[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\
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\3\ See Treas. Reg. sec. 1.119-1(a)(2)(ii)(c) and 1.119-1(f)
(Example 7).
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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\
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\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.
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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\
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\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).
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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\
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\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\
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\10\ IRS Training Guide, at 3-19.
\11\ IRS Training Guide, at 3-20.
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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.
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\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\
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\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.
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\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.
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\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.
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\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).
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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.
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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\
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\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\
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\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.
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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.
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\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\
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\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).
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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\
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\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.
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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\
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\33\ PLR 8818049, (Feb. 10, 1988).
\34\ PLR 9245004, (July 28, 1992).
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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\
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\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\
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\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)).
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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.
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\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\
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\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.
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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.
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\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).
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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\
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\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.
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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\
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\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.
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(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.
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\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.
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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.
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\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)).
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A tax-exempt organization that conducts insurance
activities through a foreign corporation is not subject to U.S.
tax with respect to such activities. Under the subpart F rules,
the United States shareholders (as defined in sec. 951(b)) of a
controlled foreign corporation (CFC) are required to include in
income currently their shares of certain income of the CFC,
whether or not such income is actually distributed to the
shareholders. This current inclusion rule applies to certain
insurance income of the CFC (sec. 953). However, income
inclusions under subpart F have been characterized as dividends
for unrelated business income tax purposes.\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.
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\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.
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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.
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\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.
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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.
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\52\ No inference is intended as to the proper application of
section 461(h) to the income forecast method under present law.
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Any costs that are 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.
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\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.
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Except as provided in Treasury regulations, a
``recomputation year'' is the third and tenth taxable year
after the taxable year the property was placed in service,
unless the actual income from the property for each taxable
year ending with or before the close of such years was within
10 percent of the estimated income from the property for such
years. The Secretary of the Treasury has the authority to allow
a taxpayer to delay the initial application of the look-back
method where the taxpayer may be expected to have significant
income from the property after the third taxable year after the
taxable year the property was placed in service (e.g., the
Treasury Secretary may exercise such authority where the
depreciable life of the property is expected to be longer than
three years).
In applying the look-back method, any cost that is taken
into account after the property was placed in service may be
taken into account by discounting (using the Federal mid-term
rate determined under sec. 1274(d) as of the time the costs
were taken into account) such cost to its value as of the date
the property was placed in service.
Property 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.
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\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).
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Courts have interpreted the exclusion from gross income
of damages received on account of personal injury or sickness
broadly in some cases to cover awards for personal injury that
do not relate to a physical injury or sickness. For example,
some courts have held that the exclusion applies to damages in
cases involving certain forms of employment discrimination and
injury to reputation where there is no physical injury or
sickness. The damages received in these cases generally consist
of back pay and other awards intended to compensate the
claimant for lost wages or lost profits. The Supreme Court
recently held that damages received based on a claim under the
Age Discrimination in Employment Act could not be excluded from
income.\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.
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\55\ Schleier v. Commissioner, 115 S. Ct. 2159 (1995).
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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.
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\56\ It is intended that the term emotional distress includes
symptoms (e.g., insomnia, headaches, stomach disorders) which may
result from such emotional distress.
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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\
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\57\ Rev. Rul. 770405, 1977-2 C.B. 381; Rev. Rul. 76-394, 1976-2
C.B. 355.
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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.
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\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\
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\60\ The Senate amendment provided transitional relief under which
gain in pre-effective date entities that make a FASIT election may be
deferred.
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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.
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\61\ Variable interest rates that would meet this standard include
variable interest rates described in Treasury Income Tax Regulations
1.860G-1(a)(3).
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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.
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\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.
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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.
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\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).
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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\
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\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)).
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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.
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\65\ Under this rule, no high-yield interests will be treated as
issued where the FASIT directly issues such interests to a disqualified
holder.
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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\
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\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.
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\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.
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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.
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\69\ The exception does not apply to the portion of any such trust
attributable to any transfers made after September 19, 1995.
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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).
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\70\ For this purpose, a family member is generally defined as a
brother, sister, spouse, ancestor or lineal descendant.
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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.
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\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.
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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.
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\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.
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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).
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\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.
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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)).
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\74\ Under present-law section 581, the definition of a ``bank''
includes a thrift institution.
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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.
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\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.
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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.
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\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.
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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.
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\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.
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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.