    [House Report 104-737]
    [From the U.S. Government Publishing Office]

    104th Congress                                                   Report
                            HOUSE OF REPRESENTATIVES

     2d Session                                                     104-737
    _______________________________________________________________________

                   SMALL BUSINESS JOB PROTECTION ACT OF 1996

                                    _______

                     August 1, 1996.--Ordered to be printed

    _______________________________________________________________________

     Mr. Archer, from the committee of conference, submitted the following

                               CONFERENCE REPORT

                            [To accompany H.R. 3448]

        The committee of conference on the disagreeing votes of the
    two Houses on the amendments of the Senate to 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, to amend the Portal-to-Portal Act of 1947 relating to
    the payment of wages to employees who use employer owned
    vehicles, and to amend the Fair Labor Standards Act of 1938 to
    increase the minimum wage rate and to prevent job loss by
    providing flexibility to employers in complying with minimum
    wage and overtime requirements under that Act, having met,
    after full and free conference, have agreed to recommend and do
    recommend to their respective Houses as follows:

                                    TITLE I

        That the House recede from its disagreement to the
    amendment of the Senate numbered 1, and agree to the same with
    an amendment as follows:
        In lieu of the matter proposed to be inserted by the Senate
    amendment, insert the following:
        (b) Table of Contents.--

    Sec. 1. Short title; 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.*COM003*
    Sec. 1115. Treatment of dues paid to agricultural or horticultural
              organizations.
    Sec. 1116. Clarification of employment tax status of certain fishermen.
    Sec. 1117. Modifications of tax-exempt bond rules for first-time
              farmers.
    Sec. 1118. Newspaper distributors treated as direct sellers.
    Sec. 1119. Application of involuntary conversion rules to presidentially
              declared disasters.
    Sec. 1120. Class life for gas station convenience stores and similar
              structures.
    Sec. 1121. Treatment of abandonment of lessor improvements at
              termination of lease.
    Sec. 1122. Special rules relating to determination whether individuals
              are employees for purposes of employment taxes.
    Sec. 1123. Treatment of housing provided to employees by academic health
              centers.

              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.
    Sec. 1204. Research credit.
    Sec. 1205. Orphan drug tax credit.
    Sec. 1206. Contributions of stock to private foundations.
    Sec. 1207. Extension of binding contract date for biomass and coal
              facilities.
    Sec. 1208. Moratorium for excise tax on diesel fuel sold for use or used
              in diesel-powered motorboats.

                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. Financial institutions.
    Sec. 1316. Certain exempt organizations allowed to be shareholders.
    Sec. 1317. 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 Retirement 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).
    Sec. 1427. Homemakers eligible for full IRA deduction.

                     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. Special rules relating to joint and survivor annuity
              explanations.
    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. Sample language for spousal consent and qualified domestic
              relations forms.
    Sec. 1458. Treatment of length of service awards to volunteers
              performing fire fighting or prevention services, emergency
              medical services, or ambulance services.
    Sec. 1459. Alternative nondiscrimination rules for certain plans that
              provide for early participation.
    Sec. 1460. Clarification of application of ERISA to insurance company
              general accounts.
    Sec. 1461. Special rules for chaplains and self-employed ministers.
    Sec. 1462. Definition of highly compensated employee for pre-ERISA rules
              for church plans.
    Sec. 1463. Rule relating to investment in contract not to apply to
              foreign missionaries.
    Sec. 1464. Waiver of excise tax on failure to pay liquidity shortfall.
    Sec. 1465. 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

                           Part I--General Provisions

    Sec. 1601. Modifications 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.
    Sec. 1607. Extension and phasedown of luxury passenger automobile tax.
    Sec. 1608. Termination of future tax-exempt bond financing for local
              furnishers of electricity and gas.
    Sec. 1609. Extension of Airport and Airway Trust Fund excise taxes.
    Sec. 1610. Basis adjustment to property held by corporation where stock
              in corporation is replacement property under involuntary
              conversion rules.
    Sec. 1611. Treatment of certain insurance contracts on retired lives.
    Sec. 1612. Treatment of modified guaranteed contracts.
    Sec. 1613. Treatment of contributions in aid of construction.
    Sec. 1614. Election to cease status as qualified scholarship funding
              corporation.
    Sec. 1615. Certain tax benefits denied to individuals failing to provide
              taxpayer identification numbers.
    Sec. 1616. Repeal of bad debt reserve method for thrift savings
              associations.
    Sec. 1617. Exclusion for energy conservation subsidies limited to
              subsidies with respect to dwelling units.

               Part II--Financial Asset Securitization Investments

    Sec. 1621. Financial Asset Securitization Investment Trusts.

                        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.

                          Subtitle H--Other Provisions

    Sec. 1801. Exemption from diesel fuel dyeing requirements with respect
              to certain States.
    Sec. 1802. Treatment of certain university accounts.
    Sec. 1803. Modifications to excise tax on ozone-depleting chemicals.
    Sec. 1804. Tax-exempt bonds for sale of Alaska Power Administration
              facility.
    Sec. 1805. Nonrecognition treatment for certain transfers by common
              trust funds to regulated investment companies.
    Sec. 1806. Qualified State tuition programs.
    Sec. 1807. Adoption assistance.
    Sec. 1808. Removal of barriers to interethnic adoption.
    Sec. 1809. 6-month delay of electronic fund transfer requirement.

                    Subtitle I--Foreign Trust Tax Compliance

    Sec. 1901. Improved information reporting on foreign trusts.
    Sec. 1902. Comparable penalties for failure to file return relating to
              transfers to foreign entities.
    Sec. 1903. Modifications of rules relating to foreign trusts having one
              or more United States beneficiaries.
    Sec. 1904. Foreign persons not to be treated as owners under grantor
              trust rules.
    Sec. 1905. Information reporting regarding foreign gifts.
    Sec. 1906. Modification of rules relating to foreign trusts which are
              not grantor trusts.
    Sec. 1907. Residence of trusts, etc.

                  Subtitle J--Generalized System of Preferences

    Sec. 1951. Short title.
    Sec. 1952. Generalized System of Preferences.
    Sec. 1953. Effective date.
    Sec. 1954. Conforming amendments.

                           TITLE II--PAYMENT OF WAGES

    Sec. 2101. Short title.
    Sec. 2102. Proper compensation for use of employer vehicles.
    Sec. 2103. Effective date.
    Sec. 2104. Minimum wage increase.
    Sec. 2105. Fair Labor Standards Act Amendments.

                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:
              1997..........................................         18,000
              1998..........................................         18,500
              1999..........................................         19,000
              2000..........................................         20,000
              2001 or 2002..................................         24,000
              2003 or thereafter............................      25,000.''.

        (b) Effective Date.--The amendment made by subsection (a)
    shall apply to taxable years beginning after December 31, 1996.

    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 providing, 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 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' means any payment (whether or not
            designated as dues) which is required to be made in
            order to be recognized by the organization as a member
            of the organization.''.
        (b) Effective Dates.--
                (1) In general.--The amendment made by this section
            shall apply to taxable years beginning after December
            31, 1986.
                (2) Transitional rule.--If--
                        (A) for purposes of applying part III of
                    subchapter F of chapter 1 of the Internal
                    Revenue Code of 1986 to any taxable year
                    beginning before January 1, 1987, an
                    agricultural or horticultural organization did
                    not treat any portion of membership dues
                    received by it as income derived in an
                    unrelated trade or business, and
                        (B) such organization had a reasonable
                    basis for not treating such dues as income
                    derived in an unrelated trade or business,
            then, for purposes of applying such part III to any
            such taxable year, in no event shall any portion of
            such dues be treated as derived in an unrelated trade
            or business.
                (3) Reasonable basis.--For purposes of paragraph
            (2), an organization shall be treated as having a
            reasonable basis for not treating membership dues as
            income derived in an unrelated trade or business if the
            taxpayer's treatment of such dues was in reasonable
            reliance on any of the following:
                        (A) Judicial precedent, published rulings,
                    technical advice with respect to the
                    organization, or a letter ruling to the
                    organization.
                        (B) A past Internal Revenue Service audit
                    of the organization in which there was no
                    assessment attributable to the reclassification
                    of membership dues for purposes of the tax on
                    unrelated business income.
                        (C) Long-standing recognized practice of
                    agricultural or horticultural organizations.

    SEC. 1116. CLARIFICATION OF EMPLOYMENT TAX STATUS OF CERTAIN FISHERMEN.

        (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 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 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
                    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 Dates.--
                        (A) In general.--The amendments made by
                    this subsection shall apply to remuneration
                    paid--
                                (i) after December 31, 1994, and
                                (ii) after December 31, 1984, and
                            before January 1, 1995, unless the
                            payor treated such remuneration (when
                            paid) as being subject to tax under
                            chapter 21 of the Internal Revenue Code
                            of 1986.
                        (B) Reporting requirement.--The amendment
                    made by paragraph (1)(C) shall apply to
                    remuneration paid after December 31, 1996.
        (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 inserting after section 6050Q the following new
            section:

    ``SEC. 6050R. 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 6050R (relating to
                            returns relating to certain purchases
                            of fish), and''.
                        (B) Paragraph (2) of section 6724(d) is
                    amended by redesignating subparagraphs (R)
                    through (U) as subparagraphs (S) through (V),
                    respectively, and by inserting after
                    subparagraph (Q) the following new
                    subparagraph:
                        ``(R) section 6050R(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 inserting after the item relating to
                    6050Q the following new item:

            ``Sec. 6050R. Returns relating to certain purchases of fish.''.

                (3) Effective date.--The amendments made by this
            subsection shall apply to payments made after December
            31, 1997.

    SEC. 1117. MODIFICATIONS OF TAX-EXEMPT BOND RULES FOR FIRST-TIME
                        FARMERS.

        (a) Acquisition From Related Person Allowed.--Section
    147(c)(2) (relating to exception for first-time farmers) is
    amended by adding at the end the following new subparagraph:
                        ``(G) Acquisition from related person.--For
                    purposes of this paragraph and section 144(a),
                    the acquisition by a first-time farmer of land
                    or personal property from a related person
                    (within the meaning of section 144(a)(3)) shall
                    not be treated as an acquisition from a related
                    person, if--
                                ``(i) the acquisition price is for
                            the fair market value of such land or
                            property, and
                                ``(ii) subsequent to such
                            acquisition, the related person does
                            not have a financial interest in the
                            farming operation with respect to which
                            the bond proceeds are to be used.''.
        (b) Substantial Farmland Amount Doubled.--Clause (i) of
    section 147(c)(2)(E) (defining substantial farmland) is amended
    by striking ``15 percent'' and inserting ``30 percent''.
        (c) Effective Date.--The amendments made by this section
    shall apply to bonds issued after the date of the enactment of
    this Act.

    SEC. 1118. NEWSPAPER DISTRIBUTORS TREATED AS DIRECT SELLERS.

        (a) In General.--Section 3508(b)(2)(A) is amended by
    striking ``or'' at the end of clause (i), by inserting ``or''
    at the end of clause (ii), and by inserting after clause (ii)
    the following new clause:
                                ``(iii) is engaged in the trade or
                            business of the delivering or
                            distribution of newspapers or shopping
                            news (including any services directly
                            related to such trade or business),''.
        (b) Effective Date.--The amendments made by this section
    shall apply to services performed after December 31, 1995.

    SEC. 1119. APPLICATION OF INVOLUNTARY CONVERSION RULES TO
                        PRESIDENTIALLY DECLARED DISASTERS.

        (a) In General.--Section 1033(h) is amended by
    redesignating paragraphs (2) and (3) as paragraphs (3) and (4),
    respectively, and by inserting after paragraph (1) the
    following new paragraph:
                ``(2) Trade or business and investment property.--
            If a taxpayer's property held for productive use in a
            trade or business or for investment is compulsorily or
            involuntarily converted as a result of a Presidentially
            declared disaster, tangible property of a type held for
            productive use in a trade or business shall be treated
            for purposes of subsection (a) as property similar or
            related in service or use to the property so
            converted.''.
        (b) Conforming Amendments.--Section 1033(h) is amended--
                (1) by striking ``residence'' in paragraph (3) (as
            redesignated by subsection (a)) and inserting
            ``property'',
                (2) by striking ``Principal Residences'' in the
            heading and inserting ``Property'', and
                (3) by striking ``(1) In general.--'' and inserting
            ``(1) Principal residences.--''.
        (c) Expansion of Oklahoma City Enterprise Community.--
    Notwithstanding sections 1391 and 1392(a)(3)(D) of the Internal
    Revenue Code of 1986, the boundaries of the enterprise
    community for Oklahoma City, Oklahoma, designated by the
    Secretary of Housing and Urban Development on December 21,
    1994, may be extended with respect to census tracts located in
    the area damaged due to the bombing of the Alfred P. Murrah
    Federal Building in Oklahoma City on April 19, 1995, primarily
    in the area bounded on the south by Robert S. Kerr Avenue, on
    the north by North 13th Street, on the east by Oklahoma Avenue,
    and on the west by Shartel Avenue.
        (d) Effective Date.--
                (1) In general.--The amendments made by this
            section shall apply to disasters declared after
            December 31, 1994, in taxable years ending after such
            date.
                (2) Subsection (c).--Subsection (c) shall take
            effect on the date of the enactment of this Act.

    SEC. 1120. CLASS LIFE FOR GAS STATION CONVENIENCE STORES AND SIMILAR
                        STRUCTURES.

        (a) In General.--Section 168(e)(3)(E) (classifying certain
    property as 15-year property) is amended by striking ``and'' at
    the end of clause (i), by striking the period at the end of
    clause (ii) and inserting ``, and'', and by adding at the end
    the following new clause:
                                ``(iii) any section 1250 property
                            which is a retail motor fuels outlet
                            (whether or not food or other
                            convenience items are sold at the
                            outlet).''.
        (b) Conforming Amendment.--Subparagraph (B) of section
    168(g)(3) is amended by inserting after the item relating to
    subparagraph (E)(ii) in the table contained therein the
    following new item:

    ``(E)(iii)........................................................ 20''.

        (c)Effective Date.--The amendments made by this section
    shall apply to property which is placed in service on or after
    the date of the enactment of this Act and to which section 168
    of the Internal Revenue Code of 1986 applies after the
    amendment made by section 201 of the Tax Reform Act of 1986. A
    taxpayer may elect (in such form and manner as the Secretary of
    the Treasury may prescribe) to have such amendments apply with
    respect to any property placed in service before such date and
    to which such section so applies.

    SEC. 1121 TREATMENT OF ABANDONMENT OF LESSOR IMPROVEMENTS AT
                        TERMINATION OF LEASE.

        (a) In General.--Paragraph (8) of section 168(i) is amended
    to read as follows:
                ``(8) Treatment of leasehold improvements.--
                        ``(A) In general.--In the case of any
                    building erected (or improvements made) on
                    leased property, if such building or
                    improvement is property to which this section
                    applies, the depreciation deduction shall be
                    determined under the provisions of this
                    section.
                        ``(B) Treatment of lessor improvements
                    which are abandoned at termination of lease.--
                    An improvement--
                                ``(i) which is made by the lessor
                            of leased property for the lessee of
                            such property, and
                                ``(ii) which is irrevocably
                            disposed of or abandoned by the lessor
                            at the termination of the lease by such
                            lessee,
                    shall be treated for purposes of determining
                    gain or loss under this title as disposed of by
                    the lessor when so disposed of or abandoned.''.
        (b) Effective Date.--Subparagraph (B) of section 168(i)(8)
    of the Internal Revenue Code of 1986, as added by the amendment
    made by subsection (a), shall apply to improvements disposed of
    or abandoned after June 12, 1996.

    SEC. 1122. SPECIAL RULES RELATING TO DETERMINATION WHETHER INDIVIDUALS
                        ARE EMPLOYEES FOR PURPOSES OF EMPLOYMENT TAXES.

        (a) In General.--Section 530 of the Revenue Act of 1978 is
    amended by adding at the end the following new subsection:
        ``(e) Special Rules for Application of Section.--
                ``(1) Notice of availability of section.--An
            officer or employee of the Internal Revenue Service
            shall, before or at the commencement of any audit
            inquiry relating to the employment status of one or
            more individuals who perform services for the taxpayer,
            provide the taxpayer with a written notice of the
            provisions of this section.
                ``(2) Rules relating to statutory standards.--For
            purposes of subsection (a)(2)--
                        ``(A) a taxpayer may not rely on an audit
                    commenced after December 31, 1996, for purposes
                    of subparagraph (B) thereof unless such audit
                    included an examination for employment tax
                    purposes of whether the individual involved (or
                    any individual holding a position substantially
                    similar to the position held by the individual
                    involved) should be treated as an employee of
                    the taxpayer,
                        ``(B) in no event shall the significant
                    segment requirement of subparagraph (C) thereof
                    be construed to require a reasonable showing of
                    the practice of more than 25 percent of the
                    industry (determined by not taking into account
                    the taxpayer), and
                        ``(C) in applying the long-standing
                    recognized practice requirement of subparagraph
                    (C) thereof--
                                ``(i) such requirement shall not be
                            construed as requiring the practice to
                            have continued for more than 10 years,
                            and
                                ``(ii) a practice shall not fail to
                            be treated as long-standing merely
                            because such practice began after 1978.
                ``(3) Availability of safe harbors.--Nothing in
            this section shall be construed to provide that
            subsection (a) only applies where the individual
            involved is otherwise an employee of the taxpayer.
                ``(4) Burden of proof.--
                        ``(A) In general.--If--
                                ``(i) a taxpayer establishes a
                            prima facie case that it was reasonable
                            not to treat an individual as an
                            employee for purposes of this section,
                            and
                                ``(ii) the taxpayer has fully
                            cooperated with reasonable requests
                            from the Secretary of the Treasury or
                            his delegate,
                    then the burden of proof with respect to such
                    treatment shall be on the Secretary.
                        ``(B) Exception for other reasonable
                    basis.--In the case of any issue involving
                    whether the taxpayer had a reasonable basis not
                    to treat an individual as an employee for
                    purposes of this section, subparagraph (A)
                    shall only apply for purposes of determining
                    whether the taxpayer meets the requirements of
                    subparagraph (A), (B), or (C) of subsection
                    (a)(2).
                ``(5) Preservation of prior period safe harbor.--
            If--
                        ``(A) an individual would (but for the
                    treatment referred to in subparagraph (B)) be
                    deemed not to be an employee of the taxpayer
                    under subsection (a) for any prior period, and
                        ``(B) such individual is treated by the
                    taxpayer as an employee for employment tax
                    purposes for any subsequent period,
            then, for purposes of applying such taxes for such
            prior period with respect to the taxpayer, the
            individual shall be deemed not to be an employee.
                ``(6) Substantially similar position.--For purposes
            of this section, the determination as to whether an
            individual holds a position substantially similar to a
            position held by another individual shall include
            consideration of the relationship between the taxpayer
            and such individuals.''.
        (b) Effective Dates.--
                (1) In general.--The amendment made by this section
            shall apply to periods after December 31, 1996.
                (2) Notice by internal revenue service.--Section
            530(e)(1) of the Revenue Act of 1978 (as added by
            subsection (a)) shall apply to audits which commence
            after December 31, 1996.
                (3) Burden of proof.--
                        (A) In general.--Section 530(e)(4) of the
                    Revenue Act of 1978 (as added by subsection
                    (a)) shall apply to disputes involving periods
                    after December 31, 1996.
                        (B) No inference.--Nothing in the
                    amendments made by this section shall be
                    construed to infer the proper treatment of the
                    burden of proof with respect to disputes
                    involving periods before January 1, 1997.

    SEC. 1123. TREATMENT OF HOUSING PROVIDED TO EMPLOYEES BY ACADEMIC
                        HEALTH CENTERS.

        (a) In General.--Paragraph (4) of section 119(d) (relating
    to lodging furnished by certain educational institutions to
    employees) is amended to read as follows:
                ``(4) Educational institution, etc.--For purposes
            of this subsection--
                        ``(A) In general.--The term `educational
                    institution' means--
                                ``(i) an institution described in
                            section 170(b)(1)(A)(ii) (or an entity
                            organized under State law and composed
                            of public institutions so described),
                            or
                                ``(ii) an academic health center.
                        ``(B) Academic health center.--For purposes
                    of subparagraph (A), the term `academic health
                    center' means an entity--
                                ``(i) which is described in section
                            170(b)(1)(A)(iii),
                                ``(ii) which receives (during the
                            calendar year in which the taxable year
                            of the taxpayer begins) payments under
                            subsection (d)(5)(B) or (h) of section
                            1886 of the Social Security Act
                            (relating to graduate medical
                            education), and
                                ``(iii) which has as one of its
                            principal purposes or functions the
                            providing and teaching of basic and
                            clinical medical science and research
                            with the entity's own faculty.''.
        (b) Effective Date.--The amendment made by this section
    shall apply to taxable years beginning after December 31, 1995.

              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,
                        ``(F) a qualified summer youth employee, or
                        ``(G) a qualified food stamp recipient.
                ``(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 subparagraph (A)(iv).
                ``(8) Qualified food stamp recipient.--
                        ``(A) In general.--The term `qualified food
                    stamp recipient' 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 being a member of a
                            family--
                                        ``(I) receiving assistance
                                    under a food stamp program
                                    under the Food Stamp Act of
                                    1977 for the 6-month period
                                    ending on the hiring date, or
                                        ``(II) receiving such
                                    assistance for at least 3
                                    months of the 5-month period
                                    ending on the hiring date, in
                                    the case of a member of a
                                    family who ceases to be
                                    eligible for such assistance
                                    under section 6(o) of the Food
                                    Stamp Act of 1977.
                        ``(B) Participation information.--
                    Notwithstanding any other provision of law, the
                    Secretary of the Treasury and the Secretary of
                    Agriculture shall enter into an agreement to
                    provide information to designated local
                    agencies with respect to participation in the
                    food stamp program.
                ``(9) Hiring date.--The term `hiring date' means
            the day the individual is hired by the employer.
                ``(10) 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).
                ``(11) 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 21st 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 400 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
                    October 1, 1996, or
                        ``(B) after September 30, 1997.''.
        (e) Redesignation of Credit.--
                (1) Sections 38(b)(2), 41(b)(2)(D)(iii),
            45A(b)(1)(B), 51 (a) and (g), and 196(c) are each
            amended in the text by striking ``targeted jobs
            credit'' each place it appears 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 headings for sections 41(b)(2)(D)(iii) and
            1396(c)(3) are each amended by striking ``targeted jobs
            credit'' and inserting ``work opportunity credit''.
                (5) The heading for subsection (j) of section 51 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 September 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 ``May 31, 1997. In the
    case of any taxable year beginning in 1997, only expenses paid
    with respect to courses beginning before July 1, 1997, shall be
    taken into account in determining the amount excluded under
    this section.''.
        (b) Limitation to Education Below Graduate Level.--The last
    sentence of section 127(c)(1) is amended by inserting before
    the period the following: ``, and such term also does not
    include any payment for, or the provision of any benefits with
    respect to, any graduate level course of a kind normally taken
    by an individual pursuing a program leading to a law, business,
    medical, or other advanced academic or professional degree''.
        (c) Effective Dates.--
                (1) Extension.--The amendment made by subsection
            (a) shall apply to taxable years beginning after
            December 31, 1994.
                (2) Graduate education.--The amendment made by
            subsection (b) shall apply with respect to expenses
            relating to courses beginning after June 30, 1996.
                (3) Expedited procedures.--The Secretary of the
            Treasury shall establish expedited procedures for the
            refund of any overpayment of taxes imposed by 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.

    SEC. 1204. RESEARCH CREDIT.

        (a) In General.--Subsection (h) of section 41 (relating to
    credit for research activities) is amended to read as follows:
        ``(h) Termination.--
                ``(1) In general.--This section shall not apply to
            any amount paid or incurred--
                        ``(A) after June 30, 1995, and before July
                    1, 1996, or
                        ``(B) after May 31, 1997.
            Notwithstanding the preceding sentence, in the case of
            a taxpayer making an election under subsection (c)(4)
            for its first taxable year beginning after June 30,
            1996, and before July 1, 1997, this section shall apply
            to amounts paid or incurred during the first 11 months
            of such taxable year.
                ``(2) Computation of base amount.--In the case of
            any taxable year with respect to which this section
            applies to a number of days which is less than the
            total number of days in such taxable year, the base
            amount with respect to such taxable year shall be the
            amount which bears the same ratio to the base amount
            for such year (determined without regard to this
            paragraph) as the number of days in such taxable year
            to which this section applies bears to the total number
            of days in such taxable year.''.
        (b) Base Amount for Start-Up Companies.--Clause (i) of
    section 41(c)(3)(B) (relating to start-up companies) is amended
    to read as follows:
                                ``(i)  Taxpayers to which
                            subparagraph applies.--The fixed-base
                            percentage shall be determined under
                            this subparagraph if--
                                        ``(I) the first taxable
                                    year in which a taxpayer had
                                    both gross receipts and
                                    qualified research expenses
                                    begins after December 31, 1983,
                                    or
                                        ``(II) there are fewer than
                                    3 taxable years beginning after
                                    December 31, 1983, and before
                                    January 1, 1989, in which the
                                    taxpayer had both gross
                                    receipts and qualified research
                                    expenses.''.
        (c) Election of Alternative Incremental Credit.--Subsection
    (c) of section 41 is amended by redesignating paragraphs (4)
    and (5) as paragraphs (5) and (6), respectively, and by
    inserting after paragraph (3) the following new paragraph:
                ``(4) Election of alternative incremental credit.--
                        ``(A) In general.--At the election of the
                    taxpayer, the credit determined under
                    subsection (a)(1) shall be equal to the sum
                    of--
                                ``(i) 1.65 percent of so much of
                            the qualified research expenses for the
                            taxable year as exceeds 1 percent of
                            the average described in subsection
                            (c)(1)(B) but does not exceed 1.5
                            percent of such average,
                                ``(ii) 2.2 percent of so much of
                            such expenses as exceeds 1.5 percent of
                            such average but does not exceed 2
                            percent of such average, and
                                ``(iii) 2.75 percent of so much of
                            such expenses as exceeds 2 percent of
                            such average.
                        ``(B) Election.--An election under this
                    paragraph may be made only for the first
                    taxable year of the taxpayer beginning after
                    June 30, 1996. Such an election shall apply to
                    the taxable year for which made and all
                    succeeding taxable years unless revoked with
                    the consent of the Secretary.''.
        (d) Increased Credit for Contract Research Expenses With
    Respect to Certain Research Consortia.--Paragraph (3) of
    section 41(b) is amended by adding at the end the following new
    subparagraph:
                        ``(C) Amounts paid to certain research
                    consortia.--
                                ``(i) In general.--Subparagraph (A)
                            shall be applied by substituting `75
                            percent' for `65 percent' with respect
                            to amounts paid or incurred by the
                            taxpayer to a qualified research
                            consortium for qualified research on
                            behalf of the taxpayer and 1 or more
                            unrelated taxpayers. For purposes of
                            the preceding sentence, all persons
                            treated as a single employer under
                            subsection (a) or (b) of section 52
                            shall be treated as related taxpayers.
                                ``(ii) Qualified research
                            consortium.--The term `qualified
                            research consortium' means any
                            organization which--
                                        ``(I) is described in
                                    section 501(c)(3) or 501(c)(6)
                                    and is exempt from tax under
                                    section 501(a),
                                        ``(II) is organized and
                                    operated primarily to conduct
                                    scientific research, and
                                        ``(III) is not a private
                                    foundation.''.
        (e)  Conforming Amendment.--Subparagraph (D) of section
    28(b)(1) is amended by inserting ``, and before July 1, 1996,
    and periods after May 31, 1997'' after ``June 30, 1995''.
        (f) Effective Dates.--
                (1) In general.--Except as provided in paragraph
            (2), the amendments made by this section shall apply to
            taxable years ending after June 30, 1996.
                (2) Subsections (c) and (d).--The amendments made
            by subsections (c) and (d) shall apply to taxable years
            beginning after June 30, 1996.
                (3) Estimated tax.--The amendments made by this
            section shall not be taken into account under section
            6654 or 6655 of the Internal Revenue Code of 1986
            (relating to failure to pay estimated tax) in
            determining the amount of any installment required to
            be paid for a taxable year beginning in 1997.

    SEC. 1205. ORPHAN DRUG TAX CREDIT.

        (a) Recategorized as a Business Credit.--
                (1) In general.--Section 28 (relating to clinical
            testing expenses for certain drugs for rare diseases or
            conditions) is transferred to subpart D of part IV of
            subchapter A of chapter 1, inserted after section 45B,
            and redesignated as section 45C.
                (2) Conforming amendment.--Subsection (b) of
            section 38 (relating to general business credit) is
            amended by striking ``plus'' at the end of paragraph
            (10), by striking the period at the end of paragraph
            (11) and inserting ``, plus'', and by adding at the end
            the following new paragraph:
                ``(12) the orphan drug credit determined under
            section 45C(a).''.
                (3) Clerical amendments.--
                        (A) The table of sections for subpart B of
                    such part IV is amended by striking the item
                    relating to section 28.
                        (B) The table of sections for subpart D of
                    such part IV is amended by adding at the end
                    the following new item:

        ``Sec. 45C. Clinical testing expenses for certain drugs for rare
                  diseases or conditions.''.

        (b) Credit Termination.--Subsection (e) of section 45C, as
    redesignated by subsection (a)(1), is amended to read as
    follows:
        ``(e) Termination.--This section shall not apply to any
    amount paid or incurred--
                ``(1) after December 31, 1994, and before July 1,
            1996, or
                ``(2) after May 31, 1997.''.
        (c) No Pre-July 1, 1996 Carrybacks.--Subsection (d) of
    section 39 (relating to carryback and carryforward of unused
    credits) is amended by adding at the end the following new
    paragraph:
                ``(7) No carryback of section 45c credit before
            july 1, 1996.--No portion of the unused business credit
            for any taxable year which is attributable to the
            orphan drug credit determined under section 45C may be
            carried back to a taxable year ending before July 1,
            1996.''.
        (d) Additional Conforming Amendments.--
                (1) Section 45C(a), as redesignated by subsection
            (a)(1), is amended by striking ``There shall be allowed
            as a credit against the tax imposed by this chapter for
            the taxable year'' and inserting ``For purposes of
            section 38, the credit determined under this section
            for the taxable year is''.
                (2) Section 45C(d), as so redesignated, is amended
            by striking paragraph (2) and by redesignating
            paragraphs (3), (4), and (5) as paragraphs (2), (3),
            and (4).
                (3) Section 29(b)(6)(A) is amended by striking
            ``sections 27 and 28'' and inserting ``section 27''.
                (4) Section 30(b)(3)(A) is amended by striking
            ``sections 27, 28, and 29'' and inserting ``sections 27
            and 29''.
                (5) Section 53(d)(1)(B) is amended--
                        (A) by striking ``or not allowed under
                    section 28 solely by reason of the application
                    of section 28(d)(2)(B),'' in clause (iii), and
                        (B) by striking ``or not allowed under
                    section 28 solely by reason of the application
                    of section 28(d)(2)(B)'' in clause (iv)(II).
                (6) Section 55(c)(2) is amended by striking
            ``28(d)(2),''.
                (7) Section 280C(b) is amended--
                        (A) by striking ``section 28(b)'' in
                    paragraph (1) and inserting ``section 45C(b)'',
                        (B) by striking ``section 28'' in
                    paragraphs (1) and (2)(A) and inserting
                    ``section 45C'', and
                        (C) by striking ``subsection (d)(2)
                    thereof'' in paragraphs (1) and (2)(A) and
                    inserting ``section 38(c)''.
        (e) Effective Date.--The amendments made by this section
    shall apply to amounts paid or incurred in taxable years ending
    after June 30, 1996.

    SEC. 1206. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.

        (a) In General.--Subparagraph (D) of section 170(e)(5)
    (relating to special rule for contributions of stock for which
    market quotations are readily available) is amended to read as
    follows:
                        ``(D) Termination.--This paragraph shall
                    not apply to contributions made--
                                ``(i) after December 31, 1994, and
                            before July 1, 1996, or
                                ``(ii) after May 31, 1997.''.
        (b) Effective Date.--The amendment made by this section
    shall apply to contributions made after June 30, 1996.

    SEC. 1207. EXTENSION OF BINDING CONTRACT DATE FOR BIOMASS AND COAL
                        FACILITIES.

        (a) In General.--Subparagraph (A) of section 29(g)(1)
    (relating to extension of certain facilities) is amended by
    striking ``January 1, 1997'' and inserting ``July 1, 1998'' and
    by striking ``January 1, 1996'' and inserting ``January 1,
    1997''.
        (b) Effective Date.--The amendment made by this section
    shall take effect on the date of the enactment of this Act.

    SEC. 1208. MORATORIUM FOR EXCISE TAX ON DIESEL FUEL SOLD FOR USE OR
                        USED IN DIESEL-POWERED MOTORBOATS.

        Subparagraph (D) of section 4041(a)(1) (relating to the
    imposition of tax on diesel fuel and special motor fuels) is
    amended by redesignating clauses (i) and (ii) as clauses (ii)
    and (iii), respectively, and by inserting before clause (ii)
    (as redesignated) the following new clause:
                                ``(i) no tax shall be imposed by
                            subsection (a) or (d)(1) during the
                            period beginning on the date which is 7
                            days after the date of the enactment of
                            the Small Business Job Protection Act
                            of 1996 and ending on December 31,
                            1997,''.

               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.
                        ``(D) Election after termination.--If a
                    corporation's status as a qualified subchapter
                    S subsidiary terminates, such corporation (and
                    any successor corporation) shall not be
                    eligible to make--
                                ``(i) an election under
                            subparagraph (B)(ii) to be treated as a
                            qualified subchapter S subsidiary, or
                                ``(ii) an election under section
                            1362(a) to be treated as an S
                            corporation,
                    before its 5th taxable year which begins after
                    the 1st taxable year for which such termination
                    was effective, unless the Secretary consents to
                    such election.''.
        (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. FINANCIAL INSTITUTIONS.

        Subparagraph (A) of section 1361(b)(2) (defining ineligible
    corporation), as redesignated by section 1308(a), is amended to
    read as follows:
                        ``(A) a financial institution which uses
                    the reserve method of accounting for bad debts
                    described in section 585,''.

    SEC. 1316. CERTAIN EXEMPT ORGANIZATIONS ALLOWED TO BE SHAREHOLDERS.

        (a) Eligibility To Be Shareholders.--
                (1) In general.--Subparagraph (B) of section
            1361(b)(1) (defining small business corporation) is
            amended to read as follows:
                        ``(B) have as a shareholder a person (other
                    than an estate, a trust described in subsection
                    (c)(2), or an organization described in
                    subsection (c)(7)) who is not an individual,''.
                (2) Eligible exempt organizations.--Section 1361(c)
            (relating to special rules for applying subsection (b))
            is amended by adding at the end the following new
            paragraph:
                ``(7) Certain exempt organizations permitted as
            shareholders.--For purposes of subsection (b)(1)(B), an
            organization which is--
                        ``(A) described in section 401(a) or
                    501(c)(3), and
                        ``(B) exempt from taxation under section
                    501(a),
            may be a shareholder in an S corporation.''.
        (b) Contributions of S Corporation Stock.--Section
    170(e)(1) (relating to certain contributions of ordinary income
    and capital gain property) is amended by adding at the end the
    following new sentence: ``For purposes of applying this
    paragraph in the case of a charitable contribution of stock in
    an S corporation, rules similar to the rules of section 751
    shall apply in determining whether gain on such stock would
    have been long-term capital gain if such stock were sold by the
    taxpayer.''.
        (c) Treatment of Income.--Section 512 (relating to
    unrelated business taxable income), as amended by section 1113,
    is amended by adding at the end the following new subsection:
        ``(e) Special Rules Applicable to S Corporations.--
                ``(1) In general.--If an organization described in
            section 1361(c)(7) holds stock in an S corporation--
                        ``(A) such interest shall be treated as an
                    interest in an unrelated trade or business; and
                        ``(B) notwithstanding any other provision
                    of this part--
                                ``(i) all items of income, loss, or
                            deduction taken into account under
                            section 1366(a), and
                        ``(ii) any gain or loss on the disposition
                    of the stock in the S corporation
            shall be taken into account in computing the unrelated
            business taxable income of such organization.
                ``(2) Basis reduction.--Except as provided in
            regulations, for purposes of paragraph (1), the basis
            of any stock acquired by purchase (within the meaning
            of section 1012) shall be reduced by the amount of any
            dividends received by the organization with respect to
            the stock.''.
        (d) Certain Benefits not Applicable to S Corporations.--
                (1) Contribution to esops.--Paragraph (9) of
            section 404(a) (relating to certain contributions to
            employee ownership plans) is amended by inserting at
            the end the following new subparagraph:
                        ``(C) S corporations.--This paragraph shall
                    not apply to an S corporation.''.
                (2) Dividends on employer securities.--Paragraph
            (1) of section 404(k) (relating to deduction for
            dividends on certain employer securities) is amended by
            striking ``a corporation'' and inserting ``a C
            corporation''.
                (3) Exchange treatment.--Subparagraph (A) of
            section 1042(c)(1) (defining qualified securities) is
            amended by striking ``domestic corporation'' and
            inserting ``domestic C corporation''.
        (e) Conforming Amendment.--Clause (i) of section
    1361(e)(1)(A), as added by section 1302, is amended by striking
    ``which holds a contingent interest and is not a potential
    current beneficiary''.
        (f) Effective Date.--The amendments made by this section
    shall apply to taxable years beginning after December 31, 1997.

    SEC. 1317. 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, 1999.
                (2) Retention of certain transition rules.--The
            amendments made by this section shall not apply to any
            distribution for which the taxpayer is eligible to
            elect the benefits of section 1122 (h)(3) or (h)(5) of
            the Tax Reform Act of 1986. Notwithstanding the
            preceding sentence, individuals who elect such benefits
            after December 31, 1999, shall not be eligible for 5-
            year averaging under section 402(d) of the Internal
            Revenue Code of 1986 (as in effect immediately before
            such amendments).

    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 annuity starting
              date is:                The number of anticipated 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.''.
        (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 RETIREMENT 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.--
                                ``(i) In general.--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
                            60-day period for such year under
                            paragraph (5)(C).
                                ``(ii) Compensation limitation.--
                            The compensation taken into account
                            under clause (i) for any year shall not
                            exceed the limitation in effect for
                            such year under section 401(a)(17).
                        ``(C) Definitions.--For purposes of this
                    subsection--
                                ``(i) Eligible employer.--
                                        ``(I) In general.--The term
                                    `eligible employer' means, with
                                    respect to any year, an
                                    employer which had no more than
                                    100 employees who received at
                                    least $5,000 of compensation
                                    from the employer for the
                                    preceding year.
                                        ``(II) 2-year grace
                                    period.--An eligible employer
                                    who establishes and maintains a
                                    plan under this subsection for
                                    1 or more years and who fails
                                    to be an eligible employer for
                                    any subsequent year shall be
                                    treated as an eligible employer
                                    for the 2 years following the
                                    last year the employer was an
                                    eligible employer. If such
                                    failure is due to any
                                    acquisition, disposition, or
                                    similar transaction involving
                                    an eligible employer, the
                                    preceding sentence shall apply
                                    only in accordance with rules
                                    similar to the rules of section
                                    410(b)(6)(C)(i).
                                ``(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 60-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,
                    1996, 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 60-day period before the
                    beginning of any year (and the 60-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.
                ``(7) Use of designated financial institution.--A
            plan shall not be treated as failing to satisfy the
            requirements of this subsection or any other provision
            of this title merely because the employer makes all
            contributions to the individual retirement accounts or
            annuities of a designated trustee or issuer. The
            preceding sentence shall not apply unless each plan
            participant is notified in writing (either separately
            or as part of the notice under subsection (l)(2)(C))
            that the participant's balance may be transferred
            without cost or penalty to another individual account
            or annuity in accordance with subsection (d)(3)(G).''.
        (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 subsection (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)(6) 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) 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) Modifications of ERISA.--
                (1) Reporting requirements.--Section 101 of the
            Employee Retirement Income Security Act of 1974 (29
            U.S.C. 1021) is amended by redesignating subsection (g)
            as subsection (h) and by inserting after subsection (f)
            the following new subsection:
        ``(g) Simple Retirement Accounts.--
                ``(1) No employer reports.--Except as provided in
            this subsection, no report shall be required under this
            section by an employer maintaining a qualified salary
            reduction arrangement under section 408(p) of the
            Internal Revenue Code of 1986.
                ``(2) Summary description.--The trustee of any
            simple retirement account established pursuant to a
            qualified salary reduction arrangement under section
            408(p) of such Code shall provide to the employer
            maintaining the arrangement each year a description
            containing the following information:
                        ``(A) The name and address of the employer
                    and the trustee.
                        ``(B) The requirements for eligibility for
                    participation.
                        ``(C) The benefits provided with respect to
                    the arrangement.
                        ``(D) The time and method of making
                    elections with respect to the arrangement.
                        ``(E) The procedures for, and effects of,
                    withdrawals (including rollovers) from the
                    arrangement.
                ``(3) Employee notification.--The employer shall
            notify each employee immediately before the period for
            which an election described in section 408(p)(5)(C) of
            such Code may be made of the employee's opportunity to
            make such election. Such notice shall include a copy of
            the description described in paragraph (2).''
                (2) Fiduciary duties.--Section 404(c) of such Act
            (29 U.S.C. 1104(c)) is amended by inserting ``(1)''
            after ``(c)'', by redesignating paragraphs (1) and (2)
            as subparagraphs (A) and (B), respectively, and by
            adding at the end the following new paragraph:
                ``(2) In the case of a simple retirement account
            established pursuant to a qualified salary reduction
            arrangement under section 408(p) of the Internal
            Revenue Code of 1986, a participant or beneficiary
            shall, for purposes of paragraph (1), be treated as
            exercising control over the assets in the account upon
            the earliest of--
                        ``(A) an affirmative election among
                    investment options with respect to the initial
                    investment of any contribution,
                        ``(B) a rollover to any other simple
                    retirement account or individual retirement
                    plan, or
                        ``(C) one year after the simple retirement
                    account is established.
            No reports, other than those required under section
            101(g), shall be required with respect to a simple
            retirement account established pursuant to such a
            qualified salary reduction arrangement.''.
        (e) 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 plan
                            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
                            60th day before the beginning of such
                            year.
                        ``(C) Exclusive plan requirement.--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 plan 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 may include a
                            qualified cash or deferred arrangement
                            as part of a plan maintained by the
                            employer.''.
        (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.

    SEC. 1427. HOMEMAKERS ELIGIBLE FOR FULL IRA DEDUCTION.

        (a) Spousal IRA Computed on Basis of Compensation of Both
    Spouses.--Subsection (c) of section 219 (relating to special
    rules for certain married individuals) is amended to read as
    follows:
        ``(c) Special Rules for Certain Married Individuals.--
                ``(1) In general.--In the case of an individual to
            whom this paragraph applies for the taxable year, the
            limitation of paragraph (1) of subsection (b) shall be
            equal to the lesser of--
                        ``(A) the dollar amount in effect under
                    subsection (b)(1)(A) for the taxable year, or
                        ``(B) the sum of--
                                ``(i) the compensation includible
                            in such individual's gross income for
                            the taxable year, plus
                                ``(ii) the compensation includible
                            in the gross income of such
                            individual's spouse for the taxable
                            year reduced by the amount allowed as a
                            deduction under subsection (a) to such
                            spouse for such taxable year.
                ``(2) Individuals to whom paragraph (1) applies.--
            Paragraph (1) shall apply to any individual if--
                        ``(A) such individual files a joint return
                    for the taxable year, and
                        ``(B) the amount of compensation (if any)
                    includible in such individual's gross income
                    for the taxable year is less than the
                    compensation includible in the gross income of
                    such individual's spouse for the taxable
                    year.''.
        (b) Conforming Amendments.--
                (1) Paragraph (2) of section 219(f) (relating to
            other definitions and special rules) is amended by
            striking ``subsections (b) and (c)'' and inserting
            ``subsection (b)''.
                (2) Section 219(g)(1) is amended by striking
            ``(c)(2)'' and inserting ``(c)(1)(A)''.
                (3) Section 408(d)(5) is amended by striking
            ``$2,250'' and inserting ``the dollar amount in effect
            under section 219(b)(1)(A)''.
        (c) Effective Date.--The amendments made by this section
    shall apply to taxable years beginning after December 31, 1996.

                    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) if the employer elects the
                            application of this clause for such
                            preceding year, was in the top-paid
                            group of employees for such preceding
                            year.
            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), and (12) and by
            redesignating paragraphs (3), (4), (7), (8), (9), (10),
            and (11) as paragraphs (2) through (8), 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(q)(5)''.
                (D) Subparagraph (A) of section 414(r)(2) is
            amended by striking ``subsection (q)(8)'' and inserting
            ``subsection (q)(5)''.
                (E) Section 414(q)(5), as redesignated by
            subparagraph (A), is amended by striking ``under
            paragraph (4), or the number of officers taken into
            account under paragraph (5)''.
                (2) 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 section 1422(b), 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.--Section
            401(k)(3)(A) is amended--
                        (A) by striking ``such year'' in clause
                    (ii) and inserting ``the plan year'',
                        (B) by striking ``for such plan year'' in
                    clause (ii) and inserting ``for the preceding
                    plan year'', and
                        (C) by adding at the end the following new
                    sentence: ``An arrangement may apply clause
                    (ii) 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 or deferred by the employer
                            at the election of the employee and
                            which is not includible in the gross
                            income of the employee by reason of
                            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) Amendments to 1986 Code.--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) Amendments to ERISA.--Paragraph (2) of section 203(a)
    of the Employee Retirement Income Security Act of 1974 (29
    U.S.C. 1053(a)) is amended--
                (1) by striking ``subparagraph (A), (B), or (C)''
            and inserting ``subparagraph (A) or (B)''; and
                (2) by striking subparagraph (C).
        (c) 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) Public utility districts.--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 imply 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 a plan in
            existence 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 the amendments made
                            by subsection (b) 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) Constructive receipt.--Section 402(e)(3) is
            amended by inserting ``or which is part of a salary
            reduction agreement under section 403(b)'' after
            ``section 401(k)(2))''.
                (3) 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. SPECIAL RULES RELATING TO JOINT AND SURVIVOR ANNUITY
                        EXPLANATIONS.

        (a) Amendment to Internal Revenue Code.--Section 417(a) is
    amended by adding at the end the following new paragraph:
                ``(7) Special rules relating to time for written
            explanation.--Notwithstanding any other provision of
            this subsection--
                        ``(A) Explanation may be provided after
                    annuity starting date.--
                                ``(i) In general.--A plan may
                            provide the written explanation
                            described in paragraph (3)(A) after the
                            annuity starting date. In any case to
                            which this subparagraph applies, the
                            applicable election period under
                            paragraph (6) shall not end before the
                            30th day after the date on which such
                            explanation is provided.
                                ``(ii) Regulatory authority.--The
                            Secretary may by regulations limit the
                            application of clause (i), except that
                            such regulations may not limit the
                            period of time by which the annuity
                            starting date precedes the provision of
                            the written explanation other than by
                            providing that the annuity starting
                            date may not be earlier than
                            termination of employment.
                        ``(B) Waiver of 30-day period.--A plan may
                    permit a participant to elect (with any
                    applicable spousal consent) to waive any
                    requirement that the written explanation be
                    provided at least 30 days before the annuity
                    starting date (or to waive the 30-day
                    requirement under subparagraph (A)) if the
                    distribution commences more than 7 days after
                    such explanation is provided.''
        (b) Amendment to ERISA.--Section 205(c) of the Employee
    Retirement Income Security Act of 1974 (29 U.S.C. 1055(c)) is
    amended by adding at the end the following new paragraph:
                ``(8) Notwithstanding any other provision of this
            subsection--
                        ``(A)(i) A plan may provide the written
                    explanation described in paragraph (3)(A) after
                    the annuity starting date. In any case to which
                    this subparagraph applies, the applicable
                    election period under paragraph (7) shall not
                    end before the 30th day after the date on which
                    such explanation is provided.
                        ``(ii) The Secretary may by regulations
                    limit the application of clause (i), except
                    that such regulations may not limit the period
                    of time by which the annuity starting date
                    precedes the provision of the written
                    explanation other than by providing that the
                    annuity starting date may not be earlier than
                    termination of employment.
                        ``(B) A plan may permit a participant to
                    elect (with any applicable spousal consent) to
                    waive any requirement that the written
                    explanation be provided at least 30 days before
                    the annuity starting date (or to waive the 30-
                    day requirement under subparagraph (A)) if the
                    distribution commences more than 7 days after
                    such explanation is provided.''
        (c) Effective Date.--The amendments made by this section
    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, 1996, and before January 1, 2000, 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, 1999.
                (2) Excess distributions.--The amendment made by
            subsection (b) shall apply to years beginning after
            December 31, 1996.

    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) is
            amended by striking ``or'' at the end of subparagraph
            (U), by striking the period at the end of subparagraph
            (V) and inserting a comma, and by inserting after
            subparagraph (V) the following new subparagraphs:
                        ``(W) 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
                        ``(X) 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)(X).''.
                (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)(W).''.
        (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 or any parsonage allowance (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. SAMPLE LANGUAGE FOR SPOUSAL CONSENT AND QUALIFIED DOMESTIC
                        RELATIONS FORMS.

        (a) Development of Sample Language.--Not later than January
    1, 1997, the Secretary of the Treasury shall develop--
                (1) sample language for inclusion in a form for the
            spousal consent required under section 417(a)(2) of the
            Internal Revenue Code of 1986 and section 205(c)(2) of
            the Employee Retirement Income Security Act of 1974
            which--
                        (A) is written in a manner calculated to be
                    understood by the average person, and
                        (B) discloses in plain form--
                                (i) whether the waiver to which the
                            spouse consents is irrevocable, and
                                (ii) whether such waiver may be
                            revoked by a qualified domestic
                            relations order, and
                (2) sample language for inclusion in a form for a
            qualified domestic relations order described in section
            414(p)(1)(A) of such Code and section 206(d)(3)(B)(i)
            of such Act which--
                        (A) meets the requirements contained in
                    such sections, and
                        (B) the provisions of which focus attention
                    on the need to consider the treatment of any
                    lump sum payment, qualified joint and survivor
                    annuity, or qualified preretirement survivor
                    annuity.
        (b) Publicity.--The Secretary of the Treasury shall include
    publicity for the sample language developed under subsection
    (a) in the pension outreach efforts undertaken by the
    Secretary.

    SEC. 1458. TREATMENT OF LENGTH OF SERVICE AWARDS TO VOLUNTEERS
                        PERFORMING FIRE FIGHTING OR PREVENTION SERVICES,
                        EMERGENCY MEDICAL SERVICES, OR AMBULANCE SERVICES.

        (a) In General.--Paragraph (11) of section 457(e) (relating
    to deferred compensation plans of State and local governments
    and tax-exempt organizations) is amended to read as follows:
                ``(11) Certain plans excluded.--
                        ``(A) In general.--The following plans
                    shall be treated as not providing for the
                    deferral of compensation:
                                ``(i) Any bona fide vacation leave,
                            sick leave, compensatory time,
                            severance pay, disability pay, or death
                            benefit plan.
                                ``(ii) Any plan paying solely
                            length of service awards to bona fide
                            volunteers (or their beneficiaries) on
                            account of qualified services performed
                            by such volunteers.
                        ``(B) Special rules applicable to length of
                    service award plans.--
                                ``(i) Bona fide volunteer.--An
                            individual shall be treated as a bona
                            fide volunteer for purposes of
                            subparagraph (A)(ii) if the only
                            compensation received by such
                            individual for performing qualified
                            services is in the form of--
                                        ``(I) reimbursement for (or
                                    a reasonable allowance for)
                                    reasonable expenses incurred in
                                    the performance of such
                                    services, or
                                        ``(II) reasonable benefits
                                    (including length of service
                                    awards), and nominal fees for
                                    such services, customarily paid
                                    by eligible employers in
                                    connection with the performance
                                    of such services by volunteers.
                                ``(ii) Limitation on accruals.--A
                            plan shall not be treated as described
                            in subparagraph (A)(ii) if the
                            aggregate amount of length of service
                            awards accruing with respect to any
                            year of service for any bona fide
                            volunteer exceeds $3,000.
                        ``(C) Qualified services.--For purposes of
                    this paragraph, the term `qualified services'
                    means fire fighting and prevention services,
                    emergency medical services, and ambulance
                    services.''.
        (b) Exemption From Social Security Taxes.--
                (1) Subsection (a)(5) of section 3121, as amended
            by section 1421, is amended by striking ``(or)'' at the
            end of subparagraph (G), by inserting ``or'' at the end
            of subparagraph (H), and by adding at the end the
            following new subparagraph:
                        ``(I) under a plan described in section
                    457(e)(11)(A)(ii) and maintained by an eligible
                    employer (as defined in section 457(e)(1)).''.
                (2) Section 209(a)(4) of the Social Security Act is
            amended by inserting ``; or (K) under a plan described
            in section 457(e)(11)(A)(ii) of the Internal Revenue
            Code of 1986 and maintained by an eligible employer (as
            defined in section 457(e)(1) of such Code)'' before the
            semicolon at the end thereof.
        (c) Effective Date.--
                (1) Subsection (a).--The amendment made by
            subsection (a) shall apply to accruals of length of
            service awards after December 31, 1996.
                (2) Subsection (b).--The amendments made by
            subsection (b) shall apply to remuneration paid after
            December 31, 1996.

    SEC. 1459. ALTERNATIVE NONDISCRIMINATION RULES FOR CERTAIN PLANS THAT
                        PROVIDE FOR EARLY PARTICIPATION.

        (a) Cash or Deferred Arrangements.--Paragraph (3) of
    section 401(k) (relating to application of participation and
    discrimination standards), as amended by section 1433(d)(1) of
    this Act, is amended by adding at the end the following new
    subparagraph:
                        ``(F) Special rule for early
                    participation.--If an employer elects to apply
                    section 410(b)(4)(B) in determining whether a
                    cash or deferred arrangement meets the
                    requirements of subparagraph (A)(i), the
                    employer may, in determining whether the
                    arrangement meets the requirements of
                    subparagraph (A)(ii), exclude from
                    consideration all eligible employees (other
                    than highly compensated employees) who have not
                    met the minimum age and service requirements of
                    section 410(a)(1)(A).''.
        (b) Matching Contributions.--Paragraph (5) of section
    401(m) (relating to employees taken into consideration) is
    amended by adding at the end the following new subparagraph:
                        ``(C) Special rule for early
                    participation.--If an employer elects to apply
                    section 410(b)(4)(B) in determining whether a
                    plan meets the requirements of section 410(b),
                    the employer may, in determining whether the
                    plan meets the requirements of paragraph (2),
                    exclude from consideration all eligible
                    employees (other than highly compensated
                    employees) who have not met the minimum age and
                    service requirements of section
                    410(a)(1)(A).''.
        (c) Effective Date.--The amendments made by this section
    shall apply to plan years beginning after December 31, 1998.

    SEC. 1460. CLARIFICATION OF APPLICATION OF ERISA TO INSURANCE COMPANY
                        GENERAL ACCOUNTS.

        (a) In General.--Section 401 of the Employee Retirement
    Income Security Act of 1974 (29 U.S.C. 1101) is amended by
    adding at the end the following new subsection:
        ``(c)(1)(A) Not later than June 30, 1997, the Secretary
    shall issue proposed regulations to provide guidance for the
    purpose of determining, in cases where an insurer issues 1 or
    more policies to or for the benefit of an employee benefit plan
    (and such policies are supported by assets of such insurer's
    general account), which assets held by the insurer (other than
    plan assets held in its separate accounts) constitute assets of
    the plan for purposes of this part and section 4975 of the
    Internal Revenue Code of 1986 and to provide guidance with
    respect to the application of this title to the general account
    assets of insurers.
        ``(B) The proposed regulations under subparagraph (A) shall
    be subject to public notice and comment until September 30,
    1997.
        ``(C) The Secretary shall issue final regulations providing
    the guidance described in subparagraph (A) not later than
    December 31, 1997.
        ``(D) Such regulations shall only apply with respect to
    policies which are issued by an insurer on or before December
    31, 1998, to or for the benefit of an employee benefit plan
    which is supported by assets of such insurer's general account.
    With respect to policies issued on or before December 31, 1998,
    such regulations shall take effect at the end of the 18-month
    period following the date on which such regulations become
    final.
        ``(2) The Secretary shall ensure that the regulations
    issued under paragraph (1)--
                ``(A) are administratively feasible, and
                ``(B) protect the interests and rights of the plan
            and of its participants and beneficiaries (including
            meeting the requirements of paragraph (3)).
        ``(3) The regulations prescribed by the Secretary pursuant
    to paragraph (1) shall require, in connection with any policy
    issued by an insurer to or for the benefit of an employee
    benefit plan to the extent that the policy is not a guaranteed
    benefit policy (as defined in subsection (b)(2)(B))--
                ``(A) that a plan fiduciary totally independent of
            the insurer authorize the purchase of such policy
            (unless such purchase is a transaction exempt under
            section 408(b)(5)),
                ``(B) that the insurer describe (in such form and
            manner as shall be prescribed in such regulations), in
            annual reports and in policies issued to the
            policyholder after the date on which such regulations
            are issued in final form pursuant to paragraph (1)(C)
            --
                        ``(i) a description of the method by which
                    any income and expenses of the insurer's
                    general account are allocated to the policy
                    during the term of the policy and upon the
                    termination of the policy, and
                        ``(ii) for each report, the actual return
                    to the plan under the policy and such other
                    financial information as the Secretary may deem
                    appropriate for the period covered by each such
                    annual report,
                ``(C) that the insurer disclose to the plan
            fiduciary the extent to which alternative arrangements
            supported by assets of separate accounts of the insurer
            (which generally hold plan assets) are available,
            whether there is a right under the policy to transfer
            funds to a separate account and the terms governing any
            such right, and the extent to which support by assets
            of the insurer's general account and support by assets
            of separate accounts of the insurer might pose
            differing risks to the plan, and
                ``(D) that the insurer manage those assets of the
            insurer which are assets of such insurer's general
            account (irrespective of whether any such assets are
            plan assets) with the care, skill, prudence, and
            diligence under the circumstances then prevailing that
            a prudent man acting in a like capacity and familiar
            with such matters would use in the conduct of an
            enterprise of a like character and with like aims,
            taking into account all obligations supported by such
            enterprise.
        ``(4) Compliance by the insurer with all requirements of
    the regulations issued by the Secretary pursuant to paragraph
    (1) shall be deemed compliance by such insurer with sections
    404, 406, and 407 with respect to those assets of the insurer's
    general account which support a policy described in paragraph
    (3).
        ``(5)(A) Subject to subparagraph (B), any regulations
    issued under paragraph (1) shall not take effect before the
    date on which such regulations become final.
        ``(B) No person shall be subject to liability under this
    part or section 4975 of the Internal Revenue Code of 1986 for
    conduct which occurred before the date which is 18 months
    following the date described in subparagraph (A) on the basis
    of a claim that the assets of an insurer (other than plan
    assets held in a separate account) constitute assets of the
    plan, except--
                ``(i) as otherwise provided by the Secretary in
            regulations intended to prevent avoidance of the
            regulations issued under paragraph (1), or
                ``(ii) as provided in an action brought by the
            Secretary pursuant to paragraph (2) or (5) of section
            502(a) for a breach of fiduciary responsibilities which
            would also constitute a violation of Federal or State
            criminal law.
    The Secretary shall bring a cause of action described in clause
    (ii) if a participant, beneficiary, or fiduciary demonstrates
    to the satisfaction of the Secretary that a breach described in
    clause (ii) has occurred.
        ``(6) Nothing in this subsection shall preclude the
    application of any Federal criminal law.
        ``(7) For purposes of this subsection, the term `policy'
    includes a contract.''.
        (b) Effective Date.--
                (1) In general.--Except as provided in paragraph
            (2), the amendment made by this section shall take
            effect on January 1, 1975.
                (2) Civil actions.--The amendment made by this
            section shall not apply to any civil action commenced
            before November 7, 1995.

    SEC. 1461. SPECIAL RULES FOR CHAPLAINS AND SELF-EMPLOYED MINISTERS.

        (a) In General.--Section 414(e) (defining church plan) is
    amended by adding at the end the following new paragraph:
                ``(5) Special rules for chaplains and self-employed
            ministers.--
                        ``(A) Certain ministers may participate.--
                    For purposes of this part--
                                ``(i) In general.--An employee of a
                            church or a convention or association
                            of churches shall include a duly
                            ordained, commissioned, or licensed
                            minister of a church who, in connection
                            with the exercise of his or her
                            ministry--
                                        ``(I) is a self-employed
                                    individual (within the meaning
                                    of section 401(c)(1)(B)), or
                                        ``(II) is employed by an
                                    organization other than an
                                    organization described in
                                    section 501(c)(3).
                                ``(ii) Treatment as employer and
                            employee.--
                                        ``(I) Self-employed.--A
                                    minister described in clause
                                    (i)(I) shall be treated as his
                                    or her own employer which is an
                                    organization described in
                                    section 501(c)(3) and which is
                                    exempt from tax under section
                                    501(a).
                                        ``(II) Others.--A minister
                                    described in clause (i)(II)
                                    shall be treated as employed by
                                    an organization described in
                                    section 501(c)(3) and exempt
                                    from tax under section 501(a).
                        ``(B) Special rules for applying section
                    403(b) to self-employed ministers.--In the case
                    of a minister described in subparagraph
                    (A)(i)(I)--
                                ``(i) the minister's includible
                            compensation under section 403(b)(3)
                            shall be determined by reference to the
                            minister's earned income (within the
                            meaning of section 401(c)(2)) from such
                            ministry rather than the amount of
                            compensation which is received from an
                            employer, and
                                ``(ii) the years (and portions of
                            years) in which such minister was a
                            self-employed individual (within the
                            meaning of section 401(c)(1)(B)) with
                            respect to such ministry shall be
                            included for purposes of section
                            403(b)(4).
                        ``(C) Effect on non-denominational plans.--
                    If a duly ordained, commissioned, or licensed
                    minister of a church in the exercise of his or
                    her ministry participates in a church plan
                    (within the meaning of this section) and in the
                    exercise of such ministry is employed by an
                    employer not eligible to participate in such
                    church plan, then such employer may exclude
                    such minister from being treated as an employee
                    of such employer for purposes of applying
                    sections 401(a)(3), 401(a)(4), and 401(a)(5),
                    as in effect on September 1, 1974, and sections
                    401(a)(4), 401(a)(5), 401(a)(26), 401(k)(3),
                    401(m), 403(b)(1)(D) (including section
                    403(b)(12)), and 410 to any stock bonus,
                    pension, profit-sharing, or annuity plan
                    (including an annuity described in section
                    403(b) or a retirement income account described
                    in section 403(b)(9)). The Secretary shall
                    prescribe such regulations as may be necessary
                    or appropriate to carry out the purpose of, and
                    prevent the abuse of, this subparagraph.
                        ``(D) Compensation taken into account only
                    once.--If any compensation is taken into
                    account in determining the amount of any
                    contributions made to, or benefits to be
                    provided under, any church plan, such
                    compensation shall not also be taken into
                    account in determining the amount of any
                    contributions made to, or benefits to be
                    provided under, any other stock bonus, pension,
                    profit-sharing, or annuity plan which is not a
                    church plan.''
        (b) Contributions by Certain Ministers to Retirement Income
    Accounts.--Section 404(a) (relating to deduction for
    contributions of an employer to an employees' trust or annuity
    plan and compensation under a deferred-payment plan) is amended
    by adding at the end the following new paragraph:
                ``(10) Contributions by certain ministers to
            retirement income accounts.--In the case of
            contributions made by a minister described in section
            414(e)(5) to a retirement income account described in
            section 403(b)(9) and not by a person other than such
            minister, such contributions--
                        ``(A) shall be treated as made to a trust
                    which is exempt from tax under section 501(a)
                    and which is part of a plan which is described
                    in section 401(a), and
                        ``(B) shall be deductible under this
                    subsection to the extent such contributions do
                    not exceed the limit on elective deferrals
                    under section 402(g), the exclusion allowance
                    under section 403(b)(2), or the limit on annual
                    additions under section 415.
            For purposes of this paragraph, all plans in which the
            minister is a participant shall be treated as one
            plan.''.
        (c) Effective Date.--The amendments made by this section
    shall apply to years beginning after December 31, 1996.

    SEC. 1462. DEFINITION OF HIGHLY COMPENSATED EMPLOYEE FOR PRE-ERISA
                        RULES FOR CHURCH PLANS.

        (a) In General.--Section 414(q) (defining highly
    compensated employee), as amended by section 1431(c)(1)(A) of
    this Act, is amended by adding at the end the following new
    paragraph:
                ``(7) Certain employees not considered highly
            compensated and excluded employees under pre-erisa
            rules for church plans.--In the case of a church plan
            (as defined in subsection (e)), no employee shall be
            considered an officer, a person whose principal duties
            consist of supervising the work of other employees, or
            a highly compensated employee for any year unless such
            employee is a highly compensated employee under
            paragraph (1) for such year.''.
        (b) Safeharbor Authority.--The Secretary of the Treasury
    may design nondiscrimination and coverage safe harbors for
    church plans.
        (c) Effective Date.--The amendments made by subsection (a)
    shall apply to years beginning after December 31, 1996.

    SEC. 1463. RULE RELATING TO INVESTMENT IN CONTRACT NOT TO APPLY TO
                        FOREIGN MISSIONARIES.

        (a) In General.--The last sentence of section 72(f) is
    amended by inserting ``, or to the extent such credits are
    attributable to services performed as a foreign missionary
    (within the meaning of section 403(b)(2)(D)(iii))'' before the
    end period.
        (b) Effective Date.--The amendment made by this section
    shall apply to taxable years beginning after December 31, 1996.

    SEC. 1464. WAIVER OF EXCISE TAX ON FAILURE TO PAY LIQUIDITY SHORTFALL.

        (a) In General.--Section 4971(f) (relating to failure to
    pay liquidity shortfall) is amended by adding at the end the
    following new paragraph:
                ``(4) Waiver by secretary.--If the taxpayer
            establishes to the satisfaction of the Secretary that--
                        ``(A) the liquidity shortfall described in
                    paragraph (1) was due to reasonable cause and
                    not willful neglect, and
                        ``(B) reasonable steps have been taken to
                    remedy such liquidity shortfall,
            the Secretary may waive all or part of the tax imposed
            by this subsection.''.
        (b) Effective Date.--The amendment made by this section
    shall take effect as if included in the amendment made by
    clause (ii) of section 751(a)(9)(B) of the Retirement
    Protection Act of 1994 (108 Stat. 5020).

    SEC. 1465. 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, 1998, 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 ``2000'' for ``1998''.

                       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) Subparagraph (G) of section 904(d)(3), as
            amended by section 1703(i)(1), is amended by striking
            ``subparagraph (B) or (C) of section 951(a)(1)'' and
            inserting ``section 951(a)(1)(B)''.
                (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 and by earnings and profits described in section
            959(c)(1).''.
                (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''.
                (11) Subparagraph (G) of section 904(d)(3) is
            amended by striking ``subparagraph (B) or (C) of
            section 951(a)(1)'' and inserting ``section
            951(a)(1)(B)''.
        (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

                           PART I--GENERAL PROVISIONS

    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)(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,
                            or
                                ``(ii) which acquired all of the
                            assets of a trade or business of a
                            corporation which--
                                        ``(I) satisfied the
                                    requirements of subclause (I)
                                    of clause (i) with respect to
                                    such trade or business, and
                                        ``(II) satisfied the
                                    requirements of subclause (II)
                                    of clause (i).
                        ``(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 (other than in an acquisition
                    described in subparagraph (A)(ii)), 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.--
                (1) In general.--Except as provided in paragraph
            (2), the amendments made by this section shall apply to
            taxable years beginning after December 31, 1995.
                (2) Special rule for qualified possession source
            investment income.--The amendments made by this section
            shall not apply to qualified possession source
            investment income received or accrued before July 1,
            1996, without regard to the taxable year in which
            received or accrued.
                (3) Special transition rule for payment of
            estimated tax installment.--In determining the amount
            of any installment due under section 6655 of the
            Internal Revenue Code of 1986 after the date of the
            enactment of this Act and before October 1, 1996, only
            \1/2\ of any increase in tax (for the taxable year for
            which such installment is made) by reason of the
            amendments made by subsections (a) and (b) shall be
            taken into account. Any reduction in such installment
            by reason of the preceding sentence shall be recaptured
            by increasing the next required installment for such
            year by the amount of such reduction.

    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 the date of the
            enactment of this Act.
                (2) Refinancings.--The amendments made by this
            section shall not apply to loans made after the date of
            the enactment of this Act 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 before June 10, 1996, and at
            all times thereafter before such loan is made, shall be
            treated for purposes of paragraphs (1) and (2) as a
            loan made on or before the date of the enactment of
            this Act.

    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.--
                                ``(i) In general.--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.
                                ``(ii) Affiliate.--For purposes of
                            this subparagraph--
                                        ``(I) In general.--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).
                                        ``(II) Special Rule.--Two
                                    or more organizations (and any
                                    affiliates of such
                                    organizations) shall be treated
                                    as affiliates if such
                                    organizations are colleges or
                                    universities described in
                                    section 170(b)(1)(A)(ii) or
                                    organizations described in
                                    section 170(b)(1)(A)(iii) and
                                    participate in an insurance
                                    arrangement that provides for
                                    any profits from such
                                    arrangement to be returned to
                                    the policyholders in their
                                    capacity as such.
                        ``(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 had a cost 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 1 or
                    more episodes 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.
                (3) Underpayments of income tax.--No addition to
            tax shall be made under section 6662 of such Code as a
            result of the application of subsection (d) of that
            section (relating to substantial understatements of
            income tax) with respect to any underpayment of income
            tax for any taxable year ending before such date of
            enactment, to the extent such underpayment was created
            or increased by the amendments made by subsection (a).

    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 the date of the enactment of
            this Act, 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.

    SEC. 1607. EXTENSION AND PHASEDOWN OF LUXURY PASSENGER AUTOMOBILE TAX.

        (a) Extension.--Subsection (f) of section 4001 is amended
    by striking ``1999'' and inserting ``2002''.
        (b) Phasedown.--Section 4001 is amended by redesignating
    subsection (f) (as amended by subsection (a) of this section)
    as subsection (g) and by inserting after subsection (e) the
    following new subsection:
        ``(f) Phasedown.--For sales occurring in calendar years
    after 1995 and before 2003, subsection (a) shall be applied by
    substituting for `10 percent' the percentage determined in
    accordance with the following table:

    ``If the calendar year is:                            The percentage is:
      1996..................................................    9 percent
      1997..................................................    8 percent
      1998..................................................    7 percent
      1999..................................................    6 percent
      2000..................................................    5 percent
      2001..................................................    4 percent
      2002.................................................. 3 percent.''.

        (c) Effective Date.--The amendments made by this section
    shall apply with respect to sales occurring after the date
    which is 7 days after the date of the enactment of this Act.

    SEC. 1608. TERMINATION OF FUTURE TAX-EXEMPT BOND FINANCING FOR LOCAL
                        FURNISHERS OF ELECTRICITY AND GAS.

        (a) In General.--Section 142(f) (relating to local
    furnishing of electric energy or gas) is amended by adding at
    the end the following new paragraphs:
                ``(3) Termination of future financing.--For
            purposes of this section, no bond may be issued as part
            of an issue described in subsection (a)(8) with respect
            to a facility for the local furnishing of electric
            energy or gas on or after the date of the enactment of
            this paragraph unless--
                        ``(A) the facility will--
                                ``(i) be used by a person who is
                            engaged in the local furnishing of that
                            energy source on January 1, 1997, and
                                ``(ii) be used to provide service
                            within the area served by such person
                            on January 1, 1997, (or within a county
                            or city any portion of which is within
                            such area), or
                        ``(B) the facility will be used by a
                    successor in interest to such person for the
                    same use and within the same service area as
                    described in subparagraph (A).
                ``(4) Election to terminate tax-exempt bond
            financing by certain furnishers.--
                        ``(A) In general.--In the case of a
                    facility financed with bonds issued before the
                    date of the enactment of this paragraph which
                    would cease to be tax-exempt by reason of the
                    failure to meet the local furnishing
                    requirement of subsection (a)(8) as a result of
                    a service area expansion, such bonds shall not
                    cease to be tax-exempt bonds (and section
                    150(b)(4) shall not apply) if the person
                    engaged in such local furnishing by such
                    facility makes an election described in
                    subparagraph (B).
                        ``(B) Election.--An election is described
                    in this subparagraph if it is an election made
                    in such manner as the Secretary prescribes, and
                    such person (or its predecessor in interest)
                    agrees that--
                                ``(i) such election is made with
                            respect to all facilities for the local
                            furnishing of electric energy or gas,
                            or both, by such person,
                                ``(ii) no bond exempt from tax
                            under section 103 and described in
                            subsection (a)(8) may be issued on or
                            after the date of the enactment of this
                            paragraph with respect to all such
                            facilities of such person,
                                ``(iii) any expansion of the
                            service area--
                                        ``(I) is not financed with
                                    the proceeds of any exempt
                                    facility bond described in
                                    subsection (a)(8), and
                                        ``(II) is not treated as a
                                    nonqualifying use under the
                                    rules of paragraph (2), and
                                ``(iv) all outstanding bonds used
                            to finance the facilities for such
                            person are redeemed not later than 6
                            months after the later of--
                                        ``(I) the earliest date on
                                    which such bonds may be
                                    redeemed, or
                                        ``(II) the date of the
                                    election.
                        ``(C) Related persons.--For purposes of
                    this paragraph, the term `person' includes a
                    group of related persons (within the meaning of
                    section 144(a)(3)) which includes such
                    person.''.
        (b) No Inference With Respect To Outstanding Bonds.--The
    use of the term ``person'' in section 142(f)(3) of the Internal
    Revenue Code of 1986, as added by subsection (a), shall not be
    construed to affect the tax-exempt status of interest on any
    bonds issued before the date of the enactment of this Act.

    SEC. 1609. EXTENSION OF AIRPORT AND AIRWAY TRUST FUND EXCISE TAXES.

        (a) Fuel Tax.--
                (1) Subparagraph (A) of section 4091(b)(3) is
            amended to read as follows:
                        ``(A) The rate of tax specified in
                    paragraph (1) shall be 4.3 cents per gallon--
                                ``(i) after December 31, 1995, and
                            before the date which is 7 calendar
                            days after the date of the enactment of
                            the Small Business Job Protection Act
                            of 1996, and
                                ``(ii) after December 31, 1996.''.
                (2) Section 4081(d) is amended--
                        (A) by adding at the end the following new
                    paragraph:
                ``(3) Aviation gasoline.--After December 31, 1996,
            the rate of tax specified in subsection (a)(2)(A)(i) on
            aviation gasoline shall be 4.3 cents per gallon.'', and
                        (B) by inserting ``(other than the tax on
                    aviation gasoline)'' after ``subsection
                    (a)(2)(A)''.
                (3) Section 4041(c)(5) is amended by inserting ``,
            and during the period beginning on the date which is 7
            calendar days after the date of the enactment of the
            Small Business Job Protection Act of 1996 and ending on
            December 31, 1996'' after ``December 31, 1995''.
        (b) Ticket Taxes.--Sections 4261(g) and 4271(d) are each
    amended by striking ``January 1, 1996'' and inserting ``January
    1, 1996, and to transportation beginning on or after the date
    which is 7 calendar days after the date of the enactment of the
    Small Business Job Protection Act of 1996 and before January 1,
    1997''.
        (c) Transfers to Airport and Airway Trust Fund.--
                (1) Subsection (b) of section 9502 is amended by
            striking ``January 1, 1996'' each place it appears and
            inserting ``January 1, 1997''.
                (2) Paragraph (3) of section 9502(f) is amended to
            read as follows:
                ``(3) Termination.--Notwithstanding the preceding
            provisions of this subsection, the Airport and Airway
            Trust Fund financing rate shall be zero with respect
            to--
                        ``(A) taxes imposed after December 31,
                    1995, and before the date which is 7 calendar
                    days after the date of the enactment of the
                    Small Business Job Protection Act of 1996, and
                        ``(B) taxes imposed after December 31,
                    1996.''.
                (3) Subsection (d) of section 9502 is amended by
            adding at the end the following new paragraph:
                ``(5) Transfers from airport and airway trust fund
            on account of refunds of taxes on transportation by
            air.--The Secretary of the Treasury shall pay from time
            to time from the Airport and Airway Trust Fund into the
            general fund of the Treasury amounts equivalent to the
            amounts paid after December 31, 1995, under section
            6402 (relating to authority to make credits or refunds)
            or section 6415 (relating to credits or refunds to
            persons who collected certain taxes) in respect of
            taxes under sections 4261 and 4271.''.
        (d) Excise Tax Exemption for Certain Emergency Medical
    Transportation by Air Ambulance.--Subsection (f) of section
    4261 (relating to imposition of tax on transportation by air)
    is amended to read as follows:
        ``(f) Exemption for Air Ambulances Providing Certain
    Emergency Medical Transportation.--No tax shall be imposed
    under this section or section 4271 on any air transportation
    for the purpose of providing emergency medical services--
                ``(1) by helicopter, or
                ``(2) by a fixed-wing aircraft equipped for and
            exclusively dedicated to acute care emergency medical
            services.''.
        (e) Exemption for Certain Helicopter Uses.--Subsection (e)
    of section 4261 is amended by adding at the end the following
    new sentence: ``In the case of helicopter transportation
    described in paragraph (1), this subsection shall be applied by
    treating each flight segment as a distinct flight.''.
        (f) Flight-By-Flight Determination of Availability for Hire
    for Affiliated Groups.--Section 4282 is amended by
    redesignating subsection (b) as subsection (c) and by inserting
    after subsection (a) the following new subsection:
        ``(b) Availability for Hire.--For purposes of subsection
    (a), the determination of whether an aircraft is available for
    hire by persons who are not members of an affiliated group
    shall be made on a flight-by-flight basis.''
        (g) Consolidation of Taxes on Aviation Gasoline.--
                (1) In General.--Subparagraph (A) of section
            4081(a)(2) (relating to imposition of tax on gasoline
            and diesel fuel) is amended by redesignating clause
            (ii) as clause (iii) and by striking clause (i) and
            inserting the following:
                                ``(i) in the case of gasoline other
                            than aviation gasoline, 18.3 cents per
                            gallon,
                                ``(ii) in the case of aviation
                            gasoline, 19.3 cents per gallon, and''.
                (2) Termination.--Subsection (d) of section 4081 is
            amended by redesignating paragraph (2) as paragraph (3)
            and by inserting after paragraph (1) the following new
            paragraph:
                ``(2) Aviation gasoline.--On and after January 1,
            1997, the rate specified in subsection (a)(2)(A)(ii)
            shall be 4.3 cents per gallon.''
                (3) Repeal of Retail Level Tax.--
                        (A) Subsection (c) of section 4041 is
                    amended by striking paragraphs (2) and (3) and
                    by redesignating paragraphs (4) and (5) as
                    paragraphs (2) and (3), respectively.
                        (B) Paragraph (3) of section 4041(c), as
                    redesignated by paragraph (1), is amended by
                    striking ``paragraphs (1) and (2)'' and
                    inserting ``paragraph (1)''.
                (4) Conforming Amendments.--
                        (A) Paragraph (1) of section 4041(k) is
                    amended by adding ``and'' at the end of
                    subparagraph (A), by striking ``, and'' at the
                    end of subparagraph (B) and inserting a period,
                    and by striking subparagraph (C).
                        (B) Paragraph (1) of section 4081(d) is
                    amended by striking ``each rate of tax
                    specified in subsection (a)(2)(A)'' and
                    inserting ``the rates of tax specified in
                    clauses (i) and (iii) of subsection
                    (a)(2)(A)''.
                        (C) Sections 6421(f)(2)(A) and
                    9502(f)(1)(A) are each amended by striking
                    ``section 4041(c)(4)'' and inserting ``section
                    4041(c)(2)''.
                        (D) Paragraph (2) of section 9502(b) is
                    amended by striking ``14 cents'' and inserting
                    ``15 cents''.
        (h) Floor Stocks Taxes on Aviation Fuel.--
                (1) Imposition of tax.--In the case of aviation
            fuel on which tax was imposed under section 4091 of the
            Internal Revenue Code of 1986 before the tax-increase
            date described in paragraph (3)(A)(i) and which is held
            on such date by any person, there is hereby imposed a
            floor stocks tax of 17.5 cents per gallon.
                (2) Liability for tax and method of payment.--
                        (A) Liability for tax.--A person holding
                    aviation fuel on a tax-increase date to which
                    the tax imposed by paragraph (1) applies shall
                    be liable for such tax.
                        (B) Method of payment.--The tax imposed by
                    paragraph (1) shall be paid in such manner as
                    the Secretary shall prescribe.
                        (C) Time for payment.--The tax imposed by
                    paragraph (1) with respect to any tax-increase
                    date shall be paid on or before the first day
                    of the 7th month beginning after such tax-
                    increase date.
                (3) Definitions.--For purposes of this subsection--
                        (A) Tax increase date.--The term ``tax-
                    increase date'' means the date which is 7
                    calendar days after the date of the enactment
                    of this Act.
                        (B) Aviation fuel.--The term ``aviation
                    fuel'' has the meaning given such term by
                    section 4093 of such Code.
                        (C) Held by a person.--Aviation fuel shall
                    be considered as ``held by a person'' if title
                    thereto has passed to such person (whether or
                    not delivery to the person has been made).
                        (D) Secretary.--The term ``Secretary''
                    means the Secretary of the Treasury or his
                    delegate.
                (4) Exception for exempt uses.--The tax imposed by
            paragraph (1) shall not apply to aviation fuel held by
            any person on any tax-increase date exclusively for any
            use for which a credit or refund of the entire tax
            imposed by section 4091 of such Code is allowable for
            aviation fuel purchased on or after such tax-increase
            date for such use.
                (5) Exception for certain amounts of fuel.--
                        (A) In general.--No tax shall be imposed by
                    paragraph (1) on aviation fuel held on any tax-
                    increase date by any person if the aggregate
                    amount of aviation fuel held by such person on
                    such date does not exceed 2,000 gallons. The
                    preceding sentence shall apply only if such
                    person submits to the Secretary (at the time
                    and in the manner required by the Secretary)
                    such information as the Secretary shall require
                    for purposes of this paragraph.
                        (B) Exempt fuel.--For purposes of
                    subparagraph (A), there shall not be taken into
                    account fuel held by any person which is exempt
                    from the tax imposed by paragraph (1) by reason
                    of paragraph (4).
                        (C) Controlled groups.--For purposes of
                    this paragraph--
                                (i) Corporations.--
                                        (I) In general.--All
                                    persons treated as a controlled
                                    group shall be treated as 1
                                    person.
                                        (II) Controlled group.--The
                                    term ``controlled group'' has
                                    the meaning given to such term
                                    by subsection (a) of section
                                    1563 of such Code; except that
                                    for such purposes the phrase
                                    ``more than 50 percent'' shall
                                    be substituted for the phrase
                                    ``at least 80 percent'' each
                                    place it appears in such
                                    subsection.
                                (ii) Nonincorporated persons under
                            common control.--Under regulations
                            prescribed by the Secretary, principles
                            similar to the principles of clause (i)
                            shall apply to a group of persons under
                            common control where 1 or more of such
                            persons is not a corporation.
                (6) Other law applicable.--All provisions of law,
            including penalties, applicable with respect to the
            taxes imposed by section 4091 of such Code shall,
            insofar as applicable and not inconsistent with the
            provisions of this subsection, apply with respect to
            the floor stock taxes imposed by paragraph (1) to the
            same extent as if such taxes were imposed by such
            section 4091.
        (i) Effective Date.--The amendments made by this section
    shall take effect on the 7th calendar day after the date of the
    enactment of this Act, except that the amendments made by
    subsection (b) shall not apply to any amount paid before such
    date.

    SEC. 1610. BASIS ADJUSTMENT TO PROPERTY HELD BY CORPORATION WHERE STOCK
                        IN CORPORATION IS REPLACEMENT PROPERTY UNDER
                        INVOLUNTARY CONVERSION RULES.

        (a) In General.--Subsection (b) of section 1033 is amended
    to read as follows:
        ``(b) Basis of Property Acquired Through Involuntary
    Conversion.--
                ``(1) Conversions described in subsection (a)(1).--
            If the property was acquired as the result of a
            compulsory or involuntary conversion described in
            subsection (a)(1), the basis shall be the same as in
            the case of the property so converted--
                        ``(A) decreased in the amount of any money
                    received by the taxpayer which was not expended
                    in accordance with the provisions of law
                    (applicable to the year in which such
                    conversion was made) determining the taxable
                    status of the gain or loss upon such
                    conversion, and
                        ``(B) increased in the amount of gain or
                    decreased in the amount of loss to the taxpayer
                    recognized upon such conversion under the law
                    applicable to the year in which such conversion
                    was made.
                ``(2) Conversions described in subsection (a)(2).--
            In the case of property purchased by the taxpayer in a
            transaction described in subsection (a)(2) which
            resulted in the nonrecognition of any part of the gain
            realized as the result of a compulsory or involuntary
            conversion, the basis shall be the cost of such
            property decreased in the amount of the gain not so
            recognized; and if the property purchased consists of
            more than 1 piece of property, the basis determined
            under this sentence shall be allocated to the purchased
            properties in proportion to their respective costs.
                ``(3) Property held by corporation the stock of
            which is replacement property.--
                        ``(A) In general.--If the basis of stock in
                    a corporation is decreased under paragraph (2),
                    an amount equal to such decrease shall also be
                    applied to reduce the basis of property held by
                    the corporation at the time the taxpayer
                    acquired control (as defined in subsection
                    (a)(2)(E)) of such corporation.
                        ``(B) Limitation.--Subparagraph (A) shall
                    not apply to the extent that it would (but for
                    this subparagraph) require a reduction in the
                    aggregate adjusted bases of the property of the
                    corporation below the taxpayer's adjusted basis
                    of the stock in the corporation (determined
                    immediately after such basis is decreased under
                    paragraph (2)).
                        ``(C) Allocation of basis reduction.--The
                    decrease required under subparagraph (A) shall
                    be allocated--
                                ``(i) first to property which is
                            similar or related in service or use to
                            the converted property,
                                ``(ii) second to depreciable
                            property (as defined in section
                            1017(b)(3)(B)) not described in clause
                            (i), and
                                ``(iii) then to other property.
                        ``(D) Special rules.--
                                ``(i) Reduction not to exceed
                            adjusted basis of property.--No
                            reduction in the basis of any property
                            under this paragraph shall exceed the
                            adjusted basis of such property
                            (determined without regard to such
                            reduction).
                                ``(ii) Allocation of reduction
                            among properties.--If more than 1
                            property is described in a clause of
                            subparagraph (C), the reduction under
                            this paragraph shall be allocated among
                            such property in proportion to the
                            adjusted bases of such property (as so
                            determined).''.
        (b) Effective Date.--The amendment made by this section
    shall apply to involuntary conversions occurring after the date
    of the enactment of this Act.

    SEC. 1611. TREATMENT OF CERTAIN INSURANCE CONTRACTS ON RETIRED LIVES.

        (a) General Rule.--
                (1) Paragraph (2) of section 817(d) (defining
            variable contract) is amended by striking ``or'' at the
            end of subparagraph (A), by striking ``and'' at the end
            of subparagraph (B) and inserting ``or'', and by
            inserting after subparagraph (B) the following new
            subparagraph:
                        ``(C) provides for funding of insurance on
                    retired lives as described in section
                    807(c)(6), and''.
                (2) Paragraph (3) of section 817(d) is amended by
            striking ``or'' at the end of subparagraph (A), by
            striking the period at the end of subparagraph (B) and
            inserting ``, or'', and by inserting after subparagraph
            (B) the following new subparagraph:
                        ``(C) in the case of funds held under a
                    contract described in paragraph (2)(C), the
                    amounts paid in, or the amounts paid out,
                    reflect the investment return and the market
                    value of the segregated asset account.''.
        (b) Effective Date.--The amendments made by this section
    shall apply to taxable years beginning after December 31, 1995.

    SEC. 1612. TREATMENT OF MODIFIED GUARANTEED CONTRACTS.

        (a) General Rule.--Subpart E of part I of subchapter L of
    chapter 1 (relating to definitions and special rules) is
    amended by inserting after section 817 the following new
    section:

    ``SEC. 817A. SPECIAL RULES FOR MODIFIED GUARANTEED CONTRACTS.

        ``(a) Computation of Reserves.--In the case of a modified
    guaranteed contract, clause (ii) of section 807(e)(1)(A) shall
    not apply.
        ``(b) Segregated Assets Under Modified Guaranteed Contracts
    Marked to Market.--
                ``(1) In general.--In the case of any life
            insurance company, for purposes of this subtitle--
                        ``(A) Any gain or loss with respect to a
                    segregated asset shall be treated as ordinary
                    income or loss, as the case may be.
                        ``(B) If any segregated asset is held by
                    such company as of the close of any taxable
                    year--
                                ``(i) such company shall recognize
                            gain or loss as if such asset were sold
                            for its fair market value on the last
                            business day of such taxable year, and
                                ``(ii) any such gain or loss shall
                            be taken into account for such taxable
                            year.
                    Proper adjustment shall be made in the amount
                    of any gain or loss subsequently realized for
                    gain or loss taken into account under the
                    preceding sentence. The Secretary may provide
                    by regulations for the application of this
                    subparagraph at times other than the times
                    provided in this subparagraph.
                ``(2) Segregated asset.--For purposes of paragraph
            (1), the term `segregated asset' means any asset held
            as part of a segregated account referred to in
            subsection (d)(1) under a modified guaranteed contract.
        ``(c) Special Rule in Computing Life Insurance Reserves.--
    For purposes of applying section 816(b)(1)(A) to any modified
    guaranteed contract, an assumed rate of interest shall include
    a rate of interest determined, from time to time, with
    reference to a market rate of interest.
        ``(d) Modified Guaranteed Contract Defined.--For purposes
    of this section, the term `modified guaranteed contract' means
    a contract not described in section 817--
                ``(1) all or part of the amounts received under
            which are allocated to an account which, pursuant to
            State law or regulation, is segregated from the general
            asset accounts of the company and is valued from time
            to time with reference to market values,
                ``(2) which--
                        ``(A) provides for the payment of
                    annuities,
                        ``(B) is a life insurance contract, or
                        ``(C) is a pension plan contract which is
                    not a life, accident, or health, property,
                    casualty, or liability contract,
                ``(3) for which reserves are valued at market for
            annual statement purposes, and
                ``(4) which provides for a net surrender value or a
            policyholder's fund (as defined in section 807(e)(1)).
    If only a portion of a contract is not described in section
    817, such portion shall be treated for purposes of this section
    as a separate contract.
        ``(e) Regulations.--The Secretary may prescribe
    regulations--
                ``(1) to provide for the treatment of market value
            adjustments under sections 72, 7702, 7702A, and
            807(e)(1)(B),
                ``(2) to determine the interest rates applicable
            under sections 807(c)(3), 807(d)(2)(B), and 812 with
            respect to a modified guaranteed contract annually, in
            a manner appropriate for modified guaranteed contracts
            and, to the extent appropriate for such a contract, to
            modify or waive the applicability of section 811(d),
                ``(3) to provide rules to limit ordinary gain or
            loss treatment to assets constituting reserves for
            modified guaranteed contracts (and not other assets) of
            the company,
                ``(4) to provide appropriate treatment of transfers
            of assets to and from the segregated account, and
                ``(5) as may be necessary or appropriate to carry
            out the purposes of this section.''.
        (b) Clerical Amendment.--The table of sections for subpart
    E of part I of subchapter L of chapter 1 is amended by
    inserting after the item relating to section 817 the following
    new item:

            ``Sec. 817A. Special rules for modified guaranteed contracts.''.

        (c) Effective Date.--
                (1) In general.--The amendments made by this
            section shall apply to taxable years beginning after
            December 31, 1995.
                (2) Treatment of net adjustments.--Except as
            provided in paragraph (3), in the case of any taxpayer
            required by the amendments made by this section to
            change its calculation of reserves to take into account
            market value adjustments and to mark segregated assets
            to market for any taxable year--
                        (A) such changes shall be treated as a
                    change in method of accounting initiated by the
                    taxpayer,
                        (B) such changes shall be treated as made
                    with the consent of the Secretary, and
                        (C) the adjustments required by reason of
                    section 481 of the Internal Revenue Code of
                    1986, shall be taken into account as ordinary
                    income by the taxpayer for the taxpayer's first
                    taxable year beginning after December 31, 1995.
                (3) Limitation on loss recognition and on deduction
            for reserve increases.--
                        (A) Limitation on loss recognition.--
                                (i) In general.--The aggregate loss
                            recognized by reason of the application
                            of section 481 of the Internal Revenue
                            Code of 1986 with respect to section
                            817A(b) of such Code (as added by this
                            section) for the first taxable year of
                            the taxpayer beginning after December
                            31, 1995, shall not exceed the amount
                            included in the taxpayer's gross income
                            for such year by reason of the excess
                            (if any) of--
                                        (I) the amount of life
                                    insurance reserves as of the
                                    close of the prior taxable
                                    year, over
                                        (II) the amount of such
                                    reserves as of the beginning of
                                    such first taxable year,
                            to the extent such excess is
                            attributable to subsection (a) of such
                            section 817A. Notwithstanding the
                            preceding sentence, the adjusted basis
                            of each segregated asset shall be
                            determined as if all such losses were
                            recognized.
                                (ii) Disallowed loss allowed over
                            period.--The amount of the loss which
                            is not allowed under clause (i) shall
                            be allowed ratably over the period of 7
                            taxable years beginning with the
                            taxpayer's first taxable year beginning
                            after December 31, 1995.
                        (B) Limitation on deduction for increase in
                    reserves.--
                                (i) In general.--The deduction
                            allowed for the first taxable year of
                            the taxpayer beginning after December
                            31, 1995, by reason of the application
                            of section 481 of such Code with
                            respect to section 817A(a) of such Code
                            (as added by this section) shall not
                            exceed the aggregate built-in gain
                            recognized by reason of the application
                            of such section 481 with respect to
                            section 817A(b) of such Code (as added
                            by this section) for such first taxable
                            year.
                                (ii) Disallowed deduction allowed
                            over period.--The amount of the
                            deduction which is disallowed under
                            clause (i) shall be allowed ratably
                            over the period of 7 taxable years
                            beginning with the taxpayer's first
                            taxable year beginning after December
                            31, 1995.
                                (iii) Built-in gain.--For purposes
                            of this subparagraph, the built-in gain
                            on an asset is the amount equal to the
                            excess of--
                                        (I) the fair market value
                                    of the asset as of the
                                    beginning of the first taxable
                                    year of the taxpayer beginning
                                    after December 31, 1995, over
                                        (II) the adjusted basis of
                                    such asset as of such time.

    SEC. 1613. TREATMENT OF CONTRIBUTIONS IN AID OF CONSTRUCTION.

        (a) Treatment of Contributions in Aid of Construction.--
                (1) In general.--Section 118 (relating to
            contributions to the capital of a corporation) is
            amended--
                        (A) by redesignating subsection (c) as
                    subsection (e), and
                        (B) by inserting after subsection (b) the
                    following new subsections:
        ``(c) Special Rules for Water and Sewerage Disposal
    Utilities.--
                ``(1) General rule.--For purposes of this section,
            the term `contribution to the capital of the taxpayer'
            includes any amount of money or other property received
            from any person (whether or not a shareholder) by a
            regulated public utility which provides water or
            sewerage disposal services if--
                        ``(A) such amount is a contribution in aid
                    of construction,
                        ``(B) in the case of contribution of
                    property other than water or sewerage disposal
                    facilities, such amount meets the requirements
                    of the expenditure rule of paragraph (2), and
                        ``(C) such amount (or any property acquired
                    or constructed with such amount) is not
                    included in the taxpayer's rate base for
                    ratemaking purposes.
                ``(2) Expenditure rule.--An amount meets the
            requirements of this paragraph if--
                        ``(A) an amount equal to such amount is
                    expended for the acquisition or construction of
                    tangible property described in section
                    1231(b)--
                                ``(i) which is the property for
                            which the contribution was made or is
                            of the same type as such property, and
                                ``(ii) which is used predominantly
                            in the trade or business of furnishing
                            water or sewerage disposal services,
                        ``(B) the expenditure referred to in
                    subparagraph (A) occurs before the end of the
                    second taxable year after the year in which
                    such amount was received, and
                        ``(C) accurate records are kept of the
                    amounts contributed and expenditures made, the
                    expenditures to which contributions are
                    allocated, and the year in which the
                    contributions and expenditures are received and
                    made.
                ``(3) Definitions.--For purposes of this
            subsection--
                        ``(A) Contribution in aid of
                    construction.--The term `contribution in aid of
                    construction' shall be defined by regulations
                    prescribed by the Secretary, except that such
                    term shall not include amounts paid as service
                    charges for starting or stopping services.
                        ``(B) Predominantly.--The term
                    `predominantly' means 80 percent or more.
                        ``(C) Regulated public utility.--The term
                    `regulated public utility' has the meaning
                    given such term by section 7701(a)(33), except
                    that such term shall not include any utility
                    which is not required to provide water or
                    sewerage disposal services to members of the
                    general public in its service area.
                ``(4) Disallowance of deductions and credits;
            adjusted basis.--Notwithstanding any other provision of
            this subtitle, no deduction or credit shall be allowed
            for, or by reason of, any expenditure which constitutes
            a contribution in aid of construction to which this
            subsection applies. The adjusted basis of any property
            acquired with contributions in aid of construction to
            which this subsection applies shall be zero.
        ``(d) Statute of Limitations.--If the taxpayer for any
    taxable year treats an amount as a contribution to the capital
    of the taxpayer described in subsection (c), then--
                ``(1) the statutory period for the assessment of
            any deficiency attributable to any part of such amount
            shall not expire before the expiration of 3 years from
            the date the Secretary is notified by the taxpayer (in
            such manner as the Secretary may prescribe) of--
                        ``(A) the amount of the expenditure
                    referred to in subparagraph (A) of subsection
                    (c)(2),
                        ``(B) the taxpayer's intention not to make
                    the expenditures referred to in such
                    subparagraph, or
                        ``(C) a failure to make such expenditure
                    within the period described in subparagraph (B)
                    of subsection (c)(2), and
                ``(2) such deficiency may be assessed before the
            expiration of such 3-year period notwithstanding the
            provisions of any other law or rule of law which would
            otherwise prevent such assessment.''.
                (2) Conforming amendment.--Section 118(b) is
            amended by inserting ``except as provided in subsection
            (c),'' before ``the term''.
                (3) Effective date.--The amendments made by this
            subsection shall apply to amounts received after June
            12, 1996.
        (b) Recovery Method and Period for Water Utility
    Property.--
                (1) Requirement to use straight line method.--
            Section 168(b)(3) is amended by adding at the end the
            following new subparagraph:
                        ``(F) Water utility property described in
                    subsection (e)(5).''.
                (2) 25-year recovery period.--The table contained
            in section 168(c)(1) is amended by inserting the
            following item after the item relating to 20-year
            property:

    ``Water utility property................................     25 years''.

                (3) Water utility property.--
                        (A) In general.--Section 168(e) is amended
                    by adding at the end the following new
                    paragraph:
                ``(5) Water utility property.--The term `water
            utility property' means property--
                        ``(A) which is an integral part of the
                    gathering, treatment, or commercial
                    distribution of water, and which, without
                    regard to this paragraph, would be 20-year
                    property, and
                        ``(B) any municipal sewer.''.
                        (B) Conforming amendments.--Section 168 is
                    amended--
                                (i) by striking subparagraph (F) of
                            subsection (e)(3), and
                                (ii) by striking the item relating
                            to subparagraph (F) in the table in
                            subsection (g)(3).
                (4) Alternative system.--Clause (iv) of section
            168(g)(2)(C) is amended by inserting ``or water utility
            property'' after ``tunnel bore''.
                (5) Effective date.--The amendments made by this
            subsection shall apply to property placed in service
            after June 12, 1996, other than property placed in
            service pursuant to a binding contract in effect before
            June 10, 1996, and at all times thereafter before the
            property is placed in service.

    SEC. 1614. ELECTION TO CEASE STATUS AS QUALIFIED SCHOLARSHIP FUNDING
                        CORPORATION.

        (a) In General.--Subsection (d) of section 150 (relating to
    definitions and special rules) is amended by adding at the end
    the following new paragraph:
                ``(3) Election to cease status as qualified
            scholarship funding corporation.--
                        ``(A) In general.--Any qualified
                    scholarship funding bond, and qualified student
                    loan bond, outstanding on the date of the
                    issuer's election under this paragraph (and any
                    bond (or series of bonds) issued to refund such
                    a bond) shall not fail to be a tax-exempt bond
                    solely because the issuer ceases to be
                    described in subparagraphs (A) and (B) of
                    paragraph (2) if the issuer meets the
                    requirements of subparagraphs (B) and (C) of
                    this paragraph.
                        ``(B) Assets and liabilities of issuer
                    transferred to taxable subsidiary.--The
                    requirements of this subparagraph are met by an
                    issuer if--
                                ``(i) all of the student loan notes
                            of the issuer and other assets pledged
                            to secure the repayment of qualified
                            scholarship funding bond indebtedness
                            of the issuer are transferred to
                            another corporation within a reasonable
                            period after the election is made under
                            this paragraph;
                                ``(ii) such transferee corporation
                            assumes or otherwise provides for the
                            payment of all of the qualified
                            scholarship funding bond indebtedness
                            of the issuer within a reasonable
                            period after the election is made under
                            this paragraph;
                                ``(iii) to the extent permitted by
                            law, such transferee corporation
                            assumes all of the responsibilities,
                            and succeeds to all of the rights, of
                            the issuer under the issuer's
                            agreements with the Secretary of
                            Education in respect of student loans;
                                ``(iv) immediately after such
                            transfer, the issuer, together with any
                            other issuer which has made an election
                            under this paragraph in respect of such
                            transferee, hold all of the senior
                            stock in such transferee corporation;
                            and
                                ``(v) such transferee corporation
                            is not exempt from tax under this
                            chapter.
                        ``(C) Issuer to operate as independent
                    organization described in section 501(c)(3).--
                    The requirements of this subparagraph are met
                    by an issuer if, within a reasonable period
                    after the transfer referred to in subparagraph
                    (B)--
                                ``(i) the issuer is described in
                            section 501(c)(3) and exempt from tax
                            under section 501(a);
                                ``(ii) the issuer no longer is
                            described in subparagraphs (A) and (B)
                            of paragraph (2); and
                                ``(iii) at least 80 percent of the
                            members of the board of directors of
                            the issuer are independent members.
                        ``(D) Senior stock.--For purposes of this
                    paragraph, the term `senior stock' means
                    stock--
                                ``(i) which participates pro rata
                            and fully in the equity value of the
                            corporation with all other common stock
                            of the corporation but which has the
                            right to payment of liquidation
                            proceeds prior to payment of
                            liquidation proceeds in respect of
                            other common stock of the corporation;
                                ``(ii) which has a fixed right upon
                            liquidation and upon redemption to an
                            amount equal to the greater of--
                                        ``(I) the fair market value
                                    of such stock on the date of
                                    liquidation or redemption
                                    (whichever is applicable); or
                                        ``(II) the fair market
                                    value of all assets transferred
                                    in exchange for such stock and
                                    reduced by the amount of all
                                    liabilities of the corporation
                                    which has made an election
                                    under this paragraph assumed by
                                    the transferee corporation in
                                    such transfer;
                                ``(iii) the holder of which has the
                            right to require the transferee
                            corporation to redeem on a date that is
                            not later than 10 years after the date
                            on which an election under this
                            paragraph was made and pursuant to such
                            election such stock was issued; and
                                ``(iv) in respect of which, during
                            the time such stock is outstanding,
                            there is not outstanding any equity
                            interest in the corporation having any
                            liquidation, redemption or dividend
                            rights in the corporation which are
                            superior to those of such stock.
                        ``(E) Independent member.--The term
                    `independent member' means a member of the
                    board of directors of the issuer who (except
                    for services as a member of such board)
                    receives no compensation directly or
                    indirectly--
                                ``(i) for services performed in
                            connection with such transferee
                            corporation, or
                                ``(ii) for services as a member of
                            the board of directors or as an officer
                            of such transferee corporation.
                    For purposes of clause (ii), the term `officer'
                    includes any individual having powers or
                    responsibilities similar to those of officers.
                        ``(F) Coordination with certain private
                    foundation taxes.--For purposes of sections
                    4942 (relating to the excise tax on a failure
                    to distribute income) and 4943 (relating to the
                    excise tax on excess business holdings), the
                    transferee corporation referred to in
                    subparagraph (B) shall be treated as a
                    functionally related business (within the
                    meaning of section 4942(j)(4)) with respect to
                    the issuer during the period commencing with
                    the date on which an election is made under
                    this paragraph and ending on the date that is
                    the earlier of--
                                ``(i) the last day of the last
                            taxable year for which more than 50
                            percent of the gross income of such
                            transferee corporation is derived from,
                            or more than 50 percent of the assets
                            (by value) of such transferee
                            corporation consists of, student loan
                            notes incurred under the Higher
                            Education Act of 1965; or
                                ``(ii) the last day of the taxable
                            year of the issuer during which occurs
                            the date which is 10 years after the
                            date on which the election under this
                            paragraph is made.
                        ``(G) Election.--An election under this
                    paragraph may be revoked only with the consent
                    of the Secretary.''.
        (b) Effective Date.--The amendment made by this section
    shall take effect on the date of the enactment of this Act.

    SEC. 1615. CERTAIN TAX BENEFITS DENIED TO INDIVIDUALS FAILING TO
                        PROVIDE TAXPAYER IDENTIFICATION NUMBERS.

        (a) Personal Exemption.--
                (1) In general.--Section 151 (relating to allowance
            of deductions for personal exemptions) is amended by
            adding at the end the following new subsection:
        ``(e) Identifying Information Required.--No exemption shall
    be allowed under this section with respect to any individual
    unless the TIN of such individual is included on the return
    claiming the exemption.''.
                (2) Conforming amendments.--
                        (A) Subsection (e) of section 6109 is
                    repealed.
                        (B) Section 6724(d)(3) is amended by adding
                    ``and'' at the end of subparagraph (C), by
                    striking subparagraph (D), and by redesignating
                    subparagraph (E) as subparagraph (D).
        (b) Dependent Care Credit.--Subsection (e) of section 21
    (relating to expenses for household and dependent care services
    necessary for gainful employment) is amended by adding at the
    end the following new paragraph:
                ``(10) Identifying information required with
            respect to qualifying individuals.--No credit shall be
            allowed under this section with respect to any
            qualifying individual unless the TIN of such individual
            is included on the return claiming the credit.''.
        (c) Extension of Procedures Applicable to Mathematical or
    Clerical Errors.--Section 6213(g)(2) (relating to the
    definition of mathematical or clerical errors), as amended by
    the Personal Responsibility and Work Opportunity Reconciliation
    Act of 1996, is amended by striking ``and' at the end of
    subparagraph (F), by striking the period at the end of
    subparagraph (G) and inserting ``, and'', and by inserting at
    the end the following new subparagraph:
                        ``(H) an omission of a correct TIN required
                    under section 21 (relating to expenses for
                    household and dependent care services necessary
                    for gainful employment) or section 151
                    (relating to allowance of deductions for
                    personal exemptions).''.
        (d) Effective Date.--
                (1) In general.--The amendments made by this
            section shall apply with respect to returns the due
            date for which (without regard to extensions) is on or
            after the 30th day after the date of the enactment of
            this Act.
                (2) Special rule for 1995 and 1996.--In the case of
            returns for taxable years beginning in 1995 or 1996, a
            taxpayer shall not be required by the amendments made
            by this section to provide a taxpayer identification
            number for a child who is born after October 31, 1995,
            in the case of a taxable year beginning in 1995 or
            November 30, 1996, in the case of a taxable year
            beginning in 1996.

    SEC. 1616. REPEAL OF BAD DEBT RESERVE METHOD FOR THRIFT SAVINGS
                        ASSOCIATIONS.

        (a) In General.--Section 593 (relating to reserves for
    losses on loans) is amended by adding at the end the following
    new subsections:
        ``(f) Termination of Reserve Method.--Subsections (a), (b),
    (c), and (d) shall not apply to any taxable year beginning
    after December 31, 1995.
        ``(g) 6-Year Spread of Adjustments.--
                ``(1) In general.--In the case of any taxpayer who
            is required by reason of subsection (f) to change its
            method of computing reserves for bad debts--
                        ``(A) such change shall be treated as a
                    change in a method of accounting,
                        ``(B) such change shall be treated as
                    initiated by the taxpayer and as having been
                    made with the consent of the Secretary, and
                        ``(C) the net amount of the adjustments
                    required to be taken into account by the
                    taxpayer under section 481(a)--
                                ``(i) shall be determined by taking
                            into account only applicable excess
                            reserves, and
                                ``(ii) as so determined, shall be
                            taken into account ratably over the 6-
                            taxable year period beginning with the
                            first taxable year beginning after
                            December 31, 1995.
                ``(2) Applicable excess reserves.--
                        ``(A) In general.--For purposes of
                    paragraph (1), the term `applicable excess
                    reserves' means the excess (if any) of--
                                ``(i) the balance of the reserves
                            described in subsection (c)(1) (other
                            than the supplemental reserve) as of
                            the close of the taxpayer's last
                            taxable year beginning before January
                            1, 1996, over
                                ``(ii) the lesser of--
                                        ``(I) the balance of such
                                    reserves as of the close of the
                                    taxpayer's last taxable year
                                    beginning before January 1,
                                    1988, or
                                        ``(II) the balance of the
                                    reserves described in subclause
                                    (I), reduced in the same manner
                                    as under section
                                    585(b)(2)(B)(ii) on the basis
                                    of the taxable years described
                                    in clause (i) and this clause.
                        ``(B) Special rule for thrifts which become
                    small banks.--In the case of a bank (as defined
                    in section 581) which was not a large bank (as
                    defined in section 585(c)(2)) for its first
                    taxable year beginning after December 31,
                    1995--
                                ``(i) the balance taken into
                            account under subparagraph (A)(ii)
                            shall not be less than the amount which
                            would be the balance of such reserves
                            as of the close of its last taxable
                            year beginning before such date if the
                            additions to such reserves for all
                            taxable years had been determined under
                            section 585(b)(2)(A), and
                                ``(ii) the opening balance of the
                            reserve for bad debts as of the
                            beginning of such first taxable year
                            shall be the balance taken into account
                            under subparagraph (A)(ii) (determined
                            after the application of clause (i) of
                            this subparagraph).
                    The preceding sentence shall not apply for
                    purposes of paragraphs (5) and (6) or
                    subsection (e)(1).
                ``(3) Recapture of pre-1988 reserves where taxpayer
            ceases to be bank.--If, during any taxable year
            beginning after December 31, 1995, a taxpayer to which
            paragraph (1) applied is not a bank (as defined in
            section 581), paragraph (1) shall apply to the reserves
            described in paragraph (2)(A)(ii) and the supplemental
            reserve; except that such reserves shall be taken into
            account ratably over the 6-taxable year period
            beginning with such taxable year.
                ``(4) Suspension of recapture if residential loan
            requirement met.--
                        ``(A) In general.--In the case of a bank
                    which meets the residential loan requirement of
                    subparagraph (B) for the first taxable year
                    beginning after December 31, 1995, or for the
                    following taxable year--
                                ``(i) no adjustment shall be taken
                            into account under paragraph (1) for
                            such taxable year, and
                                ``(ii) such taxable year shall be
                            disregarded in determining--
                                        ``(I) whether any other
                                    taxable year is a taxable year
                                    for which an adjustment is
                                    required to be taken into
                                    account under paragraph (1),
                                    and
                                        ``(II) the amount of such
                                    adjustment.
                        ``(B) Residential loan requirement.--A
                    taxpayer meets the residential loan requirement
                    of this subparagraph for any taxable year if
                    the principal amount of the residential loans
                    made by the taxpayer during such year is not
                    less than the base amount for such year.
                        ``(C) Residential loan.--For purposes of
                    this paragraph, the term `residential loan'
                    means any loan described in clause (v) of
                    section 7701(a)(19)(C) but only if such loan is
                    incurred in acquiring, constructing, or
                    improving the property described in such
                    clause.
                        ``(D) Base amount.--For purposes of
                    subparagraph (B), the base amount is the
                    average of the principal amounts of the
                    residential loans made by the taxpayer during
                    the 6 most recent taxable years beginning on or
                    before December 31, 1995. At the election of
                    the taxpayer who made such loans during each of
                    such 6 taxable years, the preceding sentence
                    shall be applied without regard to the taxable
                    year in which such principal amount was the
                    highest and the taxable year in such principal
                    amount was the lowest. Such an election may be
                    made only for the first taxable year beginning
                    after such date, and, if made for such taxable
                    year, shall apply to the succeeding taxable
                    year unless revoked with the consent of the
                    Secretary.
                        ``(E) Controlled groups.--In the case of a
                    taxpayer which is a member of any controlled
                    group of corporations described in section
                    1563(a)(1), subparagraph (B) shall be applied
                    with respect to such group.
                ``(5) Continued application of fresh start under
            section 585 transitional rules.--In the case of a
            taxpayer to which paragraph (1) applied and which was
            not a large bank (as defined in section 585(c)(2)) for
            its first taxable year beginning after December 31,
            1995:
                        ``(A) In general.--For purposes of
                    determining the net amount of adjustments
                    referred to in section 585(c)(3)(A)(iii), there
                    shall be taken into account only the excess (if
                    any) of the reserve for bad debts as of the
                    close of the last taxable year before the
                    disqualification year over the balance taken
                    into account by such taxpayer under paragraph
                    (2)(A)(ii) of this subsection.
                        ``(B) Treatment under elective cut-off
                    method.--For purposes of applying section
                    585(c)(4)--
                                ``(i) the balance of the reserve
                            taken into account under subparagraph
                            (B) thereof shall be reduced by the
                            balance taken into account by such
                            taxpayer under paragraph (2)(A)(ii) of
                            this subsection, and
                                ``(ii) no amount shall be
                            includible in gross income by reason of
                            such reduction.
                ``(6) Suspended reserve included as section 381(c)
            items.--The balance taken into account by a taxpayer
            under paragraph (2)(A)(ii) of this subsection and the
            supplemental reserve shall be treated as items
            described in section 381(c).
                ``(7) Conversions to credit unions.--In the case of
            a taxpayer to which paragraph (1) applied which becomes
            a credit union described in section 501(c) and exempt
            from taxation under section 501(a)--
                        ``(A) any amount required to be included in
                    the gross income of the credit union by reason
                    of this subsection shall be treated as derived
                    from an unrelated trade or business (as defined
                    in section 513), and
                        ``(B) for purposes of paragraph (3), the
                    credit union shall not be treated as if it were
                    a bank.
                ``(8) Regulations.--The Secretary shall prescribe
            such regulations as may be necessary to carry out this
            subsection and subsection (e), including regulations
            providing for the application of such subsections in
            the case of acquisitions, mergers, spin-offs, and other
            reorganizations.''
        (b) Conforming Amendments.--
                (1) Subsection (d) of section 50 is amended by
            adding at the end the following new sentence:
    ``Paragraphs (1)(A), (2)(A), and (4) of the section 46(e)
    referred to in paragraph (1) of this subsection shall not apply
    to any taxable year beginning after December 31, 1995.''
                (2) Subsection (e) of section 52 is amended by
            striking paragraph (1) and by redesignating paragraphs
            (2) and (3) as paragraphs (1) and (2), respectively.
                (3) Subsection (a) of section 57 is amended by
            striking paragraph (4).
                (4) Section 246 is amended by striking subsection
            (f).
                (5) Clause (i) of section 291(e)(1)(B) is amended
            by striking ``or to which section 593 applies''.
                (6) Subparagraph (A) of section 585(a)(2) is
            amended by striking ``other than an organization to
            which section 593 applies''.
                (7)(A) The material preceding subparagraph (A) of
            section 593(e)(1) is amended by striking ``by a
            domestic building and loan association or an
            institution that is treated as a mutual savings bank
            under section 591(b)'' and inserting ``by a taxpayer
            having a balance described in subsection
            (g)(2)(A)(ii)''.
                (B) Subparagraph (B) of section 593(e)(1) is
            amended to read as follows:
                        ``(B) then out of the balance taken into
                    account under subsection (g)(2)(A)(ii)
                    (properly adjusted for amounts charged against
                    such reserves for taxable years beginning after
                    December 31, 1987),''.
                (C) The second sentence of section 593(e)(1) is
            amended by striking ``the association or an institution
            that is treated as a mutual savings bank under section
            591(b)'' and inserting ``a taxpayer having a balance
            described in subsection (g)(2)(A)(ii)''.
                (D) The third sentence of section 593(e)(1) is
            amended by striking ``an association'' and inserting
            ``a taxpayer having a balance described in subsection
            (g)(2)(A)(ii)''.
                (E) Paragraph (1) of section 593(e) is amended by
            adding at the end the following new sentence: ``This
            paragraph shall not apply to any distribution of all of
            the stock of a bank (as defined in section 581) to
            another corporation if, immediately after the
            distribution, such bank and such other corporation are
            members of the same affiliated group (as defined in
            section 1504) and the provisions of section 5(e) of the
            Federal Deposit Insurance Act (as in effect on December
            31, 1995) or similar provisions are in effect.''
                (8) Section 595 is hereby repealed.
                (9) Section 596 is hereby repealed.
                (10) Subsection (a) of section 860E is amended--
                        (A) by striking ``Except as provided in
                    paragraph (2), the'' in paragraph (1) and
                    inserting ``The'',
                        (B) by striking paragraphs (2) and (4) and
                    redesignating paragraphs (3), (5), and (6) as
                    paragraphs (2), (3), and (4), respectively,
                        (C) by striking in paragraph (2) (as so
                    redesignated) all that follows ``subsection''
                    and inserting a period, and
                        (D) by striking the last sentence of
                    paragraph (4) (as so redesignated).
                (11) Paragraph (3) of section 992(d) is amended by
            striking ``or 593''.
                (12) Section 1038 is amended by striking subsection
            (f).
                (13) Clause (ii) of section 1042(c)(4)(B) is
            amended by striking ``or 593''.
                (14) Subsection (c) of section 1277 is amended by
            striking ``or to which section 593 applies''.
                (15) Subparagraph (B) of section 1361(b)(2) is
            amended by striking ``or to which section 593
            applies''.
                (16) The table of sections for part II of
            subchapter H of chapter 1 is amended by striking the
            items relating to sections 595 and 596.
        (c) Effective Dates.--
                (1) In general.--Except as otherwise provided in
            this subsection, the amendments made by this section
            shall apply to taxable years beginning after December
            31, 1995.
                (2) Subsection (b)(7)(B).--The amendments made by
            subsection (b)(7)(B) shall not apply to any
            distribution with respect to preferred stock if--
                        (A) such stock is outstanding at all times
                    after October 31, 1995, and before the
                    distribution, and
                        (B) such distribution is made before the
                    date which is 1 year after the date of the
                    enactment of this Act (or, in the case of stock
                    which may be redeemed, if later, the date which
                    is 30 days after the earliest date that such
                    stock may be redeemed).
                (3) Subsection (b)(8).--The amendment made by
            subsection (b)(8) shall apply to property acquired in
            taxable years beginning after December 31, 1995.
                (4) Subsection (b)(10).--The amendments made by
            subsection (b)(10) shall not apply to any residual
            interest held by a taxpayer if such interest has been
            held by such taxpayer at all times after October 31,
            1995.

    SEC. 1617. EXCLUSION FOR ENERGY CONSERVATION SUBSIDIES LIMITED TO
                        SUBSIDIES WITH RESPECT TO DWELLING UNITS.

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

              PART II--FINANCIAL ASSET SECURITIZATION INVESTMENTS

    SEC. 1621. FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS.

        (a) In General.--Subchapter M of chapter 1 is amended by
    adding at the end the following new part:

           ``PART V--FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS

            ``Sec. 860H. Taxation of a FASIT; other general rules.
            ``Sec. 860I. Gain recognition on contributions to a FASIT and in
                      other cases.
            ``Sec. 860J. Non-FASIT losses not to offset certain FASIT
                      inclusions.
            ``Sec. 860K. Treatment of transfers of high-yield interests to
                      disqualified holders.
            ``Sec. 860L. Definitions and other special rules.

    ``SEC. 860H. TAXATION OF A FASIT; OTHER GENERAL RULES.

        ``(a) Taxation of FASIT.--A FASIT as such shall not be
    subject to taxation under this subtitle (and shall not be
    treated as a trust, partnership, corporation, or taxable
    mortgage pool).
        ``(b) Taxation of Holder of Ownership Interest.--In
    determining the taxable income of the holder of the ownership
    interest in a FASIT--
                ``(1) all assets, liabilities, and items of income,
            gain, deduction, loss, and credit of a FASIT shall be
            treated as assets, liabilities, and such items (as the
            case may be) of such holder,
                ``(2) the constant yield method (including the
            rules of section 1272(a)(6)) shall be applied under an
            accrual method of accounting in determining all
            interest, acquisition discount, original issue
            discount, and market discount and all premium
            deductions or adjustments with respect to each debt
            instrument of the FASIT,
                ``(3) there shall not be taken into account any
            item of income, gain, or deduction allocable to a
            prohibited transaction, and
                ``(4) interest accrued by the FASIT which is exempt
            from tax imposed by this subtitle shall, when taken
            into account by such holder, be treated as ordinary
            income.
        ``(c) Treatment of Regular Interests.--For purposes of this
    title--
                ``(1) a regular interest in a FASIT, if not
            otherwise a debt instrument, shall be treated as a debt
            instrument,
                ``(2) section 163(e)(5) shall not apply to such an
            interest, and
                ``(3) amounts includible in gross income with
            respect to such an interest shall be determined under
            an accrual method of accounting.

    ``SEC. 860I. GAIN RECOGNITION ON CONTRIBUTIONS TO A FASIT AND IN OTHER
                        CASES.

        ``(a) Treatment of Property Acquired by FASIT.--
                ``(1) Property acquired from holder of ownership
            interest or related person.--If property is sold or
            contributed to a FASIT by the holder of the ownership
            interest in such FASIT (or by a related person) gain
            (if any) shall be recognized to such holder (or person)
            in an amount equal to the excess (if any) of such
            property's value under subsection (d) on the date of
            such sale or contribution over its adjusted basis on
            such date.
                ``(2) Property acquired other than from holder of
            ownership interest or related person.--Property which
            is acquired by a FASIT other than in a transaction to
            which paragraph (1) applies shall be treated--
                        ``(A) as having been acquired by the holder
                    of the ownership interest in the FASIT for an
                    amount equal to the FASIT's cost of acquiring
                    such property, and
                        ``(B) as having been sold by such holder to
                    the FASIT at its value under subsection (d) on
                    such date.
        ``(b) Gain Recognition on Property Outside FASIT Which
    Supports Regular Interests.--If property held by the holder of
    the ownership interest in a FASIT (or by any person related to
    such holder) supports any regular interest in such FASIT--
                ``(1) gain shall be recognized to such holder (or
            person) in the same manner as if such holder (or
            person) had sold such property at its value under
            subsection (d) on the earliest date such property
            supports such an interest, and
                ``(2) such property shall be treated as held by
            such FASIT for purposes of this part.
        ``(c) Deferral of Gain Recognition.--The Secretary may
    prescribe regulations which--
                ``(1) provide that gain otherwise recognized under
            subsection (a) or (b) shall not be recognized before
            the earliest date on which such property supports any
            regular interest in such FASIT or any indebtedness of
            the holder of the ownership interest (or of any person
            related to such holder), and
                ``(2) provide such adjustments to the other
            provisions of this part to the extent appropriate in
            the context of the treatment provided under paragraph
            (1).
        ``(d) Valuation.--For purposes of this section--
                ``(1) In general.--The value of any property under
            this subsection shall be--
                        ``(A) in the case of a debt instrument
                    which is not traded on an established
                    securities market, the sum of the present
                    values of the reasonably expected payments
                    under such instrument determined (in the manner
                    provided by regulations prescribed by the
                    Secretary)--
                                ``(i) as of the date of the event
                            resulting in the gain recognition under
                            this section, and
                                ``(ii) by using a discount rate
                            equal to 120 percent of the applicable
                            Federal rate (as defined in section
                            1274(d)), or such other discount rate
                            specified in such regulations,
                            compounded semiannually, and
                        ``(B) in the case of any other property,
                    its fair market value.
                ``(2) Special rule for revolving loan accounts.--
            For purposes of paragraph (1)--
                        ``(A) each extension of credit (other than
                    the accrual of interest) on a revolving loan
                    account shall be treated as a separate debt
                    instrument, and
                        ``(B) payments on such extensions of credit
                    having substantially the same terms shall be
                    applied to such extensions beginning with the
                    earliest such extension.
        ``(e) Special Rules.--
                ``(1) Nonrecognition rules not to apply.--Gain
            required to be recognized under this section shall be
            recognized notwithstanding any other provision of this
            subtitle.
                ``(2) Basis adjustments.--The basis of any property
            on which gain is recognized under this section shall be
            increased by the amount of gain so recognized.

    ``SEC. 860J. NON-FASIT LOSSES NOT TO OFFSET CERTAIN FASIT INCLUSIONS.

        ``(a) In General.--The taxable income of the holder of the
    ownership interest or any high-yield interest in a FASIT for
    any taxable year shall in no event be less than the sum of--
                ``(1) such holder's taxable income determined
            solely with respect to such interests (including gains
            and losses from sales and exchanges of such interests),
            and
                ``(2) the excess inclusion (if any) under section
            860E(a)(1) for such taxable year.
        ``(b) Coordination With Section 172.--Any increase in the
    taxable income of any holder of the ownership interest or a
    high-yield interest in a FASIT for any taxable year by reason
    of subsection (a) shall be disregarded--
                ``(1) in determining under section 172 the amount
            of any net operating loss for such taxable year, and
                ``(2) in determining taxable income for such
            taxable year for purposes of the 2nd sentence of
            section 172(b)(2).
        ``(c) Coordination With Minimum Tax.--For purposes of part
    VI of subchapter A of this chapter--
                ``(1) the reference in section 55(b)(2) to taxable
            income shall be treated as a reference to taxable
            income determined without regard to this section,
                ``(2) the alternative minimum taxable income of any
            holder of the ownership interest or a high-yield
            interest in a FASIT for any taxable year shall in no
            event be less than such holder's taxable income
            determined solely with respect to such interests, and
                ``(3) any increase in taxable income under this
            section shall be disregarded for purposes of computing
            the alternative tax net operating loss deduction.
        ``(d) Affiliated Groups.--All members of an affiliated
    group filing a consolidated return shall be treated as 1
    taxpayer for purposes of this section.

    ``SEC. 860K. TREATMENT OF TRANSFERS OF HIGH-YIELD INTERESTS TO
                        DISQUALIFIED HOLDERS.

        ``(a) General Rule.--In the case of any high-yield interest
    which is held by a disqualified holder--
                ``(1) the gross income of such holder shall not
            include any income (other than gain) attributable to
            such interest, and
                ``(2) amounts not includible in the gross income of
            such holder by reason of paragraph (1) shall be
            included (at the time otherwise includible under
            paragraph (1)) in the gross income of the most recent
            holder of such interest which is not a disqualified
            holder.
        ``(b) Exceptions.--Rules similar to the rules of paragraphs
    (4) and (7) of section 860E(e) shall apply to the tax imposed
    by reason of the inclusion in gross income under subsection
    (a).
        ``(c) Disqualified Holder.--For purposes of this section,
    the term `disqualified holder' means any holder other than--
                ``(1) an eligible corporation (as defined in
            section 860L(a)(2)), or
                ``(2) a FASIT.
        ``(d) Treatment of Interests Held By Securities Dealers.--
                ``(1) In general.--Subsection (a) shall not apply
            to any high-yield interest held by a disqualified
            holder if such holder is a dealer in securities who
            acquired such interest exclusively for sale to
            customers in the ordinary course of business (and not
            for investment).
                ``(2) Change in dealer status.--
                        ``(A) In general.--In the case of a dealer
                    in securities which is not an eligible
                    corporation (as defined in section 860L(a)(2)),
                    if--
                                ``(i) such dealer ceases to be a
                            dealer in securities, or
                                ``(ii) such dealer commences
                            holding the high-yield interest for
                            investment,
                    there is hereby imposed (in addition to other
                    taxes) an excise tax equal to the product of
                    the highest rate of tax specified in section
                    11(b)(1) and the income of such dealer
                    attributable to such interest for periods after
                    the date of such cessation or commencement.
                        ``(B) Holding for 31 days or less.--For
                    purposes of subparagraph (A)(ii), a dealer
                    shall not be treated as holding an interest for
                    investment before the 32d day after the date
                    such dealer acquired such interest unless such
                    interest is so held as part of a plan to avoid
                    the purposes of this paragraph.
                        ``(C) Administrative provisions.--The
                    deficiency procedures of subtitle F shall apply
                    to the tax imposed by this paragraph.
        ``(e) Treatment of High-Yield Interests in Pass-Thru
    Entities.--
                ``(1) In general.--If a pass-thru entity (as
            defined in section 860E(e)(6)) issues a debt or equity
            interest--
                        ``(A) which is supported by any regular
                    interest in a FASIT, and
                        ``(B) which has an original yield to
                    maturity which is greater than each of--
                                ``(i) the sum determined under
                            clauses (i) and (ii) of section
                            163(i)(1)(B) with respect to such debt
                            or equity interest, and
                                ``(ii) the yield to maturity to
                            such entity on such regular interest
                            (determined as of the date such entity
                            acquired such interest),
            there is hereby imposed on the pass-thru entity a tax
            (in addition to other taxes) equal to the product of
            the highest rate of tax specified in section 11(b)(1)
            and the income of the holder of such debt or equity
            interest which is properly attributable to such regular
            interest. For purposes of the preceding sentence, the
            yield to maturity of any equity interest shall be
            determined under regulations prescribed by the
            Secretary.
                ``(2) Exception.--Paragraph (1) shall not apply to
            arrangements not having as a principal purpose the
            avoidance of the purposes of this subsection.

    ``SEC. 860L. DEFINITIONS AND OTHER SPECIAL RULES.

        ``(a) FASIT.--
                ``(1) In general.--For purposes of this title, the
            terms `financial asset securitization investment trust'
            and `FASIT' mean any entity--
                        ``(A) for which an election to be treated
                    as a FASIT applies for the taxable year,
                        ``(B) all of the interests in which are
                    regular interests or the ownership interest,
                        ``(C) which has only 1 ownership interest
                    and such ownership interest is held directly by
                    an eligible corporation,
                        ``(D) as of the close of the 3rd month
                    beginning after the day of its formation and at
                    all times thereafter, substantially all of the
                    assets of which (including assets treated as
                    held by the entity under section 860I(b)(2))
                    consist of permitted assets, and
                        ``(E) which is not described in section
                    851(a).
            A rule similar to the rule of the last sentence of
            section 860D(a) shall apply for purposes of this
            paragraph.
                ``(2) Eligible corporation.--For purposes of
            paragraph (1)(C), the term `eligible corporation' means
            any domestic C corporation other than--
                        ``(A) a corporation which is exempt from,
                    or is not subject to, tax under this chapter,
                        ``(B) an entity described in section 851(a)
                    or 856(a),
                        ``(C) a REMIC, and
                        ``(D) an organization to which part I of
                    subchapter T applies.
                ``(3) Election.--An entity (otherwise meeting the
            requirements of paragraph (1)) may elect to be treated
            as a FASIT. Except as provided in paragraph (5), such
            an election shall apply to the taxable year for which
            made and all subsequent taxable years unless revoked
            with the consent of the Secretary.
                ``(4) Termination.--If any entity ceases to be a
            FASIT at any time during the taxable year, such entity
            shall not be treated as a FASIT after the date of such
            ceasation.
                ``(5) Inadvertent terminations, etc.--Rules similar
            to the rules of section 860D(b)(2)(B) shall apply to
            inadvertent failures to qualify or remain qualified as
            a FASIT.
                ``(6) Permitted assets not treated as interest in
            fasit.--Except as provided in regulations prescribed by
            the Secretary, any asset which is a permitted asset at
            the time acquired by a FASIT shall not be treated at
            any time as an interest in such FASIT.
        ``(b) Interests in FASIT.--For purposes of this part--
                ``(1) Regular interest.--
                        ``(A) In general.--The term `regular
                    interest' means any interest which is issued by
                    a FASIT after the startup date with fixed terms
                    and which is designated as a regular interest
                    if--
                                ``(i) such interest unconditionally
                            entitles the holder to receive a
                            specified principal amount (or other
                            similar amount),
                                ``(ii) interest payments (or other
                            similar amounts), if any, with respect
                            to such interest are determined based
                            on a fixed rate, or, except as
                            otherwise provided by the Secretary, at
                            a variable rate permitted under section
                            860G(a)(1)(B)(i),
                                ``(iii) such interest does not have
                            a stated maturity (including options to
                            renew) greater than 30 years (or such
                            longer period as may be permitted by
                            regulations),
                                ``(iv) the issue price of such
                            interest does not exceed 125 percent of
                            its stated principal amount, and
                                ``(v) the yield to maturity on such
                            interest is less than the sum
                            determined under section 163(i)(1)(B)
                            with respect to such interest.
                    An interest shall not fail to meet the
                    requirements of clause (i) merely because the
                    timing (but not the amount) of the principal
                    payments (or other similar amounts) may be
                    contingent on the extent that payments on debt
                    instruments held by the FASIT are made in
                    advance of anticipated payments and on the
                    amount of income from permitted assets.
                        ``(B) High-yield interests.--
                                ``(i) In general.--The term
                            `regular interest' includes any high-
                            yield interest.
                                ``(ii) High-yield interest.--The
                            term `high-yield interest' means any
                            interest which would be described in
                            subparagraph (A) but for--
                                        ``(I) failing to meet the
                                    requirements of one or more of
                                    clauses (i), (iv), or (v)
                                    thereof, or
                                        ``(II) failing to meet the
                                    requirement of clause (ii)
                                    thereof but only if interest
                                    payments (or other similar
                                    amounts), if any, with respect
                                    to such interest consist of a
                                    specified portion of the
                                    interest payments on permitted
                                    assets and such portion does
                                    not vary during the period such
                                    interest is outstanding.
                ``(2) Ownership interest.--The term `ownership
            interest' means the interest issued by a FASIT after
            the startup day which is designated as an ownership
            interest and which is not a regular interest.
        ``(c) Permitted Assets.--For purposes of this part--
                ``(1) In general.--The term `permitted asset'
            means--
                        ``(A) cash or cash equivalents,
                        ``(B) any debt instrument (as defined in
                    section 1275(a)(1)) under which interest
                    payments (or other similar amounts), if any, at
                    or before maturity meet the requirements
                    applicable under clause (i) or (ii) of section
                    860G(a)(1)(B),
                        ``(C) foreclosure property,
                        ``(D) any asset--
                                ``(i) which is an interest rate or
                            foreign currency notional principal
                            contract, letter of credit, insurance,
                            guarantee against payment defaults, or
                            other similar instrument permitted by
                            the Secretary, and
                                ``(ii) which is reasonably required
                            to guarantee or hedge against the
                            FASIT's risks associated with being the
                            obligor on interests issued by the
                            FASIT,
                        ``(E) contract rights to acquire debt
                    instruments described in subparagraph (B) or
                    assets described in subparagraph (D),
                        ``(F) any regular interest in another
                    FASIT, and
                        ``(G) any regular interest in a REMIC.
                ``(2) Debt issued by holder of ownership interest
            not permitted asset.--The term `permitted asset' shall
            not include any debt instrument issued by the holder of
            the ownership interest in the FASIT or by any person
            related to such holder or any direct or indirect
            interest in such a debt instrument. The preceding
            sentence shall not apply to cash equivalents and to any
            other investment specified in regulations prescribed by
            the Secretary.
                ``(3) Foreclosure property.--
                        ``(A) In general.--The term `foreclosure
                    property' means property--
                                ``(i) which would be foreclosure
                            property under section 856(e)
                            (determined without regard to paragraph
                            (5) thereof) if such property were real
                            property acquired by a real estate
                            investment trust, and
                                ``(ii) which is acquired in
                            connection with the default or imminent
                            default of a debt instrument held by
                            the FASIT unless the security interest
                            in such property was created for the
                            principal purpose of permitting the
                            FASIT to invest in such property.
                    Solely for purposes of subsection (a)(1), the
                    determination of whether any property is
                    foreclosure property shall be made without
                    regard to section 856(e)(4).
                        ``(B) Authority to reduce grace period.--In
                    the case of property other than real property
                    and other than personal property incident to
                    real property, the Secretary may by regulation
                    reduce for purposes of subparagraph (A) the
                    periods otherwise applicable under paragraphs
                    (2) and (3) of section 856(e).
        ``(d) Startup Day.--For purposes of this part--
                ``(1) In general.--The term `startup day' means the
            date designated in the election under subsection (a)(3)
            as the startup day of the FASIT. Such day shall be the
            beginning of the first taxable year of the FASIT.
                ``(2) Treatment of property held on startup day.--
            All property held (or treated as held under section
            860I(c)(2)) by an entity as of the startup day shall be
            treated as contributed to such entity on such day by
            the holder of the ownership interest in such entity.
        ``(e) Tax on Prohibited Transactions.--
                ``(1) In general.--There is hereby imposed for each
            taxable year of a FASIT a tax equal to 100 percent of
            the net income derived from prohibited transactions.
            Such tax shall be paid by the holder of the ownership
            interest in the FASIT.
                ``(2) Prohibited transactions.--For purposes of
            this part, the term `prohibited transaction' means--
                        ``(A) the receipt of any income derived
                    from any asset that is not a permitted asset,
                        ``(B) except as provided in paragraph (3),
                    the disposition of any permitted asset,
                        ``(C) the receipt of any income derived
                    from any loan originated by the FASIT, and
                        ``(D) the receipt of any income
                    representing a fee or other compensation for
                    services (other than any fee received as
                    compensation for a waiver, amendment, or
                    consent under permitted assets (other than
                    foreclosure property) held by the FASIT).
                ``(3) Exception for income from certain
            dispositions.--
                        ``(A) In general.--Paragraph (2)(B) shall
                    not apply to a disposition which would not be a
                    prohibited transaction (as defined in section
                    860F(a)(2)) by reason of--
                                ``(i) clause (ii), (iii), or (iv)
                            of section 860F(a)(2)(A), or
                                ``(ii) section 860F(a)(5),
                    if the FASIT were treated as a REMIC and debt
                    instruments described in subsection (c)(1)(B)
                    were treated as qualified mortgages.
                        ``(B) Substitution of debt instruments;
                    reduction of over-collateralization.--Paragraph
                    (2)(B) shall not apply to--
                                ``(i) the substitution of a debt
                            instrument described in subsection
                            (c)(1)(B) for another debt instrument
                            which is a permitted asset, or
                                ``(ii) the distribution of a debt
                            instrument contributed by the holder of
                            the ownership interest to such holder
                            in order to reduce over-
                            collateralization of the FASIT,
                    but only if a principal purpose of acquiring
                    the debt instrument which is disposed of was
                    not the recognition of gain (or the reduction
                    of a loss) as a result of an increase in the
                    market value of the debt instrument after its
                    acquisition by the FASIT.
                        ``(C) Liquidation of class of regular
                    interests.--Paragraph (2)(B) shall not apply to
                    the complete liquidation of any class of
                    regular interests.
                ``(4) Net income.--For purposes of this subsection,
            net income shall be determined in accordance with
            section 860F(a)(3).
        ``(f) Coordination With Other Provisions.--
                ``(1) Wash sales rules.--Rules similar to the rules
            of section 860F(d) shall apply to the ownership
            interest in a FASIT.
                ``(2) Section 475.--Except as provided by the
            Secretary by regulations, if any security which is sold
            or contributed to a FASIT by the holder of the
            ownership interest in such FASIT was required to be
            marked-to-market under section 475 by such holder,
            section 475 shall continue to apply to such security;
            except that in applying section 475 while such security
            is held by the FASIT, the fair market value of such
            security for purposes of section 475 shall not be less
            than its value under section 860I(d).
        ``(g) Related Person.--For purposes of this part, a person
    (hereinafter in this subsection referred to as the `related
    person') is related to any person if--
                ``(1) the related person bears a relationship to
            such person specified in section 267(b) or section
            707(b)(1), or
                ``(2) the related person and such person are
            engaged in trades or businesses under common control
            (within the meaning of subsections (a) and (b) of
            section 52).
    For purposes of paragraph (1), in applying section 267(b) or
    707(b)(1), `20 percent' shall be substituted for `50 percent'.
        ``(h) Regulations.--The Secretary shall prescribe such
    regulations as may be necessary or appropriate to carry out the
    purposes of this part, including regulations to prevent the
    abuse of the purposes of this part through transactions which
    are not primarily related to securitization of debt instruments
    by a FASIT.''.
        (b) Technical Amendments.--
                (1) Paragraph (2) of section 26(b) is amended by
            striking ``and'' at the end of subparagraph (M), by
            striking the period at the end of subparagraph (N) and
            inserting ``, and'', and by adding at the end the
            following new subparagraph:
                        ``(O) section 860K (relating to treatment
                    of transfers of high-yield interests to
                    disqualified holders).''.
                (2) Paragraph (6) of section 56(g) is amended by
            striking ``or REMIC'' and inserting ``REMIC, or
            FASIT''.
                (3) Clause (ii) of section 382(l)(4)(B) is amended
            by striking ``or a REMIC to which part IV of subchapter
            M applies'' and inserting ``a REMIC to which part IV of
            subchapter M applies, or a FASIT to which part V of
            subchapter M applies''.
                (4) Paragraph (1) of section 582(c) is amended by
            inserting ``, and any regular interest in a FASIT,''
            after ``REMIC''.
                (5) Subparagraph (E) of section 856(c)(6) is
            amended by adding at the end the following new
            sentence: ``The principles of the preceding provisions
            of this subparagraph shall apply to regular interests
            in a FASIT.''.
                (6) Paragraph (3) of section 860G(a) is amended by
            striking ``and'' at the end of subparagraph (B), by
            striking the period at the end of subparagraph (C) and
            inserting ``, and'', and by inserting after
            subparagraph (C) the following new subparagraph:
                        ``(D) any regular interest in a FASIT which
                    is transferred to, or purchased by, the REMIC
                    as described in clauses (i) and (ii) of
                    subparagraph (A) but only if 95 percent or more
                    of the value of the assets of such FASIT is at
                    all times attributable to obligations described
                    in subparagraph (A) (without regard to such
                    clauses).''.
                (7) Subparagraph (C) of section 1202(e)(4) is
            amended by striking ``or REMIC'' and inserting ``REMIC,
            or FASIT''.
                (8) Clause (xi) of section 7701(a)(19)(C) is
            amended to read as follows:
                                ``(xi) any regular or residual
                            interest in a REMIC, and any regular
                            interest in a FASIT, but only in the
                            proportion which the assets of such
                            REMIC or FASIT consist of property
                            described in any of the preceding
                            clauses of this subparagraph; except
                            that if 95 percent or more of the
                            assets of such REMIC or FASIT are
                            assets described in clauses (i) through
                            (x), the entire interest in the REMIC
                            or FASIT shall qualify.''.
                (9) Subparagraph (A) of section 7701(i)(2) is
            amended by inserting ``or a FASIT'' after ``a REMIC''.
        (c) Clerical Amendment.--The table of parts for subchapter
    M of chapter 1 is amended by adding at the end the following
    new item:

            ``Part V. Financial asset securitization investment trusts.''.

        (d) Effective Date.--The amendments made by this section
    shall take effect on September 1, 1997.
        (e) Treatment of Existing Securitization Entities.--
                (1) In general.--In the case of the holder of the
            ownership interest in a pre-effective date FASIT--
                        (A) gain shall not be recognized under
                    section 860L(d)(2) of the Internal Revenue Code
                    of 1986 on property deemed contributed to the
                    FASIT, and
                        (B) gain shall not be recognized under
                    section 860I of such Code on property
                    contributed to such FASIT,
            until such property (or portion thereof) ceases to be
            properly allocable to a pre-FASIT interest.
                (2) Allocation of property to pre-fasit interest.--
            For purposes of paragraph (1), property shall be
            allocated to a pre-FASIT interest in such manner as the
            Secretary of the Treasury may prescribe, except that
            all property in a FASIT shall be treated as properly
            allocable to pre-FASIT interests if the fair market
            value of all such property does not exceed 107 percent
            of the aggregate principal amount of all outstanding
            pre-FASIT interests.
                (3) Definitions.--For purposes of this subsection--
                        (A) Pre-effective date fasit.--The term
                    ``pre-effective date FASIT'' means any FASIT if
                    the entity (with respect to which the election
                    under section 860L(a)(3) of such Code was made)
                    is in existence on August 31, 1997.
                        (B) Pre-fasit interest.--The term ``pre-
                    FASIT interest'' means any interest in the
                    entity referred to in subparagraph (A) which
                    was issued before the startup day (other than
                    any interest held by the holder of the
                    ownership interest in the FASIT).

                       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 of wine
                    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.
                (19) Paragraph (1) of section 179(d) is amended by
            adding at the end 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.''.
        ``(i) Effective Date.--Except as otherwise expressly
    provided, any amendment made by this section shall take effect
    as if 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 13242.--Paragraph (4) of
    section 6427(f) is amended by striking ``1995'' and inserting
    ``1999''.
        (l) 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''.
        (m) Amendment Related to Section 13301.--Subparagraph (B)
    of section 1397B(d)(5) is amended by striking ``preceding''.
        (n) 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)''.
        (o) 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) In general.--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) Effective date.--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) 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.
        (h) 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.
        (i) 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.
        (j) 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''.
        (k) Treatment of Qualified Football Coaches Plan.--
                (1) In general.--For purposes of the Internal
            Revenue Code of 1986, a qualified football coaches
            plan--
                        (A) shall be treated as a multiemployer
                    collectively bargained plan, and
                        (B) notwithstanding section 401(k)(4)(B) of
                    such Code, may include a qualified cash and
                    deferred arrangement under section 401(k) of
                    such Code.
                (2) Qualified football coaches plan.--For purposes
            of this subsection, the term ``qualified football
            coaches plan'' means any defined contribution plan
            which is established and maintained by an
            organization--
                        (A) which is described in section 501(c) of
                    such Code,
                        (B) 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
                        (C) which was in existence on September 18,
                    1986.
                (3) Effective date.--This subsection shall apply to
            years beginning after December 22, 1987.
        (l) 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.
        (m) 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.
        (n) 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 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).''.
                (2) Amendment to erisa.--Section 408(b)(1) of the
            Employee Retirement Income Security Act of 1974 (29
            U.S.C. 1148(b)) is amended by adding at the end the
            following new sentence: ``A loan made by a plan shall
            not fail to meet the requirements of the preceding
            sentence by reason of a loan repayment suspension
            described under section 414(u)(4) of the Internal
            Revenue Code of 1986.''
                (3) Effective date.--The amendments made by this
            subsection shall be effective as of December 12, 1994.
        (o) 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.
        (p) 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.
        (q) 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.
        (r) 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.
        (s) Technical Correction of Intermediate Sanctions
    Provisions.--
                (1) Subparagraph (C) of section 6652(c)(1) is
            amended by striking ``$10'' and inserting ``$20'', and
            by striking ``$5,000'' and inserting ``$10,000''.
                (2) Subparagraph (D) of section 6652(c)(1) is
            amended by striking ``$10'' and inserting ``$20''.
        (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 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.''.
                (80) Subclause (I) of section 936(a)(4)(A)(ii) is
            amended by striking ``deprecation'' and inserting
            ``depreciation''.

                          Subtitle H--Other Provisions

    SEC. 1801. EXEMPTION FROM DIESEL FUEL DYEING REQUIREMENTS WITH RESPECT
                        TO CERTAIN STATES.

        (a) In General.--Section 4082 (relating to exemptions for
    diesel fuel) is amended by redesignating subsections (c) and
    (d) as subsections (d) and (e), respectively, and by inserting
    after subsection (b) the following new subsection:
        ``(c) Exception to Dyeing Requirements.--Paragraph (2) of
    subsection (a) shall not apply with respect to any diesel
    fuel--
                ``(1) removed, entered, or sold in a State for
            ultimate sale or use in an area of such State during
            the period such area is exempted from the fuel dyeing
            requirements under subsection (i) of section 211 of the
            Clean Air Act (as in effect on the date of the
            enactment of this subsection) by the Administrator of
            the Environmental Protection Agency under paragraph (4)
            of such subsection (i) (as so in effect), and
                ``(2) the use of which is certified pursuant to
            regulations issued by the Secretary.''
        (b) Effective Date.--The amendments made by this section
    shall apply with respect to fuel removed, entered, or sold on
    or after the first day of the first calendar quarter beginning
    after the date of the enactment of this Act.

    SEC. 1802. TREATMENT OF CERTAIN UNIVERSITY ACCOUNTS.

        (a) In General.--For purposes of subsection (s) of section
    3121 of the Internal Revenue Code of 1986 (relating to
    concurrent employment by 2 or more employers)--
                (1) the following entities shall be deemed to be
            related corporations that concurrently employ the same
            individual:
                        (A) a State university which employs health
                    professionals as faculty members at a medical
                    school, and
                        (B) an agency account of a State university
                    which is described in subparagraph (A) and from
                    which there is distributed to such faculty
                    members payments forming a part of the
                    compensation that the State, or such State
                    university, as the case may be, agrees to pay
                    to such faculty members, but only if--
                                (i) such agency account is
                            authorized by State law and receives
                            the funds for such payments from a
                            faculty practice plan described in
                            section 501(c)(3) of such Code and
                            exempt from tax under section 501(a) of
                            such Code,
                                (ii) such payments are distributed
                            by such agency account to such faculty
                            members who render patient care at such
                            medical school, and
                                (iii) such faculty members comprise
                            at least 30 percent of the membership
                            of such faculty practice plan, and
                (2) remuneration which is disbursed by such agency
            account to any such faculty member of the medical
            school described in paragraph (1)(A) shall be deemed to
            have been actually disbursed by the State, or such
            State university, as the case may be, as a common
            paymaster and not to have been actually disbursed by
            such agency account.
        (b) Effective Date.--The provisions of subsection (a) shall
    apply to remuneration paid after December 31, 1996.

    SEC. 1803. MODIFICATIONS TO EXCISE TAX ON OZONE-DEPLETING CHEMICALS.

        (a) Recycled Halon.--
                (1) In general.--Section 4682(d)(1) (relating to
            recycling) is amended by inserting ``, or on any
            recycled halon imported from any country which is a
            signatory to the Montreal Protocol on Substances that
            Deplete the Ozone Layer'' before the period at the end.
                (2) Certification system.--The Secretary of the
            Treasury, after consultation with the Administrator of
            the Environmental Protection Agency, shall develop a
            certification system to ensure compliance with the
            recycling requirement for imported halon under section
            4682(d)(1) of the Internal Revenue Code of 1986, as
            amended by paragraph (1).
        (b) Chemicals Used as Propellants in Metered-Dose Inhalers
    Tax-Exempt.--Paragraph (4) of section 4682(g) (relating to
    phase-in of tax on certain substances) is amended to read as
    follows:
                ``(4) Chemicals used as propellants in metered-dose
            inhalers.--
                        ``(A) Tax-exempt.--
                                ``(i) In general.--No tax shall be
                            imposed by section 4681 on--
                                        ``(I) any use of any
                                    substance as a propellant in
                                    metered-dose inhalers, or
                                        ``(II) any qualified sale
                                    by the manufacturer, producer,
                                    or importer of any substance.
                                ``(ii) Qualified sale.--For
                            purposes of clause (i), the term
                            `qualified sale' means any sale by the
                            manufacturer, producer, or importer of
                            any substance--
                                        ``(I) for use by the
                                    purchaser as a propellant in
                                    metered-dose inhalers, or
                                        ``(II) for resale by the
                                    purchaser to a 2d purchaser for
                                    such use by the 2d purchaser.
                            The preceding sentence shall apply only
                            if the manufacturer, producer, and
                            importer, and the 1st and 2d purchasers
                            (if any) meet such registration
                            requirements as may be prescribed by
                            the Secretary.
                        ``(B) Overpayments.--If any substance on
                    which tax was paid under this subchapter is
                    used by any person as a propellant in metered-
                    dose inhalers, credit or refund without
                    interest shall be allowed to such person in an
                    amount equal to the tax so paid. Amounts
                    payable under the preceding sentence with
                    respect to uses during the taxable year shall
                    be treated as described in section 34(a) for
                    such year unless claim thereof has been timely
                    filed under this subparagraph.''
        (c) Effective Dates.--
                (1) Recycled halon.--
                        (A) In general.--Except as provided in
                    subparagraph (B), the amendment made by
                    subsection (a)(1) shall take effect on January
                    1, 1997.
                        (B) Halon-1211.--In the case of Halon-1211,
                    the amendment made by subsection (a)(1) shall
                    take effect on January 1, 1998.
                (2) Metered-dose inhalers.--The amendment made by
            subsection (b) shall take effect on the 7th day after
            the date of the enactment of this Act.

    SEC. 1804. TAX-EXEMPT BONDS FOR SALE OF ALASKA POWER ADMINISTRATION
                        FACILITY.

        Sections 142(f)(3) (as added by section 1608) and 147(d) of
    the Internal Revenue Code of 1986 shall not apply in
    determining whether any private activity bond issued after the
    date of the enactment of this Act and used to finance the
    acquisition of the Snettisham hydroelectric project from the
    Alaska Power Administration is a qualified bond for purposes of
    such Code.

    SEC. 1805. NONRECOGNITION TREATMENT FOR CERTAIN TRANSFERS BY COMMON
                        TRUST FUNDS TO REGULATED INVESTMENT COMPANIES.

        (a) General Rule.--Section 584 (relating to common trust
    funds) is amended by redesignating subsection (h) as subsection
    (i) and by inserting after subsection (g) the following new
    subsection:
        ``(h) Nonrecognition Treatment for Certain Transfers to
    Regulated Investment Companies.--
                ``(1) In general.--If--
                        ``(A) a common trust fund transfers
                    substantially all of its assets to one or more
                    regulated investment companies in exchange
                    solely for stock in the company or companies to
                    which such assets are so transferred, and
                        ``(B) such stock is distributed by such
                    common trust fund to participants in such
                    common trust fund in exchange solely for their
                    interests in such common trust fund, no gain or
                    loss shall be recognized by such common trust
                    fund by reason of such transfer or
                    distribution, and no gain or loss shall be
                    recognized by any participant in such common
                    trust fund by reason of such exchange.
                ``(2) Basis rules.--
                        ``(A) Regulated investment company.--The
                    basis of any asset received by a regulated
                    investment company in a transfer referred to in
                    paragraph (1)(A) shall be the same as it would
                    be in the hands of the common trust fund.
                        ``(B) Participants.--The basis of the stock
                    which is received in an exchange referred to in
                    paragraph (1)(B) shall be the same as that of
                    the property exchanged. If stock in more than
                    one regulated investment company is received in
                    such exchange, the basis determined under the
                    preceding sentence shall be allocated among the
                    stock in each such company on the basis of
                    respective fair market values.
                ``(3) Treatment of assumptions of liability.--
                        ``(A) In general.--In determining whether
                    the transfer referred to in paragraph (1)(A) is
                    in exchange solely for stock in one or more
                    regulated investment companies, the assumption
                    by any such company of a liability of the
                    common trust fund, and the fact that any
                    property transferred by the common trust fund
                    is subject to a liability, shall be
                    disregarded.
                        ``(B) Special rule where assumed
                    liabilities exceed basis.--
                                ``(i) In general.--If, in any
                            transfer referred to in paragraph
                            (1)(A), the assumed liabilities exceed
                            the aggregate adjusted bases (in the
                            hands of the common trust fund) of the
                            assets transferred to the regulated
                            investment company or companies--
                                        ``(I) notwithstanding
                                    paragraph (1), gain shall be
                                    recognized to the common trust
                                    fund on such transfer in an
                                    amount equal to such excess,
                                        ``(II) the basis of the
                                    assets received by the
                                    regulated investment company or
                                    companies in such transfer
                                    shall be increased by the
                                    amount so recognized, and
                                        ``(III) any adjustment to
                                    the basis of a participant's
                                    interest in the common trust
                                    fund as a result of the gain so
                                    recognized shall be treated as
                                    occurring immediately before
                                    the exchange referred to in
                                    paragraph (1)(B).
                            If the transfer referred to in
                            paragraph (1)(A) is to two or more
                            regulated investment companies, the
                            basis increase under subclause (II)
                            shall be allocated among such companies
                            on the basis of the respective fair
                            market values of the assets received by
                            each of such companies.
                                ``(ii) Assumed liabilities.--For
                            purposes of clause (i), the term
                            `assumed liabilities' means the
                            aggregate of--
                                        ``(I) any liability of the
                                    common trust fund assumed by
                                    any regulated investment
                                    company in connection with the
                                    transfer referred to in
                                    paragraph (1)(A), and
                                        ``(II) any liability to
                                    which property so transferred
                                    is subject.
                ``(4) Common trust fund must meet diversification
            rules.--This subsection shall not apply to any common
            trust fund which would not meet the requirements of
            section 368(a)(2)(F)(ii) if it were a corporation. For
            purposes of the preceding sentence, Government
            securities shall not be treated as securities of an
            issuer in applying the 25-percent and 50-percent test
            and such securities shall not be excluded for purposes
            of determining total assets under clause (iv) of
            section 368(a)(2)(F).''.
        (b) Effective Date.--The amendment made by subsection (a)
    shall apply to transfers after December 31, 1995.

    SEC. 1806. QUALIFIED STATE TUITION PROGRAMS.

        (a) In General.--Subchapter F of chapter 1 (relating to
    exempt organizations) is amended by adding at the end the
    following new part:

                 ``PART VIII--QUALIFIED STATE TUITION PROGRAMS

            ``Sec. 529. Qualified State tuition programs.

    ``SEC. 529. QUALIFIED STATE TUITION PROGRAMS.

        ``(a) General Rule.--A qualified State tuition program
    shall be exempt from taxation under this subtitle.
    Notwithstanding the preceding sentence, such program shall be
    subject to the taxes imposed by section 511 (relating to
    imposition of tax on unrelated business income of charitable
    organizations).
        ``(b) Qualified State Tuition Program.--For purposes of
    this section--
                ``(1) In general.--The term `qualified State
            tuition program' means a program established and
            maintained by a State or agency or instrumentality
            thereof--
                        ``(A) under which a person--
                                ``(i) may purchase tuition credits
                            or certificates on behalf of a
                            designated beneficiary which entitle
                            the beneficiary to the waiver or
                            payment of qualified higher education
                            expenses of the beneficiary, or
                                ``(ii) may make contributions to an
                            account which is established for the
                            purpose of meeting the qualified higher
                            education expenses of the designated
                            beneficiary of the account, and
                        ``(B) which meets the other requirements of
                    this subsection.
                ``(2) Cash contributions.--A program shall not be
            treated as a qualified State tuition program unless it
            provides that purchases or contributions may only be
            made in cash.
                ``(3) Refunds.--A program shall not be treated as a
            qualified State tuition program unless it imposes a
            more than de minimis penalty on any refund of earnings
            from the account which are not--
                        ``(A) used for qualified higher education
                    expenses of the designated beneficiary,
                        ``(B) made on account of the death or
                    disability of the designated beneficiary, or
                        ``(C) made on account of a scholarship (or
                    allowance or payment described in section
                    135(d)(1) (B) or (C)) received by the
                    designated beneficiary to the extent the amount
                    of the refund does not exceed the amount of the
                    scholarship, allowance, or payment.
                ``(4) Separate accounting.--A program shall not be
            treated as a qualified State tuition program unless it
            provides separate accounting for each designated
            beneficiary.
                ``(5) No investment direction.--A program shall not
            be treated as a qualified State tuition program unless
            it provides that any contributor to, or designated
            beneficiary under, such program may not direct the
            investment of any contributions to the program (or any
            earnings thereon).
                ``(6) No pledging of interest as security.--A
            program shall not be treated as a qualified State
            tuition program if it allows any interest in the
            program or any portion thereof to be used as security
            for a loan.
                ``(7) Prohibition on excess contributions.--A
            program shall not be treated as a qualified State
            tuition program unless it provides adequate safeguards
            to prevent contributions on behalf of a designated
            beneficiary in excess of those necessary to provide for
            the qualified higher education expenses of the
            beneficiary.
        ``(c) Tax Treatment of Designated Beneficiaries and
    Contributors.--
                ``(1) In general.--Except as otherwise provided in
            this subsection, no amount shall be includible in gross
            income of--
                        ``(A) a designated beneficiary under a
                    qualified State tuition program, or
                        ``(B) a contributor to such program on
                    behalf of a designated beneficiary,
            with respect to any distribution or earnings under such
            program.
                ``(2) Contributions.--In no event shall a
            contribution to a qualified State tuition program on
            behalf of a designated beneficiary be treated as a
            taxable gift for purposes of chapter 12.
                ``(3) Distributions.--
                        ``(A) In general.--Any distribution under a
                    qualified State tuition program shall be
                    includible in the gross income of the
                    distributee in the manner as provided under
                    section 72 to the extent not excluded from
                    gross income under any other provision of this
                    chapter.
                        ``(B) In-kind distributions.--Any benefit
                    furnished to a designated beneficiary under a
                    qualified State tuition program shall be
                    treated as a distribution to the beneficiary.
                        ``(C) Change in beneficiaries.--
                                ``(i) Rollovers.--Subparagraph (A)
                            shall not apply to that portion of any
                            distribution which, within 60 days of
                            such distribution, is transferred to
                            the credit of another designated
                            beneficiary under a qualified State
                            tuition program who is a member of the
                            family of the designated beneficiary
                            with respect to which the distribution
                            was made.
                                ``(ii) Change in designated
                            beneficiaries.--Any change in the
                            designated beneficiary of an interest
                            in a qualified State tuition program
                            shall not be treated as a distribution
                            for purposes of subparagraph (A) if the
                            new beneficiary is a member of the
                            family of the old beneficiary.
                        ``(D) Operating rules.--For purposes of
                    applying section 72--
                                ``(i) to the extent provided by the
                            Secretary, all qualified State tuition
                            programs of which an individual is a
                            designated beneficiary shall be treated
                            as one program,
                                ``(ii) all distributions during a
                            taxable year shall be treated as one
                            distribution, and
                                ``(iii) the value of the contract,
                            income on the contract, and investment
                            in the contract shall be computed as of
                            the close of the calendar year in which
                            the taxable year begins.
                ``(4) Estate tax inclusion.--The value of any
            interest in any qualified State tuition program which
            is attributable to contributions made by an individual
            to such program on behalf of any designated beneficiary
            shall be includible in the gross estate of the
            contributor for purposes of chapter 11.
                ``(5) Special rule for applying section 2503(e).--
            For purposes of section 2503(e), the waiver (or payment
            to an educational institution) of qualified higher
            education expenses of a designated beneficiary under a
            qualified State tuition program shall be treated as a
            qualified transfer.
        ``(d) Reporting Requirements.--
                ``(1) In general.--If there is a distribution to
            any individual with respect to an interest in a
            qualified State tuition program during any calendar
            year, each officer or employee having control of the
            qualified State tuition program or their designee shall
            make such reports as the Secretary may require
            regarding such distribution to the Secretary and to the
            designated beneficiary or the individual to whom the
            distribution was made. Any such report shall include
            such information as the Secretary may prescribe.
                ``(2) Timing of reports.--Any report required by
            this subsection--
                        ``(A) shall be filed at such time and in
                    such matter as the Secretary prescribes, and
                        ``(B) shall be furnished to individuals not
                    later than January 31 of the calendar year
                    following the calendar year to which such
                    report relates.
        ``(e) Other Definitions and Special Rules.--For purposes of
    this section--
                ``(1) Designated beneficiary.--The term `designated
            beneficiary' means--
                        ``(A) the individual designated at the
                    commencement of participation in the qualified
                    State tuition program as the beneficiary of
                    amounts paid (or to be paid) to the program,
                        ``(B) in the case of a change in
                    beneficiaries described in subsection
                    (c)(2)(C), the individual who is the new
                    beneficiary, and
                        ``(C) in the case of an interest in a
                    qualified State tuition program purchased by a
                    State or local government or an organization
                    described in section 501(c)(3) and exempt from
                    taxation under section 501(a) as part of a
                    scholarship program operated by such government
                    or organization, the individual receiving such
                    interest as a scholarship.
                ``(2) Member of family.--The term `member of the
            family' has the same meaning given such term as section
            2032A(e)(2).
                ``(3) Qualified higher education expenses.--The
            term `qualified higher education expenses' means
            tuition, fees, books, supplies, and equipment required
            for the enrollment or attendance of a designated
            beneficiary at an eligible educational institution (as
            defined in section 135(c)(3)).
                ``(4) Application of section 514.--An interest in a
            qualified State tuition program shall not be treated as
            debt for purposes of section 514.''.
        (b) Conforming Amendments.--
                (1) Section 135(d)(1) 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 at the end the following new
            subparagraph:
                        ``(D) a payment, waiver, or reimbursement
                    of qualified higher education expenses under a
                    qualified State tuition program (within the
                    meaning of section 529(b)).''
                (2) The table of parts for subchapter F of chapter
            1 is amended by adding at the end the following new
            item:

            ``Part VIII. Qualified State tuition programs.''

            (c) Effective Dates.--
                (1) In general.--The amendments made by this
            section shall apply to taxable years ending after the
            date of the enactment of this Act.
                (2) Transition rule.--If--
                        (A) a State or agency or instrumentality
                    thereof maintains, on the date of the enactment
                    of this Act, a program under which persons may
                    purchase tuition credits or certificates on
                    behalf of, or make contributions for education
                    expenses of, a designated beneficiary, and
                        (B) such program meets the requirements of
                    a qualified State tuition program before the
                    later of--
                                (i) the date which is 1 year after
                            such date of enactment, or
                                (ii) the first day of the first
                            calendar quarter after the close of the
                            first regular session of the State
                            legislature that begins after such date
                            of enactment,
                    the amendments made by this section shall apply
                    to contributions (and earnings allocable
                    thereto) made before the date such program
                    meets the requirements of such amendments
                    without regard to whether any requirements of
                    such amendments are met with respect to such
                    contributions and earnings.
            For purposes of subparagraph (B)(ii), if a State has a
            2-year legislative session, each year of such session
            shall be deemed to be a separate regular session of the
            State legislature.

    SEC. 1807. ADOPTION ASSISTANCE.

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

    ``SEC. 23. ADOPTION EXPENSES.

        ``(a) Allowance of Credit.--
                ``(1) In general.--In the case of an individual,
            there shall be allowed as a credit against the tax
            imposed by this chapter the amount of the qualified
            adoption expenses paid or incurred by the taxpayer.
                ``(2) Year credit allowed.--The credit under
            paragraph (1) with respect to any expense shall be
            allowed--
                        ``(A) for the taxable year following the
                    taxable year during which such expense is paid
                    or incurred, or
                        ``(B) in the case of an expense which is
                    paid or incurred during the taxable year in
                    which the adoption becomes final, for such
                    taxable year.
        ``(b) Limitations.--
                ``(1) Dollar limitation.--The aggregate amount of
            qualified adoption expenses which may be taken into
            account under subsection (a) for all taxable years with
            respect to the adoption of a child by the taxpayer
            shall not exceed $5,000 ($6,000, in the case of a child
            with special needs).
                ``(2) Income limitation.--
                        ``(A) In general.--The amount allowable as
                    a credit under subsection (a) for any taxable
                    year shall be reduced (but not below zero) by
                    an amount which bears the same ratio to the
                    amount so allowable (determined without regard
                    to this paragraph but with regard to paragraph
                    (1)) as--
                                ``(i) the amount (if any) by which
                            the taxpayer's adjusted gross income
                            exceeds $75,000, bears to
                                ``(ii) $40,000.
                        ``(B) Determination of adjusted gross
                    income.--For purposes of subparagraph (A),
                    adjusted gross income shall be determined--
                                ``(i) without regard to sections
                            911, 931, and 933, and
                                ``(ii) after the application of
                            sections 86, 135, 137, 219, and 469.
                ``(3) Denial of double benefit.--
                        ``(A) In general.--No credit shall be
                    allowed under subsection (a) for any expense
                    for which a deduction or credit is allowed
                    under any other provision of this chapter.
                        ``(B) Grants.--No credit shall be allowed
                    under subsection (a) for any expense to the
                    extent that funds for such expense are received
                    under any Federal, State, or local program.
        ``(c) Carryforwards of Unused Credit.--If the credit
    allowable under subsection (a) for any taxable year exceeds the
    limitation imposed by section 26(a) for such taxable year
    reduced by the sum of the credits allowable under this subpart
    (other than this section), such excess shall be carried to the
    succeeding taxable year and added to the credit allowable under
    subsection (a) for such taxable year. No credit may be carried
    forward under this subsection to any taxable year following the
    fifth taxable year after the taxable year in which the credit
    arose. For purposes of the preceding sentence, credits shall be
    treated as used on a first-in first-out basis.
        ``(d) Definitions.--For purposes of this section--
                ``(1) Qualified adoption expenses.--The term
            `qualified adoption expenses' means reasonable and
            necessary adoption fees, court costs, attorney fees,
            and other expenses--
                        ``(A) which are directly related to, and
                    the principal purpose of which is for, the
                    legal adoption of an eligible child by the
                    taxpayer,
                        ``(B) which are not incurred in violation
                    of State or Federal law or in carrying out any
                    surrogate parenting arrangement,
                        ``(C) which are not expenses in connection
                    with the adoption by an individual of a child
                    who is the child of such individual's spouse,
                    and
                        ``(D) which are not reimbursed under an
                    employer program or otherwise.
                ``(2) Eligible child.--The term `eligible child'
            means any individual--
                        ``(A) who--
                                ``(i) has not attained age 18, or
                                ``(ii) is physically or mentally
                            incapable of caring for himself, and
                        ``(B) in the case of qualified adoption
                    expenses paid or incurred after December 31,
                    2001, who is a child with special needs.
                ``(3) Child with special needs.--The term `child
            with special needs' means any child if--
                        ``(A) a State has determined that the child
                    cannot or should not be returned to the home of
                    his parents,
                        ``(B) such State has determined that there
                    exists with respect to the child a specific
                    factor or condition (such as his ethnic
                    background, age, or membership in a minority or
                    sibling group, or the presence of factors such
                    as medical conditions or physical, mental, or
                    emotional handicaps) because of which it is
                    reasonable to conclude that such child cannot
                    be placed with adoptive parents without
                    providing adoption assistance, and
                        ``(C) such child is a citizen or resident
                    of the United States (as defined in section
                    217(h)(3)).
            ``(e) Special Rules for Foreign Adoptions.--In the case
    of an adoption of a child who is not a citizen or resident of
    the United States (as defined in section 217(h)(3))--
                ``(1) subsection (a) shall not apply to any
            qualified adoption expense with respect to such
            adoption unless such adoption becomes final, and
                ``(2) any such expense which is paid or incurred
            before the taxable year in which such adoption becomes
            final shall be taken into account under this section as
            if such expense were paid or incurred during such year.
        ``(f) Filing Requirements.--
                ``(1) Married couples must file joint returns.--
            Rules similar to the rules of paragraphs (2), (3), and
            (4) of section 21(e) shall apply for purposes of this
            section.
                ``(2) Taxpayer must include tin.--
                        ``(A) In general.--No credit shall be
                    allowed under this section with respect to any
                    eligible child unless the taxpayer includes (if
                    known) the name, age, and TIN of such child on
                    the return of tax for the taxable year.
                        ``(B) Other methods.--The Secretary may, in
                    lieu of the information referred to in
                    subparagraph (A), require other information
                    meeting the purposes of subparagraph (A),
                    including identification of an agent assisting
                    with the adoption.
        ``(g) Basis Adjustments.--For purposes of this subtitle, if
    a credit is allowed under this section for any expenditure with
    respect to any property, the increase in the basis of such
    property which would (but for this subsection) result from such
    expenditure shall be reduced by the amount of the credit so
    allowed.
        ``(h) Regulations.--The Secretary shall prescribe such
    regulations as may be appropriate to carry out this section and
    section 137, including regulations which treat unmarried
    individuals who pay or incur qualified adoption expenses with
    respect to the same child as 1 taxpayer forpurposes of applying
    the dollar limitation in subsection (b)(1) of this section and in
    section 137(b)(1).''
        (b) Exclusion of Amounts Received Under Employer's Adoption
    Assistance Programs.--Part III of subchapter B of chapter 1
    (relating to items specifically excluded from gross income) is
    amended by redesignating section 137 as section 138 and by
    inserting after section 136 the following new section:

    ``SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

        ``(a) In General.--Gross income of an employee does not
    include amounts paid or expenses incurred by the employer for
    qualified adoption expenses in connection with the adoption of
    a child by an employee if such amounts are furnished pursuant
    to an adoption assistance program.
        ``(b) Limitations.--
                ``(1) Dollar limitation.--The aggregate amount
            excludable from gross income under subsection (a) for
            all taxable years with respect to the adoption of a
            child by the taxpayer shall not exceed $5,000 ($6,000,
            in the case of a child with special needs).
                ``(2) Income limitation.--The amount excludable
            from gross income under subsection (a) for any taxable
            year shall be reduced (but not below zero) by an amount
            which bears the same ratio to the amount so excludable
            (determined without regard to this paragraph but with
            regard to paragraph (1)) as--
                        ``(A) the amount (if any) by which the
                    taxpayer's adjusted gross income exceeds
                    $75,000, bears to
                        ``(B) $40,000.
                ``(3) Determination of adjusted gross income.--For
            purposes of paragraph (2), adjusted gross income shall
            be determined--
                        ``(A) without regard to this section and
                    sections 911, 931, and 933, and
                        ``(B) after the application of sections 86,
                    135, 219, and 469.
        ``(c) Adoption Assistance Program.--For purposes of this
    section, an adoption assistance program is a separate written
    plan of an employer for the exclusive benefit of such
    employer's employees--
                ``(1) under which the employer provides such
            employees with adoption assistance, and
                ``(2) which meets requirements similar to the
            requirements of paragraphs (2), (3), (5), and (6) of
            section 127(b).
    An adoption reimbursement program operated under section 1052
    of title 10, United States Code (relating to armed forces) or
    section 514 of title 14, United States Code (relating to
    members of the Coast Guard) shall be treated as an adoption
    assistance program for purposes of this section.
        ``(d) Qualified Adoption Expenses.--For purposes of this
    section, the term `qualified adoption expenses' has the meaning
    given such term by section 23(d) (determined without regard to
    reimbursements under this section).
        ``(e) Certain Rules To Apply.--Rules similar to the rules
    of subsections (e), (f), and (g) of section 23 shall apply for
    purposes of this section.
        ``(f) Termination.--This section shall not apply to amounts
    paid or expenses incurred after December 31, 2001.''
        (c) Conforming Amendments.--
                (1) Subparagraph (C) of section 25(e)(1) is amended
            by inserting ``and section 23'' after ``this section''.
                (2) Sections 86(b)(2)(A) and 135(c)(4)(A) are each
            amended by inserting ``137,'' before ``911''.
                (3) Clause (i) of section 219(g)(3)(A) is amended
            by inserting ``, 137,'' before ``and 911''.
                (4) Clause (ii) of section 469(i)(3)(E) is amended
            to read as follows:
                                ``(ii) the amounts excludable from
                            gross income under sections 135 and
                            137,''.
                (5) Subsection (a) of section 1016 is amended by
            striking ``and'' at the end of paragraph (24), by
            striking the period at the end of paragraph (25) and
            inserting ``, and'', and by adding at the end the
            following new paragraph:
                ``(26) to the extent provided in sections 23(g) and
            137(e).''
                (6) The table of sections for subpart A of part IV
            of subchapter A of chapter 1 is amended by inserting
            after the item relating to section 22 the following new
            item:

            ``Sec. 23. Adoption expenses.''

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

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

            (d) Study and Report.--The Secretary of the Treasury
    shall study the effect on adoptions of the tax credit and gross
    income exclusion established by the amendments made by this
    section and shall submit a report regarding the study to the
    Committee on Finance of the Senate and the Committee on Ways
    and Means of the House of Representatives not later than
    January 1, 2000.
        (e) Effective Date.--The amendments made by this section
    shall apply to taxable years beginning after December 31, 1996.

    SEC. 1808. REMOVAL OF BARRIERS TO INTERETHNIC ADOPTION.

        (a) State Plan Requirements.--Section 471(a) of the Social
    Security Act (42 U.S.C 671(a)) is amended--
                (1) by striking ``and'' at the end of paragraph
            (16);
                (2) by striking the period at the end of paragraph
            (17) and inserting ``; and''; and
                (3) by adding at the end the following:
                ``(18) not later than January 1, 1997, provides
            that neither the State nor any other entity in the
            State that receives funds from the Federal Government
            and is involved in adoption or foster care placements
            may--
                        ``(A) deny to any person the opportunity to
                    become an adoptive or a foster parent, on the
                    basis of the race, color, or national origin of
                    the person, or of the child, involved; or
                        ``(B) delay or deny the placement of a
                    child for adoption or into foster care, on the
                    basis of the race, color, or national origin of
                    the adoptive or foster parent, or the child,
                    involved.''.
        (b) Enforcement.--Section 474 of such Act (42 U.S.C. 674)
    is amended by adding at the end the following:
        ``(d)(1) If, during any quarter of a fiscal year, a State's
    program operated under this part is found, as a result of a
    review conducted under section 1123A, or otherwise, to have
    violated section 471(a)(18) with respect to a person or to have
    failed to implement a corrective action plan within a period of
    time not to exceed 6 months with respect to such violation,
    then, notwithstanding subsection (a) of this section and any
    regulations promulgated under section 1123A(b)(3), the
    Secretary shall reduce the amount otherwise payable to the
    State under this part, for that fiscal year quarter and for any
    subsequent quarter of such fiscal year, until the State program
    is found, as a result of a subsequent review under section
    1123A, to have implemented a corrective action plan with
    respect to such violation, by--
                ``(A) 2 percent of such otherwise payable amount,
            in the case of the 1st such finding for the fiscal year
            with respect to the State;
                ``(B) 3 percent of such otherwise payable amount,
            in the case of the 2d such finding for the fiscal year
            with respect to the State; or
                ``(C) 5 percent of such otherwise payable amount,
            in the case of the 3d or subsequent such finding for
            the fiscal year with respect to the State.
    In imposing the penalties described in this paragraph, the
    Secretary shall not reduce any fiscal year payment to a State
    by more than 5 percent.
        ``(2) Any other entity which is in a State that receives
    funds under this part and which violates section 471(a)(18)
    during a fiscal year quarter with respect to any person shall
    remit to the Secretary all funds that were paid by the State to
    the entity during the quarter from such funds.
        ``(3)(A) Any individual who is aggrieved by a violation of
    section 471(a)(18) by a State or other entity may bring an
    action seeking relief from the State or other entity in any
    United States district court.
        ``(B) An action under this paragraph may not be brought
    more than 2 years after the date the alleged violation
    occurred.
        ``(4) This subsection shall not be construed to affect the
    application of the Indian Child Welfare Act of 1978.''.
        (c) Civil Rights.--
                (1) Prohibited conduct.--A person or government
            that is involved in adoption or foster care placements
            may not--
                        (A) deny to any individual the opportunity
                    to become an adoptive or a foster parent, on
                    the basis of the race, color, or national
                    origin of the individual, or of the child,
                    involved; or
                        (B) delay or deny the placement of a child
                    for adoption or into foster care, on the basis
                    of the race, color, or national origin of the
                    adoptive or foster parent, or the child,
                    involved.
                (2) Enforcement.--Noncompliance with paragraph (1)
            is deemed a violation of title VI of the Civil Rights
            Act of 1964.
                (3) No effect on the indian child welfare act of
            1978.--This subsection shall not be construed to affect
            the application of the Indian Child Welfare Act of
            1978.
        (d) Conforming Amendment.--Section 553 of the Howard M.
    Metzenbaum Multiethnic Placement Act of 1994 (42 U.S.C. 5115a)
    is repealed.

    SEC. 1809. 6-MONTH DELAY OF ELECTRONIC FUND TRANSFER REQUIREMENT.

        Notwithstanding any other provision of law, the increase in
    the applicable required percentages for fiscal year 1997 in
    clauses (i)(IV) and (ii)(IV) of section 6302(h)(2)(C) of the
    Internal Revenue Code of 1986 shall not take effect before July
    1, 1997.

                    Subtitle I--Foreign Trust Tax Compliance

    SEC. 1901. IMPROVED INFORMATION REPORTING ON FOREIGN TRUSTS.

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

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

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

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

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

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

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

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

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

    SEC. 1902. COMPARABLE PENALTIES FOR FAILURE TO FILE RETURN RELATING TO
                        TRANSFERS TO FOREIGN ENTITIES.

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

    SEC. 1903. MODIFICATIONS OF RULES RELATING TO FOREIGN TRUSTS HAVING ONE
                        OR MORE UNITED STATES BENEFICIARIES.

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

    SEC. 1904. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS UNDER GRANTOR
                        TRUST RULES.

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

    SEC. 1905. INFORMATION REPORTING REGARDING FOREIGN GIFTS.

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

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

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

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

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

    SEC. 1906. MODIFICATION OF RULES RELATING TO FOREIGN TRUSTS WHICH ARE
                        NOT GRANTOR TRUSTS.

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

    SEC. 1907. RESIDENCE OF TRUSTS, ETC.

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

                 Subtitle J--Generalized System of Preferences

    SEC. 1951. SHORT TITLE.

        This subtitle may be cited as the ``GSP Renewal Act of
    1996''.

    SEC. 1952. GENERALIZED SYSTEM OF PREFERENCES.

        (a) In General.--Title V of the Trade Act of 1974 is
    amended to read as follows:

                  ``TITLE V--GENERALIZED SYSTEM OF PREFERENCES

    ``SEC. 501. AUTHORITY TO EXTEND PREFERENCES.

        ``The President may provide duty-free treatment for any
    eligible article from any beneficiary developing country in
    accordance with the provisions of this title. In taking any
    such action, the President shall have due regard for--
                ``(1) the effect such action will have on
            furthering the economic development of developing
            countries through the expansion of their exports;
                ``(2) the extent to which other major developed
            countries are undertaking a comparable effort to assist
            developing countries by granting generalized
            preferences with respect to imports of products of such
            countries;
                ``(3) the anticipated impact of such action on
            United States producers of like or directly competitive
            products; and
                ``(4) the extent of the beneficiary developing
            country's competitiveness with respect to eligible
            articles.

    ``SEC. 502. DESIGNATION OF BENEFICIARY DEVELOPING COUNTRIES.

        ``(a) Authority To Designate Countries.--
                ``(1) Beneficiary developing countries.--The
            President is authorized to designate countries as
            beneficiary developing countries for purposes of this
            title.
                ``(2) Least-developed beneficiary developing
            countries.--The President is authorized to designate
            any beneficiary developing country as a least-developed
            beneficiary developing country for purposes of this
            title, based on the considerations in section 501 and
            subsection (c) of this section.
        ``(b) Countries Ineligible for Designation.--
                ``(1) Specific countries.--The following countries
            may not be designated as beneficiary developing
            countries for purposes of this title:
                        ``(A) Australia.
                        ``(B) Canada.
                        ``(C) European Union member states.
                        ``(D) Iceland.
                        ``(E) Japan.
                        ``(F) Monaco.
                        ``(G) New Zealand.
                        ``(H) Norway.
                        ``(I) Switzerland.
                ``(2) Other bases for ineligibility.--The President
            shall not designate any country a beneficiary
            developing country under this title if any of the
            following applies:
                        ``(A) Such country is a Communist country,
                    unless--
                                ``(i) the products of such country
                            receive nondiscriminatory treatment,
                                ``(ii) such country is a WTO Member
                            (as such term is defined in section
                            2(10) of the Uruguay Round Agreements
                            Act) (19 U.S.C. 3501(10)) and a member
                            of the International Monetary Fund, and
                                ``(iii) such country is not
                            dominated or controlled by
                            international communism.
                        ``(B) Such country is a party to an
                    arrangement of countries and participates in
                    any action pursuant to such arrangement, the
                    effect of which is--
                                ``(i) to withhold supplies of vital
                            commodity resources from international
                            trade or to raise the price of such
                            commodities to an unreasonable level,
                            and
                                ``(ii) to cause serious disruption
                            of the world economy.
                        ``(C) Such country affords preferential
                    treatment to the products of a developed
                    country, other than the United States, which
                    has, or is likely to have, a significant
                    adverse effect on United States commerce.
                        ``(D)(i) Such country--
                                ``(I) has nationalized,
                            expropriated, or otherwise seized
                            ownership or control of property,
                            including patents, trademarks, or
                            copyrights, owned by a United States
                            citizen or by a corporation,
                            partnership, or association which is 50
                            percent or more beneficially owned by
                            United States citizens,
                                ``(II) has taken steps to repudiate
                            or nullify an existing contract or
                            agreement with a United States citizen
                            or a corporation, partnership, or
                            association which is 50 percent or more
                            beneficially owned by United States
                            citizens, the effect of which is to
                            nationalize, expropriate, or otherwise
                            seize ownership or control of property,
                            including patents, trademarks, or
                            copyrights, so owned, or
                                ``(III) has imposed or enforced
                            taxes or other exactions, restrictive
                            maintenance or operational conditions,
                            or other measures with respect to
                            property, including patents,
                            trademarks, or copyrights, so owned,
                            the effect of which is to nationalize,
                            expropriate, or otherwise seize
                            ownership or control of such property,
                    unless clause (ii) applies.
                        ``(ii) This clause applies if the President
                    determines that--
                                ``(I) prompt, adequate, and
                            effective compensation has been or is
                            being made to the citizen, corporation,
                            partnership, or association referred to
                            in clause (i),
                                ``(II) good faith negotiations to
                            provide prompt, adequate, and effective
                            compensation under the applicable
                            provisions of international law are in
                            progress, or the country described in
                            clause (i) is otherwise taking steps to
                            discharge its obligations under
                            international law with respect to such
                            citizen, corporation, partnership, or
                            association, or
                                ``(III) a dispute involving such
                            citizen, corporation, partnership, or
                            association over compensation for such
                            a seizure has been submitted to
                            arbitration under the provisions of the
                            Convention for the Settlement of
                            Investment Disputes, or in another
                            mutually agreed upon forum,
                    and the President promptly furnishes a copy of
                    such determination to the Senate and House of
                    Representatives.
                        ``(E) Such country fails to act in good
                    faith in recognizing as binding or in enforcing
                    arbitral awards in favor of United States
                    citizens or a corporation, partnership, or
                    association which is 50 percent or more
                    beneficially owned by United States citizens,
                    which have been made by arbitrators appointed
                    for each case or by permanent arbitral bodies
                    to which the parties involved have submitted
                    their dispute.
                        ``(F) Such country aids or abets, by
                    granting sanctuary from prosecution to, any
                    individual or group which has committed an act
                    of international terrorism.
                        ``(G) Such country has not taken or is not
                    taking steps to afford internationally
                    recognized worker rights to workers in the
                    country (including any designated zone in that
                    country).
            Subparagraphs (D), (E), (F), and (G) shall not prevent
            the designation of any country as a beneficiary
            developing country under this title if the President
            determines that such designation will be in the
            national economic interest of the United States and
            reports such determination to the Congress with the
            reasons therefor.
        ``(c) Factors Affecting Country Designation.--In
    determining whether to designate any country as a beneficiary
    developing country under this title, the President shall take
    into account--
                ``(1) an expression by such country of its desire
            to be so designated;
                ``(2) the level of economic development of such
            country, including its per capita gross national
            product, the living standards of its inhabitants, and
            any other economic factors which the President deems
            appropriate;
                ``(3) whether or not other major developed
            countries are extending generalized preferential tariff
            treatment to such country;
                ``(4) the extent to which such country has assured
            the United States that it will provide equitable and
            reasonable access to the markets and basic commodity
            resources of such country and the extent to which such
            country has assured the United States that it will
            refrain from engaging in unreasonable export practices;
                ``(5) the extent to which such country is providing
            adequate and effective protection of intellectual
            property rights;
                ``(6) the extent to which such country has taken
            action to--
                        ``(A) reduce trade distorting investment
                    practices and policies (including export
                    performance requirements); and
                        ``(B) reduce or eliminate barriers to trade
                    in services; and
                ``(7) whether or not such country has taken or is
            taking steps to afford to workers in that country
            (including any designated zone in that country)
            internationally recognized worker rights.
        ``(d) Withdrawal, Suspension, or Limitation of Country
    Designation.--
                ``(1) In general.--The President may withdraw,
            suspend, or limit the application of the duty-free
            treatment accorded under this title with respect to any
            country. In taking any action under this subsection,
            the President shall consider the factors set forth in
            section 501 and subsection (c) of this section.
                ``(2) Changed circumstances.--The President shall,
            after complying with the requirements of subsection
            (f)(2), withdraw or suspend the designation of any
            country as a beneficiary developing country if, after
            such designation, the President determines that as the
            result of changed circumstances such country would be
            barred from designation as a beneficiary developing
            country under subsection (b)(2). Such country shall
            cease to be a beneficiary developing country on the day
            on which the President issues an Executive order or
            Presidential proclamation revoking the designation of
            such country under this title.
                ``(3) Advice to congress.--The President shall, as
            necessary, advise the Congress on the application of
            section 501 and subsection (c) of this section, and the
            actions the President has taken to withdraw, to
            suspend, or to limit the application of duty-free
            treatment with respect to any country which has failed
            to adequately take the actions described in subsection
            (c).
        ``(e) Mandatory Graduation of Beneficiary Developing
    Countries.--If the President determines that a beneficiary
    developing country has become a `high income' country, as
    defined by the official statistics of the International Bank
    for Reconstruction and Development, then the President shall
    terminate the designation of such country as a beneficiary
    developing country for purposes of this title, effective on
    January 1 of the second year following the year in which such
    determination is made.
        ``(f) Congressional Notification.--
                ``(1) Notification of designation.--
                        ``(A) In general.--Before the President
                    designates any country as a beneficiary
                    developing country under this title, the
                    President shall notify the Congress of the
                    President's intention to make such designation,
                    together with the considerations entering into
                    such decision.
                        ``(B) Designation as least-developed
                    beneficiary developing country.--At least 60
                    days before the President designates any
                    country as a least-developed beneficiary
                    developing country, the President shall notify
                    the Congress of the President's intention to
                    make such designation.
                ``(2) Notification of termination.--If the
            President has designated any country as a beneficiary
            developing country under this title, the President
            shall not terminate such designation unless, at least
            60 days before such termination, the President has
            notified the Congress and has notified such country of
            the President's intention to terminate such
            designation, together with the considerations entering
            into such decision.

    ``SEC. 503. DESIGNATION OF ELIGIBLE ARTICLES.

        ``(a) Eligible Articles.--
                ``(1) Designation.--
                        ``(A) In general.--Except as provided in
                    subsection (b), the President is authorized to
                    designate articles as eligible articles from
                    all beneficiary developing countries for
                    purposes of this title by Executive order or
                    Presidential proclamation after receiving the
                    advice of the International Trade Commission in
                    accordance with subsection (e).
                        ``(B) Least-developed beneficiary
                    developing countries.--Except for articles
                    described in subparagraphs (A), (B), and (E) of
                    subsection (b)(1) and articles described in
                    paragraphs (2) and (3) of subsection (b), the
                    President may, in carrying out section
                    502(d)(1) and subsection (c)(1) of this
                    section, designate articles as eligible
                    articles only for countries designated as
                    least-developed beneficiary developing
                    countries under section 502(a)(2) if, after
                    receiving the advice of the International Trade
                    Commission in accordance with subsection (e) of
                    this section, the President determines that
                    such articles are not import-sensitive in the
                    context of imports from least-developed
                    beneficiary developing countries.
                        ``(C) Three-year rule.--If, after receiving
                    the advice of the International Trade
                    Commission under subsection (e), an article has
                    been formally considered for designation as an
                    eligible article under this title and denied
                    such designation, such article may not be
                    reconsidered for such designation for a period
                    of 3 years after such denial.
                ``(2) Rule of origin.--
                        ``(A) General rule.--The duty-free
                    treatment provided under this title shall apply
                    to any eligible article which is the growth,
                    product, or manufacture of a beneficiary
                    developing country if--
                                ``(i) that article is imported
                            directly from a beneficiary developing
                            country into the customs territory of
                            the United States; and
                                ``(ii) the sum of--
                                        ``(I) the cost or value of
                                    the materials produced in the
                                    beneficiary developing country
                                    or any two or more such
                                    countries that are members of
                                    the same association of
                                    countries and are treated as
                                    one country under section
                                    507(2), plus
                                        ``(II) the direct costs of
                                    processing operations performed
                                    in such beneficiary developing
                                    country or such member
                                    countries,
                            is not less than 35 percent of the
                            appraised value of such article at the
                            time it is entered.
                        ``(B) Exclusions.--An article shall not be
                    treated as the growth, product, or manufacture
                    of a beneficiary developing country by virtue
                    of having merely undergone--
                                ``(i) simple combining or packaging
                            operations, or
                                ``(ii) mere dilution with water or
                            mere dilution with another substance
                            that does not materially alter the
                            characteristics of the article.
                ``(3) Regulations.--The Secretary of the Treasury,
            after consulting with the United States Trade
            Representative, shall prescribe such regulations as may
            be necessary to carry out paragraph (2), including, but
            not limited to, regulations providing that, in order to
            be eligible for duty-free treatment under this title,
            an article--
                        ``(A) must be wholly the growth, product,
                    or manufacture of a beneficiary developing
                    country, or
                        ``(B) must be a new or different article of
                    commerce which has been grown, produced, or
                    manufactured in the beneficiary developing
                    country.
        ``(b) Articles That May Not Be Designated As Eligible
    Articles.--
                ``(1) Import sensitive articles.--The President may
            not designate any article as an eligible article under
            subsection (a) if such article is within one of the
            following categories of import-sensitive articles:
                        ``(A) Textile and apparel articles which
                    were not eligible articles for purposes of this
                    title on January 1, 1994, as this title was in
                    effect on such date.
                        ``(B) Watches, except those watches entered
                    after June 30, 1989, that the President
                    specifically determines, after public notice
                    and comment, will not cause material injury to
                    watch or watch band, strap, or bracelet
                    manufacturing and assembly operations in the
                    United States or the United States insular
                    possessions.
                        ``(C) Import-sensitive electronic articles.
                        ``(D) Import-sensitive steel articles.
                        ``(E) Footwear, handbags, luggage, flat
                    goods, work gloves, and leather wearing apparel
                    which were not eligible articles for purposes
                    of this title on January 1, 1995, as this title
                    was in effect on such date.
                        ``(F) Import-sensitive semimanufactured and
                    manufactured glass products.
                        ``(G) Any other articles which the
                    President determines to be import-sensitive in
                    the context of the Generalized System of
                    Preferences.
                ``(2) Articles against which other actions taken.--
            An article shall not be an eligible article for
            purposes of this title for any period during which such
            article is the subject of any action proclaimed
            pursuant to section 203 of this Act (19 U.S.C. 2253) or
            section 232 or 351 of the Trade Expansion Act of 1962
            (19 U.S.C. 1862, 1981).
                ``(3) Agricultural products.--No quantity of an
            agricultural product subject to a tariff-rate quota
            that exceeds the in-quota quantity shall be eligible
            for duty-free treatment under this title.
        ``(c) Withdrawal, Suspension, or Limitation of Duty-Free
    Treatment; Competitive Need Limitation.--
                ``(1) In general.--The President may withdraw,
            suspend, or limit the application of the duty-free
            treatment accorded under this title with respect to any
            article, except that no rate of duty may be established
            with respect to any article pursuant to this subsection
            other than the rate which would apply but for this
            title. In taking any action under this subsection, the
            President shall consider the factors set forth in
            sections 501 and 502(c).
                ``(2) Competitive need limitation.--
                        ``(A) Basis for withdrawal of duty-free
                    treatment.--
                                ``(i) In general.--Except as
                            provided in clause (ii) and subject to
                            subsection (d), whenever the President
                            determines that a beneficiary
                            developing country has exported
                            (directly or indirectly) to the United
                            States during any calendar year
                            beginning after December 31, 1995--
                                        ``(I) a quantity of an
                                    eligible article having an
                                    appraised value in excess of
                                    the applicable amount for the
                                    calendar year, or
                                        ``(II) a quantity of an
                                    eligible article equal to or
                                    exceeding 50 percent of the
                                    appraised value of the total
                                    imports of that article into
                                    the United States during any
                                    calendar year,
                            the President shall, not later than
                            July 1 of the next calendar year,
                            terminate the duty-free treatment for
                            that article from that beneficiary
                            developing country.
                                ``(ii) Annual adjustment of
                            applicable amount.--For purposes of
                            applying clause (i), the applicable
                            amount is--
                                        ``(I) for 1996,
                                    $75,000,000, and
                                        ``(II) for each calendar
                                    year thereafter, an amount
                                    equal to the applicable amount
                                    in effect for the preceding
                                    calendar year plus $5,000,000.
                        ``(B) Country defined.--For purposes of
                    this paragraph, the term `country' does not
                    include an association of countries which is
                    treated as one country under section 507(2),
                    but does include a country which is a member of
                    any such association.
                        ``(C) Redesignations.--A country which is
                    no longer treated as a beneficiary developing
                    country with respect to an eligible article by
                    reason of subparagraph (A) may, subject to the
                    considerations set forth in sections 501 and
                    502, be redesignated a beneficiary developing
                    country with respect to such article if imports
                    of such article from such country did not
                    exceed the limitations in subparagraph (A)
                    during the preceding calendar year.
                        ``(D) Least-developed beneficiary
                    developing countries.--Subparagraph (A) shall
                    not apply to any least-developed beneficiary
                    developing country.
                        ``(E) Articles not produced in the united
                    states excluded.--Subparagraph (A)(i)(II) shall
                    not apply with respect to any eligible article
                    if a like or directly competitive article was
                    not produced in the United States on January 1,
                    1995.
                        ``(F) De minimis waivers.--
                                ``(i) In general.--The President
                            may disregard subparagraph (A)(i)(II)
                            with respect to any eligible article
                            from any beneficiary developing country
                            if the aggregate appraised value of the
                            imports of such article into the United
                            States during the preceding calendar
                            year does not exceed the applicable
                            amount for such preceding calendar
                            year.
                                ``(ii) Applicable amount.--For
                            purposes of applying clause (i), the
                            applicable amount is--
                                        ``(I) for calendar year
                                    1996, $13,000,000, and
                                        ``(II) for each calendar
                                    year thereafter, an amount
                                    equal to the applicable amount
                                    in effect for the preceding
                                    calendar year plus $500,000.
        ``(d) Waiver of Competitive Need Limitation.--
                ``(1) In general.--The President may waive the
            application of subsection (c)(2) with respect to any
            eligible article of any beneficiary developing country
            if, before July 1 of the calendar year beginning after
            the calendar year for which a determination described
            in subsection (c)(2)(A) was made with respect to such
            eligible article, the President--
                        ``(A) receives the advice of the
                    International Trade Commission under section
                    332 of the Tariff Act of 1930 on whether any
                    industry in the United States is likely to be
                    adversely affected by such waiver,
                        ``(B) determines, based on the
                    considerations described in sections 501 and
                    502(c) and the advice described in subparagraph
                    (A), that such waiver is in the national
                    economic interest of the United States, and
                        ``(C) publishes the determination described
                    in subparagraph (B) in the Federal Register.
                ``(2) Considerations by the president.--In making
            any determination under paragraph (1), the President
            shall give great weight to--
                        ``(A) the extent to which the beneficiary
                    developing country has assured the United
                    States that such country will provide equitable
                    and reasonable access to the markets and basic
                    commodity resources of such country, and
                        ``(B) the extent to which such country
                    provides adequate and effective protection of
                    intellectual property rights.
                ``(3) Other bases for waiver.--The President may
            waive the application of subsection (c)(2) if, before
            July 1 of the calendar year beginning after the
            calendar year for which a determination described in
            subsection (c)(2) was made with respect to a
            beneficiary developing country, the President
            determines that--
                        ``(A) there has been a historical
                    preferential trade relationship between the
                    United States and such country,
                        ``(B) there is a treaty or trade agreement
                    in force covering economic relations between
                    such country and the United States, and
                        ``(C) such country does not discriminate
                    against, or impose unjustifiable or
                    unreasonable barriers to, United States
                    commerce,
            and the President publishes that determination in the
            Federal Register.
                ``(4) Limitations on waivers.--
                        ``(A) In general.--The President may not
                    exercise the waiver authority under this
                    subsection with respect to a quantity of an
                    eligible article entered during any calendar
                    year beginning after 1995, the aggregate
                    appraised value of which equals or exceeds 30
                    percent of the aggregate appraised value of all
                    articles that entered duty-free under this
                    title during the preceding calendar year.
                        ``(B) Other waiver limits.--The President
                    may not exercise the waiver authority provided
                    under this subsection with respect to a
                    quantity of an eligible article entered during
                    any calendar year beginning after 1995, the
                    aggregate appraised value of which exceeds 15
                    percent of the aggregate appraised value of all
                    articles that have entered duty-free under this
                    title during the preceding calendar year from
                    those beneficiary developing countries which
                    for the preceding calendar year--
                                ``(i) had a per capita gross
                            national product (calculated on the
                            basis of the best available
                            information, including that of the
                            International Bank for Reconstruction
                            and Development) of $5,000 or more; or
                                ``(ii) had exported (either
                            directly or indirectly) to the United
                            States a quantity of articles that was
                            duty-free under this title that had an
                            aggregate appraised value of more than
                            10 percent of the aggregate appraised
                            value of all articles that entered
                            duty-free under this title during that
                            year.
                        ``(C) Calculation of limitations.--There
                    shall be counted against the limitations
                    imposed under subparagraphs (A) and (B) for any
                    calendar year only that value of any eligible
                    article of any country that--
                                ``(i) entered duty-free under this
                            title during such calendar year; and
                                ``(ii) is in excess of the value of
                            that article that would have been so
                            entered during such calendar year if
                            the limitations under subsection
                            (c)(2)(A) applied.
                ``(5) Effective period of waiver.--Any waiver
            granted under this subsection shall remain in effect
            until the President determines that such waiver is no
            longer warranted due to changed circumstances.
        ``(e) International Trade Commission Advice.--Before
    designating articles as eligible articles under subsection
    (a)(1), the President shall publish and furnish the
    International Trade Commission with lists of articles which may
    be considered for designation as eligible articles for purposes
    of this title. The provisions of sections 131, 132, 133, and
    134 shall be complied with as though action under section 501
    and this section were action under section 123 to carry out a
    trade agreement entered into under section 123.
        ``(f) Special Rule Concerning Puerto Rico.--No action under
    this title may affect any tariff duty imposed by the
    Legislature of Puerto Rico pursuant to section 319 of the
    Tariff Act of 1930 on coffee imported into Puerto Rico.

    ``SEC. 504. REVIEW AND REPORT TO CONGRESS.

        The President shall submit an annual report to the Congress
    on the status of internationally recognized worker rights
    within each beneficiary developing country.

    ``SEC. 505. DATE OF TERMINATION.

        ``No duty-free treatment provided under this title shall
    remain in effect after May 31, 1997.

    ``SEC. 506. AGRICULTURAL EXPORTS OF BENEFICIARY DEVELOPING COUNTRIES.

        ``The appropriate agencies of the United States shall
    assist beneficiary developing countries to develop and
    implement measures designed to assure that the agricultural
    sectors of their economies are not directed to export markets
    to the detriment of the production of foodstuffs for their
    citizenry.

    ``SEC. 507. DEFINITIONS.

        ``For purposes of this title:
                ``(1) Beneficiary developing country.--The term
            `beneficiary developing country' means any country with
            respect to which there is in effect an Executive order
            or Presidential proclamation by the President
            designating such country as a beneficiary developing
            country for purposes of this title.
                ``(2) Country.--The term `country' means any
            foreign country or territory, including any overseas
            dependent territory or possession of a foreign country,
            or the Trust Territory of the Pacific Islands. In the
            case of an association of countries which is a free
            trade area or customs union, or which is contributing
            to comprehensive regional economic integration among
            its members through appropriate means, including, but
            not limited to, the reduction of duties, the President
            may by Executive order or Presidential proclamation
            provide that all members of such association other than
            members which are barred from designation under section
            502(b) shall be treated as one country for purposes of
            this title.
                ``(3) Entered.--The term `entered' means entered,
            or withdrawn from warehouse for consumption, in the
            customs territory of the United States.
                ``(4) Internationally recognized worker rights.--
            The term `internationally recognized worker rights'
            includes--
                        ``(A) the right of association;
                        ``(B) the right to organize and bargain
                    collectively;
                        ``(C) a prohibition on the use of any form
                    of forced or compulsory labor;
                        ``(D) a minimum age for the employment of
                    children; and
                        ``(E) acceptable conditions of work with
                    respect to minimum wages, hours of work, and
                    occupational safety and health.
                ``(5) Least-developed beneficiary developing
            country.--The term `least-developed beneficiary
            developing country' means a beneficiary developing
            country that is designated as a least-developed
            beneficiary developing country under section
            502(a)(2).''.
        (b) Table of Contents.--The items relating to title V in
    the table of contents of the Trade Act of 1974 are amended to
    read as follows:

                  ``TITLE V--GENERALIZED SYSTEM OF PREFERENCES

    ``Sec. 501. Authority to extend preferences.
    ``Sec. 502. Designation of beneficiary developing countries.
    ``Sec. 503. Designation of eligible articles.
    ``Sec. 504. Review and reports to Congress.
    ``Sec. 505. Date of termination.
    ``Sec. 506. Agricultural exports of beneficiary developing countries.
    ``Sec. 507. Definitions.''.

    SEC. 1953. EFFECTIVE DATE.

        (a) In General.--The amendments made by this subtitle apply
    to articles entered on or after October 1, 1996.
        (b) Retroactive Application.--
                (1) General rule.--Notwithstanding section 514 of
            the Tariff Act of 1930 or any other provision of law
            and subject to subsection (c)--
                        (A) any article that was entered--
                                (i) after July 31, 1995, and
                                (ii) before January 1, 1996, and
                    to which duty-free treatment under title V of
                    the Trade Act of 1974 would have applied if the
                    entry had been made on July 31, 1995, shall be
                    liquidated or reliquidated as free of duty, and
                    the Secretary of the Treasury shall refund any
                    duty paid with respect to such entry, and
                        (B) any article that was entered--
                                (i) after December 31, 1995, and
                                (ii) before October 1, 1996, and
                    to which duty-free treatment under title V of
                    the Trade Act of 1974 (as amended by this
                    subtitle) would have applied if the entry had
                    been made on or after October 1, 1996, shall be
                    liquidated or reliquidated as free of duty, and
                    the Secretary of the Treasury shall refund any
                    duty paid with respect to such entry.
                (2) Limitation on refunds.--No refund shall be made
            pursuant to this subsection before October 1, 1996.
                (3) Entry.--As used in this subsection, the term
            ``entry'' includes a withdrawal from warehouse for
            consumption.
        (c) Requests.--Liquidation or reliquidation may be made
    under subsection (b) with respect to an entry only if a request
    therefor is filed with the Customs Service, within 180 days
    after the date of the enactment of this Act, that contains
    sufficient information to enable the Customs Service--
                (1) to locate the entry; or
                (2) to reconstruct the entry if it cannot be
            located.

    SEC. 1954. CONFORMING AMENDMENTS.

        (a) Trade Laws.--
                (1) Section 1211(b) of the Omnibus Trade and
            Competitiveness Act of 1988 (19 U.S.C. 3011(b)) is
            amended--
                        (A) in paragraph (1), by striking ``(19
                    U.S.C. 2463(a), 2464(c)(3))'' and inserting
                    ``(as in effect on July 31, 1995)''; and
                        (B) in paragraph (2), by striking ``(19
                    U.S.C. 2464(c)(1))'' and inserting the
                    following: ``(as in effect on July 31, 1995)''.
                (2) Section 203(c)(7) of the Andean Trade
            Preference Act (19 U.S.C. 3202(c)(7)) is amended by
            striking ``502(a)(4)'' and inserting ``507(4)''.
                (3) Section 212(b)(7) of the Caribbean Basin
            Economic Recovery Act (19 U.S.C. 2702(b)(7)) is amended
            by striking ``502(a)(4)'' and inserting ``507(4)''.
                (4) General note 3(a)(iv)(C) of the Harmonized
            Tariff Schedule of the United States is amended by
            striking ``sections 503(b) and 504(c)'' and inserting
            ``subsections (a), (c), and (d) of section 503''.
                (5) Section 201(a)(2) of the North American Free
            Trade Agreement Implementation Act (19 U.S.C.
            3331(a)(2)) is amended by striking ``502(a)(2) of the
            Trade Act of 1974 (19 U.S.C. 2462(a)(2))'' and
            inserting ``502(f)(2) of the Trade Act of 1974''.
                (6) Section 131 of the Uruguay Round Agreements Act
            (19 U.S.C. 3551) is amended in subsections (a) and
            (b)(1) by striking ``502(a)(4)'' and inserting
            ``507(4)''.
        (b) Other Laws.--
                (1) Section 871(f)(2)(B) of the Internal Revenue
            Code of 1986 is amended by striking ``within the
            meaning of section 502'' and inserting ``under title
            V''.
                (2) Section 2202(8) of the Export Enhancement Act
            of 1988 (15 U.S.C. 4711(8)) is amended by striking
            ``502(a)(4)'' and inserting ``507(4)''.
                (3) Section 231A(a) of the Foreign Assistance Act
            of 1961 (22 U.S.C. 2191a(a)) is amended--
                        (A) in paragraph (1) by striking
                    ``502(a)(4) of the Trade Act of 1974 (19 U.S.C.
                    2462(a)(4))'' and inserting ``507(4) of the
                    Trade Act of 1974'';
                        (B) in paragraph (2) by striking ``505(c)
                    of the Trade Act of 1974 (19 U.S.C. 2465(c))''
                    and inserting ``504 of the Trade Act of 1974'';
                    and
                        (C) in paragraph (4) by striking
                    ``502(a)(4)'' and inserting ``507(4)''.
                (4) Section 1621(a)(1) of the International
            Financial Institutions Act (22 U.S.C. 262p-4p(a)(1)) is
            amended by striking ``502(a)(4)'' and inserting
            ``507(4)''.
                (5) Section 103B of the Agricultural Act of 1949 (7
            U.S.C. 1444-2) is amended in subsections (a)(5)(F)(v)
            and (n)(1)(C) by striking ``503(d) of the Trade Act of
            1974 (19 U.S.C. 2463(d))'' and inserting ``503(b)(3) of
            the Trade Act of 1974''.
          And the Senate agree to the same.

                                    TITLE II

        That the House recede from its disagreement to the
    amendments of the Senate numbered 2 and 3 and agree to the
    same.
        That the House recede from its disagreement to the
    amendment of the Senate numbered 4 and agree to the same with
    an amendment as follows:
        On page 236, line 12 of the House engrossed bill, strike
    ``Act'' and insert ``This section and sections 2102 and 2103'';
    and on page 237, line 4 of the House engrossed bill, strike
    ``section 1'' and insert ``section 2102''; and the Senate agree
    to the same.
        That the House recede from its disagreement to the
    amendment of the Senate numbered 5 and agree to the same with
    an amendment as follows:
        On page 237, line 18 of the House engrossed bill, strike
    ``June 30, 1996'' and insert ``September 30, 1996''; on line
    19, strike ``July 1, 1996'' and insert ``October 1, 1996'';
    beginning in line 20 strike ``after the expiration of such
    year'' and insert ``beginning September 1, 1997''; and after
    line 21, insert the following:
        (c) Conforming Amendment.--Section 6 of such Act (29 U.S.C.
    206) is amended by striking subsection (c).
        And the Senate agree to the same.
        That the House recede from its disagreement to the
    amendment of the Senate numbered 6 and agree to the same with
    an amendment as follows:
        On page 239, line 1 of the House engrossed bill, strike
    ``next to''; in line 3 of such page strike ``to read as
    follows'' and insert ``by striking `previous sentence' and
    inserting `preceding 2 sentences' and by striking `(1)' and
    `(2)' and such section is amended by striking the next to last
    sentence and inserting the following''; and in line 15 of such
    page strike ``cash''; and the Senate agree to the same.
                    From the Committee on Ways and Means, for
                    consideration of the House bill (except for
                    title II) and the Senate amendment numbered 1,
                    and modifications committed to conference:
                                       Bill Archer,
                                       Phil Crane,
                                       Bill Thomas,
                                       Sam Gibbons,
                                       Charles B. Rangel,
                    As additional conferees from the Committee on
                    Economic and Educational Opportunities, for
                    consideration of secs. 1704(h)(1)(B) and
                    1704(l) of the House bill and secs. 1421(d),
                    1442(b), 1442(c), 1451, 1457, 1460(b), 1460(c),
                    1461, 1465, and 1704(h)(1)(B) of the Senate
                    amendment numbered 1, and modifications
                    committed to conference:
                                       William F. Goodling,
                                       Cass Ballenger,
                    As additional conferees from the Committee on
                    Economic and Educational Opportunities, for
                    consideration of title II of the House bill and
                    the Senate amendments numbered 2-6, and
                    modifications committed to conference:
                                       William F. Goodling,
                                       H.W. Fawell,
                                       Frank Riggs,
                                       William L. Clay,
                                       Major R. Owens,
                                       Maurice Hinchey,
                                     Managers on the Part of the House.

                    From the Committee on Labor and Human
                    Resources:
                                       Nancy Landon Kassebaum,
                                       Edward M. Kennedy,
                                       Jim Jeffords,
                    From the Committee on Finance:
                                       Bill Roth,
                                       John H. Chafee,
                                       Chuck Grassley,
                                       Orin G. Hatch,
                                       Al Simpson,
                                       Larry Pressler,
                                       Daniel P. Moynihan,
                                       Max Baucus,
                                       David Pryor,
                                       John D. Rockefeller IV,
                                    Managers on the Part of the Senate.
           JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

          The managers on the part of the House and the Senate at
    the conference on the disagreeing votes of the two Houses on
    the amendments of the Senate to 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, to
    amend the Portal-to-Portal Act of 1947 relating to the payment
    of wages to employees who use employer owned vehicles, and to
    amend the Fair Labor Standards Act of 1938 to increase the
    minimum wage rate and to prevent job loss by providing
    flexibility to employers in complying with minimum wage and
    overtime requirements under that Act, submit the following
    joint statement to the House and the Senate in explanation of
    the effect of the action agreed upon by the managers and
    recommended in the accompanying conference report:

                   I. SMALL BUSINESS AND OTHER TAX PROVISIONS

                          A. Small Business Provisions

                 1. increase in expensing for small businesses

          (Sec. 1111 of the House bill and the Senate amendment.)
    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).
    ---------------------------------------------------------------------------
    House bill
          The House 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.
    Senate amendment \2\
          The Senate amendment increases the $17,500 amount allowed
    to be expensed under Code section 179 to $25,000. The increase
    is phased in as follows:
    ---------------------------------------------------------------------------
        \2\ See discussion in Part VII (Tax Technical Corrections
    Provisions) below, regarding the Senate amendment clarification of the
    present-law provision that horses are qualified property for purposes
    of section 179.

            Taxable year beginning in--                    Maximum expensing
    1997..........................................................   $18,000
    1998..........................................................    18,500
    1999..........................................................    19,000
    2000..........................................................    20,000
    2001..........................................................    24,000
    2002..........................................................    24,000
    2003 and thereafter...........................................    25,000

          Effective date.--The provision is effective for property
    placed in service in taxable years beginning after December 31,
    1996, subject to the phase-in schedule set forth above.
    Conference agreement
          The conference agreement follows the Senate amendment.

     2. tax credit for social security taxes paid with respect to employee
                                   cash tips

          (Sec. 1112 of the House bill and the Senate amendment.)
    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.
    House bill
          The provision 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 provision also modifies the credit so that it applies
    with respect to tips received from customers in connection with
    the delivery or serving 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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

       3. Home office deduction: treatment of storage of product samples

          (Sec. 1113 of the House bill.)
    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)).
    House bill
          The House 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.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement follows the House bill.

                 4. Treatment of certain charitable risk pools

          (Sec. 1114 of the House bill.)
    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) requires 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).
    House bill
          Under the House bill, a qualified charitable risk pool is
    treated as organized and operated exclusively for charitable
    purposes. The provision make 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 House 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 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 House bill further requires that a qualified 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.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement follows the House bill.

          5. treatment of dues paid to agricultural or horticultural
                                 organizations

          (Sec. 1115 of the House bill and sec. 1113 of the Senate
    amendments.)
    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. 95-2646 (4th Cir. 1996), 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.
    House bill
          Under the House 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 (covering
    the same period) would not be within the scope of the
    provision.
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1994.
    Senate amendment
          Same as the House bill, except that the Senate amendment
    applies to taxable years beginning after December 31, 1986. The
    Senate amendment also provides transitional relief to
    agricultural or horticultural organizations that had a
    reasonable basis for not treating membership dues received
    prior to January 1, 1987, as unrelated business income. In such
    cases, no portion of such dues will be treated as derived from
    an unrelated trade or business.
    Conference agreement
          The conference agreement follows the Senate amendment.
    The conferees intend that, if a person makes a single payment
    that entitles the person to be recognized as a member of the
    organization for more than twelve months, then such payment may
    be prorated to determine whether annual dues exceed the $100
    cap (as adjusted for inflation).

             6. clarify employment tax status of certain fishermen

          (Sec. 1116(a) of the House bill and sec. 1114 of the
    Senate amendment.)
    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. If a crew member receives any
    other cash, e.g., payment for services as an engineer, the
    exemption from FICA and FUTA taxes does not apply. 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.
    House bill
          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 certain cash
    payments. The cash payments cannot 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.
          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 FICA taxes.
    Senate amendment
          The Senate amendment is the same as the House bill.
          Effective date.--The provision applies to remuneration
    paid after December 31, 1994. In addition, the provision
    applies to remuneration paid after December 31, 1984, and
    before January 1, 1995, unless the payer treated such
    remuneration when paid as subject to FICA taxes.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.
          Effective date.--The conference agreement follows the
    Senate amendment.

                7. Reporting requirements for purchasers of fish

          (Sec. 1116(b) of the House bill.)
    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).
    House bill
          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.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement follows the House bill.
          Effective date.--The provision is effective for purchases
    made after December 31, 1997.

     8. Modify rules governing issuance of tax-exempt bonds for first-time
                                    farmers

          (Sec. 1115 of the Senate amendment.)
    Present law
          Interest on bonds issued by State and local governments
    to provide financing to private persons is taxable unless an
    exception is provided in the Internal Revenue Code. One such
    exception allows State and local governments to issue bonds to
    finance loans to first-time farmers for the acquisition of land
    (and limited amounts of related depreciable farm property) if
    the purchasers will be the principal user of the property and
    will materially participate in the farming operation in which
    the property is to be used.
          A first-time farmer is defined as an individual who has
    at no time owned farm land in excess of 15 percent of the
    median size of the farm in the county in which such land is
    located, and the fair market value of the land has not at any
    time when held by the individual exceeded $125,000.
          Under general rules governing issuance of tax-exempt
    bonds, working capital financing (including purchases from
    related parties) is precluded.
    House bill
          No provision.
    Senate amendment
          The Senate amendment makes two modifications to the rules
    governing issuance of tax-exempt bonds for first-time farmers.
    First, the definition of first-time farmer is broadened to
    include an individual who has at no time owned farm land in
    excess of 30 percent of the median size farm in the county.
    Second, these bonds may be used to finance purchases between
    related parties provided that: (1) the price paid reflects the
    fair market value of the property and, (2) the seller has no
    financial interest in the farming operation conducted on the
    land after the bond-financed sale occurs.
          Effective date.--For financing provided with bonds issued
    after the date of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment
    with a clarification relating to the circumstances in which a
    related seller is treated as having a continuing financial
    interest in bond-financed farmland. In general, the conferees
    intend that such a seller will not be treated as having a
    financial interest if the seller:
                (a) has no more than a ten-percent interest in the
            capital or profits in a partnership comprising the
            farm;
                (b) has no more than a ten-percent stock interest
            in a corporation comprising the farm;
                (c) has no more than ten-percent of the beneficial
            interest in a trust comprising the farm;
                (d) is not a principal user of the farm; or
                (e) has no other direct or indirect ownership or
            use of the farm which has as a principal purposes, the
            avoidance of this provision.
          The conferees further intend that issuers making loans to
    finance related party sales provide appropriate notice to
    borrowers of these restrictions and of the fact that bond-
    proceeds may not be re-transferred from sellers to purchasers
    as part of efforts (e.g., step-transactions) to transfer both
    property financed with the bond proceeds and the bond proceeds
    received by the seller.

     9. Clarify treatment of newspaper distributors and carriers as direct
                                    sellers

          (Sec. 1116 of the Senate amendment.)
    Present law
          For Federal tax purposes, there are two classifications
    of workers: a worker is either an employee of the service
    recipient or an independent contractor. Significant tax
    consequences result from the classification of a worker as an
    employee or independent contractor. These differences relate to
    withholding and employment tax requirements, as well as the
    ability to exclude certain types of compensation from income or
    take tax deductions for certain expenses. Some of these
    consequences favor employee status, while others favor
    independent contractor status. For example, an employee may
    exclude from gross income employer-provided benefits such as
    pension, health, and group-term life insurance benefits. On the
    other hand, an independent contractor can establish his or her
    own pension plan and deduct contributions to the plan. An
    independent contractor also has greater ability to deduct work-
    related expenses.
          Under present law, the determination of whether a worker
    is an employee or an independent contractor is generally made
    under a common-law facts and circumstances test that seeks to
    determine whether the service provider is subject to the
    control of the service recipient, not only as to the nature of
    the work performed, but the circumstances under which it is
    performed. Under a special safe harbor rule (sec. 530 of the
    Revenue Act of 1978), a service recipient may treat a worker as
    an independent contractor for employment tax purposes even
    though the worker is an employee under the common-law test if
    the service recipient has a reasonable basis for treating the
    worker as an independent contractor and certain other
    requirements are met.
          In addition to the common-law test, there are also some
    persons who are treated by statute as either employees or
    independent contractors. For example, ``direct sellers'' are
    deemed to be independent contractors. A direct seller is a
    person engaged in the trade or business of selling consumer
    products in the home or otherwise than in a permanent retail
    establishment, if substantially all the remuneration for the
    performance of the services is directly related to sales or
    other output rather than to the number of hours worked, and the
    services performed by the person are performed pursuant to a
    written contract between such person and the service recipient
    and such contract provides that the person will not be treated
    as an employee for Federal tax purposes.
          The newspaper industry has generally taken the position
    that newspaper distributors and carriers should be treated as
    direct sellers for income and employment tax purposes. The
    Internal Revenue Service has generally taken the position that
    the direct seller rules do not apply to newspaper distributors
    and carriers operating under an agency distribution system
    (i.e., where the publisher retains title to the newspapers).
    House bill
          No provision.
    Senate amendment
          The Senate amendment clarifies the treatment of
    qualifying newspaper distributors and carriers as direct
    sellers. Under the Senate amendment, a person engaged in the
    trade or business of the delivery or distribution of newspapers
    or shopping news (including any services that are directly
    related to such trade or business such as solicitation of
    customers of collection of receipts) qualifies as a direct
    seller, provided substantially all the remuneration for the
    performance of the services is directly related to sales or
    other output rather than to the number of hours worked, and the
    services performed by the person are performed pursuant to a
    written contract between such person and the service recipient
    and such contract provides that the person will not be treated
    as an employee for Federal tax purposes. The Senate amendment
    is intended to apply to newspaper distributors and carriers
    whether or not they hire others to assist in the delivery of
    newspapers. The Senate amendment also applies to newspaper
    distributors and carriers operating under either a buy-sell
    distribution system (i.e., where the newspaper distributors or
    carriers purchase the newspapers from the publisher) or an
    agency distribution system. For example, newspaper distributors
    and carriers operating under an agency distribution system who
    are paid based on the number of papers delivered and have an
    appropriate written agreement qualify as direct sellers. The
    status of newspaper distributors and carriers who do not
    qualify as direct sellers under the Senate amendment continue
    to be determined under present-law rules. No inference is
    intended with respect to the employment status of newspaper
    distributors and carriers prior to the effective date of the
    Senate amendment. Further, the provision is intended to clarify
    the worker classification issue for income and employment taxes
    only. The provision is not intended to have any impact
    whatsoever on the interpretation or applicability of Federal,
    State, or local labor laws.
          Effective date.--The provision is effective with respect
    to services performed after December 31, 1995.
    Conference agreement
          The conference agreement follows the Senate amendment.

    10. Application of involuntary conversion rules to property damaged as
                 a result of Presidentially declared disasters

          (Sec. 1117 of the Senate amendment.)
    Present law
          A taxpayer may elect not to recognize gain with respect
    to property that is involuntarily converted if the taxpayer
    acquires within an applicable period property similar or
    related in service or use. If the taxpayer does not replace the
    converted property with property similar or related in service
    or use, then gain generally is recognized.
    House bill
          No provision.
    Senate amendment
          Any tangible property acquired and held for productive
    use in a business is treated as similar or related in service
    or use to property that (1) was held for investment or for
    productive use in a business and (2) was involuntarily
    converted as a result of a Presidentially declared disaster.
          Effective date.--The Senate amendment is effective for
    disasters for which a Presidential declaration is made after
    December 31, 1994, in taxable years ending after that date.
    Conference agreement
          The conference agreement follows the Senate amendment,
    with the modification that the boundaries of the enterprise
    community for Oklahoma City designated by the Secretary of
    Housing and Urban Development on December 21, 1994, may be
    extended with respect to the census tracts located in the area
    damaged by the bombing of the Alfred P. Murrah Federal Building
    in Oklahoma City on April 19, 1995. The modification is
    effective on the date of enactment.

      11. Establish 15-year recovery period for retail motor fuels outlet
                                     stores

          (Sec. 1118 of the Senate amendment.)
    Present law
          Under present law, depreciation for property used in the
    retail gasoline trade is calculated under section 168 using a
    15-year recovery period and the 150-percent declining balance
    method. Nonresidential real property is depreciated using a 39-
    year recovery period and the straight-line method. It is
    understood that taxpayers generally have taken the position
    that convenience stores and other buildings installed at retail
    motor fuels outlets have a 15-year recovery period. The IRS, in
    a position described in a recent Coordinated Issues Paper,
    generally limits the application of the 15-year recovery period
    to instances where the structure: (1) is 1,400 square feet or
    less or (2) meets a 50-percent test. The 50-percent test is met
    if: (1) 50 percent or more of the gross revenues that are
    generated from the building are derived from petroleum sales
    and (2) 50 percent or more of the floor space in the building
    is devoted to petroleum marketing sales.
    House bill
          No provision.
    Senate amendment
          The Senate amendment provides that 15-year property
    includes any section 1250 property (generally, depreciable real
    property) that is a retail motor fuels outlet (whether or not
    food or other convenience items are sold at the outlet). A
    retail motor fuels outlet does not include any facility related
    to petroleum or natural gas trunk pipelines or to any section
    1250 property used only to an insubstantial extent in the
    retail marketing of petroleum or petroleum products.
          Effective date.--The provision is effective for property
    placed in service on or after the date of enactment and to
    which the amendments made by section 201 of the Tax Reform Act
    of 1986 apply (i.e., property subject to the modified
    Accelerated Cost Recovery System of sec. 168). The taxpayer may
    elect the application of the provision for property placed in
    service prior to the date of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment.
          A taxpayer may elect the application of the provision for
    qualified property placed in service prior to the date of
    enactment. The conferees clarify that if a taxpayer has already
    treated qualified property that was placed in service before
    the date of enactment as 15-year property, the taxpayer will be
    deemed to have made the election with respect to such property.

                    12. Treatment of leasehold improvements

          (Sec. 1119 of the Senate amendment.)
    Present law
          A taxpayer generally recovers the adjusted basis of
    property for purposes of determining gain or loss upon the
    disposition of the property. Upon the termination of a lease,
    the adjusted basis of leasehold improvements that were made,
    but are not retained, by a lessee are taken into account to
    compute gain or loss by the lessee. The proper treatment of the
    adjusted basis of improvements made by a lessor upon
    termination of a lease is less clear. It appears that it is the
    position of the Internal Revenue Service that leasehold
    improvements made by a lessor that constitute structural
    components of a building must be continued to be depreciated in
    the same manner as the underlying real property, even if such
    improvements are retired at the end of the lease term. Some
    lessors, on the other hand, may be taking the position that a
    leasehold improvement is a property separate and distinct from
    the underlying building and that an abandonment loss under
    section 165 is allowable at the end of the lease term for the
    adjusted basis of the property.
    House bill
          No provision.
    Senate amendment
          A lessor of leased property that disposes of a leasehold
    improvement which was made by the lessor for the lessee of the
    property may take the adjusted basis of the improvement into
    account for purposes of determining gain or loss, if the
    improvement is irrevocably disposed of or abandoned by the
    lessee at the termination of the lease.
          Effective date.--The provision is effective for leasehold
    improvements disposed of after June 12, 1996. No inference is
    intended as to the proper treatment of such dispositions before
    June 13, 1996.
    Conference agreement
          The conference agreement follows the Senate amendment.
    The conferees wish to clarify that the provision does not apply
    to the extent section 280B of present law applies to the
    demolition of a structure, a portion of which may include
    leasehold improvements.

    13. Increase deductibility of business meal expenses of certain seafood
                             processing facilities

          (Sec. 1120 of the Senate amendment.)
    Present law
          In general, 50 percent of meal and entertainment expenses
    incurred in connection with a trade or business that are
    ordinary and necessary (and not lavish or extravagant) are
    deductive (sec. 274). Food or beverage expenses are fully
    deductible provided that they are (1) required by Federal law
    to be provided to crew members of a commercial vessel, (2)
    provided to crew members of similar commercial vessels not
    operated on the oceans, or (3) provided on certain oil or gas
    platforms or drilling rigs.
    House bill
          No provision.
    Senate amendment
          The Senate amendment adds remote seafood processing
    facilities located in the United States north of 53 degrees
    north latitude to the present-law list of entities not subject
    to the 50 percent limitation on the deductibility of business
    meals. Consequently, these expenses are fully deductible. A
    seafood processing facility is remote when there are
    insufficient eating facilities in the vicinity of the
    employer's premises.\3\
    ---------------------------------------------------------------------------
        \3\ See Treas. Reg. sec. 1.119-1(a)(2)(ii)(c) and 1.119-1(f)
    (Example 7).
    ---------------------------------------------------------------------------
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1996.
    Conference agreement
          The conference agreement does not include the Senate
    amendment provision.

             14. Provide a lower rate of tax on certain hard ciders

          (Sec. 1121 of the Senate amendment.)
    Present law
          Distilled spirits are taxed at a rate of $13.50 per proof
    gallon; beer is taxed at a rate of $18 per barrel
    (approximately 58 cents per gallon); and still wines of 14
    percent alcohol or less are taxed at a rate of $1.07 per wine
    gallon. Higher rates of tax are applied to wines with great
    alcohol content and sparkling wines.
          Certain small wineries may claim a credit against the
    excise tax on wine of 90 cents per wine gallon on the first
    100,000 gallons on wine produced annually. Certain small
    breweries pay a reduced tax of $7.00 per barrel (approximately
    22.6 cents per gallon) on the first 60,000 barrels of beer
    produced annually.
          Apple cider containing alcohol is classified and taxed as
    wine.
    House bill
          No provision.
    Senate amendment
          The Senate amendment adjusts the tax rate on apple cider
    having an alcohol content of no more than seven percent to 22.6
    cents per gallon.
          Effective date.--The provision is effective for apple
    cider removed after December 31, 1996.
    Conference agreement
          The conference agreement does not include the Senate
    amendment.

          15. modifications to section 530 of the revenue act of 1978

          (Sec. 1122 of the Senate amendment.)
    Present law
                In general
          For Federal tax purposes, there are two classifications
    of workers: a worker is either an employee of the service
    recipient or an independent contractor. In general, the
    determination of whether an employer-employee relationship
    exists for Federal tax purposes is made under a common-law
    test. Treasury regulations provide that an employer-employee
    relationship generally exists if the person contracting for
    services has the right to control not only the result of the
    services, but also the means by which that result is
    accomplished.\4\
    ---------------------------------------------------------------------------
        \4\ The Internal Revenue Service (``IRS'') has developed a list of
    20 factors that may be examined in determining whether an employer-
    employee relationship exists. Rev. Rul. 87-41, 1987-1 C.B. 296.
    ---------------------------------------------------------------------------
                Section 530
          With increased enforcement of the employment tax laws
    beginning in the late 1960s, controversies developed between
    the IRS and taxpayers as to whether businesses had correctly
    classified certain workers as self employed rather than as
    employees. In response to this problem, the Congress enacted
    section 530 of the Revenue Act of 1978 (``section 530''). That
    provision generally allows a taxpayer to treat a worker as not
    being an employee for employment tax purposes (but not income
    tax purposes), regardless of the individual's actual status
    under the common-law test, unless the taxpayer has no
    reasonable basis for such treatment.
          It is the position of the IRS, based on legislative
    history, that section 530 can only apply after a determination
    has been made that a worker is an employee under the common-law
    test.\5\ The IRS does not require the taxpayer to concede or
    agree to a determination that the worker is an employee.\6\
    However, several courts that have explicitly considered the
    question have held that section 530 relief is available
    irrespective of whether there has been an initial determination
    of worker classification under the common law.\7\
    ---------------------------------------------------------------------------
        \5\ Employee or Independent Contractor?, at 3-4 (July 15, 1996)
    (hereinafter the ``IRS Training Guide'').
        \6\ IRS Training Guide, at 3-6; TAM 9443002 (December 3, 1993).
        \7\ See e.g., Lambert's Nursery and Landscaping, Inc. v. U.S., 894
    F.2d 154 (5th Cir. 1990) (``It is not necessary to determine whether
    [taxpayer's] workers were independent contractors or employees for
    employment tax purposes.'') J & J Cab Service, Inc. v. U.S., 75 AFTR2d
    No. 95-618 (W.D. N.C. 1995) (``Section 530 relief may be granted
    irrespective of whether individuals were incorrectly treated as other
    than employees''); Queensgate Dental Family Practice, Inc. v. U.S., 91-
    2 USTC No. 50,536 (M.D. Pa. 1991) (disagreeing with the IRS' contention
    that the court must first determine worker classification before
    applying section 530).
    ---------------------------------------------------------------------------
          Under section 530, a reasonable basis for treating a
    worker as an independent contractor is considered to exist if
    the taxpayer (1) reasonably relied on published rulings or
    judicial precedent, (2) reasonably relied on past IRS audit
    practice with respect to the taxpayer, (3) reasonably relief on
    long-standing recognized practice of a significant segment of
    the industry of which the taxpayer is a member, or (4) has any
    other reasonable basis for treating a worker as an independent
    contractor. The legislative history states that section 530 is
    to be ``construed liberally in favor of taxpayers.'' \8\
    ---------------------------------------------------------------------------
        \8\ H. Rept. No. 1748 (95th Cong., 2d Sess., 5 (1978)). The
    conference agreement to the Revenue Act of 1978 adopted the provisions
    of the House bill and therefore incorporates this legislative history.
    ---------------------------------------------------------------------------
          Under section 530, reliance on judicial precedent,
    published rulings, technical advice with respect to the
    taxpayer, or a letter ruling to the taxpayer is deemed a
    reasonable basis for treating a worker as an independent
    contractor. If a taxpayer relies on this safe harbor, the IRS
    will look to see whether the facts of the judicial precedent or
    published ruling are sufficiently similar to the taxpayer's
    facts.\9\
    ---------------------------------------------------------------------------
        \9\ See e.g., TAM 9443002 (December 3, 1993); TAM 9330007 (April
    28, 1993).
    ---------------------------------------------------------------------------
          Under the prior-audit safe harbor, reasonable reliance is
    generally found to exist if the IRS failed to raise an
    employment tax issue on audit, even though the audit was not
    related to employment tax matters. A taxpayer can also rely on
    a prior audit in which an employment tax issue was raised, but
    was resolved in favor of the taxpayer. According to the IRS, an
    ``audit'' must involve an examination of the taxpayer's books
    and records; mere inquiries from an IRS service center or a
    ``compliance check'' to determine whether a taxpayer has filed
    all returns will not suffice.\10\ In order to rely on a prior
    audit, the IRS requires that the taxpayer must have treated the
    workers at issue as independent contractors during the period
    covered by the prior audit.\11\
    ---------------------------------------------------------------------------
        \10\ IRS Training Guide, at 3-19.
        \11\ IRS Training Guide, at 3-20.
    ---------------------------------------------------------------------------
          A taxpayer is also treated as having a reasonable basis
    for treating a worker as an independent contractor under
    section 530 if the taxpayer reasonably relied on long-standing
    recognized practice of a significant segment of the industry in
    which the taxpayer is engaged.
          Section 530 does not specify a period of time in order
    for a practice to be long standing. The IRS Training Guide
    provides that a practice is presumed to be long standing if it
    existed for 10 years or more.\12\ the IRS Training Guide
    recognizes that a taxpayer may use the industry practice safe
    harbor even if it began business after 1978 or the industry
    came into existence after 1978.\13\ However, the IRS Training
    Guide provides that if the industry practice changed by the
    time the taxpayer joined the industry, the taxpayer cannot rely
    on the former practice.
    ---------------------------------------------------------------------------
        \12\ IRS Training Guide, at 3-24.
        \13\ IRS Training Guide, at 3-24.
    ---------------------------------------------------------------------------
          Neither section 530, nor the legislative history,
    provides a clear standard as to what constitutes a significant
    segment of a taxpayer's industry. The IRS Training Guide
    provides that the determination will be based on the facts and
    circumstances.\14\ A few courts have addressed this issue. In
    one case, the IRS argued that a significant segment of the
    industry means more than 50 percent of the industry.\15\
    However, that court held that a significant segment is less
    than a majority of the firms in an industry. Another court held
    that 15 out of 84 industry respondents (18 percent) treating
    workers as independent contractors would constitute a
    significant segment of an industry.\16\
    ---------------------------------------------------------------------------
        \14\ IRS Training Guide, at 3-25.
        \15\ In re Bentley, 73 AFTR2d No. 94-667 (Bkrtcy. E.D. Tenn. 1994).
        \16\ REAG, Inc. v. U.S., 801 F.Supp. 494 (W.D. Okla. 1992).
    ---------------------------------------------------------------------------
          Even if a taxpayer is unable to rely on one of the three
    safe harbors described above, a taxpayer may still be entitled
    to relief under section 530 if the taxpayer has any other
    reasonable basis for treating a worker as an independent
    contractor.
          The relief under section 530 is available with respect to
    an individual only if certain additional requirements are
    satisfied. The taxpayer must not have treated the individual as
    an employee for any period, and for periods since 1978 all
    Federal tax returns, including information returns, must have
    been filed on a basis consistent with treating such individual
    as an independent contractor. Further, the taxpayer (or a
    predecessor) must not have treated any individual holding a
    substantially similar position as an employee for purposes of
    employment taxes for any period beginning after 1977.
          Whether workers are similarly situated is dependent on
    the facts and circumstances. The IRS Training Guide states that
    a ``substantially similar position exists if the job functions,
    duties, and responsibilities are substantially similar and the
    control and supervision of those duties and responsibilities is
    substantially similar.''\17\
    ---------------------------------------------------------------------------
        \17\ IRS Training Guide, at 3-11.
    ---------------------------------------------------------------------------
          There have been a few court decisions addressing this
    issue. For example, in REAG, Inc. v. U.S.,\18\ the court held
    that the position of appraisers who were owner-officers of the
    business was not substantially similar to appraisers who were
    not owners since the owner-officers had managerial
    responsibilities. By contrast, in Lowen Corp. v. U.S.,\19\ the
    court found that all workers engaged in the business of selling
    real estate signs had substantially similar positions even
    though some were salaried and had to file daily reports while
    others were paid by commission and did not have to file such
    reports.
    ---------------------------------------------------------------------------
        \18\ 801 F.Supp. 494 (W.D. Okla. 1992).
        \19\ 785 F.Supp. 913 (D. Kan. 1992).
    ---------------------------------------------------------------------------
          The IRS Training Guide states that the burden of proof is
    on the taxpayer to demonstrate that it had a reasonable basis
    for treating a worker as an independent contractor.\20\
    However, in light of the Congressional instruction in the
    legislative history to construe section 530 liberally,\21\
    courts appear to be split as to how stringent a burden to
    apply.
    ---------------------------------------------------------------------------
        \20\ IRS Training Guide, at 3-6.
        \21\ H. Rept. No. 1748 (95th Cong., 2d Sess., 5 (1978)). The
    conference agreement to the Revenue Act of 1978 adopted the provisions
    of the House bill and therefore incorporates this legislative history.
    ---------------------------------------------------------------------------
          In McClellan v. U.S.,\22\ the court held that section 530
    requires the ``taxpayer to come forward with an explanation and
    enough evidence to establish prima facie grounds for a finding
    of reasonableness. . . . [T]his threshold burden is relatively
    low, and can be met with any reasonableness showing. Once the
    taxpayer has made this prima facie showing, the burden then
    shifts to the IRS to verify or refute the taxpayer's
    explanation.'' By contrast, in Boles Trucking, Inc., v.
    U.S.,\23\ the court held that the burden is on the taxpayer to
    show, based on a preponderance of the evidence, that it had a
    reasonable basis for treating workers as independent
    contractors.
    ---------------------------------------------------------------------------
        \22\ 900 F.Supp. 101 (E.D. Mich. 1995). See also REAG. Inc. v.
    U.S., 801 F.Supp. 494 (W.D. Okla. 1992) (a taxpayer need only show a
    substantial rational basis for its decision to treat the workers as
    independent contractors).
        \23\ 77 F.3d 236 (8th Cir. 1996) See also Springfield v. U.S., 1996
    U.S. App. LEXIS 15879 (9th Cir. 1996) (taxpayer has the burden to show
    it satisfies the requirements of section 530 by a preponderance of the
    evidence).
    ---------------------------------------------------------------------------
          Under section 1706 of the Tax Reform Act of 1986, section
    530 does not apply in the case of an individual who, pursuant
    to an arrangement between the taxpayer and another person,
    provides services for such other person as an engineer;
    designer, drafter, computer programmer, systems analyst, or
    other similarly skilled worker engaged in a similar line of
    work. Thus, the determination of whether such individuals are
    employees or self employed is made in accordance with the
    common-law test.
    House bill
          No provision.
    Senate amendment
          The Senate amendment makes several clarifications of and
    modifications to section 530.
          First, under the Senate amendment, a worker does not have
    to otherwise be an employee of the taxpayer in order for
    section 530 to apply. The provision is intended to reverse the
    IRS position, as stated in the IRS Training Guide, that there
    first must be a determination that the worker is an employee
    under the common law standards before application of section
    530.
          The Senate amendment modifies the prior audit safe harbor
    so that taxpayers may not rely on an audit commencing after
    December 31, 1996, unless such audit included an examination
    for employment tax purposes of whether the worker involved (or
    any worker holding a position substantially similar to the
    position held by the worker involved) should be treated as an
    employee of the taxpayer. The provision does not affect the
    ability of taxpayers to rely on prior audits that commenced
    before January 1, 1997, even though the audit was not related
    to employment tax matters, as under present law.
          Under the Senate amendment, section 530 does not apply
    with respect to a worker unless the taxpayer and the worker
    sign a statement (at such time and in such manner as the
    Secretary may prescribe) which provides that the worker will
    not be treated as an employee for employment tax purposes.
    Also, the Senate amendment provides that an officer or employee
    of the IRS must, at (or before) the commencement of an audit
    involving worker classification issues, provide the taxpayer
    with written notice of the provisions of section 530.
          The Senate amendment makes a number of changes to the
    industry practice safe harbor. First, the Senate amendment
    provides that a significant segment of the taxpayer's industry
    under the industry practice safe harbor does not require a
    reasonable showing of the practice of more than 25 percent of
    an industry (determined without taking into account the
    taxpayer). The provision is intended to be a safe harbor; a
    lower percentage may constitute a significant segment of the
    taxpayer's industry based on the particular facts and
    circumstances.
          The Senate amendment also provides that an industry
    practice need not have continued for more than 10 years in
    order for the industry practice to be considered long standing.
    As with the significant segment safe harbor, this provision is
    intended to be a safe harbor; an industry practice in existence
    for a shorter period of time may be considered long standing
    based on the particular facts and circumstances. In addition,
    the Senate amendment clarifies that an industry practice will
    not fail to be treated as long standing merely because such
    practice began after 1978. Consequently, the provision
    clarifies that new industries can take advantage of section
    530.
          The Senate amendment modifies the burden of proof in
    section 530 cases by providing that if a taxpayer establishes a
    prima facie case that it was reasonable not to treat a worker
    as an employee for purposes of section 530,\24\ the burden of
    proof shifts to the IRS with respect to such treatment.\25\ In
    order for the shift in burden of proof to occur, the taxpayer
    must fully cooperate with reasonable requests by the IRS for
    information relevant to the taxpayer's treatment of the worker
    as an independent contractor under section 530. It is intended
    that a request by the IRS will not be treated as reasonable if
    complying with the request would be impracticable given the
    particular circumstances and the relative costs involved. The
    shift in the burden of proof does not apply for purposes of
    determining whether the taxpayer had any other reasonable basis
    for treating the worker as an independent contractor, but does
    apply to all other aspects of section 530. So, for example,
    provided the taxpayer establishes its prima facie case and
    fully cooperates with the IRS' reasonable requests, the burden
    of proof shifts to the IRS with respect to all other aspects of
    section 530, including whether the taxpayer had a reasonable
    basis for treating the worker as an independent contractor
    under the judicial or administrative precedent, prior audit, or
    long-standing industry practice safe harbors, whether the
    taxpayer filed all Federal tax returns on a basis consistent
    with treating the worker as an independent contractor, and
    whether the taxpayer treated any worker holding a substantially
    similar position as an employee. No inference is intended with
    respect to the application of the burden of proof in section
    530 cases prior to the effective date of this provision.
    ---------------------------------------------------------------------------
        \24\ For example, the taxpayer must establish a prima facie case
    that it reasonably satisfies the requirements of section 530 for not
    treating the worker as an employee, including the reporting consistency
    and consistency among workers with substantially similar positions
    requirements, and the requirement that the taxpayer have a reasonable
    basis for not treating the worker as an employee.
        \25\ The provision is generally intended to codify the holding in
    McClellan v. U.S., discussed above, with respect to the burden of proof
    in section 530 cases.
    ---------------------------------------------------------------------------
          The Senate amendment also provides that if a taxpayer
    prospectively changes its treatment of workers from independent
    contractors to employees for employment tax purposes, such a
    change will not affect the applicability of section 530 with
    respect to such workers for prior periods.
          Finally, the Senate amendment provides that, in
    determining whether a worker holds a substantially similar
    position to another worker, the relationship of the parties
    must be one of the factors taken into account.
          Effective date.--The provisions generally apply to
    periods after December 31, 1996. The provision regarding the
    burden of proof applies to disputes with respect to periods
    after December 31, 1996. In the case of workers engaged to
    perform services for a taxpayer before January 1, 1997, the
    provision requiring a written statement that such workers are
    not employees for employment tax purposes is effective for
    periods after December 31, 1997 (unless the taxpayer elects to
    apply the provision earlier). The provision requiring the IRS
    to notify taxpayers of the provisions of section 530 applies to
    audits commencing after December 31, 1996.
    Conference agreement
          The conference agreement follows the Senate amendment,
    with the following modifications:
          The conference agreement deletes the written statement
    requirement in the Senate amendment.
          The conferees wish to clarify the notice that the IRS
    must provide to taxpayers at (or before) the commencement of an
    audit inquiry involving worker classification issues. The
    conferees recognize that, in many cases, the portion of an
    audit involving worker classification issues will not arise
    until after the examination of the taxpayer begins. In that
    case, the notice need only be given at the time the worker
    classification issue is first raised with the taxpayer.
          With respect to the burden of proof in section 530 cases,
    the conferees intend that a request for information by the IRS
    will not be treated as reasonable if (1) it does not relate to
    the particular basis on which the taxpayer relied for
    establishing its reasonable basis, or (2) complying with the
    request would be impracticable given the particular
    circumstances and the relative costs involved.
          With respect to the substantially similar position
    provision, the conferees clarify that consideration of the
    relationship between a taxpayer and a worker includes
    consideration of the degree of supervision and control of the
    worker by the taxpayer.

         16. employee housing for certain medical research institutions

          (Sec. 1123 of the Senate amendment.)
    Present law
          Under Code section 119(d), employees of an educational
    institution described in Code section 170(b)(1)(A)(ii) do not
    have to include in income the fair market value of campus
    housing as long as the rent is at least five percent of the
    appraised value of the housing. If the rent is less than the
    five-percent safe harbor, there is inclusion into income to the
    extent that the rent that was charged falls short of the lesser
    of five percent of the appraised value or the average of rents
    paid by individuals (other than employees or students of the
    educational institution) for similar lodging provided by the
    institution.
    House bill
          No provision.
    Senate amendment
          The Senate amendment treats as ``educational
    institutions'' for purposes of Code section 119(d) certain
    medical research institutions (``academic health centers'')
    that engage in basic and clinical research, have a regular
    faculty and teach a curriculum in basic and clinical research
    to students in attendance at the institution.
          Effective date.--The provision is effective for taxable
    years beginning after December 31, 1995.
    Conference agreement
          The conference agreement follows the Senate amendment,
    with a further modification that treats as ``educational
    institutions'' for purposes of Code section 119(d) certain
    entities (``university systems'') organized under State law
    composed of public institutions described in Code section
    170(b)(1)(A)(ii). The conferees intend that, for purposes of
    the present-law requirement of Code section 119(d)(3)(A) that
    the employee housing be provided on (or in the proximity of) a
    campus of the employer, a campus of one of the component
    educational institutions of a university system should be
    considered to be a campus of the university system.

                  B. Extension of Certain Expiring Provisions

                         1. Work opportunity tax credit

          (Sec. 1201 of House bill and the Senate amendment.)
    Present law
          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 (up to $6,000) for maximum credit of $2,400.
    House bill
          General rules.--The House bill replaces the targeted jobs
    tax credit with the ``work opportunity tax credit''. The new
    credit is available on an elective basis for employers hiring
    individuals from one or more of seven targeted groups. The
    credit generally is equal to 35 percent of qualified first-year
    wages.
          Minimum employment period.--Under the House bill, 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).
          Certification of members of targeted groups.--In general,
    under the House bill, an individual is not 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.
          Effective date.--Wages paid or incurred to a qualified
    individual who begins work for an employer after June 30, 1996,
    and before July 1, 1997.
    Senate amendment
          General rules.--Same as the House bill with the addition
    of an eighth targeted group, individuals 18 to 24 who are in
    families that have been receiving food stamps for at least a
    three-month period ending on the date of hire.
          Minimum employment period.--Under the Senate amendment,
    no credit is allowed for wages paid unless the eligible
    individual is employed by the employer for at least 180 days
    (20 in the case of a qualified summer youth employee) or 375
    hours (120 hours in the case of a qualified summer youth
    employee).
          Certification of members of targeted groups.--Same as
    House bill except that it replaces the 14-day rule with a 21-
    day rule for submission of pre-screening notice.
          Effective date.--Wages paid or incurred to a qualified
    individual who begins work for an employer after September 30,
    1996, and before October 1, 1997.
    Conference agreement
          General rules.--The conference agreement generally
    follows the Senate amendment with one modification to the food
    stamps category. Under the modification, members of the eighth
    targeted group are individuals aged 18-24 who are in families
    that have been receiving food stamps for at least a six-month
    (rather than a three-month) period ending on the date of hire.
    In the case of families that cease to be eligible for food
    stamps under section 6(o) of the Food Stamp Act of 1977, the
    six-month requirement is replaced with a requirement that the
    family has been receiving food stamps for at least three of the
    five months ending on the date of hire.
          Minimum employment period.--Under the conference
    agreement, no credit is allowed for wages paid unless the
    eligible individual is employed by the employer for at least
    180 days (20 in the case of a qualified summer youth employee)
    or 400 hours (120 hours in the case of a qualified summer youth
    employee).
          Certification of members of targeted groups.--The
    conference agreement follows the Senate amendment.
          Effective date.--The conference agreement follows the
    Senate amendment.

                  2. Employer-provided educational assistance

          (Sec. 1202 of the House bill and the Senate amendment.)
    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.
    House bill
          The provision extends the exclusion for employer-provided
    educational assistance for taxable years beginning after
    December 31, 1994, and before January 1, 1997. After December
    31, 1995, the exclusion would not apply with respect to
    graduate education.
          To the extent employers have previously filed Forms W-2
    reporting the amount of educational assistance provided as
    taxable wages, present Treasury regulations require the
    employer to file Forms W-2c (i.e., corrected Forms W-2) with
    the Internal Revenue Service.\26\ It is intended that employers
    also be required to provide copies of Form W-2c to affected
    employees.
    ---------------------------------------------------------------------------
        \26\ Treasury regulation section 31.6051-1(c).
    ---------------------------------------------------------------------------
          The Secretary is directed to establish expedited
    procedures for the refund of any overpayment of 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.
    Senate amendment
          The provision is the same as the House bill, except that
    the exclusion is extended for an additional year, through
    December 31, 1997, and the Senate amendment does not preclude
    application of the exclusion to graduate courses.
          Effective date.--The provision is effective for taxable
    years beginning after December 31, 1994, and before January 1,
    1998.
    Conference agreement
          The conference agreement follows the House bill, with the
    following modifications. The exclusion expires with respect to
    courses beginning after May 31, 1997. The exclusion for
    graduate courses applies in 1995. In 1996, the exclusion for
    graduate courses does not apply to courses beginning after June
    30, 1996.

    3. permanent extension of futa exemption for alien agricultural workers

          (Sec. 1203 of the House bill.)
    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 20 different days,
    each beginning 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.
    House bill
          The House bill permanently extends the FUTA exemption for
    alien agricultural workers.
          Effective date.--Labor performed on or after January 1,
    1995.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement includes the House bill
    provision.

                    4. research and experimental tax credit

          (Sec. 1203 of the Senate amendment.)
    Present and prior law
                General rule
          Prior to July 1, 1995, section 41 of the Internal Revenue
    Code provided for a research tax credit equal to 20 percent of
    the amount by which a taxpayer's qualified research
    expenditures for a taxable year exceeded its base amount for
    that year. The research tax credit expired and does not apply
    to amounts paid or incurred after June 30, 1995.
          A 20-percent research tax credit also applied to the
    excess of (1) 100 percent of corporate cash expenditures
    (including grants or contributions) paid for basic research
    conducted by universities (and certain nonprofit scientific
    research organizations) over (2) the sum of (a) the greater of
    two minimum basic research floors plus (b) an amount reflecting
    any decrease in nonresearch giving to universities by the
    corporation as compared to such giving during a fixed-base
    period, as adjusted for inflation. This separate credit
    computation is commonly referred to as the ``university basic
    research credit'' (see sec. 41(e)).
                Computation of allowable credit
          Except for certain university basic research payments
    made by corporations, the research tax credit applies only to
    the extent that the taxpayers' qualified research expenditures
    for the current taxable year exceed its base amount. The base
    amount for the current year generally is computed by
    multiplying the taxpayer's ``fixed-base percentage'' by the
    average amount of the taxpayer's gross receipts for the four
    preceding years. If a taxpayer both incurred qualified research
    expenditures and had gross receipts during each of at least
    three years from 1984 through 1988, then its ``fixed-base
    percentage'' is the ratio that its total qualified research
    expenditures for the 1984-1988 period bears to its total gross
    receipts for that period (subject to a maximum ratio of .16).
    All other taxpayers (so-called ``start-up firms'') are assigned
    a fixed-base percentage of 3 percent.\27\
    ---------------------------------------------------------------------------
        \27\ The Omnibus Budget Reconciliation Act of 1993 included a
    special rule designed to gradually recompute a start-up firm's fixed-
    base percentage based on its actual research experience. Under this
    special rule, a start-up firm (i.e., any taxpayer that did not have
    gross receipts in at least three years during the 1984-1988 period)
    will be assigned a fixed-base percentage of 3 percent for each of its
    first five taxable years after 1993 in which it incurs qualified
    research expenditures. In the event that the research credit is
    extended beyond the scheduled June 30, 1995 expiration date, a start-up
    firm's fixed-base percentage for its sixth through tenth taxable years
    after 1993 in which it incurs qualified research expenditures will be a
    phased-in ratio based on its actual research experience. For all
    subsequent taxable years, the taxpayer's fixed-base percentage will be
    its actual ratio of qualified research expenditures to gross receipts
    for any five years selected by the taxpayer from its fifth through
    tenth taxable years after 1993 (sec. 41(c)(3)(B)).
    ---------------------------------------------------------------------------
          In computing the credit, a taxpayer's base amount may not
    be less than 50 percent of its current-year qualified research
    expenditures.
          To prevent artificial increases in research expenditures
    among commonly controlled or otherwise related entities,
    research expenditures and gross receipts of the taxpayer are
    aggregated with research expenditures and gross receipts of
    certain related persons for purposes of computing any allowable
    credit (sec. 41(f)(l)). Special rules apply for computing the
    credit when a major portion of a business changes hands, under
    which qualified research expenditures and gross receipts for
    periods prior to the change or ownership of a trade or business
    are treated as transferred with the trade or business that gave
    rise to those expenditures and receipts for purposes of
    recomputing a taxpayer's fixed-base percentage (sec. 41(f)(3)).
                Eligible expenditures
          Qualified research expenditures eligible for the research
    tax credit consist of (1) ``in-house'' expenses of the taxpayer
    for wages and supplies attributable to qualified research; (2)
    certain time-sharing costs for computer use in qualified
    research; and (3) 65 percent of amounts paid by the taxpayer
    for qualified research conducted on the taxpayer's behalf (so-
    called ``contract research expenses'').
          To be eligible for the credit, the research must not only
    satisfy the requirements of present-law section 174 but must be
    undertaken for the purpose of discovering information that is
    technological in nature, the application of which is intended
    to be useful in the development of a new or improved business
    component of the taxpayer, and must pertain to functional
    aspects, performance, reliability, or quality of a business
    component. Research does not qualify for the credit if
    substantially all of the activities relate to style, taste,
    cosmetic, or seasonal design factors (sec. 41(d)(3)). In
    addition, research does not qualify for the credit if conducted
    after the beginning of commercial production of the business
    component, if related to the adaptation of an existing business
    component to a particular customer's requirements, if related
    to the duplication of an existing business component from a
    physical examination of the component itself or certain other
    information, or if related to certain efficiency surveys,
    market research or development, or routine quality control
    (sec. 41(d)(4)).
          Expenditures attributable to research that is conducted
    outside the United States do not enter into the credit
    computation. In addition, the credit is not available for
    research in the social sciences, arts, or humanities, nor is it
    available for research to the extent funded by any grant,
    contract, or otherwise by another person (or governmental
    entity).
    House bill
          No provision.
    Senate amendment
          The Senate amendment extends the research tax credit for
    18 months--i.e., for the period July 1, 1996, through December
    31, 1997 (with a special rule for taxpayers who elect the
    alternative incremental research credit regime, as described
    below).
          The Senate amendment also expand the definition of
    ``start-up firms'' under section 41(c)(3)(B)(I) to include any
    firm if the first taxable year in which such firm had both
    gross receipts and qualified research expenses began after
    1983.\28\
    ---------------------------------------------------------------------------
        \28\ In applying the start-up firm rules, the test is whether a
    taxpayer, in fact, both incurred research expenses (which under the
    present-law rules would be qualified research expenses) and had gross
    receipts in a particular year, not whether the taxpayer claimed a
    research tax credit for that year.
    ---------------------------------------------------------------------------
          In addition, the Senate amendment allows taxpayers to
    elect an alternative incremental research credit regime. If a
    taxpayer elects to be subject to this alternative regime, the
    taxpayer is assigned a three-tiered fixed-base percentage (that
    is lower than the fixed-base percentage otherwise applicable
    under present law) and the credit rate likewise is reduced.
    Under the alternative credit regime, a credit rate of 1.65
    percent applies to the extent that a taxpayer's current-year
    research expenses exceed a base amount computed by using a
    fixed-base percentage of 1 percent (i.e., the base amount
    equals 1 percent of the taxpayer's average gross receipts for
    the four preceding years) but do not exceed a base amount
    computed by using a fixed-base percentage of 1.5 percent. A
    credit rate of 2.2 percent applies to the extent that a
    taxpayer's current-year research expenses exceed a base amount
    computed by using a fix-base percentage of 1.5 percent but do
    not exceed a base amount computed by using a fixed-base
    percentage of 2 percent. A credit rate of 2.75 percent applies
    to the extent that a taxpayer's current-year research expenses
    exceed a base amount computed by using a fixed-base percentage
    of 2 percent. An election to be subject to this alternative
    incremental credit regime may be made only for a taxpayer's
    first taxable year beginning after June 30, 1996, and such an
    election applies to that taxable year and all subsequent years
    unless revoked with the consent of the Secretary of the
    Treasury. Under the amendment, if a taxpayer elects the
    alternative incremental credit regime for its first taxable
    year beginning after June 30, 1996, and before July 1, 1997,
    then all qualified research expenses paid or incurred during
    such taxable year and the first six months of the following
    taxable year are treated as qualified research expenses for
    purposes of computing the taxpayer's credit under the
    alternative incremental credit regime.
          The Senate amendment also provide for a special rule for
    payments made to certain nonprofit research consortia. Under
    this special rule, 75 percent of amounts paid to a research
    consortium for qualified research is treated as qualified
    research expenses eligible for the research credit (rather than
    65 percent under the present-law section 41(b)(3) rule
    governing contract research expenses) if (1) such research
    consortium is a tax-exempt organization that is described in
    section 501(c)(3) (other than a private foundation) or section
    501(c)(6) and is organized and operated primarily to conduct
    scientific research, and (2) such qualified research is
    conducted by the consortium on behalf of the taxpayer and one
    or more persons not related to the taxpayer.
          Effective date.--Under the Senate amendment, extension of
    the research tax credit is effective for expenditures paid or
    incurred during the period July 1, 1996, through December 31,
    1997 (with a special rule for taxpayers who elect the
    alternative incremental research credit regime). The
    modification to the definition of ``start-up firms'' is
    effective for taxable years ending after June 30, 1996.
    Taxpayers may elect the alternative research credit regime
    (with lower fixed-base percentages and lower credit rates) for
    the first taxable year beginning after June 30, 1996, and
    before July 1, 1997, and the credit is available with respect
    to all qualified research expenses incurred during such taxable
    year and during the first six months of the following taxable
    year. The rule that treats 75 percent of qualified research
    consortium payments as qualified research expenses is effective
    for taxable years beginning after June 30, 1996.
    Conference agreement
          The conference agreement extends the research tax credit
    for 11 months--i.e., for the period July 1, 1996, through May
    31, 1997 (with a special rule for taxpayers who elect the
    alternative incremental research credit regime, as described
    below).
          The conference agreement includes the provision in the
    Senate amendment to expand the definition of ``start-up firms''
    under section 41(c)(3)(B)(I).
          The conference agreement includes the provision in the
    Senate amendment to allow taxpayers to elect an alternative
    incremental research credit regime, with the modification that,
    if a taxpayer elects the alternative incremental credit regime
    for its first taxable year beginning after June 30, 1996, and
    before July 1, 1997, then all qualified research expenses paid
    or incurred during the first 11 months of such taxable year are
    treated as qualified research expenses for purposes of
    computing the taxpayers's credit under the alternative
    incremental credit regime.
          The conference agreement includes the special rule of the
    Senate amendment that treats 75 percent (rather than 65
    percent) of payments made to certain nonprofit research
    consortia as qualified research expenses.
          In addition, the conference agreement provides that
    research credit amounts earned under the conference agreement
    may not be taken into account in computing estimated tax
    payments required to be paid for taxable years beginning in
    1997.
          Effective date.--Under the conference agreement,
    extension of the research tax credit is effective for
    expenditures paid or incurred during the period July 1, 1996,
    through May 31, 1997 (with a special rule for taxpayers who
    elect the alternative incremental research credit regime). The
    modification to the definition of ``start-up firms'' is
    effective for taxable years ending after June 30, 1996.
    Taxpayers may elect the alternative research credit regime
    (with lower fixed-base percentages and lower credit rates) for
    the first taxable year beginning after June 30, 1996, and
    before July 1, 1997, and the credit is available with respect
    to all qualified research expenses incurred during the first 11
    months of such taxable year. The rule that treats 75 percent of
    qualified research consortium payments as qualified research
    expenses is effective for taxable years beginning after June
    30, 1996.

                           5. Orphan drug tax credit

          (Sec. 1204 of the Senate amendment.)
    Present and prior law
          Prior to January 1, 1995, a 50-percent nonrefundable tax
    credit was allowed for qualified clinical testing expenses
    incurred in testing of certain drugs for rare diseases or
    conditions, generally referred to as ``orphan drugs.''
    Qualified testing expenses are costs incurred to test an orphan
    drug after the drug has been approved for human testing by the
    Food and Drug Administration (FDA) but before the drug has been
    approved for sale by the FDA. A rare disease or condition is
    defined as one that (1) affects less than 200,000 persons in
    the United States, or (2) affects more than 200,000 persons,
    but for which there is no reasonable expectation that
    businesses could recoup the costs of developing a drug for such
    disease or condition from U.S. sales of the drug. These rare
    diseases and conditions include Huntington's disease,
    myoclonus, ALS (Lou Gehrig's disease), Tourette's syndrome, and
    Duchenne's dystrophy (a form of muscular dystrophy).
          Under prior law, the orphan drug tax credit could be
    claimed by a taxpayer only to the extent that its regular tax
    liability for the year the credit was earned exceeded its
    tentative minimum tax for the year, after regular tax was
    reduced by nonrefundable personal credits and the foreign tax
    credit.\29\ Unused credits could not be carried back or carried
    forward to reduce taxes in other years.
    ---------------------------------------------------------------------------
        \29\ To the extent that the orphan drug tax credit could not be
    used by reason of the minimum tax limitation, the taxpayer's minimum
    tax credit was increased (sec. 53(d)(1)(B)(iii)).
    ---------------------------------------------------------------------------
          The orphan drug tax credit expired after December 31,
    1994.
    House bill
          No provision.
    Senate amendment
          The Senate amendment extends the orphan drug tax credit
    for 18 months--i.e., for the period July 1, 1996, through
    December 31, 1997.
          In addition, the Senate amendment allows taxpayers to
    carry back unused credits to three years preceding the year the
    credit is earned and to carry forward unused credits to 15
    years following the year the credit is earned.
          Effective date.--The Senate amendment applies to
    qualified clinical testing expenses paid or incurred during the
    period July 1, 1996, through December 31, 1997. The provision
    allowing for the carry back and carry forward of unused credits
    is effective for taxable years ending after June 30, 1996. No
    portion of the unused business credit that is attributable to
    the orphan drug credit could be carried back under section 39
    to a taxable year ending before July 1, 1996.
    Conference agreement
          The conference agreement extends the orphan drug tax
    credit for 11 months--i.e., for the period July 1, 1996,
    through May 31, 1997.
          In addition, the conference agreement includes the
    provision of the Senate amendment that allows taxpayers to
    carry back unused credits to three years preceding the year the
    credit is earned and to carry forward unused credits to 15
    years following the year the credit is earned.
          Effective date.--The conference agreement applies to
    qualified clinical testing expenses paid or incurred during the
    period July 1, 1996, through May 31, 1997. The provision
    allowing for the carry back and carry forward of unused credits
    is effective for taxable years ending after June 30, 1996. No
    portion of the unused business credit that is attributable to
    the orphan drug credit could be carried back under section 39
    to a taxable year ending before July 1, 1996.

                6. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS

          (Sec. 1205 of the Senate amendment.)
    Present and prior law
          In computing taxable income, a taxpayer who itemizes
    deductions generally is allowed to deduct the fair market value
    of property contributed to a charitable organization. \30\
    However, in the case of a charitable contribution of short-term
    gain, inventory, or other ordinary income property, the amount
    of the deduction generally is limited to the taxpayer's basis
    in the property. In the case of a charitable contribution of
    tangible personal property, the deduction is limited to the
    taxpayer's basis in such property if the use by the recipient
    charitable organization is unrelated to the organization's tax-
    exempt purpose. \31\
    ---------------------------------------------------------------------------
        \30\ The amount of the deduction allowable for a taxable year with
    respect to a charitable contribution may be reduced depending on the
    type of property contributed, the type of charitable organization to
    which the property is contributed, and the income of the taxpayer
    (secs. 170(b) and 170(e)).
        \31\ As part of the Omnibus Budget Reconciliation Act of 1993,
    Congress eliminated the treatment of contributions of appreciated
    property (real, personal, and intangible) as a tax preference for
    alternative minimum tax (AMT) purposes. Thus, if a taxpayer makes a
    gift to charity of property (other than short-term gain, inventory, or
    other ordinary income property, or gifts to private foundations) that
    is real property, intangible property, or tangible personal property
    the use of which is related to the donee's tax-exempt purpose, the
    taxpayer is allowed to claim the same fair-market-value deduction for
    both regular tax and AMT purposes (subject to present-law percentage
    limitations).
    ---------------------------------------------------------------------------
          In cases involving contributions to a private foundation
    (other than certain private operating foundations), the amount
    of the deduction is limited to the taxpayer's basis in the
    property. However, under a special rule contained in section
    170(e)(5), taxpayers were allowed a deduction equal to the fair
    market value of ``qualified appreciated stock'' contributed to
    a private foundation prior to January 1, 1995. Qualified
    appreciated stock was defined as publicly traded stock which is
    capital gain property. The fair-market-value deduction for
    qualified appreciated stock donations applied only to the
    extent that total donations made by the donor to private
    foundations of stock in a particular corporation did not exceed
    10 percent of the outstanding stock of that corporation. For
    this purpose, an individual was treated as making all
    contributions that were made by any member of the individual's
    family. This special rule contained in section 170(e)(5)
    expired after December 31, 1994.
    House bill
          No provision.
    Senate amendment
          The Senate amendment extends the special rule contained
    in section 170(e)(5) for 18 months--i.e., for contributions of
    qualified appreciated stock made to private foundations during
    the period July 1, 1996, through December 31, 1997.
          Effective date.--The provision is effective for
    contributions of qualified appreciated stock to private
    foundations made during the period July 1, 1996, through
    December 31, 1997.
    Conference agreement
          The conference agreement extends the special rule
    contained in section 170(e)(5) for 11 months--i.e., for
    contributions of qualified appreciated stock made to private
    foundations during the period July 1, 1996, through May 31,
    1997. \32\
    ---------------------------------------------------------------------------
        \32\ If, during this period, a taxpayer contributes qualified
    appreciated stock as defined in section 170(e)(5) and the amount of
    such contribution exceeds the percentage limitation under section
    170(b)(1)(D), the excess may be carried over to succeeding taxable
    years. See, e.g., LTR 9444029, LTR 9424020.
    ---------------------------------------------------------------------------
          Effective date.--The provision is effective for
    contributions of qualified appreciated stock to private
    foundations made during the period July 1, 1996, through May
    31, 1997.

         7. TAX CREDIT FOR PRODUCING FUEL FROM A NONCONVENTIONAL SOURCE

          (Sec. 1206 of the Senate amendment.)
    Present law
          Certain fuels produced from ``nonconventional sources''
    and sold to unrelated parties are eligible for an income tax
    credit equal to $3 (generally adjusted for inflation) per
    barrel or BTU oil barrel equivalent (sec. 29). Qualified fuels
    must be produced within the United States.
          Qualified fuels include: (1) oil produced from shale and
    tar sands; (2) gas produced from geopressured brine, Devonian
    shale, coal seams, tight formations (``tight sands''), or
    biomass; and (3) liquid, gaseous, or solid synthetic fuels
    produced from coal (including lignite).
          In general, the credit is available only with respect to
    fuels produced from wells drilled or facilities placed in
    service after December 31, 1979, and before January 1, 1993. An
    exception extends the January 1, 1993 expiration date for
    facilities producing gas from biomass and synthetic fuel from
    coal if the facility producing the fuel is placed in service
    before January 1, 1997, pursuant to a binding contract entered
    into before January 1, 1996.
          The credit may be claimed for qualified fuels produced
    and sold before January 1, 2003 (in the case of nonconventional
    sources subject to the January 1, 1993 expiration date) or
    January 1, 2008 (in the case of biomass gas and synthetic fuel
    facilities eligible for the extension period).
    House bill
          No provision.
    Senate amendment
          The Senate amendment extends the binding contract date
    for facilities producing synthetic fuels from coal and gas from
    biomass until the date which is six months after the date of
    the provision's enactment, and then placed in service date for
    two years. The present sunset on producing qualifying for the
    credit is not changed.
          Therefore, under the provision, synthetic fuels from coal
    and gas from biomass produced from a facility placed in service
    before January 1, 1999, pursuant to a binding contract entered
    into before the date which is six months after the date of the
    provision's enactment, will be eligible for the tax credit if
    produced before January 1, 2008.
          Effective date.--The provision is effective on the date
    of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment
    with two modifications. First, the conference agreement extends
    the binding contract date for facilities producing synthetic
    fuels from coal and gas from biomass through December 31, 1996,
    rather than for six months after the date of enactment as would
    have been provided in the Senate amendment. Second, the
    conference agreement extends the placed in service date for
    eighteen months, rather than for two years as would have been
    provided in the Senate amendment. The conference agreement does
    not change the present-law sunset on production qualifying for
    the credit.
          Therefore, under the conference agreement, synthetic
    fuels from coal and gas from biomass produced from a facility
    placed in service before July 1, 1998, pursuant to a binding
    contract entered into before January 1, 1997, will be eligible
    for the tax credit if produced before January 1, 2008.
          Effective date.--The provision is effective on the date
    of enactment.

      8. suspend imposition of diesel fuel tax on recreational motorboats

          (Sec. 1207 of the Senate amendment.)
    Present law
          Diesel fuel used in recreational motorboats is subject to
    a 24.4 cents-per-gallon excise tax through December 31, 1999.
    This tax was enacted by the Omnibus Budget Reconciliation Act
    of 1993 as a revenue offset for repeal of the excise tax on
    certain luxury boats. Revenues from this tax are retained in
    the General Fund.
          The diesel fuel tax is imposed on removal of the fuel
    from a registered terminal facility (i.e., at the ``terminal
    rack''). Present law provides that tax is imposed on all diesel
    fuel removed from terminal facilities unless the fuel is
    destined for a nontaxable use and is indelibly dyed pursuant to
    Treasury Department regulations. If fuel on which tax is paid
    at the terminal rack (i.e., undyed diesel fuel) ultimately is
    used in a nontaxable use, a refund is allowed. Depending on the
    aggregate amount of tax to be refunded, this refund may be
    claimed either by a direct filing with the Internal Revenue
    Service or as a credit against income tax.
          Dyed diesel fuel (fuel on which no tax is paid) may not
    be used in a taxable use. Present law imposes a penalty equal
    to the greater of $10 per gallon or $1,000 on persons found to
    be violating this prohibition.
    House bill
          No provision.
    Senate amendment
          The Senate amendment provides that no tax will be imposed
    on diesel fuel used in recreational motorboats during the
    period beginning seven days after the date of enactment through
    December 31, 1997.
          In addition, the Senate Finance Committee requested that
    the Treasury Department study possible alternatives to the
    current collection regime for motoboat diesel fuel that will
    provide comparable compliance with the law, and report to the
    House Committee on Ways and Means and the Senate Committee on
    Finance no later than April 1, 1997.
          Effective date.--The provision is effective on the date
    of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment.

          9. Extension of transition rule for certain publicly traded
                                  partnerships

          (Sec. 1208 of the Senate amendment.)
    Present law
          Present law provides that, in general, a publicly traded
    partnership is treated as a corporation for Federal income tax
    purposes. An exception is provided for certain partnerships, 90
    percent or more of whose gross income is passive-type income
    (as defined for purposes of the provision). A publicly traded
    partnership is any partnership if (1) partnership interests are
    traded on an established securities market, or (2) partnership
    interests are readily tradable on a secondary market (or the
    substantial equivalent). This provision was added by the
    Omnibus Budget Reconciliation Act of 1987 (the ``1987 Act''),
    and applied generally to taxable years beginning after December
    31, 1987.
          The 1987 Act provided a 10-year grandfather rule for
    certain existing partnerships. Thus, the provision becomes
    effective for such existing partnerships for taxable years
    beginning after December 31, 1997. The 1987 Act provides that
    an existing partnership is one: (1) which was a publicly traded
    partnership on December 17, 1987; (2) with respect to which a
    registration statement indicating that such partnership was to
    be a publicly traded partnership was filed with the Securities
    and Exchange Commission on or before December 17, 1987; or (3)
    with respect to which an application was filed with a State
    regulatory commission on or before December 17, 1987 seeking
    permission to restructure a portion of a corporation as a
    publicly traded partnership. A partnership ceases to be treated
    as an existing partnership if it adds a substantial new line of
    business after December 17, 1987.
    House bill
          No provision.
    Senate amendment
          The Senate amendment provides a two-year extension of the
    ten-year grandfather rule for existing partnerships. Thus,
    under the Senate amendment, the present-law provision treating
    publicly traded partnerships as corporations applies to
    existing partnerships for taxable years beginning after
    December 31, 1999.
          Effective date.--The provision takes effect as if
    included in the 1987 Act.
    Conference agreement
          The conference agreement does not include the Senate
    amendment provision.

                    C. Provisions Relating to S Corporations

              1. S corporations permitted to have 75 shareholders

          (Sec. 1301 of the House bill and the Senate amendment.)
    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.
    House bill
          The House bill increases maximum number of eligible
    shareholders from 35 to 75.
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1996.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                       2. Electing small business trusts

          (Sec. 1302 of the House bill and the Senate amendment.)
    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 an 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.
    House bill
                In general
          The House bill 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.
          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.
                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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

          3. Expansion of post-death qualification for certain trusts

          (Sec. 1303 of the House bill and the Senate amendment.)
    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 two years if the entire corpus of the
    trust is includible 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.
    House bill
          The House bill expands the post-death holding period to
    two years for all testamentary trusts.
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1996.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

          4. financial institutions permitted to hold safe harbor debt

          (Sec. 1304 of the House bill and the Senate amendment.)
    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.
    House bill
          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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

      5. Rules relating to inadvertent terminations and invalid elections

          (Sec. 1305 of the House bill and the Senate amendment.)
    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.
    House bill
          Under the House bill, 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 House bill 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. 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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment. The conferees wish to clarify that in
    exercising the authority provided under the provision, the IRS
    may consider relevant information provided by any affected
    shareholder (including a person who became a shareholder in a
    subsequent year) before determining the validity of the S
    election for the taxable year in question.

                         6. Agreement to terminate year

          (Sec. 1306 of the House bill and the Senate amendment.)
    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.
    House bill
          The House bill 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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

               7. Expansion of post-termination transition period

          (Sec. 1307 of the House bill and the Senate amendment.)
    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.
    House bill
          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 House bill repeals the TEFRA audit
    provisions applicable to S corporations and would provide 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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                8. s corporations permitted to hold subsidiaries

          (Sec. 1308 of the House bill and the Senate amendment.)
    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).
    House bill
          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.
          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. 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.
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1996.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                9. treatment of distributions during loss years

          (Sec. 1309 of the House bill and the Senate amendment.)
    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.
          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.
          In addition, if the S corporation has accumulated
    earnings and profits, 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.
    House bill
          The House bill 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 House bill 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.
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1996.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

               10. treatment of s corporations under subchapter c

          (Sec. 1310 of the House bill and the Senate amendment.)
    Present law
          Present law contains several provisions relating to the
    treatment of S corporations as corporations generally for
    purpose 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.\33\ In 1992, the
    Internal Revenue Service reversed its position, stating that
    the prior ruling was incorrect.\34\
    ---------------------------------------------------------------------------
        \33\ PLR 8818049, (Feb. 10, 1988).
        \34\ PLR 9245004, (July 28, 1992).
    ---------------------------------------------------------------------------
    House bill
          The House bill 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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                11. elimination of certain earnings and profits

          (Sec. 1311 of the House bill and the Senate amendment.)
    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.
    House bill
          The House bill provides that if a corporation is an S
    corporation for its first taxable year beginning after December
    31, 1995, 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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

      12. carryover of disallowed losses and deductions under the at-risk
                                     rules

          (Sec. 1312 of the House bill and the Senate amendment.)
    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.
    House bill
          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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

    13. adjustments to basis of inherited s stock to reflect certain items
                                   of income

          (Sec. 1313 of the House bill and the Senate amendment.)
    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. 681(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 ``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 require
    a reduction in the basis of stock in an S corporation acquired
    from a decedent where the S corporation holds items of IRD.
    House bill
          The House bill 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
    decedent dying after the date of enactment.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

       14. s corporations eligible for rules applicable to real property
                 subdivided for sale by noncorporate taxpayers

          (Sec. 1314 of the House bill and the Senate amendment.)
    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.
    House bill
          The House bill 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.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

          15. Certain financial institutions as eligible corporations

          (Sec. 1315 of the Senate amendment.)
    Present law
          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 meets certain other requirements. An
    ``ineligible corporation'' means any corporation which is a
    member of an affiliated group, certain depository financial
    institutions (i.e., banks, domestic savings and loan
    associations, mutual savings banks, and certain cooperative
    banks), certain insurance companies, a section 936 corporation,
    or a DISC or former DISC.
    House bill
          No provision.
    Senate amendment
          A bank (as defined in sec. 581) is allowed to be an
    eligible small business corporation unless such institution
    uses a reserve method of accounting for bad debts.
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1996.
    Conference agreement
          The conference agreement follows the Senate amendment.

           16. certain tax-exempt entities allowed to be shareholders

          (Sec. 1316 of the Senate amendment.)
    Present law
          A tax-exempt organization described in section 401(a)
    (relating to qualified retirement plan trusts) or section
    501(c)(3) (relating to certain charitable organizations) cannot
    be a shareholder in an S corporation.
    House bill
          No provision.
    Senate amendment
          Tax-exempt organizations described in Code sections
    401(a) and 501(c)(3) (``qualified tax-exempt shareholders'')
    are allowed to be shareholders in S corporations. For purposes
    of determining the number of shareholders of an S corporation,
    a qualified tax-exempt shareholder will count as one
    shareholder.
          Items of income or loss of an S corporation will flow-
    through to qualified tax-exempt shareholders as unrelated
    business taxable income (``UBTI''), regardless of the source or
    nature of such income (e.g., passive income of an S corporation
    will flow through to the qualified tax-exempt shareholders as
    UBTI.) In addition, gain or loss on the sale or other
    disposition of stock of an S corporation by a qualified tax-
    exempt shareholder will be treated as UBTI.
          In addition, certain special tax rules relating to
    employee stock ownership plans (``ESOPs'') will not apply with
    respect to S corporation stock held by the ESOP.
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1997.
    Conference agreement
          The conference agreement generally follows the Senate
    amendment. In addition, the conference agreement provides that
    if a qualified tax-exempt shareholder acquired, by purchase,
    stock in an S corporation (whether such stock was acquired when
    the corporation was a C or an S corporation) and receives a
    dividend distribution with respect to such S corporation stock
    (i.e., a distribution of subchapter C earnings and profits),
    except as provided in regulations the shareholder must reduce
    its basis in the stock by the amount of the dividend.
    Regulations may provide that the basis reduction only would
    apply to the extent the dividend is deemed to be allocable to
    subchapter C earnings and profits that accrued on or before the
    date of acquisition.

                       17. reelecting subchapter s status

          (Sec. 1315(b) of the House bill and sec. 1317(b) of the
    Senate amendment.)
    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.
    House bill
          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 a taxable year beginning before
    January 1, 1997.
    Senate amendment
          Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                     II. PENSION SIMPLIFICATION PROVISIONS

                        A. Simplified Distribution Rules

          (Secs. 1401-1404 of the House bill and the Senate
    amendment.)
    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 59\1/2\ may be made with respect to any
    employee.
          Under the Tax Reform Act of 1986 (the ``1986 Act''),
    individuals who attained age 50 by January 1, 1986, can elect
    to use 10-year averaging (under the rates in effect prior to
    the 1986 Act) in lieu of 5-year averaging. In addition, such
    individuals may elect to retain capital gains treatment with
    respect to the pre-1974 portion of a lump sum distribution.
                Exclusion of $5,000 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 includable 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.
    House bill
                Lump-sum distributions
          The House bill repeals 5-year averaging for lump-sum
    distributions from qualified plans. Thus, the House 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.
          Effective date.--The provision is effective for taxable
    years beginning after December 31, 1998. The House bill
    preserves the ability of certain individuals to elect 10-year
    averaging and capital gains treatment as provided under the Tax
    Reform Act of 1986.
                Exclusion of $5,000 for employer-provided death benefits
          The House bill repeals the $5,000 exclusion for employer-
    provided death benefits.
          Effective date.--The provision applies with respect to
    decedents dying after date of enactment.
                Recovery of basis
          The House 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

          Effective date.--The provision is effective with respect
    to annuity starting dates beginning 90 days after the date of
    enactment.
                Required distributions
          The House 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
    House 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 House 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 House
    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 House bill, in the case of a
    governmental plan or church plan.
          Effective date.--The provision is effective for years
    beginning after December 31, 1996. If a participant is
    currently receiving distributions, but does not have to under
    the provision, it is intended that a plan (or annuity contract)
    could (but would not be required to) permit the participant,
    with his or her consent, with his or her consent to stop
    receiving distributions until such distributions are required
    under the provision.
    Senate amendment
                Lump-sum distributions
          The Senate amendment is the same as the House bill.
          Effective date.--The provision is effective for taxable
    years beginning after December 31, 1999.
                Exclusion of $5,000 for employer-provided death benefits
          The Senate amendment is the same as the House bill.
                Recovery of basis
          The Senate amendment is the same as the House bill.
                Required distributions
          The Senate amendment is the same as the House bill.
    Conference agreement
                Lump-sum distributions
          The conference agreement follows the Senate amendment.
                Exclusion of $5,000 for employer-provided death benefits
          The conference agreement follows the House bill and the
    Senate amendment.
                Recovery of basis
          The conference agreement follows the House bill and the
    Senate amendment.
                Required distributions
          The conference agreement follows the House bill and the
    Senate amendment. The conferees intend that the actuarial
    adjustment rule does not apply in the case of a defined
    contribution plan.

                B. Increased Access to Retirement Savings Plans

     1. establish simple retirement plans for employees of small employers

          (Secs. 1421-1422 of the House bill and the Senate
    amendment.)
    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'').
          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.
    House bill
                In general
          The House 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 House 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 can elect a lower percentage
    matching contribution for all employees (but not less than 1
    percent of each employee's compensation). A lower percentage
    cannot be elected for more than 2 out of any 5 years.
          Alternatively, for any year, in lieu of making matching
    contributions, an employer may elect 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. 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.
          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 generally must 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.
          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 is 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
    includable 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) and 2 years have expired since the
    employee first participated in the SIMPLE plan, the employee's
    SIMPLE account is treated as an IRA.
          Early withdrawals from a SIMPLE account generally are
    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).
          Employer matching or nonelective contributions to a
    SIMPLE account are not treated as wages for employment tax
    purposes.
          Administrative requirements.--Each eligible employee can
    elect, with 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). It is
    intended that an employer is permitted to designate a SIMPLE
    account trustee to which contributions on behalf of eligible
    employees are made.
          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 include 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.
                SIMPLE 401(k) plans
          In general, under the House bill, a cash or deferred
    arrangement (i.e., 401(k) plan), is 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)
    employees' 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 House bill, SARSEPs are repealed.
                Effective date
          The provision relating to SIMPLE plans are effective for
    years beginning after December 31, 1996. The repeal of SARSEPs
    applies to years beginning 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.
    Senate amendment
          The Senate amendment is the same as the House bill,
    except for the following modifications.
          Under the Senate amendment, a SIMPLE plan can be adopted
    by employers who employed 100 employees or less with at least
    $5,000 in compensation for the preceding year. Employers who no
    longer qualify are given a 2-year grace period to continue to
    maintain the plan.
          Under the Senate amendment, eligible employees are given
    60 days before the beginning of any year (or the 60-day period
    before first becoming eligible to participate in the plan) to
    elect to participate in the SIMPLE plan.
          For purposes of the 2 percent of compensation nonelective
    contribution formula, no more than $150,000 of compensation can
    be taken into account in any year with respect to any eligible
    employee.
          The Senate amendment clarifies that an employer is
    permitted to designate a SIMPLE account trustee to which
    contributions on behalf of eligible employees are made. The
    Senate amendment also amends title I of ERISA to provide that
    only simplified reporting requirements apply to SIMPLE plans
    and so that the employer (and any other plan fiduciary) will
    not be subject to fiduciary liability resulting from the
    employee (or beneficiary) exercising control over the assets in
    the SIMPLE account. For this purpose, an employee (or
    beneficiary) is treated as exercising control over the assets
    in his or her account upon the earlier of (1) an affirmative
    election with respect to the initial investment of any
    contributions, (2) a rollover contribution (including a
    trustee-to-trustee transfer) to another SIMPLE account or IRA,
    or (3) one year after the SIMPLE account is established.
    Conference agreement
          The conference agreement follows the Senate amendment.

           2. tax-exempt organizations eligible under section 401(k)

          (Sec. 1426 of the House bill and the Senate amendment.)
    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.
    House bill
          The House 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 House 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 tribal
    governments.
          Effective date.--The provision is effective for plan
    years beginning after December 31, 1996.
    Senate amendment
          The Senate amendment is the same as the House bill,
    except that the legislative history to the Senate amendment
    provides that no inference is intended with respect to whether
    Indian tribal governments are permitted to maintain qualified
    cash or deferred arrangements under present law.
    Conference agreement
          The conference agreement follows the Senate amendment.
    Thus, under the conference agreement, no inference is intended
    with respect to whether Indian tribal governments are permitted
    to maintain qualified cash or deferred arrangements under
    present law.

                                3. spousal iras

          (Sec. 1427 of the Senate amendment.)
    Present law
          Within limits, an individual is allowed a deduction for
    contributions to an individual retirement account or an
    individual retirement annuity (an ``IRA''). An individual
    generally is not subject to income tax on amounts held in an
    IRA, including earnings on contributions, until the amounts are
    withdrawn from the IRA.
          Under present law, the maximum deductible contribution
    that can be made to an IRA generally is the lesser of $2,000 or
    100 percent of an individual's compensation (earned income in
    the case of a self-employed individual). In the case of a
    married individual whose spouse has no compensation (or elects
    to be treated as having no compensation), the $2,000 maximum
    limit on IRA contributions is increased to $2,250.
    House bill
          No provision.
    Senate amendment
          The Senate amendment permits deductible IRA contributions
    of up to $2,000 to be made for each spouse (including, for
    example, a homemaker who does not work outside the home) if the
    combined compensation of both spouses is at least equal to the
    contributed amount.
          Effective date.--The provision is effective for taxable
    years beginning after December 31, 1996.
    Conference agreement
          The conference agreement follows the Senate amendment.

                        C. Nondiscrimination Provisions

      1. Definition of highly compensated employees and repeal of family
                               aggregation rules

          (Sec. 1431 of the House bill and the Senate amendment.)
    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.
          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)).
    House bill
                Definition of highly compensated employee
          Under the House 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 employees by compensation for such year. The House
    bill also repeals the rule requiring the highest paid officer
    to be treated as a highly compensated employee.
          Effective date.--The provision is effective for years
    beginning after December 31, 1996.
                Family aggregation rules
          The House bill repeals the family aggregation rules.
          Effective date.--The provision is effective for years
    beginning after December 31, 1996.
    Senate amendment
                Definition of highly compensated employee
          The Senate amendment is the same as the House bill,
    except an employee who had compensation for the preceding year
    in excess of $80,000 is treated as highly compensated without
    regard to whether the employee was in the top 20 percent of
    employees by compensation.
                Family aggregation rules
          The Senate amendment is the same as the House bill.
    Conference agreement
                Definition of highly compensated employee
          The conference agreement follows the House bill and the
    Senate amendment. Thus, under the conference agreement, a plan
    may elect for a plan year to use either the definition of
    highly compensated employee in the House bill or the Senate
    amendment.
                Family aggregation rules
          The conference agreement follows the House bill and the
    Senate amendment.

            2. modification of additional participation requirements

          (Sec. 1432 of the House bill and the Senate amendment.)
    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.
    House bill
          The House bill provides that the minimum participation
    rule applies only to defined benefit pension plans. In
    addition, the House 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 House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

    3. nondiscrimination rules for qualified cash or deferred arrangements
                           and matching contributions

          (Sec. 1433 of the House bill and the Senate amendment.)
    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.
    House bill
                Prior-year data
          The House 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 House 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 House 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 employer'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.
          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.
          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 House 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 aggressive
                        contributions
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

          4. Definition of compensation for purposes of the limits on
                           contributions and benefits

          (Sec. 1434 of the House bill and the Senate amendment.)
    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.
    House bill
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                    D. Miscellaneous Pension Simplification

                  1. plans covering self-employed individuals

          (Sec. 1441 of the House bill and the Senate amendment.)
    Present law
          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)).
    House bill
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

         2. elimination of special vesting rule for multiemployer plans

          (Sec. 1442 of the House bill and the Senate amendment.)
    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 10 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.
    House bill
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                 3. distributions under rural cooperative plans

          (Sec. 1443 of the House bill and the Senate amendment.)
    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.
    House bill
          The House 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.
          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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

              4. Treatment of governmental plans under section 415

          (Sec. 1444 of the House bill and the Senate amendment.)
    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.
    House bill
          The House 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 House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                           5. Uniform retirement age

          (Sec. 1445 of the House bill and the Senate amendment.)
    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.
    House bill
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                6. Contributions on behalf of disabled employees

          (Sec. 1446 of the House bill and the Senate amendment.)
    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 become disabled.
    House bill
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

        7. Treatment of deferred compensation plans of State and local
                    governments and tax-exempt organizations

          (Sec. 1447 of the House bill and the Senate amendment.)
    Present law
          Under an unfunded deferred compensation plan of a State
    or local government or a tax-exempt organization (a ``sec. 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.
    House bill
          The House bill makes three changes to the rules governing
    section 457 plans.
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

    8. Trust requirement for deferred compensation plans of State and local
                                  governments

          (Sec. 1448 of the House bill and the Senate amendment.)
    Present law
          Until deferrals under an unfunded deferred compensation
    plan of a State or local government or a tax-exempt
    organization (a ``sec. 457 plan'') are made available to a plan
    participant, the 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.
    House bill
          Under the House 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 are not 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
    (and income thereon), the trust requirement does not have to be
    satisfied until January 1, 1999.
    Senate amendment
          The Senate amendment is the same as the House bill.
          Effective date.--The Senate amendment is the same as the
    House bill, except that in the case of plans in existence on
    the date of enactment, the trust requirement does not have to
    be satisfied until January 1, 1999. Thus, deferrals prior to
    and after the date of enactment (and earnings thereon) do not
    have to be held in trust (or custodial account or annuity
    contract) until January 1, 1999.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment. The conference agreement clarifies that
    amounts held in trust (or custodial account or annuity
    contract), may be loaned to plan participants (or
    beneficiaries) pursuant to rules applicable to loans from
    qualified plans (sec. 72(p)).\35\ A section 457 plan is not
    required to permit loans. The conferees intend that the income
    inclusion rules in the Code (secs. 83 and 402(b), do not apply
    to amounts deferred under the section 457 plan (and income
    thereon) merely because such amounts are contributed to the
    trust (or custodial account or annuity contract).
    ---------------------------------------------------------------------------
        \35\ Under section 72(p), a loan from a plan is treated as a
    distribution unless the loan generally (1) does not exceed certain
    limits (generally, the lesser of $50,000 or one-half of the
    participant's vested plan benefit; (2) must be repaid within 5 years;
    and (3) must be amortized on a substantially level basis with payments
    at least quarterly.
    ---------------------------------------------------------------------------
          Effective date.--The conference agreement follows the
    House bill and the Senate amendment. Under the conference
    agreement, in the case of plans in existence on the date of
    enactment, the trust requirement does not have to be satisfied
    until January 1, 1999. Thus, deferrals prior to and after the
    date of enactment (and earnings thereon) do not have to be held
    in trust (or custodial account or annuity contract) until
    January 1, 1999.

      9. Correction of GATT interest and mortality rate provisions in the
                           Retirement Protection Act

          (Sec. 1449 of the House bill and the Senate amendment.)
    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.
    House bill
          The House 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.
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

    10. multiple salary reduction agreements permitted under section 403(b)

          (Sec. 1450(a) of the House bill and the Senate
    amendment.)
    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 restrictions do not apply to other elective
    deferral arrangements such as a qualified cash or deferred
    arrangement (sec. 401(k)).
    House bill
          Under the House bill, 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

        11. treatment of indian tribal governments under section 403(b)

          (Sec. 1450(b) of the House bill and the Senate
    amendment.)
    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.
    House bill
          The House bill provides that any section 403(b) annuity
    contract purchased in a plan year beginning before January 1,
    1995, by an Indian tribal government will be treated as
    purchased by an entity permitted to maintain a tax-sheltered
    annuity plan. The House 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.
    Senate amendment
          The Senate amendment provides that any section 403(b)
    annuity contract purchased in a plan year beginning before
    January 1, 1997, by an Indian tribal government will be treated
    as purchased by an entity permitted to maintain a tax-sheltered
    annuity plan. The Senate amendment also provides that such
    contracts may be rolled over into a section 401(k) plan
    maintained by the Indian tribal government.
          In addition, beginning January 1, 1997, Indian tribal
    governments are permitted to maintain tax-sheltered annuity
    plans.
          Effective date.--The provision generally is effective on
    the date of enactment, except that the provision permitting
    Indian tribal governments to maintain tax-sheltered annuity
    plans is effective for taxable years beginning after December
    31, 1996.
    Conference agreement
          The conference agreement follows the House bill.

     12. application of elective deferral limit to section 403(b) contracts

          (Sec. 1450(c) of the House bill and the Senate
    amendment.)
    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.
    House bill
          Under the House 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. It is intended that the
    contract terms be given effect in order for this requirement to
    be satisfied.
          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. No inference is intended as to whether the
    exclusion of elective deferrals from gross income by employees
    who have not exceeded the annual limit on elective deferrals is
    affected to the extent other employees exceed the annual limit
    prior to the effective date of this provision.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

     13. waiver of minimum waiting period for qualified plan distributions

          (Sec. 1451 of the House bill.)
    Present law
          Under present law, in the case of a qualified joint and
    survivor annuity (``QJSA''), 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. Temporary Treasury regulations 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.
    House bill
          The House 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.
          Effective date.--The provision is effective with respect
    to plan years beginning after December 31, 1996.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement codifies the provision in the
    temporary Treasury regulations which provides 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. The conference agreement also
    provides that a plan is permitted to provide the explanation
    after the annuity starting date if the distribution commences
    at least 30 days after such explanation was provided, subject
    to the same waiver of the 30-day minimum waiting period as
    described above. This is intended to allow retroactive payments
    of benefits which are attributable to the period before the
    explanation was provided.

               14. Expansion of PBGC missing participant program

          (Sec. 1451 of the Senate amendment.)
    Present law
          The Retirement Protection Act (``RPA''), enacted as part
    of the legislation implementing the General Agreement on
    Tariffs and Trade (``GATT'') in 1994, provided special rules
    for the payment of benefits with respect to missing
    participants under a terminating single-employer defined
    benefit plan covered by the Pension Benefit Guaranty
    Corporation (``PBFC''). These rules generally required the plan
    administrator to (1) transfer the missing participant's
    designated benefit to the PBGC or purchase an annuity from an
    insurer to satisfy the benefit liability, and (2) provide the
    PBGC with such information and certifications with respect to
    the benefits or annuity as the PBGC may specify. The missing
    participant program does not apply to multiemployer defined
    benefit plans, defined contribution plans, and defined benefit
    plans not covered by the PBGC (generally governmental plans,
    church plans, and plans sponsored by professional service
    employers with less than 25 employees).
    House bill
          No provision.
    Senate amendment
          The missing participant program is generally expanded to
    be available to multiemployer defined benefit plans, defined
    contribution plans, and defend benefit plans not covered by the
    PBGC (other than governmental and church plans). Under the
    Senate amendment, the present law missing participant program
    applicable to single-employer defined benefits plans applies to
    a terminating muiltiemployer defined benefit plan under rules
    prescribed by the PBGC.
          In the case of a terminating defined contribution plan or
    a terminating defined benefit plan not covered by the PBGC, the
    missing participant program does not apply unless the plan
    elects to transfer a missing participant's benefits to the
    PBGC. To the extent provided in regulations issued by the PBGC,
    the administrator of the plan making such an election is
    required to provide the PBGC with information with respect to
    the benefits of a missing participant. Upon location of the
    missing participant, the missing participant's benefits would
    be paid by the PBGC in a lump sum or in such other form as
    specified in regulations.
          Effective date.--The provision is effective with respect
    to distributions made on or after the date final regulations
    implementing the provision are issued by the PBGC.
    Conference agreement
          The conference agreement does not include the Senate
    amendment provision.

                       15. Repeal of combined plan limit

          (Sec. 1452 of the House bill and the Senate amendment.)
    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). In the case of a defined
    contribution plan, annual contributions are generally limited
    to the lesser of $30,000 (for 1996) and 25 percent of
    compensation. In the case of a defined benefit pension plan,
    the annual benefit is generally limited to the lesser of
    $120,000 (for 1996) and 100 percent of the participant's
    average compensation for the highest 3 years. 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.
    House bill
                Combined plan limit
          The House bill repeals the combined plan limit.
          Effective date.--The provision repealing the combined
    plan limit is effective with respect to limitation years
    beginning after December 31, 1998.
                Excess distribution tax
          Until the repeal of the combined plan limit is effective,
    the House bill suspends the excise tax on excess distributions.
    The additional estate tax on excess accumulations continues to
    apply.
          Effective date.--The provision relating to the excise tax
    on excess distributions is effective with respect to
    distributions received in 1996, 1997, and 1998.
    Senate amendment
                Combined plan limit
          The Senate amendment is the same as the House bill.
          Effective date.--The provision repealing the combined
    plan limit is effective with respect to limitation years
    beginning after December 31, 1999.
                Excess distribution tax
          The Senate amendment is the same as the House bill.
          Effective date.--The provision relating to the excise tax
    on excess distribution is effective with respect to
    distributions received in 1997, 1998, and 1999.
    Conference agreement
                Combined plan limit
          The conference agreement follows the Senate amendment.
                Excess distribution tax
          The conference agreement follows the Senate amendment.

                       16. tax on prohibited transactions

          (Sec. 1453 of the House bill and the Senate amendment.)
    Present law
          Present law prohibits certain transactions (prohibited
    transactions) between a qualified plan and a disqualified
    person in order to prevent 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.
    House bill
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

                       17. Treatment of leased employees

          (Sec. 1454 of the House bill and the Senate amendment.)
    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.
    House bill
          Under the House 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 judgment 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 House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

     18. Uniform penalty provisions to apply to certain pension reporting
                                  requirements

          (Sec. 1455 of the House bill and the Senate amendment.)
    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.
    House bill
          The House 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

    19. Retirement benefits of ministers not subject to tax on net earnings
                              from self-employment

          (Sec. 1456 of the House bill and the Senate amendment.)
    Present law
          Under present law, certain benefits provided to ministers
    after they retire are subject to self-employment tax.
    House bill
          The House bill provides that retirement benefits received
    from a church plan after a minister retires, and the rental
    value or allowance 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment.

     20. Treasury to provide model forms for spousal consent and qualified
                           domestic relations orders

          (Sec. 1457 of the Senate amendment.)
    Present law
          Present law contains a number of rules designed to
    provide income to the surviving spouse of a deceased employee.
    Under these spousal protection rules, defined benefit pension
    plans and money purchase pension plans are required to provide
    that vested retirement benefits with a present value in excess
    of $3,500 are payable in the form of a qualified joint and
    survivor annuity (``QJSA'') or, in the case of a participant
    who dies before the annuity starting date, a qualified
    preretirement survivor annuity (``QPSA''). Benefits from a plan
    subject to the survivor benefit rules may be paid in a form
    other than a QJSA or QPSA if the participant waives the QJSA or
    QPSA (or both) and the applicable notice, election, and spousal
    consent requirements are satisfied.
          Also, under present law, benefits under a qualified
    retirement plan are subject to prohibitions against assignment
    or alienation of benefits. An exception to this rule generally
    applies in the case of plan benefits paid to a former spouse
    pursuant to a qualified domestic relations order (``QDRO'').
    House bill
          No provision.
    Senate amendment
                Model spousal consent form
          The Secretary is required to develop a model spousal
    consent from, no later than January 1, 1997, waving the QJSA
    and QPSA forms of benefit. Such form must be written in a
    manner calculated to be understood by the average person, and
    must disclose in plain form whether the waiver is irrevocable
    and that it may be revoked by a QDRO.
                Model QDRO
          The Secretary is required to develop a model QDRO, no
    later than January 1, 1997, which satisfies the requirements of
    a QDRO under present law, and the provisions of which focus
    attention on the need to consider the treatment of any lump sum
    payment, QJSA, or QPSA.
                Effective date
          The provisions are effective on the date of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment,
    except that instead of developing a model spousal consent form
    and a model QDRO, the Secretary must develop sample language
    for inclusion in a spousal consent form and QDRO.

    21. Treatment of length of service awards for certain volunteers under
                                  section 457

          (Sec. 1458 of the Senate amendment.)
    Present law
          Compensation deferred under an eligible deferred
    compensation plan of a tax-exempt or governmental employer that
    meets certain requirements (a ``sec. 457 plan'') is not
    includible in gross income until paid or made available. One of
    the requirements for a section 457 plan is that the maximum
    annual amount that can be deferred is the lesser of $7,500 or
    33\1/3\ percent of the individual's taxable compensation.
          Amounts deferred under plans of tax-exempt and
    governmental employers that do not meet the requirements of
    section 457 (other than amounts deferred under tax-qualified
    retirement plans, section 403(b) annuities and certain other
    plans) are includible in gross income in the first year in
    which there is no substantial risk of forfeiture of such
    amounts.
    House bill
          No provision.
    Senate amendment
          Under the Senate amendment, the requirements of section
    457 do not apply to any plan paying solely length of service
    awards to bona fide volunteers (or their beneficiaries) on
    account of fire fighting and prevention, emergency medical, and
    ambulance services performed by such volunteers. An individual
    is considered a ``bona fide volunteer'' if the only
    compensation received by such individual for performing such
    services is reimbursement (or a reasonable allowance) for
    expenses incurred in the performance of such services, or
    reasonable benefits (including length of service awards) and
    nominal fees for such services customarily paid by tax-exempt
    or governmental employers in connection with the performance of
    such services by volunteers. Under the Senate amendment, a
    length of service award plan will not qualify for this special
    treatment under section 457 if the aggregate amount of length
    of service awards accruing with respect to any year of service
    for any bona fide volunteer exceeds $3,000.
          In addition, any amounts exempt from the requirements of
    section 457 under the Senate amendment are not considered wages
    for purposes of the Federal Insurance Contribution Act
    (``FICA'') taxes.
          Effective date.--The provision applies to accruals of
    length of service awards after December 31, 1996.
    Conference agreement
          The conference agreement follows the Senate amendment.

     22. alternative nondiscrimination rules for certain plans that provide
                            for early participation

          (Sec. 1459 of the Senate amendment.)
    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.
          In general, a plan need not permit employees to enter a
    plan prior to the attainment of age 21 and the completion of 1
    year service. For purposes of the nondiscrimination rules
    (including the ADP and ACP tests), an employer that chooses
    less restrictive entry conditions (e.g., age 18 rather than age
    21) may choose ``separate testing'' under which all employees
    who have not met the statutory age and service entry maximums
    are disregarded, provided that the plan satisfies the
    nondiscrimination rules taking into account only those
    employees whose age and service are less than the statutory age
    and service maximums. Thus, for example, such a plan would
    apply one ADP test for employees who are over age 21 with 1
    year of service, under which the plan would disregard elective
    contributions for other employees, and a second ADP test
    looking solely at elective contribution for employees under age
    21 or who have not completed 1 year of service.
    House bill
          No provision.
    Senate amendment
          Under the Senate amendment, for purposes of the ADP test,
    a section 401(k) plan may elect to disregard employees (other
    than highly compensated employees) eligible to participate
    before they have completed 1 year of service and reached age
    21, provided the plan separately satisfies the minimum coverage
    rules (sec. 410(b)) taking into account only those employees
    who have not completed 1 year of service or are under age 21.
    Instead of applying two separate ADP tests, such a plan could
    apply a single ADP test that compares the ADP for all highly
    compensated employees who are eligible to make elective
    contributions with the ADP for those nonhighly compensated
    employees who are eligible to make elective contributions and
    who have completed one year of service and reached age 21. A
    similar rule applies for purposes of the ACP test.
          Effective date.--The provision is effective for plan
    years beginning after December 31, 1998.
    Conference agreement
          The conference agreement follows the Senate amendment.

          23. modifications of joint and survivor annuity requirements

          (Sec. 1460 of the Senate amendment.)
    Present law
          Present law contains a number of rules designed to
    provide income to the surviving spouse of a deceased employee.
    These rules are in both the Internal Revenue Code and title I
    of the Employee Retirement Income Security Act of 1974, as
    amended.
          Under the spousal protection rules, defined benefit
    pension plans and money purchase pension plans are required to
    provide that vested retirement benefits with a present value in
    excess of $3,500 are payable in the form of a qualified joint
    and survivor annuity (``QJSA'') or, in the case of a
    participant who dies before the annuity starting date, a
    qualified preretirement survivor annuity (``QPSA''). A QJSA is
    generally defined as an annuity for the life of the participant
    with a survivor annuity for the life of the spouse which is not
    less than 50 percent of (and not greater than 100 percent of)
    the amount of the participant's annuity, and which is the
    actuarial equivalent of a single life annuity for the life of
    the participant. A QPSA is generally defined as an annuity for
    the life of the surviving spouse of the participant, the
    payments of which are not less than the amount which would be
    payable as a survivor annuity under the plan's QJSA.
          The survivor benefit rules do not apply to defined
    contribution plans other than money purchase pension plans if
    (1) the plan provides that, upon the death of the participant,
    the participant's accrued benefit is payable to the
    participant's surviving spouse, (2) the participant does not
    elect payment of benefits in the form of an annuity, and (3)
    the plan is not a transferee plan of a plan subject to the
    joint and survivor rules.
          Benefits from a plan subject to the survivor benefit
    rules may be paid in a form other than a QJSA or QPSA if the
    participant waives the QJSA or QPSA and the applicable notice,
    election, and spousal consent requirements are satisfied.
    Similarly, under a defined contribution plan not subject to the
    survivor benefit rules, the spouse can consent to have benefits
    paid to another beneficiary.
    House bill
          No provision.
    Senate amendment
          Under the Senate amendment, if a plan provides as its
    QJSA a benefit which provides a survivor annuity for the life
    of the spouse which is not equal to 66\2/3\ percent of the
    amount of the participant's annuity, the plan is required to
    provide the participant with an election to receive an annuity
    for the life of the participant with a survivor annuity for the
    life of the spouse which is 66\2/3\ percent of the amount of
    the participant's annuity.\36\ If the participant makes such an
    election the benefit received is treated as a QJSA for purposes
    of the qualified plan requirements; however the fact that such
    an election is offered does not affect how the QPSA is
    calculated. In other words, the QPSA continues to be based on
    the regular QJSA provided under the plan.
    ---------------------------------------------------------------------------
        \36\ As with the QJSA, this benefit would be the actuarial
    equivalent of a single life annuity for the life of the participant.
    ---------------------------------------------------------------------------
          Effective date.--The provision is effective for plan
    years beginning after December 31, 1996. However, plans in
    existence on the date of enactment do not have to comply with
    the requirements of the amendment before the plan year
    immediately following the first plan year in which any
    amendment to the plan that is otherwise made becomes effective.
    Conference agreement
          The conference agreement does not include the Senate
    amendment provision.

    24. clarification of application of erisa to insurance company general
                                    accounts

          (Sec. 1461 of the Senate amendment.)
    Present law
          The Employee Retirement Income Security Act of 1974
    (``ERISA'') imposes certain fiduciary requirements (including
    restrictions on certain prohibited transactions) with respect
    to the assets of an employee benefit plan (``plan assets'').
    The International Revenue Code of 1986 (the ``Code'') imposes
    an excise tax in the case of certain prohibited transactions
    involving plan assets.
          In 1975, the Department of Labor issued guidance
    providing that if an insurance company issues a contract or
    policy of insurance to an employee benefit plan and places the
    consideration for such contract or policy in its general asset
    account, the assets in such account are not considered to be
    plan assets.\37\ In 1993, the Supreme Court \38\ ruled that
    certain assets held in an insurance company's general account
    should be considered plan assets.
    ---------------------------------------------------------------------------
        \37\ Interpretive Bulletin 1975-2, 29 CFR section 2509.75-2(b)
    (1992). The term ``general account'' refers to all assets of an
    insurance company which are not legally segregated and allocated to
    separate accounts. The assets in a general account are derived from all
    classes of business and support the insurer's obligations on an
    unsegregated basis, with no particular assets being specifically
    committed to meet the obligations under any particular contract or
    policy.
        \38\ John Hancock Mutual Life Insurance Company v. Harris Trust and
    Savings Bank, 510 U.S. 86 (1993).
    ---------------------------------------------------------------------------
    House bill
          No provision.
    Senate amendment
          Under the Senate amendment, not later than December 31,
    1996, the Secretary of Labor is required to issue proposed
    regulations providing guidance for the purpose of determining,
    in cases where an insurer issues 1 or more policies (supported
    by the assets of the insurer's general account) to or for the
    benefit of an employee benefit plan, which assets of the
    insurer (other than plan assets held in its separate account)
    constitute plan assets for purposes of the fiduciary rules of
    ERISA and the prohibited transaction provisions of the Code.
    Such proposed regulations must be subject to public notice and
    comment until March 31, 1997, and the Secretary of Labor is
    required to issue final regulations by June 30, 1997. Any
    regulations issued by the Secretary of Labor in accordance with
    the Senate amendment generally could not take effect before the
    date on which such regulations became final.
          In issuing regulations, the Secretary of Labor would have
    to ensure that such regulations are administratively feasible
    and are designed to protect the interests and rights of the
    plan and of the plans participants and beneficiaries. In
    issuing regulations, the Secretary of Labor may exclude any
    assets of the insurer with respect to its operations, products,
    or services from treatment as plan assets. Further, the
    regulations would have to provide that plan assets do not
    include assets which are not treated as plan assets under
    present law because they are (1) assets of an investment
    company registered under the Investment Company Act of 1940, or
    (2) assets of an insurer with respect to a guaranteed benefit
    policy issued by such insurer.
          Under the Senate amendment, no person is liable under
    ERISA or the Code for conduct which occurred prior to the date
    which is 18 months following the effective date of the final
    regulations on the basis of a claim that the assets of the
    insurer (other than plan assets held in a separate account)
    constituted plan assets, except as otherwise provided by the
    Secretary of Labor in order to prevent avoidance of the
    guidance in the regulations or as provided in an action brought
    by the Secretary of Labor under ERISA's enforcement provisions
    for a breach of fiduciary responsibility which would also
    constitute a violation of Federal criminal law or constitute a
    felony under applicable State law.\39\
    ---------------------------------------------------------------------------
        \39\ The Senate amendment provides that the term policy includes a
    contract.
    ---------------------------------------------------------------------------
          The Senate amendment does not preclude the application of
    any Federal criminal law.
          Effective date.--The provision generally would be
    effective on January 1, 1975. However, the provision would not
    apply to any civil action commenced before January 7, 1995.
    Conference agreement
          The conference agreement follows the Senate amendment
    with the following modifications.
          Proposed regulations need not be issued by the Secretary
    of Labor until June 30, 1997. Such proposed regulations will be
    subject to public notice and comment until September 30, 1997.
    Final regulations need not be issued until December 31, 1997.
          Such regulations will only apply with respect to a policy
    issued by an insurer on or before December 31, 1998. In the
    case of such a policy, the regulations will take effect at the
    end of the 18 month period following the date such regulations
    become final. New policies issued after December 31, 1998, will
    be subject to the fiduciary obligations under ERISA.
          In issuing regulations, the Secretary of Labor must
    ensure that such regulations protect the interests and rights
    of the plan and of its participants and beneficiaries as
    opposed to ensuring that such regulations are designed to
    protect the interests and rights of the plan and of its
    participants and beneficiaries.
          Under the conference agreement, in connection with any
    policy (other than a guaranteed benefit policy) issued by an
    insurer to or for the benefit of an employee benefit plan, the
    regulations issued by the Secretary of Labor must require (1)
    that a plan fiduciary totally independent of the insurer
    authorize the purchase of such policy (unless it is the
    purchase of a life insurance, health insurance, or annuity
    contract exempt from ERISA's prohibited transaction rules); (2)
    that after the date final regulations are issued the insurer
    provide periodic reports to the policyholder disclosing the
    method by which any income or expenses of the insurer's general
    account are allocated to the policy and disclosing the actual
    return to the plan under the policy and such other financial
    information the Secretary may deem appropriate; and (3) that
    the insurer disclose to the plan fiduciary the extent to which
    alternative arrangements supported by assets of separate
    accounts of the insurer are available, whether there is a right
    under the policy to transfer funds to a separate account and
    the terms governing any such right, and the extent to which
    support by assets of the insurer's general account and support
    by assets of separate accounts of the insurer might pose
    differing risks to the plan; and (4) that the insurer must
    manage general account assets with the level of care, skill,
    prudence and diligence under the circumstances then prevailing
    that a prudent man acting in a like capacity and familiar with
    such matters would use in the conduct of an enterprise of a
    like character and with like aims, taking into account all
    obligations supported by such enterprise.
          Under the Conference agreement, compliance by the insurer
    with all the requirements of the regulations issued by the
    Secretary of Labor will be deemed compliance by such insurer
    with ERISA's fiduciary duties, prohibited transactions, and
    limitations on holding employer securities and employer real
    property provisions (ERISA secs. 404, 406, and 407).

                     25. church pension plan simplification

          (Secs. 1462-1464 of the Senate amendment.)
    Present law
          In general, a church plan is a plan established and
    maintained for employees (or their beneficiaries) by a church
    or a church convention or association of churches that is
    exempt from tax (sec. 414(e)). Church plans include plans
    maintained by an organization, whether a corporation or
    otherwise, that has as its principal purpose or function the
    administration or funding of a plan or program for providing
    retirement or welfare benefits for the employees of the church
    or convention or association of churches. Employees of a church
    include any minister, regardless of the source of his or her
    compensation, and an employee of an organization which is
    exempt from tax and which is controlled by or associated with a
    church or a convention or association of churches.\40\
    ---------------------------------------------------------------------------
        \40\ With respect to certain provisions (e.g., the exemption for
    church plans from nondiscrimination requirements applicable to tax-
    sheltered annuities), the more limited definition of church under the
    employment tax rules applies (secs. 3121(w)(3) (A) and (B)).
    ---------------------------------------------------------------------------
          Plans maintained by churches and certain church-
    controlled organizations are exempt from certain of the
    requirements applicable to pension plans under the Code
    pursuant to the Employee Retirement Income Security Act of 1974
    (as amended) (``ERISA''). For example, such plans are not
    subject to ERISA's vesting, coverage, and funding requirements.
    In some cases, such plans are subject to provisions in effect
    before the enactment of ERISA. Under the rules in effect before
    ERISA, a plan cannot discriminate in favor of officers,
    shareholders, persons whose principal duties consist in
    supervising the work of other employees, or highly compensated
    employees. Church plans may elect to waive the exemption from
    the qualification rules (sec. 410(d)). Electing plans become
    subject to all the tax Code (sec. 401(a)) qualification
    requirements, Title I of ERISA, the excise tax on prohibited
    transactions, and participation in the pension plan termination
    insurance program administered by the Pension Benefit Guaranty
    Corporation.
          Certain eligible employers may maintain tax-sheltered
    annuity plans (sec. 403(b)). These plans provide tax-deferred
    retirement savings for employees of public education
    institutions and employees of certain tax-exempt organizations
    (including churches and certain organizations associated with
    churches). In addition to tax-sheltered annuities, alternative
    funding mechanisms that provide similar tax benefits include
    church-maintained retirement income accounts (sec. 403(b)(9)).
          For purposes of determining an employee's investment in
    the contract under the rules relating to taxation of annuities,
    amounts contributed by the employer are included as investment
    in the contract, but only to the extent that such amounts were
    includible in the gross income of the employee or, if such
    amounts had been paid directly to the employee, would not have
    been includible in income. However, amounts contributed by the
    employer which, if they had been paid directly to the employee,
    would have been excludable under section 911 are not treated as
    investment in the contract, except to the extent attributable
    to services performed before January 1, 1963.
    House bill
          No provision.
    Senate amendment
          The Senate amendment allows self-employed ministers to
    participate in a church plan. For purposes of the definition of
    a church plan, a self-employed minister is treated as his or
    her own employer and as if the employer were a tax-exempt
    organization under section 501(c)(3). The earned income of the
    self-employed minister is treated as his or her compensation.
    Self-employed ministers are able to deduct their contributions.
          In addition, ministers employed by an organization other
    than a church are treated as if employed by a church. Thus,
    such ministers can also participate in a church plan.
          The Senate amendment provides that if a minister is
    employed by an employer that is not eligible to maintain a
    church plan, the minister is not taken into account by that
    employer in applying nondiscrimination rules.
          The Senate amendment permits retirement income accounts
    to be established for self-employed ministers.
          The Senate amendment provides that church plans subject
    to the pre-ERISA nondiscrimination rules are to apply the same
    definition of highly compensated employee as other pension
    plans, rather than the pre-ERISA rule relating to employees who
    are officers, shareholders, persons whose principal duties
    consist of supervising the work of other employees or highly
    compensated employees.
          The Senate amendment provides that the Secretary of the
    Treasury may develop safe harbor rules for church plans under
    the applicable coverage and nondiscrimination rules.
          The Senate amendment provides that, in the case of
    foreign missionaries, amounts contributed to a plan by the
    employer are investment in the contract even though the
    amounts, if paid directly to the employee would have been
    excludable under section 911.
          Effective date.--The provision is effective for years
    beginning after December 31, 1996.
    Conference agreement
          The conference agreement follows the Senate amendment
    with technical modifications.

             26. increase in multiemployer plan benefits guaranteed

          (Sec. 1465 of the Senate amendment.)
    Present law
          The Pension Benefit Guaranty Corporation (``PBGC'')
    guarantees benefits of workers under multiemployer plans. The
    monthly guarantee is equal to the participant's years of
    service multiplied by the sum of (1) 100 percent of the first
    $5 of the monthly benefit accrual rate, and (2) 75 percent of
    the next $15 of the accrual rate.
    House bill
          No provision.
    Senate amendment
          The Senate amendment generally adjusts the amount
    guaranteed under multiemployer plans to account for changes in
    the Social Security wage index since 1980. Under the Senate
    amendment, the monthly benefit guaranteed by the PBGC is
    generally increased to the participant's years of service
    multiplied by the sum of (1) 100 percent of the first $11 of
    the monthly benefit accrual rate, and (2) 75 percent of the
    next $33 of the accrual rate. The maximum annual guarantee for
    a retiree with 30 years of service is generally increased to
    $12,870.
          The increase in guaranteed multiemployer plan benefits
    only applies in the case of multiemployer plans which first
    receive financial assistance from the PBGC during the
    applicable period. The applicable period is the period
    beginning on the date of enactment and ending on the last day
    of the first fiscal year in which the surplus in the PBGC's
    multiemployer insurance program is less than half of the
    surplus for the fiscal year ending September 30, 1995, as
    reflected in the Statement of Financial Condition in the PBGC's
    1995 Annual Report. In determining the surplus in the
    multiemployer insurance program in any fiscal year, the PBGC is
    required to use the same actuarial assumptions that it used in
    determining the surplus for the fiscal year ending September
    30, 1995. If the PBGC surplus declines by more than 50 percent,
    benefits of participants in multiemployer plans that first
    received financial assistance from the PBGC during the
    applicable period would continue to be guaranteed at the
    increased level; however, other benefits would be guaranteed at
    the present-law levels. The guaranteed benefit level would not
    automatically increase if the surplus increases.
          Effective date.--The provision is effective on the date
    of enactment.
    Conference agreement
          The conference agreement does not include the Senate
    amendment provision.

         27. Waiver of excise tax on failure to pay liquidity shortfall

          (Sec. 1466 of the Senate amendment.)
    Present law
          A provision in the Retirement Protection Act of 1994,
    enacted as part of the implementing legislation for the General
    Agreement on Tariffs and Trade (``GATT''), generally requires
    certain underfunded single-employer defined benefit plans to
    make quarterly contributions sufficient to maintain liquid plan
    assets, i.e., cash and marketable securities, at an amount
    approximately equal to three times the total trust
    disbursements for the preceding 12-month period. This liquidity
    requirement only applies to underfunded single-employer defined
    benefit plans (other than small plans) \41\ that (1) are
    required to make quarterly installments of their estimated
    minimum funding contribution for the plan year, and (2) have a
    liquidity shortfall for any quarter during the plan year.
    ---------------------------------------------------------------------------
        \41\ A plan is a small plan if it had 100 or fewer participants on
    each day during the plan year (as determined in Code sec. 412(l)(6)).
    ---------------------------------------------------------------------------
          A plan has a liquidity shortfall if its liquid assets as
    of the last day of the quarter are less than the base amount
    for the quarter. Liquid assets are cash, marketable securities
    and such other assets as specified by the Secretary. The base
    amount for the quarter is an amount equal to the product of
    three times the adjusted disbursements from the plan for the 12
    months ending on the last day of the last month preceding the
    quarterly installment due date. If the base amount exceeds the
    product of two times the sum of adjusted disbursements for the
    36 months ending on the last day of the last month preceding
    the quarterly installment due date, and an enrolled actuary
    certifies to the satisfaction of the Secretary that the excess
    is the result of nonrecurring circumstances, such nonrecurring
    circumstances are not included in the base amount. For purposes
    of determining the base amount, adjusted disbursements mean the
    amount of all disbursements from the plan's trust, including
    purchases of annuities, payments of single sums, other benefit
    payments, and administrative expenses reduced by the product of
    the plan's funded current liability percentage for the plan
    year and the sum of the purchases of annuities, payments of
    single sums, and such other disbursements as the Secretary
    provides in regulations.
          The amount of the required quarterly installment for
    defined benefit plans that have a liquidity shortfall for any
    quarter is the greater of the quarterly installment or the
    liquidity shortfall. The amount of the liquidity shortfall must
    be paid in the form of liquid assets. It may not be paid by the
    application of credit balances in the funding standard account.
    The amount of any liquidity shortfall payment when added to
    prior installments for the plan year cannot exceed the amount
    necessary to increase the funded current liability percentage
    of the plan to 100 percent taking into account the expected
    increase in current liability due to benefits accruing during
    the plan year.
          If a liquidity shortfall payment is not made, then the
    plan sponsor is subject to a nondeductible excise tax equal to
    10 percent of the amount of the outstanding liquidity
    shortfall. A liquidity shortfall payment is no longer
    considered outstanding on the earlier of (1) the last day of a
    later quarter for which the plan does not have a liquidity
    shortfall or (2) the date on which the liquidity shortfall for
    a later quarter is timely paid. If the liquidity shortfall
    remains outstanding after four quarters, the excise tax
    increases to 100 percent.
    House bill
          No provision.
    Senate amendment
          The Senate amendment gives the Secretary authority to
    waive all or part of the excise tax imposed for a failure to
    make a liquidity shortfall payment if the plan sponsor
    establishes to the satisfaction of the Secretary that the
    liquidity shortfall was due to reasonable cause and not willful
    neglect and reasonable steps have been taken to remedy such
    shortfall.
          Effective date.--The provision is effective as if
    included in GATT.
    Conference agreement
          The conference agreement follows the Senate amendment.

             28. treatment of multiemployer plans under section 415

          (Sec. 1467 of the Senate amendment.)
    Present law
          Present law imposes limits on contributions and benefits
    under qualified plans based on the type of plan. 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.
    House bill
          No provision.
    Senate amendment
          The Senate amendment makes the following modifications to
    the limits on contributions and benefits as applied to
    multiemployer plans:
                (1) the 100 percent of compensation limitation on
            defined benefit pension plan benefits does not apply;
            and
                (2) the early retirement reduction and the 10-year
            phase-in of the defined benefit pension plan dollar
            limit does not apply to certain disability and survivor
            benefits.
          Effective date.--The provision applies to multiemployer
    plans for years beginning after December 31, 1996.
    Conference agreement
          The conference agreement does not include the Senate
    amendment provision.

     29. payment of lump-sum credit for former spouses of federal employees

          (Sec. 1468 of the Senate amendment.)
    Present law
          When a Federal employee or former Federal employee dies,
    any contribution to his or her credit in the Civil Service
    Retirement and Disability Fund must be paid to whomever the
    employee designated to receive that contribution. If no
    designation was made, there is a statutory order of precedence
    beginning with the surviving spouse. There is no provision in
    law that permits a domestic relations order to interfere with
    these arrangements. Thus, if an employee agreed in a divorce
    settlement to designate a former spouse to receive these funds,
    and later designated another individual, present law would
    require payment of the funds to the other individual. By
    contrast, under present law, an employee's annuity and survivor
    benefits are subject to the provisions of a domestic relations
    order.
    House bill
          No provision.
    Senate amendment
          The payment of contributions to the employee's credit in
    the Civil Service Retirement and Disability Fund is subject to
    the provisions of a domestic relations order, in the same way
    as the employee's annuity and survivor benefits. Thus, a
    domestic relations order on file with the Office of Personnel
    Management supersedes any designation of beneficiary by the
    employee.
          Effective date.--The provision is effective with respect
    to deaths occurring after the 90th day after the date of
    enactment.
    Conference agreement
          The conference agreement does not include the Senate
    amendment.

                    30. Date for adoption of plan amendments

          (Sec. 1459 of the House bill and sec. 1469 of the Senate
    amendment.)
    Present law
          Plan amendments to reflect amendments to the law
    generally must be made by the time prescribed by law for filing
    the income tax return of the employer for the employer's
    taxable year in which the change in law occurs.
    House bill
          The House bill generally provides that any amendments to
    a plan or annuity contract required by the pension
    simplification amendments 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.
    Senate amendment
          The Senate amendment is the same as the House bill.
    Conference agreement
          Under the conference agreement, any amendments to a plan
    or annuity contract required by the pension simplification
    amendments would not be required to be made before the first
    plan year beginning on or after January 1, 1998. The date for
    amendments is extended to the first plan year beginning on or
    after January 1, 2000, in the case of a governmental plan.
          Effective date.--The provision is effective on the date
    of enactment.

                      IV. FOREIGN SIMPLIFICATION PROVISION

                  1. Repeal of excess passive assets provision

          (Sec. 1501 of the House bill.)
    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. shareholder 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.
    House bill
          The House 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.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement follows the House bill.

                              V. OTHER PROVISIONS

    1. EXEMPT ALASKA FROM DIESEL DYEING REQUIREMENT WHILE ALASKA IS EXEMPT
                 FROM SIMILAR CLEAN AIR ACT DYEING REQUIREMENT

          (Sec. 1801 of the Senate amendment.)
    Present law
          An excise tax totaling 24.3 cents per gallon is imposed
    on diesel fuel. In the case of fuel used in highway
    transportation, 20 cents per gallon is dedicated to the Highway
    Trust Fund. The remaining portion of this tax is imposed on
    transportation generally and is retained in the General Fund.
          The diesel fuel tax is imposed on removal of the fuel
    from a pipeline or barge terminal facility (i.e., at the
    ``terminal rack''). Present law provides that tax is imposed on
    all diesel fuel removed from terminal facilities unless the
    fuel is destined for a nontaxable use and is indelibly dyed
    pursuant to Treasury Department regulations.
          In general, the diesel fuel tax does not apply to non-
    transportation uses of the fuel. A specific exemption is
    provided for off-highway business uses (e.g., use as fuel
    powering off-highway equipment). Use as heating oil also is
    exempt. (Most fuel commonly referred to as heating oil is
    diesel fuel.) The tax also does not apply to fuel used on a
    farm for farming purposes or by State and local governments, to
    exported fuels, and to fuel used in commercial shipping. Fuel
    used by intercity buses and trains is partially exempt from the
    diesel fuel tax.
          A similar dyeing regime exists for diesel fuel under the
    Clean Air Act. That Act prohibits the use on highways of diesel
    fuel with a sulfur content exceeding prescribed levels. This
    ``high sulfur'' diesel fuel is required to be dyed by the EPA.
    The State of Alaska generally was exempted from the Clean Air
    Act, but not the excise tax, dyeing regime for three years
    (until October 1, 1996) (urban areas) or permanently (remote
    areas).
    House bill
          No provision.
    Senate amendment
          The Senate amendment provides that diesel fuel sold in
    the State of Alaska will be exempt from the diesel dyeing
    requirement during the period when that State is exempt from
    the Clean Air Act dyeing requirements. Thus, subject to a
    certification procedure to be developed by the Treasury
    Department, undyed diesel fuel which is destined for a
    nontaxable use may be removed from terminals without payment of
    tax through September 30, 1996 (urban areas, unless extended by
    the Environmental Protection Agency) or permanently (remote
    areas).
          Effective date.--Effective beginning with the first
    calendar quarter after the date of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment.

    2. APPLICATION OF COMMON PAYMASTER RULES TO CERTAIN AGENCY ACCOUNTS AT
                               STATE UNIVERSITIES

          (Sec. 1802 of the Senate amendment.)
    Present law
          In general, the OASDI portion of FICA taxes are payable
    with respect to employee remuneration not in excess of a
    contribution base. If an employee works for more than one
    employer during a year, these taxes are payable for each
    employer up to the contribution base. Under the common
    paymaster rule if an individual works for two or more related
    corporations, the remuneration may be treated as being from one
    employer and therefore taxable for one contribution base.
          Section 125 of Social Security Amendments of 1983
    provided a common paymaster rule for certain State universities
    that employ health care professionals as faculty members at a
    medical school and at a tax-exempt faculty practice plan. This
    rule does not explicitly apply to situations where compensation
    is made through a university agency account and not directly by
    a medical school faculty practice plan.
    House bill
          No provision.
    Senate amendment
          The Senate amendment establishes a common paymaster rule
    in cases where: (1) a State or State university provides
    remuneration pursuant to a single contract of employment to
    certain health care professionals as members of its medical
    school faculty; and (2) as agency account at such institution
    also provides remuneration to such health care professionals.
    The agency account must receive funds for the remuneration from
    a faculty practice plan described in section 501(c)(3) of the
    Code. The payments may only be distributed by the agency
    account to faculty members who render patient care at the
    medical school. The faculty members receiving payments must
    comprise at least 30 percent of the membership of the faculty
    practice plan.
          Effective date.--Remuneration paid after December 31,
    1996. It is intended that, with respect to years before the
    effective date, the Secretary apply present law in a manner
    consistent with the proposal.
    Conference agreement
          The conference agreement includes the Senate amendment
    provision.

          3. modifications to excise tax on ozone-depleting chemicals

        a. Exempt imported recycled halons from the excise tax on ozone-
                              depleting chemicals

          (Sec. 1803(a) of the bill.)
    Present law
          An excise tax is imposed on the sale or use by the
    manufacturer or importer of certain ozone-depleting chemicals
    (Code sec. 4681). The amount of tax generally is determined by
    multiplying the base tax amount applicable for the calendar
    year by an ozone-depleting factor assigned to each taxable
    chemical. The base tax amount is $5.80 per pound in 1996 and
    will increase by 45 cents per pound per year thereafter. The
    ozone-depleting factors for taxable halons are 3 for halon-
    1211, 10 for halon-1301, and 6 for halon-2402.
          Taxable chemicals that are recovered and recycled within
    the United States are exempt from tax.
    House bill
          No provision.
    Senate amendment
          The Senate amendment extends the exemption from tax for
    domestically recovered and recycled ozone-depleting chemicals
    to imported recycled halons. The exemption for imported
    recycled halons applies only to such chemicals imported from
    countries that are signatories to the Montreal Protocol on
    Substances that Deplete the Ozone Layer.
          Effective date.--The provision is effective for chemicals
    imported after December 31, 1996.
    Conference agreement
          The conference agreement follows the Senate amendment
    with a modification to the effective date.
          Effective date.--The provision is effective for halon-
    1301 and halon-2402 imported after December 31, 1996, and for
    halon-1211 imported after December 31, 1997.

     b. Exempt chemicals used in metered-dose inhalers from the excise tax
                          on ozone-depleting chemicals

          (Sec. 1803(b) of the bill.)
    Present law
          An excise tax is imposed on the sale or use by the
    manufacturer or importer of certain ozone-depleting chemicals
    (Code sec. 4681). The amount of tax generally is determined by
    multiplying the base tax amount applicable for the calendar
    year by an ozone-depleting factor assigned to each taxable
    chemical. The base tax amount is $5.80 per pound in 1996 and
    will increase by 45 cents per pound per year thereafter.
          A reduced rate of tax of $1.67 per pound applies to
    chemicals used as propellants in metered-dose inhalers (sec.
    4682(g)(4)).
    House bill
          No provision.
    Senate amendment
          The Senate amendment exempts chemicals used as
    propellants in metered-dose inhalers from the excise tax on
    ozone-depleting chemicals.
          Effective date.--The provision is effective for chemicals
    sold or used seven days after the date of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment.

      4. tax-exempt bonds for the sale of the alaska power administration
                                    facility

          (Sec. 1804 of the Senate amendment.)
    Present law
          Interest on State and local government bonds to provide
    financing to private parties (private activity bonds) is
    taxable unless an exception is provided in the Internal Revenue
    Code. One such exception relates to the financing of facilities
    for the furnishing of electricity and gas.
          Most private activity bonds are subject to annual State
    volume limits of the greater of $50 per resident of the State
    or $150 million. Additionally, persons acquiring existing
    property financed with most private activity bonds must satisfy
    a rehabilitation requirement as a condition of the financing.
    House bill
          No provision.
    Senate amendment
          Provides an exception from the general rehabilitation
    requirement for private activity bonds used to acquire existing
    property for certain bonds to finance the acquisition of the
    Snettisham hydroelectric project for the Alaska Power
    Administration pursuant to legislation that has been enacted
    authorizing that transaction. These bonds are subject to the
    State of Alaska's private activity bond volume limit.
          Effective date.--Bonds issued after the date of
    enactment.
    Conference agreement
          The conference agreement follows the Senate amendment.

       5. allow bank common trust funds to transfer assets to regulated
                     investment companies without taxation

          (Sec. 1805 of the Senate amendment.)
    Present law
                Common trust funds
          A common trust fund is a fund maintained by a bank
    exclusively for the collective investment and reinvestment of
    monies contributed by the bank in its capacity as a trustee,
    executor, administrator, guardian, or custodian of certain
    accounts and in conformity with rules and regulations of the
    Board of Governors of the Federal Reserve System or the
    Comptroller of the Currency pertaining to the collective
    investment of trust funds by national banks (sec. 584(a)).
          The common trust fund is not subject to tax and is not
    treated as a corporation (sec. 584(b)). Each participant in a
    common trust fund includes his proportional share of common
    trust fund income, whether or not the income is distributed or
    distributable (sec. 584(c)).
          No gain or loss is realized by the fund upon admission or
    withdrawal of a participant. Participants generally treat their
    admission to the fund as the purchase of an interest.
    Withdrawals from the fund generally are treated as the sale of
    an interest by the participant (sec. 584(e)).
                Regulated investment companies (``RICs'')
          A RIC also is treated as a conduit for Federal income tax
    purposes. Conduit treatment is accorded by allowing the RIC a
    deduction for dividend distributions to its shareholders.
    Present law is unclear as to the tax consequences when a common
    trust fund transfers its assets to one or more RICs.
    House bill
          No provision.
    Senate amendment
          In general, the Senate amendment permits a common trust
    fund to transfer substantially all of its assets to one or more
    RICs without gain or loss being recognized by the fund or its
    participants. The fund must transfer its assets to the RICs
    solely in exchange for shares of the RICs, and the fund must
    then distribute the RIC shares to the fund's participants in
    exchange for the participants' interests in the fund.
          The basis of any asset received by a RIC will be the
    basis of the asset in the hands of the fund prior to transfer
    (increased by the amount of gain recognized by reason of the
    rule regarding the assumption of liabilities). In addition, the
    basis of any RIC shares that are received by a fund participant
    will be an allocable portion of the participant's basis in the
    interests exchanged. If stock in more than one RIC is received
    in exchange for assets of a common trust fund, the basis of the
    shares in each RIC shall be determined by allocating the basis
    of common fund assets used in the exchange among the shares of
    each RIC received in the exchange on the basis of the
    respective fair market values of the RICs.
          The tax-free transfer is not available to a common trust
    fund with assets that are not diversified under the
    requirements of section 368(a)(2)(F)(ii), except that the
    diversification test is modified so that Government securities
    are not to be included as securities of an issuer and are to be
    included in determining total assets for purposes of the 25-
    and 50-percent tests.
          Effective date.--The provision is effective for transfers
    after December 31, 1995.
    Conference agreement
          The conference agreement follows the Senate amendment. In
    order to qualify for the provision, the transfer by the common
    trust fund to the RIC must occur after December 31, 1995. The
    conferees intend that there is no requirement for qualification
    that the transfer of assets by the common trust fund to one or
    more RICs and the distribution of RIC shares to participants in
    the common trust fund be made contemporaneously or pursuant to
    a single plan.

                6. treatment of qualified state tuition programs

          (Sec. 1806 of the Senate amendment.)
    Present law
          In Michigan v. United States, 40 F.3d 817 (6th Cir.
    1994), the Sixth Circuit held that the Michigan Education
    Trust, an entity created by the State of Michigan to operate a
    prepaid tuition payment program, is an integral part of the
    State, and, thus, the investment income realized by the Trust
    is not currently subject to Federal income tax. The Trust was
    established to receive advance payments of college tuition,
    invest the money, and ultimately make disbursements under a
    program that allows beneficiaries to attend any of the State's
    public colleges or universities without further tuition costs
    for a year or more (depending on the terms of the contract).
          Section 115 of the Code provides that gross income does
    not include income derived from any public utility or the
    exercise of any essential governmental function and accruing to
    a State or any political subdivision thereof, or the District
    of Columbia.
          Section 2501 imposes a Federal gift tax on certain
    transfers of property by gift. Section 2503(e) specifically
    excludes from gifts subject to tax under section 2501 any
    ``qualified transfer,'' which includes any amount paid on
    behalf of an individual as tuition to an educational
    institution (as described in sec. 170(b)(1)(A)(ii)) for the
    education or training of such individual.
          On June 11, 1996, the Treasury Department issued final
    regulations under the original issue discount (``OID'')
    provisions of the Code (secs. 163(e) and 1271 through 1275),
    including regulations relating to debt instruments that provide
    for contingent payments (see TD 8674). These regulations
    specifically provide that they do not apply to contracts issued
    pursuant to State-sponsored prepaid tuition programs, whether
    or not the contracts are debt instruments. In addition, the IRS
    announced in Rev. Proc. 96-34 that it will not issue advance
    rulings or determination letters regarding State-sponsored
    prepaid tuition plans because issues that arise under such
    plans are being studied.
    House bill
          No provision.
    Senate amendment
          The Senate amendment provides tax-exempt status to
    ``qualified State tuition programs,'' meaning programs
    established and maintained by a State (or agency or
    instrumentality thereof) under which persons may (1) purchase
    tuition credits or certificates on behalf of a designated
    beneficiary that entitle the beneficiary to a waiver or payment
    of qualified higher education expenses of the beneficiary, or
    (2) make contributions to an account that is established for
    the sole purpose of meeting qualified higher education expenses
    of the designated beneficiary of the account. ``Qualified
    higher education expenses'' are defined as tuition, fees,
    books, and equipment required for enrollment or attendance at a
    college or university (or certain vocational schools). The
    Senate amendment specifically provides that, although a
    qualified State tuition program generally is exempt from
    Federal income tax, such a program is subject to the unrelated
    business income tax (UBIT).\42\
    ---------------------------------------------------------------------------
        \42\ The bill specifically provides that an interest in a qualified
    State tuition program will not be treated as debt for purposes of the
    UBIT debt-financed property rules (sec. 514). Consequently, a qualified
    State tuition program's investment income will not constitute debt-
    financed property income subject to the UBIT merely because the program
    accepts contributions and is obligated to pay out (or refund) such
    contributions and certain earnings thereon to designated beneficiaries
    or to contributors. However, investment income of a qualified State
    tuition program could be subject to the UBIT as debt-financed property
    income to the extent the program acquires indebtedness when investing
    the contributions made on behalf of designated beneficiaries.
    ---------------------------------------------------------------------------
          A qualified State tuition program is required to provide
    that purchases or contributions only be made in cash.
    Contributors and beneficiaries are not allowed to direct any
    investments made on their behalf by the program. The program is
    required to maintain a separate accounting for each designated
    beneficiary. A specified individual must be designated as the
    beneficiary at the commencement of participation in a qualified
    State tuition program (i.e., when contributions are first made
    to purchase an interest in such a program \43\), unless
    interests in such a program are purchased by a State or local
    government or a tax-exempt charity described in section
    501(c)(3) as part of a scholarship program operated by such
    government or charity under which beneficiaries to be named in
    the future will receive such interests as scholarships. A
    transfer of credits (or other amounts) from one account
    benefiting one designated beneficiary to another account
    benefiting a different beneficiary will be considered a
    distribution (as will a change in the designated beneficiary of
    an interest in a qualified State tuition program) unless the
    beneficiaries are members of the same family.\44\ Earnings on
    an account may be refunded to a contributor or beneficiary, but
    the State or instrumentality must impose a more than de minimis
    monetary penalty unless the refund is (1) used for qualified
    higher education expenses of the beneficiary, (2) made on
    account of the death or disability of the beneficiary,\45\ or
    (3) made on account of a scholarship received by the designated
    beneficiary to the extent the amount refunded does not exceed
    the amount of the scholarship used for higher education
    expenses. A qualified State tuition program may not allow any
    interest in the program or any portion thereof to be used as
    security for a loan.
    ---------------------------------------------------------------------------
        \43\ The bill allows for a change in designated beneficiaries, so
    long as the new beneficiary is a member of the family of the old
    beneficiary.
        \44\ For this purpose, the term ``member of the family'' is defined
    under present-law section 2032A(e)(2).
        \45\ Thus, a State need not impose a monetary penalty when a refund
    is made from a qualified State tuition program in order to cover
    medical expenses incurred by (or on behalf of) a designated beneficiary
    who suffers a disabling illness (and who could be any member of the
    same family of the originally designated beneficiary).
    ---------------------------------------------------------------------------
          In addition, the Senate amendment provides that no amount
    shall be included in the gross income of a contributor to, or
    beneficiary of, a qualified State tuition program with respect
    to any distribution from, or earnings under, such program,
    except that (1) amounts distributed or educational benefits
    provided to a beneficiary (e.g., when the beneficiary attends
    college) will be included in the beneficiary's gross income
    (unless excludable under another Code section) to the extent
    such amount or the value of the educational benefits exceeds
    contributions made on behalf of the beneficiary, and (2)
    amounts distributed to a contributor (e.g., when a parent or
    other relative receives a refund) will be included in the
    contributor's gross income to the extent such amounts exceed
    contributions made by that person.\46\
    ---------------------------------------------------------------------------
        \46\ Specifically, the bill provides that any distribution under a
    qualified State tuition program shall be includible in the gross income
    of the distributee in the same manner as provided under present-law
    section 72 to the extent not excluded from gross income under any other
    provision of the Code.
    ---------------------------------------------------------------------------
          The Senate amendment further provides that, for purposes
    of present-law section 2503(e), contributions made by an
    individual to a qualified State tuition program are treated as
    a qualified transfer and, thus, not subject to Federal gift
    tax.
          Effective date.--The provision is effective for taxable
    years ending after the date of enactment. The bill also
    includes a transition rule providing that if (1) a State
    maintains (on the date of enactment) a program under which
    persons may purchase tuition credits on behalf of, or make
    contributions for educational expenses of, a designated
    beneficiary, and (2) such program meets the requirements of a
    qualified State tuition program before the later of (a) one
    year after the date of enactment, or (b) the first day of the
    first calendar quarter after the close of the first regular
    session of the State legislature that begins after the date of
    enactment, then the provisions of the bill will apply to
    contributions (and earnings allocable thereto) made before the
    date the program meets the requirements of a qualified State
    tuition program, without regard to whether the requirements of
    a qualified State tuition program are satisfied with respect to
    such contributions and earnings (e.g., even if the interest in
    the tuition or educational savings program covers not only
    qualified higher education expenses but also room and board
    expenses).
    Conference agreement
          The conference agreement generally follows the Senate
    amendment, with the following modifications:
                (1) A program will not be treated as a qualified
            State tuition program unless it provides adequate
            safeguards to prevent contributions on behalf of a
            designated beneficiary in excess of those necessary to
            provide for the qualified higher education expenses of
            the beneficiary.
                (2) Contributions made to a qualified State tuition
            program will be treated as incomplete gifts for Federal
            gift tax purposes. Thus, any Federal gift tax
            consequences will be determined at the time that a
            distribution is made from an account under the program.
                (3) The waiver (or payment) of qualified higher
            education expenses of a designated beneficiary by (or
            to) an educational institution under a qualified State
            tuition program will be treated as a qualified transfer
            for purposes of present-law section 2503(e).\47\
    ---------------------------------------------------------------------------
        \47\ In this regard, the conferees intend that if a qualified State
    tuition program issues a check in the names of both the designated
    beneficiary and an educational institution at which the beneficiary
    incurs (or will incur) qualified higher education expenses, then the
    issuance of the check will be considered a payment of qualified higher
    education expenses to an educational institution if the check (after
    endorsement by the beneficiary) is deposited in the institution's bank
    account.
    ---------------------------------------------------------------------------
                (4) Amounts contributed to a qualified State
            tuition program (and earnings thereon) will be included
            in the contributor's estate for Federal estate tax
            purposes in the event that the contributor dies before
            such amounts are distributed under the program.
          The conference agreement provides that any distribution
    under a qualified State tuition program shall be includible in
    the gross income of the distributee in the manner as provided
    under section 72 to the extent not excluded from gross income
    under any other provision of the Internal Revenue Code. Thus,
    the conferees understand that if matching-grant amounts are
    distributed to (or on behalf of) a beneficiary as part of a
    qualified State tuition program, then such matching-grant
    amounts still may be excluded from the gross income of the
    beneficiary as a scholarship under present-law section 117.
          Effective date.--The conference agreement follows the
    Senate amendment.

                             7. Adoption assistance

          (Sec. 101 of H.R. 3286.)
    Present law
          Present law does not provide a tax credit for adoption
    expenses. Also, present law does not provide an exclusion from
    gross income for employer-provided adoption assistance. The
    Federal Adoption Assistance program (a Federal outlay program)
    provides financial assistance for the adoption of certain
    special needs children. In general, a special needs child is
    defined as a child who (1) according to a State determination,
    could not or should not be returned to the home of the birth
    parents and (2) on account of a specific factor or condition
    (such as ethnic background, age, membership in a minority or
    sibling group, medical condition, or physical, mental or
    emotional handicap), could not reasonably be expected to be
    adopted unless adoption assistance is provided. Specifically,
    the program provides assistance for adoption expenses for those
    special needs children receiving Federally assisted adoption
    assistance payments as well as special needs children in
    private and State-funded programs. The maximum Federal
    reimbursement is $1,000 per special needs child. Reimbursable
    expenses include those nonrecurring costs directly associated
    with the adoption process such as legal costs, social service
    review, and transportation costs.
    House bill
                Tax credit
          No provision. However, H.R. 3286 provides taxpayers with
    a maximum nonrefundable credit against income tax liability of
    $5,000 per child for qualified adoption expenses paid or
    incurred by the taxpayer. Any unused adoption credit may be
    carried forward by the taxpayer for up to five years. Qualified
    adoption expenses are reasonable and necessary adoption fees,
    court costs, attorneys' fees and other expenses that are
    directly related to the legal adoption of an eligible child. In
    the case of an international adoption, the credit is not
    available unless the adoption is finalized. An eligible child
    is an individual (1) who has not attained age 18 as of the time
    of the adoption, or (2) who is physically or mentally incapable
    of caring for himself or herself. No credit is allowed for
    expenses incurred (1) in violation of State or Federal law, (2)
    in carrying out any surrogate parenting arrangement, or (3) in
    connection with the adoption of a child of the taxpayer's
    spouse. The credit is phased out ratably for taxpayers with
    modified adjusted gross income (AGI) above $75,000, and is
    fully phased out at $115,000 of modified AGI.
          The credit is not allowed for any expenses for which a
    grant is received under any Federal, State, or local program.
    This limit, however, does not apply in the case of special
    needs adoptions.
                Exclusion from income
          The proposal provides a maximum $5,000 exclusion from the
    gross income of an employee for specified certain adoption
    expenses paid by the employer. The $5,000 limit is a per child
    limit, not an annual limitation. The exclusion is phased out
    ratably for taxpayers with modified AGI above $75,000 and is
    fully phased out at $115,000 of modified AGI.
          No credit is allowed for adoption expenses paid or
    reimbursed under an adoption assistance program.
                Effective date
          The House bill is effective for taxable years beginning
    after December 31, 1996.
    Senate amendment
                Tax credit
          The Senate amendment to H.R. 3286 is the same as the
    House bill, with three changes:
                (1) The maximum credit is increased from $5,000 to
            $6,000 in the case of special needs adoptions.
                (2) The credit for non-special needs adoptions is
            repealed for expenses paid or incurred after December
            31, 2000.
                (3) No credit is allowed in the case of special
            needs adoptions for expenses for which a grant is
            received under any Federal, State or local program.
                Exclusion from income
          The Senate amendment to H.R. 3286 is the same as the
    House bill except:
                (1) The maximum exclusion is increased from $5,000
            to $6,000 in the case of special needs adoptions.
                (2) The exclusion is repealed after December 31,
            2000.
                Effective date
          The Senate amendment to H.R. 3286 is the same as the
    House bill.
    Conference agreement
                Tax credit
          The conference agreement follows the Senate amendment
    provision of H.R. 3286 with four modifications:
                (1) The repeal of the credit for non-special needs
            adoptions is delayed for one year. Therefore, the
            credit for non-special needs adoptions is not available
            for expenses paid or incurred after December 31, 2001.
                (2) Special needs foreign adoptions are limited to
            a maximum credit of $5,000 (rather than $6,000) for
            qualified adoption expenses until December 31, 2001, at
            which time the credit for special needs foreign
            adoptions is also repealed.
                (3) The taxpayer is required to provide available
            information about the name, age, and taxpayer
            identification number of each adopted child.
                (4) Otherwise, qualified adoption expenses paid in
            one taxable year are not taken into account for
            purposes of the credit until the next taxable year
            unless the expenses are incurred in the year the
            adoption becomes final.
                Exclusion from income
          The conference agreement follows the Senate amendment
    provision of H.R. 3286 with three modifications:
                (1) The repeal of the exclusion is delayed for one
            year. Therefore, the exclusion is not available for
            expenses paid or incurred after December 31, 2001.
                (2) Special needs foreign adoptions are limited to
            a maximum exclusion of $5,000 (rather than $6,000) for
            qualified adoption expenses until December 31, 2001, at
            which time the exclusion is repealed.
                (3) The taxpayer is required to provide available
            information about the name, age, and taxpayer
            identification number of each adopted child.
                Taxpayer identification numbers
          The conference committee is concerned that problems may
    arise in processing tax returns of adopting parents because of
    unavoidable delays involved in obtaining a social security
    number of a child who is being adopted. The conference
    understands that the Internal Revenue Service recognizes these
    concerns and is committed to working with the Congress to
    develop as soon as possible an administrative solution that
    minimizes the burdens imposed on adopting parents while
    balancing processing and potential compliance considerations.
                Effective date
          The conference agreement follows the House bill and the
    Senate amendment.
          The conferees wish to clarify the operation of the
    effective date by way of an example. Suppose that, in the
    course of attempting to adopt a child, a taxpayer incurs $1,000
    in qualified adoption expenses in November, 1996, and an
    additional $3,000 in qualified adoption expenses in February,
    1997, when the adoption becomes final. The taxpayer is entitled
    to claim a credit for tax year 1997 only with respect to the
    $3,000 of qualified adoption expenses in February, 1997. The
    taxpayer is never entitled to claim a credit with respect to
    the $1,000 in qualified adoption expenses in November, 1996,
    because those expenses were incurred prior to the effective
    date of this provision.

    8. Six-month delay in implementation of electronic fund transfer system
                        for collection of certain taxes

    Present law
          Employers are required to withhold income taxes and FICA
    taxes from wages paid to their employees. Employers also are
    liable for their portion of FICA taxes, excise taxes, and
    estimated payments of their corporate income tax liability.
          The Code requires the development and implementation of
    an electronic fund transfer system to remit these taxes and
    convey deposit information directly to the Treasury (Code sec.
    6302(h)). The Electronic Federal Tax Payment System (``EFTPS'')
    was developed by Treasury in response to this requirement.\48\
    Employers must enroll with one of two private contractors hired
    by the Treasury. After enrollment, employers generally initiate
    deposits either by telephone or by computer.
    ---------------------------------------------------------------------------
        \48\ Treasury had earlier developed TAXLINK as the prototype for
    EFTPS. TAXLINK has been operational for several years; EFTPS is
    currently becoming operational. Employers currently using TAXLINK will
    ultimately be required to participate in EFTPS.
    ---------------------------------------------------------------------------
          The new system is phased in over a period of years by
    increasing each year the percentage of total taxes subject to
    the new EFTPS system. For fiscal year 1994, 3 percent of the
    total taxes are required to be made by electronic fund
    transfer. These percentages increased gradually for fiscal
    years 1995 and 1996. For fiscal year 1996, the percentage was
    20.1 percent (30 percent for excise taxes and corporate
    estimated tax payments). For fiscal year 1997, these
    percentages increased significantly, to 58.3 percent (60
    percent for excise taxes and corporate estimated tax payments).
    The specific implementation method required to achieve the
    target percentages is set forth in Treasury regulations.
    Implementation began with the largest depositors. Treasury has
    implemented the 1997 percentages by requiring that all
    employers who deposit more than $50,000 in 1995 must begin
    using EFTPS by January 1, 1997.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conferees are concerned that the initial mailing by
    IRS to employers that informed them of the 1997 requirements
    confused many of these employers. The conferees believe that it
    is necessary to provide additional time prior to implementation
    of the 1997 requirements so that employers may be better
    informed about their responsibilities. Accordingly, the
    conference agreement provides that the increase in the required
    percentages for fiscal year 1997 (which, pursuant to Treasury
    regulations, was to take effect on January 1, 1997) shall not
    take effect until July 1, 1997.
          Effective date.--The provision is effective on the date
    of enactment.

                              VI. REVENUE OFFSETS

         1. Modifications of the Puerto Rico and possession tax credit

          (Sec. 1601 of the bill and the Senate amendment.)
    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 Puerto
    Rico and possession 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 eligible
    for the credit 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. 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. Under the economic activity limit,
    the amount of the credit with respect to such income cannot
    exceed an amount equal to the sum of (i) 60 percent of the
    taxpayer's qualifying wage and fringe benefit expenses, (ii)
    specified percentages of the taxpayer's depreciation allowances
    with respect to qualifying tangible property, and (iii) in
    certain cases, the taxpayer's qualifying possession income
    taxes. The credit calculated under the economic activity limit
    is referred to herein as the ``wage credit.'' 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 1995, 45
    percent for 1997, and 40 percent for 1998 and thereafter. The
    credit calculated under the applicable percentage limit is
    referred to herein as the ``income credit.'' The amount of the
    Puerto Rico and possession tax
    House bill
          In general.--The House bill generally repeals the Puerto
    Rico and possession tax credit for taxable years beginning
    after December 31, 1995. However, the House 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.
          Wage credit.--For corporations that are existing credit
    claimants with respect to a possession and that use the wage
    credit method, the possession tax credit attributable to
    business income from the possession (determined under the wage
    credit method) 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 wage 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 wage credit
    method) is eliminated.
          The House bill adds to the Code a new section which
    provides a credit determined under the wage credit method 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 wage credit method. Such section
    applies for taxable years beginning after December 31, 1995 and
    before January 1, 2006.
          Income credit.--For corporations that are existing credit
    claimants with respect to a possession and that elected to use
    the income credit method and not to use the wage credit method,
    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 tax 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 income credit method) is
    eliminated.
          A corporation that had elected to use the income credit
    method is permitted to revoke that election under present law.
    Under the House 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 income credit method could revoke such election
    effective for its taxable year beginning in 1997 and
    thereafter; such corporation would continue to use the income
    credit method for its taxable year beginning in 1996 and would
    use the wage credit method for its taxable year beginning in
    1997 and thereafter.
          Computation of income cap.--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 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.
          Qualification as existing credit claimant.--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 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.
          Special rules for certain possessions.--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 House bill is effective for taxable
    years beginning after December 31, 1995.
    Senate amendment
          The Senate amendment is the same as the House bill with
    three modifications.
          Under the Senate amendment, the Puerto Rico and
    possession tax credit attributable to QPSII continues to be
    allowed for QPSII earned before July 1, 1996.
          Under the Senate amendment, a corporation that is an
    existing credit claimant continues to be eligible to claim
    credits under the wage credit method for taxable years
    beginning after December 31, 2005. For taxable years beginning
    in 2006 and thereafter, in computing the economic activity
    limit on the wage credit, the percentage of the corporation's
    qualifying wage and fringe benefit expenses that is taken into
    account is reduced from 60 percent of 40 percent. The
    corporation's business income that is eligible for the wage
    credit continues to be subject to the income cap. For taxable
    years beginning in 2006 and thereafter, a corporation that is
    an existing credit claimant with respect to Guam, American
    Samoa, or the Commonwealth of the Northern Mariana Islands
    continues to be eligible to claim credits under the wage credit
    method, determined under the foregoing rules, with respect to
    its operations in such possession.
          Under the Senate amendment, the Treasury Department is
    directed to study the effect on the economy of Puerto Rico of
    the wage credit (under present law and as amended), including
    an analysis of the impact of such credit on unemployment rates
    and economic growth. The Treasury Department is directed to
    submit to the House Committee on Ways and Means and the Senate
    Committee on Finance reports on its findings with respect to
    the impact of the wage credit within two years of the date of
    enactment and every four years thereafter.
          Effective date.--Same as the House bill.
    Conference agreement
          The conference agreement follows the House bill with
    modifications.
          Under the conference agreement, as under the Senate
    amendment, the Puerto Rico and possession tax credit
    attributable to QPSII continues to be allowed for QPSII earned
    before July 1, 1996. The conferees note that the repeal of the
    credit for QPSII will have the effect of eliminating a
    provision that has supported economic development and trade-
    related growth in the Caribbean Basin and served U.S. interests
    in the region. The loss of this program should not be
    interpreted as a loss of U.S. interest in the region. The
    conferees continue to support efforts furthering stable
    commercial and economic relations in that region.
          Under the conference agreement, a corporation that
    acquires all the assets of a trade or business of an existing
    credit claimant will qualify as an existing credit claimant.
    The adjusted base period income of the existing credit claimant
    from which the assets are acquired is divided between such
    corporation and the corporation that acquires such assets. It
    is intended that regulations or other guidance will prevent
    taxpayers from abusing this rule through transactions that
    manipulate base period income amounts.
          Under the conference agreement, for purposes of estimated
    tax payments due before October 1, 1996, a taxpayer whose tax
    liability is increased by reason of the modifications of the
    Puerto Rico and possession tax credit is not required to make a
    deposit with respect to more than 50 percent of such increase;
    any amount not deposited by such date will be required to be
    deposited, without penalty or interest, on the next estimated
    tax payment due date.

         2. Repeal 50-percent interest income exclusion for financial
                          institution loans to ESOP's

          (Sec. 1602 of the House bill and the Senate amendment.)
    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.
    House bill
          The provision repeals the 50-percent interest exclusion
    with respect to ESOP's.
          Effective date.--The provision generally is effective
    with respect to loans made after October 13, 1995. The repeal
    of the exclusion does not apply to the refinancing of an ESOP
    loan originally made on or before October 13, 1995, provided:
    (1) such refinancing loan otherwise meets the requirements of
    section 133 in effect on or before October 13, 1993; (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.
    Senate amendment
          Same as the House bill.
          Effective date.--The provision is effective with respect
    to loans made after the date of enactment, other than loans
    made pursuant to a written binding contract in effect before
    June 10, 1996, 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 the date of enactment or pursuant to a binding contract
    in effect before June 10, 1996, provided: (1) such refinancing
    loan otherwise meets the requirements of section 133 in effect
    on the day before the date of enactment; (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.
    Conference agreement
          The conference agreement follows the Senate amendment.

       3. Apply look-through rule for purposes of characterizing certain
        subpart F insurance income as unrelated business taxable income

          (Sec. 1602 of the House bill.)
    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 or 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)).\49\ 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.
    ---------------------------------------------------------------------------
        \49\ 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)).
    ---------------------------------------------------------------------------
          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.\50\ 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.
    ---------------------------------------------------------------------------
        \50\ 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
    shareholders (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 conferees believe 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.
    ---------------------------------------------------------------------------
    House bill
          The House bill applies a look-through rule in
    characterizing certain subpart F insurance income for unrelated
    business income tax purposes. Under the House 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). For purposes of this provision, 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.
          Effective date.--The provision applies to amounts
    includible in gross income in taxable years beginning after
    December 31, 1995.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement follows the House bill with one
    modification. For purposes of the provision, two or more
    organizations generally are treated as affiliates if such
    organizations are colleges or universities described in section
    170(b)(1)(A)(ii) or hospitals or other medical entities
    described in section 170(b)(1)(A)(iii). Accordingly, in
    applying the provision to two or more such organizations that
    are the shareholders of a CFC, the exceptions from the look-
    through rule apply to each shareholder's share of the income
    attributable to insurance of risks of all such shareholders;
    the look-through rule applies to a shareholder's share of any
    income attributable to insurance of risks of a third party.

                4. DEPRECIATION UNDER THE INCOME FORECAST METHOD

          (Sec. 1604 of the House bill.)
    Present law
                In general
          A taxpayer generally must capitalize the cost of property
    used in a trade or business and is allowed to recover such cost
    over time through allowances for depreciation or amortization.
          The ``income forecast'' method is an allowable method for
    calculating depreciation 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 \51\ (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. 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.
    ---------------------------------------------------------------------------
        \51\ 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, the ``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.
    ---------------------------------------------------------------------------
    House bill
          The House bill makes several amendments to the income
    forecast method of determining depreciation deductions.
          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. 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)). 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 lookback method described below.
          Second, the adjusted basis of property that may be taken
    into account under the income forecast method only will include
    amounts that satisfy the economic performance standard of
    section 461(h).
          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. 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. 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. Property that had a basis of $100,000 or less when
    placed in service is not subject to the look-back method.
          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 on
    such date and all times thereafter.
    Senate amendment
          No provision. A similar provision was contained in
    section 402 of the Senate amendment to H.R. 3286, the
    ``Adoption, Promotion and Stability Act of 1996,'' as favorably
    reported by the Senate Finance Committee on June 12, 1996.
    Conference agreement
          The conference agreement follows the provision that was
    contained in section 402 of the Senate amendment to H.R. 3286,
    the ``Adoption, Promotion and Stability Act of 1996,'' as
    favorably reported by the Senate Finance Committee on June 12,
    1996. Thus, the conference agreement provides the following
    modifications to the income forecast method of present law.
                Determination of estimated income
          First, the agreement 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 form
    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 and treatment of costs of property
          The adjusted basis of property that may be taken into
    account under the income forecast method only will include
    amounts that satisfy the economic performance standard of
    section 461(h).\52\ 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, the recurring item exception of section
    461(h)(3) will apply in a manner similar to the way such
    exception applies under present law. Thus, expenditures that
    relate to an item of property that are incurred in the taxable
    year following the taxable year in which the property is placed
    in service may be taken into account in the year the property
    is placed in service to the extent such expenditures meet the
    recurring item exception for such year.
    ---------------------------------------------------------------------------
        \52\ No inference is intended as to the proper application of
    section 461(h) to the income forecast method under present law.
    ---------------------------------------------------------------------------
          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 as 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.
          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.\53\ The ``look-back'' method is
    applied in any ``recomputation year'' by (1) comparing
    depreciation deductions that had been claimed in prior periods
    of 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.
    ---------------------------------------------------------------------------
        \53\ 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.
    ---------------------------------------------------------------------------
          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 that had an unadjusted basis of $100,000 or less
    is not subject to the look-back method. For this purpose,
    ``unadjusted basis'' means the total capitalized cost of a
    property as of the close of a recomputation year.
          The agreement provides a simplified look-back method for
    pass-through entities.
    Effective date
          The agreement is effective for property placed in service
    after September 13, 1995, unless produced or acquired pursuant
    to a binding written contract in effect on such date and all
    times thereafter. For this purpose, the binding contract
    exception may apply to a written contract in effect on the
    relevant dates if that contract binds a taxpayer to produce,
    license or deliver property that will be used by the other
    party to the contract once the property is produced.
          The agreement may apply to property placed in service in
    taxable years that ended before the date of enactment of this
    Act. The agreement waives additions to tax imposed under
    sections 6654, 6655, and 6662(d) for any underpayments of tax
    or estimated tax for any taxable year ending before the date of
    enactment of this Act to the extent the underpayment was
    created or increased by the changes made to the income forecast
    method of depreciation by the provision. The application of the
    agreement (including the look-back method) is not waived for
    any taxable year that ends after the date of enactment of this
    Act.

     5. MODIFY EXCLUSION OF DAMAGES RECEIVED ON ACCOUNT OF PERSONAL INJURY
                                  OR SICKNESS

          (Sec. 1605 of the House bill and sec. 1603 of the Senate
    amendment.)
    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.\54\ Certain States provide that, in the
    case of claims under a wrongful death statute, only punitive
    damages may be awarded.
    ---------------------------------------------------------------------------
        \54\ 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).
    ---------------------------------------------------------------------------
          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.\55\ 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.
    ---------------------------------------------------------------------------
        \55\ Schleier v. Commissioner, 115 S. Ct. 2159 (1995).
    ---------------------------------------------------------------------------
    House bill
                Include in income all punitive damages
          The House 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 House
    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. No inference is intended as to the application of the
    exclusion to punitive damages prior to the effective date of
    the House bill in connection with a case involving a physical
    injury or physical sickness.
                Include in income damage recoveries for nonphysical
                        injuries
          The House 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 House bill also specifically provides that emotional
    distress is not considered a physical injury or physical
    sickness.\56\ 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.
    ---------------------------------------------------------------------------
        \56\ It is intended that the term emotional distress includes
    symptoms (e.g., insomnia, headaches, stomach disorders) which may
    result from such emotional distress.
    ---------------------------------------------------------------------------
          No inference is intended as to the application of the
    exclusion to damages prior to the effective date of the House
    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.
    Senate amendment
                Include in income all punitive damages
          The Senate amendment is the same as the House bill.
                Include in income damage recoveries for nonphysical
                        injuries
          No provision.
    Conference agreement
                Include in income all punitive damages
          The conference agreement follows the House bill and the
    Senate amendment.
                Include in income damage recoveries for nonphysical
                        injuries
          The conference agreement follows the House bill.
          Effective date.--The provisions generally are effective
    with respect to amounts received after date of enactment. 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 House bill.)
    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.
    House bill
          The House bill repeals the tax credit for purchasers of
    diesel-powered automobiles, vans and light trucks.
          Effective date.--Vehicles purchased after the date of
    enactment.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement follows the House bill.

         7. extension and phaseout of excise tax on luxury automobiles

          (Sec. 1604 of the bill and sec. 4001 of the Code.)
    Present law
          Present law imposes an excise tax on the sale of an
    automobile whose price exceeds a designated threshold,
    currently $34,000. The excise tax is imposed at a rate of 10-
    percent on the excess of the sales price above the designated
    threshold. The $34,000 threshold is indexed for inflation.
          The tax applies to sales before January 1, 2000.
    House bill
          No provision.
    Senate amendment
          The Senate amendment extends and phases out the luxury
    tax on automobiles. The tax rate is reduced by one percentage
    point per year beginning in 1996. The tax rate for sales (on or
    after the date of enactment plus seven days) in 1996 is 9
    percent. The tax rate for sales in 1997 is 8 percent. The tax
    rate for sales in 1998 is 7 percent. The tax rate for sales in
    1999 is 6 percent. The tax rate for sales in 2000 is 5 percent.
    The tax rate for sales in 2001 is 4 percent. The tax rate for
    sales in 2002 is 3 percent. The tax will expire after December
    31, 2002.
          Effective date.--The provision is effective for sales on
    or after date of enactment plus seven days.
    Conference agreement
          The conference agreement follows the Senate amendment.

    8. allow certain persons engaged in the local furnishing of electricity
    or gas to elect not to be eligible for future tax-exempt bond financing

          (Sec. 1605 of the amendment.)
    Present law
          Interest on State and local government bonds generally is
    excluded from income except where the bonds are issued to
    provide financing for private parties. Present law includes
    several exceptions, however, that allow tax-exempt bonds to be
    used to provide financing for certain specifically identified
    private parties. One such exception allows tax-exempt bonds to
    be issued to finance facilities for the furnishing of
    electricity or gas by private parties if the area served by the
    facilities does not exceed (1) two contiguous counties or (2) a
    city and a contiguous county (commonly referred to as the
    ``local furnishing'' of electricity or gas).
          Most private activity tax-exempt bonds are subject to
    general State private activity bond volume limits of $50 per
    resident of the State ($150 million, if greater) per year. Tax-
    exempt bonds for facilities used in the local furnishing of
    electricity or gas are subject to this limit. Like most other
    private beneficiaries of tax-exempt bonds, borrowers using tax-
    exempt bonds to finance these facilities are denied interest
    deductions on the debt underlying the bonds if the facilities
    cease to be used in qualified local furnishing activities.
    Additionally, as with all tax-exempt bonds, if the use of
    facilities financed with the bonds changes to a use a not
    qualified for tax-exempt financing after the debt is incurred,
    interest on the bonds becomes taxable unless certain safe
    harbor standards are satisfied.
    House bill
          No provision.
    Senate amendment
          The Senate amendment allows persons that have received
    tax-exempt financing of facilities that currently qualify as
    used in the local furnishing of electricity or gas to elect to
    terminate their qualification for this tax-exempt financing and
    to expand their service areas without incurring the present-law
    loss of interest deductions and loss of tax-exemption penalties
    if--
                (1) no additional bonds are issued for facilities
            of the person making the election (or were issued for
            any predecessor) after the date of the provision's
            enactment;
                (2) the expansion of the person's service area is
            not financed with any tax-exempt bond proceeds; and
                (3) all outstanding tax-exempt bounds of the person
            making the election (and any predecessor) are redeemed
            no later than six months after the earliest date on
            which redemption is not prohibited under the terms of
            the bonds, as issued, (or six months after the
            election, if later).
          Except as described below, the provision further limits
    the local furnishing exception to bonds for facilities of (1)
    of persons that qualified as engaged in that activity on the
    date of the provision's enactment and (2) that serve areas
    served by those persons on that date. The area which is
    considered to be served on the date of the provision's
    enactment consists of the geographic area in which service
    actually is being provided on that date. Service initially
    provided after the date of enactment to a new customer within
    that area (e.g., as a result of new construction or of a change
    in heating fuel type) is not treated as a service area
    expansion.
          For purposes of this requirement, a change in the
    identity of a person serving an area is disregarded if the
    change is the result of a corporate reorganization where the
    area served remains unchanged and there is common ownership of
    both the predecessor and successor entities. To facilitate
    compliance with electric and gas industry restructuring now in
    progress, the Senate amendment further permits continued
    qualification of successor entities under a ``step-in-the-
    shoes'' rule without regard to common ownership if the service
    provided remains unchanged and the area served after the
    facilities are transferred does not exceed the service area
    before the transfer. For example, if facilities of a person
    engaged in local furnishing are sold to another person, the
    purchaser (when it engages in otherwise qualified local
    furnishing activities) is eligible for continued tax-exempt
    financing to the same extent that the seller would have been
    had the sale not occurred if the service provided and the area
    served by the facilities do not change.
          Similarly, a purchaser ``steps into the shoes'' of its
    seller with regard to eligibility (or the lack thereof) for
    making the election to terminate its status as engaged in local
    furnishing without imposition of certain penalties on
    outstanding tax-exempt bonds. For example, if a person engaged
    in local furnishing activities on the date of the provision's
    enactment receives financing from tax-exempt bonds issued after
    the date of the provision's enactment (and is thereby
    ineligible to make the election), any purchaser from that
    person likewise is ineligible.
          Effective date.--The Senate amendment is effective on the
    date of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment,
    with two modifications to the portion of the provision that
    generally limits the benefit of tax-exempt financing to persons
    engaged in local furnishing activities on the date of the
    provision's enactment. First, the conference agreement allows
    certain expansions of existing local furnishing service areas
    to occur after the effective date of the provision without
    affecting continued qualification under the local furnishing
    exception, both within the existing service area and in the
    expansion area. Under this modification, a qualified local
    furnishing service area which includes a portion of a city or a
    county on the effective date of the provision may be expanded
    after that date to include other portions of the same city or
    county. For example, if a gas utility's service area on the
    effective date of the provision includes only an urban section
    of a county, a subsequent expansion of the utility's service
    area to include rural portions of the same county (e.g., as a
    result of population growth), does not in itself preclude
    qualification of the entire, expanded service area as a local
    furnishing area. This exception does not, however, allow
    expansion of local furnishing service areas beyond the borders
    of a city or county where service is being provided on the
    effective date of the provision or interconnection of
    facilities serving those areas with other facilities or persons
    in a manner not permitted under present law.
          Second, the date by which an entity must be engaged in
    local furnishing activities (i.e., have facilities for local
    furnishing placed in service in that activity) as a condition
    of receiving future tax-exempt financing is delayed until
    January 1, 1997 (rather than the date of the provision's
    enactment).
          The conferees also wish to clarify several questions that
    have arisen since passage of the Senate amendment with respect
    to the limitation on future eligibility under the local
    furnishing exception. First, because the conference agreement
    precludes issuance of tax-exempt bonds except for local
    furnishers engaged in that activity on January 1, 1997 (and
    successors in interest), the statutory wording of the provision
    differs from the traditional focus of the local furnishing
    exception on a two county (or city and contiguous county) area
    without regard to the entity providing the service. The
    statutory references to ``persons'' engaged in the local
    furnishing of electricity or gas contained in the conference
    agreement are intended to prevent new entities (other than
    successors in interest) from qualifying for tax-exempt
    financing under the local furnishing exception. They are not to
    be construed in a manner affecting the tax-exempt status of
    interest on any outstanding bonds or the receipt of additional
    tax-exempt financing by an existing local furnisher, provided
    that the facilities financed with those bonds are used at all
    times in qualified local furnishing activities (defined under
    present law as modified by the conference agreement) and the
    bonds comply otherwise with the Internal Revenue Code's
    requirements for tax-exemption.
          Second, the conferees are aware that present-law
    disregards certain transmission of electricity pursuant to FERC
    orders in determining whether a facility is used in the local
    furnishing of electricity. The conference agreement retains the
    relevant statutory rule to that effect, and the conferees
    intend no change in that rule.
          Third, the conferees wish to clarify, by example, the
    application of the restriction on qualified local furnishing
    activities contained in this portion of the conference
    agreement to certain utility transactions such as those that
    may be expected to occur as a result of deregulation of the
    electric and gas industries.
          Example (1).--As part of a corporate reorganization, an
    existing local furnishing utility sells a portion of its
    service area to a third party. The retained portion of the
    utility's service territory continues to qualify for tax-exempt
    financing under the local furnishing exception provided that no
    violations of that exception such as an impermissible
    interconnection with facilities outside the area occur. The
    determination of whether the portion of the service territory
    that is sold to a third party continues to qualify under the
    local furnishing exception depends on the manner in which the
    purchaser provides service in the area it acquires. If, for
    example, the purchaser operates in the area which it purchases
    in a manner that otherwise qualifies under the local furnishing
    exception, the purchaser is treated as a successor in interest
    to the seller and facilities for the area that is sold continue
    to be treated as used in local furnishing. However, if that
    area is merged into, or impermissibly (under present-law rules)
    interconnected with, another service area that does not qualify
    as a local furnishing area after the transaction, the successor
    in interest rule does not preserve the status as a local
    furnishing area of the area sold.
          Example (2).--Two independent utilities, both qualifying
    as engaged in local furnishing on the effective date of the
    provision, serve adjoining areas. The utilities decide to
    adjust their common service area boundary line to eliminate
    irregular geographic patterns. The parties to this transaction
    may be treated as successors in interest with respect to the
    area each acquires if the resulting service areas each qualify
    under the local furnishing exception (as modified by the
    conference agreement).
          Example (3).--Assume the facts of Example (2), except the
    area acquired by one of the utilities is in a county where it
    did not provide service before the boundary line adjustments,
    and the utility's resulting service area includes all or part
    of three counties. That utility would no longer qualify as
    engaged in local furnishing under present law. The result is
    the same under the conference agreement.
          Example (4).--Assume the facts of Example (2), except the
    utilities merge into a single company with a single service
    area. If the resulting combined service area of the new company
    does not exceed two counties (or a city and a contiguous
    county), the new company continues to be eligible for tax-
    exempt financing as a successor in interest.
          Example (5).--Assume that a local furnishing utility
    decides to contract with a newly-formed independent power
    generating venture to construct a generating plant that will
    sell electricity to it exclusively for use in its service area.
    Tax-exempt bonds may not be issued under the local furnishing
    exception for construction of the generating plant. The
    independent power producer was neither engaged in the local
    furnishing of electricity to the service area involved on the
    effective date of the conference agreement's restriction nor is
    it a successor in interest under the agreement.
          Effective date.--These provisions are effective on the
    date of the conference agreement's enactment.

        9. Repeal of financial institution transition rule to interest
                                allocation rules

    Present law
          For foreign tax credit purposes, taxpayers generally are
    required to allocate and apportion interest expense between
    U.S. and foreign source income based on the proportion of the
    taxpayer's total assets in each location. Such allocation and
    apportionment is required to be made for affiliated groups (as
    defined in sec. 864(e)(5)) as a whole rather than on a
    subsidiary-by-subsidiary basis. However, certain types of
    financial institutions that are members of an affiliated group
    are treated as members of a separate affiliated group for
    purposes of allocating and apportioning their interest expense.
    Section 1215(c)(5) of the Tax Reform Act of 1986 (P.L. 99-514,
    100 Stat. 2548) includes a targeted rule which treats a certain
    corporation as a financial institution for this purpose.
    House bill
          No provision.
    Senate amendment
          No provision. However section 1606 of the Senate
    amendment to H.R. 3448 (Small Business Job Protection Act of
    1996) contained a provision that repeals section 1215(c)(5) of
    the Tax Reform Act of 1986.
          Effective date.--Taxable years beginning after December
    31, 1995.
    Conference agreement
          The conference agreement does not include the Senate
    amendment provision.

          10. extension of airport and airway trust fund excise taxes

          (Sec. 1607 of the Senate amendment and secs. 4041, 4081,
    4261, and 4271 of the Code.)
    Present law
                Extension of aviation taxes
          Before January 1, 1996, the following excise taxes were
    imposed to fund the Airport and Airway Trust Fund: (1) a 10-
    percent tax on domestic air passenger tickets; (2) a 6.25-
    percent tax on domestic air freight waybills; (3) a $6-per-
    person tax on international air departures; (4) a 17.5 cents-
    per-gallon tax on jet fuel used in noncommercial aviation; and
    (5) a 15-cents-per-gallon tax on gasoline used in noncommercial
    aviation (14 cents per gallon of this tax continues, with the
    revenues being deposited in the Highway Trust Fund). In
    addition, jet fuel and gasoline used in noncommercial aviation
    are subject to a tax of 4.3 cents per gallon, the revenues of
    which are deposited in the General Fund of the Treasury. Prior
    to January 1, 1996, of the total tax of 19.3 cents per gallon
    imposed on gasoline used in noncommercial aviation, 18.3 cents
    per gallon was collected when the gasoline was removed from a
    pipeline or barge terminal. The remaining 1 cent per gallon was
    imposed at the retail level.
                Exemption for certain medical air transportation
          An exemption is provided from the air passenger and air
    freight taxes for emergency medical helicopter transportation
    if the helicopter does not take off from or land at Federally
    assisted airports or otherwise use Federal aviation facilities
    or services.
                Exemption for helicopters used in exploration or
                        development of hard minerals or oil or gas
          An exemption is provided from the air passenger tax for
    helicopter transportation for exploration, development, or
    removal of hard minerals or oil or gas if the helicopter does
    not take off from or land at Federally assisted airports or
    otherwise use Federal aviation facilities or services.
                Transportation of employees of affiliated companies
          Generally, when employees fly on their employer's
    aircraft, the fuel tax applies, but when a company flies other
    passengers for compensation or hire, the passenger ticket tax
    applies. Employees of affiliated corporations do not cause the
    air ticket tax to apply. The Internal Revenue Service has
    interpreted the use limitation of present-law section 4282 on
    an all-or nothing basis relating to aircraft of affiliated
    groups. That is, if an aircraft is available for hire by
    persons outside the affiliated group, all amounts paid for
    transportation, including charges among members of an
    affiliated group, are subject to the passenger ticket tax
    rather than the fuels tax.\57\
    ---------------------------------------------------------------------------
        \57\ Rev. Rul. 770405, 1977-2 C.B. 381; Rev. Rul. 76-394, 1976-2
    C.B. 355.
    ---------------------------------------------------------------------------
    House bill
          No provision.
    Senate amendment
                Extension of aviation taxes
          The five Airport and Airway Trust Fund excise taxes are
    reinstated at the pre-1996 rates for the period beginning seven
    days after the date of enactment through April 15, 1997.
                Exemption for certain medical air transportation
          The Senate amendment: (1) expands the exemption for
    emergency medical helicopters to also include fixed-wing
    aircraft equipped for and exclusively dedicated to acute care
    emergency medical services; and (2) removes the reference to
    non-use of Federally assisted airports or other Federal
    aviation facilities or services for such medical aircraft to
    qualify for the exemption.
                Exemption for helicopters used in exploration or
                        development of hard minerals or oil or gas
          The Senate amendment provides that the exemption for such
    helicopter transportation applies on a flight segment basis.
          Effective date.--The Senate amendment applies for
    transportation or fuel sold beginning seven days after the date
    of enactment. The air passenger and air freight taxes do not
    apply to any amount paid before that date, even if for
    transportation occurring during the reinstatement period.
    Conference agreement
          The conference agreement follows the Senate amendment
    with three modifications. First, the conference agreement
    reinstates the five Airport and Airway Trust Fund excise taxes
    at the pre-1996 rates for the period beginning seven calendar
    days after the date of enactment and through December 1, 1996
    (rather than through April 15, 1997).
          Second, the conference agreement consolidates imposition
    of the aviation gasoline excise tax, with the entire 19.3-
    cents-per-gallon rate being imposed when the gasoline is
    removed from a pipeline or barge terminal facility.
          Third, the conference agreement provides that the
    determination of which tax, the passenger ticket tax or the
    fuels tax, applies to flights of aircraft of affiliated groups
    of corporations will be made on a flight-by-flight basis.
          Effective date.--Same as Senate amendment.

              11. Modify basis adjustment rules under section 1033

          (Sec. 1608 of the Senate amendment.)
    Present law
          Under section 1033, gain realized by a taxpayer from
    certain involuntary conversions of property is deferred to the
    extent the taxpayer purchases property similar or related in
    service of use to the converted property within a specified
    replacement period of time. The replacement property may be
    acquired directly or by acquiring control of a corporation
    (generally, 80 percent of the stock of the corporation) that
    owns replacement property. The taxpayer's basis in the
    replacement property generally is the same as the taxpayer's
    basis in the converted property, decreased by the amount of any
    money or loss recognized on the conversion, and increased by
    the amount of any gain recognized on the conversion. In cases
    in which a taxpayer purchases stock as replacement property,
    the taxpayer generally reduces the basis of the stock, but does
    not reduce the basis of the underlying assets. Thus, the
    reduction in the basis of the stock generally does not result
    in reduced depreciation deductions where the corporation holds
    depreciable property, and may result in the taxpayer having
    more aggregate depreciable basis after the acquisition of
    replacement property than before the involuntary conversion.
    House bill
          No provision.
    Senate amendment
          The Senate amendment provides that where the taxpayer
    satisfies the replacement property requirement of section 1033
    by acquiring stock in a corporation, the corporation generally
    will reduce its adjusted bases in its assets by the amount by
    which the taxpayer reduces its basis in the stock. The
    corporation's adjusted bases in its assets will not be reduced,
    in the aggregate, below the taxpayer's basis is its stock
    (determined after the appropriate basis adjustment for the
    stock). In addition, the basis of any individual asset will not
    be reduced below zero. The basis reduction first is applied to:
    (1) property that is similar or related in service or use to
    the converted property, then (2) to other depreciable property,
    then (3) to other property.
          Effective date.--The provision applies to involuntary
    conversions occurring after the date of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment.

           12. Extension of withholding to certain gambling winnings

          (Sec. 1609 of the Senate amendment.)
    Present law
          In general, proceeds from a wagering transaction are
    subject to withholding at a rate of 28 percent if the proceeds
    exceed $5,000 and are at least 300 times as large as the amount
    wagered. No withholding tax is imposed on winnings from bingo
    or keno.
    House bill
          No provision.
    Senate amendment
          The Senate amendment imposes withholding on proceeds from
    bingo or keno wagering transactions at a rate of 28 percent if
    such proceeds exceed $5,000, regardless of the odds of the
    wager.
          Effective date.--The provision is effective 30 days after
    the date of enactment.
    Conference agreement
          The conference agreement does not include the Senate
    amendment provision.

         13. Treatment of certain insurance contracts on retired lives

          (Sec. 1610 of the Senate amendment.)
    Present law
          Life insurance companies are allowed a deduction for any
    net increase in reserves and are required to include in income
    any net decrease in reserves. The reserve of a life insurance
    company for any contract is the greater of the net surrender
    value of the contract or the reserve determined under Federally
    prescribed rules. In no event, however, may the amount of the
    reserve for tax purposes for any contract at any time exceed
    the amount of the reserve for annual statement purposes.
          Special rules are provided in the case of a variable
    contract. Under these rules, the reserve for a variable
    contract is adjusted by (1) subtracting any amount that has
    been added to the reserve by reason of appreciation in the
    value of assets underlying such contract, and (2) adding any
    amount that has been subtracted from the reserve by reason of
    depreciation in the value of assets underlying such contract.
    In addition, the basis of each asset underlying a variable
    contract is adjusted for appreciation or depreciation to the
    extent the reserve is adjusted.
          A variable contract generally is defined as any annuity
    or life insurance contract (1) that provides for the allocation
    of all or part of the amounts received under the contract to an
    account that is segregated from the general asset accounts of
    the company, and (2) under which, in the case of an annuity
    contract, the amounts paid in, or the amounts paid out, reflect
    the investment return and the market value of the segregated
    asset account, or, in the case of a life insurance contract,
    the amount of the death benefit (or the period of coverage) is
    adjusted on the basis of the investment return and the market
    value of the segregated asset account. A pension plan contract
    that is not a life, accident, or health, property, casualty, or
    liability insurance contract is treated as an annuity contract
    for purposes of this definition.
    House bill
          No provision.
    Senate amendment
          The Senate amendment provides that a variable contract is
    to include a contract that provides for the funding of group
    term life or group accident and health insurance on retired
    lives if: (1) the contract provides for the allocation of all
    or part of the amounts received under the contract to an
    account that is segregated from the general asset account of
    the company; and (2) the amounts paid in, or the amounts paid
    out, under the contract reflect the investment return and the
    market value of the segregated asset account underlying the
    contract.
          Thus, the reserve for such a contract is to be adjusted
    by (1) subtracting any amount that has been added to the
    reserve by reason of appreciation in the value of assets
    underlying such contract, and (2) adding any amount that has
    been subtracted from the reserve by reason of depreciation in
    the value of assets underlying such contract. In addition, the
    basis of each asset underlying the contract is to be adjusted
    for appreciation or depreciation to the extent that the reserve
    is adjusted.
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1995.
    Conference agreement
          The conference agreement follows the Senate amendment.

                 14. treatment of modified guaranteed contracts

    Present law
          Life insurance companies are allowed a deduction for any
    net increase in reserves and are required to include in income
    any net decrease in reserves. The reserve of a life insurance
    company for any contract is the greater of the net surrender
    value of the contract or the reserve determined under Federally
    prescribed rules. The net surrender value of a contract is the
    cash surrender value reduced by any surrender penalty, except
    that any market value adjustment required on surrender is not
    taken into account. In no event, however, may the amount of the
    reserve for tax purposes for any contract at any time exceed
    the amount of the reserve for annual statement purposes.
          In general, assets held for investment are treated as
    capital assets. Any gain or loss from the sale or exchange of a
    capital asset is treated as a capital gain or loss and is taken
    into account for the taxable year in which the asset is sold or
    exchanged.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement generally applies a mark-to-
    market regime to assets held as part of a segregated account
    under a modified guaranteed contract issued by a life insurance
    company. Gain or loss with respect to such assets held as of
    the close of any taxable year are taken into account for that
    year (even though the assets have not been sold or
    exchanged),\58\ and are treated as ordinary. If gain or loss is
    taken into account by reason of the mark-to-market requirement,
    then the amount of gain or loss subsequently realized as a
    result of sale, exchange, or other disposition of the asset, or
    as a result of the application of the mark-to-market
    requirement is appropriately adjusted to reflect such gain or
    loss. In addition, the reserve for a modified guaranteed
    contract is determined by taking into account the market value
    adjustment required on surrender of the contract.
    ---------------------------------------------------------------------------
        \58\ The wash sale rules of section 1091 of the Code are not to
    apply to any loss that is required to be taken into account solely by
    reason of the mark-to-market requirement.
    ---------------------------------------------------------------------------
          A modified guaranteed contract is defined as any life
    insurance contract, annuity contract or pension plan contract
    \59\ that is not a variable contract (within the meaning of
    Code section 817), and that satisfies the following
    requirements. All or part of the amounts received under the
    contract must be allocated to an account which, pursuant to
    State law or regulation, is segregated from the general asset
    accounts of the company and is valued from time to time by
    reference to market values.
    ---------------------------------------------------------------------------
        \59\ The provision applies only to a pension plan contract that is
    not a life, accident or health, property, casualty, or liability
    contract.
    ---------------------------------------------------------------------------
          The reserves for the contract must be valued at market
    for annual statement purposes and the Federally prescribed
    reserve for the contract under section 807(d)(2) must be valued
    at market. Further, a modified guaranteed contract includes
    only a contract that provides either for a net surrender value
    or for a policyholder's fund (within the meaning of section
    807(e)(1)). It is intended that a policyholder's fund be more
    than de minimis. For example, Treasury regulations could
    provide that a policyholder's fund that represents 15 percent
    or less of the insurer's reserve for the contract under section
    807, and that is attributable to employee contributions, would
    be considered de minimis.
          If only a portion of the contract is not described in
    section 817, that portion is treated as a separate contract for
    purposes of the provision.
          The Treasury Department is authorized to issue
    regulations that provide for the application of the mark-to-
    market requirement at times other than the close of a taxable
    year or the last business day of a taxable year. The Treasury
    Department is also authorized to issue such regulations as may
    be necessary or appropriate to carry out the purposes of the
    provision and to provide for treatment of modified guaranteed
    contracts under sections 72, 7702, and 7702A. In addition, the
    Treasury Department is authorized to determine the interest
    rates applicable under section 807(c)(3), 807(d)(2)(B) and 812
    with respect to modified guaranteed contracts annually,
    calculating such rates as appropriate for modified guaranteed
    contracts. The Treasury Department has discretion to determine
    an appropriate rate that is a current market rate, which could
    be determined, for example, either by using a rate that is
    appropriate for the obligations under the contract to which the
    reserve relates, or by taking into account the yield on the
    assets underlying the contract. The Treasury Department may
    exercise this authority by issuing a periodic announcement of
    the appropriate market interest rates or formula for
    determining such rates. The Treasury Department is also
    authorized, to the extent appropriate for such a contract, to
    modify or waive section 811(d).
          The Treasury Department is also authorized to provide
    rules limiting the ordinary treatment provided under the
    provision to gain or loss on those assets properly taken into
    account in calculating the reserve for Federal tax purposes
    (and necessary to support such reserves) for modified
    guaranteed contracts, and to provide rules for limiting such
    treatment with respect to other assets (such as assets
    representing surplus of the company). Particular concern has
    been expressed about characterization of gain or loss as
    ordinary under the provision in transactions that would
    otherwise either (1) have to meet the requirements of the
    hedging exception to the straddle rules to receive this
    treatment, or (2) by treated as capital transactions under
    present law. It is intended that the mark-to-market treatment
    apply to all assets held as part of a segregated account
    established under the provision, even though ordinary treatment
    may not apply (pursuant to Treasury regulatory authority) to
    assets held as part of the segregated account that are not
    necessary to support the reserve for modified guaranteed
    contracts.
          The conference agreement authorizes the Treasury
    Department to prescribe regulations that provide for the
    treatment of assets transferred to or from a segregated
    account. This regulatory authority is provided because of
    concern that taxpayers may exercise selective ordinary loss (or
    income or gain) recognition by virtue of the ordinary treatment
    under the provision. One example of selective ordinary loss
    recognition could arise if assets are always marked to market
    when transferred out of the segregated account. For example, if
    at the beginning of the taxable year an asset in the segregated
    account is worth $1,000, but declines to $900 in July, the
    taxpayer might choose to recognize $100 of ordinary loss while
    continuing to own the asset, simply by transferring it out of
    the segregated account in July and replacing $1,000 of cash
    (for example) in the segregated account.
          It is intended that the regulations relating to asset
    transfers will forestall opportunities for selective
    recognition of ordinary items. Prior to the issuance of these
    regulations, the following rules shall apply.
          If an asset is transferred to a segregated account, gain
    or loss attributable to the period during which the asset was
    not in the segregated account is taken into account when the
    asset is actually sold, and retains the character (as ordinary
    or capital) properly attributable to that period. Appropriate
    adjustments are made to the basis of the asset to reflect gain
    or loss attributable to that period.
          If an asset is transferred out of a segregated account,
    the transfer is deemed to occur on the last business day of the
    taxable year and gain or loss with respect to the transferred
    asset is taken into account as of that day. Loss with respect
    to such transferred asset is treated as ordinary to the extent
    of the lesser of (1) the loss (if any) that would have been
    recognized if the asset had been sold for its fair market value
    on the last business day of the taxable year (or the date the
    asset was actually sold by the taxpayer, if earlier) or (2) the
    loss (if any) that would have been recognized if the asset had
    been sold for its fair market value on the date of the
    transfer. A similar rule applies for gains. Proper adjustment
    is made in the amount of any gain or loss subsequently realized
    to reflect gain or loss under the provision.
          For example, assume that a capital asset in the
    segregated account that is worth $1,000 at the beginning of the
    year is transferred out of the segregated account in July at a
    value of $900, is retained by the company and is worth $950 on
    the last business day of the taxable year. A $50 ordinary loss
    is taken into account with respect to the asset for the taxable
    year (the difference Between $1,000 and $950). The asset is not
    marked to market in any subsequent year under the provision,
    provide that it is not transferred back to the segregated
    account.
          As an additional example, assume that a capital asset in
    the segregated account that is worth $1,000 at the beginning of
    the year is transferred out of the segregated accounted in July
    at a value of $900, is retained by the company and continues to
    decline in value to $850 on the last business day of the
    taxable year. A $100 ordinary loss ($1,000 less $900) and a $50
    capital loss ($900 less $850) is taken into account with
    respect to the asset for the taxable year.
          Effective date.--The provision applies to taxable years
    beginning after December 31, 1995. A taxpayer that is required
    to (1) change its calculation of reserves to take into account
    market value adjustments and (2) mark to market its segregated
    assets in order to comply with the requirements of the
    provision is treated as having initiated changes in methods of
    accounting and as having received the consent of the Treasury
    Department to make such changes.
          Except as otherwise provided in special rules (described
    below), the section 481(a) adjustments required by reason of
    the changes in method of accounting are to be taken into
    account as ordinary income for the taxpayer's first taxable
    year beginning after December 31, 1995.
          Special rules providing for a seven-year spread apply in
    the case of certain losses (if any), and in the case of certain
    reserve increases (if any), in order to limit selective loss
    recognition or selective minimization of gain recognition.
    Thus, the seven-year spread rule applies when the taxpayer's
    section 481(a) adjustment is negative.
          First, if, for the taxpayer's first taxable year
    beginning after December 31, 1995, (1) the aggregate amount of
    the loss recognized by reason of the change in method of
    accounting with respect to segregated assets under modified
    guaranteed contracts (i.e., the switch to a mark-to-market
    regime for such assets) exceeds (2) the amount included in
    income by reason of the change in method of accounting with
    respect to reserves (i.e., the change permitting a market value
    adjustment to be taken into account with respect to a modified
    guaranteed contract), then the excess is not allowed as a
    deduction in the taxpayer's first taxable year beginning after
    December 31, 1995. Rather, such excess is allowed ratably over
    the period of seven taxable years beginning with the taxpayer's
    first taxable year beginning after December 31, 1995. The
    adjusted basis of each such segregated asset is nevertheless
    determined as if such losses were realized in the taxpayer's
    first taxable year beginning after December 31, 1995.
          Second, if, for the taxpayer's first taxable year
    beginning after December 31, 1995, (1) the aggregate amount the
    taxpayer's deduction that arises by reason of the change in
    method of accounting with respect to reserves (i.e., the change
    permitting a market value adjustment to be taken into account
    with respect to a modified guaranteed contract), exceeds (2)
    the aggregate amount of the gain recognized by reason of the
    change in method of accounting with respect to segregated
    assets under modified guaranteed contracts (i.e., the switch to
    a mark-to-market regime for such assets), then the excess is
    not allowed as a deduction in the taxpayer's first taxable year
    beginning after December 31, 1995. Rather, such excess is
    allowed ratably over the period of seven taxable years
    beginning with the taxpayer's first taxable year beginning
    after December 31, 1995.

        15. treatment of contributions in aid of construction for water
                                   utilities

          (Sec. 1611(a) of the Senate amendment.)
    Present and prior law
          The gross income of a corporation does not include
    contributions to its capital. A contribution to the capital of
    a corporation does not include any contribution in aid of
    construction or any other contribution as a customer or
    potential customer.
          Prior to the enactment of the Tax Reform Act of 1986
    (``1986 Act''), a regulated public utility that provided
    electric energy, gas water, or sewage disposal services was
    allowed to treat any amount of money or property received from
    any person as a tax-free contribution to its capital so long as
    such amount: (1) was a contribution in aid of construction; and
    (2) was not included in the taxpayer's rate base for rate-
    making purposes. A contribution in aid of construction did not
    include a connection fee. The basis of any property acquired
    with a contribution in aid of construction was zero.
          If the contribution was in property other than electric
    energy, gas, steam, water, or sewerage disposal facilities,
    such contribution was not includible in the utility's gross
    income so long as: (1) an amount at least equal to the amount
    of the contribution was expended for the acquisition or
    construction of tangible property that was used predominantly
    in the trade or business of furnishing utility services; (2)
    the expenditure occurred before the end of the second taxable
    year after the year that the contribution was received; and (3)
    certain records were kept with respect to the contribution and
    the expenditure. In addition, the status of limitations for the
    assessment of deficiencies was extended in the case of these
    contributions.
          These rules were repealed by the 1986 Act. Thus, after
    the 1986 Act, the receipt by a utility of a contribution in aid
    of construction is includible in the gross income of the
    utility, and the basis of property received or constructed
    pursuant to the contribution is not reduced.
    House bill
          No provision.
    Senate amendment
          The Senate amendment restores the contributions in aid of
    construction provisions that were repealed by the 1986 Act for
    regulated public utilities that provide water or sewerage
    disposal services.
          Effective date.--The provision is effective for amounts
    received after June 12, 1996.
    Conference agreement
          The conference agreement follows the Senate amendment.

       16. require water utility property to be depreciated over 25 years

          (Sec. 1611(b) of the Senate amendment.)
    Present law
          Property used by a water utility in the gathering,
    treatment, and commercial distribution of water and municipal
    sewers are depreciated over a 20-year period for regular tax
    purposes. The depreciation method generally applicable to
    property with a recovery period of 20 years is the 150-percent
    declining balance method (switching to the straight-line method
    in the year that maximizes the depreciation deduction). The
    straight-line method applies to property with a recovery period
    over 20 years.
    House bill
          No provision.
    Senate amendment
          The Senate amendment provides that water utility property
    will be depreciated using a 25-year recovery period and the
    straight-line method for regular tax purposes. For this
    purpose, ``water utility property'' means (1) property that is
    an integral part of the gathering, treatment, or commercial
    distribution of water, and that, without regard to the
    proposal, would have had a recovery period of 20 years and (2)
    any municipal sewer. Such property generally is described in
    Asset Classes 49.3 and 51 of Revenue Procedure 87-56, 1987-2
    C.B. 674. The Senate amendment does not change the class lives
    of water utility property for purposes of the alternative
    depreciation system of section 168(g).
          Effective date.--The provision is effective for property
    placed in service after June 12, 1996, other than property
    placed in service pursuant to a binding contract in effect
    before June 10, 1996, and at all times thereafter before the
    property is placed in service.
    Conference agreement
          The conference agreement follows the Senate amendment.

      17. allow conversion of scholarship funding corporation to taxable
                                  corporation

          (Sec. 1621 of the Senate amendment.)
    Present law
          Qualified scholarship funding corporations are nonprofit
    corporations established and operated exclusively for the
    purpose of acquiring student loan notes incurred under the
    Higher Education Act of 1965 (sec. 150(d)). In addition, a
    qualified scholarship funding corporation must be required by
    its corporate charter and bylaws, or under State law, to devote
    any income (after payment of expenses, debt service and the
    creation of reserves for the same) to the purchase of
    additional student loan notes or to pay over any income to the
    United States.
          In general, State and local government bonds issued to
    finance private loans (e.g., student loans) are taxable private
    activity bonds. However, interest on qualified student loan
    bonds is tax-exempt. Qualified scholarship funding corporations
    are eligible issuers of qualified student loan bonds.
          The Internal Revenue Code restricts the direct and
    indirect investment of bond proceeds in higher yielding
    investments and requires that profits on investments that are
    unrelated to the government purpose for which the bonds are
    issued be rebated to the United States. Special allowance
    payments (SAP) made by the Department of Education are treated
    as interest on notes and, therefore, are permitted arbitrage
    that need not be rebated to the United States.
          Generally, a private foundation and disqualified persons
    may, in the aggregate, own 20 percent of the voting stock of a
    functionally unrelated corporation.
    House bill
          No provision.
    Senate amendment
          In general.--The amendment would provide that a nonprofit
    student loan funding corporation may elect to cease its status
    as a qualified scholarship funding corporation. If the
    corporation meets the requirements outlined below, such an
    election would not cause any bond outstanding as of the date of
    the issuer's election and any bond issued to refund such a bond
    to fail to be a qualified student loan bond. Once made, an
    election could be revoked only with the consent of the
    Secretary of the Treasury. After making the election, the
    issuer would not be authorized to issue any new bonds.
          Requirements.--First, upon making the election, the
    issuer would be required to transfer all of the student loan
    notes to another, taxable, corporation in exchange for senior
    stock of such corporation within a reasonable period of time
    after the election is made. Immediately after the transfer, the
    issuer, and any other issuer who made the election, would be
    required to hold all of the senior stock of the corporation.
    Senior stock is stock whose rights to dividends, liquidation or
    redemption rights are not inferior to those of any other class
    of stock and that (1) participates pro rata and fully in the
    equity value of any other common stock of the corporation, (2)
    has the right to payments receivable in liquidation prior to
    any other stock in the corporation, (3) upon liquidation or
    redemption, has a fixed right to receive the greater of (a) the
    fair market value of the stock at the date of liquidation or
    redemption or (b) the net fair market value of all assets
    transferred to the corporation by the issuer, and (4) has a
    right to require its redemption by a date which is not later
    than 10 years after the date that the election is made.
          Second, the transferee corporation would be required to
    assume or otherwise provide for the payment of all the
    qualified scholarship funding bond indebtedness of the issuer
    within a reasonable period after the election.
          Third, immediately after the transfer, the issuer (i.e.,
    the nonprofit student loan funding corporation) would be
    required to become a charitable organization (described in
    section 501(c)(3) that is exempt from tax under section
    501(a)), at least 80 percent of the members of its board of
    directors must be independent members, and it must hold all of
    the senior stock of the corporation.
          Excess business holdings.--For purposes of the excess
    business holding restrictions imposed on a private foundation,
    the charity would not be required to divest its ownership in a
    corporation most of whose assets are student loan notes
    incurred under the Higher Education Act of 1965.
          Effective date.--The amendment would be effective on the
    date of enactment.
    Conference agreement
          The conference agreement follows the Senate amendment.

      18. APPLY MATHEMATICAL OR CLERICAL ERROR PROCEDURES FOR DEPENDENCY
       EXEMPTIONS AND FILING STATUS WHEN CORRECT TAXPAYER IDENTIFICATION
                            NUMBERS ARE NOT PROVIDED

          (Sec. 1613 of the Senate amendment.)
    Present law
                In general
          Individuals who claim personal exemptions for dependents
    must include on their tax return the name and taxpayer
    identification number (TIN) of each dependent. For returns
    filed with respect to tax year 1996, individuals must provide a
    TIN for all dependents born on or before November 30, 1996. For
    returns filed with respect to tax year 1997 and all subsequent
    years, individuals must provide TINs for all dependents,
    regardless of their age. An individual's TIN is generally that
    individual's social security number.
          If the individual fails to provide a correct TIN for a
    dependent, the Internal Revenue Service may impose a $50
    penalty.
                Mathematical or clerical errors
          The IRS may summarily assess additional tax due as a
    result of a mathematical or clerical error without sending the
    taxpayer a notice of deficiency and giving the taxpayer an
    opportunity to petition the Tax Court. Where the IRS uses the
    summary assessment procedure for mathematical or clerical
    errors, the taxpayer must be given an explanation of the
    asserted error and a period of 60 days to request that the IRS
    abate its assessment. The IRS may not proceed to collect the
    amount of the assessment until the taxpayer has agreed to it or
    has allowed the 60-day period for objecting to expire. If the
    taxpayer files a request for abatement of the assessment
    specified in the notice, the IRS must abate the assessment. Any
    reassessment of the abated amount is subject to the ordinary
    deficiency procedures. The request for abatement of the
    assessment is the only procedure a taxpayer may use prior to
    paying the assessed amount in order to contest an assessment
    arising out of a mathematical or clerical error. Once the
    assessment is satisfied, however, the taxpayer may file a claim
    for refund if he or she believes the assessment was made in
    error.
    House bill
          No provision.
    Senate amendment
          If an individual fails to provide a correct TIN for a
    dependent, the IRS is authorized to deny the dependency
    exemption. Such a change also has indirect consequences for
    other tax benefits currently conditioned on being able to claim
    a dependency exemption (e.g., head of household filing status
    and the dependent care credit). In addition, the failure to
    provide a correct TIN for a dependent will be treated as a
    mathematical or clerical error and thus any notification that
    the taxpayer owes additional tax because of that failure will
    not be treated as a notice of deficiency.
          Effective date.--The provision is effective for tax
    returns for which the due date (without regard to extensions)
    is 30 days or more after the date of enactment. For taxable
    years beginning in 1995, no requirement to obtain a TIN applies
    in the case of dependents born after October 31, 1995. For
    taxable years beginning in 1996, no requirement to obtain a TIN
    applies in the case of dependents born after November 30, 1996.
    Conference agreement
          The conference agreement follows the Senate amendment.

       19. Treatment of financial asset securitization investment trusts
                                  (``FASITs'')

          (Sec. 1621 of the Senate amendment.)
    Present law
          An individual can own income-producing assets directly,
    or indirectly through an entity (i.e., a corporation,
    partnership, or trust). Where an individual owns assets through
    an entity (e.g., a corporation), the nature of the interest in
    the entity (e.g., stock of a corporation) is different than the
    nature of the assets held by the entity (e.g., assets of the
    corporation).
          Securitization is the process of converting one type of
    asset into another and generally involves the use of an entity
    separate from the underlying assets. In the case of
    securitization of debt instruments, the instruments created in
    the securitization typically have different maturities and
    characteristics than the debt instruments that are securitized.
          Entities used in securitization include entities that are
    subject to tax (e.g., a corporation), conduit entities that
    generally are not subject to tax (e.g., a partnership, grantor
    trust, or real estate mortgage investment conduit (``REMIC'')),
    or partial-conduit entities that generally are subject to tax
    only to the extent income is not distributed to owners (e.g., a
    trust, real estate investment trust (``REIT''), or regulated
    investment company (``RIC'')).
          There is no statutory entity that facilitates the
    securitization of revolving, non-mortgage debt obligations.
    House bill
          No provision.
    Senate amendment
                In general
          The Senate amendment would create a new type of statutory
    entity called a ``financial asset securitization investment
    trust'' (``FASIT'') that facilitates the securitization of debt
    obligations such as credit card receivables, home equity loans,
    and auto loans. A FASIT generally will not be taxable; the
    FASIT's taxable income or net loss will flow through to the
    owner of the FASIT.
          The ownership interest of a FASIT generally will be
    required to be entirely held by a single domestic C
    corporation. The Finance Committee expected that the Treasury
    Department will issue guidance on how this rule would apply to
    cases in which the entity that owns the FASIT joins in the
    filing of a consolidated return with other members of the group
    that wish to hold an ownership interest in the FASIT. In
    addition, a FASIT generally may hold only qualified debt
    obligations, and certain other specified assets, and will be
    subject to certain restrictions on its activities. An entity
    that qualifies as a FASIT can issue instruments that meet
    certain specified requirements and treat those instruments as
    debt for Federal income tax purposes. Instruments issued by a
    FASIT bearing yields to maturity over five percentage points
    above the yield to maturity on specified United States
    government obligations (i.e., ``high-yield interests'') must be
    held, directly or indirectly, only by domestic C corporations
    that are not exempt from income tax.
                Qualification as a FASIT
          In general.--To qualify as a FASIT, an entity must: (1)
    make an election to be treated as a FASIT for the year of the
    election and all subsequent years; (2) have assets
    substantially all of which (including assets that the FASIT is
    treated as owning because they support regular interests) are
    specified types called ``permitted assets;'' (3) have non-
    ownership interests be certain specified types of debt
    instruments called ``regular interests''; (4) have a single
    ownership interest which is held by an ``eligible holder''; and
    (5) not qualify as a RIC. Any entity, including a corporation,
    partnership, or trust may be treated as a FASIT. In addition, a
    segregated pool of assets may qualify as a FASIT.
          Election to be a FASIT.--Once an election to be a FASIT
    is made, the election applies from the date specified in the
    election and all subsequent years until the entity ceases to be
    a FASIT. The manner of making the election to be a FASIT is to
    be determined by the Secretary of the Treasury. If an election
    to be a FASIT is made after the initial year of an entity, all
    of the assets in the entity at the time of the FASIT election
    are deemed contributed to the FASIT at that time and,
    accordingly, any gain (but not loss) on such assets will be
    recognized at that time.\60\
    ---------------------------------------------------------------------------
        \60\ The Senate amendment provided transitional relief under which
    gain in pre-effective date entities that make a FASIT election may be
    deferred.
    ---------------------------------------------------------------------------
          Ceasing to be a FASIT.--Once an entity ceases to be a
    FASIT, it is not a FASIT for that year or any subsequent year.
    Nonetheless, an entity can continue to be a FASIT where the
    Treasury Department determines that the entity inadvertently
    ceases to be a FASIT, steps are taken reasonably soon after it
    is discovered that the entity ceased being a FASIT so that it
    again qualifies as a FASIT, and the FASIT and its owner take
    those steps that the Treasury Department deems necessary. An
    entity will cease qualifying as a FASIT if the entity's owner
    ceases being an eligible corporation. Loss of FASIT status is
    to be treated as if all of the regular interests of the FASIT
    were retired and then reissued without the application of the
    rule which deems regular interests of a FASIT to be debt. The
    Finance Committee understood that this treatment could result
    in the creation of cancellation of indebtedness income where
    the new instruments deemed to be issued are treated as stock
    under general tax principles.
                Permitted assets
           In general.--For an entity or arrangement to qualify as
    a FASIT, substantially all of its assets must consist of the
    following ``permitted assets'': (1) cash and cash equivalents;
    (2) certain permitted debt instruments; (3) certain foreclosure
    property; (4) certain instruments or contracts that represent a
    hedge or guarantee of debt held or issued by the FASIT; (5)
    contract rights to acquire permitted debt instruments or
    hedges; and (6) a regular interest in another FASIT. A FASIT
    must meet the asset test at the 90th day after its formation
    and at all times thereafter. Permitted assets may be acquired
    at any time by a FASIT, including any time after its formation.
          Permitted debt instruments.--A debt instrument will be a
    permitted asset only if the instrument is indebtedness for
    Federal income tax purposes including trade receivables,
    regular interests in a real estate mortgage investment conduit
    (REMIC), or regular interests issued by another FASIT and it
    bears (1) fixed interest or (2) variable interest of a type
    that relates to qualified variable rate debt (as defined in
    Treasury regulations prescribed under sec. 860G(a)(1)(B)).
    Except for cash equivalents, permitted debt obligations cannot
    be obligations issued, directly or indirectly, by the owner of
    the FASIT or a related person.
          Foreclosure property.--Permitted assets include property
    acquired on default (or imminent default) of debt instruments,
    swap contracts, forward contracts, or similar contracts held by
    the FASIT that would be foreclosure property to a REIT (under
    sec. 856(e)) if the property that was acquired by foreclosure
    by the FASIT was real property or would be foreclosure property
    to a REIT but for certain leases entered into or construction
    performed (as described in sec. 856(e)(4)) while held by the
    FASIT.
          Hedges.--Permitted assets include interest rate or
    foreign currency notional principal contracts, letters of
    credit, insurance, guarantees against payment defaults,
    notional principal contracts that are ``in the money,'' or
    other similar instruments as permitted under Treasury
    regulations, which are reasonably required to guarantee or
    hedge against the FASIT's risks associated with being the
    obligor of regular interests. An instrument is a hedge if it
    results in risk reduction as described in Treasury regulation
    section 1.1221-2.
          ``Regular interests'' of a FASIT.--Under the Senate
    amendment, ``regular interests'' of a FASIT, including ``high-
    yield interests,'' are treated as debt for Federal income tax
    purposes regardless of whether instruments with similar terms
    issued by non-FASITs might be characterized as equity under
    general tax principles. To be treated as a ``regular
    interest,'' an instrument must have fixed terms and must: (1)
    unconditionally entitle the holder to receive a specified
    principal amount; (2) pay interest that is based on (a) one or
    more rates that are fixed, (b) rates that measure
    contemporaneous variations in the cost of newly borrowed
    funds,\61\ or (c) to the extent permitted by Treasury
    regulations, variable rates allowed to regular interests of a
    REMIC if the FASIT would otherwise qualify as a REMIC; (3) have
    a term to maturity of no more than 30 years, except as
    permitted by Treasury regulations; (4) be issued to the public
    with a premium of not more than 25 percent of its stated
    principal amount; and (5) have a yield to maturity determined
    on the date of issue of no more than five percentage points
    above the applicable Federal rate (AFR) for the calendar month
    in which the instrument is issued.
    ---------------------------------------------------------------------------
        \61\ Variable interest rates that would meet this standard include
    variable interest rates described in Treasury Income Tax Regulations
    1.860G-1(a)(3).
    ---------------------------------------------------------------------------
          A FASIT also may issue high-yield debt instruments, which
    includes any debt instrument issued by a FASIT that meets the
    second and third conditions described above, so long as such
    interests are not held by a disqualified holder. A
    ``disqualified holder'' generally is any holder other than (1)
    a domestic C corporation that does not qualify as a RIC, REIT,
    REMIC, or cooperative \62\ or (2) a dealer who acquires FASIT
    debt for resale to customers in the ordinary course of
    business. An excise tax is imposed at the highest corporate
    rate on a dealer if there is a change in dealer status or if
    the holding of the instrument is for investment purposes. A 31-
    day grace period is granted before ownership of an interest
    held by a dealer generally could be treated as held by the
    FASIT owner for investment purposes.
    ---------------------------------------------------------------------------
        \62\ The Senate amendment treats cooperatives as disqualified
    holders since cooperatives, like RICs and REITs, are treated as pass-
    through entities and, also like the owners of RICs and REITs, the
    cooperative's members and patrons need not be C corporations.
    ---------------------------------------------------------------------------
          Permitted ownership holder.--A permitted holder of the
    ownership interest in a FASIT generally is a non-exempt
    domestic C corporation, other than a corporation that qualifies
    as a RIC, REIT, REMIC, or cooperative.
                Transfers to non-permitted holders of high-yield interests
          A transfer of a high-yield interest to a disqualified
    holder is to be ignored for Federal income tax purposes. Thus,
    such a transferor will continue to be liable for any taxes due
    with respect to the transferred interest.
                Taxation of a FASIT
          In general.--A FASIT generally is not subject to tax.
    Instead, all of the FASIT's assets and liabilities are treated
    as assets and liabilities of the FASIT's owner and any income,
    gain, deduction or loss of the FASIT is allocable directly to
    its owner. Accordingly, income tax rules applicable to a FASIT
    (e.g., related party rules, sec. 871(h), sec. 165(g)(2)) are to
    be applied in the same manner as they apply to the FASIT's
    owner. Any securities held by the FASIT that are treated as
    held by its owner are treated as held for investment. The
    taxable income of a FASIT is calculated using an accrual method
    of accounting. The constant yield method and principles that
    apply for purposes of determining OID accrual on debt
    obligations whose principal is subject to acceleration apply to
    all debt obligations held by a FASIT to calculate the FASIT's
    interest and discount income and premium deductions or
    adjustments. For this purpose, a FASIT's income does not
    include any income subject to the 100-percent penalty excise
    tax on prohibited transactions.
          Income from prohibited transactions.--The owner of a
    FASIT is required to pay a penalty excise tax equal to 100
    percent of net income derived from (1) an asset that is not a
    permitted asset, (2) any disposition of an asset other than a
    permitted disposition, (3) any income attributable to loans
    originated by the FASIT, and (4) compensation for services
    (other than fees for a waiver, amendment, or consent under
    permitted assets not acquired through foreclosure). A permitted
    disposition is any disposition of any permitted asset (1)
    arising from complete liquidation of a class of regular
    interests (i.e., a qualified liquidation\63\), (2) incident to
    the foreclosure, default, or imminent default of the asset, (3)
    incident to the bankruptcy or insolvency of the FASIT, (4)
    necessary to avoid a default on any indebtedness of the FASIT
    attributable to a default (or imminent default) on an asset of
    the FASIT, (5) to facilitate a clean-up call, (6) to substitute
    a permitted debt instrument for another such instrument, or (7)
    in order to reduce over-collateralization where a principal
    purpose of the disposition was not to avoid recognition of gain
    arising from an increase in its market value after its
    acquisition by the FASIT. Notwithstanding this rule, the owner
    of a FASIT may currently deduct its losses incurred in
    prohibited transactions in computing its taxable income for the
    year of the loss.
    ---------------------------------------------------------------------------
        \63\ For this purpose, a ``qualified liquidation'' has the same
    meaning as it does purposes of the exemption from the tax on prohibited
    transactions of a REMIC in section 860F(a)(4).
    ---------------------------------------------------------------------------
                Taxation of interests in the FASIT
          Taxation of holders of regular interests.--In general.--A
    holder of a regular interest, including a high-yield interest,
    is taxed in the same manner as a holder of any other debt
    instrument, except that the regular interest holder is required
    to account for income relating to the interest on an accrual
    method of accounting, regardless of the method of accounting
    otherwise used by the holder.\64\
    ---------------------------------------------------------------------------
        \64\ Regular interests in a FASIT 95 percent or more of whose
    assets are real estate mortgages are treated as real estate assets
    where relevant (e.g., secs. 856, 593, 7701(a)(19)).
    ---------------------------------------------------------------------------
          High-yield interests.--Holders of high-yield interests
    are not allowed to use net operating losses to offset any
    income derived from the high-yield debt. Any net operating loss
    carryover shall be computed by disregarding any income arising
    by reason of the disallowed loss.
          In addition, a transfer of a high-yield interest to a
    disqualified holder is not recognized for Federal income tax
    purposes such that the transferor will continue to be taxed on
    the income from the high-yield interest unless the transferee
    provides the transferor with an affidavit that the transferee
    is not a disqualified person or the Treasury Secretary
    determines that the high-yield interest is no longer held by a
    disqualified person and a corporate tax has been paid on the
    income from the high-yield interest while it was held by a
    disqualified person.\65\ High-yield interests may be held
    without a corporate tax being imposed on the income from the
    high-yield interest where the interest is held by a dealer in
    securities who acquired such high-yield interest for sale in
    the ordinary course of his business as a securities dealer. In
    such a case, a corporate tax is imposed on such a dealer if his
    reason for holding the high-yield interest changes to
    investment. There is a presumption that the dealer has not
    changed his intent for holding high-yield instruments to
    investment for the first 31 days he holds such interests unless
    such holding is part of a plan to avoid the restriction on
    holding of high-yield interests by disqualified persons.
    ---------------------------------------------------------------------------
        \65\ Under this rule, no high-yield interests will be treated as
    issued where the FASIT directly issues such interests to a disqualified
    holder.
    ---------------------------------------------------------------------------
          Where a pass-through entity (other than a FASIT) issues
    either debt or equity instruments that are secured by regular
    interests in a FASIT and such instruments bear a yield to
    maturity greater than the yield on the regular iterests and the
    applicable Federal rate plus five percentage points (determined
    on date that the pass-through entity acquires the regular
    interests in the FASIT) and the pass-through entity issued such
    debt or equity with a principal purpose of avoiding the rule
    that high-yield interests be held by corporations, then an
    excise tax is imposed on the pass-through entity at a rate
    equal to the highest corporate rate on the income of any holder
    of such instrument attributable to the regular interests.
          Taxation of holder of ownership interest.--All of the
    FASIT's assets and liabilities are treated as assets and
    liabilities of the holder of a FASIT ownership interest and
    that owner takes into account all of the FASIT's income, gain,
    deduction, or loss in computing its taxable income or net loss
    for the taxable year. The character of the income to the holder
    of an ownership interest is the same as its character to the
    FASIT, except tax-exempt interest is taken into income of the
    holder as ordinary income.\66\
    ---------------------------------------------------------------------------
        \66\ Ownership interests in a FASIT 95 percent or more of whose
    assets are real estate mortgages are treated as real estate assets
    where relevant (e.g., secs. 856, 593, 7701(a)(19)).
    ---------------------------------------------------------------------------
          Losses on assets contributed to the FASIT are not allowed
    upon their contribution, but may be allowed to the FASIT owner
    upon their disposition by the FASIT. A special rule provides
    that the holder of a FASIT ownership interest cannot offset
    income or gain from the FASIT ownership interest with any other
    losses. Any net operating loss carryover of the FASIT owner
    shall be computed by disregarding any income arising by reason
    arising by reason of a disallowed loss.
          For purposes of the alternative minimum tax, the owner's
    taxable income is determined without regard to the minimum
    FASIT income. The alternative minimum taxable income of the
    FASIT owner cannot be less than the FASIT income for that year,
    and the alternative minimum tax net operating loss deduction is
    computed without regard to the minimum FASIT income.
                Transfers to FASITs
          Gain generally is recognized immediately by the owner of
    the FASIT upon the transfer of assets to a FASIT. Assets that
    are acquired by the FASIT from someone other than its owner are
    treated as if they were acquired by the owner and then
    contributed to the FASIT. In addition, any assets of the FASIT
    owner or a related person that are used to support \67\ FASIT
    regular interests are treated as contributed to the FASIT and,
    thus, any gain on any such assets also will be recognized at
    the earliest date that such assets support any FASIT's regular
    interests.\68\ To the extent provided by Treasury regulations,
    gain recognition on the contributed assets may be deferred
    until such assets support regular interests issued by the FASIT
    or any indebtedness of the owner or related person. These
    regulations may adjust other statutory FASIT provisions to the
    extent such provisions are inconsistent with such regulations.
    For example, such regulations may disqualify certain assets as
    permitted assets. The basis of any FASIT assets is increased by
    the amount of the taxable gain recognized on the contribution
    of the assets to the FASIT.
    ---------------------------------------------------------------------------
        \67\ For this purpose, supporting assets includes any assets that
    are reasonably expected to directly or indirectly pay regular interests
    or to otherwise secure or collateralize regular interests. In the case
    where there is a commitment to make additional contributions to a
    FASIT, any such assets will not be treated as supporting the FASIT
    until they are transferred to the FASIT or set aside for such use.
        \68\ In the case of a securities dealer which may be an eligible
    holder, the Finance Committee understood that the mark-to-market rule
    of section 475 will not apply to an ownership interest in a FASIT or
    assets held in the FASIT.
    ---------------------------------------------------------------------------
                Valuation rules
          In general, except in the case of debt instruments, the
    value of FASIT assets is their fair market value. In the case
    of debt instruments that are traded on an established
    securities market, then the market price will be used for
    purposes of determining the amount of gain realized upon
    contribution of such assets to a FASIT. Nonetheless, the Senate
    amendment contained special rules for valuing other debt
    instruments for purposes of computing gain on the transfer to a
    FASIT. Under these rules, the value of such debt instruments is
    the sum of the present values of the reasonably expected cash
    flows from such obligations discounted over the weighted
    average life of such assets. The discount rate is 120 percent
    of the applicable Federal rate, compounded semiannually, or
    such other rate that the Treasury Secretary shall prescribe by
    regulations. For purposes of determining the value of a pool of
    revolving loan accounts having substantially the same terms,
    each extension of credit (other than the accrual of interest)
    is treated as a separate debt instrument and the maturity of
    the instruments is determined using the reasonably anticipated
    periodic payment rate at which principal payments will be made
    as a proportion of their aggregate outstanding principal
    assuming that payments are applied to the earliest credit
    extensions. The Finance Committee understood that reasonably
    expected cash flows from loans will reflect nonpayment (i.e.,
    losses), early payments (i.e., prepayments), and reasonable
    costs of servicing the loans. This value shall be used in
    determining the amount of gain realized upon the contribution
    of assets to a FASIT even though that value may be different
    than the value of such assets would be applying a willing
    buyer/willing seller standard.
                Related person
          For purposes of the FASIT rules, a person is related to
    another person if that person bears a relationship to the other
    person specified in sections 267(b) or 707(b)(1), using a 20-
    percent ownership test instead of the 50-percent test, or such
    persons are engaged in trades or businesses under common
    control as determined under sections 52 (a) or (b).
                Related amendments
          For purposes of the wash sale rule (sec. 1091), an
    ownership interest of a FASIT is treated as a ``security.'' In
    addition, an ownership interest in a FASIT and a residual
    interest in a pool of debt obligations that are substantially
    similar to the debt obligations in the FASIT shall be treated
    as ``substantially identical stock or securities''. Finally,
    the wash sale period begins six months before, and ends six
    months after, the sale of the ownership interest of the FASIT.
                Effective date
          The Senate amendment would take effect on the date of
    enactment. The Senate amendment provided a special transition
    rule for entities (e.g., a trust whose interests are taxed like
    a partnership) that were in existence on June 10, 1996, that
    subsequently elect to be a FASIT (called a ``pre-effective date
    FASIT''). Under the special transitional rule, gain is not
    recognized on property contributed, or deemed contributed, to
    the FASIT to the extent that any such property is allocable to
    interests issued by a ``pre-effective date FASIT'' (called a
    ``pre-FASIT interest''). The portion of such property that is
    allocable to pre-FASIT interests is to be determined by the
    Treasury Secretary, except that the property of the entity
    allocable to ``pre-FASIT interests'' shall not be less than 107
    percent of the aggregate principal amounts of outstanding
    ``pre-FASIT interests.''
    Conference agreement
          The conference agreement follows the Senate amendment
    with the following changes and clarifications:
          The conference agreement modifies the rule under which
    property that is acquired by a FASIT from someone other than
    the FASIT's owner or a person related to the FASIT's owner is
    treated as being first acquired by the FASIT's owner who then
    transfers that asset to the FASIT. The conference modification
    would clarify that the deemed acquisition by the FASIT's owner
    would be for the FASIT's cost in acquiring that asset from the
    non-owner or related person.
          The conference agreement makes a technical modification
    to the rule which deems gain to be recognized on assets held by
    the owner of the FASIT or a related person that support any
    regular interest of the FASIT to clarify that the gain will be
    deemed realized to the related person when the assets which
    support a regular interest in the FASIT is held by that related
    person.
          The conference agreement clarifies that the taxable
    income of the holder of the ownership interest or a high-yield
    interest, that may not be offset by non-FASIT losses, includes
    gain and loss from the sale of the ownership interest or high-
    yield interest. In addition, the conference agreement
    coordinates the rule that limits a taxpayer's ability to offset
    REMIC excess inclusion income against net operating losses with
    this similar rule under the FASIT provisions.
          The conference agreement provides that the taxable income
    of a holder of a FASIT ownership interest cannot be less than
    the taxable income with respect to the FASIT interest applies
    to any consolidated group of corporations of which the holder
    is a member as if the group were a single taxpayer.
          The conference agreement makes a technical modification
    to the wording of a waiver of the rule that treats transfers of
    high-yield interest to disqualified persons as being
    ineffective such that the income for such high-yield interests
    will remain includible in the gross income of the transferor in
    computing its tax.
          The conference agreement limits the rule of the Senate
    amendment that imposes a corporate tax on a pass-thru entity
    that issues a debt or equity interest that is supported by a
    regular interest in a FASIT and has high yield to cases where a
    principal purpose of such arrangement is the avoidance of the
    restriction that high-yield interests be held only by qualified
    holders.
          The conference agreement modifies the rule of the Senate
    amendment which deals with terminations of a FASIT to provide
    that such terminations become effective on the date of the
    termination, instead of the beginning of the FASIT's taxable
    year in which the termination occurs.
          The conference agreement provides that an asset which was
    a permitted asset at the time that it was acquired by the FASIT
    shall not be treated as an interest in the FASIT, except to the
    extent provided by regulation issued by the Treasury Secretary.
    Thus, an instrument acquired by the FASIT as a hedge (e.g., an
    interest rate swap) will not later become an interest in the
    FASIT when there is later an obligation by the FASIT to make
    payments to the counterparty under that hedge instrument.
          The conference agreement clarifies that a FASIT may issue
    regular instruments with fixed rates or, except as provided by
    regulations issued by the Treasury Secretary, variable rates
    permitted to be issued by real estate mortgage investment
    conduits (``REMICs'').
          The conference agreement clarifies that ``interest-only
    instruments'' (``IOs'') may be issued by a FASIT as high-yield
    instruments if the instrument makes payments which consist of a
    specified portion of the interest payments in permitted assets
    and that portion does not vary throughout the life of that
    instrument.
          The conference agreement clarifies that foreclosure
    property, which may be a permitted asset of a FASIT, includes
    property acquired by foreclosure even though the acquired
    property is not real property. The conference agreement also
    grants the Treasury Secretary the power to reduce by
    regulations the two-year period that foreclosure property may
    be held as a permitted asset of the FASIT.
          The conference agreement clarifies the application of
    section 475 to a securities dealer that holds an ownership
    interest in a FASIT. Under this clarification, except as
    provided in Treasury regulations, if section 475 applies to
    securities before their transfer to the FASIT, section 475 will
    continue to apply to securities that have been transferred (or
    deemed transferred) to the FASIT, except that the amount
    realized under the mark-to-market rule of section 475 shall be
    the greater of the securities' value under present law or their
    value determined under the special valuation rules applicable
    to FASITs.
          The conference agreement deletes in technical amendments
    the rules that treat an ownership interests in a FASIT (a) as a
    noncapital asset of a bank or (b) as a permitted asset of a
    real estate investment trust (``REIT'').
          The conference agreement provides that a regular
    interest, but not an ownership interest, in a FASIT is treated
    as a qualified mortgage of a real estate mortgage investment
    conduit (``REMIC'') if 95 percent or more of the value of the
    FASIT's assets consists, at all times, of real estate
    mortgages.
          The conference agreement clarifies that a regular
    interest, but not an ownership interest, in a FASIT is treated
    as a qualifying asset for purposes of the definition of a
    domestic building and loan association so long as at least 95
    percent of the assets of the FASIT are, at all times, qualified
    assets.
          The conference agreement delays the effective date of the
    provision from the date of enactment of the provision to
    September 1, 1997, and extends the special transitional rule to
    any entity created before that date. The conferees expect that,
    prior to September 1, 1997, Treasury will issue guidance on how
    the ownership rule would apply to cases in which the entity
    that owns the FASIT joins in the filing of a consolidated
    return with other members of the group that wish to hold an
    ownership interest in the FASIT.

                     20. revision of expatriation tax rules

          (Secs. 1631-1633 of the Senate amendment.)
    Present law
          Individuals who relinquish U.S. citizenship with a
    principal purpose of avoiding U.S. taxes are subject to special
    tax provisions for 10 years after expatriation. The
    determination of who is a U.S. citizen for tax purposes, and
    when such citizenship is lost, is governed by the provisions of
    the Immigration and Nationality Act, 8 U.S.C. section 1401, et.
    seq.
          An individual who relinquishes his U.S. citizenship with
    a principal purpose of avoiding U.S. taxes is subject to tax on
    his or her U.S. source income at the rates applicable to U.S.
    citizens, rather than the rates applicable to other non-
    resident aliens, for 10 years after expatriation. In addition,
    the scope of items treated as U.S. source income for this
    purpose is broader than those items generally considered to be
    U.S. source income. For example, gains on the sale of personal
    property located in the United States and gains on the sale or
    exchange of stock or securities issued by U.S. persons are
    treated as U.S. source income. This alternative method of
    income taxation applies only if it results in a higher U.S. tax
    liability.
          Rules applicable in the estate and gift tax contexts
    expand the categories of items that are subject to the gift and
    estate taxes in the case of a U.S. citizen who relinquished
    citizenship with a principal purpose of avoiding U.S. taxes
    within the 10-year period ending on the date of the transfer.
    For example, U.S. property held through a foreign corporation
    controlled by such individual and related persons is included
    in his or her estate and gifts of U.S.-situs intangible
    property by such individual are subject to the gift tax.
    House bill
          No provision.
    Senate amendment
          The Senate amendment replaces the present-law
    expatriation income tax rules with rules that generally subject
    certain U.S. citizens who relinquish their U.S. citizenship and
    certain long-term U.S. residents who relinquish their U.S.
    residency to tax on the net unrealized gain in their property
    as if such property were sold for fair market value on the
    expatriation date. The Senate amendment modifies the present-
    law expatriation estate and gift tax rules to apply to certain
    long-term U.S. residents and to provide that, for purposes of
    applying such rules, certain persons would be treated as having
    relinquished citizenship or residency for a principal purpose
    of avoiding U.S. taxes. The Senate amendment also imposes
    information reporting and sharing obligations with respect to
    U.S. citizens who relinquish their citizenship and long-term
    residents whose U.S. residency is terminated.
          Effective date.--The provision generally is effective for
    U.S. citizens whose date of relinquishment of citizenship
    occurs on or after February 6, 1995 and for long-term residents
    who terminate their U.S. residency on or after such date.
    Conference agreement
          The conference agreement does not include the Senate
    amendment provision.

                     21. Modify treatment of foreign trusts

          (Secs. 411-417 of H.R. 3286.)
    Present law
                Inbound grantor trusts with foreign grantors
          Under the grantor trust rules (secs. 671-679), a grantor
    that retains certain rights or powers generally is treated as
    the owner of the trust's assets without regard to whether the
    grantor is a domestic or foreign person. Under these rules,
    U.S. trust beneficiaries are not subject to U.S. tax on
    distributions from a trust where a foreign grantor is treated
    as owner of the trust, even though no tax may be imposed on the
    trust income by any jurisdiction. In addition, a special rule
    provides that if a U.S. beneficiary of an inbound grantor trust
    transfers property to the foreign grantor by gift, that U.S.
    beneficiary is treated as the grantor of the trust to the
    extent of the transfer.
                Foreign trusts that are no grantor trusts
          Under the accumulation distribution rules (which
    generally apply to distributions from a trust in excess of the
    trust's distributable net income for the taxable year), a
    distribution by a foreign nongrantor trust of previously
    accumulated income generally is taxed at the U.S. beneficiary's
    average marginal rate for the prior 5 years, plus interest
    (secs. 666 and 667). Interest is computed at a fixed annual
    rate of 6 percent, with no compounding (sec. 668). If adequate
    records of the trust are not available to determine the proper
    application of the rules relating to accumulation distributions
    to any distribution from a trust, the distribution is treated
    as an accumulation distribution out of income earned during the
    first year of the trust (sec. 666(d)).
          If a foreign nongrantor trust makes a loan to one of its
    beneficiaries, the principal of such a loan generally is not
    taxable as income to the beneficiary.
                Outbound foreign grantor trusts with U.S. grantors
          Under the grantor trust rules, a U.S. person that
    transfers property to a foreign trust generally is treated as
    the owner of the portion of the trust comprising that property
    for any taxable year in which there is a U.S. beneficiary of
    any portion of the trust (sec. 679(a)). This treatment
    generally does not apply, however, to transfers by reason of
    death, to transfers made before the transferor became a U.S.
    person, or to transfers that represent sales or exchanges of
    property at fair market value where gain is recognized to the
    transferor.
                Residence of trusts
          A trust is treated as foreign if it is not subject to
    U.S. income taxation on its income that is neither derived from
    U.S. sources nor effectively connected with the conduct of a
    U.S. trade or business. Thus, if a trust is taxed in a manner
    similar to a nonresident alien individual, it is considered to
    be a foreign trust. Any other trust is treated as domestic.
          Section 1491 generally imposes a 35-percent excise tax on
    a U.S. person that transfers appreciated property to certain
    foreign entities, including a foreign trust. In the case of a
    domestic trust that changes its situs and becomes a foreign
    trust, it is unclear whether property has been transferred from
    a U.S. person to a foreign entity and, thus, whether the
    transfer is subject to the excise tax.
                Information reporting and penalties related to foreign
                        trusts
          Any U.S. person that creates a foreign trust or transfers
    money or property to a foreign trust is required to report that
    event to the Treasury Department without regard to whether the
    trust is a grantor or a nongrantor trust. Similarly, any U.S.
    person that transfers property to a foreign trust that has one
    or more U.S. beneficiaries is required to report annually to
    the Treasury Department. In addition, any U.S. person that
    makes a transfer described in section 1491 is required to
    report the transfer to the Treasury Department.
          Any person that fails to file a required report with
    respect to the creation of, or a transfer to, a foreign trust
    may be subject to a penalty of 5 percent of the amount
    transferred to the foreign trust. Similarly, any person that
    fails to file a required annual report with respect to a
    foreign trust with U.S. beneficiaries may be subject to a
    penalty of 5 percent of the value of the corpus of the trust at
    the close of the taxable year. The maximum amount of the
    penalty imposed under either case may not exceed $1,000. A
    reasonable cause exception is available.
                Reporting of foreign gifts
          There is no requirement to report gifts or bequests from
    foreign sources.
    House bill
          No provision. However, sections 411-417 of H.R. 3286
    (Adoption Promotion and Stability Act of 1996) contains the
    following provisions:
                Inbound grantor trusts with foreign grantors
          The House bill generally applies only to the extent it
    results, directly or indirectly, in income or other amounts (if
    any) being currently taken into account in computing the income
    of a U.S. citizen or resident or a domestic corporation.
    Certain exceptions apply to this rule. Under one exception, the
    grantor trust rules continue to apply to the portion of a trust
    where that portion of the trust is revocable by the grantor
    either without approval of another person or with the consent
    of a related or subordinate party who is subservient to the
    grantor. Under another exception, the grantor trust rules
    continue to apply to the portion of a trust where the only
    amounts distributable from that portion during the lifetime of
    the grantor are to the grantor or the grantor's spouse. The
    general rule denying grantor trust status does not apply to
    trusts established to pay compensation, and certain trusts in
    existence as of September 19, 1995 provided that such trust is
    treated as owned by the grantor under section 676 or 677 (other
    than sec. 677(a)(3)).\69\ In addition, the grantor trust rules
    generally apply where the grantor is a controlled foreign
    corporation (as defined in sec. 957). Finally, the grantor
    trust rules continue to apply in determining whether a foreign
    corporation is characterized as a passive foreign investment
    company (``PFIC''). Thus, a foreign corporation cannot avoid
    PFIC status by transferring its assets to a grantor trust.
    ---------------------------------------------------------------------------
        \69\ The exception does not apply to the portion of any such trust
    attributable to any transfers made after September 19, 1995.
    ---------------------------------------------------------------------------
          If a U.S. beneficiary, or a family member of such a
    beneficiary,\70\ of an inbound grantor trust transfers property
    to the foreign grantor, such beneficiary generally is treated
    as a grantor of a portion of the trust to the extent of the
    transfer. This rule applies without regard to whether the
    foreign grantor is otherwise treated as the owner of any
    portion of such trust. However, this rule does not apply if the
    transfer is a sale of the property for full and adequate
    consideration or if the transfer is a gift that qualifies for
    the annual exclusion described in section 2503(b).
    ---------------------------------------------------------------------------
        \70\ For this purpose, a family member is generally defined as a
    brother, sister, spouse, ancestor or lineal descendant.
    ---------------------------------------------------------------------------
          The House bill provides a special rule that allows the
    Secretary of the Treasury to recharacterize a transfer,
    directly or indirectly, from a partnership or foreign
    corporation which the transferee treats as a gift or bequest,
    to prevent the avoidance of the purpose of section 672(f).\71\
    In a case where a foreign person (that would be treated as the
    owner of a trust but for the above rule) actually pays tax on
    the income of the trust to a foreign country, it is anticipated
    that Treasury regulations will provide that, for foreign tax
    credit purposes, U.S. beneficiaries that are subject to U.S.
    income tax on the same income will be treated as having paid
    the foreign taxes that are paid by the foreign grantor. Any
    resulting foreign tax credits would be subject to applicable
    foreign tax credit limitations.
    ---------------------------------------------------------------------------
        \71\ See discussion below for reporting requirements under the
    House bill with respect to certain foreign gifts and bequests received
    by a U.S. person.
    ---------------------------------------------------------------------------
          The House bill provides a transition rule for any
    domestic trust that has a foreign grantor that is treated as
    the owner of the trust under present law, but becomes a
    nongrantor trust under the bill. If such a trust becomes a
    foreign trust before January 1, 1997, or if the assets of such
    a trust are transferred to a foreign trust before that date,
    such trust is exempt from the excise tax on transfers to a
    foreign trust otherwise imposed by section 1491. However, the
    House bill's new reporting requirements and penalties are
    applicable to such a trust and its beneficiaries. In addition,
    the assets of such a trust will be treated as if they were
    recontributed to a nongrantor trust by the foreign grantor,
    with no recognition of gain or loss, on the date the trust
    ceases to be treated as a grantor trust. The nongrantor trust
    will have the same basis in such assets as did the grantor on
    the date the trust ceases to be treated as a grantor trust.
          Effective date.--The provisions described in this part
    are effective on the date of enactment.
                Foreign trusts that are not grantor trusts
          The House bill changes the interest rate applicable to
    accumulation distributions from foreign trusts from simple
    interest at a fixed rate of 6 percent to compound interest
    determined in the same manner as interest imposed on
    underpayments of tax under section 6621(a)(2). Simple interest
    is accrued at the rate of 6 percent through 1995. Beginning on
    January 1, 1996, however, compound interest based on the
    underpayment rate is imposed not only on tax amounts determined
    under the accumulation distribution rules but also on the total
    simple interest for pre-1996 periods, if any. For purposes of
    computing the interest charge, the accumulation distribution is
    allocated proportionately to prior trust years in which the
    trust has undistributed net income (and the beneficiary
    receiving the distribution was a U.S. citizen or resident),
    rather than to the earliest of such years. An accumulation
    distribution is treated as reducing proportionately the
    undistributed net income from prior years.
          In the case of a loan of cash or marketable securities by
    the foreign trust to a U.S. grantor or a U.S. beneficiary (or a
    U.S. person related to such grantor or beneficiary \72\),
    except, to the extent provided by Treasury regulations, the
    House bill treats the full amount of the loan as distributed to
    the grantor or beneficiary. It is expected that Treasury
    regulations will provide an exception from this treatment for
    loans with arm's-length terms. In applying this exception, it
    is further expected that consideration be given to whether
    there is a reasonable expectation that a loan will be repaid.
    In addition, any subsequent transaction between the trust and
    the original borrower regarding the principal of the loan
    (e.g., repayment) is disregarded for all purposes of the Code.
    This provision does not apply to loans made to persons that are
    exempt from U.S. income tax.
    ---------------------------------------------------------------------------
        \72\ For this purpose, a person generally would be treated as
    related to the grantor or beneficiary if the relationship between such
    person and the grantor or beneficiary would result in a disallowance of
    losses under section 267 or 707(b), except that in applying section
    267(c)(4) an individual's family includes the spouses of the members of
    the family.
    ---------------------------------------------------------------------------
          Effective date.--The provision to modify the interest
    charge on accumulation distributions applies to distributions
    after the date of enactment. The provision with respect to
    loans to U.S. grantors, U.S. beneficiaries or a related U.S.
    person related to such a grantor or beneficiary applies to
    loans made after September 19, 1995.
                Outbound foreign grantor trusts with U.S. grantors
          The House bill makes several modifications to the general
    rule of section 679(a)(1) under which a U.S. person who
    transfer property to a foreign trust generally is treated as
    the owner of the portion of the trust comprising that property
    for any taxable year in which there is a U.S. beneficiary of
    the trust. The House bill also contains an amendment to conform
    the definition of certain foreign corporations the income of
    which is deemed to be accumulated for the benefit of a U.S.
    beneficiary to the definition controlled foreign corporations
    (as defined in sec. 957(a)).
          Sale or exchange at market value.--Present law contains
    several exceptions to grantor trust treatment under section
    679(a)(1) described above. Under one of the exceptions, grantor
    trust treatment does not result from a transfer of property by
    a U.S. person to a foreign trust in the form of a sale or
    exchange at fair market value where gain is recognized to the
    transferor. In determining whether the trust paid fair markets
    value to the transferor, the House bill provides that
    obligations issued (or, to the extent provided by regulations,
    guaranteed) by the trust, by any grantor or beneficiary of the
    trust, or by any person related to any grantor or beneficiary
    \73\ (referred to as ``trust obligations'') generally are not
    taken into account except as provided in Treasury regulations.
    It is expected that Treasury regulations will provide an
    exception from this treatment for loans with arm's-length
    terms. In applying this exception, it is further expected that
    consideration be given to whether there is a reasonable
    expectation that a loan will be repaid. Principal payments by
    the trust on any such trust obligations generally will reduce
    the portion of the trust attributable to the property
    transferred (i.e., the portion of which the transferor is
    treated as the grantor).
    ---------------------------------------------------------------------------
        \73\ For this purpose, a person is treated as related to the
    grantor or beneficiary if the relationship between such person and the
    grantor or beneficiary would result in a disallowance of losses under
    section 267 or 707(b), except that in applying section 267(c)(4) an
    individual's family includes the spouses of the members of the family.
    ---------------------------------------------------------------------------
          Other transfers.--The House bill adds new exception to
    the general rule of section 679(a)(1) described above. Under
    the House bill, a transfer of property to certain charitable
    trusts is exempt from the application of the rules treating
    foreign trusts with U.S. grantors and U.S. beneficiaries as
    grantor trusts.
          Transferors or beneficiaries who become U.S. persons.--
    The House bill applies the rule of section 679(a)(1) to certain
    foreign persons who transfer property to a foreign trust and
    subsequently become U.S. persons. A nonresident alien
    individual who transfers property, directly or indirectly, to a
    foreign trust and then becomes a resident of the United States
    within 5 years after the transfer generally is treated as
    making a transfer to the foreign trust on the individual's U.S.
    residency starting date (as defined in sec. 7701(b)(2)(A)). The
    amount of the deemed transfer is the portion of the trust
    (including undistributed earnings) attributable to the property
    previously transferred. Consequently, the individual generally
    is treated under section 679(a)(1) as the owner of that portion
    of the trust in any taxable year in which the trust has U.S.
    beneficiaries.
          Outbound trust migrations.--The House bill applies the
    rules of section 679(a)(1) to a U.S. person who transferred
    property to a domestic trust if the trust subsequently becomes
    a foreign trust while the transferor is still alive. Such a
    person is deemed to make a transfer to the foreign trust on the
    date of the migration. The amount of the deemed transfer is the
    portion of the trust (including undistributed earnings)
    attributable to the property previously transferred.
    Consequently, the individual generally is treated under the
    rules of section 679(a)(1) as the owner of that portion of the
    trust in any taxable year in which the trust has U.S.
    beneficiaries.
          Effective date.--The provisions to amend section 679
    apply to transfers of property after February 6, 1995.
                Anti-abuse regulatory authority
          The House bill includes an anti-abuse rule which
    authorizes the Secretary of the Treasury to issue regulations,
    on or after the date of enactment, that may be necessary or
    appropriate to carry out the purposes of the rules applicable
    to estates, trusts and beneficiaries, including regulations to
    prevent the avoidance of those purposes.
          Effective date.--The provision is effective on the date
    of enactment.
                Residence of trusts
          The House bill establishes a two-part objective test for
    determining for tax purposes whether a trust is foreign or
    domestic. If both parts of the test are satisfied, the trust is
    treated as domestic. Under the first part of the proposed test,
    if a U.S. court (i.e., Federal, State, or local) exercises
    primary supervision over the administration of the trust, the
    trust is treated as domestic. Under the second part of the
    proposed test, in order for a trust to be treated as domestic,
    one or more U.S. fiduciaries must have the authority to control
    all substantial decisions of the trust.
          Under the House bill, if a domestic trust changes its
    situs and becomes a foreign trust, the trust is treated as
    having made a transfer of its assets to a foreign trust and is
    subject to the 35-percent excise tax imposed by present-law
    section 1491 unless one of the exceptions to this excise tax is
    applicable.
          Effective date.--The provision to modify the treatment of
    a trust as a U.S. person applies to taxable years beginning
    after December 31, 1996. In addition, if the trustee of a trust
    so elects, the provision would apply to taxable years ending
    after the date of enactment. The amendment to section 1491 is
    effective on the date of enactment.
                Information reporting and penalties relating to foreign
                        trusts
          The House bill generally requires the grantor, transferor
    or executor (i.e., the ``responsible party'') to file
    information returns with the Treasury Department upon the
    occurrence of certain events. The term ``reportable event''
    generally means the creation of any foreign trust by a U.S.
    person, the direct and indirect transfer of any money or
    property to a foreign trust, including a transfer by reason of
    death, and the death of a U.S. citizen or resident if any
    portion of a foreign trust was included in the gross estate of
    the decedent. In addition, a U.S. owner of any portion of a
    foreign trust generally is required to ensure that the trust
    files an annual return to provide full accounting of all the
    trust activities for the taxable year. Finally, any U.S. person
    that receives (directly or indirectly) any distribution from a
    foreign trust generally is required to file a return to report
    the name of the trust, the aggregate amount of the
    distributions received, and other information that the
    Secretary of the Treasury may prescribe.
          Under the House bill, a person that fails to provide the
    required notice or return in cases involving the transfer of
    property to a new or existing foreign trust, or a distribution
    by a foreign trust to a U.S. person, is subject to an initial
    penalty equal to 35 percent of the gross reportable amount. A
    failure to provide an annual reporting of trust activities will
    result in an initial penalty equal to 5 percent of the gross
    reportable amount.
          The House bill provides that if a U.S. owner of any
    portion of a foreign trust fails to appoint a limited U.S.
    agent to accept service of process with respect to any requests
    and summons by the Secretary of the Treasury in connection with
    the tax treatment of any items related to the trust, the
    Secretary may determine the tax consequences of amounts to be
    taken into account under the grantor trust rules. In cases
    where adequate records are not provided to the Secretary to
    determine the proper treatment of any distributions from a
    foreign trust, the distribution is includible in the gross
    income of the U.S. distributee and is treated as an
    accumulation distribution from the middle year of a foreign
    trust (i.e., computed by taking the number of years that the
    trust has been in existence divided by 2) for purposes of
    computing the interest charge applicable to such distribution,
    unless the foreign trust elects to have a U.S. agent for the
    limited purpose of accepting service of process (as described
    above).
          Under the House bill, a person that fails to provide the
    required notice or return in cases involving the transfer of
    property to a new or existing foreign trust, or a distribution
    by a foreign trust to a U.S. person, is subject to an initial
    penalty equal to 35 percent of the gross reportable amount
    (generally the value of the property involved in the
    transaction). A failure to provide an annual reporting of trust
    activities will result in an initial penalty equal to 5 percent
    of the gross reportable amount. An additional $10,000 penalty
    is imposed for continued failure for each 30-day period (or
    fraction thereof) beginning 90 days after the Treasury
    Department notifies the responsible party of such failure. Such
    penalties are subject to a reasonable cause exception. In no
    event will the total amount of penalties exceed the gross
    reportable amount.
          Effective date.--The reporting requirements and
    applicable penalties generally apply to reportable events
    occurring or distributions received after the date of
    enactment. The annual reporting requirement and penalties
    applicable to U.S. grantors apply to taxable years of such
    persons beginning after December 31, 1995.
                Reporting of foreign gifts
          The House bill generally requires any U.S. person (other
    than certain tax-exempt organizations) that receives purported
    gifts or bequests from foreign sources total more than $10,000
    during the taxable year to report them to the Treasury
    Department. The threshold for this reporting requirement is
    indexed for inflation. The definition of a gift to a U.S.
    person for this purpose excludes amounts that are qualified
    tuition or medical payments made on behalf of the U.S. person,
    as defined for gift tax purposes (sec. 2503(e)(2)), and amounts
    that are distributions to a U.S. beneficiary of a foreign trust
    if such amounts are properly disclosed under the reporting
    requirements of the House bill. If the U.S. person fails,
    without reasonable cause, to report foreign gifts as required,
    the Secretary of the Treasury is authorized to determine the
    tax treatment of the unreported gifts. It is intended that the
    Treasury Secretary's exercise of its authority to make such a
    determination will be subject to judicial review under a
    arbitrary or capricious standard, which provides a high degree
    of deference to such determination. In addition, the U.S.
    person is subject to a penalty equal to 5 percent of the amount
    of the gift for each month that the failure continues, with the
    total penalty not to exceed 25 percent of such amount.
          Effective date.--The provision applies to amounts
    received after the date of enactment.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement adopts the House bill provision
    of H.R. 3286 with one modification and two clarifications.
          If a U.S. beneficiary of an inbound grantor trust
    transfers property to a foreign grantor, such beneficiary
    generally is treated as a grantor of a portion of the trust to
    the extent of the transfer. Under the conference agreement,
    this provision generally does not apply transfers by a family
    member of such a beneficiary.
          The conferees wish to clarify that in exercising its
    regulatory authority to treat a U.S. trust as a foreign trust
    for purposes of information reporting purposes, the Secretary
    of the Treasury will take into account the information that
    such a trust reported under the domestic trust reporting rules.
          Under the House bill, the section 1491 excise tax applies
    when a domestic trust changes its situs and becomes a foreign
    trust after the date of enactment. In addition, under the House
    bill, a trustee may elect to apply the new objective test for
    determining the residence of a trust to the taxable year of the
    trust ending after the date of enactment. The conferees wish to
    clarify that when a trustee makes this election, and thereby
    changes the situs of a trust from domestic to foreign, the
    trust is treated as having made an outbound transfer of its
    assets on the date of such election. Consequently, the section
    1491 excise tax will apply to such a transfer.

          22. treatment of bad debt deductions of thrift institutions

          (Sec. 401 of the H.R. 3103 and sec. 611 of the Senate
    amendment to H.R. 3103.)
    Present law
          Generally, a taxpayer engaged in a trade or business may
    deduct the amount of any debt that becomes wholly or partially
    worthless during the year (the ``specific charge-off'' method
    of sec. 166). Certain thrift institutions (building and loan
    associations, mutual savings banks, or cooperative banks) are
    allowed deductions for bad debts under rules more favorable
    than those granted to other taxpayers (and more favorable than
    the rules applicable to other financial institutions).
    Qualified thrift institutions may compute deductions for bad
    debts using either the specific charge-off method or the
    reserve method of section 593. To qualify for this reserve
    method, a thrift institution must meet an asset test, requiring
    that 60 percent of its assets consist of ``qualifying assets''
    (generally cash, government obligations, and loans secured by
    residential real property). This percentage must be computed at
    the close of the taxable year, or at the option of the
    taxpayer, as the annual average of monthly, quarterly, or
    semiannual computations of similar percentages.
          If a thrift institution uses the reserve method of
    accounting, it must establish and maintain a reserve for bad
    debts and charge actual losses against the reserve, and is
    allowed a deduction for annual additions to restore the reserve
    to its permitted balance. Under section 593, a thrift
    institution annually may elect to calculate its addition to its
    bad debt reserve under either (1) the ``percentage of taxable
    income'' method applicable only to thrift institutions, or (2)
    the ``experience'' method that also is available to small
    banks.
          Under the ``percentage of taxable income'' method, a
    thrift institution generally is allowed a deduction for an
    addition to its bad debt reserve equal to 8 percent of its
    taxable income (determined without regard to this deduction and
    with additional adjustments). Under the experience method, a
    thrift institution generally is allowed a deduction for an
    addition to its bad debt reserve equal to the greater of: (1)
    an amount based on its actual average experience for losses in
    the current and five preceding taxable years, or (2) an amount
    necessary to restore the reserve to its balance as of the close
    of the base year. For taxable years beginning before 1988, the
    ``base year'' was the last taxable year before the most recent
    adoption of the experience method (i.e., generally, the last
    year the taxpayer was on the percentage of taxable income
    method). For taxable years beginning after 1987, the base year
    is the last taxable year beginning before 1988. Prior to 1988,
    computing bad debts under a ``base year'' rule allowed a thrift
    institution to claim a deduction for bad debts for an amount at
    least equal to the institution's actual losses that were
    charged off during the taxable year.
          If a thrift institution becomes a commercial bank, or if
    the institution fails to satisfy the 60-percent qualified asset
    test, it is required to change its method of accounting for bad
    debts and, under proposed Treasury regulations, is required to
    recapture its bad debt reserve. The percentage-of-taxable-
    income portion of the reserve generally is included in income
    ratably over a 6-taxable year period. The experience method
    portion of the reserve is not restored to income if the former
    thrift institution qualifies as a small bank. If the former
    thrift institution is treated as a large bank, the experience
    method portion of the reserve is restored to income ratably
    over a 6-taxable year period, or under the 4-year recapture
    method or the cut-off method described above.
          In addition, a thrift institution may be subject to a
    form of reserve recapture even if the institution continues to
    qualify for the percentage of taxable income method.
    Specifically, if a thrift institution distributes to its
    shareholders an amount in excess of its post-1951 earnings and
    profits, such excess is deemed to be distributed from the
    nonexperience potion of the institution's bad debt reserve and
    is restored to income. In the case of any distribution in
    redemption of stock or in partial or complete liquidation of an
    institution, the distribution is treated as first coming from
    the nonexperience potion of the bad debt reserves of the
    institution (sec. 593(e)).
    House bill
          No provision in H.R. 3448. Section 401 of H.R. 3103, the
    ``Health Coverage Availability and Affordability Act of 1996,''
    as passed by the House of Representatives on March 28, 1996,
    contained the following provision.
                Repeal of section 593
          The bill repeals the section 593 reserve method of
    account for bad debts by thrift institutions, effective for
    taxable years beginning after 1995. Thrift institutions that
    would be treated as small banks (as determined under sec.
    585(c)(2)) are allowed to utilize the experience method
    applicable to such institutions, while thrift institutions that
    are treated as large banks are required to use only the
    specific charge-off method.
                Treatment of recapture of bad debt reserves
          In general.--A thrift institution required to change its
    method of computing reserves for bad debts will treat such
    change as a change in a method of accounting, initiated by the
    taxpayer, and having been made with the consent of the
    Secretary of the Treasury. Any section 481(a) adjustment
    required to be taken into account with respect to such change
    generally will be determined solely with respect to the
    ``applicable excess reserves'' of the taxpayer. The amount of
    applicable excess reserves shall be taken into account ratably
    over a six-taxable year period, beginning with the first
    taxable year beginning after 1995, subject to the residential
    loan requirement described below. In the case of a thrift
    institution that becomes a large bank, the amount of the
    institution's applicable excess reserves generally is the
    excess of (1) the balance of its reserves described in section
    593(c)(1) other than its supplemental reserve for losses on
    loans (i.e., its reserve for losses on qualifying real property
    loans and its reserve for losses on nonqualifying loans) as of
    the close of its last taxable year beginning before January 1,
    1996, over (2) the balance of such reserves (i.e., its reserve
    for losses on qualifying real property loans and its reserve
    for losses on nonqualifying loans) as of the close of its last
    taxable year beginning before January 1, 1988 (i.e., the ``pre-
    1988 reserves''). Similar rules would apply to small banks.
          The balance of the pre-1988 reserves is subject to the
    provisions of section 593(e) (requiring recapture in the case
    of certain excess distributions to, and redemptions of,
    shareholders). In addition, the balances of the pre-1988
    reserve and the supplemental reserve will be treated as tax
    attributes to which section 381 applies. Certain internal
    reorganizations of a group of thrift institutions will not be
    treated as distributions to shareholders for purposes of
    section 593(e). Further, if a taxpayer no longer qualifies as a
    bank (as defined by sec. 581), the balances of the taxpayer's
    pre-1988 reserve and supplement reserves are restored to income
    ratably over a six-year period, beginning in the taxable year
    the taxpayer no longer qualifies as a bank.
          Residential loan requirement.--Under a special rule, if
    the taxpayer meets the ``residential loan requirement'' for a
    taxable year, the recapture of the applicable excess reserves
    otherwise required to be taken into account as a section 481(a)
    adjustment for such year will be suspended. A taxpayer meets
    the residential loan requirement if, for the taxable year, the
    principal amount of residential loans made by the taxpayer
    during the year is not less than its base amount. The
    residential loan requirement is applicable only for taxable
    years that begin after December 31, 1995, and before January 1,
    1998, and must be applied separately with respect to each such
    year.
                Treatment of conversions to credit unions
          The bill provides that if a thrift institution to which
    the repeal of section 593 applies becomes a credit union, the
    credit union will be treated as a institution that is not a
    bank and any section 481(a) adjustment required to be included
    in gross income will be treated as derived from an unrelated
    trade or business.
                Effective date
          The provision general is effective for taxable years
    beginning after December 31, 1995. The amendments to section
    593(e) do not apply to certain distributions with respect to
    preferred stock.
    Senate amendment
          No provision in the Senate amendment to H.R. 3448.
    Section 611 of the Senate amendment to H.R. 3103, the ``Health
    Coverage Availability and Affordability Act of 1996,'' as
    passed by the Senate on April 23, 1996, contained a provision
    similar to the provision in the House-passed version of H.R.
    3103.
    Conference agreement
          The conference agreement generally follows the provision
    in the House-and Senate-passed versions of H.R. 3103, with
    modifications. The following describes the provisions of the
    conference agreement.
                Repeal of section 593
          The conference agreement repeals the section 593 reserve
    method of accounting for bad debts by thrift institutions,
    effective for taxable years beginning after 1995. Thrift
    institutions that would be treated as small banks \74\ are
    allowed to utilize the experience method applicable to such
    institutions, while thrift institutions that are treated as
    large banks are required to use only the specific charge-off
    method. Thus, the percentage of taxable income method of
    accounting for bad debts is no longer available for any
    financial institution. The conference agreement also repeals
    the following present-law provisions that only apply to thrift
    institutions to which section 593 applies: (1) the denial of a
    portion of certain tax credits to a thrift institution (sec.
    50(d)(1)); (2) the special rules with respect to the
    foreclosure of property securing loans of a thrift institution
    (sec. 595); (3) the reduction in the dividends received
    reduction of a thrift institution (sec. 596); and (4) the
    ability of a thrift institution to use a net operating loss to
    offset its income from a residual interest in REMIC (sec.
    860E(a)(2)).
    ---------------------------------------------------------------------------
        \74\ Under present-law section 581, the definition of a ``bank''
    includes a thrift institution.
    ---------------------------------------------------------------------------
                Treatment of recapture of bad debt reserves
          In general.--A thrift institution required to change its
    method of computing reserves for bad debts will treat such
    change as a change in a method of accounting initiated by the
    taxpayer, and having been made with the consent of the
    Secretary of the Treasury.\75\ Any section 481(a) adjustment
    required to be taken into account with respect to such change
    generally will be determined solely with respect to the
    ``applicable excess reserves'' of the taxpayer. The amount of
    applicable excess reserves shall be taken into account ratably
    over a six-taxable year period, beginning with the first
    taxable year beginning after 1995, subject to the residential
    loan requirement described below. In the case of a thrift
    institution that becomes a ``large bank'' (as determined under
    sec. 585(c)(2)), the amount of the institution's applicable
    excess reserves generally is the excess of (1) the balance of
    its reserves described in section 593(c)(1) other than its
    supplemental reserve for losses on loans (i.e., its reserve for
    losses on qualifying real property loans and its reserve for
    losses on nonqualifying loans) as of the close of its last
    taxable year beginning before January 1, 1996, over (2) the
    balance of such reserves (i.e., its reserve for losses on
    qualifying real property loans and its reserve for losses on
    nonqualifying loans) as of the close of its last taxable year
    beginning before January 1, 1988 (i.e., the ``pre-1988
    reserves'').\76\ Thus, a thrift institution that is treated as
    a large bank generally is required to recapture its post-1987
    additions to its bad debt reserves, whether such additions are
    made pursuant to the percentage of taxable income method or the
    experience method. The timing of this recapture may be delayed
    for a one- or two-year period to the extent the residential
    loan requirement described below applies.
    ---------------------------------------------------------------------------
        \75\ The provisions of the conference agreement will apply to a
    thrift institution that has a taxable year that begins after December
    31, 1995, even if such taxable year is a short taxable year that comes
    to a close because the thrift institution is acquired by a non-thrift
    institution.
        In addition, a thrift institution that uses a reserve method
    described in section 593 will be deemed to have changed its method of
    computing reserves for bad debts even though such institution will be
    allowed to use the reserve method of section 585. Similarly, a large
    thrift institution will be deemed to have changed its method of
    computing reserves for bad debts even through such institution used the
    experience-method portion of section 593 in lieu of the percentage-of-
    taxable-income method of section 593.
        \76\ The balance of a taxpayer's pre-1988 reserves is reduced if
    the taxpayer's loan portfolio had decreased since 1988. The permitted
    balance of a taxpayer's pre-1988 reserves is reduced by multiplying
    such balance by the ratio of the balance of the taxpayer's loans
    outstanding at the close of the last taxable beginning before 1996, to
    the balance of the taxpayer's loans outstanding at the close of the
    last taxable beginning before 1988. This reduction is required for both
    large and small banks.
    ---------------------------------------------------------------------------
          In the case of a thrift institution that becomes a
    ``small bank'' (as determined under sec. 585(c)(2)), the amount
    of the institution's applicable excess reserves will be the
    excess of (1) the balance of its reserves described in section
    593(c)(1) as of the close of its last taxable year beginning
    before January 1, 1996, over (2) the greater of the balance of:
    (a) its pre-1988 reserves or (b) what the institution's
    reserves would have been at the close of its last taxable year
    beginning before January 1, 1996, had the institution always
    used the experience method described in section 585(b)(2)(A)
    (i.e., the six-year average method). For purposes of the future
    application of section 585, the beginning balance of the small
    bank's reserve for its first taxable year beginning after
    December 31, 1995, will be the greater of the two amounts
    described in (2) in the preceding sentence, and the balance of
    the reserve at the close of the base year (for purposes of sec.
    585(b)(2)(B)) will be the amount of its pre-1988 reserves. The
    residential loan requirement described below also applies to
    small banks. If such small bank later becomes a large bank, any
    section 481(a) adjustment amount required to be taken into
    account under section 585(c)(3) will not include any portion of
    the bank's pre-1988 reserve. Similarly, if the bank elects the
    cut-off method to implement its conversion to large bank
    status, the amount of the reserve against which the bank
    charges its actual losses will not include any portion of the
    bank's pre-1988 reserve and the amount by which the pre-1988
    reserve exceeds actual losses will not be included in gross
    income.
          The balance of the pre-1988 reserves is subject to the
    provisions of section 593(e), as modified by the conference
    agreement (requiring recapture in the case of certain excess
    distributions to, and redemptions of, shareholders). Thus,
    section 593(e) will apply to an institution regardless of
    whether the institution becomes a commercial bank or remains a
    thrift institution. In addition, the balances of the pre-1988
    reserve and the supplemental reserve will be treated as tax
    attributes to which section 381 applies. The conferees expect
    that Treasury regulations will provide rules for the
    application of section 593(e) in the case of mergers,
    acquisitions, spin-offs, and other reorganizations of thrift
    and other institutions. \77\ The conferees believe that any
    such regulations should provide that, if the stock of an
    institution with a pre-1988 reserve is acquired by another
    depository institution, the pre-1988 reserve will not be
    restored to income by reason of the acquisition. Similarly, if
    an institution with a pre-1988 reserve is merged or liquidated
    tax-free into a bank, the pre-1988 reserve should not be
    restored to income by reason of the merger or liquidation.
    Rather, the bank will inherit the pre-1988 reserve and the
    post-1951 earnings and profits of the former thrift institution
    and section 593(e) will apply to the bank as if it were a
    thrift institution. That is, the pre-1988 reserve will be
    restored into income in the case of any distribution in
    redemption of the stock of the bank or in partial or complete
    liquidation of the bank following the merger or liquidation. In
    the case of any other distribution, the pre-1988 reserve will
    not be restored to income unless the distribution is in excess
    of the sum of the post-1951 earnings and profits inherited from
    the thrift institution and the post-1913 earnings and profits
    of the acquiring bank. \78\ The conferees expect that Treasury
    regulations will address the case where the shareholders of an
    institution with a pre-1988 reserve are ``cashed out'' in a
    taxable merger of the institution and a bank. Such regulations
    may provide that the pre-1988 reserve may be restored to income
    if such redemption represents a concealed distribution from the
    former thrift institution. For example, cash received by former
    thrift shareholders pursuant to a taxable reverse merger may
    represent a concealed distribution if, immediately preceding
    the merger, the acquiring bank had no available resources to
    distribute and its existing debt structure, indenture
    restriction, financial condition, or regulatory capital
    requirements precluded it from borrowing money for purposes of
    making the cash payment to the former thrift shareholders. No
    inference is intended by the conferees as to the application of
    section 593(e) to these and similar transactions under present
    law.
    ---------------------------------------------------------------------------
        \77\ The conferees expect that in the case of the merger,
    acquisition, spin-off, or other reorganization involving only thrift
    institutions, section 593(e) as modified by the conference agreement,
    will continue to be applied in a manner similar to the way section
    593(e) is applied under present law.
        However, guidance will be needed in the case of transactions where
    one of the parties to the transaction is not a thrift institution.
    Guidance may be needed because the issue of whether section 593(e)
    applies in the case where a thrift institution is merged into a bank
    generally does not arise under present law because such merger results
    in a charter change and, under proposed Treasury regulations, requires
    full bad debt reserve recapture.
        \78\ If the acquiring bank is a former thrift institution itself
    and the pre-1988 reserves of neither institution are restored to income
    pursuant to the merger, the conferees expect that the pre-1988 reserves
    and the post-1951 earnings and profits of the two institutions will be
    combined for purposes of the continued application of section 593(e)
    with respect to the combined institution.
    ---------------------------------------------------------------------------
          Further, if a taxpayer no longer qualifies as a bank (as
    defined by sec. 581), the balances of the taxpayer's pre-1988
    reserve and supplemental reserves are restored to income
    ratably over a six-year period, beginning in the taxable year
    the taxpayer no longer qualifies as a bank.
          Residential loan requirement.--Under a special rule, if
    the taxpayer meets the ``residential loan requirement'' for a
    taxable year, the recapture of the applicable excess reserve
    otherwise required to be taken into account as a section 481(a)
    adjustment for such year will be suspended. A taxpayer meets
    the residential loan requirement if, for the taxable year, the
    principal amount of residential loans made by the taxpayer
    during the year is not less than its base amount. The
    residential loan requirement is applicable only for taxable
    years that begin after December 31, 1995, and before January 1,
    1998, and must be applied separately with respect to each such
    year. Thus, all taxpayers are required to recapture their
    applicable excess reserves within six, seven, or eight years
    after the effective date of the provision.
          The ``base amount'' of a taxpayer means the average of
    the principal amounts of the residential loans made by the
    taxpayer during the six most recent taxable years beginning
    before January 1, 1996. At the election of the taxpayer, the
    base amount may be computed by disregarding the taxable years
    within that six-year period in which the principal amounts of
    loans made during such years were highest and lowest. This
    election must be made for the first taxable year beginning
    after December 31, 1995, and applies to the succeeding taxable
    year unless revoked with the consent of the Secretary of the
    Treasury or his delegate.
          For purposes of the residential loan requirement, a loan
    will be deemed to be ``made'' by a financial institution to the
    extent the institution is, in fact, the principal source of the
    loan financing. Thus, any loan only can be ``made'' once. The
    conferees expect that loans ``made'' by a financial institution
    may include, but are not limited to, loans (1) originated
    directly by the institution through its place of business or
    its employees, (2) closed in the name of the institution, (3)
    originated by a broker that acts as an agent for the
    institution, and (4) originated by another person (other than a
    financial institution) and that are acquired by the institution
    pursuant to a pre-existing, enforceable agreement to acquire
    such loans. In addition, Treasury regulations also may provide
    that loans ``made'' by a financial institution may include
    loans originated by another person (other than a financial
    institution) acquired by the institution soon after origination
    if such acquisition is pursuant to a customary practice of
    acquiring such loans from such person. A loan acquired by a
    financial institution from another financial institution
    generally will be considered to be made by the transferor
    rather than the transferee of the loan; however, such loan may
    be completely disregarded if a principal purpose of the
    transfer was to allow the transferor to meet the residential
    loan requirement. A loan may be considered to be made by a
    financial institution even if such institution has an
    arrangement to transfer such loan to the Federal National
    Mortgage Association or the Federal Home Loan Mortgage
    Corporation.
          For purposes of the residential loan requirement, a
    ``residential loan'' is a loan described in section
    7701(a)(19)(C)(v) (generally, loans secured by residential real
    and church property and certain mobile homes),\79\ but only to
    the extent the loan is made to the owner of the property to
    acquire, construct, or improve the property. Thus, mortgage
    refinancings and home equity loans are not considered to be
    residential loans, except to the extent the proceeds of the
    loan are used to acquire, construct, or improve qualified
    residential real property. The conferees understand that
    pursuant to the Home Mortgage Disclosure Act, financial
    institutions are required to disclose the purpose for which
    loans are made. The conferees further understand that for
    purposes of this disclosure, institutions are required to
    classify loans as home purchase loans, home improvement loans,
    refinancings, and multifamily dwelling loans (whether for
    purchase, improvement or refinancing of such property). The
    conferees expect that taxpayers (and the Secretary of the
    Treasury in promulgating guidance) may take such reporting into
    account, and make such adjustments as are appropriate,\80\ in
    determining: (1) whether or not a loan qualifies as a
    ``residential loan'' and (2) whether the institution ``made''
    the loan. A taxpayer must use consistent standards for
    determining whether loans qualify as residential loans made by
    the institution both for purposes of determining its base
    amount and for purposes of determining whether it met the
    residential loan requirement for a taxable year.
    ---------------------------------------------------------------------------
        \79\ For this purpose, as under present law, if a multifamily
    structure securing a loan is used in part for nonresidential purposes,
    the entire loan will be deemed a residential real property loan if the
    planned residential use exceeds 80 percent of the property's planned
    use (determined as of the time the loan is made). In addition, loans
    made to finance the acquisition or development of land will be deemed
    to be loans secured by an interest in residential real property if,
    under regulations prescribed by the Secretary of the Treasury, there is
    a reasonable assurance that the property will become residential real
    property within a period of three years from the date of acquisition of
    the land.
        \80\ For example, adjustments will be required with respect to the
    reporting of multifamily dwellings in order to distinguish home
    purchase, home improvement, and refinancing loans.
    ---------------------------------------------------------------------------
          The residential loan requirement is determined on a
    controlled group basis. Thus, for example, if a controlled
    group consists of two thrift institutions with applicable
    excess reserves that are wholly-owned by a bank, the
    residential loan requirement will be met (or not met) with
    respect to both thrift institutions by comparing the principal
    amount of the residential loans made by all three members of
    the group during the taxable year to the group's base amount.
    The group's base amount will be the average principal amount of
    residential loans made by all three members of the group during
    the base period. The election to disregard the high and low
    taxable years during the 6-year base period also would be
    applied on a controlled group basis (i.e., generally by
    treating the members of the group as one taxpayer so that all
    members of the group must join in the election, and the same
    corresponding years of each member would be so disregarded).
          Treasury regulations may provide rules for the
    application of the residential loan requirement in the case of
    mergers, acquisitions, and other reorganizations of thrift and
    other institutions. For example, the balance of a taxpayer's
    applicable excess reserve will be treated as a tax attribute to
    which section 381 applies. Thus, if an institution with an
    applicable excess reserve is acquired in a tax-free
    reorganization, the conferees expect that balance of such
    reserve will not be immediately restored to income but will
    continue to be subject to the residential loan requirement in
    the hands of the acquirer. The conferees further expect that if
    a financial institution joins or merges into (or leaves) a
    group of financial institutions, the base amount of the
    acquiring (or remaining) group will be appropriately adjusted
    to reflect the base amount of the acquired (or departing)
    institution for purposes of determining whether the group meets
    the residential loan requirement for the year of the
    acquisition (or departure) and subsequent years. Similarly, if
    a controlled group of institutions had made an election to
    disregard its high and low years in computing its base amount,
    it is anticipated that such election shall be binding on any
    institution that subsequently joins the group and the election
    shall be applied to the new member by disregarding the high and
    low years of the new member even if such years do not
    correspond to the years applicable to the other members of the
    group.
                Treatment of conversions to credit unions
          The conference agreement provides that if a thrift
    institution to which the repeal of section 593 applies becomes
    a credit union, the credit union will be treated as an
    institution that is not a bank and any section 481(a)
    adjustment required to be included in gross income will be
    treated as derived from an unrelated trade or business. Thus,
    if a thrift institution becomes a credit union in its first
    taxable year beginning after December 31, 1995, the entire
    balance of the institution's bad debt reserve will be included
    in income, and subject to tax, over a six-year period beginning
    with such taxable year. No inference is intended as to the
    Federal income tax treatment of any other aspect of the
    conversion of a financial institution to a credit union.
          Effective date.--The repeal of section 593 is effective
    for taxable years beginning after December 31, 1995. The repeal
    of section 595 is effective for property acquired in taxable
    years beginning after December 31, 1995. The amendment to
    section 860E does not apply to any residual interest in a REMIC
    held by the taxpayer on October 31, 1995, and at all times
    thereafter.
          The amendment to section 593(e)(1)(B) does not apply to
    any distributions with respect to preferred stock (including
    redemptions of such stock) if: (1) such stock was issued and
    outstanding as of November 1, 1995, and at all times thereafter
    before the distribution and (2) such distribution is made
    within the later of (a) one year after the date of enactment of
    this Act or (b) if the stock is redeemable by the issuer or a
    related party, 30 days after the date such stock first may be
    redeemed. For this purpose, the first date a preferred stock
    may be redeemed is the day upon which the issuer or a related
    party has the right to call the stock, regardless of the amount
    of call premium.

     23. remove business exclusion for energy subsidies provided by public
                                   utilities

          (Sec. 401 of H.R. 3286.)
    Present law
          Internal Revenue Code section 136, as added by the Energy
    Policy Act of 1992, provides an exclusion from the gross income
    of a customer of a public utility for the value of any subsidy
    provided by the utility for the purchase or installation of an
    energy conservation measure with respect to a dwelling unit (as
    defined by sec. 280A(f)(1)). In addition, for subsidies
    received after 1994, section 136 provides a partial exclusion
    from gross income for the value of any subsidy provided by a
    utility for the purchase or installation of an energy
    conservation measure with respect to property that is not a
    dwelling unit. The amount of the exclusion is 40 percent of the
    value for subsidies received in 1995, 50 percent of the value
    for subsidies received in 1996, and 65 percent of the value for
    subsidies received after 1996.
          For this purpose, an energy conservation measure is any
    installation or modification primarily designed to reduce
    consumption of electricity or natural gas or to improve the
    management of energy demand with respect to property. With
    respect to property other than a dwelling unit, an energy
    conservation measure includes ``specially defined energy
    property'' (generally, property described in sec. 48(l)(5) of
    the Code as in effect on the day before the date of enactment
    of the Revenue Reconciliation Act of 1990).
          The exclusion does not apply to payments made to or from
    a qualified cogeneration facility or a qualifying small power
    production facility pursuant to section 210 of the Public
    Utility Regulatory Policy Act of 1978.
          Section 136 denies a deduction or credit to a taxpayer
    (or in appropriate cases requires a reduction in the adjusted
    basis of property of a taxpayer) for any expenditure to the
    extent that a subsidy related to the expenditure was excluded
    from the gross income of the taxpayer.
    House bill
          No provision in H.R. 3448. Section 401 of H.R. 3286, the
    ``Adoption Promotion and Stability Act of 1996,'' as passed by
    the House, repeals the partial exclusion for any subsidy
    provided by a utility for the purchase or installation of an
    energy conservation measure with respect to property that is
    not a dwelling unit.
          Effective date.--The provision is effective for subsidies
    received after December 31, 1996, unless received pursuant to a
    binding written contract in effect on September 13, 1995, and
    all times thereafter.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement follows the provision in H.R.
    3286.

                   VII. TAX TECHNICAL CORRECTIONS PROVISIONS

    House bill
          The House bill contains technical, clerical, and
    conforming amendments to the Revenue Reconciliation Act of
    1990, the Revenue Reconciliation Act of 1993, and other
    recently enacted tax legislation.
    Senate amendment
          The Senate amendment is the same as the House bill,
    except as follows:

    (a) Expiration date of special ethanol blender refund (sec. 1703(k) of
                             the Senate amendment)

          The Senate amendment corrects a 1990 drafting error by
    conforming the expiration date for an excise tax expedited
    refund provision for gasohol blenders to that for gasoline tax
    provisions generally.

     (b) Estate tax freezes (sec. 1702(f) of the House bill and the Senate
                                   amendment)

          The House bill includes a provision (also contained in
    prior technical corrections bills) to provide a special
    definition of ``applicable family member'' for purposes of
    determining control under section 2701 of the Code (relating to
    special valuation rules in case of transfers of certain
    interests in corporations or partnerships). The Senate
    amendment does not include this provision.

    (c) Certain property not treated as section 179 property (sec. 1704(u)
        of the House bill and sec. 1702(h)(19) of the Senate amendment)

          The House bill includes a provision denying the section
    179 expensing allowance to (1) property described in section
    50(b) (generally property used outside the United States,
    property used in connection with furnishing lodging, property
    used by tax exempt organizations, governments and foreign
    persons); (2) air conditioning or heating units; and (3)
    horses. The provision is effective for property placed in
    service after May 14, 1996.
          The Senate amendment does not deny the expensing
    allowance for horses. The provision in the Senate amendment is
    effective as if included in the Revenue Reconciliation Act of
    1990.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment with respect to identical provisions, with one
    modification. That modification deletes the technical
    correction related to a Tax Reform Act of 1986 transition rule
    allowing tax-exempt bonds to be issued for certain facilities.
    The 1986 provision to which that technical correction relates
    expired after December 31, 1990, and the correction has been
    rendered moot by passage of time.
          With regard to the differing provisions, the conference
    agreement includes the following:

             (a) Expiration date of special ethanol blender refund

          The conference agreement follows the Senate amendment.

                             (b) Estate tax freezes

          The conference agreement follows the House bill.

            (c) Certain property not treated as section 179 property

          The conference agreement follows the Senate amendment.

                 (d) Intermediate sanctions penalty provisions

          The conference agreement corrects a drafting error in the
    Taxpayer Bill of Rights II (H.R. 2337) with respect to the
    additional filing and disclosure rules imposed on certain tax-
    exempt organizations as part of the intermediate sanctions
    provisions. The conference agreement increases (from $10 to $20
    per each day of failure) present-law penalties that apply when
    a tax-exempt organization fails to allow public inspection of
    its annual returns (sec. 6652(c)(1)(C)) or fails to allow
    public inspection of its application for recognition of tax-
    exempt status (sec. 6652(c)(1)(D)). In addition, the conference
    agreement increases the section 6652(c)(1)(C) maximum penalty
    with respect to any one return from $5,000 to $10,000.

                                Trade Provisions

                       Generalized System of Preferences

          Subtitle J of Title I of the conference agreement, the
    Generalized System of Preferences (GSP) Renewal Act of 1996, is
    a substitute amendment to Title V of the Trade Act of 1974,
    which expired on July 31, 1995. As indicated below, the
    conference agreement reinstates several provisions of expired
    law without change.

                               1. basic authority

    Expired law
          Section 501 of the Trade Act of 1974, as amended,
    (Generalized System of Preferences) grants authority to the
    President to provide duty-free treatment to imports of eligible
    articles from designated Beneficiary Developing Countries
    (BDCs), subject to certain conditions and limitations.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement reinstates the expired section
    501 of Title V, without change.

               2. designation of beneficiary developing countries

    Expired law
          Section 502 of the Trade Act of 1974 sets forth both the
    procedures for designating countries as Beneficiary Developing
    Countries (BDCs) and the conditions for such designation. This
    section establishes conditions for designation which are
    mandatory and others which are discretionary. With regard to
    mandatory conditions, the President is prohibited from
    designating any country for GSP benefits which is a developed
    country listed in section 502(b). Further, the term ``country''
    is defined as any foreign country, any overseas dependent
    territory or possession of a foreign country, or the Trust
    Territory of the Pacific Islands.
          Under Section 502(b), the President is prohibited from
    designating specific developed countries as BDCs: Australia,
    Austria, Canada, European Union member states, Finland,
    Iceland, Japan, Monaco, New Zealand, Norway, Sweden, and
    Switzerland.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement amends the definition of country
    to include ``any territory'' and deletes the reference in
    section 502(b) to Austria, Finland, and Sweden which are now
    European Union member states.

                            3. mandatory conditions

    Expired law
          Under section 502(c) the President is prohibited from
    designating as a BDC a country which:
                (a) is a Communist country, unless (i) its products
            receive non-discriminatory most-favored-nation (MFN)
            treatment, (ii) it is a GATT Contracting Party and a
            member of the International Monetary Fund (IMF), and
            (iii) it is not dominated or controlled by
            international communism;
                (b) is an OPEC member, or a party to another
            arrangement, and participates in an action the effect
            of which is to withhold supplies of vital commodity
            resources from international trade or raise their price
            to an unreasonable level and to cause disruption of the
            world economy, subject to trade agreement exemptions
            consistent with objectives under the Trade Act of 1974;
                (c) affords ``reverse preferences'' having or
            likely to have a significant adverse effect on U.S.
            commerce, unless the President receives satisfactory
            assurances of elimination before January 1, 1976;
                (d) has nationalized or expropriated U.S. property,
            or taken similar actions, unless compensation is made,
            being negotiated, or in arbitration;
                (e) fails to recognize as binding or enforce
            arbitral awards in favor of U.S. citizens;
                (f) aids or abets, by granting sanctuary from
            prosecution to, any individual or group which has
            committed an act of international terrorism; and
                (g) has not taken or is not taking steps to afford
            internationally recognized worker rights to its
            workers.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement reinstates expired law, except,
    with respect to mandatory conditions: in (a)(ii), replaces ``is
    a GATT contracting party'' with ``is a Member of the World
    Trade Organization.''; in (b), deletes the reference to OPEC
    member and the exemption authority; in (c), deletes the
    satisfactory assurances exemption for reverse preferences.

                           4. discretionary criteria

    Expired law
          Under section 502(c) of the Trade Act of 1974 the
    President must take into account a list of factors in
    determining whether to designate a country a BDC, including
    whether or not other major developed countries are granting GSP
    to the country, whether or not the country has taken or is
    taking steps to afford its workers internationally recognized
    workers rights, and the extent to which the country is
    providing adequate and effective intellectual property
    protection.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement makes no substantive change to
    the expired provision, but makes a technical change to the
    intellectual property rights criterion.

                             5. graduation of bdc's

    Expired law
          Countries are graduated from GSP eligibility if the per
    capita GNP of any BDC for any year exceeds a dollar limit
    ($11,800 in 1994), indexed annually under a formula starting
    with the base amount of $500 in 1984. When the income level
    reaches this amount, such country is subject to a 25, rather
    than 50, percent competitive need import share limit on all
    eligible articles for up to the following two years. After that
    time, the country is no longer treated as a BDC.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement substitutes ``high income''
    country as designated by the World Bank (approximately $8,600
    per capita GNP in 1994), for the per capita GNP indexing
    formula in current law. Thus, if the President determines that
    a BDC has become a ``high income'' country as designated by the
    World Bank, the President is required to remove the country
    from eligibility under the program. Although the Conference
    agreement would reinstate a transition period of up to two
    years for country graduation from the GSP program, it would
    eliminate application of the 25 percent competitive need limit
    during this phase-out period.

                      6. Designation of eligible articles

                              a. Exempted products

    Expired law
          Under Section 503 of the Trade Act of 1974 the President
    may not designate any article as GSP eligible within the
    following categories of import-sensitive articles:
                (a) textile and apparel articles which are subject
            to textile agreements;
                (b) watches, except watches entered after June 30,
            1989 that the President determines will not cause
            material injury to watch or watch band, strap, or
            bracelet manufacturing and assembly operations in the
            United States or U.S. insular possessions;
                (c) import-sensitive electronic articles;
                (d) import-sensitive steel articles;
                (e) footwear, handbags, luggage, flat goods, work
            gloves, and leather wearing apparel which were not GSP
            eligible articles on April 1, 1984;
                (f) import-sensitive semi-manufactured and
            manufactured glass products; and
                (g) any other articles the President determines to
            be import-sensitive in the context of GSP.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement reinstates provisions of expired
    law, except, with respect to changes in the following statutory
    exemptions: in (a), it replaces the expired provision with
    exemption of textile and apparel articles which were not GSP
    eligible on January 1, 1994 and; in (e) it applies exemption to
    footwear and related articles which were not GSP eligible on
    January 1, 1995.

                               b. Three-year rule

    Expired law
          Each year the U.S. Trade Representative (USTR) conducts
    an interagency review process in which products can be added to
    or removed from the GSP program, or in which a country's
    compliance with eligibility requirements can be reviewed. The
    reviews are normally based on petitions filed by interested
    parties, but may also be self-initiated by USTR.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement prohibits consideration of an
    article for designation of eligibility for three years
    following formal consideration and denial of that article.

                c. Least developed developing countries (LDDCs)

    Expired law
          No provision.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement provides specific authority for
    the President to designate any article that is the growth,
    product, or manufacture of a least-developed developing country
    (LDDC) as an eligible article with respect to imports from
    LDDCs, if, after receiving advice from the International Trade
    Commission, the President determines such an article is not
    import-sensitive in the context of imports from LDDCs. This
    authority does not apply to statutorily exempt articles--
    textiles and apparel, footwear and related articles, and
    watches. The President shall notify Congress at least 60 days
    in advance of LDDC designations. LDDC designations will be
    based on overall economic and discretionary criteria for
    country designation under the GSP program.

                      7. limits on preferential authority

    Expired law
          Under Section 504 of the Trade Act of 1974, the President
    may withdraw, suspend, or limit GSP duty-free treatment with
    respect to any article or any country, except that no duty may
    be established other than the rate of duty which would
    otherwise apply (the MFN rate), after considering both the
    policy objectives and the discretionary BDC designation factors
    of the GSP program. The President shall withdraw or suspend the
    BDC designation of any country if he determines that, as a
    result of changed circumstances, the country would be barred
    from designation.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement reinstates expired law.

                           8. competitive need limits

    Expired law
          Whenever the President determines that exports by any BDC
    to the United States of a GSP eligible article during any
    year--
                (a) exceed a dollar limit ($122 million in 1995)
            based on $25 million adjusted annually relative to
            changes in the U.S. GNP since 1974, or
                (b) equal or exceed a 50 percent share of the total
            value of U.S. imports of the article,
    then, no later than July 1 of the next year, such country is
    not treated as a BDC with respect to such article.
          Not later than January 4, 1987, and periodically
    thereafter, the President must conduct a general review of
    eligible articles and, if he determines that a BDC has
    demonstrated a sufficient degree of competitiveness relative to
    other BDCs on any eligible article, then a lower competitive
    need dollar limit ($41.9 million in 1993, indexed annually from
    1984 base) and 25 percent total import share limit apply.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement reduces the basic competitive
    need limit to $75 million for any year beginning January 1,
    1996, and substitutes a standard annual increase of $5 million
    for the indexing formula in expired law. The 50 percent import
    share limit is reinstated. The conference agreement deletes the
    general review requirements and the lower competitive need
    limits.

                 9. authority to waive competitive need limits

    Expired law
          The President may waive the dollar and import share
    competitive need limits on any eligible article of any BDC if
    he (1) receives ITC advice on the likely effect of the waiver
    on any U.S. industry; (2) determines, based on the overall GSP
    and discretionary country designation considerations and the
    ITC advice, that the waiver is in the U.S. national economic
    interest; and (3) publishes the determination in the Federal
    Register.
          The import share competitive need limit may be
    disregarded if total U.S. imports of the eligible article
    during the preceding year do not exceed a de minimis amount of
    $5 million adjusted annually ($13.4 million in 1994) according
    to changes in U.S. GNP since 1979. The import share competitive
    need limit does not apply to any eligible article if a like or
    directly competitive article was not produced in the United
    States as of January 3, 1985.
    House bill
          No provision.
    Senate amendment
          No provision.
    Conference agreement
          The conference agreement reinstates the expired waiver
    authority. Under the conference Agreement the import share
    competitive need limit does not apply if the article is not
    produced in the United States as of January 1, 1995. The
    conference Agreement also reinstates the de minimis import
    provision, but substitutes $13 million in 1996 and a standard
    annual increase of $500,000 beginning January 1, 1996 for the
    indexing formula in expired law.

         10. other provisions regarding waiver authority, reports, and
                              agriculture exports

                             a. Waiver trade limits

    Expired law
          Under section 504(c)(3)(D) of the Trade Act of 1974, the
    President may not exercise the competitive need waiver
    authority in any year on imports of eligible articles
    exceeding:
                (a) 30 percent of total GSP duty-free imports
            during the preceding year, or
                (b) 15 percent of total GSP duty-free imports
            during the preceding year from BDCs which had (i) a per
            capita GNP of $5,000 or more, or (ii) exported to the
            United States more than 10 percent of total GSP duty-
            free imports during that year.
          The President may waive competitive need limits in
    certain cases where there has been a historical preferential
    trade relationship between the United States and that country.
    House bill
          No provision.
    Senate amendment
        No provision.

    Conference agreement

          The conference agreement reinstates provisions in expired
    law regarding waiver trade limits, and historical preferences.

                          b. Report on workers rights

    Expired law

          The President must submit an annual report to the
    Congress on the status of internationally recognized workers'
    rights within each BDC.

    House bill

          No provision.

    Senate amendment

          No provision.

    Conference agreement

          The conference agreement reinstates expired law.

                             c. Agriculture exports

    Expired law

          Section 506 requires that appropriate U.S. agencies
    assist BDCs in developing and implementing measures designed to
    ensure that the production of agricultural sectors of their
    economies is not directed to export markets, to the detriment
    of the foodstuff production for their citizens.

    House bill

          No provision.

    Senate bill

          No provision.

    Conference agreement

          The conference agreement reinstates expired law.

            11. provisions regarding termination and effective dates

    Expired law

          No duty-free treatment shall remain in effect after July
    31, 1995.

    House bill

          No provision.

    Senate amendment

          No provision.

    Conference agreement

          The conference agreement reauthorizes the program for one
    year, ten months, to terminate on May 31, 1997. The effective
    date of the extension of the GSP program is October 1, 1996.
    However, the conference agreement also provides that,
    notwithstanding section 514 of the Tariff Act of 1930 or any
    other provision of law, the entry (1) of any article to which
    duty-free treatment under Title V of the Trade Act of 1974
    would have applied if the entry had been made on July 31, 1995,
    and (2) that was made after July 31, 1995, and before January
    1, 1996, shall be liquidated or reliquidated as free of duty
    and the Secretary of the Treasury shall refund any duty paid,
    upon proper request filed with the appropriate customs officer,
    within 180 days after the date of enactment. Further, the
    conference agreement provides that notwithstanding section 514
    of the Tariff Act of 1930 or any other provision of law, the
    entry (1) of any article to which duty-free treatment under
    Title V of 1974 (as amended by this Title) would have applied
    if the entry had been made on or after October 1, 1996, and (2)
    that was made after December 31, 1995, and before October 1,
    1996, shall be liquidated or reliquidated as free of duty and
    the Secretary of the Treasury shall refund any duty paid, upon
    proper request filed with the appropriate customs officer,
    within 180 days after the date of enactment. Although importers
    would be entitled to request such refunds after the date of
    enactment of the bill, reimbursement of duties would occur only
    after the beginning of fiscal year 1997 (October 1, 1996).

                  Removal of Barriers to Interethnic Adoption

    Present law
          State law governs adoption and foster care placement.
    Many States permit race matching of foster and adoptive parents
    with children either in regulation, statute, policy, or
    practice. The Howard M. Metzenbaum Multiethnic Placement Act of
    1994 (``Metzenbaum Act'', Public Law 103-382) permits States to
    consider race and ethnicity in selecting a foster care or
    adoptive home, but States cannot delay or deny the placement of
    the child solely on the basis of race, color, or national
    origin.
          Noncompliance with the Metzenbaum Act is deemed a
    violation of Title VI of the Civil Rights Act of 1964.
    House bill
          Section 553 of the Metzenbaum Act is repealed. In
    addition, Section 471 of the Social Security Act is amended to
    prohibit a State or other entity that receives Federal
    assistance from denying to any person the opportunity to become
    an adoptive or a foster parent on the basis of the race, color,
    or national origin of the person or of the child involved.
    Similarly, so State or other entity receiving Federal funds can
    delay or deny the placement of a child for adoption or foster
    care in making a placement, on the basis of the race, color, or
    national origin of the adoptive or foster parent or the child
    involved.
          Section 474 of the Social Security Act is amended to
    require the Secretary of the Department of Health and Human
    Services (HHS) to reduce the amount of Federal foster care and
    adoption funds provided to the State through Title IV-E if the
    State program is found in violation of this provision as a
    result of a review conducted under Section 1123 of the Social
    Security Act. States found to be in violation would have their
    quarterly funds reduced by 2 percent for the first violation,
    by 5 percent for the second violation, and by 10 percent for
    the third or subsequent violation.
          Private entities found to be in violation of this
    provision for a quarter are required to return to the Secretary
    all federal funds received from the State during the quarter.
    Any individual who is harmed by a violation of this provision
    may seek redress in any United States district court. An action
    under this provision may not be brought more than two years
    after the alleged violation occurred.
          Noncompliance with this provision constitutes a violation
    of Title VI of the Civil Rights Act of 1964. The Indian Child
    Welfare Act of 1978 is not affected by changes made in this
    title.
          Effective date.--This provision applies upon enactment
    (except States must meet the State plan requirement provision
    of bill section 201(a) not later than January 1, 1997).
    Senate amendment
          The Senate amendment is the same as the House bill,
    except that the Senate amendment clarifies that the Secretary
    of HHS shall apply penalties in conformance with section 1123
    procedures to include an opportunity for the State to adopt and
    implement a corrective action plan. The provision clarifies
    that penalties will be assessed on a fiscal year basis. The
    amendment limits to 25 percent the maximum amount the Secretary
    of HHS can reduce a State's grant in a quarter.
    Conference agreement
          The conference agreement follows the House bill and the
    Senate amendment with modifications. If the State has failed to
    correct the violation within six months (or less, at the
    Secretary's discretion), the Secretary shall impose penalties.
    The amount of the graduated penalties or set at 2, 3, and 5
    percent respectively. The total amount of penalties which can
    be applied in a fiscal year cannot exceed 5 percent of a
    State's total IV-E grant.
          The Indian Child Welfare Act of 1978 is not affected by
    changes made in this title.
          Effective date.--The provisions related to civil rights
    enforcement are effective upon enactment. The provisions
    related to State plan requirements are effective on January 1,
    1997.

                                    TITLE II

          Senate Amendments 2 through 6: Senate amendments 2
    through 6 made technical corrections in the section numbering
    in title II of the House bill. The House receded from its
    disagreement to Senate amendments 2 through 6 with technical
    changes to the House bill and other changes described in this
    statement.

                     1. employee commuting flexibility act

    House bill
          The House bill would clarify the Portal-to-Portal Act of
    1947 to allow employers and employees to agree on the use of
    employer-provided vehicles to commute to and from work at the
    beginning and end of the workday, without the commuting time
    being treated as hours of work.
    Senate amendment
          Same.
    Conference agreement
          Follow House and Senate language.

                            2. minimum wage increase

    House bill
          The House bill would increase the minimum wage in two
    increments. Beginning July 1, 1996 the minimum wage would
    increase from $4.25 to $4.75, and beginning July 1, 1997 the
    minimum wage would increase from $4.75 to $5.15.
    Senate amendment
          Same.
    Conference agreement
          Beginning October 1, 1996, the minimum wage would
    increase from $4.25 to $4.75, and beginning September 1, 1997,
    the minimum wage would increase from $4.75 to $5.15. The
    conference agreement also makes a technical change to avoid
    retroactively increasing the minimum wage in Puerto Rico by
    also striking section 6(c) of the Fair Labor Standards Act.

                      3. Computer Professionals Exemption

    House bill
          The House bill specifies that computer professionals who
    are paid at least $27.63 per hour (maintaining current law) are
    exempt from overtime wages.
    Senate amendment
          Same.
    Conference agreement
          Follow House and Senate language.

                                 4. Tip Credit

    House bill
          The Fair Labor Standards Act (FLSA) currently contains a
    tip credit system whereby employers of tipped employees may
    count tips received by the worker for up to 50 percent of the
    employer's minimum wage obligation. In the event that an
    employee's cash wages and tips do not meet the statutory
    minimum wage, the employer must contribute the amount of wages
    necessary for the employee to make at least the minimum wage.
          The House bill sets the cash wage paid by employers to
    tipped employees at $2.13 and allows tips to be counted toward
    the remainder of the minimum wage obligation. The employer
    would be required to make up any difference between the minimum
    wage and the combination of $2.13 plus tips to ensure that each
    employee makes at least the minimum wage.
    Senate amendment
          Same.
    Conference agreement
          Follows House and Senate language except makes technical
    changes including the technical change of deleting the word
    ``cash'' before ``wage'' where it appears in paragraph (2).

                              5. Opportunity Wage

    House bill
          The House bill allows employers to pay new hires under 20
    years of age not less than $4.25 per hour for the first 90 days
    (calendar days--not days of work) after the employee is hired.
    The House bill contains protections for current workers by
    prohibiting employers from taking any action to displace any
    employee in order to hire a worker at the opportunity wage.
    Senate amendment
          Same.
    Conference agreement
          Follow House and Senate language.

                    From the Committee on Ways and Means, for
                    consideration of the House bill (except for
                    title II) and the Senate amendment numbered 1,
                    and modifications committed to conference:
                                       Bill Archer,
                                       Phil Crane,
                                       Bill Thomas,
                                       Sam Gibbons,
                                       Charles B. Rangel,
                    As additional conferees from the Committee on
                    Economic and Educational Opportunities, for
                    consideration of secs. 1704(h)(1)(B) and
                    1704(l) of the House bill and secs. 1421(d),
                    1442(b), 1442(c), 1451, 1457, 1460(b), 1460(c),
                    1461, 1465, and 1704(h)(1)(B) of the Senate
                    amendment numbered 1, and modifications
                    committed to conference:
                                       William F. Goodling,
                                       Cass Ballenger,
                    As additional conferees from the Committee on
                    Economic and Educational Opportunities, for
                    consideration of title II of the House bill and
                    the Senate amendments numbered 2-6, and
                    modifications committed to conference:
                                       William F. Goodling,
                                       H.W. Fawell,
                                       Frank Riggs,
                                       William L. Clay,
                                       Major R. Owens,
                                       Maurice Hinchey,
                                     Managers on the Part of the House.

                    From the Committee on Labor and Human
                    Resources:
                                       Nancy Landon Kassebaum,
                                       Edward M. Kennedy,
                                       Jim Jeffords,
                    From the Committee on Finance:
                                       Bill Roth,
                                       John H. Chafee,
                                       Chuck Grassley,
                                       Orrin G. Hatch,
                                       Al Simpson,
                                       Larry Pressler,
                                       Daniel P. Moynihan,
                                       Max Baucus,
                                       David Pryor,
                                       John D. Rockefeller IV,
                                    Managers on the Part of the Senate.