 shall be applied with respect to
any item of income of the S corporation in the
same manner as if the decedent had held
directly his pro rata share of such item.
(B) Adjustments to basis.--The basis
determined under section 1014 of any stock in
an S corporation shall be reduced by the
portion of the value of the stock which is
attributable to items constituting income in
respect of the decedent.
* * * * * * *
SEC. 1368. DISTRIBUTIONS.
(a) * * *
* * * * * * *
(d) Certain Adjustments Taken Into Account.--Subsections (b)
and (c) shall be applied by taking into account (to the extent
proper)--
(1) the adjustments to the basis of the shareholder's
stock described in section 1367, and
(2) the adjustments to the accumulated adjustments
account which are required by subsection (e)(1).
In the case of any distribution made during any taxable year,
the adjusted basis of the stock shall be determined with regard
to the adjustments provided in paragraph (1) of section 1367(a)
for the taxable year.
(e) Definitions and Special Rules.--For purposes of this
section--
(1) Accumulated adjustments account.--
(A) In general.--Except [as provided in
subparagraph (B)] as otherwise provided in this
paragraph, the term ``accumulated adjustments
account'' means an account of the S corporation
which is adjusted for the S period in a manner
similar to the adjustments under section 1367
(except that no adjustment shall be made for
income (and related expenses) which is exempt
from tax under this title and the phrase ``(but
not below zero)'' shall be disregarded in
[section 1367(b)(2)(A)] section 1367(a)(2)) and
no adjustment shall be made for Federal taxes
attributable to any taxable year in which the
corporation was a C corporation.
* * * * * * *
(C) Net loss for year disregarded.--
(i) In general.--In applying this section to
distributions made during any taxable year, the
amount in the accumulated adjustments account
as of the close of such taxable year shall be
determined without regard to any net negative
adjustment for such taxable year.
(ii) Net negative adjustment.--For purposes
of clause (i), the term ``net negative
adjustment'' means, with respect to any taxable
year, the excess (if any) of--
(I) the reductions in the account for
the taxable year (other than for
distributions), over
(II) the increases in such account
for such taxable year.
* * * * * * *
PART III--SPECIAL RULES
Sec. 1371. Coordination with subchapter C.
* * * * * * *
Sec. 1375. Tax imposed when passive investment income of
corporation having [subchapter C] accumulated earnings
and profits exceeds 25 percent of gross receipts.
* * * * * * *
SEC. 1371. COORDINATION WITH SUBCHAPTER C.
[(a) Application of Subchapter C Rules.--
[(1) In general.--Except as otherwise provided in
this title, and except to the extent inconsistent with
this subchapter, subchapter C shall apply to an S
corporation and its shareholders.
[(2) S corporation as shareholder treated like
individual.--For purposes of subchapter C, an S
corporation in its capacity as a shareholder of another
corporation shall be treated as an individual.]
(a) Application of Subchapter C Rules.--Except as otherwise
provided in this title, and except to the extent inconsistent
with this subchapter, subchapter C shall apply to an S
corporation and its shareholders.
* * * * * * *
SEC. 1375. TAX IMPOSED WHEN PASSIVE INVESTMENT INCOME OF CORPORATION
HAVING [SUBCHAPTER C] ACCUMULATED EARNINGS AND
PROFITS EXCEEDS 25 PERCENT OF GROSS RECEIPTS.
(a) General Rule.--If for the taxable year an S corporation
has--
(1) [subchapter C] accumulated earnings and profits
at the close of such taxable year, and
* * * * * * *
(b) Definitions.--For purposes of this section--
(1) * * *
* * * * * * *
[(3) Passive investment income; etc.--The terms
``subchapter C earnings and profits'', ``passive
investment income'', and ``gross receipts'' shall have
the same respective meanings as when used in paragraph
(3) of section 1362(d).]
(3) Passive investment income, etc.--The terms
``passive investment income'' and ``gross receipts''
have the same respective meanings as when used in
paragraph (3) of section 1362(d).
* * * * * * *
PART IV--DEFINITIONS; MISCELLANEOUS
* * * * * * *
SEC. 1377. DEFINITIONS AND SPECIAL RULE.
(a) Pro Rata Share.--For purposes of this subchapter--
(1) * * *
[(2) Election to terminate year.--Under regulations
prescribed by the Secretary, if any shareholder
terminates his interest in the corporation during the
taxable year and all persons who are shareholders
during the taxable year agree to the application of
this paragraph, paragraph (1) shall be applied as if
the taxable year consisted of 2 taxable years the first
of which ends on the date of the termination.]
(2) Election to terminate year.--
(A) In general.--Under regulations prescribed
by the Secretary, if any shareholder terminates
the shareholder's interest in the corporation
during the taxable year and all affected
shareholders and the corporation agree to the
application of this paragraph, paragraph (1)
shall be applied to the affected shareholders
as if the taxable year consisted of 2 taxable
years the first of which ends on the date of
the termination.
(B) Affected shareholders.--For purposes of
subparagraph (A), the term ``affected
shareholders'' means the shareholder whose
interest is terminated and all shareholders to
whom such shareholder has transferred shares
during the taxable year. If such shareholder
has transferred shares to the corporation, the
term ``affected shareholders'' shall include
all persons who are shareholders during the
taxable year.
(b) Post-Termination Transition Period.--
(1) In general.--For purposes of this subchapter, the
term ``post-termination transition period'' means--
(A) the period beginning on the day after the
last day of the corporation's last taxable year
as an S corporation and ending on the later
of--
(i) the day which is 1 year after
such last day, or
(ii) the due date for filing the
return for such last year as an S
corporation (including extensions),
[and]
(B) the 120-day period beginning on the date
of any determination pursuant to an audit of
the taxpayer which follows the termination of
the corporation's election and which adjusts a
subchapter S item of income, loss, or deduction
of the corporation arising during the S period
(as defined in section 1368(e)(2)), and
[(B)] (C) the 120-day period beginning on the
date of a determination that the corporation's
election under section 1362(a) had terminated
for a previous taxable year.
(2) Determination defined.--For purposes of paragraph
(1), the term ``determination'' means--
[(A) a court decision which becomes final,
[(B) a closing agreement, or]
(A) a determination as defined in section
1313(a), or
[(C)] (B) an agreement between the
corporation and the Secretary that the
corporation failed to qualify as an S
corporation.
* * * * * * *
Subchapter U--Designation and Treatment of Empowerment Zones,
Enterprise Communities, and Rural Development Investment Areas
* * * * * * *
PART II--TAX-EXEMPT FACILITY BONDS FOR EMPOWERMENT ZONES AND ENTERPRISE
COMMUNITIES
* * * * * * *
SEC. 1394. TAX-EXEMPT ENTERPRISE ZONE FACILITY BONDS.
(a) * * *
* * * * * * *
(e) Penalty for Ceasing to Meet Requirements.--
(1) * * *
(2) Loss of deductions where facility ceases to be
qualified.--No deduction shall be allowed under this
chapter for interest on any financing provided from any
bond to which subsection (a) applies with respect to
any facility to the extent such interest accrues during
the period beginning on the first day of the calendar
year which includes the date on which--
[(i)] (A) substantially all of the facility
with respect to which the financing was
provided ceases to be used in an empowerment
zone or enterprise community, or
[(ii)] (B) the principal user of such
facility ceases to be an enterprise zone
business (as defined in subsection (b)).
* * * * * * *
PART III--ADDITIONAL INCENTIVIES FOR EMPOWERMENT ZONES
* * * * * * *
Subpart A--Empowerment Zone Employment Credit
* * * * * * *
SEC. 1396. EMPOWERMENT ZONE EMPLOYMENT CREDIT.
(a) * * *
* * * * * * *
(c) Qualified Zone Wages.--
(1) * * *
* * * * * * *
(3) Coordination with [targeted jobs credit] work
opportunity credit.--
(A) In general.--The term ``qualified zone
wages'' shall not include wages taken into
account in determining the credit under section
51.
* * * * * * *
Subpart B--Additional Expensing
* * * * * * *
SEC. 1397B. ENTERPRISE ZONE BUSINESS DEFINED.
(a) * * *
* * * * * * *
(d) Qualified Business.--For purposes of this section--
(1) * * *
* * * * * * *
(5) Certain businesses excluded.--The term
``qualified business'' shall not include--
(A) any trade or business consisting of the
operation of any facility described in section
144(c)(6)(B), and
(B) any trade or business the principal
activity of which is farming (within the
meaning of subparagraphs (A) or (B) of section
2032A(e)(5)), but only if, as of the close of
the [preceding] taxable year, the sum of--
(i) the aggregate unadjusted bases
(or, if greater, the fair market value)
of the assets owned by the taxpayer
which are used in such a trade or
business, and
(ii) the aggregate value of assets
leased by the taxpayer which are used
in such a trade or business,exceeds
$500,000.
For purposes of subparagraph (B), rules similar to the rules of
section 1397(b) shall apply.
* * * * * * *
CHAPTER 2--TAX ON SELF-EMPLOYMENT INCOME
* * * * * * *
SEC. 1402. DEFINITIONS.
(a) Net Earnings From Self-Employment.--The term ``net
earnings from self-employment'' means the gross income derived
by an individual from any trade or business carried on by such
individual, less the deductions allowed by this subtitle which
are attributable to such trade or business, plus his
distributive share (whether or not distributed) of income or
loss described in section 702(a)(8) from any trade or business
carried on by a partnership of which he is a member; except
that in computing such gross income and deductions and such
distributive share of partnership ordinary income or loss--
(1) * * *
* * * * * * *
(8) an individual who is a duly ordained,
commissioned, or licensed minister of a church or a
member of a religious order shall compute his net
earnings from self-employment derived from the
performance of service described in subsection (c)(4)
without regard to section 107 (relating to rental value
of parsonages), section 119 (relating to meals and
lodging furnished for the convenience of the employer),
and section 911 (relating to citizens or residents of
the United States living abroad), but shall not include
in such net earnings from self-employment the rental
value of any parsonage (whether or not excludable under
section 107) provided after the individual retires, or
any other retirement benefit received by such
individual from a church plan (as defined in section
414(e)) after the individual retires;
* * * * * * *
CHAPTER 3--WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN
CORPORATIONS
* * * * * * *
Subchapter A--Nonresident Aliens and Foreign Corporations
* * * * * * *
SEC. 1445. WITHHOLDING OF TAX ON DISPOSITIONS OF UNITED STATES REAL
PROPERTY INTERESTS.
(a) * * *
* * * * * * *
(e) Special Rules Relating to Distributions, Etc., by
Corporations, Partnerships, Trusts, or Estates.--
(1) * * *
* * * * * * *
(3) Distributions by certain domestic corporations to
foreign shareholders.--If a domestic corporation which
is or has been a United States real property holding
corporation (as defined in section 897(c)(2)) during
the applicable period specified in section
897(c)(1)(A)(ii) distributes property to a foreign
person in a transaction to which section 302 or part II
of subchapter C applies, such corporation shall deduct
and withhold under subsection (a) a tax equal to 10
percent of the amount realized by the foreign
shareholder. The preceding sentence shall not apply if,
as of the date of the distribution, interests in such
corporation are not United States real property
interests by reason of section 897(c)(1)(B). Rules
similar to the rules of the preceding provisions of
this paragraph shall apply in the case of any
distribution to which section 301 applies and which is
not made out of the earnings and profits of such a
domestic corporation.
* * * * * * *
Subchapter B--Application of Withholding Provisions
* * * * * * *
SEC. 1463. TAX PAID BY RECIPIENT OF INCOME.
If--
(1) any person, in violation of the provisions of
this chapter, fails to deduct and withhold any tax
under this chapter, and
(2) thereafter the tax against which such tax may be
credited is paid,
the tax so required to be deducted and withheld shall not be
collected from such person; but this [subsection] section shall
in no case relieve such person from liability for interest or
any penalties or additions to the tax otherwise applicable in
respect of such failure to deduct and withhold.
* * * * * * *
CHAPTER 6--CONSOLIDATED RETURNS
* * * * * * *
Subchapter A--Returns and Payment of Tax
* * * * * * *
SEC. 1504. DEFINITIONS.
(a) * * *
(b) Definition of ``Includible Corporation''.--As used in
this chapter, the term ``includible corporation'' means any
corporation except--
(1) * * *
* * * * * * *
(8) An S corporation.
(c) Includible Insurance Companies.--Notwithstanding the
provisions of paragraph (2) of subsection (b)--
(1) * * *
(2)(A) * * *
(B) If an election under this paragraph is in effect
for a taxable year.--
(i) section 243(b)(3) and the
exception provided under section
243(b)(2) with respect to subsections
(b)(2) and (c) of this section,
* * * * * * *
Subchapter B--Related Rules
* * * * * * *
PART II--CERTAIN CONTROLLED CORPORATIONS
* * * * * * *
SEC. 1561. LIMITATIONS ON CERTAIN MULTIPLE TAX BENEFITS IN THE CASE OF
CERTAIN CONTROLLED CORPORATIONS.
(a) General Rule.--The component members of a controlled
group of corporations on a December 31 shall, for their taxable
years which include such December 31, be limited for purposes
of this subtitle to--
(1) amounts in each taxable income bracket in the tax
table in section 11(b)(1) which do not aggregate more
than the maximum amount in such bracket to which a
corporation which is not a component member of a
controlled group is entitled,
(2) one $250,000 ($150,000 if any component member is
a corporation described in section 535(c)(2)(B)) amount
for purposes of computing the accumulated earnings
credit under section 535(c)(2) and (3),
(3) one $40,000 exemption amount for purposes of
computing the amount of the minimum tax, and
(4) one $2,000,000 amount for purposes of computing
the tax imposed by section 59A.
The amounts specified in paragraph (1), the amount specified in
paragraph (3), and the amount specified in paragraph (4) shall
be divided equally among the component members of such group on
such December 31 unless all of such component members consent
(at such time and in such manner as the Secretary shall by
regulations prescribe) to an apportionment plan providing for
an unequal allocation of such amounts. The amounts specified in
paragraph (2) shall be divided equally among the component
members of such group on such December 31 unless the Secretary
prescribes regulations permitting an unequal allocation of such
amounts. Notwithstanding paragraph (1), in applying the [last
sentence] last 2 sentences of section 11(b)(1) to such
component members, the taxable income of all such component
members shall be taken into account and any increase in tax
under such [last sentence] last 2 sentences shall be divided
among such component members in the same manner as amounts
under paragraph (1). In applying section 55(d)(3), the
alternative minimum taxable income of all component members
shall be taken into account and any decrease in the exemption
amount shall be allocated to the component members in the same
manner as under paragraph (3).
* * * * * * *
Subtitle B--Estate and Gift Taxes
* * * * * * *
CHAPTER 11--ESTATE TAX
* * * * * * *
Subchapter B--Estates of Nonresidents Not Citizens
* * * * * * *
SEC. 2102. CREDITS AGAINST TAX.
(a) * * *
* * * * * * *
(c) Unified Credit.--
(1) * * *
* * * * * * *
(3) Special rules.--
(A) Coordination with treaties.--To the
extent required under any treaty obligation of
the United States, the credit allowed under
this subsection shall be equal to the amount
which bears the same ratio to $192,800 as the
value of the part of the decedent's gross
estate which at the time of his death is
situated in the United States bears to the
value of his entire gross estate wherever
situated. For purposes of the preceding
sentence, property shall not be treated as
situated in the United States if such property
is exempt from the tax imposed by this
subchapter under any treaty obligation of the
United States.
* * * * * * *
SEC. 2104. PROPERTY WITHIN THE UNITED STATES.
(a) * * *
* * * * * * *
(c) Debt Obligations.--For purposes of this subchapter, debt
obligations of--
(1) a United States person, or
(2) the United States, a State or any political
subdivision thereof, or the District of Columbia,
owned and held by a nonresident not a citizen of the United
States shall be deemed property within the United States. With
respect to estates of decedents dying after December 31, 1969,
deposits with a domestic branch of a foreign corporation, if
such branch is engaged in the commercial banking business,
shall, for purposes of this subchapter, be deemed property
within the United States. This subsection shall not apply to a
debt obligation to which section 2105(b) applies or to a debt
obligation of a domestic corporation if any interest on such
obligation, were such interest received by the decedent at the
time of his death, would be treated by reason of [subparagraph
(A), (C), or (D) of section 861(a)(1)] section 861(a)(1)(A) as
income from sources without the United States.
* * * * * * *
CHAPTER 14--SPECIAL VALUATION RULES
* * * * * * *
SEC. 2701. SPECIAL VALUATION RULES IN CASE OF TRANSFERS OF CERTAIN
INTERESTS IN CORPORATIONS OR PARTNERSHIPS.
(a) Valuation Rules.--
(1) * * *
* * * * * * *
(3) Valuation of rights to which paragraph applies.--
(A) In general.--The value of any right
described in paragraph (1), other than a
distribution right which consists of a right to
receive a qualified payment, shall be treated
as being zero.
(B) Valuation of certain qualified
payments.--If--
(i) any applicable retained interest
confers a distribution right which
consists of the right to a qualified
payment, and
(ii) there are 1 or more liquidation,
put, call, or conversion rights with
respect to such interest, the value of
all such rights shall be determined as
if each liquidation, put, call, or
conversion right were exercised in the
manner resulting in the lowest value
being determined for all such rights.
(C) Valuation of qualified payments where no
liquidation, etc. rights.--In the case of an
applicable retained interest which is described
in subparagraph (B)(i) but not subparagraph
(B)(ii), the value of the distribution right
shall be determined without regard to this
section.
(4) Minimum valuation of junior equity.--
(A) In general.--In the case of a transfer
described in paragraph (1) of a junior equity
interest in a corporation or partnership, such
interest shall in no event be valued at an
amount less than the value which would be
determined if the total value of all of the
junior equity interests in the entity were
equal to 10 percent of the sum of--
(i) the total value of all of the
equity interests in such entity, plus
(ii) the total amount of indebtedness
of such entity to the transferor (or an
applicable family member).
(B) Definitions.--For purposes of this
paragraph--
(i) Junior equity interest.--The term
``junior equity interest'' means common
stock or, in the case of a partnership,
any partnership interest under which
the rights as to income and capital
(or, to the extent provided in
regulations, the rights as to either
income or capital) are junior to the
rights of all other classes of equity
interests.
(ii) Equity interest.--The term
``equity interest'' means stock or any
interest as a partner, as the case may
be.
(b) Applicable Retained Interests.--For purposes of this
section--
(1) In general.--The term ``applicable retained
interest'' means any interest in an entity with respect
to which there is--
(A) a distribution right, but only if,
immediately before the transfer described in
subsection (a)(1), the transferor and
applicable family members hold (after
application of subsection (e)(3)) control of
the entity, or
(B) a liquidation, put, call, or conversion
right.
(2) Control.--For purposes of paragraph (1)--
(A) Corporations.--In the case of a
corporation, the term ``control'' means the
holding of at least 50 percent (by vote or
value) of the stock of the corporation.
(B) Partnerships.--In the case of a
partnership, the term ``control'' means--
(i) the holding of at least 50
percent of the capital or profits
interests in the partnership, or
(ii) in the case of a limited
partnership, the holding of any
interest as a general partner.
(C) Applicable family member.--For purposes
of this subsection, the term ``applicable
family member'' includes any lineal descendant
of any parent of the transferor or the
transferor's spouse.
(c) Distribution and Other Rights; Qualified Payments.--For
purposes of this section--
(1) Distribution right.--
(A) In general.--The term ``distribution
right'' means--
(i) a right to distributions from a
corporation with respect to its stock,
and
(ii) a right to distributions from a
partnership with respect to a partner's
interest in the partnership.
(B) Exceptions.--The term ``distribution
right'' does not include--
[(i) a right to distributions with
respect to any junior equity interest
(as defined in subsection
(a)(4)(B)(i)),]
(i) a right to distributions with
respect to any interest which is junior
to the rights of the transferred
interest,
(ii) any liquidation, put, call, or
conversion right, or
(iii) any right to receive any
guaranteed payment described in section
707(c) of a fixed amount.
* * * * * * *
(3) Qualified payment.--
(A) In general.--Except as otherwise provided
in this paragraph, the term ``qualified
payment'' means any dividend payable on a
periodic basis under any cumulative preferred
stock (or a comparable payment under any
partnership interest) to the extent that such
dividend (or comparable payment) is determined
at a fixed rate.
(B) Treatment of variable rate payments.--For
purposes of subparagraph (A), a payment shall
be treated as fixed as to rate if such payment
is determined at a rate which bears a fixed
relationship to a specified market interest
rate.
(C) Elections.--
[(i) Waiver of qualified payment
treatment.--A transferor or applicable
family member may elect with respect to
payments under any interest specified
in such election to treat such payments
as payments which are not qualified
payments.]
(i) In general.--Payments under any
interest held by a transferor which
(without regard to this subparagraph)
are qualified payments shall be treated
as qualified payments unless the
transferor elects not to treat such
payments as qualified payments.
Payments described in the preceding
sentence which are held by an
applicable family member shall be
treated as qualified payments only if
such member elects to treat such
payments as qualified payments.
(ii) Election to have interest
treated as qualified payment.--[A
transferor or any applicable family
member may elect to treat any
distribution right as a qualified
payment, to be paid in the amounts and
at the times specified in such
election.] A transferor or applicable
family member holding any distribution
right which (without regard to this
subparagraph) is not a qualified
payment may elect to treat such right
as a qualified payment, to be paid in
the amounts and at the times specified
in such election. The preceding
sentence shall apply only to the extent
that the amounts and times so specified
are not inconsistent with the
underlying legal instrument giving rise
to such right.
(iii) Elections irrevocable.--Any
election under this subparagraph with
respect to an interest shall, once
made, be irrevocable.
(d) Transfer Tax Treatment of Cumulative but Unpaid
Distributions.--
(1) In general.--If a taxable event occurs with
respect to any distribution right to which [subsection
(a)(3)(B)] subsection (a)(3) (B) or (C) applied, the
following shall be increased by the amount determined
under paragraph (2):
* * * * * * *
(3) Taxable events.--For purposes of this
subsection--
(A) In general.--The term ``taxable event''
means any of the following:
(i) The death of the transferor if
the applicable retained interest
conferring the distribution right is
includible in the estate of the
transferor.
(ii) The transfer of such applicable
retained interest.
(iii) At the election of the
taxpayer, the payment of any qualified
payment after the period described in
paragraph (2)(C), but only with respect
to [the period ending on the date of]
such payment.
(B) Exception where spouse is transferee.--
(i) Deathtime transfers.--
Subparagraph (A)(i) shall not apply to
any interest includible in the gross
estate of the transferor if a deduction
with respect to such interest is
allowable under section 2056 or
2106(a)(3).
(ii) Lifetime transfers.--A transfer
to the spouse of the transferor shall
not be treated as a taxable event under
subparagraph (A)(ii) if such transfer
does not result in a taxable gift by
reason of--
(I) any deduction allowed
under section 2523, or the
exclusion under section
2503(b), or
(II) consideration for the
transfer provided by the
spouse.
(iii) Spouse succeeds to treatment of
transferor.--If an event is not treated
as a taxable event by reason of this
subparagraph, the transferee spouse or
surviving spouse (as the case may be)
shall be treated in the same manner as
the transferor in applying this
subsection with respect to the interest
involved.
(4) Special rules for applicable family members.--
(A) Family member treated in same manner as
transferor.--For purposes of this subsection,
an applicable family member shall be treated in
the same manner as the transferor with respect
to any distribution right retained by such
family member to which [subsection (a)(3)(B)]
subsection (a)(3) (B) or (C) applied.
(B) Transfer to applicable family member.--In
the case of a taxable event described in
paragraph (3)(A)(ii) involving the transfer of
an applicable retained interest to an
applicable family member (other than the spouse
of the transferor), the applicable family
member shall be treated in the same manner as
the transferor in applying this subsection to
distributions accumulating with respect to such
interest after such taxable event.
(C) Transfer to transferors.--In the case of
a taxable event described in paragraph
(3)(A)(ii) involving a transfer of an
applicable retained interest from an applicable
family member to a transferor, this subsection
shall continue to apply to the transferor
during any period the transferor holds such
interest.
(5) Transfer to include termination.--For purposes of
this subsection, any termination of an interest shall
be treated as a transfer.
(e) Other Definitions and Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
[(3) Attribution rules.--
[(A) Indirect holdings and transfers.--An
individual]
(3) Attribution of indirect holdings and transfers.--
An individual shall be treated as holding any interest
to the extent such interest is held indirectly by such
individual through a corporation, partnership, trust,
or other entity. If any individual is treated as
holding any interest by reason of the preceding
sentence, any transfer which results in such interest
being treated as no longer held by such individual
shall be treated as a transfer of such interest.
[(B) Control.--For purposes of subsections
(b)(1), an individual shall be treated as
holding any interest held by the individual's
brothers, sisters, or lineal descendants.]
(4) Effect of adoption.--A relationship by legal
adoption shall be treated as a relationship by blood.
(5) Certain changes treated as transfers.--Except as
provided in regulations, a contribution to capital or a
redemption, recapitalization, or other change in the
capital structure of a corporation or partnership shall
be treated as a transfer of an interest in such entity
to which this section applies if the taxpayer or an
applicable family member--
(A) receives an applicable retained interest
in such entity pursuant to [such contribution
to capital or such redemption,
recapitalization, or other change] such
transaction, or
(B) under regulations, otherwise holds,
immediately after [the transfer] such
transaction, an applicable retained interest in
such entity.
This paragraph shall not apply to any transaction (other than a
contribution to capital) if the interests in the entity held by
the transferor, applicable family members, and members of the
transferor's family before and after the transaction are
substantially identical.
(6) Adjustments.--Under regulations prescribed by the
Secretary, if there is any subsequent transfer, or
inclusion in the gross estate, of any applicable
retained interest which was valued under the rules of
subsection (a), appropriate adjustments shall be made
for purposes of chapter 11, 12, or 13 to reflect the
increase in the amount of any prior taxable gift made
by the transferor or decedent by reason of such
valuation or to reflect the application of subsection
(d).
(7) Treatment as separate interests.--The Secretary
may by regulation provide that any applicable retained
interest shall be treated as 2 or more separate
interests for purposes of this section.
* * * * * * *
SEC. 2702. SPECIAL VALUATION RULES IN CASE OF TRANSFERS OF INTERESTS IN
TRUSTS.
(a) Valuation Rules.--
(1) * * *
* * * * * * *
(3) Exceptions.--
(A) In general.--This subsection shall not
apply to any transfer--
(i) [to the extent] if such transfer
is an [incomplete transfer] incomplete
gift, [or]
(ii) if such transfer involves the
transfer of aninterest in trust all the
property in which consists of a
residence to be used as a personal
residence by persons holding term
interests in such trust[.], or
(iii) to the extent that regulations
provide that such transfer is not
inconsistent with the purposes of this
section.
(B) [Incomplete transfer] Incomplete gift.--
For purposes of subparagraph (A), the term
``[incomplete transfer] incomplete gift'' means
any transfer which would not be treated as a
gift whether or not consideration was received
for such transfer.
* * * * * * *
SEC. 2704. TREATMENT OF CERTAIN LAPSING RIGHTS AND RESTRICTIONS.
(a) * * *
* * * * * * *
(c) Definitions and Special Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
(3) Attribution.--The rule of section [2701(e)(3)(A)]
2701(e)(3) shall apply for purposes of determining the
interests held by any individual.
* * * * * * *
Subtitle C--Employment Taxes
* * * * * * *
CHAPTER 21--FEDERAL INSURANCE CONTRIBUTIONS ACT
* * * * * * *
Subchapter C--General Provisions
* * * * * * *
SEC. 3121. DEFINITIONS.
(a) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration for employment, including the cash value
of all remuneration (including benefits) paid in any medium
other than cash; except that such term shall not include--
(1) * * *
* * * * * * *
(5) any payment made to, or on behalf of, an employee
or his beneficiary--
(A) * * *
* * * * * * *
(F) to supplement pension benefits under a
plan or trust described in any of the foregoing
provisions of this paragraph to take into
account some portion or all of the increase in
the cost of living (as determined by the
Secretary of Labor) since retirement but only
if such supplemental payments are under a plan
which is treated as a welfare plan under
section 3(2)(B)(ii) of the Employee Retirement
Income Security Act of 1974, [or]
(G) under a cafeteria plan (within the
meaning of section 125) if such payment would
not be treated as wages without regard to such
plan and it is reasonable to believe that (if
section 125 applied for purposes of this
section) section 125 would not treat any wages
as constructively received; or
(H) under an arrangement to which section
408(p) applies, other than any elective
contributions under paragraph (2)(A)(i)
thereof,
* * * * * * *
(b) Employment.--For purposes of this chapter, the term
``employment'' means any service, of whatever nature, performed
(A) by an employee for the person employing him, irrespective
of the citizenship or residence of either, (i) within the
United States, or (ii) on or in connection with an American
vessel or American aircraft under a contract of service which
is entered into within the United States or during the
performance of which and while the employee is employed on the
vessel or aircraft it touches at a port in the United States,
if the employee is employed on and in connection with such
vessel or aircraft when outside the United States, or (B)
outside the United States by a citizen or resident of the
United States as an employee for an American employer (as
defined in subsection (h)), or (C) if it is service, regardless
of where or by whom performed, which is designated as
employment or recognized as equivalent to employment under an
agreement entered into under section 233 of the Social Security
Act; except that such term shall not include--
(1) * * *
* * * * * * *
(20) service (other than service described in
paragraph (3)(A)) performed by an individual on a boat
engaged in catching fish or other forms of aquatic
animal life under an arrangement with the owner or
operator of such boat pursuant to which--
[(A) such individual does not receive any
cash remuneration (other than as provided in
subparagraph (B)),]
(A) such individual does not receive any cash
remuneration other than as provided in
subparagraph (B) and other than cash
remuneration--
(i) which does not exceed $100 per
trip;
(ii) which is contingent on a minimum
catch; and
(iii) which is paid solely for
additional duties (such as mate,
engineer, or cook) for which additional
cash remuneration is traditional in the
industry,
* * * * * * *
For purposes of paragraph (20), the operating crew of a boat
shall be treated as normally made up of fewer than 10
individuals if the average size of the operating crew on trips
made during the preceding 4 calendar quarters consisted of
fewer than 10 individuals.
* * * * * * *
CHAPTER 23--FEDERAL UNEMPLOYMENT TAX ACT
* * * * * * *
SEC. 3306. DEFINITIONS.
(a) * * *
(b) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration for employment, including the cash value
of all remuneration (including benefits) paid in any medium
other than cash; except that such term shall not include--
(1) * * *
* * * * * * *
(5) any payment made to, or on behalf of, an employee
or his beneficiary--
(A) * * *
* * * * * * *
(F) to supplement pension benefits under a
plan or trust described in any of the foregoing
provisions of this paragraph to take into
account some portion or all of the increase in
the cost of living (as determined by the
Secretary of Labor) since retirement but only
if such supplemental payments are under a plan
which is treated as a welfare plan under
section 3(2)(B)(ii) of the Employee Retirement
Income Security Act of 1974; [or]
(G) under a cafeteria plan (within the
meaning of section 125) if such payment would
not be treated as wages without regard to such
plan and it is reasonable to believe that (if
section 125 applied for purposes of this
section) section 125 would not treat any wages
as constructively received, or
(H) under an arrangement to which section
408(p) applies, other than any elective
contributions under paragraph (2)(A)(i)
thereof,
* * * * * * *
(c) Employment.--For purposes of this chapter, the term
``employment'' means any service performed prior to 1955, which
was employment for purposes of subchapter C of chapter 9 of the
Internal Revenue Code of 1939 under the law applicable to the
period in which such service was performed, and (A) any
service, of whatever nature, performed after 1954 by an
employee for the person employing him, irrespective of the
citizenship or residence of either, (i) within the United
States, or (ii) on or in connection with an American vessel or
American aircraft under a contract of service which is entered
into within the United States or during the performance of
which and while the employee is employed on the vessel or
aircraft it touches at a port in the United States, if the
employee is employed on and in connection with such vessel or
aircraft when outside the United States, and (B) any service,
of whatever nature, performed after 1971 outside the United
States (except in a contiguous country with which the United
States has an agreement relating to unemployment compensation)
by a citizen of the United States as an employee of an American
employer (as defined in subsection (j)(3)), except--
(1) agricultural labor (as defined in subsection (k))
unless--
(A) * * *
(B) such labor is not agricultural labor
performed [before January 1, 1995,] by an
individual who is an alien admitted to the
United States to perform agricultural labor
pursuant to sections 214(c) and 101(a)(15)(H)
of the Immigration and Nationality Act;
* * * * * * *
(k) Agricultural Labor.--For purposes of this chapter, the
term ``agricultural labor'' has the meaning assigned to such
term by subsection (g) of section 3121, except that for
purposes of this chapter subparagraph (B) of paragraph (4) of
such subsection (g) shall be treated as reading:
``(B) in the employ of a group of operators
of farms (or a cooperative organization of
which such operators are members) in the
performance of service described in
subparagraph (A), but only if such if such
operators produced more than one-half of the
commodity with respect to which such service is
performed;''.
* * * * * * *
CHAPTER 24--COLLECTION OF INCOME TAX AT SOURCE ON WAGES
* * * * * * *
SEC. 3401. DEFINITIONS.
(a) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration (other than fees paid to a public
official) for services performed by an employee for his
employer, including the cash value of all remuneration
(including benefits) paid in any medium other than cash; except
that such term shall not include remuneration paid--
(1) for active service performed in a month for which
such employee is entitled to the benefits of section
112 (relating to certain [combat pay] combat zone
compensation of members of the Armed Forces of the
United States) to the extent remuneration for such
service is excludable from gross income under such
section; or
* * * * * * *
(12) to, or on behalf of, an employee or his
beneficiary--
(A) from or to a trust described in section
401(a) which is exempt from tax under section
501(a) at the time of such payment unless such
payment is made to an employee of the trust as
remuneration for services rendered as such
employee and not as a beneficiary of the trust;
or
(B) under or to an annuity plan which, at the
time of such payment, is a plan described in
section 403(a); or
(C) for a payment described in section
402(h)(1) and (2) if, at the time of such
payment, it is reasonable to believe that the
employee will be entitled to an exclusion under
such section for payment; or
(D) under an arrangement to which section
408(p) applies; or
* * * * * * *
SEC. 3405. SPECIAL RULES FOR PENSIONS, ANNUITIES, AND CERTAIN OTHER
DEFERRED INCOME.
(a) * * *
* * * * * * *
(e) Definitions and Special Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
(12) Failure to provide correct tin.--If--
(A) a payee fails to furnish his TIN to the
payor in the manner required by the Secretary,
or
(B) the Secretary notifies the payor before
any payment or distribution that the TIN
furnished by the payee is incorrect, no
election under subsection (a)(2) or [(b)(3)]
(b)(2) shall be treated as in effect and
subsection (a)(4) shall not apply to such
payee.
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 31--RETAIL EXCISE TAXES
* * * * * * *
Subchapter A--Luxury Passenger Automobiles
* * * * * * *
SEC. 4001. IMPOSITION OF TAX.
(a) * * *
* * * * * * *
[(e) Inflation Adjustment.--
[(1) In general.--If, for any calendar year, the
excess (if any) of--
[(A) $30,000, increased by the cost-of-living
adjustment for the calendar year, over
[(B) the dollar amount in effect under
subsection (a) for the calendar year,
is equal to or greater than $2,000, then the $30,000
amount in subsection (a) and section 4003(a) (as
previously adjusted under this subsection) for any
subsequent calendar year shall be increased by the
amount of such excess rounded to the next lowest
multiple of $2,000.
[(2) Cost-of-living adjustment.--For purposes of
paragraph (1), the cost-of-living adjustment for any
calendar year shall be the cost-of-living adjustment
under section 1(f)(3) for such calendar year,
determined by substituting ``calendar year 1990'' for
``calendar year 1992'' in subparagraph (B) thereof.]
(e) Inflation Adjustment.--
(1) In general.--The $30,000 amount in subsection (a)
and section 4003(a) shall be increased by an amount
equal to--
(A) $30,000, multiplied by
(B) the cost-of-living adjustment under
section 1(f)(3) for the calendar year in which
the vehicle is sold, determined by substituting
``calendar year 1990'' for ``calendar year
1992'' in subparagraph (B) thereof.
(2) Rounding.--If any amount as adjusted under
paragraph (1) is not a multiple of $2,000, such amount
shall be rounded to the next lowest multiple of $2,000.
* * * * * * *
CHAPTER 36--FACILITIES AND SERVICES
* * * * * * *
Subchapter A--Harbor Maintenance Tax
* * * * * * *
SEC. 4462. DEFINITIONS AND SPECIAL RULES.
(a) * * *
(b) Special Rule for Alaska, Hawaii, and Possessions.--
(1) In general.--No tax shall be imposed under
section 4461(a) with respect to--
(A) * * *
* * * * * * *
(D) cargo loaded on a vessel in Alaska,
Hawaii, or a possession of the United States
and unloaded in the State or possession in
which loaded, or passengers transported on
United States flag vessels operating solely
within the State waters of Alaska or Hawaii and
adjacent international waters.
* * * * * * *
Subchapter B--Transportation by Water
* * * * * * *
Sec. 4472. Definitions [and special rules].
* * * * * * *
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
* * * * * * *
[Sec. 4978B. Tax on disposition of employer securities to which
section 133 applied.]
* * * * * * *
SEC. 4972. TAX ON NONDEDUCTIBLE CONTRIBUTIONS TO QUALIFIED EMPLOYER
PLANS.
(a) * * *
* * * * * * *
(d) Definitions.--For purposes of this section--
(1) Qualified employer plan.--
(A) In general.--The term ``qualified
employer plan'' means--
(i) any plan meeting the requirements
of section 401(a) which includes a
trust exempt from tax under section
501(a),
(ii) an annuity plan described in
section 403(a), [and]
(iii) any simplified employee pension
(within the meaning of section
408(k))[.], and
(iv) any simple retirement account
(within the meaning of section 408(p)).
* * * * * * *
SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO INDIVIDUAL RETIREMENT
ACCOUNTS, CERTAIN SECTION 403(B) CONTRACTS, AND
CERTAIN INDIVIDUAL RETIREMENT ANNUITIES.
(a) * * *
(b) Excess Contributions.--For purposes of this section, in
the case of individual retirement accounts or individual
retirement annuities, the term ``excess contributions'' means
the sum of--
(1) the excess (if any) of--
(A) the amount contributed for the taxable
year to the accounts or for the annuities
(other than a rollover contribution described
in [sections 402(c)] section 402(c), 403(a)(4),
403(b)(8), or 408(d)(3)), over
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) Initial Taxes on Disqualified Person.--There is hereby
imposed a tax on each prohibited transaction. The rate of tax
shall be equal to [5] 10 percent of the amount involved with
respect to the prohibited transaction for each year (or part
thereof) in the taxable period. The tax imposed by this
subsection shall be paid by any disqualified person who
participates in the prohibited transaction (other than a
fiduciary acting only as such).
* * * * * * *
(d) Exemptions.--The prohibitions provided in subsection (c)
shall not apply to--
(1) * * *
* * * * * * *
(13) any transaction which is exempt from section 406
of such Act by reason of section 408(e) of such Act (or
which would be so exempt if such section 406 applied to
such transaction) or which is exempt from section 406
of such Act by reason of section [408(b)] 408(b)(12) of
such Act;
* * * * * * *
SEC. 4977. TAX ON CERTAIN FRINGE BENEFITS PROVIDED BY AN EMPLOYER.
(a) * * *
* * * * * * *
(c) Effect of Election on Section 132(a).--If--
(1) an election under this section is in effect with
respect to an employer for any calendar year, and
(2) at all times on or after January 1, 1984, and
before the close of the calendar year involved,
substantially all of the employees of the employer were
entitled to employee discounts on goods or services
provided by the employer in 1 line of business,
for purposes of paragraphs (1) and (2) of section 132(a) (but
not for purposes of [section 132(i)(2)] section 132(h)), all
employees of any line of business of the employer which was in
existence on January 1, 1984, shall be treated as employees of
the line of business referred to in paragraph (2).
* * * * * * *
SEC. 4978. TAX ON CERTAIN DISPOSITIONS BY EMPLOYEE STOCK OWNERSHIP
PLANS AND CERTAIN COOPERATIVES.
(a) * * *
(b) Amount of Tax.--
(1) * * *
(2) Limitation.--The amount realized taken into
account under paragraph (1) shall not exceed that
portion allocable to qualified securities acquired in
the sale to which section 1042 applied determined as if
such securities were disposed of--
[(A) first, from section 133 securities (as
defined in section 4978B(e)(2)) acquired during
the 3-year period ending on the date of such
disposition, beginning with the securities
first so acquired.
[(B) second, from section 133 securities (as
so defined) acquired before such 3-year period
unless such securities (or proceeds from the
disposition) have been allocated to accounts of
participants or beneficiaries.''
[(C) third, from qualified securities to
which section 1042 applied acquired during the
3-year period ending on the date of the
disposition, beginning with the securities
first so acquired, and
[(D) then from any other employer securities.
[If subsection (d) or section 4978B(d) applies to a
disposition, the disposition shall be treated as made
from employer securities in the opposite order of the
preceding sentence.]
(A) first from qualified securities to which
section 1042 applied acquired during the 3-year
period ending on the date of the disposition,
beginning with the securities first so
acquired, and
(B) then from any other employer securities.
If subsection (d) applies to a disposition, the
disposition shall be treated as made from employer
securities in the opposite order of the preceding
sentence.
* * * * * * *
[SEC. 4978B. TAX ON DISPOSITION OF EMPLOYER SECURITIES TO WHICH SECTION
133 APPLIED.
[(a) Imposition of Tax.--In the case of an employee
stockownership plan which has acquired section 133 securities,
there is hereby imposed a tax on each taxable event in an
amount equal to the amount determined under subsection (b).
[(b) Amount of Tax.--
[(1) In general.--The amount of the tax imposed by
subsection (a) shall be equal to 10 percent of the
amount realized on the disposition to the extent
allocable to section 133 securities under section
4978(b)(2).
[(2) Dispositions other than sales or exchanges.--For
purposes of paragraph (1), in the case of a disposition
of employer securities which is not a sale or exchange,
the amount realized on such disposition shall be the
fair market value of such securities at the time of
disposition.
[(c) Taxable Event.--For purposes of this section, the term
``taxable event'' means any of the following dispositions:
[(1) Dispositions within 3 years.--Any disposition of
any employer securities by an employee stock ownership
plan within 3 years after such plan acquired section
133 securities if--
[(A) the total number of employer securities
held by such plan after such disposition is
less than the total number of employer
securities held after such acquisition, or
[(B) except to the extent provided in
regulations, the value of employer securities
held by such plan after the disposition is 50
percent or less of the total value of all
employer securities as of the time of the
disposition.
For purposes of subparagraph (B), the aggregation rule
of section 133(b)(6)(D) shall apply.
[(2) Stock disposed of before allocation.--Any
disposition of section 133 securities to which
paragraph (1) does not apply if--
[(A) such disposition occurs before such
securities are allocated to accounts of
participants or their beneficiaries, and
[(B) the proceeds from such disposition are
not so allocated.
[(d) Section Not to Apply to Certain Dispositions.--
[(1) In general.--This section shall not apply to any
disposition described in paragraph (1), (3), or (4) of
section 4978(d).
[(2) Certain reorganizations.--For purposes of this
section, any exchange of section 133 securities for
employer securities of another corporation in any
reorganization described in section 368(a)(1) shall not
be treated as a disposition, but the employer
securities received shall be treated as section 133
securities and as having been held by the plan during
the period the securities which were exchanged were
held.
[(3) Forced disposition occurring by operation of
state law.--Any forced disposition of section 133
securities by an employee stock ownership plan
occurring by operation of a State law shall not be
treated as a disposition. This paragraph shall only
apply to securities which, at the time the securities
were acquired by the plan, were regularly traded on an
established securities market.
[(4) Coordination with other taxes.--This section
shall not apply to any disposition which is subject to
tax under section 4978 or section 4978A (as in effect
on the day before the date of enactment of this
section).
[(e) Definitions and Special Rules.--For purposes of this
section--
[(1) Liability for payment of taxes.--The tax imposed
by this section shall be paid by the employer.
[(2) Section 133 securities.--The term ``section 133
securities'' means employer securities acquired by an
employee stock ownership plan in a transaction to which
section 133 applied.
[(3) Disposition.--The term ``disposition'' includes
any distribution.
[(4) Ordering rules.--For ordering rules for
dispositions of employer securities, see section
4978(b)(2).]
* * * * * * *
SEC. 4980A. TAX ON EXCESS DISTRIBUTIONS FROM QUALIFIED RETIREMENT
PLANS.
(a) * * *
* * * * * * *
(c) Excess Distributions.--For purposes of this section--
(1) * * *
* * * * * * *
[(4) Special rule where taxpayer elects income
averaging.--]
(4) Special one-time election.--If the retirement
distributions with respect to any individual during any
calendar year include a lump sum distribution [to which
an election under section 402(d)(4)(B) applies] (as
defined in section 402(e)(4)(D)) with respect to which
the individual elects to have this paragraph apply--
(A) paragraph (1) shall be applied separately
with respect to such lump sum distribution and
other retirement distributions, and
(B) the limitation under paragraph (1) with
respect to such lump sum distribution shall be
equal to 5 times the amount of such limitation
determined without regard to this subparagraph.
An individual may elect to have this paragraph apply to
only one lump-sum distribution.
* * * * * * *
(g) Limitation on Application.--This section shall not apply
to distributions during years beginning after December 31,
1995, and before January 1, 1999, and such distributions shall
be treated as made first from amounts not described in
subsection (f).
SEC. 4980B. FAILURE TO SATISFY CONTINUATION COVERAGE REQUIREMENTS OF
GROUP HEALTH PLANS.
(a) * * *
* * * * * * *
(f) Continuation Coverage Requirements of Group Health
Plans.--
(1) * * *
(2) Continuation coverage.--For purposes of paragraph
(1), the term ``continuation coverage'' means coverage
under the plan which meets the following requirements:
(A) * * *
(B) Period of coverage.--The coverage must
extend for at least the period beginning on the
date of the qualifying event and ending not
earlier than the earliest of the following:
(i) Maximum required period.--
(I) * * *
* * * * * * *
[(V) Qualifying event
involving medicare
entitlement.--In the case of an
event described in paragraph
(3)(D) (without regard to
whether such event is a
qualifying event), the period
of coverage for qualified
beneficiaries other than the
covered employee for such event
or any subsequent qualifying
event shall not terminate
before the close of the 36-
month period beginning on the
date the covered employee
becomes entitled to benefits
under title XVIII of the Social
Security Act.]
(V) Medicare entitlement
followed by qualifying event.--
In the case of a qualifying
event described in paragraph
(3)(B) that occurs less than 18
months after the date the
covered employee became
entitled to benefits under
title XVIII of the Social
Security Act, the period of
coverage for qualified
beneficiaries other than the
covered employee shall not
terminate under this clause
before the close of the 36-
month period beginning on the
date the covered employee
became so entitled.
* * * * * * *
Subtitle E--Alcohol, Tobacco, and Certain Other Excise Taxes
* * * * * * *
CHAPTER 51--DISTILLED SPIRITS, WINES, AND BEER
* * * * * * *
PART I--GALLONAGE TAXES
* * * * * * *
Subpart C--Wines
* * * * * * *
SEC. 5041. IMPOSITION AND RATE OF TAX.
(a) * * *
* * * * * * *
(c) Credit for Small Domestic Producers.--
(1) * * *
* * * * * * *
[(6) Regulations.--The Secretary may prescribe such
regulations as may be necessary to prevent the credit
provided in this subsection from benefiting any person
who produces more than 250,000 wine gallons of wine
during a calendar year and to assure proper reduction
of such credit for persons producing more than 150,000
wine gallons of wine during a calendar year.]
(6) Credit for transferee in bond.--If--
(A) wine produced by any person would be
eligible for any credit under paragraph (1) if
removed by such person during the calendar
year,
(B) wine produced by such person is removed
during such calendar year by any other person
(hereafter in this paragraph referred to as the
``transferee'') to whom such wine was
transferred in bond and who is liable for the
tax imposed by this section with respect to
such wine, and
(C) such producer holds title to such wine at
the time of its removal and provides to the
transferee such information as is necessary to
properly determine the transferee's credit
under this paragraph,
then, the transferee (and not the producer) shall be
allowed the credit under paragraph (1) which would be
allowed to the producer if the wine removed by the
transferee had been removed by the producer on that
date.
(7) Regulations.--The Secretary may prescribe such
regulations as may be necessary to carry out the
purposes of this subsection, including regulations--
(A) to prevent the credit provided in this
subsection from benefiting any person who
produces more than 250,000 wine gallons during
a calendar year, and
(B) to assure proper reduction of such credit
for persons producing more than 150,000 wine
gallons of wine during a calendar year.
* * * * * * *
Subpart E--General Provisions
* * * * * * *
SEC. 5061. METHOD OF COLLECTING TAX.
(a) * * *
(b) Exceptions.--Notwithstanding the provisions of subsection
(a), any taxes imposed on, or amounts to be paid or collected
in respect of, distilled spirits, wines, and beer under--
(1) * * *
* * * * * * *
[(3) section 5041(e),]
(3) section 5041(f),
* * * * * * *
PART II--OCCUPATIONAL TAX
* * * * * * *
Subpart F--Nonbeverage Domestic Drawback Claimants
* * * * * * *
SEC. 5134. DRAWBACK.
(a) * * *
* * * * * * *
(c) Allowance of Drawback Even Where Certain Requirements Not
Met.--
(1) * * *
* * * * * * *
(3) Penalty treated as tax.--The penalty imposed by
paragraph (2) shall be assessed, collected, and paid in
the same manner as taxes, as provided in section
[6662(a)] 6665(a).
* * * * * * *
Subchapter C--Operation of Distalled Spirits Plants
* * * * * * *
PART I--GENERAL PROVISIONS
* * * * * * *
SEC. 5206. CONTAINERS.
(a) * * *
* * * * * * *
(f) Cross References.--
(1) * * *
(2) For provisions relating to labeling containers of
distilled spirits of one gallon or less for nonindustrial uses,
see section [5(e)] 105(e) of the Federal Alcohol Administration
Act (27 U.S.C. 205(e)).
* * * * * * *
Subchapter F--Bonded and Taxpaid Wine Premises
* * * * * * *
SEC. 5354. BOND.
The bond for a bonded wine cellar shall be in such
form, on such conditions, and with such adequate
surety, as regulations issued by the Secretary shall
prescribe, and shall be in a penal sum not less than
the tax on any wine or distilled spirits possessed or
in transit at any one time (taking into account the
appropriate amount of credit with respect to such wine
under section 5041(c)), but not less than $1,000 nor
more than $50,000; except that where the tax on such
wine and on such distilled spirits exceeds $250,000,
the penal sum of the bond shall be not more than
$100,000. Where additional liability arises as a result
of deferral of payment of tax payable on any return,
the Secretary may require the proprietor to file a
supplemental bond in such amount as may be necessary to
protect the revenue. The liability of any person on any
such bond shall apply whether the transaction or
operation on which the liability of the proprietor is
based occurred on or off the proprietor's premises.
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--Returns and records
* * * * * * *
PART III--INFORMATION RETURNS
* * * * * * *
Subpart A--Information Concerning Persons Subject to Special Provisions
* * * * * * *
SEC. 6033. RETURNS BY EXEMPT ORGANIZATIONS.
(a) * * *
* * * * * * *
(e) Special Rules Relating to Lobbying Activities.--
(1) Reporting requirements.--
(A) * * *
(B) Organizations to which subsection
applies.--
(i) In general.--This subsection
shall apply to any organization which
is exempt from taxation under [this
subtitle] section 501 other than an
organization described in section
501(c)(3).
* * * * * * *
(iii) Coordination with section
527(f).--This subsection shall not
apply to any amount on which tax is
imposed by reason of section 527(f).
* * * * * * *
SEC. 6037. RETURN OF S CORPORATION.
(a) * * *
* * * * * * *
(c) Shareholder's Return Must Be Consistent With Corporate
Return or Secretary Notified of Inconsistency.--
(1) In general.--A shareholder of an S corporation
shall, on such shareholder's return, treat a subchapter
S item in a manner which is consistent with the
treatment of such item on the corporate return.
(2) Notification of inconsistent treatment.--
(A) In general.--In the case of any
subchapter S item, if--
(i)(I) the corporation has filed a
return but the shareholder's treatment
on his return is (or may be)
inconsistent with the treatment of the
item on the corporate return, or
(II) the corporation has not filed a
return, and
(ii) the shareholder files with the
Secretary a statement identifying the
inconsistency,
paragraph (1) shall not apply to such item.
(B) Shareholder receiving incorrect
information.--A shareholder shall be treated as
having complied with clause (ii) of
subparagraph (A) with respect to a subchapter S
item if the shareholder--
(i) demonstrates to the satisfaction
of the Secretary that the treatment of
the subchapter S item on the
shareholder's return is consistent with
the treatment of the item on the
schedule furnished to the shareholder
by the corporation, and
(ii) elects to have this paragraph
apply with respect to that item.
(3) Effect of failure to notify.--In any case--
(A) described in subparagraph (A)(i)(I) of
paragraph (2), and
(B) in which the shareholder does not comply
with subparagraph (A)(ii) of paragraph (2),
any adjustment required to make the treatment of the
items by such shareholder consistent with the treatment
of the items on the corporate return shall be treated
as arising out of mathematical or clerical errors and
assessed according to section 6213(b)(1). Paragraph (2)
of section 6213(b) shall not apply to any assessment
referred to in the preceding sentence.
(4) Subchapter s item.--For purposes of this
subsection, the term ``subchapter S item'' means any
item of an S corporation to the extent that regulations
prescribed by the Secretary provide that, for purposes
of this subtitle, such item is more appropriately
determined at the corporation level than at the
shareholder level.
(5) Addition to tax for failure to comply with
section.--
For addition to tax in the case of a shareholder's negligence
in connection with, or disregard of, the requirements of this
section, see part II of subchapter A of chapter 68.
SEC. 6038. INFORMATION WITH RESPECT TO CERTAIN FOREIGN CORPORATIONS.
(a) Requirement.--
(1) In general.--Every United States person shall
furnish, with respect to any foreign corporation which
such person controls (within the meaning of subsection
(e)(1)), such information as the Secretary may
prescribe by regulations relating to--
(A) * * *
* * * * * * *
(E) a description of the varoius classes of
stock outstanding, and a list showing the name
and address of, and number of shares held by,
each United States person who is a shareholder
of record owning at any time during the annual
accounting period 5 percent or more in value of
any class of stock outstanding of such foreign
corporation[, and].
[(F) such information as the Secretary may
require for purposes of carrying out the
provisions of section 453C.]
* * * * * * *
[(e)] (f) Cross References.--
(1) For provisions relating to penalties for violations of
this section, see section 7203.
(2) For definition of the term ``United States person'', see
section 7701(a)(30).
* * * * * * *
SEC. 6038A. INFORMATION WITH RESPECT TO CERTAIN FOREIGN-OWNED
CORPORATIONS.
(a) * * *
(b) Required Information.--For purposes of subsection (a),
the information described in this subsection is such
information as the Secretary may prescribe by regulations
relating to--
(1) * * *
* * * * * * *
(2) the manner in which the reporting corporation is
related to each person referred to in paragraph (1),
and
(3) transactions between the reporting corporation
and each foreign person which is a related party to the
reporting corporation[, and].
[(4) such information as the Secretary may require
for purposes of carrying out the provisions of section
453C.]
* * * * * * *
(e) Enforcement of Requests for Certain Records.--
(1) * * *
* * * * * * *
(4) Judicial proceedings.--
(A) * * *
* * * * * * *
(D) Suspension of statute of limitations.--If
the reporting corporation brings an action
under subparagraph (A) or (B), the running of
any period of limitations under section 6501
(relating to assessment and collection of tax)
or under section 6531 (relating to criminal
prosecutions) with respect to [any transaction
to which the summons relates] any affected
taxable year shall be suspended for the period
during which such proceeding, and appeals
therein are pending. In no event shall any such
period expire before the 90th day after the day
on which there is a final determination in such
proceeding. For purposes of this subparagraph,
the term ``affected taxable year'' means any
taxable year if the determination of the amount
of tax imposed for such taxable year is
affected by the treatment of the transaction to
which the summons relates.
* * * * * * *
Subpart B--Information Concerning Tranactions With Other Persons
Sec. 6041. Information at source.
* * * * * * *
Sec. 6043. Liquidating[;], etc., transactions.
* * * * * * *
Sec. 6050Q. Returns relating to certain purchases of fish.
* * * * * * *
SEC. 6043. LIQUIDATING[;], ETC., TRANSACTIONS.
(a) * * *
* * * * * * *
SEC. 6045. RETURNS OF BROKERS.
(a) * * *
(e) Return Required in the Case of Real Estate
Transactions.--
(1) * * *
* * * * * * *
(3) Prohibition of separate charge for filing
return.--It shall be unlawful for any real estate
reporting person to separately charge any customer for
complying with any requirement of paragraph (1).
Nothing in this paragraph shall be construed to
prohibit the real estate reporting person from taking
into account its cost of complying with such
requirement in establishing its charge (other than a
separate charge for complying with such requirement) to
any customer for performing services in the case of a
real estate transaction.
* * * * * * *
SEC. 6047. INFORMATION RELATING TO CERTAIN TRUSTS AND ANNUITY PLANS.
(a) * * *
* * * * * * *
(d) Reports by Employers, Plan Administrators, Etc.--
(1) In general.--The Secretary shall by forms or
regulations require that--
(A) the employer maintaining, or the plan
administrator (within the meaning of section
414(g)) of, a plan from which designated
distributions (as defined in section
3405(e)(1)) may be made, and
(B) any person issuing any contract under
which designated distributions (as so defined)
may be made,
make returns and reports regarding such plan (or
contract) to the Secretary, to the participants and
beneficiaries of such plan (or contract), and to such
other persons as the Secretary may by regulations
prescribe. No return or report may be required under
the preceding sentence with respect to distributions to
any person during any year unless such distributions
aggregate $10 or more.
* * * * * * *
(e) Employee Stock Ownership Plans.--The Secretary shall
require--
[(1) any employer maintaining, or the plan
administrator (within the meaning of section 414(g))
of, an employee stock ownership plan--
[(A) which acquired stock in a transaction to
which section 133 applies, or
[(B) which holds stock with respect to which
section 404(k) applies to dividends paid on
such stock,
[(2) any person making or holding a loan to which
section 133 applies, or
[(3) both such employer or plan administrator and
such person,]
(1) any employer maintaining, or the plan
administrator (within the meaning of section 414(g))
of, an employee stock ownership plan which holds stock
with respect to which section 404(k) applies to
dividends paid on such stock, or
(2) both such employer or plan administrator,
to make returns and reports regarding such plan, transaction,
or loan to the Secretary and to such other persons as the
Secretary may prescribe. Such returns and reports shall be made
in such form, shall be made at such time, and shall contain
such information as the Secretary may prescribe.
(f) Cross References.--
[(1) For provisions relating to penalties for failure to file
a return required by this section, see section 6652(e).]
(1) For provisions relating to penalties for failures to file
returns and reports required under this section, see sections
6652(e), 6721, and 6722.
(2) For criminal penalty for furnishing fraudulent
information, see section 7207.
(3) For provisions relating to penalty for failure to comply
with the provisions of subsection (d), see section 6704.
* * * * * * *
SEC. 6050A. REPORTING REQUIREMENTS OF CERTAIN FISHING BOAT OPERATORS.
(a) Reports.--The operator of a boat on which one or more
individuals, during a calendar year, perform services described
in section 3121(b)(20) shall submit to the Secretary (at such
time, and in such manner and form, as the Secretary shall by
regulations prescribe) information respecting--
(1) * * *
* * * * * * *
(3) if such individual receives his share in kind,
the type and weight of such share, together with such
other information as the Secretary may prescribe by
regulations reasonably necessary to determine the value
of such share; [and]
(4) if such individual receives a share of the
proceeds of such catches, the amount so received[.];
and
(5) any cash remuneration described in section
3121(b)(20)(A).
* * * * * * *
SEC. 6050B. RETURNS RELATING TO UNEMPLOYMENT COMPENSATION.
(a) * * *
* * * * * * *
(c) Definitions.--For purposes of this section--
(1) Unemployment compensation.--The term
``unemployment compensation'' has the meaning given to
such term by section [85(c)] 85(b).
(2) Person.---The term ``person'' means the officer
or employee having control of the payment of the
unemployment compensation, or the person appropriately
designated for purposes of this section.
* * * * * * *
SEC. 6050Q. RETURNS RELATING TO CERTAIN PURCHASES OF FISH.
(a) Requirement of Reporting.--Every person--
(1) who is engaged in the trade or business of
purchasing fish for resale from any person engaged in
the trade or business of catching fish; and
(2) who makes payments in cash in the course of such
trade or business to such a person of $600 or more
during any calendar year for the purchase of fish,
shall make a return (at such times as the Secretary may
prescribe) described in subsection (b) with respect to each
person to whom such a payment was made during such calendar
year.
(b) Return.--A return is described in this subsection if such
return--
(1) is in such form as the Secretary may prescribe,
and
(2) contains--
(A) the name, address, and TIN of each person
to whom a payment described in subsection
(a)(2) was made during the calendar year;
(B) the aggregate amount of such payments
made to such person during such calendar year
and the date and amount of each such payment,
and
(C) such other information as the Secretary
may require.
(c) Statement To Be Furnished With Respect to Whom
Information is Required.--Every person required to make a
return under subsection (a) shall furnish to each person whose
name is required to be set forth in such return a written
statement showing--
(1) the name and address of the person required to
make such a return, and
(2) the aggregate amount of payments to the person
required to be shown on the return.
The written statement required under the preceding sentence
shall be furnished to the person on or before January 31 of the
year following the calendar year for which the return under
subsection (a) is required to be made.
(d) Definitions.--For purposes of this section:
(1) Cash.--The term ``cash'' has the meaning given
such term by section 6050I(d).
(2) Fish.--The term ``fish'' includes other forms of
aquatic life.
* * * * * * *
Subchapter B--Miscellaneous Provisions
* * * * * * *
SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN
INFORMATION.
(a) * * *
* * * * * * *
(e) Disclosure to Persons Having Material Interest.--
(1) In general.--The return of a person shall, upon
written request, be open to inspection by or disclosure
to--
(A) in the case of the return of an
individual--
(i) * * *
* * * * * * *
(iv) the child of that individual (or
such child's legal representative) to
the extent necessary to comply with the
provisions of [section 1(i) or 59(j);]
section 1(g) or 59(j);
* * * * * * *
SEC. 6109. IDENTIFYING NUMBERS.
(a) * * *
* * * * * * *
[(f)] (g) Access to Employer Identification Numbers by
Federal Crop Insurance Corporation for Purposes of the Federal
Crop Insurance Act.--
(1) * * *
* * * * * * *
CHAPTER 62--TIME AND PLACE FOR PAYING TAX
* * * * * * *
Subchapter B--Extensions of Time for Payment
* * * * * * *
SEC. 6166. EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX WHERE ESTATE
CONSISTS LARGELY OF INTEREST IN CLOSELY HELD
BUSINESS.
(a) * * *
* * * * * * *
(k) Cross References.--
(1) * * *
* * * * * * *
[(6) Payment of estate tax by employee stock ownership plan or
eligible worker-owned cooperative.--For provision allowing plan
administrator or eligible worker-owned cooperative to elect to
pay a certain portion of the estate tax in installments under
the provisions of this section, see section 2210(c).]
* * * * * * *
CHAPTER 63--ASSESSMENT
Subchapter A. In general.
* * * * * * *
[Subchapter D. Tax Treatment of subchapter S items.]
* * * * * * *
Subchapter B--Deficiency Procedures in the Case of Income, Estate,
Gift, and Certain Excise Taxes
* * * * * * *
SEC. 6214. DETERMINATIONS BY TAX COURT.
(a) * * *
* * * * * * *
[(e) Cross References.--
[(1) For provision giving Tax Court jurisdiction to determine
whether any portion of deficiency is a substantial underpayment
attributable to tax motivated transactions, see section
6621(c)(4).
[(2) For provision giving Tax Court jurisdiction to order a
refund of an overpayment and to award sanctions, see section
6512(b)(2).]
(e) Cross Reference.--
For provision giving Tax Court jurisdiction to order a refund
of an overpayment and to award sanctions, see section
6512(b)(2).
* * * * * * *
Subchapter C--Tax Treatment of Partnership Items
* * * * * * *
SEC. 6233. EXTENSION TO ENTITIES FILING PARTNERSHIP RETURNS, ETC.
(a) * * *
[(b) Similar Rules in Certain Cases.--If for any taxable
year----
[(1) an entity files a return as an S corporation but
it is determined that the entity was not an S
corporation for such year, or
[(2) a partnership return or S corporation return is
filed but it is determined that there is no entity for
such taxable year,
then, to the extent provided in regulations, rules similar to
the rules of subsection (a) shall apply.]
(b) Similar Rules in Certain Cases.--If a partnership return
is filed for any taxable year but it is determined that there
is no entity for such taxable year, to the extent provided in
regulations, rules similar to the rules of subsection (a) shall
apply.
* * * * * * *
[Subchapter D--Tax Treatment of Subchapter S Items
[Sec. 6241. Tax treatment determined at corporate level.
[Sec. 6242. Shareholder's return must be consistent with
corporate return or Secretary notified of
inconsistency.
[Sec. 6243. All shareholders to be notified of proceedings and
given opportunity to participate.
[Sec. 6244. Certain partnership provisions made applicable.
[Sec. 6245. Subchapter S item defined.
[SEC. 6241. TAX TREATMENT DETERMINED AT CORPORATE LEVEL.
[Except as otherwise provided in regulations prescribed by
the Secretary, the tax treatment of any subchapter S item shall
be determined at the corporate level.
[SEC. 6242. SHAREHOLDER'S RETURN MUST BE CONSISTENT WITH CORPORATE
RETURN OR SECRETARY NOTIFIED OF INCONSISTENCY.
[A shareholder of an S corporation shall, on such
shareholder's return, treat a subchapter S item in a manner
which is consistent with the treatment of such item on the
corporate return unless the shareholder notifies the Secretary
(at the time and in the manner prescribed by regulations) of
the inconsistency.
[SEC. 6243. ALL SHAREHOLDERS TO BE NOTIFIED OF PROCEEDINGS AND GIVEN
OPPORTUNITY TO PARTICIPATE.
[In the manner and at the time prescribed in regulations,
each shareholder in a corporation shall be given notice of, and
the right to participate in, any administrative or judicial
proceeding for the determination at the corporate level of any
subchapter S item.
[SEC. 6244. CERTAIN PARTNERSHIP PROVISIONS MADE APPLICABLE.
[The provisions of--
[(1) subchapter C which relate to--
[(A) assessing deficiencies, and filing
claims for credit or refund, with respect to
partnership items, and
[(B) judicial determination of partnership
items, and
[(2) so much of the other provisions of this subtitle
as relate to partnership items,
are (except to the extent modified or made inapplicable in
regulations) hereby extended to and made applicable to
subchapter S items.
[SEC. 6245. SUBCHAPTER S ITEM DEFINED.
[For purposes of this subchapter, the term ``subchapter S
item'' means any item of an S corporation to the extent
regulations prescribed by the Secretary provide that, for
purposes of this subtitle, such item is more appropriately
determined at the corporate level than at the shareholder
level.]
* * * * * * *
CHAPTER 64--COLLECTION
* * * * * * *
Subchapter A--General Provisions
* * * * * * *
SEC. 6302. MODE OR TIME OF COLLECTION.
(a) * * *
* * * * * * *
(g) Deposits of Social Security Taxes and Withheld Income
Taxes.--If, under regulations prescribed by the Secretary, a
person is required to make deposits of taxes imposed by
chapters 21, 22, and 24 on the basis of eight-month periods,
such person shall make deposits of such taxes on the 1st
banking day after any day on which such person has $100,000 or
more of such taxes for deposit.
* * * * * * *
CHAPTER 65--ABATEMENTS, CREDITS, AND REFUNDS
* * * * * * *
Subchapter B--Rules of Special Application
* * * * * * *
SEC. 6416. CERTAIN TAXES ON SALES AND SERVICES.
(a) * * *
(b) Special Cases in Which Tax Payments Considered
Overpayments.--Under regulations prescribed by the Secretary,
credit or refund (without interest) shall be allowed or made in
respect of the overpayments determined under the following
paragraphs:
(1) Price readjustments.--
(A) In general.--Except as provided in
subparagraph (B) or (C), if the price of any
article in respect of which a tax, based on
such price, is imposed by [chapter 32 or by
section 4051] chapter 31 or 32, is readjusted
by reason of the return or repossession of the
article or a covering or container, or by a
bona fide discount, rebate, or allowance,
including a readjustment for local advertising
(but only to the extent provided in section
4216(e)(2) and (3)), the part of the tax
proportionate to the part of the price repaid
or credited to the purchaser shall be deemed to
be an overpayment.
* * * * * * *
SEC. 6427. FUELS NOT USED FOR TAXABLE PURPOSES.
(a) * * *
* * * * * * *
[(g) Advance Repayment of Increased Diesel Fuel Tax to
Original Purchasers of Diesel.--Upowered Automobiles and Light
Trucks.--
[(1) In general.--Except as provided in subsection
(k), the Secretary shall pay (without interest) to the
original purchaser of any qualified diesel-powered
highway vehicle an amount equal to the diesel fuel
differential amount.
[(2) Qualified diesel-powered highway vehicle.--For
purposes of this subsection, the term ``qualified
diesel-powered highway vehicle'' means any diesel-
powered highway vehicle which--
[(A) has at least 4 wheels,
[(B) has a gross vehicle weight rating of
10,000 pounds or less, and
[(C) is registered for highway use in the
United States under the laws of any State.
[(3) Diesel fuel differential amount.--For purposes
of this subsection, the term ``diesel fuel differential
amount'' means--
[(A) except as provided in subparagraph (B),
$102, or
[(B) in the case of a truck or van, $198.
[(4) Original purchaser.--For purposes of this
subsection--
[(A) In general.-- Except as provided in
subparagraph (B), the term ``original
purchaser'' means the first person to purchase
the qualified diesel-powered vehicle for use
other than resale.
[(B) Exception for certain persons not
subject to fuels tax.--The term ``original
purchaser'' shall not include any State or
local government (as defined in section
4221(d)(4)) or any nonprofit educational
organization (as defined in section
4221(d)(5)).
[(C) Treatment of demonstration use by
dealer.--For purposes of subparagraph (A), use
as a demonstrator by a dealer shall not be
taken into account.
[(5) Vehicles to which subsection applies.--Except as
provided in paragraph (6), this subsection shall only
apply to qualified diesel-powered highway vehicles
originally purchased after January 1, 1985, and before
January 1, 1999.
[(6) Special rule for certain vehicles held on
january 1, 1985.--
[(A) In general.--In the case of any person
holding a qualified diesel-powered highway
vehicle on January 1, 1985--
[(i) such person shall be treated as
if he originally purchased such vehicle
on December 31, 1984, but
[(ii) the amount payable under
paragraph (1) to such person for such
vehicle shall be the applicable
fraction of the diesel fuel
differential amount.
[(B) Applicable fraction.--For purposes of
subparagraph (A), the applicable fraction is
the fraction determined in accordance with the
following table:
The applicable
[If the model year of the vehicle is: fraction is:
1984 or 1985........................................ 1
1983................................................ \5/6\
1982................................................ \4/6\
1981................................................ \3/6\
1980................................................ \2/6\
1979................................................ \1/6\
In the case of a 1978 or earlier model year vehicle,
the applicable fraction shall be zero.
[(7) Basis reduction.--For the purposes of subtitle
A, the basis of any qualified diesel-powered highway
vehicle shall be reduced by the amount payable under
this subsection with respect to such vehicle.]
* * * * * * *
(i) Time for Filing Claims; Period Covered.--
(1) General rule.--Except as otherwise provided in
this subsection, not more than one claim may be filed
under subsection (a), (b), (c), (d), [(g),] (h), (l) or
(q) by any person with respect to fuel used [(or a
qualified diesel powered highway vehicle purchased)]
during his taxable year; and no claim shall be allowed
under this paragraph with respect to fuel used [(or a
qualified diesel powered highway vehicle purchased)]
during any taxable year unless filed by the purchaser
not later than the time prescribed by law for filing a
claim for credit or refund of overpayment of income tax
for such taxable year. For purposes of this paragraph,
a person's taxable year shall be his taxable year for
purposes of subtitle A.
(2) Exceptions.--
(A) In general.--If $1,000 or more is payable
under subsections (a), (b), (d), [(g),] (h),
and (q) to any person with respect to fuel used
[(or a qualified diesel powered highway vehicle
purchased)] during any of the first 3 quarters
of his taxable year, a claim may be filed under
this section by the purchaser with respect to
fuel used [(or a qualified diesel powered
highway vehicle purchased)], during such
quarter.
* * * * * * *
CHAPTER 66--LIMITATIONS
* * * * * * *
Subchapter A--Procedure in General
* * * * * * *
SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.
(a) * * *
* * * * * * *
[(m) Deficiency Attributable to Election Under Section 44B.--
The period for assessing a deficiency attributable to any
election under section 44B (or any revocation thereof) shall
not expire before the date 1 year after the date on which the
Secretary is notified of such election (or revocation).]
[(n)] (m) Deficiencies Attributable to Election of Certain
Credits.--The period for assessing a deficiency attributable to
any election under [section 40(f) or 51(j)] section 30(d)(4),
40(f), 43, 45B, or 51(j) (or any revocation thereof) shall not
expire before the date 1 year after the date on which the
Secretary is notified of such election (or revocation).
[(o)] (n) Cross References.--
(1) For period of limitations for assessment and collection in
the case of a joint income return filed after separate returns
have been filed, see section 6013(b)(3) and (4).
(2) For extension of period in the case of partnership items
(as defined in section 6231(a)(3)), see section 6229.
* * * * * * *
SEC. 6503. SUSPENSION OF RUNNING OF PERIOD OF LIMITATION.
(a) * * *
* * * * * * *
[(k)] (j) Extension in Case of Certain Summonses.--
(1) In general.--If any designated summons is issued
by the Secretary with respect to any return of tax by a
corporation, the running of any period of limitations
provided in section 6501 on the assessment of such tax
shall be suspended--
(A) * * *
* * * * * * *
[(l)] (k) Cross References.--
For suspension in case of--
* * * * * * *
CHAPTER 67--INTEREST
* * * * * * *
Subchapter C--Determination of Interest Rate; Compounding of Interest
* * * * * * *
SEC. 6621. DETERMINATION OF RATE OF INTEREST.
(a) * * *
* * * * * * *
(c) Increase in Underpayment Rate for Large Corporate
Underpayments.--
(1) * * *
(2) Applicable rate.--For purposes of this
subsection--
(A) In general.--The applicable date is the
30th day after the earlier of--
(i) the date on which the 1st letter
of proposed deficiency which allows the
taxpayer an opportunity for
administrative review in the Internal
Revenue Service Office of Appeals is
sent, or
(ii) the date on which the deficiency
notice under section 6212 is sent.
The preceding sentence shall be applied without
regard to any such letter or notice which is
withdrawn by the Secretary.
(B) Special rules.--
(i) Nondeficiency procedures.--In the
case of any underpayment of any tax
imposed by this [subtitle] title to
which the deficiency procedures do not
apply, subparagraph (A) shall be
applied by taking into account any
letter or notice provided by the
Secretary which notifies the taxpayer
of the assessment or proposed
assessment of the tax.
* * * * * * *
CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, ANS ASSESSABLE
PENALTIES
* * * * * * *
Subchapter A--Additions to the Tax and Additional Amounts
* * * * * * *
PART I--GENERAL PROVISIONS
Sec. 6651. Failure to file tax return or to pay tax.
* * * * * * *
[Sec. 6662. Applicable rules.]
* * * * * * *
SEC. 6652. FAILURE TO FILE CERTAIN INFORMATION RETURNS, REGISTRATION
STATEMENTS, ETC.
(a) * * *
(e) Information Required in Connection With Certain Plans of
Deferred Compensation, Etc.--In the case of failure to file a
return or statement required under section 6058 (relating to
information required in connection with certain plans of
deferred compensation), 6047 (relating to information relating
to certain trusts and annuity and bond purchase plans), or
6039D (relating to returns and records with respect to certain
fringe benefit plans) on the date and in the manner prescribed
therefor (determined with regard to any extension of time for
filing), unless it is shown that such failure is due to
reasonable cause, there shall be paid (on notice and demand by
the Secretary and in the same manner as tax) by the person
failing so to file, $25 for each day during which such failure
continues, but the total amount imposed under this subsection
on any person for failure to file any return shall not exceed
$15,000. This subsection shall not apply to any return or
statement which is an information return described in section
6724(d)(1)(C)(ii) or a payee statement described in section
6724(d)(2)(W).
* * * * * * *
(i) Failure To Give Written Explanation to Recipients of
Certain Qualifying Rollover Distributions.--In the case of each
failure to provide a written explanation as required by section
402(f), at the time prescribed therefor, unless it is shown
that such failure is due to reasonable cause and not to willful
neglect, there shall be paid, on notice and demand of the
Secretary and in the same manner as tax, by the person failing
to provide such written explanation, an amount equal to [the
$10] $100 for each such failure, but the total amount imposed
on such person for all such failures during any calendar year
shall not exceed [$5,000] $50,000.
* * * * * * *
SEC. 6655. FAILURE BY CORPORATION TO PAY ESTIMATED INCOME TAX.
(a) * * *
* * * * * * *
(g) Definitions and Special Rules.--
(1) * * *
* * * * * * *
(3) Certain tax-exempt organizations.--For purposes
of this section--
(A) * * *
* * * * * * *
(C) Any reference to taxable income shall be
treated as including a reference to unrelated
business taxable income or net investment
income (as the case may be).
In the case of any organization described in
subparagraph (A), subsection (b)(2)(A) shall be applied
by substituting ``5th month'' for ``3rd month''[, and,
except in the case of an election under subsection
(e)(2)(C), subsection (e)(2)(A) shall be applied by
substituting ``2 months'' for ``3 months'' and in
clause (i)(I), by substituting ``4 months'' for ``5
months'' in clause (i)(II), by substituting ``7
months'' for ``8 months'' in clause (i)(III), and by
substituting ``10 months'' for ``11 months'' in clause
(i)(IV).], subsection (e)(2)(A) shall be applied by
substituting ``2 months'' for ``3 months'' in clause
(i)(I), the election under clause (i) of subsection
(e)(2)(C) may be made separately for each installment,
and clause (ii) of subsection (e)(2)(C) shall not
apply.
* * * * * * *
Subchapter B--Assessable Penalties
* * * * * * *
PART I--GENERAL PROVISIONS
Sec. 6671. Rules for application of assessable penalties.
* * * * * * *
Sec. [6714.] 6715. Dyed fuel sold for use in or used in taxable
use, etc.
* * * * * * *
SEC. 6693. FAILURE TO PROVIDE REPORTS ON INDIVIDUAL RETIREMENT ACCOUNTS
OR ANNUITIES; PENALTIES RELATING TO DESIGNATED
NONDEDUCTIBLE CONTRIBUTIONS.
(a) The person required by subsection (i) or (l) of section
408 to file a report regarding an individual retirement account
or individual retirement annuity at the time and in the manner
required by such subsection shall pay a penalty of $50 for each
failure unless it is shown that such failure is due to
reasonable cause. This subsection shall not apply to any report
which is an information return described in section
6724(d)(1)(C)(i) or a payee statement described in section
6724(d)(2)(V).
* * * * * * *
(c) Penalties Relating to Simple Retirement Accounts.--
(1) Employer penalties.--An employer who fails to
provide 1 or more notices required by section
408(l)(2)(C) shall pay a penalty of $50 for each day on
which such failures continue.
(2) Trustee penalties.--A trustee who fails--
(A) to provide 1 or more statements required
by the last sentence of section 408(i) shall
pay a penalty of $50 for each day on which such
failures continue, or
(B) to provide 1 or more summary descriptions
required by section 408(l)(2)(B) shall pay a
penalty of $50 for each day on which such
failures continue.
(3) Reasonable cause exception.--No penalty shall be
imposed under this subsection with respect to any
failure which the taxpayer shows was due to reasonable
cause.
[(c)] (d) Deficiency Procedures Not to Apply.--Subchapter B
of chapter 63 (relating to deficiency procedures for income,
estate, gift, and certain excise taxes) does not apply to the
assessment or collection of any penalty imposed by this
section.
SEC. 6714. FAILURE TO MEET DISCLOSURE REQUIREMENTS APPLICABLE TO QUID
PRO QUO CONTRIBUTIONS.
(a) Imposition of penalty.--If an organization fails to meet
the disclosure requirement of section 6115 with respect to a
quid pro quo contribution, such organization shall pay a
penalty of $10 for each contribution in respect of which the
organization fails to make the required disclosure, except that
the total penalty imposed by this subsection with respect to a
particular fundraising event or mailing shall not exceed
$5,000.
(b) Reasonable Cause Exception.--No penalty shall be
imposed under this section with respect to any failure
if it is shown that such failure is due to reasonable
cause.
SEC. [6714.] 6715. DYED FUEL SOLD FOR USE OR USED IN TAXABLE USE, ETC.
(a) Imposition of Penalty.--If--
(1) any dyed fuel is sold or held for sale by any
person for any use which such person knows or has
reason to know is not a nontaxable use of such fuel,
(2) * * *
* * * * * * *
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) Information return.--The term ``information
return'' means--
(A) any statement of the amount of payments
to another person required by--
(i) * * *
* * * * * * *
(vi) section 6050N(a) (relating to
payments of royalties), [or]
(vii) section 6051(d) (relating to
information returns with respect to
income tax withheld), [and] or
(viii) section 6050Q (relating to
returns relating to certain purchases
of fish), and
(B) any return required by--
(i) * * *
* * * * * * *
(xii) subparagraph (A) or (C) of
subsection (c)(4), or section 4093
(relating to information reporting with
respect to tax on diesel and aviation
fuels), [or]
(xiii) section 4101(d) (relating to
information reporting with respect to
fuels taxes)[.], or
(xiv) subparagraph (C) of section
338(h)(10)(relating to information
required to be furnished to the
Secretary in case of elective
recognition of gain or loss)[.], and
(C) any statement of the amount of payments
to another person required to be made to the
Secretary under--
(i) section 408(i) (relating to
reports with respect to individual
retirement accounts or annuities), or
(ii) section 6047(d) (relating to
reports by employers, plan
administrators, etc.).
Such term also includes any form, statement, or
schedule required to be filed with the Secretary with
respect to 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).
(2) Payee statement.--The term ``payee statement''
means any statement required to be furnished under--
(A) section 6031 (b) or (c), 6034A, or
6037(b) (relating to statements furnished by
certain pass-thru entities),
* * * * * * *
(Q) section 6050Q(c) (relating to returns
relating to certain purchases of fish),
[(Q)] (R) section 6051 (relating to receipts
for employees),
[(R)] (S) section 6052(b) (relating to
returns regarding payment of wages in the form
of group-term life insurance),
[(S)] (T) section 6053 (b) or (c) (relating
to reports of tips), [or]
[(T)] (U) section 4093(c)(4)(B) (relating to
certain purchasers of diesel and aviation
fuels)[.],
(V) section 408(i) (relating to reports with
respect to individual retirement plans) to any
person other than the Secretary with respect to
the amount of payments made to such person, or
(W) section 6047(d) (relating to reports by
plan administrators) to any person other than
the Secretary with respect to the amount of
payments made to such person.
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).
(3) Specified information reporting requirement.--The
term ``specified information reporting requirement''
means--
(A) * * *
* * * * * * *
(E) any requirement under section [6109(f)]
6109(h) that--
(i) a person include on his return
the name, address, and TIN of another
person, or
(ii) a person furnish his TIN to
another person.
* * * * * * *
SEC. 7012. CROSS REFERENCES.
(1) * * *
* * * * * * *
(3) For provisions relating to registration in relation to the
[production or importation of gasoline] taxes on gasoline and
diesel fuel, see section 4101.
[(4) For provisions relating to registration in relation to
the manufacture or production of lubricating oils, see section
4101.]
[(5)] (4) For penalty for failure to register, see section
7272.
[(6)] (5) For other penalties for failure to register with
respect to wagering, see section 7262.
* * * * * * *
CHAPTER 75--CRIMES, OTHER OFFENSES, AND FIREARMS
* * * * * * *
Subchapter A--Crimes
* * * * * * *
PART II--PENALTIES APPLICABLE TO CERTAIN TAXES
Sec. 7231. Failure to obtain license for collection of foreign
items.
Sec. 7232. Failure to register, or false statement by
manufacturer or producer of gasoline, [lubricating
oil,] diesel fuel, or aviation fuel.
* * * * * * *
SEC. 7232. FAILURE TO REGISTER, OR FALSE STATEMENT BY MANUFACTURER OR
PRODUCER OF GASOLINE, [LUBRICATING OIL,] DIESEL
FUEL, OR AVIATION FUEL.
Every person who fails to register as required by section
4101, or who in connection with any purchase of gasoline,
[lubricating oil,] diesel fuel, or aviation fuel falsely
represents himself to be registered as provided by section
4101, or who willfully makes any false statement in an
application for registration under section 4101, shall, upon
conviction thereof, be fined not more than $5,000, or
imprisoned not more than 5 years, or both, together with the
costs of prosecution.
* * * * * * *
CHAPTER 76--JUDICIAL PROCEEDINGS
* * * * * * *
Subchapter C--The Tax Court
* * * * * * *
PART II--PROCEDURE
* * * * * * *
SEC. 7454. BURDEN OF PROOF IN FRAUD, FOUNDATION MANAGER, AND TRANSFEREE
CASES.
(a) * * *
(b) Foundation Managers.--In any proceeding involving the
issue whether a foundation manager (as defined in section
4946(b)) has ``knowingly'' participated in an act of self-
dealing (within the meaning of section 4941), participated in
an investment which jeopardizes the carrying out of exempt
purposes (within the meaning of section 4944), or agreed to the
making of a taxable expenditure (within the meaning of section
4945), or whether the trustee of a trust described in section
501(c)(21) has ``knowingly'' participated in an act of self-
dealing (within the meaning of section 4951) or agreed to the
making of a taxable expenditure (within the meaning of section
4952), or whether an organization manager (as defined in
[section 4955(e)(2)] section 4955(f)(2)) has ``knowingly''
agreed to the making of a political expenditure (within the
meaning of section 4955),, or whether an organization manager
(as defined in section 4912(d)(2)) has ``knowingly'' agreed to
the making of disqualifying lobbying expenditures within the
meaning of section 4912(b), the burden of proof in respect of
such issue shall be upon the Secretary.
* * * * * * *
CHAPTER 78--DISCOVERY OF LIABILITY AND ENFORCEMENT OF TITLE
* * * * * * *
Subchapter A--Examination and Inspection
* * * * * * *
SEC. 7611. RESTRICTIONS ON CHURCH TAX INQUIRIES AND EXAMINATIONS.
(a) * * *
* * * * * * *
(h) Definitions.--For purposes of this section--
(1) * * *
* * * * * * *
(7) Appropriate high-level treasury official.--The
term ``[approporiate] appropriate high-level Treasury
official'' means the Secretary of the Treasury or any
delegate of the Secretary whose rank is no lower than
that of a principal Internal Revenue officer for an
internal revenue region.
* * * * * * *
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) * * *
* * * * * * *
(20) Employee.--For the purpose of applying the
provisions of section 79 with respect to group-term
life insurance purchased for employees, for the purpose
of applying the provisions of sections 104, 105, and
106 with respect to accident and health insurance or
accident and health plans[, for the purpose of applying
the provisions of section 101(b) with respect to
employees' death benefits], and for the purpose of
applying the provisions of subtitle A with respect to
contributions to or under a stock bonus, pension,
profit-sharing, or annuity plan, and with respect to
distributions under such a plan, or by a trust forming
part of such a plan, and for purposes of applying
section 125 with respect to cafeteria plans, the term
``employee'' shall include a full-time life insurance
salesman who is considered an employee for the purpose
of chapter 21, or in the case of services performed
before January 1, 1951, who would be considered an
employee if his services were performed during 1951.
* * * * * * *
CHAPTER 80--GENERAL RULES
* * * * * * *
Subchapter C--Provisions Affecting More Than One Subtitle
* * * * * * *
SEC. 7872. TREATMENT OF LOANS WITH BELOW-MARKET INTEREST RATES.
(a) Treatment of gift loans and demand loans.--
(1) In general.--For purposes of this title, in the
case of any below-market loan to which this section
applies and which is a gift loan or a demand loan, the
[foregone] forgone interest shall be treated as--
(A) transferred from the lender to the
borrower, and
(B) retransferred by the borrower to the
lender as interest.
(2) Time when transfers made.--Except as otherwise
provided in regulations prescribed by the Secretary,
any [foregone] forgone interest attributable to periods
during any calendar year shall be treated as
transferred (and retransferred) under paragraph (1) on
the last day of such calendar year.
* * * * * * *
(e) Definitions of Below-Market Loan and [Foregone] Forgone
Interest.--For purposes of this section--
(1) * * *
(2) [Foregone] Forgone interest.--The term
``[foregone] forgone interest'' means, with respect to
any period during which the loan is outstanding, the
excess of--
(A) the amount of interest which would have
been payable on the loan for the period if
interest accrued on the loan at the applicable
Federal rate and were payable annually on the
day referred to in subsection (a)(2), over
(B) any interest payable on the loan properly
allocable to such period.
(f) Other Definitions and Special Rules.--For purposes of
this section--
(1) * * *
* * * * * * *
[(12) Special rule for certain employer security
loans.--This section shall not apply to any loan
between a corporation (or any member of the controlled
group of corporations which includes such corporation)
and an employee stock ownership plan described in
section 4975(e)(7) to the extent that the interest rate
on such loan is equal to the interest rate paid on a
related securities acquisition loan (as described in
section 133(b)) to such corporation.]
* * * * * * *
Subtitle I--Trust Fund Code
* * * * * * *
CHAPTER 98 TRUST FUND CODE
* * * * * * *
Subchapter A--Establishment of Trust Funds
* * * * * * *
SEC. 9502. AIRPORT AND AIRWAY TRUST FUND.
(a) * * *
(b) Transfer to Airport and Airway Trust Fund of Amounts
Equivalent to Certain Taxes.--There is hereby appropriated to
the Airport and Airway Trust Fund--
(1) * * *
(2) amounts determined by the Secretary of the
Treasury to be equivalent to the taxes received in the
Treasury after August 31, 1982, and before January 1,
1996, under section 4081 (to the extent of 14 cents per
gallon), with respect to gasoline used in aircraft;
* * * * * * *
Subtitle J--Coal Industry Health Benefits
* * * * * * *
CHAPTER 99--COAL INDUSTRY HEALTH BENEFITS
* * * * * * *
Subchapter B--Combined Benefit Fund
* * * * * * *
PART III--ENFORCEMENT
* * * * * * *
SEC. 9707. FAILURE TO PAY PREMIUM.
(a) * * *
* * * * * * *
(d) Limitations on a of Penalty.--
(1) In general.--No penalty shall be imposed by
subsection (a) on any failure during any period for
which it is established to the satisfaction of the
Secretary of the Treasury that none of the persons
responsible for such failure knew, or exercising
reasonable [diligence,] diligence would have known,
that such failure existed.
* * * * * * *
----------
REVENUE RECONCILIATION ACT OF 1993
TITLE XIII--REVENUE, HEALTH CARE, HUMAN RESOURCES, INCOME SECURITY,
CUSTOMS AND TRADE, FOOD STAMP PROGRAM, AND TIMBER SALE PROVISIONS
CHAPTER 1--REVENUE PROVISIONS
SEC. 13001. SHORT TITLE; ETC.
(a) Short Title.--This chapter may be cited as the ``Revenue
Reconciliation Act of 1993''.
* * * * * * *
Subchapter A--Training and Investment Incentives
* * * * * * *
PART IV--INCENTIVES FOR INVESTMENT IN REAL ESTATE
Subpart A--Extension of Qualified Mortgage Bonds and Low-Income Housing
Credit
* * * * * * *
SEC. 13142. LOW-INCOME HOUSING CREDIT.
(a) * * *
(b) Modifications.--
(1) * * *
* * * * * * *
(6) Effective dates.--
(A) * * *
[(B) Waiver authority and prohibited
discrimination.--The amendments made by
paragraphs (3) and (4) shall take effect on the
date of the enactment of this Act.]
(B) Full-time students, waiver authority, and
prohibited discrimination.--The amendments made
by paragraphs (2), (3), and (4) shall take
effect on the date of the enactment of this
Act.
(C) HOME assistance.--The amendment made by
paragraph [(2)] (5) shall apply to periods
after the date of the enactment of this Act.
* * * * * * *
Subchapter B--Revenue Increases
PART I--PROVISIONS AFFECTING INDIVIDUALS
Subpart A--Rate Increases
* * * * * * *
SEC. 13206. PROVISIONS TO PREVENT CONVERSION OF ORDINARY INCOME TO
CAPITAL GAIN.
(a) Interest Embedded in Financial Transactions.--
(1) * * *
* * * * * * *
(3) Effective date.--The amendments made by this
[section] subsection shall apply to conversion
transactions entered into after April 30, 1993.
* * * * * * *
Subpart B--Other Provisions
* * * * * * *
SEC. 13215. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.
(a) * * *
* * * * * * *
(c) Transfers to the Hospital Insurance Trust Fund.--
(1) In general.--Paragraph (1) of section 121(e) of
the Social Security Amendments of 1983 ([Public Law 92-
21] Public Law 98-21) is amended by--
(A) * * *
* * * * * * *
PART VI--TREATMENT OF INTANGIBLES
SEC. 13261. AMORTIZATION OF GOODWILL AND CERTAIN OTHER INTANGIBLES.
(a) * * *
* * * * * * *
(g) Effective Date.--
(1) * * *
(2) Election to have amendments apply to property
acquired after july 25, 1991.--
(A) In general.--If an election under this
paragraph applies to the taxpayer--
(i) * * *
* * * * * * *
(iii) in applying subsection (f)(9)
of such section, with respect to any
property acquired [by the taxpayer] by
the taxpayer or a related person on or
before the date of the enactment of
this Act, only holding or use on July
25, 1991, shall be taken into account.
* * * * * * *
Subchapter C--Empowerment Zones, Enterprise Communities, Rural
Development Investment Areas, Etc.
* * * * * * *
PART II--CREDIT FOR CONTRIBUTIONS TO CERTAIN COMMUNITY DEVELOPMENT
CORPORATIONS
SEC. 13311. CREDIT FOR CONTRIBUTIONS TO CERTAIN COMMUNITY DEVELOPMENT
CORPORATIONS.
(a) * * *
* * * * * * *
(e) Selected Community Development Corporations.--
(1) * * *
(2) Only 20 corporations may be selected.--The
Secretary of Housing and Urban Development may select
20 corporations for purposes of this section, subject
to the availability of eligible corporations. Such
selections may be made only before July 1, 1994. At
least 8 of the operational areas of the corporations
selected must be rural areas (as defined by section
[1393(a)(3)] 1393(a)(2) of such Code).
* * * * * * *
Part V--Miscellaneous Provisions
* * * * * * *
SEC. 13443. CREDIT FOR PORTION OF EMPLOYER SOCIAL SECURITY TAXES PAID
WITH RESPECT TO EMPLOYEE CASH TIPS.
(a) * * *
* * * * * * *
(d) Effective Date.--The amendments made by this section
shall apply with respect to taxes paid after December 31, 1993,
with respect to services performed before, on, or after such
date.
* * * * * * *
----------
SOCIAL SECURITY ACT
* * * * * * *
TITLE II--FEDERAL OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE BENEFITS
* * * * * * *
definition of wages
Sec. 209. (a) For the purposes of this title, the term
``wages'' means remuneration paid prior to 1951 which was wages
for the purposes of this title under the law applicable to the
payment of such remuneration, and remuneration paid after 1950
for employment, including the cash value of all remuneration
(including benefits) paid in any medium other than cash; except
that, in the case of remuneration paid after 1950, such term
shall not include--
(1) * * *
* * * * * * *
(4) Any payment made to, or on behalf of, an employee
or his beneficiary (A) from or to a trust exempt from
tax under section 165(a) of the Internal Revenue Code
of 1939 at the time of such payment or, in the case of
a payment after 1954, under sections 401 and 501(a) of
the Internal Revenue Code of 1954 or the Internal
Revenue Code of 1986, unless such payment is made to an
employee of the trust as remuneration for services
rendered as such employee and not as a beneficiary of
the trust, or (B) under or to an annuity plan which, at
the time of such payment, meets the requirements of
section 165(a)(3), (4), (5), and (6) of the Internal
Revenue Code of 1939 or, in the case of a payment after
1954 and prior to 1963, the requirements of section
401(a)(3), (4), (5), and (6) of the Internal Revenue
Code of 1954, or (C) under or to an annuity plan which,
at the time of any such payment after 1962, is a plan
described in section 403(a) of the Internal Revenue
Code of 1986, or (D) under or to a bond purchase plan
which, at the time of any such payment after 1962, is a
qualified bond purchase plan described in section
405(a) of the Internal Revenue Code of 1954 (as in
effect before the enactment of the Tax Reform Act of
1984), or (E) under or to an annuity contract described
in section 403(b) of the Internal Revenue Code of 1986,
other than a payment for the purchase of such contract
which is made by reason of a salary reduction agreement
(whether evidenced by a written instrument or
otherwise), or (F) under or to an exempt governmental
deferred compensation plan (as defined in section
3121(v)(3) of such Code), or (G) to supplement pension
benefits under a plan or trust described in any of the
foregoing provisions of this subsection to take into
account some portion or all of the increase in the cost
of living (as determined by the Secretary of Labor)
since retirement but only if such supplemental payments
are under a plan which is treated as a welfare plan
under section 3(2)(B)(ii) of the Employee Retirement
Income Security Act of 1974, or (H) under a simplified
employee pension (as defined in section 408(k)(1) of
such Code), other than any contributions described in
section 408(k)(6) of such Code, (I) under a cafeteria
plan (within the meaning of section 125 of the Internal
Revenue Code of 1986) if such payment would not be
treated as wages without regard to such plan and it is
reasonable to believe that (if section 125 applied for
purposes of this section) section 125 would not treat
any wages as constructively received, or (J) under an
arrangement to which section 408(p) of such Code
applies, other than any elective contributions under
paragraph (2)(A)(i) thereof;
* * * * * * *
definition of employment
Sec. 210. For the purposes of this title--
Employment
(a) The term ``employment'' means any service performed after
1936 and prior to 1951 which was employment for the purposes of
this title under the law applicable to the period in which such
service was performed, and any service, of whatever nature,
performed after 1950 (A) by an employee for the person
employing him, irrespective of the citizenship or residence of
either, (i) within the United States, or (ii) on or in
connection with an American vessel or American aircraft under a
contract of service which is entered into within the United
States or during the performance of which and while the
employee is employed on the vessel or aircraft it touches at a
port in the United States, if the employee is employed on and
in connection with such vessel or aircraft when outside the
United States, or (B) outside the United States by a citizen or
resident of the United States as an employee (i) of an American
employer (as defined in subsection (e) of this section), or
(ii) of a foreign affiliate (as defined in section 3121(l)(6)
of the Internal Revenue Code of 1986 of an American employer
during any period for which there is in effect an agreement,
entered into pursuant to section 3121(l) of such Code, with
respect to such affiliate, or (C) if it is service, regardless
of where or by whom performed, which is designated as
employment or recognized as equivalent to employment under an
agreement entered into under section 233; except that, in the
case of service performed after 1950, such term shall not
include--
(1) * * *
* * * * * * *
(20) Service (other than service described in
paragraph (3)(A)) performed by an individual on a boat
engaged in catching fish or other forms of aquatic
animal life under an arrangement with the owner or
operator of such boat pursuant to which--
[(A) such individual does not receive any
cash remuneration (other than as provided in
subparagraph (B)),]
(A) such individual does not receive any
additional compensation other than as provided
in subparagraph (B) and other than cash
remuneration--
(i) which does not exceed $100 per
trip;
(ii) which is contingent on a minimum
catch; and
(iii) which is paid solely for
additional duties (such as mate,
engineer, or cook) for which additional
cash remuneration is traditional in the
industry,
* * * * * * *
For purposes of paragraph (20), the operating crew of a boat
shall be treated as normally made up of fewer than 10
individuals if the average size of the operating crew on trips
made during the preceding 4 calendar quarters consisted of
fewer than 10 individuals.
* * * * * * *
----------
TAX REFORM ACT OF 1986
* * * * * * *
TITLE XI--PENSIONS AND DEFERRED COMPENSATION; EMPLOYEE BENEFITS;
EMPLOYEE STOCK OWNERSHIP PLANS
Subtitle A--Pensions and Deferred Compensation
* * * * * * *
PART II--NONDISCRIMINATION REQUIREMENTS
* * * * * * *
SEC. 1114. DEFINITION OF HIGHLY COMPENSATED EMPLOYEE.
(a) * * *
* * * * * * *
(c) Effective Date.--
(1) * * *
* * * * * * *
(4) Special rule for determining highly compensated
employees.--For purposes of sections 401(k) and 401(m)
of the Internal Revenue Code of 1986, in the case of an
employer incorporated on December 15, 1924, if more
than 50 percent of its employees in the top-paid group
(within the meaning of section 414(q)(4) of such Code)
earn less than $25,000 (indexed at the same time and in
the same manner as under section 415(d) of such Code),
then the highly compensated employees shall include
employees described in section 414(q)(1)(C) of such
Code determined without regard to the level of
compensation of such employees. Any reference in this
paragraph to section 414(q) shall be treated as a
reference to such section as in effect on the day
before the date of the enactment of the Small Business
Job Protection Act of 1996.
* * * * * * *
TITLE XIII--TAX-EXEMPT BONDS
* * * * * * *
Subtitle B--Effective Dates and Transitional Rules
* * * * * * *
SEC. 1317. TRANSITIONAL RULES FOR SPECIFIC FACILITIES.
(1) * * *
* * * * * * *
(3) Sports facilities.--A bond issued as part of an
issue 95 percent or more of the net proceeds of which
are to be used to provide sports facilities (within the
meaning of section 103(b)(4)(B) of the 1954 Code) shall
be treated as an exempt facility bond for purposes of
part IV of subchapter B of chapter 1 of the 1986 Code
if such facilities are described in any of the
following subparagraphs:
(A) A facility is described in this
subparagraph if it is a stadium--
(i) * * *
* * * * * * *
The aggregate face amount of bonds to which
this subparagraph applies shall not exceed
$200,000,000. A facility shall not fail to be
treated as described in this subparagraph by
reason of an assignment (or an agreement to an
assignment) by the governmental unit on whose
behalf the bonds are issued of any part of its
interest in the property financed by such bonds
to another governmental unit.
* * * * * * *
----------
SECTION 767 OF THE URUGUAY ROUND AGREEMENTS ACT
SEC. 767. SINGLE SUM DISTRIBUTIONS.
(a) * * *
* * * * * * *
(d) Effective Date.--
(1) * * *
* * * * * * *
(3) Section 415.--
[(A) No reduction required.--An accrued
benefit shall not be required to be reduced
below the accrued benefit as of the last day of
the last plan year beginning before January 1,
1995, merely because of the amendments made by
subsection (b).]
(A) Exception.--A plan that was adopted and
in effect before December 8, 1994, shall not be
required to apply the amendments made by
subsection (b) with respect to benefits accrued
before the earlier of--
(i) the later of the date a plan
amendment applying such amendment is
adopted or made effective, or
(ii) the first day of the first
limitation year beginning after
December 31, 1999.
Determinations under section 415(b)(2)(E) of
the Internal Revenue Code of 1986 before such
earlier date shall be made with respect to such
benefits on the basis of such section as in
effect on December 7, 1994 (except that the
modification made by section 1449(b) of the
Small Business Job Protection Act of 1996 shall
be taken into account), and the provisions of
the plan as in effect on December 7, 1994, but
only if such provisions of the plan meet the
requirements of such section (as so in effect).
* * * * * * *
----------
REVENUE RECONCILIATION ACT OF 1990
TITLE XI--REVENUE PROVISIONS
SEC. 11001. SHORT TITLE; ETC.
(a) Short Title.--This title may be cited as the ``Revenue
Reconciliation Act of 1990''.
* * * * * * *
Subtitle B--Excise Taxes
* * * * * * *
PART II--USER-RELATED TAXES
* * * * * * *
SEC. 11212. IMPROVEMENTS IN ADMINISTRATION OF GASOLINE EXCISE TAX.
(a) * * *
* * * * * * *
(e) Technical and Conforming Amendments.--
(1) [Paragraph (1) of section 6724(d)] Subparagraph
(B) of section 6724(d)(1) is amended by striking ``or''
at the end of clause (x), by striking ``, or subsection
(e),'' in clause (xi), by striking the period at the
end of clause (xi) and inserting ``, or'', and by
inserting after clause (xi) the following new clause:
``(xii) section 4101(d) (relating to
information reporting with respect to
fuels taxes).''
* * * * * * *
Subtitle G--Tax Technical Corrections
* * * * * * *
SEC. 11701. AMENDMENTS RELATED TO REVENUE RECONCILIATION ACT OF 1989.
(a) Amendments Related to Section 7108.--
(1) * * *
* * * * * * *
[(11) Paragraph (2) of section 7108(r) of the Revenue
Reconciliation Act of 1989 is amended by inserting
before the period ``but only with respect to bonds
issued after such date''.]
* * * * * * *
(f) Amendment Related to Section 7401.--Paragraph (2) of
section 6038(e) (relating to definitions) is amended by adding
at the end thereof the following new sentence: ``In the case of
a specified foreign corporation (as defined in section 898),
the taxable year of such corporation shall be treated as its
annual accounting period.''
* * * * * * *
----------
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
* * * * * * *
TITLE I--PROTECTION OF EMPLOYEE BENEFIT RIGHTS
Subtitle A--General Provisions
* * * * * * *
DEFINITIONS
Sec. 3. For purposes of this title:
(1) * * *
* * * * * * *
(37)(A) * * *
* * * * * * *
(F)(i) * * *
(ii) For purposes of the Internal Revenue Code of 1986--
(I) clause (i) shall apply, and
(II) a qualified football coaches plan shall be
treated as a multiemployer collectively bargained plan.
[(ii)] (iii) For purposes of this subparagraph, the term
``qualified football coaches plan'' means any defined
contribution plan which is established and maintained by an
organization--
(I) which is described in section 501(c) of such
Code;
(II) the membership of which consists entirely of
individuals who primarily coach football as full-time
employees of 4-year colleges or universities described
in section 170(b)(1)(A)(ii) of such Code; and
(III) which was in existence on September 18, 1986.
* * * * * * *
Part 6--Group Health Plans
Group Health Plans
* * * * * * *
SEC. 602. CONTINUATION COVERAGE.
For purposes of section 601, the term ``continuation
coverage'' means coverage under the plan which meets the
following requirements:
(1) * * *
(2) Period of coverage.--The coverage must extend for
at least the period beginning on the date of the
qualifying event and ending not earlier than the
earliest of the following:
(A) Maximum required period.--
(i) * * *
* * * * * * *
[(v) Qualifying event involving
medicare entitlement.--In the case of
an event described in section 603(4)
(without regard to whether such event
is a qualifying event), the period of
coverage for qualified beneficiaries
other than the covered employee for
such event or any subsequent qualifying
event shall not terminate before the
close of the 36-month period beginning
on the date the covered employee
becomes entitled to benefits under
title XVIII of the Social Security
Act.]
(v) Medicare entitlement followed by
qualifying event.--In the case of a
qualifying event described in section
603(2) that occurs less than 18 months
after the date the covered employee
became entitled to benefits under title
XVIII of the Social Security Act, the
period of coverage for qualified
beneficiaries other than the covered
employee shall not terminate under this
subparagraph before the close of the
36-month period beginning on the date
the covered employee became so
entitled.
In the case of an individual who is determined,
under title II or XVI of the Social Security
Act, to have been disabled at the time of a
qualifying event described in section 603(2),
any reference in clause (i) or (ii) to 18
months with respect to such event is deemed a
reference to 29 months, but only if the
qualified beneficiary has provided notice of
such determination under section 606(3) before
the end of such 18 months.
* * * * * * *
----------
SECTION 2202 OF THE PUBLIC HEALTH SERVICE ACT
SEC. 2202. CONTINUATION COVERAGE.
For purposes of section 2201, the term ``continuation
coverage'' means coverage under the plan which meets the
following requirements:
(1) * * *
(2) Period of coverage.--The coverage must extend for
at least the period beginning on the date of the
qualifying event and ending not earlier than the
earliest of the following:
(A) Maximum required period.--
(i) * * *
* * * * * * *
[(iv) Qualifying event involving
medicare entitlement.--In the case of
an event described in section 2203(4)
(without regard to whether such event
is a qualifying event), the period of
coverage for qualified beneficiaries
other than the covered employee for
such event or any subsequent qualifying
event shall not terminate before the
close of the 36-month period beginning
on the date the covered employee
becomes entitled to benefits under
title XVIII of the Social Security
Act.]
(iv) Medicare entitlement followed by
qualifying event.--In the case of a
qualifying event described in section
2203(2) that occurs less than 18 months
after the date the covered employee
became entitled to benefits under title
XVIII of the Social Security Act, the
period of coverage for qualified
beneficiaries other than the covered
employee shall not terminate under this
subparagraph before the close of the
36-month period beginning on the date
the covered employee became so
entitled.
* * * * * * *
----------
OMNIBUS BUDGET RECONCILIATION ACT OF 1989
* * * * * * *
TITLE VI--MEDICARE, MEDICAID, MATERNAL AND CHILD HEALTH, AND OTHER
HEALTH PROVISIONS
* * * * * * *
Subtitle E--Provisions With Respect to COBRA Continuation Coverage
PART 1--EXTENSION OF COVERAGE FOR DISABLED EMPLOYEES
* * * * * * *
SEC. 6701. EXTENSION, UNDER INTERNAL REVENUE CODE, OF COVERAGE FROM 18
TO 29 MONTHS FOR THOSE WITH A DISABILITY AT TIME OF
TERMINATION OF EMPLOYMENT.
(a) In General.--Paragraph (2)(B) of section 4980B(f) of the
Internal Revenue Code of 1986, as added by section 3011(a) of
the Technical and Miscellaneous Revenue Act of 1988 (Public Law
100-647), (relating to maximum required period of continuation
coverage), is amended--
(1) in clause (i) by adding after and below subclause
[(IV)] (V) the following new sentence:
``In the case of a qualified
beneficiary who is determined, under
title II or XVI of the Social Security
Act, to have been disabled at the time
of a qualifying event described in
paragraph (3)(B), any reference in
subclause (I) or (II) to 18 months with
respect to such event is deemed a
reference to 29 months, but only if the
qualified beneficiary has provided
notice of such determination under
paragraph (6)(C) before the end of such
18 months.''; and
* * * * * * *
TITLE VII--REVENUE MEASURES
* * * * * * *
Subtitle C--Employee Benefit Provisions
PART I--EMPLOYEE STOCK OWNERSHIP PLANS
* * * * * * *
SEC. 7304. REPEAL OF CERTAIN PROVISIONS RELATING TO EMPLOYEE STOCK
OWNERSHIP PLANS.
(a) Estate Tax Deduction.--
(1) * * *
(2) Conforming amendments.--
(A) * * *
* * * * * * *
(D) Section 4979A is amended--
(i) by striking ``or section 2057''
in subsection (b)(1), and
(ii) by striking ``or section
2057(d)'' in subsection [(c)(2)] (c).
* * * * * * *
Subtitle F--Miscellaneous Provisions
* * * * * * *
PART V--OTHER PROVISIONS
* * * * * * *
SEC. 7646. REPORTING OF POINTS ON MORTGAGE LOANS.
(a) * * *
(b) Technical Amendments.--
(1) Subparagraph (B) of section [6050H(b)(1)]
6050H(b)(2) is amended by inserting ``(other than
points)'' after ``such interest''.
* * * * * * *
Subtitle G--Revision of Civil Penalties
* * * * * * *
PART II--REVISION OF ACCURACY-RELATED PENALTIES
SEC. 7721. REVISION OF ACCURACY-RELATED PENALTIES.
(a) * * *
* * * * * * *
(c) Technical and Conforming Amendments.--
(1) * * *
* * * * * * *
(10) Subparagraph (C) of section 461(i)(3) is amended
by striking ``section [6662(b)(2)(C)(ii)]
6661(b)(2)(C)(ii)'' and inserting ``section
6662(d)(2)(C)(ii)''.
* * * * * * *
Subtitle H--Technical Corrections
* * * * * * *
PART I--AMENDMENTS RELATED TO TECHNICAL AND MISCELLANEOUS REVENUE ACT
OF 1988
SEC. 7811. AMENDMENTS RELATED TO TITLE I OF THE 1988 ACT.
(a) * * *
* * * * * * *
(i) Amendments Related to Section 1012 of the 1988 Act.--
(1) * * *
* * * * * * *
(3) Subparagraph (A) of section 954(c)(3) is
amended--
(A) by striking ``is created'' the first
place it appears in clause (i) and inserting
``is a corporation created'',
* * * * * * *
PART IV--MISCELLANEOUS CHANGES
SEC. 7841. MISCELLANEOUS CHANGES.
(a) * * *
* * * * * * *
(d) Miscellaneous Clerical Changes.--
(1) * * *
* * * * * * *
(10) Paragraph (27) of section [381(a)] 381(c)
(relating to credit under section 53) is redesignated
as paragraph (26).
* * * * * * *
PART V--AMENDMENTS RELATED TO PENSION PROVISIONS
* * * * * * *
Subpart A--Amendments Related To Tax Reform Act of 1986
SEC. 7861. AMENDMENTS RELATED TO TITLE XI OF THE REFORM ACT.
(a) * * *
* * * * * * *
(c) Amendments Related to Section 1140 of the Reform Act.--
(1) * * *
(2) Section 1140(c) of the Reform Act is amended by
striking all after ``the first plan year beginning''
the second place it appears and inserting ``after the
later of--
``(1) December 31, 1988, or
``(2) the earlier of--
``(A) December 31, 1990, or
``(B) the date on which the last of such
collective bargaining agreements terminate
(without regard to any extension after February
28, 1986).''
* * * * * * *
VII. SUPPLEMENTAL VIEWS OF DEMOCRATIC MEMBERS OF THE COMMITTEE ON WAYS
AND MEANS ON H.R. 3448
After many months of strong opposition to legislation that
would increase the minimum hourly wage from $4.25 to $5.15 over
two years, Republicans have indicated they will consider wage
legislation only if they are allowed to include tax benefits
for business. Even though we favor expanded investment
incentives and simplified rules for small business, we prefer
not to endanger the passage of an increase in the minimum wage
by linking it to unrelated issues.
Some Republicans have argued that minimum wage concerns
should not be taken seriously since workers living on these low
wages do not exist.We know differently; these workers are real
people; they do exist; many of them have families; many of them
are struggling to make ends meet. These people are not seeking
government hand-outs. They merely seek a way to keep their
heads above water, food on the table, and shelter. They also
seek an opportunity to improve their status in life.
However, our major regret over most of the tax provisions
contained in the bill is that we were not permitted to reach a
bipartisan consensus on the details of the provisions that we
all support. We think this bill should help the workers and
their families as well as business owners.
During Committee consideration of this bill, we attempted
to improve the bill for workers and their families. Our
Republican Members rejected amendments which would have (1)
improved educational opportunities for American workers and
low- and middle-income families and (2) enhanced financial
stability for the long-term unemployed.
Improved educational opportunity needs more than lip service to become
a reality
Under the bill, the provision to provide tax-free employer-
provided educational assistance would be extended from January
1, 1995, through December 31, 1996. However educational
expenses for graduate studies would not receive the exclusion
after December 31, 1995. We question the intelligence of this
decision. The Republicans argue that their primary concern here
is to provide more Americans with the opportunity to obtain a
basic education at the undergraduate level before resources can
be committed for graduate studies. Given the advanced knowledge
of technology that is required by many of today's jobs, it is
more important than ever that our American workers receive
higher education. If employers are willing to foot the bill,
can we as a national fail to encourage the effort?
During consideration of H.R. 3448, Republicans were given
the opportunity to approve an amendment, originally proposed by
President Clinton, that would have allowed taxpayers with
income below $70,000 (single return) and $120,000 (joint
return) to deduct up to $5,000 of educational expenses.
Republicans argued that because the benefit would not be
available to taxpayers at all income levels, they could not
support the amendment. We cannot endorse such policies. In a
time of limited Resources, our Republican colleagues have
refused to set priorities based on areas of greatest need.
Republicans continue to demonstrate that any tax benefits they
support for low- and middle-income taxpayers must trickle down
from benefits bestowed upon the high-income taxpayers.
In addition, the fallacy of the argument espoused by
Republicans in support of the repeal of the benefit for
graduate studies must be questioned. If the true reason for
this repeal is to give priority to providing a basic
undergraduate education to a greater number of workers and
families, what happened to this commitment when the Republicans
were presented with the perfect opportunity to lend credence to
this claim? How do they explain their failure to provide
approximately 17 million students with a modest deduction for
educational expenses incurred in obtaining the basic
undergraduate education? What alternative do they offer? Let us
remind ourselves that this bill is intended to include benefits
for ``small'' businesses and the employees of those businesses.
In the area of education, it fails.
The need for continuing education has never been more real
and evident in our country than today. Technological advances
outpace the ability of employers and workers to maintain a
leading competitive edge in the world today. The world economy
mandates that substantial resources be committed to the
continuing training and education of our workers. This effort
cannot be executed efficiently if it must be undertaken solely
by employers.
Data on the employer-provided educational assistance
benefit indicate that most employees who are receiving
employer-provided graduate education are studying business
education; health-related courses are second; and engineering
is third. We have been unable to uncover any evidence to
support the Republican claim that graduate level benefits
should not be allowed because they are used primarily by
individuals who become doctors and lawyers. We cannot argue
that this does not occur occasionally, but are we prepared to
``throw the baby out with the bath water'' at a time when this
benefit is needed more than ever? We implore our Republican
colleagues to reconsider their position on this issue.
It was argued that the employer-provided educational
assistance benefit must be modified because it gives an unfair
advantage to the worker whose employer offers this benefit over
the worker whose employer does not offer the benefit. We must
ask, if this is truly a concern why not support the effort to
provide these workers with the benefit of a $5,000 deduction
for their educational expense? Moreover, should we be concerned
over the total elimination of this benefit the next time
around? At one point during consideration of this bill, five
Republicans joined us in adding back graduate education
benefits to the exclusion. For one fleeting moment, we
delighted in the fact that this Committee had set aside
partisanship and accomplished good policy. However, our pride
in the Committee was short-lived for within an hour of the
first vote every Republican Member voted to reconsider the
earlier vote and then voted against the graduate education
benefit.
Where is the concern for the long-term unemployed?
We were also disappointed when our Republican colleagues
turned their backs on a golden opportunity to permit long-term
unemployed individuals, during periods of unemployment, to
withdraw funds from their pension plans without paying the
additional 10-percent tax.
The urgency of this provision confronts us every day as we
hear from people who were once gainfully employed, saving for
retirement, and providing adequately for the needs of their
families. Then their employment was terminated. At the
beginning of this process, the worker is optimistic because he
or she has some small savings to cover short-term emergencies.
A few months go by and the reality of job hunting in today's
market catches up with the individual. Unemployment benefits
begin but at a level substantially below the worker's former
salary. However, the rent or mortgage continue to be due every
month, the utilities charges begin to fall into arrears; even
with modification, the food bill becomes impossible for the
family. This family is desperate and the only other available
funds are invested in retirement savings. The family is now
faced with the difficult choice of depleting some portion of
its resources set aside for retirement. Under present law,
withdrawals before age 59\1/2\ are not only subject to income
tax on the withdrawn amount but also an additional 10-percent
tax. This policy can become self-defeating. It must be
evaluated in more realistic terms.
Our Republican colleagues have argued that this is not the
time to support such a provision. We ask, if not now, when? How
many more large-scale corporate restructuring deals must we
read about before we hear the pleas of desperate individuals
and families? Another argument raised by the Republicans in
their defense of their position is that the provision would
permit individuals to withdraw retirement funds for lavish
Christmas shopping. We must strongly state our disagreement. We
believe that if an employee has been conscientious enough to
save for retirement, such an employee is not likely to deplete
these resources willy-nilly.
In summary, we wish we had been allowed to help craft a
bill to assist both businesses and workers. We believe a better
product would have been reported from this Committee if such
bipartisanship had prevailed.
Sam M. Gibbons.
Charles B. Rangel.
Fortney Pete Stark.
Harold E. Ford.
Robert T. Matsui.
Barbara B. Kennelly.
William J. Coyne.
Sander M. Levin.
Jim McDermott.
Gerald D. Kleczka.
John Lewis.
L.F. Payne.
Richard E. Neal.
Michael R. McNulty.
VIII. DISSENTING VIEWS ON H.R. 3448 BY: REP. CHARLES B. RANGEL (D-NY)
Although I may differ over some of the details, I support
most of the provisions contained in the bill reported by the
Committee. I do regret that the Committee was not permitted to
reach a bipartisan consensus over the details of tax provisions
that we all support. However, that is not the reason for my
opposition to the bill. I oppose the bill reported by the
Committee because the tax benefits it provides for small
businesses and others are largely funded through revenues
raised by modifications to the section 936 credit. I believe
that those modifications will have an adverse impact on the
economy of Puerto Rico and other possessions.
Section 936 has long been an important part of the economic
development programs of Puerto Rico and the other possessions.
We made substantial revisions to the section 936 credit in the
1993 Reconciliation Act with the purpose of focusing the
benefits of that credit on companies with substantial economic
activities in Puerto Rico. Before we have had an opportunity to
analyze the impact of those changes on the economy of Puerto
Rico and the other possessions, we are again considering
substantial changes to section 936.
When one examines the details of the Committee bill, it
becomes apparent that great care was taken to accommodate the
interests of the companies currently operating in Puerto Rico.
I only wish that similar care had been taken in assessing its
impact on the economies of Puerto Rico and the other
possessions. The fact that the individuals who could be
directly and adversely affected by the Committee bill do not
have voting representation in Congress requires us to be
particularly sensitive to their interests.
For U.S. companies operating in Puerto Rico, section 936
generally eliminates the U.S. tax on their active business
income in Puerto Rico (referred to as the active business
credit) and on their income derived from certain passive
investments in Puerto Rico (referred to as the QPSII credit).
The bill reported by Committee immediately terminates the
QPSII credit without any serious examination of the adverse
impact of such a change. Currently over one-third of the total
bank deposits in Puerto Rico consists of investments eligible
for the QPSII credit. Many of these deposits have short
maturities and will likely be quickly withdrawn if the
Committee bill becomes law. One can only speculate on the
impact of such withdrawals on the banking system of Puerto
Rico. The termination of the QPSII credit may have a dramatic
impact on the Puerto Rican banking system but is a small
inconvenience for the companies operating there. That
inconvenience is offset by other provisions of the Committee
bill that facilitate the accumulation of passive investment
assets in foreign tax haven countries.
The Committee bill immediately terminates the section 936
active business credit for new investments in Puerto Rico.
Under the committee bill, there will be no tax incentives for
new business investments in Puerto Rico but there will be very
generous transition rules for those companies who have claimed
section 936 benefits in the past. Opponents of section 936 have
argued that it provides overly generous tax benefits to a
relatively small number of companies operating in Puerto Rico.
Ironically, the companies currently enjoying those ``over
generous'' benefits are generally supportive of the Committee
bill because it provides them a generous ten-year transition
period during which they will continue to enjoy most of those
benefits.
I believe that we should consider modifications to the
section 936 credit and other tax benefits to ensure that they
are accomplishing their intended purpose. The Administration
has a proposal that would continue the effort started in 1993
to focus the credit on companies with substantial economic
activities in Puerto Rico. I believe that such an approach
would eliminate the alleged abuses under the section 936 credit
and would continue positive tax incentives for future business
investments in Puerto Rico.
Charles B. Rangel.